Time to target trade gap – King
THE world’s economy “could be facing a recovery that is not merely reluctant but recalcitrant” if efforts are not made to tackle structural trade imbalances, according to Bank of England Governor Sir Mervyn King.
Speaking last night, Sir Mervyn said that after four years of economic crisis, it was time for both countries and financial institutions “to accept that the underlying problem is one of solvency, not liquidity.”
He argued that although measures like quantitative easing and asset purchase programmes may be necessary in the short term to allow countries to “buy valuable time” to affect restructurings, they ran counter-productive to long term goals of reducing consumption in countries like the UK and US running trade deficits and increasing unsustainably low spending levels in countries running persistent trade surpluses, such as Japan, China and Germany.
The problems of dealing with debt are most acute in Europe, where Sir Mervyn pointed out that wholesale funding for many banks “dried up” over the summer, and that share prices for Euro-area banks are now around 35% lower than at the start of July.
“A transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence,” he said.
“On its own, however, such a policy will raise difficult political questions about the capacity of the weaker sovereigns to pay for any recapitalisation of their banks. Bank and sovereign solvency concerns are inextricably intertwined.”
Concerns about the Euro area and the slowdown in the world economy were the principal reasons for the second, £75bn round of quantitative easing announced earlier this month, he argued. And although yesterday’s inflation figures showed that headline inflation had reached 5.2%, he said that was “likely to be at, or close to, the peak” and that inflation should once again fall back once recent increases in energy prices, import prices and VAT had been absorbed.
“In contrast to headline inflation, domestically generated inflation remains subdued – and on some measures barely above zero.”
Sir Mervyn also responded to calls by some commentators that the assets bought by the banks should be somehow geared towards helping smaller firms.
He argued that buying gilts was the only effective way of getting such a significant amount of money into the market, and that it allowed “the private sector to decide in which directions the money we create should percolate through the economy”.
However, he added that he shared the concerns of entrepreneurs and SME owners about their ability to obtain credit from banks – a point which he said has “repeatedly” been raised at hearings of the Treasury Committee.
“Over the past year the stock of SME borrowing has shrunk by around £5 billion or 5%,” he said. “By far the most effective way of helping SMEs quickly would be to provide incentives for lending by existing banks because they can assess credit risk in a way that no other institution could.
“Bank and Treasury officials are working together on such ideas. In the end, however, the shape and parameters of any scheme will be, and properly so, determined by the Government.”
Sir Mervyn was speaking at a dinner held by the Institute of Directors at St George’s Hall in Liverpool.
