That is why we are treading a fine line between stimulus to demand in the short run, and a rebalancing away from private and public consumption towards exports and import substitution in the longer run. Without monetary stimulus – low interest rates and large asset purchases – there is a risk that growth will stall and inflation fall below our symmetric 2% target. But easy monetary policy, by bringing forward spending from the future to the present, means that the ultimate adjustment of borrowing and spending will be even greater. That is our dilemma, and that of other deficit countries. The best way to escape this dilemma would be higher spending by the surplus countries – to make possible rebalancing by the deficit countries – and supply-side reforms in the deficit countries – to raise expected future incomes and ease the burden of debt repayments. Each country can put itself in a position to rebalance, as we have done in the UK. But in the absence of rebalancing, globally and especially in the euro area, we could be facing a recovery that is not merely reluctant but recalcitrant. Just as St. George’s Hall was reconstructed to meet the needs of Liverpool in the twenty-first century, so the international financial system must be reconstructed to ensure a return to prosperity. We can be optimistic – the fundamentals of the UK economy are strong. But without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone.
As a country, we are trying to rebalance our economy at a time when a global slowdown, and concerns about the solvency of European banks and sovereigns, threaten recovery here in the United Kingdom. Two weeks ago, the Monetary Policy Committee (MPC) decided to resume its asset purchase programme and create new money. Before I set out the reasons for that decision, I want to explain why the global nature of the crisis means that monetary and fiscal policy in the United Kingdom can only do so much. Our fate rests to a considerable extent on the policies pursued by our trading partners. That is why the Chancellor and I put such weight on this interdependence among the major economies at last weekend’s G20 Meetings in Paris. Countries have responsibilities to each other, and we need to work with our partners overseas to find a solution to present problems. Four years into the crisis it is surely time to accept that the underlying problem is one of solvency not liquidity – solvency of banks and solvency of countries. Of course, the provision of additional liquidity support to countries or institutions in trouble can buy valuable time. But that time will prove valuable only if it is used to tackle the underlying problem.