Former Governor of the Bank of England Lord King discusses his views on challenges facing the world economy following COVID-19 in the latest Pembroke Speaker Series lecture, organised by Pembroke College, Cambridge, and Cambridge Judge Business School.
University of Cambridge alumnus Lord King participated in the Pembroke Speaker Series, a collaboration between Pembroke College and Cambridge Judge Business School, and which features experts from the world of international finance. Lord Mervyn King served as Governor of the Bank of England from 2003 to 2013 and was Deputy Governor from 1998 to 2003. The event was hosted by Professor Mauro Guillén, Dean of Cambridge Judge Business School.
In conversation with Lord Smith, former Labour minister and Master of Pembroke College, Lord King said he believed the Treasury made the right decisions in response to COVID-19. Speaking at the hybrid event on 23 February, he pointed to the success of the furlough scheme in ensuring the UK’s unemployment rate did not rise in line with America’s during the outbreak. The amount of debt this created is not too big a risk, but now the key test was to get the ratio of debt to national income to steadily come down: “Everything will hinge on the ability of politicians to resist the temptation to throw more money at something, so we’ll be in a good position when the next pandemic, war, or major event comes along.”
1. Financial crisis measures from 2008 aren’t resilient enough for events like COVID-19
While the financial crisis of 2008 meant that measures were put in place to make the banking system more resilient, he said the pandemic highlighted areas including health systems and businesses that were not resilient enough. With the movement of both goods and people across borders no longer guaranteed to run as smoothly as in the past, countries will want to ensure they have a domestic supply of products including PPE and readily available vaccines in sufficient quantities. “These things will bring significant changes to the structure of our economies,” he commented. “It’s something we shouldn’t have had to wait for COVID-19 to hit, to realise the importance of resilience.” Although he doesn’t believe the world is deglobalising, he feels people will be more cautious, in the short term, to create free trade agreements.
2. Restructuring global debt and China’s role
The restructuring of debt, both corporate and national, was identified as a key challenge to the global economy. Lord King outlined how the impact of the pandemic has dramatically worsened the fiscal position of many countries outside the industrialised world, both large emerging economies such as Brazil, and low-income economies. Never before has restructuring the debt of so many countries at the same time been considered. It’s a situation that has been exacerbated by a decade of very low interest rates, allowing “zombie companies to survive because the debt can be serviced, even if there is no prospect of repaying it”, he said.
China has been responsible for much of the lending to low-income countries during this period, and he commented it would be “immensely difficult” to get the Chinese to take part in the debt restructuring process alongside big banks and Western governments: “Even if you bought in the Chinese government, my guess is they would say it’s not official debt that has been extended to these lower-income economies, it’s debt from the state banks, and that’s not the same thing.”
3. UK’s path to prosperity post-Brexit
Asked whether there is a path to prosperity for the UK out of the EU, Lord King suggested that Brexit was more important politically than economically. “I don’t see the changes brought about by Brexit in 20 years’ time will have a major impact economically. The success or failure of the British economy will depend on our own internal policies – that doesn’t mean we’ll automatically be better off outside the EU, it depends on what we do with it. That will hinge on a much wider range of factors, not just government policies, but education as well.”
4. The difficulty of making predictions during uncertainty
Having recently co-authored a book called Radical Uncertainty, Lord King said that during both Brexit and the pandemic those in positions of authority needed to be better at saying “I don’t know”. By making predictions that were too precise, both politicians and epidemiologists can “get sucked into exaggerating what they can say”. This can damage the credibility of so-called experts, and good public policy must recognise what we do and don’t know. Lord Smith agreed : “You’re not only right about economics, but you’re also right about politics. The culture of politics nowadays does not encourage someone saying ‘I don’t know’”.
This was the latest interview in the Pembroke Speaker Series, with Shriti Vadera, Chair of Prudential, and Alistair Darling, former Chancellor of the Exchequer, already featured. The collaboration between Cambridge Judge Business School and Pembroke College also includes the annual appointment of a Pembroke Visiting Professorship of International Finance at the Business School, as well as support for Pembroke PhD studentships in the field of international finance.