Julian Harris
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BRITAIN’S recovery has been knocked off track by the global financial crisis, Bank of England governor Sir Mervyn King claimed last night, in a sweeping attack on governments and monetary authorities throughout the world.

King hit out at monetary authorities that have fixed currencies, and criticised governments for failing to act quickly enough on the “weaknesses in bank and sovereign balance sheets.” “Time is running out,” King warned a meeting of the Institute of Directors, in Liverpool.

“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.”

Following the crisis of 2008, banks were recapitalised “inadequately”, King said, “especially on the continent [of Europe]”.

“A transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence,” King said, although he recognised that some governments are too hard-up to fund such measures.

King’s chilling verdict on the potentially near-bankrupt state of some banks and sovereigns imposes more pressure on the Eurozone, where crunch meetings are scheduled for the coming days.

Policy-makers in the UK alone are limited in how much they can do to avert a further economic downturn, King said. “Our fate rests to a considerable extent on the policies pursued by our trading partners.”

While governments in the West need to rein in their spending and borrowing, King called for “higher spending by the surplus countries”, stating that countries such as China and Germany “share a major responsibility to respond to our present dilemma by expanding domestic demand.

“By importing more they would provide deficit countries with the wherewithal to export and service debt repayments,” King argued.

China should also cease tampering with its currency, King implied. “Over the past two decades, some governments, particularly in China and the euro area, have tried to fix exchange rates without putting in place mechanisms to ensure that competitiveness could be rebalanced by other means,” he said, arguing that exchange rate manipulation has “contributed significantly” to the current turmoil.

Earlier in the day King’s Bank had come under criticism itself, as CPI inflation climbed to 5.2 per cent, and RPI inflation reached a 20-year high of 5.6 per cent. Yet the governor defended the Bank’s record and recent expansion of its quantitative easing programme.

“Without monetary stimulus -- low interest rates and asset purchases -- there is a risk that growth will stall and inflation fall below our symmetric two per cent target,” he said. Yet the current soaring inflation saw Britain’s “Misery Index” climb to yet another unenviable 19-year high, economists said yesterday.

The index of misery was confirmed at its highest since the aftermath of Black Wednesday in the autumn of 1992. The index combines the effect of inflation with levels of unemployment, to produce an overall measure of gloom.

The UK recovery was “on track” until recently, King concluded last night. “But the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely,” he warned. “We must use the gravity of the global crisis to provoke a bold response.”