mervyn king : balancing the economic see - saw speech by mr mervyn king, deputy governor of the bank of england, to the plymouth chamber of commerce and industry ’ s 187th anniversary banquet, on 14 april 2000. * * * mr chairman, distinguished guests, ladies and gentlemen, i was delighted to receive an invitation to speak at your 187th anniversary banquet. plymouth people are brave souls. and few are braver than those who choose to listen to a central banker at 10 o ’ clock on a friday evening. the more so, when i tell you that our ambition at the bank of england is to be boring. not, i hasten to add, at events like this. but in our management of the economy where our belief is that boring is best. macroeconomic policy has, for most of our lifetime, been rather too exciting for comfort. as miss prism told her charge in the importance of being earnest, “ cecily you will read your political economy in my absence. the chapter on the fall of the rupee you may omit. it is somewhat too sensational ”. if the rupee was too sensational, what words could describe the drama of sterling during the past fifty years? devaluations in 1949 and 1967, eight - week membership of the european “ snake ” in 1972, and the exchange rate mechanism ( erm ) which we joined in 1990 and left in september 1992. and now, of course, sterling ’ s remarkable strength against the new currency of the euro. in short, the peripatetic pound has caused, and continues to cause, severe headaches for economic policymakers. but was currency instability really the cause of those headaches in the past, or was it simply the effect of bad policies? some of both is the answer. large movements in sterling can create problems for monetary policy, as we have seen very recently. equally, the absence of a credible monetary framework means that the currency is likely to be volatile. sterling crises of the past reflected an absence of monetary stability. inflation has eroded the value of money to the point where the purchasing power of £1 in 1950 has been reduced to less than a shilling, or 5p, today. the failure to control inflation led to excessive expansions of the economy, and the subsequent struggle to bring inflation back down resulted in severe recessions. this country experienced the sharpest decline in output of any g7 economy in the early 1980s. and in the early 1990s only canada

. while the mpc can try to maintain stability in the economy as a whole it cannot prevent movements in the see - saw reflecting swings between external and domestic demand resulting from changes in the world economy. and lurches in this see - saw produce damage - as manufacturing and agricultural businesses know only too well, and as domestically - oriented businesses saw in the early 1990s. of course, the uk is not alone in this experience. so can we learn from others? april is the month not just of showers ; it is also the month of the washington spring meetings : the meetings of finance ministers and central bank governors from the one hundred and eighty - two member countries of the imf and world bank. early tomorrow morning i shall leave plymouth, rather as the pilgrim fathers, to travel to the new world to take part in those meetings. they provide an opportunity to take stock of the world economy. this year the key word will be “ imbalances ”. the very word does not bode well for our attempt to balance the economic see - saw at home. so i want to pose three questions. first, what are these imbalances? second, why have they arisen? third, do they make it more difficult to balance the uk ’ s economic see - saw? my first question, then, concerns the nature of the imbalances. over the past year, there has been a marked recovery of the world economy as the effects on confidence and capital flows of the financial crises in emerging markets were quickly reversed. in the words of the imf, the global downturn following the crises of 1997 and 1998 “ now appears to have been relatively mild and brief ”. growth in most emerging markets has been impressive. but in the three largest economies of the industrialised world - the us, the euro area and japan - economic growth has been lopsided. in the us, the extraordinary strength of consumption and investment has resulted in annual growth of final domestic demand of over 5 % a year since 1996. output grew impressively, but less fast, so the current account deficit has expanded and it is now not far short of 5 % of gdp, a record level. equally remarkable is the absence of sustained growth in japan, where output is still no higher now than it was in 1996. a lack of consumer confidence resulted in falling domestic demand and a rising current account surplus. less extreme is the euro zone, where, after a period of slow growth in the area as a whole,