Bank of England Deputy Governor Charlie Bean said agreement on a second bailout for Greece might not be enough to end the debt crisis and countries in the eurozone periphery must reduce debt and improve competitiveness.
While the agreement “between the Greek government and the euro-area authorities is certainly welcome, there still remains a possibility that events could unfold in a disorderly and damaging fashion at some stage in the future,” Bean said in a speech late on Tuesday in Glasgow, Scotland.
The euro crisis “represents the biggest downside risk” to the UK.
The Bank of England expanded its bond-purchase target by ￡50 billion (US$79 billion) to ￡325 billion this month in response to a recovery weakened by a squeeze on consumers and Europe’s debt turmoil.
Bean said that while inflation was easing and some recent business surveys had been encouraging, growth would be “sluggish” in the first half of this year and there was “added incentive” to cement the recovery.
The deputy governor said a “disorderly outcome” in the eurozone would hit the UK’s export and financial links, reduce confidence and lead companies and consumers to “hunker down and postpone spending.”
He added that Greece wasn’t the only country in the currency zone facing challenges.
“Greece is the country in the headlines right now, but several countries of the euro-area periphery face, in varying degrees, a challenging mixture of unsustainably high public and/or private indebtedness and weak competitiveness,” Bean said.
“At best, these countries face an extended period of very low growth while the necessary adjustments take place,” he said.
Bean added that the Bank of England’s bond program boosts asset prices and should encourage spending, though investors anticipating the bank’s actions “make it harder than before” to isolate the effect.
Still, “so far we have seen little to suggest that the effect on nominal demand will be markedly at odds with that of our first round of purchases,” he said.
Bean also defended the policy from criticism that it has reduced returns on pensions and other savings.
While the gilt purchases have helped lower yields, their impact on assets such as equities provides an “offset to the fall in annuity rates,” he said.
“The impact of quantitative easing on those approaching retirement is thus more complex than it seems at first blush,” Bean said.