Must-Read: Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain? No.

Must-Read: Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain?: “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…. The failure of European economic policy has two, closely related, aspects: (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 United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential….

The promise of the euro was both to increase prosperity and to foster closer European integration. But current economic conditions are hardly building public confidence in European economic policymakers or providing an environment conducive to fiscal stabilization and economic reform; and European solidarity will not flower under a system which produces such disparate outcomes among countries….

Nobody is suggesting that the well-known efficiency and quality of German production are anything other than good things, or that German firms should not strive to compete in export markets. What is a problem, however, is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus… [which] puts all the burden of adjustment on countries with trade deficits, who must undergo painful deflation of wages and other costs to become more competitive….

I’ll end with 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 (either surpluses or deficits), which, in a fixed-exchange-rate system like the euro zone, impose significant costs and risks…

July 17, 2015

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