Greenspan warns of possible "painful" adjustment for world economy

US Federal Reserve Chairman Alan Greenspan Friday cautioned that the adjustment of the world economy could be "painful" if the United States fails to cut its high budget deficit and if the trade barriers remain across borders.

Addressing a meeting of Group of Seven (G7) economic powers in London, Greenspan said the rise of the US current account deficit over the past decade appears to have coincided with a pronounced new phase of globalization.

He mentioned that so far the United States has had no problem financing its current account trade deficit, which last year hit record high 668 billion US dollars, because of the flexibility of the American economy.

But he also expressed concerns about the possibility that US debts grow to unsustainable levels and the move to open global markets is halted.

"Deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely," Greenspan said, repeating one of his frequent warnings. "At some point, foreign investors will balk at a growing concentration of claims against US residents."

Greenspan said if the global economy remains open and flexible, the US deficits will eventually be corrected by market forces.

"If the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy."

Greenspan who will step down as Federal chairman after 18 and half years on Jan. 31, was in London to attend his final meeting of finance ministers and central bank governors of the world's seven largest economies.

In addition to their normal discussions of the global economy, the Group of Seven finance officials were going to honor Greenspan with a retirement party, including a dinner Friday night, during the meetings.

On Friday, finance ministers and central bank governors from the G7 countries gathered in London for two-day conference to discuss world trade issues.

The meeting, hosted by British Chancellor of the Exchequer Gordon Brown, will mainly focus on development issues and economic aspects of trade in the run-up to the World Trade Organization ministerial meeting to be held in Hong Kong between December 13 and 18.

Finance ministers of China, India, Brazil will attend on the sidelines of the G7 meeting.

It is the last meeting of the G7 finance ministers in 2005. The G7 generally holds four meetings each year, but it has added a fifth one this year to bid farewell to the outgoing 79-year-old US Federal Reserve Chairman Alan Greenspan, who will be succeeded by top White House economist Ben Bernanke, 51.

The G7 comprises Britain, Canada, France, Germany, Italy, Japan, and the United States.

Source: Xinhua