The global economy is being confronted with a new wave of credit tightening as a result of the European debt crisis that will subdue growth in many countries, Bank of Canada governor Mark Carney warns.

In his first speech since being named by G20 leaders to the head of the international body in charge of banking reform, Carney used a keynote speech to a London business audience Tuesday to stress the need for quick action to increase global liquidity.

But there was also a long game objective to Carney’s largely technical speech in one of the world’s leading financial hubs: connecting the dots on how he will use his three-year posting at the Financial Stability Board to try to end the boom and bust liquidity cycles that constantly plague the global economy.

“Global liquidity has fluctuated wildly over the past five years and we are on the cusp of another retrenchment,” he said in notes of the address released in Ottawa.

“Over the medium term, the continuation of such extreme liquidity cycles could ultimately threaten open capital markets and a free trading system if not better addressed.”

With private liquidity drying up over concerns about sovereign debt in Europe, Carney said it is again up to the public sector, in particularly central banks, to ensure there is sufficient credit available at reasonable terms for businesses and households to continue to invest and spend.

The recent retreat of available credit — much as happened when Lehman Brothers collapsed in 2008 — has already pushed Europe into what he said will be “at least a brief recession.”

But the impact has spread beyond Europe, he noted. Global financial markets have tightened significantly and market-making activity has decreased.

“The effect on the real economy will soon be felt,” he said.

Forecasts from global organizations such as the International Monetary Fund, as well as central banks, and private sector economies have all recently pointed to slower global and domestic growth.

In Canada, Carney last month projected the economy would slow to sub-one per cent growth in the last three months of this year, half of the expected rate of the third quarter.

The long-term answer to these wild fluctuation in global liquidity is enactment of financial system reforms proposed by the G20, which the FSB will help monitor, Carney said.

The reforms, if successful, will help moderate the cycles and help smooth out global liquidity flows by making financial institutions more sound, with greater capital reserves.

“Measures that increase the resilience of financial institutions … will reduce the probability and frequency of a sudden liquidity shock,” he explained. “Measures that reduce the procyclicality of the financial system will help stabilize global liquidity flows.”