Governor of the Bank of England Mervyn King has warned that “time is running out” to solve the global economic crisis.
Speaking in Liverpool last night, King said that despite a raft of emergency measures, governments had not yet addressed the overspending that has been at the heart of the financial crisis.
King said that, on its own, solving the debt crisis in countries such as Greece would not stabilise the global economy and warned of the policymaking dilemma that short-term solutions to the crisis will add to problems in the long-term.
King reiterated his view that inflation, which officially hit 5.2 per cent in September, would peak and soon start to fall back to its 2 per cent target and the real danger is that inflation will fall below target.
King pointed to “unsustainable high levels of consumption” in Western economies which had been exacerbated by China’s low spending levels and the lending of its surplus to the West. He added that all the stimulus measures used to this point had only given leaders time to deal with the real problem.
He said: “So far, that time has not been used to deal with the underlying imbalances, or the weaknesses in bank and sovereign balance sheets. Time is running out.”
King said that on top of supporting banks and the eurozone, Western nations must look to “adopt compatible policies so they can credibly service their internal and external debts”.
He also highlighted the need for Western nations to be more competitive and said China and other emerging economies must increase their domestic consumption. He said an even larger debt-crisis would occur unless that imbalance was addressed.
“Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone. We must use the gravity of the global crisis to provoke a bold response.”
“If the time bought is not used then the size of the debt problem becomes larger and its cost is gradually transferred from private sector creditors to taxpayers,” King said.
King said having low interest rates and quantitative easing would only “delay and exacerbate the final reckoning for the West”.
He added that the coalition plans had put the UK “on track” but said the current eurozone crisis had lengthened the period of time before normality was restored.