NEW YORK – While hailing recent progress in Europe’s financial mess, Federal Reserve Board Chairman Ben Bernanke warned Europe’s “situation remains difficult,” and the Fed will be prepared if U.S. markets need stabilization due to any contagion.

“The recent reduction in financial stresses in Europe is a welcome development for the United States, given the important trade and financial linkages connecting our economies,” Bernanke told a House committee Wednesday, according to prepared text of his remarks, released by the Fed. “However, Europe's financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilization. I believe that our European counterparts understand the challenges and risks they face and are committed to take the necessary steps to address those issues.”

During the past two years “high debts, large deficits, and poor growth prospects in several countries using the euro” led to “concerns about fiscal sustainability” for several countries, and the U.S. has felt the pain with exports to Europe underperforming exports elsewhere and the weaker demand from Europe slowing other economies’ growth.

With the recent easing of financial stress in Europe, financial market tone improved globally. “Although progress has been made, more needs to be done,” Bernanke testified. “Full resolution of the crisis will require a further strengthening of the European banking system; a significant expansion of financial backstops, or ‘firewalls,’ to guard against contagion in sovereign debt markets; and, critically, continued efforts to increase economic growth and competitiveness and to reduce external imbalances in the troubled countries.”

The Fed, Bernanke said, has kept close tabs on Europe and has been in touch with key European policymakers. “We are particularly focused on protecting U.S. financial institutions, businesses, and consumers from adverse financial and economic developments in Europe,” he said.

 

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