THE UNITED States and Europe are the main engines of growth in the world economy. Together they account for half of all global economic activity, and 40 per cent of trade in global goods and services.
What happens in America matters in Europe, and vice versa. That economic reality was underlined yesterday by Ben Bernanke, chairman of the Federal Reserve and by Tim Geithner, secretary of the treasury, in their testimonies to a committee of Congress discussing the European debt crisis.
As Mr Bernanke pointed out, high debts, large deficits and poor growth prospects in some of the peripheral euro zone countries have undermined confidence in European financial institutions. These developments have had a negative impact on the US economy, depressing the country’s exports to Europe and weakening both US and global financial markets.
However, he readily accepted that financial strains in Europe have reduced in recent months, helped by a number of positive decisions: the European Central Bank’s provision of a huge liquidity facility, which has made it easier and cheaper for banks to borrow; the successful completion of the second Greek bailout; and the fiscal compact treaty, which imposes tougher debt and deficit discipline on most EU member states. But Mr Bernanke, while recognising that progress has been made, also said Europe’s financial and economic situation “remains difficult”. And he warned that “more needs to be done” to achieve a full resolution of the crisis.
On the steps that need to be taken, he was quite specific. European banks should be further strengthened. The EU should establish a larger firewall of funds to prevent contagion in sovereign debt markets. And the EU should also try harder to increase growth and competitiveness, with the implication that this could help peripheral countries in economic difficulty – such as Greece, Portugal and Ireland - achieve a better balance between austerity and growth. Mr Geithner in his congressional testimony made a similar observation.
Few in Ireland would fault Mr Bernanke’s proposals. Irish banks are now well capitalised, and they hardly need further support. A larger firewall adds to the credibility and seriousness of the commitments made by euro zone members to defend the euro at all costs. And a greater emphasis on growth, to balance the fiscal austerity imposed on weaker European economies, would help ease their painful path to economic recovery.