Ben Bernanke's European blind spot

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Last week's press conference was not among Mr. Bernanke's finer moments in his eight-year chairmanship of the Federal Reserve. For aside from making the egregious blunder of providing a more specific time frame as to when the Fed's quantitative easing program might be ended, Mr. Bernanke appeared to seriously underestimate the very real external risks to the US economic recovery. In providing a relative rosy forecast for the US economy, no mention was made to either the economic slowdown presently underway in China or to the risk of a renewed intensification of the European economic crisis.

Mr. Bernanke's glossing over the threat to the US economic recovery from Europe is all the more surprising given the considerable importance of Europe in the global economy and the many red flags that are now surfacing in Europe about the prospect of renewed trouble for the European economy. Had he been paying attention, Mr. Bernanke might have noticed that the European economy is sinking ever deeper into economic recession. Mr. Bernanke also might have noticed that the Greek government is now teetering, that Silvio Berlusconi is insisting that the Italian government should take a tougher stance against Brussels' imposed budget austerity, and that the Cypriot president himself is acknowledging that the Cypriot economy is imploding.

Of all people, Mr. Bernanke should also have been painfully aware that there is very little that the European Central Bank can do to keep the European crisis from deepening ahead of the German elections in September, particularly since countries like Italy and Spain are now showing acute signs of austerity fatigue. And this awareness should have made Mr. Bernanke less confident in his relatively rosy scenario for the US economy in the year ahead particularly since the only thing that has held Europe together over the past year has been the ECB's pledge to do whatever it took to save the Euro. 

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
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    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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