Bank chief warns of slow recovery
But Sir Mervyn warned that any recovery would be slow and that the crisis in the eurozone had cast a "black cloud of uncertainty" over businesses around the world.
In a wide-ranging interview on Channel 4 News, Sir Mervyn cautioned Chancellor George Osborne not to water down the proposals for reform of the UK's banks proposed in Sir John Vickers's review.
And following reports that the Government could miss its target of beginning to see national debt falling by 2015/16, Sir Mervyn said that would be acceptable only if the global economy was growing slowly.
Sir Mervyn said he had predicted a "zig-zag year" for the UK economy. "The last quarter was down, I think the next quarter will probably be up," he said. "I think we are beginning to see a few signs now of a slow recovery, but it will be a slow recovery. After a banking crisis one can't expect to get back to normal and I fear it will take a long time."
The recovery would depend on events in the euro area and in other economies such as the US and China, he said. The eurozone countries had been working hard to avoid triggering a Lehman-style collapse in the markets, but there was no "guarantee that they will be able to do that". Sir Mervyn added: "I think it's this black cloud of uncertainty which is hanging over British business as it is hanging over American business."
The European Central Bank's actions to support the currency had bought some breathing space, Sir Mervyn said. "Now is the time that they have to decide exactly what kind of monetary union they want," he said.
Sir Mervyn acknowledged that a break-up of the eurozone would be "extremely difficult for all concerned" but "we would come through it" and preparations had been made for such an eventuality. "I think it would have been irresponsible not to have made preparations or contingency plans for it," he said.
He defended the use of quantitative easing as a short-term measure, claiming it had averted a "deeper recession", adding: "But in the long run we know that we need to spend less and save more. And we know that Germany and China need to spend more and save less."
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