Germany is growing rapidly, led in part by an expansion in exports to the booming Asian economies. The countries of the periphery are, however, struggling in the face of significant fiscal and structural challenges. While the countries of the euro-area periphery are each confronted by specific challenges, they all need to restore their competitiveness without the option of devaluation. Instead, in the absence of effective structural reform, they face the prospect of sustained low growth in order to drive down wages and prices. That itself makes the task of stabilising public debt harder. Support to Greece and Ireland from the IMF and rest of the European Union has given those countries a breathing space in which to undertake the necessary adjustments. Financial support for other countries may or may not prove necessary – only time will tell. But the important thing for us is whether an intensification of the difficulties in the euro-area periphery could also derail the recovery here. 2  Analysis of the earlier phases of quantitative easing both here and in the United States suggest that purchases of the order of 12–14% of GDP have lowered longer-term government and corporate bond yields by around 70–100 basis points relative to where they would otherwise have been.
Tightening policy sharply in order to deal with the currently elevated level of inflation would simply have put a brake on the recovery unnecessarily and would have made inflation more likely than not to fall below the target in the medium term. If all goes to plan, however, and private final demand continues to pick up the baton as the fiscal consolidation proceeds, then the margin of spare capacity will shrink and it will at some juncture become appropriate to begin withdrawing the current extraordinary degree of monetary stimulus. And, when that point comes, the MPC will aim to do so in a timely, but measured, fashion. As 2010 draws to a close, the good news, then, is that the recovery, here and more widely, has remained on track, following the sharpest downturn in activity since the Great Depression. Such an outcome was by no means guaranteed twelve months ago; for that we must be grateful. But there remain significant challenges for the year ahead. In many developed countries, the after-effects of the financial crisis still linger, in the form of banks that are still overly reliant on official support, fragile household and business confidence, and bloated public sector deficits and debt. Moreover, the rapid recovery in emerging markets  BIS Review 169/2010  5  has reawakened global inflationary pressures. And here in the United Kingdom, inflation has been running above the MPC’s 2% target for an uncomfortably long time. It may be some while yet before normality is restored. Thank you.