Last week, Mark Carney spoke about the state of the global economy in Halifax for the Atlantic Institute for Market Studies (AIMS).
He touched on the situation in Europe, and focused on how an open, resilient financial system can support sustained global growth. He also addressed the need to pay down debt and the too-big-to-fail mentality.
Read his speech below:
- European Monetary Union
- What should the Europeans do?
- Bretton Woods II
- How to pay down debt
- Sustainable private growth and the role of financial reform
- The imbalance between states and markets
- Building resilient financial institutions
- Ending too-big-to-fail
- Creating continuously open markets
- Moving from shadow banking to market-based finance
- Timely, consistent implementation
- Conclusion
On a global scale, never in history has economic integration involved so many people, such a variety of goods and so much capital.
This process lifted hundreds of millions of people out of poverty and created the potential for hundreds of millions more to follow in their path. The gap between rich and poor countries has narrowed dramatically and soon the global middle class will outnumber the poor. The shrinking disparity between the United States and China is particularly striking. In 1990, GDP per capita in the United States was almost 30 times higher than in China; by 2010, this ratio had fallen to just six times.
The crisis is accelerating this transformation.
But this transition will not be smooth, and it is not preordained. Downside risks to Europe are materializing, threatening the pace of global growth. More broadly, the rebalancing of the global economy is stalled, as much of the advanced world remains mired in a prolonged deleveraging.
During this challenging time, we must remember that realizing Europe’s and globalization’s potential requires an open system.
It is reasonable to expect capital to flow, on a net basis, from advanced economies towards higher expected returns in emerging-market economies. This is what happened during the last wave of globalization at the turn of the 20th century when Canada, then an emerging economy, ran current account deficits averaging 7% of GDP over three decades.
These were good imbalances. Imported capital was invested in productive capacity that later served to pay off the accumulated debts.
Global imbalances over the past decade have too often been bad, if not positively un-Canadian. In some cases, public capital has flowed from emerging-market economies to advanced economies to be invested in non-tradable goods such as housing. In others, private flows overshot in a complacent, deregulated “new era.”
Large current account imbalances are an inherent part of strong global growth, but in order to be sustainable, they must be:
the product of private decisions taken in a context of sound macroeconomic policies and robust market structures; and financed by an open, resilient financial system.
In many respects, the problems we face today are the product of two flawed monetary unions: one formal—the European monetary union; the other informal—Bretton Woods II. In both cases, financial reforms will be integral to the solution.