Weighing the risks
The most important risk hanging over the UK is not the scale of government borrowing: it is the pace of the recovery.
That was one important message that Mervyn King wanted to get across to the Treasury Select Committee this morning.
You might find this surprising, given the fevered debate of the past weeks over when and how to cut borrowing.
Hasn't Mervyn King played his own part in the debate - on occasion - insisting that the chancellor needed a "clear and credible plan" for bringing the structural deficit down?
The answer is yes. He wants the deficit to be high on the to-do list of the next government. And before that, he wants to see a "clear and credible plan" for cutting borrowing from the chancellor, in next month's Budget.
It's fun - I suppose - to ponder what, exactly, the governor means by a clear and credible plan, and how it would differ from the plan laid down in the pre-Budget report. He wants a "large part" of the structural deficit removed by the end of the Parliament.
So, is "half" a large part? If you took half of my dinner I would consider that a large part. But others say "a large part" actually means "nearly all".
Mervyn King didn't add light to this somewhat idiotic debate this morning. He talked about needing to have a plan to "bring down" the structural deficit in the lifetime of the Parliament.
The larger point is that the most credible plan you could imagine could still fail to cut borrowing, if the economy does not recover.
On the basis of his testimony - and that of other members of the Monetary Policy Committee (MPC) - it is the state of the recovery that is clearly their major concern.
We heard several times that "risks to the Committee's central view of a gradual recovery of output remain to the downside". Subtitle: we're not out of the woods yet.
Britain's banks, households and government all need to get their balance sheets in order over the next few years, and bring down their stock of debt. That has long been a reason to expect a weak recovery.
But, as King and his colleagues noted, the weakness of the recovery in the eurozone gives us another one.
Euro-sceptics may have been tempted to take some pleasure out of the travails of the euroland economies like Greece or Spain, who will struggle to regain their competitiveness without the option to devalue. But the state of our economy affords little room for schadenfreude.
The eurozone is by far our biggest trading partner: bad economic news in the eurozone is bad news for us as well.
We learned the other day that euro-zone GDP growth in the last three months of 2009 is estimated to have risen by just 0.1%, down from 0.4% in the previous quarter.
Germany seems to have had no growth at all, the Italian economy shrank by another 0.2%, and Spain by 0.1%.
Between them, those three countries accounted for 15% of UK exports in 2008. Exports to the eurozone accounted for about half.
As the deputy governor, Charlie Bean, pointed out, we haven't seen much of a bump to exports as a result of the unprecedented fall in the value of the pound in 2008/09.
That is partly because exporters have used the depreciation to earn bigger margins on the goods they sell abroad - rather than cut prices in foreign markets to boost sales.
This will come as no surprise to anyone who had studied the behaviour of the UK economy over the past 50 years: it's what our exporters always do. In an environment of collapsing domestic demand, it may also have been a handy way for such companies to preserve their cash flow.
But, even if we've learned to expect it, it's striking that UK export prices have fallen by little more than 10% relative to the sterling price of exports from other countries since the middle of 2007.
On a trade-weighted basis, the exchange rate has moved by 25% in that time. That's a lot of extra margin.
In theory, this needn't be a problem: if exporters are earning higher profits, that in itself should encourage those companies to invest and expand - and attract others to the sector. But that is unlikely to happen if the recovery in Europe disappoints.
Yes, the Brics (the burgeoning economies of Brazil, Russia, India and China) are growing at a fair clip - and so are our exports to those countries.
British exports to China were 53% higher last month than in January 2009. But they start from a very, very low base: just 2% of our exports went to China in 2008.
In total, about 12% went to the Brics - with about 75% going to advanced economies, primarily the the US and the EU.
Solid growth in Europe is a necessary condition for a healthy recovery in the UK. So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further quantitative easing wide open.