Mervyn King blames trade imbalances for economic woes

by Alistair Houghton, Liverpool Daily Post
Oct 19 2011

BANK of England Governor Sir Mervyn King last night blamed huge global trade imbalances for Europe’s ongoing financial problems, and warned that time is running out to find a solution.

Speaking in Liverpool last night, Sir Mervyn said a massive build-up of trade surpluses in China and trade deficits in the US, UK and elsewhere resulted in unsustainable imbalances.

In a speech delivered to an audience of businesspeople attending an Institute of Directors dinner held at St George’s Hall, Sir Mervyn pointed the finger at China, Germany and Japan. He said: “Surplus countries, a group which includes three of the world’s largest four economies, share a major responsibility to respond to our present dilemma by expanding domestic demand. By importing more, they would provide deficit countries with the wherewithal to export and service debt repayments.

“When the crisis hit, the starting point was the need for a substantial rebalancing of demand and a repayment of debt.”

Sir Mervyn offered little by way of hope for an early return to economic growth. The Governor said: “There is a long journey ahead before the world economy returns to a sustainable equilibrium, involving rebalancing and a reduction of debt burdens.

“For the time being, a significant degree of policy stimulus is appropriate to support demand. But that will delay and exacerbate the size of the adjustment ultimately required. It is hard to imagine a solution that does not involve actions in more than one country. In 2008-09, countries needed no persuasion of the necessity of policy stimulus. But it has proved much harder to form a consensus on how to tackle the underlying problems. So, three years later, the imbalances in demand remain.

“Around the world, stimulus packages of various kinds, and unsustainably low interest rates, have bought time.

“So far, that time has not been used to deal with the underlying imbalances, or the weaknesses in bank and sovereign balance sheets. Four years after the financial crisis began, the foreign exchange reserve holdings of China are substantially larger than at the onset of the crisis. And the indebtedness of governments around the world is certainly greater. Time is running out.”