or institutions in trouble can buy valuable time. but that time will prove valuable only if it is used to tackle the underlying problem. after the crisis began, it took a year before governments in europe and the united states were persuaded that the problems of their banking sectors resulted not from a shortage of liquidity – that was merely the symptom – but from massively over - leveraged balance sheets. eventually, in october 2008, banks were recapitalised, albeit, especially on the continent, inadequately so. but the underlying problems of excessive debt have not gone away. as a result, markets are now posing new questions about the solvency of banks, and indeed of governments themselves. what were the causes of the unsustainable build - up of debt in europe and elsewhere? they lay in the continuing imbalance between those economies running large current account surpluses and those running large current account deficits. persistent trade surpluses in some countries and deficits in others did not reflect a flow of capital to countries with profitable investment opportunities, but to countries that borrowed to finance consumption or had lost competitiveness. the result was unsustainably high levels of consumption ( whether public or private ) in the united states, united kingdom and a range of other advanced economies, and unsustainably low levels of consumption in china and other economies in asia, and some advanced economies with persistent trade surpluses, such as germany and bis central bankers ’ speeches japan. the burden of debt will go on rising in the former group of countries until these spending patterns adjust and the latter group will find their loans eventually repaid in depreciated currencies, if at all. surplus countries, a group which includes three of the world ’ s largest four economies, 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. when the crisis hit, the starting point was the need for a substantial rebalancing of demand and a repayment of debt. in the deficit economies, there was an inevitable tension between the short run need to stimulate demand to prevent rising unemployment and falling inflation, and the long run need to rebalance demand and reduce indebtedness. in january 2009, i described this as “ the paradox of policy … almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term

the world economy that we find ways of allowing competitiveness to adjust so that trade imbalances, and hence the present scale of indebtedness, can be reduced. neither liquidity nor austerity are answers to the question of how to restore a loss of competitiveness. dealing with these structural issues will take time. meanwhile, how do we resolve the immediate crisis of confidence in some banks and sovereigns? since the summer, there have been renewed concerns about the adequacy of the capital of banks in the euro area to absorb likely future losses, thus jeopardising their ability to raise funds. wholesale funding dried up for many banks over the summer, and share prices of european banks are around 35 % lower today than at the start of july. a transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence. on its bis central bankers ’ speeches own, however, such a policy will raise difficult political questions about the capacity of the weaker sovereigns to pay for any recapitalisation of their banks. bank and sovereign solvency concerns are inextricably intertwined. in the end, the underlying solvency concerns require countries to adopt compatible policies so that they can credibly service their internal and external debts. what does this mean for our own economy? our objective must be to steer the uk economy slowly back to a position of more normal interest rates and lower budget deficits. with a lower level of sterling and a credible plan to reduce the fiscal deficit over the medium term, we were on track. 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. 2011 has been the year of the reluctant recovery. growth has disappointed, both here and abroad. business and consumer confidence have fallen sharply, not only at home but also elsewhere in europe and the united states. and the level of world trade in goods has stagnated. a slowing of the world economy, especially in the euro area, is a threat to our strategy of rebalancing and recovery of the uk economy. despite the more competitive level of sterling, the recovery in our trade position is at risk of stalling. it is not surprising, therefore, that although unemployment has been broadly stable over the past two years at around 2½ million, a rate of about 8 %, it has risen in recent months, especially among young people. and total output remains around