Ben Bernanke Speaks of Eurozone Crisis Alternatives

Ben Bernanke Speaks of Eurozone Crisis Alternatives

The leaders of the Eurozone must find a way to boost economic growth, as the crisis in this market is “unsustainable in the long term,” says the former chairman of the US Federal Reserve, Ben Bernanke.

The former central banker was speaking on Wednesday in Montreal to an audience of 1,200 people in the financial industry, who came to hear him speak during a party organized by the Montreal CFA Society.

After officially becoming the head of the Fed on 1 January 2006, Ben Bernanke has played an important role in limiting the impact of the financial crisis of 2007-2008, the worst recession to devastate the global economy since the Depression of the 1930s.

In the curse of a conversation with Chris Ragan (Professor of Economics at McGill University), Ben Bernanke argued that the 18 countries of the euro area are inspired by those who have managed to boost their economies, in the first place, the United States and the United Kingdom.

For if nothing is done, the Eurozone could face economic stagnation for years, warns former Fed chairman. A situation that could escalate and maybe even encourage some countries to question their commitment to the euro.

The ECB must resort to quantitative easing

Currently, Germany, France and Italy – the three largest economies in the market with 332 million people and a GDP of 11,906 billion dollars – are having difficulties, not to mention a increasingly large risks and worrisome deflation.

According to Ben Bernanke, European Central Bank (ECB) in an ideal world should play a greater role in reviving the economy, as did the Fed and the Bank of England.

“The United States and the United Kingdom have used quantitative easing, and they were able to revive their economies. Continental Europe has not done so, and failed to revive its economy,” said the former head of the Fed.

Through this policy (QE), a central bank buys financial assets (which may be both government securities as assets of the private sector) that finance the expansion of its reserves.

These purchases are sure to increase the price of the assets acquired and decrease performance. In addition, the increase in reserves available to commercial banks encourages the latter to increase the supply of credit to households and businesses. This is what allows to revive the economy.

In October, the ECB has implemented a form of monetary easing. It launched a program to purchase securities backed securities (Asset-Backed Securities) from among other financial institutions and SMEs. This policy is expected to restart lending to SMEs to stimulate investment and job creation.

The Germans rely on austerity

But according to Ben Bernanke, the ECB must go further, while fiscal policies are restrictive in the area. The problem is that the engine of the euro zone, Germany, will put on a policy of austerity. And countries that want to spend more to stimulate their economies, such as Spain, have too much debt to do so.

The economic recovery in the euro area is a major challenge, according to Ben Bernanke. For if the recovery continues growing in the United States, the US economy will still be affected by the slowdown in global demand: stagnation in Europe, recession in Japan and slower growth in China.

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