My Lord Mayor, Mr Chancellor, My Lords, Ladies and Gentlemen:
In recent years, I have set the Mansion House audience a numerical examination. After a pleasant dinner, you will not want to listen to more numbers. A more literary style is appropriate. So my question to you tonight is: which aspect of financial regulation is most deserving of the adjective “tragic”? The answer comes later.
A year ago, we met in the wake of a major sovereign debt crisis in Greece with market nervousness about how far that might spread. Since then, this crisis of external indebtedness has consumed Ireland and now Portugal, as well as Greece. Current account imbalances in the euro area remain large, should concern us all, and will certainly affect us all.
Inexorably, the world economy is adjusting from an unstable disequilibrium to a new equilibrium. Trade imbalances and the associated levels of borrowing proved unsustainable. In more biblical language, failure to tackle the imbalances during the seven years of plenty before 2007 threatens seven lean years thereafter for at least part of the world economy. After a deep-seated banking crisis, now transmuted into a sovereign debt crisis, the need to reduce debt as the world adjusts to a new equilibrium pattern of spending and trade will mean only a gradual recovery in many advanced economies.
Storms from the world economy are likely to stir up the waters through which the UK economy must pass as it too adjusts to a new equilibrium with lower levels of debt and a rebalancing from domestic to external demand. So, my Lord Mayor, there is no shortage of challenges at home. Consumer price inflation has risen to 4½%, and further large rises in utility prices are expected. Output has probably grown by only around 1% or so over the past year. Our banking system faces a need, over time, to build higher levels of capital and find new sources of domestic funding. And regulation must be reformed to respond to the lessons from the crisis.
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