Brainard Says Europe Needs Decisive Action Now to Spur Demand

The U.S. Treasury Department’s top international official said European officials deserve credit for restoring financial stability and must shift quickly to spurring domestic demand to avert a prolonged economic slump.

“Decisive action is needed now to restart demand and avoid the risk of protracted stagnation,” Lael Brainard, the Treasury’s undersecretary for international affairs, said in testimony prepared for a hearing today before the Senate Foreign Relations Committee.

Brainard reiterated the department’s view that access to credit for small and medium-sized businesses in southern Europe must be improved to combat high unemployment. The financial crisis in Cyprus underscores “the importance of moving forward with a full banking union,” she said.

The euro area’s 18-month recession will end in the second quarter, as the economy stagnates before returning to growth in the following three months, according to a Bloomberg News survey of economists. The economy contracted 0.2 percent in the first quarter.

The 17-nation economy’s contraction has left the European Central Bank to try to mitigate the damage by cutting interest rates and exploring unconventional ways of channeling money to needy companies, especially in the south. The ECB this month cut its benchmark rate to a record low of 0.5 percent.

“U.S. companies are adversely affected by weak business and consumer demand across Europe,” Brainard said. “Three years into the euro-area crisis, the risk of protracted stagnation represents one of the most important challenges to the global economic outlook.”

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