The world economy is at risk of 1930s-style protectionism if leading nations cannot reach a deal to reduce imbalances in trade and capital flows, Bank of England Governor Mervyn King said on Friday.
In a speech to an economics conference in California, King reiterated the call he made last October for a "grand bargain" between surplus and deficit countries in the G20 group of major economies to reduce global imbalances.
"The current pattern of demand in the world economy is unsustainable," he said in the speech at Stanford University, which he also plans to deliver in Tokyo and Beijing next week.
The United States and Britain run large trade deficits due to net imports from emerging economies such as China, which they fund with capital from emerging economies.
Many Western economists and politicians say that China keeps its currency artificially weak to boost domestic employment in export industries, and needs to let it strengthen for the world economy to rebalance -- a conclusion resisted by China.
But King said it was in China's interests to compromise lest its main markets close their doors to its exports.
"The political tension generated by the divergent preferences of surplus and deficit countries risks moves towards protectionism. So there must be scope ... for a 'grand bargain' to adopt a set of policies that would support an agreed path of rebalancing and avert a move towards protectionism," he said.
King said countries needed to agree a pace at which to reduce the export-reliance of high-saving emerging economies and for changes in exchange rates to support export-growth in countries that currently have big trade deficits.
The plight of less competitive economies on the edge of the euro zone showed how fixed exchange rates made economic adjustment harder, King added.
"The challenges of sustainability are most evident in vulnerable euro-area periphery countries," he said. "Without a flexible exchange rate, it is not easy for them to lower domestic prices relative to those overseas."
King also called for an agreement on fiscal measures to boost savings in low-saving countries and do the opposite in countries with high levels of saving, as well as macroprudential policies to stabilise the global banking system.
Longer term, King said that he hoped that the G20 would evolve into a governing body for the International Monetary Fund. The IMF had proven too unwieldy during the financial crisis, while the G20 lacked the IMF's degree of global acceptance.
Ultimately, the rules-based World Trade Organisation offered a good example for the G20 in taking the heat out of international disputes that risked triggering protectionism.
"Recognising our common interest in moving to a more sustainable pattern of world demand is in our self-interest," he said.
Source: http://uk.reuters.com
In a speech to an economics conference in California, King reiterated the call he made last October for a "grand bargain" between surplus and deficit countries in the G20 group of major economies to reduce global imbalances.
"The current pattern of demand in the world economy is unsustainable," he said in the speech at Stanford University, which he also plans to deliver in Tokyo and Beijing next week.
The United States and Britain run large trade deficits due to net imports from emerging economies such as China, which they fund with capital from emerging economies.
Many Western economists and politicians say that China keeps its currency artificially weak to boost domestic employment in export industries, and needs to let it strengthen for the world economy to rebalance -- a conclusion resisted by China.
But King said it was in China's interests to compromise lest its main markets close their doors to its exports.
"The political tension generated by the divergent preferences of surplus and deficit countries risks moves towards protectionism. So there must be scope ... for a 'grand bargain' to adopt a set of policies that would support an agreed path of rebalancing and avert a move towards protectionism," he said.
King said countries needed to agree a pace at which to reduce the export-reliance of high-saving emerging economies and for changes in exchange rates to support export-growth in countries that currently have big trade deficits.
The plight of less competitive economies on the edge of the euro zone showed how fixed exchange rates made economic adjustment harder, King added.
"The challenges of sustainability are most evident in vulnerable euro-area periphery countries," he said. "Without a flexible exchange rate, it is not easy for them to lower domestic prices relative to those overseas."
King also called for an agreement on fiscal measures to boost savings in low-saving countries and do the opposite in countries with high levels of saving, as well as macroprudential policies to stabilise the global banking system.
Longer term, King said that he hoped that the G20 would evolve into a governing body for the International Monetary Fund. The IMF had proven too unwieldy during the financial crisis, while the G20 lacked the IMF's degree of global acceptance.
Ultimately, the rules-based World Trade Organisation offered a good example for the G20 in taking the heat out of international disputes that risked triggering protectionism.
"Recognising our common interest in moving to a more sustainable pattern of world demand is in our self-interest," he said.
Source: http://uk.reuters.com
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