mark carney : financing the global transition remarks by mr mark carney, governor of the bank of canada and chairman of the financial stability board, at the atlantic institute for market studies, halifax, nova scotia, 21 june 2012. * * * introduction i want to thank the atlantic institute for market studies ( aims ) for the invitation to speak here in halifax. one of halifax ’ s greatest entrepreneurs was samuel cunard, whose shipping empire, like this centre, still bears his name. launched more than 100 years ago, the cunard business prospered in the last great era of global change. in my remarks today, i will speak about the transformation currently under way in the global economy. in touching on the situation in europe, and the challenges of the international monetary system, i will concentrate on the central role of an open, resilient financial system to sustained global growth. the transition to a multi - polar world i would like to start by putting the recent darkening of the global economic outlook in perspective. europe has built a single market of 500 million people and 27 countries, with free movement of goods, services, capital and people. in the process, it has transformed the economies of southern and eastern europe. it has also played a consistently positive role in rising above national interests to address global problems. 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 materialising, 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 realising europe ’ s and globalisation ’ 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

makers need to be careful about delaying the inevitable and merely funding the private exit. some have suggested that higher inflation may be a way out from the burden of excessive debt. to be effective, this would need to be coupled with various forms of financial repression, including capital controls and forced holdings of government debt. this is a counsel of despair. an inflation surprise needs to be very large or very sudden to work. moving opportunistically to a higher inflation target would risk unmooring inflation expectations, destroying the hardwon gains that have come from the entrenchment of price stability, and increasing real rates that would exacerbate unfavourable debt dynamics. financial repression would have to be both massive and sustained. it would undermine the system that has helped bring us the prosperity of the past three decades. the most palatable strategy to reduce debt is to increase growth. private growth will not flourish in an environment of macro instability. fiscal sustainability and price stability are essentials, not luxuries. private growth needs an enabling environment, including tax competitiveness and a framework for infrastructure investment. it needs a sound financial sector that is diverse, resilient and open. sustainable private growth and the role of financial reform this is not yet assured. most immediately, there is a risk that a series of contingency measures could extend to a global scale the current european trend towards renationalisation. that is one reason why the european initiatives expected in the coming weeks are so important. more broadly, the financial reform agenda must address legitimate emerging - market concerns over the resiliency of the advanced - economy financial systems. because of these worries, there is pressure for localisation to protect domestic systems and renewed use of capital controls to dampen the volatility of cross - border flows. if allowed to persist, these nascent trends could seriously restrain the global capital flows necessary for the next stage of the global transformation. the imbalance between states and markets i recall the german finance minister, peer steinbruck, at a fateful g - 7 meeting in the wake of lehman ’ s failure, relating that he had met a woman in east germany earlier that week who told him that : “ i have seen the fall of communism and now i am seeing the fall of capitalism. ” the complete loss of confidence in private finance at that time could only be arrested by the provision of comprehensive backstops by the richest economies in the world. even with these heroic efforts, the global financial crisis