It’s being called the “battle of the beards” — Paul Krugman vs. Ben Bernanke. Both are eminent (and bearded) economists: Bernanke, chairman of the Federal Reserve Board; Krugman, a Nobel Prize winner and a prominent New York Times columnist. Krugman accuses Bernanke of being too timid in fighting high unemployment and slow economic growth. Bernanke calls Krugman’s policy proposals “reckless.” What’s going on? 
 
 Beyond the rhetoric, there’s a serious debate about the Federal Reserve. A decade ago, the Fed was widely seen as all-knowing and powerful. It could cushion business cycles, defuse financial crises and ensure prosperity. No more. Almost everyone thinks unemployment (8.1 percent in April) is declining too slowly. By year-end 2013, it will still be somewhere between 7 and 8.1 percent, according to top Fed officials’ latest estimates. 
 
 Robert J. Samuelson writes a weekly column on economics. View Archive 
 
 The Fed hasn’t been passive. Since late 2008, it has kept overnight interest rates just above zero. During the 2008-09 financial crisis, its emergency loans to banks and money market funds averted a broader collapse. The Fed also bought more than $2.5 trillion of Treasury bonds and mortgage-related securities in an effort to lower long-term interest rates (studies suggest a decline of 0.7 percentage points or more) and boost stock prices, as investors seek higher returns. 
 
 But these heroic exertions haven’t yet ignited a robust recovery. 
 
 What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years. 
 
 “You’d make borrowing more attractive. Sitting on cash would be less attractive,” he says. The logic is straightforward. If prices rise 4 percent instead of 2, consumers and businesses have an incentive to buy now and avoid higher prices later. If interest rates don’t increase (or increase less than inflation), then “real” rates — adjusted for inflation — fall; again, that makes borrowing more appealing. 
 
 Higher inflation would also erode the “real” value of debt. With a lighter debt burden, households and businesses would feel freer to spend. Another channel would be a cheaper dollar on foreign exchange markets, making U.S. exports less expensive and imports more expensive. (Krugman minimizes this channel, because he thinks Europe and Japan should also pursue higher inflation.) 
 
 Besides Krugman, some other economists advocate higher inflation. But not Bernanke. 
 
 Without naming Krugman, he responded at an April 25 news conference: “Does it make sense to actively seek a higher inflation rate in order to achieve . . . a slightly increased pace of reduction in the unemployment rate? The view [of top Fed policymakers] is that that would be very reckless.” 
 
 Bernanke argued that the belief that the Fed keeps inflation down (what economists call the “anchoring” of inflationary expectations) tends to be self-fulfilling. If companies think inflation will stay low, they refrain from large price increases that might weaken their competitiveness. This then allows the Fed to be more aggressive in cutting interest rates to fight unemployment. If inflationary expectations shifted, as they might under Krugman’s proposal, the flexibility could be lost. 
 
 Although Bernanke didn’t say so, there are other reasons Krugman’s policy could backfire. Consider: 
 
 ●Prices might increase faster than wages, reducing workers’ purchasing power and (probably) dampening spending. 
 
 ●Experiencing higher inflation, consumers might become more fearful of the future and, to protect against the unknown, might increase saving and reduce spending — the opposite of what Krugman intends. This happened in the 1970s, although at higher inflation rates than Krugman proposes. 
 
 ●Something similar could happen in financial markets. Investors — not knowing whether inflation would return to 2 percent and fearing it might go higher than 4 percent — might demand much higher interest rates to prevent erosion of their money. This, too, would undermine Krugman’s strategy. 
 
 None of this is preordained. Krugman’s theory could be right. It responds to an understandable urge to do something about the feeble recovery and the millions left without work and hope. But in this debate, I side with Bernanke. Flirting with more inflation is treacherous. If inflation expectations change, the consequences are hard to predict. The double-digit inflation in the late 1970s (peak: 13 percent) resulted from well-intended mistakes and unleashed many damaging side effects. 
 
 What we should have learned since 2008 is that the Federal Reserve can’t do everything and overambitious goals guarantee disappointment. The larger lesson is that economists have exaggerated their understanding and control of the economy. People often don’t act according to academic theories. There isn’t a proper policy response for every need. This captures our frustration. ||||| And he's off. Ben Bernanke has left the building. No real new news. Bernanke may have his critics but you can't fault how "on message" he is. 
 
 In summary, the US economy is recovering, but worries remain over unemployment and the housing market. It's slow steam ahead. 
 
 Why are people dropping out of the job market? Yay. A good question. 
 
 "It's a very important issue," Bernanke says. "There is a downward trend." Female participation in the job market has levelled out and as society ages, male participation is declining, he says. 
 
 Bernanke says a "good bit of the decline represents cyclical factors, like young people who are not out of the market indefinitely but are going to school or doing something else other than working." 
 
 "I would agree with the argument that a significant part is cyclical and should reverse when the recovery gets stronger," he says. 
 
 The March report, which was a disappointment, may have been affected by the mild winter, he says. "The weather issue just reflects how difficult it can be to make real-time assessments" on the state of the economy, he says. It probably made January and February artificially strong and March artificially weak. 
 
 "We're doing our best to try to adjust for that." 
 
 Is Ben confident that the US will avoid long-term stagnation like Japan? 
 
 Two distinctions, says Ben. "We acted agrressively and preemptively to avoid deflation, and we moved fairly quickly to make sure banks were capitalized and that they recognised their bad assets." 
 
 "As a result the banking sector is much more resilient than it was a couple of years ago," he says. "That said, it's better to be humble and avoid being too confident. We need to continue to maintain strong monetary policy." 
 
 More questions about too big to fail. Ugh. How about some questions about the jobs market or housing? Too Bored To Type. 
 
 Bernanke is being asked about his Fed Love strategy. After the Fed hate-athon that followed the massive bailouts at the end of the credit crisis, Ben has been on an outreach programme, adding press conferences, doing speeches, releasing more data. "Most recently I did some classes at a local university," he says sweetly. 
 
 The aim is to make the Fed "a little bit more understandable to the average person" and also to communicate with markets. 
 
 On the latter, he believes there is better understanding and that there has been less volatility is interest rates. But this is an "ongoing task" he says. 
 
 Bernanke is being asked about "too big to fail" – where a firm is bailed out because its collapse would be too much for the financial system. 
 
 "The first thing we are going to do is make sure that these large institutions are stronger" Bernanke says, "and that they are watched a lot more carefully." 
 
 Also: they have to allowed to fail, he says. He's talking to international colleagues about how they could put multinational companies into receivership. 
 
 In January the Fed said strains in global financial markets were easing, but now they are more concerned, Bernanke says, that "in recent weeks we have seen more market stress". 
 
 Bernanke says he spent the weekend discussing the eurozone crisis with European leaders at the G20 meeting in Washington. "Progress has been made," he says, but "there's still more work to be done." 
 
 We are counting on our European colleagues to continue to follow through their commitments … in addressing significant problems and concerns in Europe. 
 
 Now he's being asked again about the Krugman piece. In particular, the perceived conflict between his views as an academic and his actions as Fed chairman. 
 
 Bernanke says there is no conflict. In his academic studies of Japan's crisis he said the Japanese had two priorities: to eliminate inflation, and, once that was done, for the central bank to act again when interest rates hit zero. "A central bank can do more," he says. 
 
 The US is not in deflation, he says. "Likewise we have been aggressive and creative" in their support of the US economy. So ner, Krugman. Ner ner ner. 
 
 Bernanke says rising gas prices have created a "temporary inflation bulge", but he doesn't seem too concerned. So far the US stock markets are not reacting to his statements – he hasn't said anything to surprise them. 
 
 First question is about the Krugman critique – is the Fed being too cautious? 
 
 Ben says "the committee has certainly been bold and aggressive" and "we remain prepared to do what is needed". The tools remain on the table, he says. 
 
 Bernanke is talking about the Fed's latest forecasts, which are modestly more upbeat about economic growth. 
 
 The growth forecast for 2012 has been moved up to a range of 2.4-2.9%, higher than the 2.2-2.7% projections made in January. Unemployment at the end of the year is expected around 7.8- 8%, down from the earlier projection of 8.2-8.5%. 
 
 Big Ben is in the house! This is Bernanke's fourth press conference. He's wearing a very sober navy tie. Bad sign? 
 
 Ben has faced a lot of criticism recently. Ron Paul, would-be Republican presidential candidate, has consistently attacked him and the Fed for doing too much. Over at the New York Times, Paul Krugman recently blasted him for doing too little. 
 
 Krugman said the "Bernanke Conundrum" was that here was an economist who is an expert on the Great Depression and Japan's lost decade, a man who has argued in academic papers that an "aggressive response" was the best course of action for solving those crises – and yet he has not been aggressive enough. Maybe Bernanke has been "assimilated by the Fed Borg and turned into a conventional central banker," wrote Krugman. 
 
 Poor Ben – damned if he does and damned if he don't. 
 
 There's been little reaction on the US stock markets to the Fed statement ahead of Bernanke's press conference. The Dow is up a smidge – 0.54% – at the moment. The statement didn't contain any surprises and these days the press conference is where most attention is focused. 
 
 March's jobs report caught every economist by surprise – but perhaps it wouldn't have if they'd been listening to Ben. He warned ahead of the report that the jobs recovery may be 'out of sync' with economic picture. Everyone will be listening closely to whatever he has to say about jobs and the wider economy today. 
 
 Hello there, Dominic Rushe here in New York. Ben Bernanke, the Fed chairman, is about to hold his latest press conference following the release of Fed's latest update on the US economy. We'll be liveblogging it here. 
 
 The federal open market committee (FOMC) statement said that the US economy has been "expanding moderately" but stopped short of taking any action to promote that recovery. 
 
 The statement comes after a series of economic indicators seem to suggest spring is finally here for the US economy – albeit with some showers. 
 
 In the corporate world, there are signs of recovery. Apple once again announced massive sales on Tuesday, and a raft of other firms including banks JP Morgan and Goldman Sachs, plus Alcoa, the aluminum firm, have also published better-than-expected results. Caterpillar, the largest maker of construction and mining equipment, announced results today that were slightly lower than expected but suggested a healthy pick-up in US construction. 
 
 Against this, Europe continues to struggle. The UK is back in recession. China's growth has slowed. Bernanke has said before that Europe's woes could threaten the US's recovery. 
 
 But the big report everyone is waiting for comes next week when the US releases the latest monthly jobs figures. Last month's figures were disappointing. The US created 120,000 jobs in March, half the number it had created in February. 
 
 Ahead of chairman Ben Bernanke's press conference later, the US Federal Reserve has repeated that it expects to leave interest rates at their current low level until at least late 2014. 
 
 In its statement, the Fed said the world's largest economy was expanding moderately, similar to its comments in March. 
 
 There were few clues as to whether it planned to provide further stimulus to the economy - today's disappointing durable goods order figures were the latest in a mixed bag of recent indicators. James Knightley at ING Bank said: 
 
 There are only very minor changes to the Fed's accompanying statement, in which they acknowledge that "inflation has picked up somewhat", reflecting higher energy costs. However they are not unduly worried given "inflation expectations have remained stable". As for growth, they continue to state the economy has "been expanding moderately". We therefore take the view that while QE3 remains a possibility, it will require an external shock – oil or an escalation of the sovereign debt crisis – for the Fed to pull the trigger. 
 
 The Fed gives its updated GDP forecasts in just over an hour, followed by Bernanke's press conference. 
 
 All eyes and ears will be on the chairman to see whether he gives any further hints about the Fed's plans, and my US colleagues will be taking over the blog shortly to cover the meeting. 
 
 At this end, we'll be back to cover all tomorrow's developments, so it just remains to thank you all once again for all the lively comments so far. 
 
 European markets have closed and despite continuing worries about the eurozone debt crisis and the UK tipping into a double dip recession, the mood has been reasonably positive. 
 
 Apple's forecast beating figures have proved a strong influence, as has optimism ahead of the imminent US Federal Reserve announcements and press conference following its latest meeting. 
 
 The FTSE 100 is the laggard across Europe, which is perhaps not surprising given the GDP figure showing a second quarter of decline. It is up just 0.16% at 5718.89. Germany's Dax, by contrast, is 1.8% higher while France's Cac has climbed 2.06%. Spain's Ibex is 1.7% better and Italy's FTSE MIB up 2.91%. 
 
 Meanwhile ahead of the Fed, the Dow Jones Industrial Average is 0.58% higher at the moment. 
 
 China to the rescue is a refrain being repeated once more. According to Reuters, Italy's deputy economy minister Vittorio Grilli is visiting Beijing tomorrow. 
 
 His mission? To persuade Chinese investors like the China Investment Corporation to buy Italian government bonds, which of course have come under renewed pressure in the markets as the positive effects of the ECB's cheap loans began to wear off. 
 
 Italy's prime minister Mario Monti made a similar appeal for investment during a visit last month. 
 
 Meanwhile Francois Hollande is stirring things up even more, suggesting the European Central Bank should be able to intervene directly to help states. That attitude should make his forthcoming meetings with Germany's Angele Merkel interesting, presupposing he does indeed get elected. 
 
 But as several people have already pointed out on Twitter, saying things before an election do not necessarily mean they get done once polling day has passed. 
 
 Wall Street has opened sharply higher. There is a growing feeling that after fairly mixed recent data, and the continuing eurozone crisis, the US Federal Reserve might hint at further stimulus moves to boost the world's largest economy. 
 
 Today's worse than expected durable goods orders has just added fuel to that particular fire. A statement and press conference is due later following the Fed's latest meeting. 
 
 So the Dow Jones Industrial Average is up around 90 points in early trading. Better than expected results from Apple have also helped the mood across the Atlantic. France's Cac is around 2.5% higher and Germany's Dax nearly 2% better. But the FTSE 100 is up just 15 points or so, following the GDP figures showing the country is back in recession. 
 
 As the electioneering in France continues, both the presidential frontrunner Francois Hollande and the incumbent Nicolas Sarkozy have been spelling out some of their plans if they are elected. 
 
 Sarkozy said if the controversial EU fiscal pact - which he supports - was not backed by the Senate, he would call a referendum to see what the French people wanted. In some ways, however, the election is that referendeum since Hollande opposes the measure. 
 
 Hollande confirmed France would not ratify the treaty if he was elected. He added that if he won he would set out his ideas on improving economic growth in a letter to EU leaders the day after the election. As Reuters reports, he told a news conference his letter would include four points: 
 
 
 
 "First the creation of eurobonds, not to mutualise debt but to finance investment and industry projects. The second point will be to free up more investment financing by the European Investment Bank", he said. He said the third point would be to create a financial transaction tax to help finance development projects, and the fourth would be to deploy structural funds for different projects. 
 
 There's some more fall-out from the Dutch prime minister's resignation on Monday. 
 
 Fitch forecasts that the Netherlands will miss its target to reduce the budget deficit to 3% this year, "following the breakdown in negotiations over austerity measures and possibility of early elections". It wrote: 
 
 The Dutch Prime Minister tendered his resignation on Monday following the failure of three-party negotiations over fiscal consolidation measures. These measures were intended to ensure the government meets its commitment to the European Commission to rein in its deficit to under 3% of GDP in 2013. Early elections in September are probable. In the meantime, a caretaker administration would be responsible for the day-to-day running of the country. Its caretaker status would not necessarily preclude further austerity measures being introduced during its term. However, the electoral cycle would make this outcome less likely. It is therefore possible that no such measures will be agreed until the autumn, by which point their effectiveness in reducing the current year's fiscal deficit will be limited. 
 
 Fitch expects the budget deficit to be 4.5% of GDP this year. Its base-case scenario is that the Netherlands will manage to rein that in to 3% next year, but it warns that if it does not, it may lose its AAA rating. 
 
 And with that, I'm handing over to my colleague Nick Fletcher. 
 
 Greece has completed the restructuring of some €200bn of its debt mountain today. 
 
 It swapped a final €522m of Greek bonds, bringing the total participation rate for the swap up to 96.9%. Greek officials were very pleased with the result. 
 
 Across the pond, US durable goods orders were much worse than expected. New orders dropped by 4.2% in March compared with expectations of a drop of just 1.7%. In February, new orders grew by 1.9%. 
 
 Those gloomy figures come ahead of the Fed's interest rate decision due out at 5.30pm today, followed by Fed chairman Ben Bernanke's press conference. 
 
 Economists expect those to confirm a few common beliefs: That the Fed plans to keep short-term interest rates at record lows through 2014. That it isn't going to launch any new program to ease long-term rates unless the economy weakens. But it isn't ruling out such a program, either. 
 
 The OECD today confirmed what many will have noticed over the past year, that governments in developed countries are squeezing more revenue out of workers. 
 
 In its Taxing Wages report, the OECD notes that the average tax and social security burden on workers increased in 26 out of 34 OECD countries in 2011 
 
 It looks at the tax wedge, which it defines as the difference between the cost of employing a worker (ie gross wages, social security contributions and employer's taxes) and take home-pay. That was highest in Belgium at 55.5%, followed by Germany at 49.8%. Chilean workers were the most lightly taxed, with a tax wdge of 7%. 
 
 OECD tax expert Maurice Nettley warned governments against squeezing workers too much: 
 
 What you have to do at the moment is to keep incentives going for people to be in work. 
 
 In corporate news, Europe's largest drug company GlaxoSmithKline is feeling the effects of the eurozone crisis, as my colleague Julia Kollewe reports: 
 
 GlaxoSmithKline, Europe's largest drugmaker, barely grew in its first quarter, as sales and profits were hit by government austerity measures in Europe and some emerging markets, such as Russia and Turkey, as well as political unrest in the Middle East. GSK chief executive Andrew Witty said government-imposed price cuts in Europe were worse than expected and would probably average between 4% and 5% for the rest of the year. 
 
 There's some good news for Hungary, which has been stuck in a dispute with the European Commission over the independence of its central bank for the past five months. 
 
 The EC says it is satisfied with assurances from Budapest that its central bank law would be brought back in line with that of the European Union. That paves the way for talks over financial aid to stabilise Hungary's faltering economy. 
 
 There's been a war of words up to this point, with the EC questioning "the quality of democracy" in Hungary; and Hungarian prime minister Viktor Orban this week accusing the EU of setting unfair preconditions for talks. 
 
 We've got more from the European Parliament, where ECB president Mario Draghi and vice president Vitor Constancio are talking. 
 
 In the question and answer session following his statement to the committee, Constancio said the ECB will cut interest rates if the risks facing the eurozone materialise. 
 
 We don't know what is going to happen with the economy but if those risks we have mentioned turn out to be true, then rest assured we will adapt our policy as we did last year. 
 
 Here's a graph showing that the UK economy has performed even more weakly since the current financial crisis began than in the Great Depression: 
 
 Each number on the horizontal axis represents one calendar quarter, while the vertical axis tracks economic outlook (with 100 representing the peak economic outlook before each downturn began). 
 
 With thanks to a fund manager who tweets as @Pawelmorski, who points out that Britain did "the equivalent of leaving the euro" (ie, quitting the gold standard) in 1931 (data points 4-7) on the graph. 
 
 Compass, the left-wing pressure group, argues that neither Labour nor the Conservatives have the right policies to end the economic crisis. 
 
 Neal Lawson, chair of Compass, said Ed Miliband and Ed Balls should be bolder: 
 
 Labour's '5 point plan' doesn't go far enough. Ed Miliband and Ed Balls need to go on the offensive by presenting a clear alternative to the failed politics of austerity, rather than offering up a lightweight version of the "Osbornomics" which has let the country down so badly these last two years. 
 
 • Reversing the cuts until the economy is growing strongly. 
 
 • A new round of Quantitative Easing to be directed to a Green New Deal, to insulate and prepare large numbers of buildings to use renewable energy. 
 
 • Cancelling PFI debts, saving the nation £200bn in debt repayments. 
 
 • Increasing some benefits for the poorest, who are most likely to spend any extra income, thus boosting demand. 
 
 • Introducing a Financial Transaction tax on the City to be used for public investment purposes. 
 
 • Closing the £70 billion lost tax gap with a range of anti-avoidance measures including a general anti-avoidance principle. 
 
 MPs are continuing to grill David Cameron over Britain's double-dip recession at Prime Minister's Questions. Conservative members are eager to report signs of recovery in their constituencies, while Labour ones are asking why the PM won't change course. 
 
 Cameron argues that, behind the 0.2% contraction, there are signs that a "rebalancing of the UK economy" is taking place. 
 
 He also insists that the current fiscal plans are right, saying that Britain had "a deficit bigger than Greece, bigger than Spain, bigger than Portugal" when he took office. 
 
 In the House of Commons, Ed Miliband begins Prime Minister's Questions by asking David Cameron about the "catastrophic news" that the UK is back in recession. What is the prime minister's excuse? 
 
 Cameron says that the 0.2% drop in GDP is "very, very disappointing", and shows that Britain faces "a very tough situation that just got tougher". 
 
 Cameron insists, though, that the UK economic crisis did not suddenly flare up in the last 24 months, and that the country is recovering from the deepest recession in living memory. 
 
 We have got to rebalance our economy. We need a bigger private sector, more exports, more jobs.... The debt crisis was long in the making.....government overspending was long in the making. 
 
 So the government's strategy is clearly to pin as much blame as possible for today's GDP data on the previous government.... 
 
 Our political colleague Andrew Sparrow is covering all of PMQ's in his Politics Live blog, here. 
 
 Shadow chancellor Ed Balls has excoriated George Osborne's handling of the UK economy, saying the chancellor's 'failed policies' has driven Britain back into recession. 
 
 Balls said: 
 
 We consistently warned that their austerity plan was self-defeating and that cutting spending and raising taxes too far and too fast would badly backfire. David Cameron and George Osborne arrogantly and complacently dismissed people who warned of the risk of a double-dip recession and the country is now paying a very heavy price. Their economic credibility is now in tatters. 
 
 Balls clearly sees the 0.2% fall in GDP in the last quarter as vindication for his repeated warnings that Osborne has been cutting 'too far and too fast' (a phrase that we'll be hearing again, and again). 
 
 As Dan Hodges puts it in the Daily Telegraph: 
 
 Ed Balls has put George Osborne on the canvas. 
 
 There's better news on the UK economy out of the CBI, whose monthly survey showed confidence among Britain's manufacturers improving markedly this month. 
 
 The CBI's quarterly measure of business confidence jumped to a balance of +22 from -25 in January. CBI chief economic advisor Ian McCafferty said: 
 
 With acute fears over Europe and global demand subsiding somewhat since the start of 2012, sentiment about the general business situation has risen among manufacturers for the first time in a year. Nevertheless, given Europe is still our biggest export market, the outlook for UK manufacturing will remain uncertain until the eurozone crisis is resolved. 
 
 Graeme Wearden looks at some of the scepticism around the UK GDP figures this morning... 
 
 Is Britain really back in recession? Two of Britain's more respected business groups are questioning the accuracy of the Office for National Statistics data - claiming that it gives too pessimistic a view. 
 
 The CBI said it was "surprised" by the news that the UK contracted by 0.2% in the last three months. CBI director-general John Cridland argued that business confidence has improved recently, and that underlying economic conditions appear to have strengthened since the eurozone fires were raging last autumn. Cridland said: 
 
 In particular, the weakness of the services sector data does not tally closely with a range of survey indicators suggesting that the sector has been picking up through the first quarter. 
 
 According to the ONS, the UK services sector grew by just 0.1% in Q1 2012. 
 
 Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, was blunter - reacting with "disbelief" to the news of Britain's first recession since the 1970s. Goodwin pointed to recent economic surveys that showed decent growth in services and construction. He added: 
 
 I would be very surprised if these figures were not revised upwards substantially, although history tells us that this process may take a while. In the meantime, the concern is that the extra bank holiday in June will cause another negative in Q2. The prospect of three successive negative quarters will further depress confidence and reinforce the culture of risk aversion which is preventing any sustainable recovery from taking off. 
 
 Back to the European Parliament, where ECB vice president Vitor Constancio said the bank would adapt its monetary policy if "downside risks turn out to be true". 
 
 MEPs will this afternoon vote on a financial transaction tax. ECB president Mario Draghi gave his opinion on the controversial tax this morning: 
 
 One wonders whether a financial transaction tax is the best way to attract investors back to the euro area. 
 
 Greece is clamping down on benefit fraud. A labour ministry official said this morning, it has stopped benefits, including pensions, to some 200,000 people who lied to get their monthly cheques or were in fact dead. 
 
 Athens apparently discovered the fraud after basic data checks and means-testing, which it started following pressure from its international lenders to cut deficits. 
 
 There's more analysis from my colleague Polly Curtis on the cause of the double-dip recession. She asks, is the coalition's economic strategy to blame, or the eurozone crisis? 
 
 The German government is coming out with some economic forecasts to make George Osborne turn green. 
 
 It is sticking to forecasts that growth in the German economy will likely slow to 0.7% in 2012, and will expand by 1.6% in 2013. 
 
 The government believes private consumption remains the support for growth and expects disposable income to rise 3.3% this year, and 3.1% in 2013. Economy minister Philipp Roesler said: 
 
 Even if the German economy is excellently positioned, we have deliberately remained on the cautious side with our forecasts. This is because the risks in the international environment remain high. The European sovereign debt crisis has not been solved. 
 
 He said Germany supported the ECB in returning to "normal mode" of monetary policy and its focus on price stability. 
 
 There's a couple of lines coming out of Germany's debt agency, which said in a statement that the bond auction reflects the very volatile, uncertain market environment. 
 
 A spokesman for the agency subsequently told Reuters that they see no difficulty in placing the Bunds they did not sell in the secondary market. He said the market is somewhat saturated and the ability to absorb fresh long-term debt was limited. 
 
 Another wry observation that the low yields on Germany's government debt are a product of the market we are in, from Sony Kapoor of think-tank Re-Define. 
 
 Low #German bond yields are more a case of the one-eyed being the king in the land of the blind than anything else! Flight 2 relative safety — Sony Kapoor (@SonyKapoor) April 25, 2012 
 
 Today's figures show just how badly the UK is doing, compared with the US. The British economy is still 4.3% smaller than in was before recession of 2008, by contrast the US has recovered its losses. 
 
 Reuters have put out a chart comparing the trajectory of GDP in the UK, US and Eurozone. 
 
 It should be noted that not everyone was flocking to buy the German debt at those levels, as the Bundesbank could not sell all of the €3bn of Bunds on sale, making it technically a failed auction. Dow Jones currencies editor Katie Martin notes that this will no doubt prompt heated discussions among market commentators.... 
 
 Cue the usual 'OMG Germany is screwed' vs 'no it's just a really low yield' shouting match. — Katie Martin (@katie_martin_FX) April 25, 2012 
 
 Fund management veteran Pawel Morski points out that the successful German bond auction only serves to demonstrate the fear in the markets. 
 
 Remember: people buy bunds when they're scared of everything else. Everybody except John Paulson understands this. — P M (@Pawelmorski) April 25, 2012 
 
 Germany, meanwhile, has managed to sell €2.4bn of 30-year Bunds at a record low yield (the interest rate it must pay on the debt) of 2.41%. 
 
 Our economics editor Larry Elliott gives his view of the UK GDP figures. You can read his full analysis here. 
 
 The dip in activity is small but massively significant. With the Government up to its eyeballs in the phone hacking scandal and with local elections looming, the timing could hardly have been worse for David Cameron and George Osborne. Slow growth makes it harder for the Government to hit its deficit-reduction targets and may well result in the UK having its credit-rating downgraded. That would be a bitter blow for Osborne, since his entire economic and political strategy has relied on the UK remaining in the dwindling club of nations with a prized AAA rating. City analysts, once again caught on the hop by the dismal growth figures, will no doubt make the point that the main reason behind the 0.2% contraction in the first quarter was the performance of the construction sector, where the figures are notoriously prone to revision. It could well be that fresh data over the coming months will see growth revised up and no double-dip recession after all. But today's announcement will be big news; any positive changes later will not be. The damage has been done. 
 
 In the UK, we've got plenty of reaction to the dismal GDP figures. The centre-left think tank IPPR said: 
 
 This is a further blow for the government's reputation for economic competency. 
 
 The economists are mixed on the results. Chris Williamson, at Markit, said: 
 
 The underlying strength of the economy is probably much more robust than these data suggest. The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession. 
 
 David Miller, partner at Cheviot Asset Management agrees: 
 
 Investors have been looking to the GDP figures coming up this week as their fear is that should numbers be poor, we could be in for a repeat of July and August last year when the markets sold off. From corporate results this does not feel like a recession. Today's numbers could, however, have a negative effect on consumer and business confidence and so be self-fulfilling as we enter the summer months. 
 
 James Knightley, UK economist at ING, says the data is unlikely to heral more QE next month: 
 
 Deputy Bank of England governor, Paul Tucker, commented recently that the GDP numbers come with a "risk of mismeasurement" because of construction data issues. He indicated that looking at the business surveys may provide a truer picture of the state of the UK economy than the official measure of GDP, which suggests he will not be overly concerned by a disappointing GDP reading. Consequently this is unlikely to significantly alter the outlook for policy with further QE probably not coming through in May. 
 
 Vicky Redwood, senior UK economist at Capital Economics, says she would not dismiss today's figures so readily: 
 
 Even if the underlying picture is stronger than the official GDP figures show, there is no guarantee that the recent pickup will continue. Indeed, we remain comfortable with our view that GDP will contract by about 0.5% this year. 
 
 Back to the European Parliament, where ECB President Mario Draghi said the results of the bank lending survey were "encouraging" but demand for credit is still very weak. 
 
 He gave no indication that the ECB was poised to provide more support for banks or governments but also said the time was not right to consider rolling back its crisis-fighting measures. 
 
 The primary mandate of the ECB is ensuring price stability in the medium terms for the whole fo the euro area. I think that we have to ... [keep] this thin but delicate balance where we want to preserve the credibility of the ECB. 
 
 But he said an exit strategy from the ECB's emergency measures was "premature" given prevailing conditions. 
 
 General consensus is that this is a terrible outcome for Chancellor George Osborne. Channel 4 reporter Faisal Islam points out the huge discrepancy in what has happened in the economy compared with what was supposed to happen... 
 
 In all 8 quarters since the Chancellor arrived at Number 11, economy has grown 0.4% vs 4.3%* predicted by June 2010 deficit reduction plan — Faisal Islam (@faisalislam) April 25, 2012 
 
 The 4.3% is, apparently, composed of 3.6% identified by the Office for Budget Responsibility plus 1/4 of 2012 estimate of 2.8% also by OBR. 
 
 The briefing has now finished. Looking at the GDP release, the ONS has adjusted the data to take into account the leap year on 29th February, by adjusting February's value to "represent an average length February of 28 1/4 days". This, Joe Grice said, is "in accordance with best international practice". 
 
 ... thanks to Graeme Wearden for those updates. 
 
 Reuters asks Joe Grice whether the ONS expects a similar performance in the second quarter of 2012. He won't be drawn into speculation, saying: 
 
 We have enough problems, as these questions have shown, trying to measure the current quarter. 
 
 We're not in the business of forecasting, he adds. 
 
 The 'bigger picture'in today's GDP data is that the UK economy, in volume terms, was flat in Q1 2012 compared to Q1 2011. 
 
 Looking at the UK since last summer, Joe Grice says, the picture is of "a flattish economy". 
 
 Britain is the first major economy to report GDP data for the last quarter. Grice is asked whether there have been discussions between the ONS and the Bank of England about whether to wait a bit longer and get more data in. Grice responds that: 
 
 We haven't had discussions about this..... clearly there is an advantage in having data earlier rather than later. 
 
 Today's data is only the preliminary estimate of Q1 GDP in 2012, based on aroudn 42% of total output during the quarter (it mainly covered January and February). 
 
 Joe Grice says there is: "as much chance of an upward revision as a downward one" 
 
 The ONS is challenged over its use of construction data -- today's data includes a 3.0% plunge in construction output. Last week, the Bank of England minutes showed that it has some concerns. 
 
 Joe Grice responds that the ONS polls 8,000 construction firms to track activity. It's fully confident that its data is accurate. 
 
 Updates from Graeme Wearden at the GDP press conference... 
 
 small gasp and furions tapping as joe grice reveals the Uk is back 
 
 into recession. 
 
 The first question -- are there any special factors that might have influenced this data? Joe Grice says no. The panic fuel buying has probably not had any effect, he says. 
 
 Duncan Weldon of the TUC expresses the general feeling of doom following the UK's GDP figures. 
 
 I was expecting weak growth around the 0.1 or 0.2% mark. Which would have been very bad. This is just awful. — Duncan Weldon (@DuncanWeldon) April 25, 2012 
 
 George Osborne has put out a statement reacting to the news saying the UK economic situation is very tough and is taking longer than hoped to recover. But he won't be swayed from Plan A. 
 
 The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt. 
 
 He says paying off the debt is harder as Europe nears recession and notes that the UK faces the "biggest debt crisis of our lifetimes". 
 
 The pound dropped on the news that the UK is officially back in recession, which produced a gasp in the newsroom. We'll have more detail coming in from Graeme Wearden who's at the press conference 
 
 First quarter construction output was down by 3%, the biggest drop since the first quarter of 2009, and compared with a drop of 0.2% in the last quarter of 2011. 
 
 UK drops into recession after first quarter GDP came in at -0.2 
 
 My colleague Graeme Wearden is embedded at Church House in Westminster for the Office for National Statistics press briefing on UK GDP for the first quarter of 2012. 
 
 He writes: 
 
 At 9.30 sharp, we'll find out whether the UK is in recession again. Joe Grice, ONS chief economist, and senior statistician Harry Duff will then answer a few questions from the assembled media (which consists of me and a group of cameramen, at the time of writing). Following the 0.3% contraction in Q4 2011, City economists expect meagre growth of perhaps 0.1% to 0.3%. But a second contraction can't be ruled out (as Bank of England dove David Miles warned yesterday evening). We've certainly got the weather for a double-dip recession -- it has been tipping it down in London this morning. 
 
 The consensus opinion for UK GDP may be growth of 0.1%, but economists at the big banks are more downbeat, as FT reporter Alice Ross notes: 
 
 Much protective muttering among investment banks this morning predicting doom for UK Q1 GDP. Consensus is 0.1% but not judging by my inbox. — Alice Ross (@aliceemross) April 25, 2012 
 
 More from ECB president Mario Draghi, who's speaking to the European Parliament. 
 
 He says the financial market situation has markedly improved since the long-term refinancing operation, and constraints on bank lending have declined significantly since the second tranche of money was released in February. Referring to the possibility of another LTRO, he said "we never precommit". 
 
 He was also keen to stress the role individual banks must play. 
 
 I consider it of crucial importance that banks strengthen their resilience further, including by retaining earnings and by retaining bonus payments. The soundness of banks' balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of their funding channels. 
 
 ECB President Mario Draghi has been speaking to the European Parliament's Committee on Economic and Monetary Affairs. He sees economic activity stabilising "at a low level", noting that developments in survey data are mixed, highlighting the prevailing uncertainty. 
 
 Looking ahead, he says growth should be supported by foreign demand, very low short-term interest rates, as well as the ECB's "non-standard measures", such as the bank's long-term refinancing operation. 
 
 On the downside, he said risks relate to renewed intensification of eurozone debt market tensions and potential spillover to the economy. Further rises in commodity prices could also hamper economic activity. He thinks inflation risks are balanced. 
 
 Inflation is likely to stay above 2% in the course of this year, because of recent increases in energy prices and indirect taxes. The governing council continues to expect annual inflation rates to fall below 2% in early 2013. 
 
 He is confident central bank liquidity has come very close to the real economy. And says that credit growth depends on demand, which is likely to remain subdued. 
 
 He says non-standard measures are not a contraint on setting interst rates to secure price stability, and said the ECB will use all the tools available to counter upside prices risks if they arise. 
 
 Quick look at the markets, which are all slightly higher. Traders woke in a good mood after Apple beat expectations across the board last night. 
 
 FTSE 100: up 0.3%, or 18 points, at 5728 
 
 France's CAC 40: up 0.2% 
 
 Spain's IBEX: up 0.7% 
 
 Italy's FTSE MIB: up 0.5% 
 
 Germany's DAX: up 0.5% 
 
 We've got some analyst comment about the upcoming GDP figures from the UK. Michelle Girard, Omair Sharif & Guy Berger of RBS expect a drop in GDP: 
 
 Overall, we forecast the preliminary Q1 GDP estimate to show a fall of 0.1% q/q, +0.2% y/y. This seems artificially low – dragged down by implausibly weak construction output data and the inherently volatile energy sector. For reference, GDP ex-construction looks set to rise by around 0.5% q/q and this is a better indicator of the underlying state of the economy 
 
 Michael Hewson of CMC Markets is more upbeat: 
 
 Given that every single sector of the economy has seen robust PMI data in January, February and March it would be somewhat of a surprise if the data were to disappoint, whatever MPC member David Miles suggested yesterday about the risks of a small contraction, due to weak demand in the economy. Expectations vary as to the figure that markets are looking for, but anything between 0.1% and 0.3% is likely to see a fairly muted reaction in line with expectations. Zero growth or a negative number could well see a sharp sterling sell off after the gains of recent weeks. 
 
 There was a spate of gloomy corporate news out of Europe this morning. My colleague Julia Kollewe has this report. 
 
 Siemens, Germany's biggest company, has warned on annual profits after incurring charges related to delayed offshore wind projects. It has slashed its estimate for profits this year to €5.2-€5.4bn, from €6bn. Peugeot Citroen blamed the recession-hit markets in southern Europe for a 7% sales slump in the first quarter. And Spain's second-biggest bank BBVA suffered a 13% drop in first-quarter profits but managed to meet solvency targets set by European regulators - without selling core assets or chipping into its dividend. 
 
 Here's today's agenda. 
 
 • ECB preisdent Draghi appears at European Parliament: 8am BST 
 
 • Bundesbank board member Dombret speaks: 8.25am BST 
 
 • ECB publishes euro area bank lending survey: 9am BST 
 
 • UK preliminary GDP for Q1 2012: 9.30am BST 
 
 • ECB annual report presented to European Parliament: 10.15am BST 
 
 • UK CBI trends for April: 11am BST 
 
 • US durable goods orders for March: 1.30pm BST 
 
 • MEPs vote on financial transaction tax: 3pm BST 
 
 • US interest rate decision: 5.30pm BST 
 
 • Fed chairman Bernanke holds press conference: 7.15pm BST 
 
 In the debt markets, Germany is auctioning €3bn of 32-year Bunds, maturing in 2044. 
 
 Good morning and welcome to today's rolling coverage of the eurozone financial crisis. 
 
 The big news this morning will be the UK's GDP figure, which will tell us if we've fallen into a double-dip recession or not. The economy shrank by 0.3% in the last quarter of 2011, so a second quarter of contraction would signal we are back in recession. 
 
 The consensus view is that that's not going to happen, with the average forecast for 0.1% growth, but the economists have been wrong before. (The sweepstake in the newsroom ranges from -0.3 to +0.3). We'll be following the action as it happens, courtesy of my colleague Graeme Wearden, who's heading over to Westminster for the press conference. 
 
 In the eurozone, Mario Draghi, president of the ECB, is appearing before the European Parliament to explain the central bank's policy stance. MEPs are voting on the introduction of a financial transaction tax. And the German government will publish its twice-yearly economic forecasts. ||||| Advertisement Continue reading the main story 
 
 
 
 
 
 
 
 Washington 
 
 On Wednesday at 2:15 p.m., Ben Bernanke will do something that previous Federal Reserve chairmen considered a terrible idea. He will hold a news conference. 
 
 Mr. Bernanke spent much of his academic career arguing that the Fed should be less opaque, and, as chairman, he has put his ideas into action. Now it’s time for those of us in the media to hold up our end of bargain. In the spirit of democratic accountability, we should ask hard questions — and we shouldn’t let him get away with the evasions and half-answers that members of Congress too often allow Fed chairmen during their appearances on Capitol Hill. 
 
 One question more than any than other is crying out for an answer: Why has Mr. Bernanke decided to accept widespread unemployment for years on end, even though he believes he has the power to reduce it? 
 
 The Fed’s own forecasts suggest that the unemployment rate won’t fall below 5 percent for perhaps another five or six years. Mr. Bernanke believes the Fed “retains considerable power” to reduce unemployment faster, despite the fact that its benchmark interest rate is zero, as he’s said before. Yet he has been hesitant to use that power. 
 
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 He is in a tough spot, to be fair. Several other voting members of the Fed’s monetary policy committee — and some prominent members of Congress — oppose aggressive action, because they worry it will set off inflation. But these critics always worry about inflation. They have been wrong again and again over the last two years. More important, they don’t have enough power to keep Mr. Bernanke from pursuing the policy he thinks is best. 
 
 So the Fed’s decision to permit high unemployment for an extended period rests on his shoulders. 
 
 As he has explained many times, the Fed has alternatives. It could announce that it would keep its benchmark rate at zero for a few years, which would probably hold down long-term rates. It could say that it was comfortable with higher inflation for a limited period of time, given how low inflation has been since 2007 and how high unemployment is. Above all, Mr. Bernanke could make clear that he considers years of widespread unemployment to be unacceptable. 
 
 He has not done so, and he has yet to offer a satisfying rationale. 
 
 Instead, he has said that more aggressive action brings risks. And it does. Low interest rates have the potential to spark inflation, by enticing millions of households and businesses to borrow money and causing the economy to overheat. Higher inflation could, among other things, increase borrowing rates for the United States government and worsen the deficit. 
 
 But it’s worth keeping in mind that just about every decision involves some risk. Simply stating that more aggressive action brings risks is not a good argument against that option. 
 
 Economists sometimes like to describe choices in terms of a concept known as expected value. The expected value of a decision is the odds of each possible outcome multiplied by the benefit (or cost) of that outcome. If you make an investment that has a 90 percent of breaking even and a 10 percent chance of earning you $5,000, the expected value is $500. 
 
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 Advertisement Continue reading the main story 
 
 Now extend this concept to the Fed’s decision. The consequences of being too aggressive and creating an inflationary spiral are undeniably serious. But the odds still appear quite low. Put the two together, and you get an expected cost that is not high enough to be dictating Fed policy. 
 
 One of the best guides to future inflation is recent core inflation — that is, inflation excluding food and energy prices, which bounce around a lot and often do not translate into big changes in other prices. Despite the uptick in core inflation, it has still risen at an annual pace of only 2 percent over the last three months. On only a few other occasions over the last 40 years has it been so low. 
 
 This shouldn’t be surprising. After all, does the economy feel as if it’s on the verge of overheating? 
 
 The expected cost of high unemployment, on the other hand, is steep. For one thing, the chances that unemployment will remain a problem are close to 100 percent. The debate is whether the country will return to full employment in four years or 10 years. 
 
 For another, the consequences of high unemployment are also awful. With fewer jobs, states and cities are short of tax revenue. Families lose their life savings. People’s health can deteriorate. For the long-term unemployed, the financial damage can be permanent. “If things go on and they simply sit at home or work very irregularly,” Mr. Bernanke himself said last year, “when the economy gets back to a more normal state, they’re not going to be able to find good work.” 
 
 Unemployment creates political problems, too. Historically, it has tended to make voters less willing to help their fellow citizens, as the economist Benjamin Friedman has written. It’s hard to imagine any grand political compromise — on the deficit, for instance — in an angry country. 
 
 Mr. Bernanke is an admirable public official in many ways. He was calmly heroic during the worst days of the financial crisis. By making the Fed more open, he has taken the rarest of steps for a political figure: voluntarily giving up some of his power. 
 
 Nonetheless, his job performance over the last year or so has been flawed. The Fed badly overestimated the economy’s strength in 2010 and took too long to correct its mistake. Despite his core belief in letting facts guide decisions, Mr. Bernanke has let himself be overly influenced by a group of colleagues who see inflation always and everywhere as a threat and unemployment as a mere nuisance. 
 
 The news conference on Wednesday offers a chance to hold him accountable. The country’s leading Fed scholar — one Ben Bernanke, formerly of Princeton — would expect nothing less.
– Call it the "battle of the beards," suggests Robert Samuelson of the Washington Post: Paul Krugman vs. Ben Bernanke. Both are prominent economists, both have facial hair aplenty, and each has called the other "reckless." Krugman has been lambasting the Fed for not doing enough to help the economy recover—even if it means boosting inflation. Inflation, he argues, isn't so scary. Rising prices would encourage people to buy now, not later, and it would reduce the "real" value of debt. But Bernanke has said that "would be very reckless." He observed that the Fed's inflation goals are a self-fulfilling prophesy—without them, companies would jack up prices. Samuelson sides with Ben, adding that prices could rise faster than wages, hurting spending. "None of this is preordained," Samuelson writes. "Economists have exaggerated their understanding and control of the economy. People don't often act according to academic theories." Krugman actually responded, praising Samuelson for making "a serious effort" to tackle the tough issue. He still thinks he's right, "but then, I would, wouldn't I?"