Britain is at risk from a fundamental crisis in the world economy and “time is running out” to solve it, Mervyn King, the governor of the Bank of England, has said.

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Despite record low interest rates, printing new money and other emergency measures, governments had not yet addressed the underlying problem of overspending that was at the root of the financial crisis, he said, adding, the consequences threatened to “inflict pain on everyone”.

In a sobering assessment of the world economy, King warned that even if world leaders managed to agree on emergency moves to support the banking system and debt-stricken economies such as Greece, they would still not have averted the threat to global stability.

Unless overspending by Western economies was curbed it would bring about an ever-larger debt crisis that would mean much lower long-term growth rates, he said.

Worse, he suggested, some of the measures being deployed to counter the short-term situation could actually exacerbate fundamental economic problems, worsening the debt crisis and leaving taxpayers footing an even larger bill.

King delivered his gloomy verdict as official figures showed that inflation surged to 5.2% last month, squeezing living standards and eroding the value of savings and pensions. Inflation was “at or close to” its peak and would soon start to fall back towards the bank’s 2% target, he said.

Instead of prices rising too quickly, the real danger to the economy was a collapse in growth that would see inflation fall below 2%, he pointed out.

The root cause of the debt crisis threatening major Western economies was a long period of “unsustainably high levels of consumption”, in which governments, companies and individuals spent more than they earned, the governor said.

That spending was made possible because fast-growing emerging economies such as China spent much less than they earned, then used their surpluses to lend to the West. All of the emergency stimulus measures employed to support European banks and the eurozone had simply “bought time” for world leaders to address that fundamental imbalance, King said in a speech in Liverpool last night.

“So far, that time has not been used to deal with the underlying imbalances, or the weaknesses in bank and sovereign balance sheets,” he said. “Time is running out.”

European Union leaders will meet in Brussels this weekend to discuss a package of emergency measures aimed at recapitalising European banks and helping countries such as Greece repay their loans. That meeting will be followed by a summit of the Group of 20 leading economies in Cannes which could agree to boost the International Monetary Fund and provide more support for banks and struggling economies.

But King warned that neither rescuing the euro zone nor bailing out the European banking sector would be enough to stabilise the world economy.

As well as supporting banks and the euro zone, he said, Western nations must embark on fundamental changes to make their economies more efficient and reduce government spending from recent levels.

“In the end,” he said, the only answer to debt problems was for countries to “adopt compatible policies so that they can credibly service their internal and external debts.”

Western economies must also become more competitive, he said. Meanwhile, China and other emerging economies must increase their domestic consumption. Unless these imbalances were resolved, the West would suffer ever-larger debt crises, he warned.

“Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone,” said King. “We must use the gravity of the global crisis to provoke a bold response.”

The longer leaders failed to act on the global economic imbalance, the worse the problem would become. More and more of the final cost would fall on taxpayers who would have to fund ever larger bail-out packages in future, he suggested.

“If the time bought is not used then the size of the debt problem becomes larger and its cost is gradually transferred from private sector creditors to taxpayers,” said King.

Western governments have responded to the recent financial crisis and slow economic growth by trying to inject more money into their economies. Telegraph