ALAN GREENSPAN last night issued a stern, renewed warning over threats to the global economy posed by the twin US budget and current account deficits, and a rising climate of protectionism worldwide.

As the outgoing Federal Reserve Chairman prepared to bid farewell to colleagues among finance ministers and central bank chiefs from the world’s biggest economies at a London dinner, he took the chance to re-emphasise his concerns over key global risks.

Mr Greenspan, 79, steps down from his post at the end of January after 18 years guiding the American economy.

Yesterday he said that unless action was taken to curb US Government borrowing and to fend off protectionist sentiment that could lead to new trade barriers, the world economy was prey to the risk that global imbalances could unwind in a painful manner.

“If . . . the pernicious drift towards fiscal instability in the United States and elsewhere is not arrested, and is compounded by a protectionist reversal of globalisation, the adjustment process could be quite painful for the global economy,” he told a conference on the fringe of weekend talks among the Group of Seven (G7) leading economies.

The Fed Chairman said that, so far, the US had avoided any serious pressure in financing its vast $668 billion (£385 billion) current account deficit. This might imply that a larger deficit had been made more sustainable by more integrated capital markets in a globalised economy, he suggested.

But he gave warning that if this flexibility was jeopardised by a “disturbing drift toward protectionism” that led to higher barriers to the free flow of goods and capital, then the current account deficit could trigger a severe adjustment.

In any case, he emphasised that the US reliance on ever- rising inflows of foreign capital could not go on for ever.

“Deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely,” he said. “To the extent that an economy harbours elements of inflexibility, so that prices and quantities are slow to respond to new developments, the process of current account adjustments . . . is also more likely to adversely affect the levels of output and employment as well.”

His warnings over the scale of the US budget deficit echoed earlier remarks he made in Philadelphia. If policymakers failed to rein in spending and borrowing, he said that “in the end, the consequences for the US economy of doing nothing could be severe”.

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