Bailey warns of global fragmentation risks to open economies

Governor Bailey underscored the benefits of open economies, which rely on an international rules-based system and multilateral institutions.

He stressed that this system needs domestic national support, allowing international goals to shape national objectives, not just the reverse.

This creates inherent tension between economic globalisation and domestic welfare, particularly concerning persistent global imbalances.

Bailey argued the system must be robust and flexible, capable of reinvention in a multi-polar world where power dynamics are shifting, historically straining such systems.

International tensions have also evolved from monetary relations, as in the Bretton Woods era, to a greater focus on trade, which is more susceptible to domestic pressures and often blamed for internal economic disparities.

Bailey noted that strong, inclusive growth typically eases international cooperation, but current slower growth faces four significant headwinds: a 15-year lull in major productivity cycles, ageing populations, rising defence expenditures, and climate-related economic shocks.

These forces powerfully complicate the international system's operation.

He also highlighted the resurgence of industrial policies, which can drive persistent global imbalances.

Bank of England staff work suggests that while macro factors dominate, industrial policy, especially with closed capital accounts, can have material short-to-medium-term effects on current account surpluses.