Former Federal Reserve Chair Ben Bernanke said Friday that the “failure of European economic policy” played a significant role in the Greek debt crisis.
“Now is a good time to ask: Is Europe holding up its end of the bargain?" Bernanke asked in a blog post on the Brookings Institution website. "Specifically, is the euro zone's leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece a reasonable chance to meet their growth, employment, and fiscal objectives?”
He called the answer “obvious”: No.
“Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing,” wrote Bernanke, who headed the Fed from 2006 to 2014 and now works as a Brookings Institution economist.
Bernanke argued that the economic policy failure of eurozone leaders has allowed unemployment in the eurozone to remain high since the 2008 crisis, and has enabled vast employment disparities between northern Europe and southern Europe.
While unemployment rates in the United States and Europe were both about 10 percent in late 2009 and 2010, unemployment is now 5.3 percent in the U.S. and more than 11 percent in Europe. Europe’s jobless rate would top 13 percent, he said, if not for Germany’s rate of less than 5 percent bringing down the average.
Bernanke attributed the eurozone’s stubbornly high unemployment mostly to inadequate monetary and fiscal stimulus -- casualties of what he called “political resistance.” He took European leaders to task for administering a strict diet of austerity policies at a time when he said printing money and allowing budget deficits, where possible, were urgently needed. He also said Europe's financial leaders should have moved more quickly to shore up confidence in major banks.
Bernanke said Germany’s tight fiscal policies are responsible for uneven employment within the eurozone. Germany’s tight fiscal policies keep consumer demand low at home, boosting its exports in a way that has given it a lasting trade surplus with its neighbors. In a currency union, these trading partners cannot devalue their money to boost their own exports in the same way. This puts them at an economic disadvantage that has kept unemployment high, he said.
To fix these problems in the context of the short-term crisis in Greece, Bernanke recommended eurozone leaders adjust the fiscal austerity they are imposing on Greece to more accurately account for overall sluggish European growth.
“If European growth turns out to be weaker than projected, which in turn would makes it tougher for Greece to grow, then Greece should be allowed greater leeway after the fact in meeting its fiscal targets,” he wrote.
He also recommended that the eurozone adopt rules against sustained trade imbalances to mirror its rules against high budget deficits. That would force Germany and other countries with massive trade surpluses to boost domestic demand through looser fiscal policies.
Bernanke’s blog post is consistent with his policy approach as Fed chair. He kept interest rates at or near zero, and initiated an unprecedented multi-trillion-dollar quantitative easing program. He also counseled Congress against reducing budget deficits prematurely.
But his criticism shows how far eurozone leaders’ post-financial crisis economic policies are out of the mainstream. The condemnation of liberal economists like Paul Krugman is one thing, but Bernanke is a self-identified Republican appointed by President George W. Bush.
Although Bernanke did not address in detail the German-led eurozone treatment of Greece since 2010, his indictment of European policies echoes widespread criticism by economists of the loans-for-austerity policies imposed on Greece.
Since being bailed out by Europe in 2010 and again in 2012, Greece has been forced to undergo one of the most dramatic fiscal adjustments in modern history. At the end of 2014, it boasted the highest cyclically adjusted primary budget surplus. But over the same period, its economy shrank by nearly one-third, and unemployment has risen above 25 percent.