In Which Ben Bernanke Asks and Answers a Rhetorical Question About the Eurozone

The current and the greater onrushing disaster that is macroeconomic policy in the eurozone is, in my opinion, the result of two things:

1. Setting up a Single currency in the region much broader than any optimum currency area.

2. Abysmal macroeconomic management by would-be economic hegemons that do not understand that system management needs to keep him employment high and thus make adjustment easy.

Even if dismantling the eurozone is not possible, transferring authority for North Atlantic macroeconomic management as a whole out of Europe is possible.

Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain? No: “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?…. Unfortunately, the answers… are… obvious… (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone…. In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today… the unemployment rate in the euro zone is more than 11 percent… a very large share of… younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential….

What is a problem… is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home… Two concrete proposals. First, negotiations over Greece’s evidently unsustainable debt burden should be based on explicit assumptions about European growth. If European growth turns out to be weaker than projected… Greece should be allowed greater leeway…. Second, it’s time for the leaders of the euro zone to address the problem of large and sustained trade imbalances… which… impose significant costs and risks…

If I were Ben Bernanke, I would put this much more strongly. The ECB, the IMF, and the northern European fiscal authorities have conspicuously failed to do their job to maintain a stable path of nominal demand growth the previously anticipated level in the euro zone. They also have failed to create the preconditions for Greece to grow out of its depression:

Since the primary responsibility for the fact that Greece’s debt is now unsustainable lies with the masters and designers of the current macroeconomic situation–with the ECB, the IMF, and the northern European fiscal authorities–creditors of Greece need to apply to them, And not to Greece, for rep for repayment. Greece’s debt should now be wiped clean.

Perhaps the ECB and the northern European fiscal authorities should be given one more chance to get their institutions of collective macroeconomic management right. And perhaps they can do so: impose responsibility for adjustment on surplus as well as deficit regions, set up the requisite system of fiscal transfers as insurance to make a currency union a win-win, and so forth. I would recommend against it. And if they are given one more chance, there need to be consequences if in five years eurozone economic governance and collective macroeconomic management are still in as great as mess as they are today.

Either then–or, I would prefer, now–Europe needs to cede control over macroeconomic management to more responsible actors. I would suggest a condominium of the U.S. and the IMF to serve as a hegemon for the North Atlantic macroeconomy as far as stabilization policy is concerned. A reallocation of more of the North Atlantic votes in the IMF to the United States and a substantial multiplication of the IMF’s resources could do the job.