WASHINGTON — The U.S. economy’s recovery looks increasingly solid and Europe’s debt crisis is likely to have only a modest impact over here, Federal Reserve Chairman Ben Bernanke said Wednesday.
However, in testimony to Congress, the Fed chief cautioned that Europe should serve as a reminder of the big dangers posed to an economy lacking sound government finances. He even warned that the U.S. could experience the same problems faced by Greece if it doesn’t soon come up with a plan to reduce its huge budget deficit.
U.S. consumer spending and company investments are picking up the baton from a fading federal stimulus in lifting the economy, Bernanke said. Still, the recovery is likely to stay modest, with annual growth of 4.0 percent at most in 2010 and 2011, because of high joblessness and a weak housing sector.
But the biggest risk to the U.S. economy could come if financial markets begin to worry about the U.S. government’s ability and commitment to reduce a record budget deficit that is seen at around $1.5 trillion this year and next.
If the U.S. doesn’t soon come up with what he dubbed a “fiscal exit strategy,” Bernanke said that “would cause a lot of stress in the economy and, in the worst case, would cause financial instability like we’re seeing to some extent in Greece.”
Although markets have until now been focusing on the euro zone’s large sovereign debts, the U.S. is arguably in a worse situation. The Organization for Economic Cooperation and Development predicts that the U.S. budget deficit will be at 8 percent of GDP in 2011, compared with 9.3 percent of GDP in 2009. For the euro area, the OECD sees the deficit remaining around 4 percent of GDP.
European governments, aided by the International Monetary Fund, were forced to cobble together a nearly $100 billion bailout of Greece and an almost $1 trillion rescue fund for other weak euro- zone economies.
“What we’re watching is the rough justice of the marketplace,” said Rep. Paul Ryan, R-Wis., who is on the House budget panel. “Americans are left to wonder: Could we one day find ourselves at the epicenter of such a crisis? The answer is undoubtedly yes.”
