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Bernanke warns of possible European 'contagion'

Weakness in the eurozone is beginning to have an impact on the U.S. economy, according to Federal Reserve Chairman Ben Bernanke, who will warn legislators Wednesday of possible "contagion."

 “The difficulties in the euro area have affected the U.S. economy," Bernanke says, according to prepared text of his remarks. "The European Union accounts for roughly one-fifth of U.S. exports of goods and services. Not surprisingly, U.S. exports to Europe over the past two years have underperformed our exports to the rest of the world. In addition, weaker demand from Europe has slowed growth in other economies, which has also lowered foreign demand for our products.”

The Fed posted the prepared text on its website ahead of time after Fox Business News apparently obtained a copy and published excerpts on its website. Bernanke is scheduled to testify on Europe to the House Committee on Government Oversight and Reform.

"U.S. financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree as the European situation has evolved, but the risks of contagion remain a concern for both these institutions and their supervisors and regulators," Bernanke says in the remarks. He warned in particular of potential danger to the financial sector.

“Although progress has been made, more needs to be done," Bernanke says. He recommends strengthening the European banking and taking steps to boost the continents economy.

The testimony appears to represent a change from February when he told a congressional panel: “Our basic conclusion is that direct exposure of U.S. banks to European sovereign debt is quite limited, particularly on the periphery.”

Read the full text of Bernanke’s prepared testimony at the Fed’s web site.