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Bernanke: German Trade Imbalance Weighs on Rest of Eurozone

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Greece reopened its banks for the first time in three weeks — with restrictions —  and repaid some 6.25 billion euros ($6.78 billion) owed to the International Monetary Fund and European Central Bank on Monday. But its financial crisis is far from over, and the eurozone remains at risk, according to former Federal Reserve Board Chairman Ben Bernanke.

In his latest blog, Bernanke writes that the disparity among different eurozone economies pose “serious challenges” for the region and for the eurozone project. One primary example: the eurozone’s unemployment rate tops 13% excluding Germany, while Germany’s unemployment rate is under 5%, less than 5.3% rate in the U.S.

“The promise of the euro was both to increase prosperity and to foster closer European integration,” writes Bernanke. “But current economic conditions are hardly building public confidence in European economic policymakers or providing an environment conducive to fiscal stabilization and economic reform.”

Bernanke calls for the eurozone to address its “large and sustained trade imbalances” by having Germany reduce its “persistent trade surplus,” which has climbed to almost 7.5% of its GDP.

Germany has benefited from a euro that is “significantly weaker than a hypothetical Germany-only currency would be,” and has helped boost exports, writes Bernanke. But its “large trade surplus 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,” writes Bernanke. “Germany could help restore balance within the eurozone and raise the currency area’s overall pace of growth by increasing spending at home.”

Bernanke suggests that Germany increase spending on domestic infrastructure and push for higher wages at home.  Such measures would involve little sacrifice for Germany and would reduce the risks of a breakup of the euro area, says Bernanke.

Bernanke also suggests that the European policymakers amend the Stability and Growth Pact — the set of rules on the public finances and fiscal policies of member nations in the European Union — to include trade imbalances.

As for Greece, Bernanke suggests that creditors allow Greece some leniency in meeting its fiscal targets if European growth is weaker than they had expected during their negotiations with Greece.

Ashoka Mody, a visiting professor in international economic policy at Princeton’s Woodrow Wilson School of Public and International Affairs, offers a more dramatic solution to the problems in the eurozone than Bernanke does. In a Bloomberg View piece, he argues that Germany, not Greece, should leave the eurozone.

Germany’s departure would devalue the euro, giving countries like Greece “a much-needed boost in competitiveness and the disruption in Germany would be minor,” writes Mody.

Germans would be able to buy more goods and services in Europe because the new Deutsche mark would be worth than the old euro, but Germany’s exports would be more expensive and less competitive. That would reduce Germany’s large trade surplus, which former Bernanke says is needed.

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