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European Central Bank warns of ''disruptive unwinding of imbalances''
From Canadian Press
Monday, May 30, 2005
http://www.canada.com/businesscentre/story.html?id=f164422c-2c54-
408d-8cbe-3fb8298b23b5
MONTREAL -- A growing imbalance in the global economy, exacerbated
by a rampant U.S. deficit as the rest of the world records
surpluses, needs to be addressed soon before it gets resolved "in an
abrupt, disorderly way," the governor of the Bank of Canada said
Monday.
The way to do that is through a revitalized International Monetary
Fund evolved "to take account of today's realities," David Dodge
said in remarks released in advance of a speech to the Conference de
Montreal.
"The concern is that the longer these imbalances remain unresolved,
the greater the chances that the ultimate resolution will be
disorderly," Dodge said.
"Equally troubling, there is a greater chance of protectionist
measures that can seriously damage the global economy."
World capital markets have been managing global economic
imbalances "in a reasonably smooth way" so far, Dodge said, and
should be able to continue do so in the short term.
But problems loom down the road, he said.
"For one thing, a country's external indebtedness cannot keep
growing indefinitely as a share of its GDP. Eventually, investors
will begin to balk at increasing their exposure to that country,
even if it is a reserve-currency country, such as the United
States."
Dodge said allowing global economic imbalances to be resolved in the
capital markets is "potentially more disruptive, because there is
less labour mobility across international borders, and so larger
movements in relative wages and prices are needed in order for them
to act as an equilibrating mechanism."
Some national and international policies and interventions in the
foreign exchange market have been a drag on relative wage and price
movements, Dodge said.
"It is clear that, to date, there has not been enough progress on
structural reforms," Dodge said.
"This lack of progress is somewhat frustrating, given that there is
a reasonable consensus on what should be done domestically in all
countries."
Dodge warned that microeconomic policies should allow markets for
both goods and labour to function as well as possible and encourage
the creation and maintenance of a sound financial system to
efficiently allocate domestic and foreign savings.
And he said all countries must look to produce a sustainable public
debt-to-GDP ratio.
"Where structural fiscal balance is absent, it should be achieved;
where it is present, it should be maintained," Dodge said.
"There are some real problems on this front in the United States, in
Europe, in Japan, and in some developing countries."
Though the IMF's mandate to promote an international order that
fosters economic growth and investment is still "relevant and
important," it "could, and should, be doing its job more
effectively," Dodge said.
The head of Canada's central bank said he has hopes that a current
review of the IMF will produce a stronger, more vital international
economic monitor.
"If we can get it right, a more effective IMF would be helpful in
the worldwide effort to resolve global imbalances in an orderly
way," Dodge said.
"If we all follow appropriate policies, then market mechanisms can
defuse the danger posed by global imbalances. And that is an outcome
that is in everyone's interest."
* * *
Text of Dodge's speech:
http://www.bankofcanada.ca/en/speeches/2005/sp05-7.htm
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