 Welcome back to the ECB Forum on Central Banking. Please continue to share your comments on social media under the hashtag ECB Forum. As we continue our session on macroeconomic stabilization frameworks in the new economic environment, it is my pleasure to introduce our next moderator and chair, Yves Merge, member of the Executive Board of the ECB. The floor is yours. Thank you, Thierry, for this new session. This session is focusing on fiscal rules, fiscal frameworks in the new economic environment. And within this session, we will deal with topics like fiscal frameworks, but also fiscal policies. It is meant, for example, to deal with the balance between fiscal rules versus discretionary fiscal policies. We will also look at options for improving the euro area fiscal governance after it has been put under the escape clause into the freezer. We will also, obviously, in such discussions, we will not escape the academic discussions on the scope and direction of fiscal multipliers, especially in an area of close to the lower effective lower bound. We will see also the relative roles and interactions between fiscal policies and monetary policies. And finally, also, I think if you talk about fiscal policies, we have to discuss the assessment of the composition of fiscal policies, as well as the promise that the new central, the new central next generation EU program will bear for the post-COVID European recovery. I think that is also one area we might have to expand upon. So without further ado, I turn to the author of the paper and the discussant. The author of the paper is Evi Papa. Evi Papa is a full professor of macroeconomics at Universidad Carlos Tercero in Guetafe, Madrid. And she has had extensive external coverage also not only in Spain, in different universities also in Barcelona, Boconi, London School of Economics. She was recently also in the United States. And her research focuses on fiscal and monetary policy in closed and open economies and the analysis of the business cycles that goes along. The discussant will be Vitor Gaspar. Vitor has a very rich career. He graduated in Portugal first from Universidad de Católica, Portuguesa. Afterwards he got an aggregation in economics from Universidad de Nova de Lisboa. His professional career spent central banking where he started in Portugal, but then also he came very quickly to the ECB. In between I remember that Vitor was part of the Portuguese delegation when we were discussing the Maastricht Treaty back in 1990, 1991. And I think he is one of the only ones of that time that is still regularly around. He was inside the ECB head of research. Afterwards he had stints at the European Commission. He was also at Ministry of Finance in Portugal before, even becoming Minister of Finance himself. But after such a broad career in Europe, obviously Europe became too small for him and he went to the US where he became Director for Fiscal Studies in the Fiscal Affairs Department at the IMF. Usually those people who take that tenure have a very long tenure. But enough, let's immediately start with the presentation of the paper. I give the floor to Evie. Yes, Evie, thanks very much for your kind words and the introduction and thanks to Organizing for inviting me. So today I'm going to talk about Europe. And Europe has been subject to many shocks and starting with abduction by Zeus in Greek mythology. It experienced world wars, collapse of monetary systems and many other tests. Today it is facing a new challenge and my role here today is going to be to describe how and whether discretionary fiscal policy can help us out of the current pandemic crisis. So what I'm going to do before starting and since Zeus also has promised it, I will leave Greek mythology and I will actually move to the Mosque Theater of Córdoba, according to Vitor, describes well the complexity of the fiscal rules in Europe. Since its creation in 1992 with a master treaty and its establishment, the European framework has been criticized, revised, amended multiple times. And this brings us in February 2020 with the European Convention launching a call for a possible revision of the European Governors. So well, I'm not going to talk about the past because the past has passed. So what I'm going to do is I'm going to talk about the future. And that's why I will take you to Belgium and to the Atonium, which should be the building that we should all look for when we look for a European reform. So the European fiscal board in its October annual report suggested that the European reform should envision a permanent fiscal authority able to address large shocks, then a simplification and a leaning of the growth and stability pact, having a differentiated depth anchor adaptable in the medium run. This is going to be actually obtained through an expenditure rule, which lays down credible and country-specific adjustments and speeds to raise a depth anchor. And also this general escape is closed to be activated on basis of independent analysis and advice. And finally, the board also suggests the protection of growth and housing expenditure. And I will come back to this very soon. I think that we should very much welcome the reform suggested by the pact. First of all, because if we looks like it took notice of previous proposals starting from the one of Benasequiere or the 7 and 7 Franco-German economies or Darvas on the expenditure rule, it is suggesting a debt rule, which is simple and it's easy to understand and to implement. The framework recognizes the limitation of one size fits all and allows for differentiating depending on countries needs and capacities. Moreover, it offers flexibility and flexibility is needed to decrease policy uncertainty because flexibility means less sanctions and less exceptions. Also, the expenditure rule seems to have optimal features in the sense that it can induce counter-cyclical deficits. And also, what we have is that given the access to the central capacity will be conditional fiscal discipline, this is going to reduce the danger of irresponsible fiscal policies or free riding. Also, the last two crisis has taught us that it is necessary to have a central fiscal authority that reacts timely on big shocks. So it is very welcome also this suggestion. And finally, as I'm going to show you later, the growth and housing expenditure is probably the expenditures that is first to be cut. So it really needs an effective shield. And I think this suggestion of the EFP is very much welcome. However, I think that we shouldn't beat around the bush and we should recognize that the Achilles skill of euros financial markets is the high level of risk in nature of government debt. And I think that, yes, it is very good to have a medium term objective for debt and to go slowly about it, but I'm not sure it's enough. Well, some colleagues would say growth and housing policies could also be enough because they will increase growth while the interest rates are low. Well, I will have my doubts on that. And actually in the evidence I'm going to present in the end of my presentation, I'll show you that growth might not work the same for everybody. Now, there has been some other discussions and some other proposals in the table, like the Padre Plan by Paris and Wiplos or the framework that Corsetti, Dédola, Jaroczynski, Makovia and Smith have also suggested, which is some kind of debt restructuring. I mean, I understand, I'm not a topic here, I understand that restructuring debt is not going to be welcomed by many European politicians and courts. However, I need to stress as an academic that this would be substantially the road to recovery. Now that said, I'm going to take you to another Greek standard, which is the Iliad. And here what we have is where we stand now. The monetary policy is tightened in the mast of the zero lower bounties, which is what I believe is what's tightened in this mosaic. And we need a new hero. And the new hero we are calling for is discretionary fiscal policy. Before telling you why I think that discretionary fiscal policy is the hero that we need, let me define you the notion of the fiscal multiplier. When I talk about the fiscal multiplier, I talk about how much one euro of a spending increase or of a tax cut translate in terms of GDP increases. The literature review that you will see in the paper that's accompanying this talk shows that there is not a unique multiplier. The fiscal policy effects depend on a variety of factors. Actually, the literature on this topic is ever growing. So the persistence of the fiscal expansion matters. The implementation lags matter and many other things. I cannot talk about them in 20 minutes. However, what I want to tell you is that there are some good news. All the estimated multipliers or the majority of them in the literature shows that their government spending multiplier is positive and significant, which means that a substantial amount of government spending can still leave the economy out of a severe recession, according to what the data tells us. But let's move now to the fiscal policy in the zero lower bound, which is what we would all like to understand. So in order to do that, I'm going to use a standard textbook analysis of an aggregate demand and an aggregate supply curve. I'm going to use a standard textbook analysis of an aggregate demand, which is basically in equilibrium at point E, where the aggregate demand meets the aggregate supply, and then I have a fiscal expansion. What happens with the fiscal expansion? Actually, I'm increasing government absorption, so aggregate demand is going to shift to the right, to the point F, and this would be the end if monetary policy would not react. But monetary policy is going to react because the fiscal expansion creates the zero lower bound, this is not going to happen. Because as we said, and as Klaus said earlier, the monetary policy is tied at the zero lower bound. As a result, we are going to have an expansion with higher output effects and possibly also some inflation. Now, this is what the theory says and that is what is behind the theoretical works of Christiano and Koffers, myself, Egerson, Woodford and many, many others, and I don't want to leave anybody out. Well, here is the intuition. The intuition is that at the zero lower bound, I'm going to have increases in inflationary pressures coming from the fiscal stimuli, and this is going to generate inflation expectations that the monetary policy cannot undo, so this will reduce the real interest rate, and this is going actually to enhance the effects of the fiscal stimuli. What are the empirical evidence on that? Well, medium-moto and Koffers report multiplies for Japan around 1.5 to 2.5, so much bigger than one. And if we look at historical samples in the U.S. from the work of Framme and Zubairi, we see that the multiplier estimated is around 1.5. So, these are good news, but let's put some words of caution in place. First of all, we have to mind the debt. There are a lot of empirical studies by Lzenskian, Koffers, Nikil and Tudika and Fotiu and Koffers that present evidence that says that the fiscal multiplier is lower or it can even turn negative in countries with high debt-to-GDP levels. So, when we think about fiscal expansions, we have to think about the trade-off between active use of fiscal expansion and the risk of triggering unsustainable public debt dynamics. So, we come back to debt here. Another reason why we have to be careful is that the environment should be one of low confidence fiscal expansion might not work. There is a very nice theoretical work by Mertens and Rav that they show that if the liquidity trap isn't used by loss and sadness by the consumers, then a fiscal expansion will not work. People will think that things are really bad and when they will see fiscal policy expanding, they will take a signal that things are worse than what they thought and the expansion will not work. These authors suggest that probably supply-side policies such cuts and labor and taxes could work better in this environment. And the third factor that we have to take into account is uncertainty. Uncertainty might reduce the fiscal impact. This is shown both in works of Bansru and Bunnik and Fernandez and Verdenkothers in which they show that actually under high uncertainty the agents actually are going to adopt the precautionary behavior and they will not actually react to the fiscal signal. So, things can be positive but we have to be careful. Now, I will move to the specific components of government spending and in particular I want to go to growth enhancing and spending and I want to talk about government investment and why I think that the EFTB has a great idea about shielding this kind of investment. Here, you will see in the graph is the evolution of government investment between 2006 and 2019 in selected European-Iran countries. What do we see? We see that Greece, Italy, Spain had their government investment during the consolidation period and this didn't happen in Germany and this should not happen. Why should not happen? So, let's go back to the textbook analysis and understand what government investment does here. So, as I said, a government expansion is going to move us from point H to point J. Well, what government investment does if we believe the estimates of Fassauer is that it increases which means that it shifts also the aggregate supply out leading to less inflationary pressures here and more out. So, there is consensus about the high long-run multiplier of government investment. However, the role of government investment as a sub-analyzation tool is debatable. It looks like that in the short run it might not work. This is done by works like LEPR that shows that actually there might be some crowding out of private investment. Now, this brings us naturally to the new generation EU funds and what I'm going to look at here is what are the macroeconomic effects of the EU recovery plan which is part of ongoing work I have with Fabio Canola. So, what do we do here? We start from the premise that the kind of this fiscal expansion is not unprecedented. Because for 30 years the EU members have been receiving structural funds and so we are going to use this 30 years analysis for 314 European regions and we are going to investigate what kind of effects this fund had for the European economy. We are going to concentrate on two funds. One is the regional development fund which concerns itself with innovation and research. It finances the digital agenda. It's supporting the small and medium size enterprises and low carbon economy and the European social fund which is mainly financing investment in education, health and projects fighting poverty. So, in order to study the macroeconomic effects of these funds what we will do is that we will adopt a local projections and in particular what we are going to do, given the endogeneity of these structural funds we are going to use in the local direction as an instrument the residuals of this second regression here with the structural fund is regressed against aggregate conditions in the European economy such as GDP employment GDP deflator, the nominal interest rate and the nominal exchange rate. Now, the dependent variable here is going to be the cumulative sum up to horizon of the macroeconomic variable of interest and the independent variable is going to be the cumulative sum of the grant that we are going to scale with gross value body. So, this means that I can interpret this coefficient CIEH as the cumulative multiplier at horizon age. So, when I will look at average cumulative multipliers for the European structural investment funds and I'm going to look at two categories one is going to be the ERDF and the ESF funds what I see is that the two funds have very different effects. So, if we look at the ERDF funds what we see is that they have a lot of potential to stimulate the economy on impact. So, they look like a good stabilization tool but as we move towards the further the horizon like we move to the three years we see all the effects of the initial stimuli to dissipate. Instead for the ESF funds we see that this kind of funds look like to actually to crowd out the label market. Why? Because we see a fall in employment here and an increase in their compensation which are significant and they do not affect really output in the short run but as we move towards the three years horizon we see that their effects are not only economically significant they're also important both for output and for investment and their effect on employment is actually positive. So, ERDF funds have an important positive short-term effect while ESF funds have positive effects that they are mostly concerned with the medium run. But this picture is covering a lot of heterogeneities. What this graph does is it is plotting the three year cumulative multiplier for employment and gross value added for different regions in Europe and with red I am picturing here the regions for which both the output and the employment multiplier is negative after three years for the ERDF funds. With purple are the regions in which both multipliers are positive. Green is the region for which we have a positive output multiplier but a negative employment multiplier and the orange is the opposite. We have positive employment multipliers but negative gross value added multipliers. What do we see? We see that the effect of the structural fund is not uniform but we see some kind of concentration. We have a lot of red and a lot of purple which means that we have regions in Central Europe, the UK and the Balkans in which both multipliers are negative while we have positive multipliers in Spain, France, Italy, Finland and Ireland and among other countries. So, the effects of the funds are not going to be unilateral and we have to be aware of that. Now, if we turn to the ESF funds, the picture looks a little bit better because we got rid of the reds here. We have a lot of green and purple which means that the three-year multiplier for almost most of the regions in Europe are going to be positive and for output at least. And we see that we still have some regions like the UK for which the multiplier is always going to be negative. Whether we look at the ESF or the ERDF funds. So, where this leads us? So, this tells us that the NGEU funds have a high probability of success on average and this is good news. The current recession may be effectively constructed by an appropriate combination of grants and loans for both short trans-tabilization through the ERDF funds, for example and medium-run growth like the ESF funds. However, the historical evidence shown you here suggests that the new funds will not have a uniform regional effect, nor help to cut up those who currently last most behind. So, we will need to have structural reform still. The threat that regional inequalities will increase and that the growth and death disparities might emerge is real. So, the Greek legend has it that there was a poet called Dionysio Solomos that he had Italian origins and he was going in the roads of Zante and he was actually buying words Greek words for the locals to write his poetry. So, today I want to offer you this word, megalopsy here. It means the greatness of soul. I'm not asking you here to be naive. I asked you to have a great soul to be magnanimous because I think magnanimous fiscal policy can work and magnanimous is what the president Lagarde said yesterday. We will do everything it can take to save the young generation, but we have to be cautious here and the caution has to do with what instrument we are going to use and what policy objective we are going to target. The second is that we have to be careful with the debt accumulation. The cost of a possible debt crisis is still alive, is still hanging out there. The consumer sentiment and the degree of uncertainty is important and it's something that we have to evaluate when designing fiscal policies in Europe and we have to also be aware that we might have effects on regional disparities which are not going to be un-homogeneous and we have to stay ready to affront these kind of challenges. I thank you very, very much and mostly the organizers for inviting me in this event. As usual, I have run before time because this is how it is. Thank you. Thank you very much V. I wondered myself how you could squeeze such a rich presentation, such a rich paper into a 20-minute presentation, but you did it. Thank you very much for respecting the allocated time. I turn now to Vitor. Vitor is speaking a little bit more slowly. That's why we are located in 10 minutes to discuss the paper. Please, Vitor. Thank you so much Yves. I guess that you can hear me and you can also see my slides. It is such a pleasure to be here and to speak to this ECB Forum on Central Banks and it is a particular privilege to be here with you Yves and to have the chance to comment on this presentation by Evie Papa on fiscal rules, policy and macroeconomic stabilization in the Euro area. What I will try to do is to complement the presentation of Evie with some thoughts that I hope you will find useful. And it would be wonderful if the slides with progress which they now do. So I found it interesting from my own purposes to go back to the first ECB Central Banking Conference back in 2001. In that conference there was a paper presentation by Marvin Goodfriend and Bob King in which they made the case for price as the objective for monetary policy. They basically had three main points in their paper. The first is that monetary policy controlled the path of the economy and prices through policy rates. That it did so by following neutral policy and neutral policy was a policy that kept output at potential while ensuring price stability. The second element and that's something which is less prominent in the literature that Goodfriend and King stressed was that for a small open economy integrated and complete financial markets allowed for insurance and therefore consumption smoothing. The issue of stabilization would be to a very large extent tackled by financial markets. And third given that monetary policy would keep output at potential for the area as a whole and insurance would be available at country level public finances should focus on long-term goals like sustainability resilience and distribution. Now we can perhaps think that this was too good to be true and indeed already at the beginning of the process towards monetary integration Alexander Lanfalusi in the law report called to everybody's attention that market forces might be too slow and weak to discipline, profligate governments in normal times but then too sudden and disruptive in crisis situations and indeed this chart with euro area spreads for Spain and Italy is an illustration of Lanfalusi's point if there ever is one. Now it's possible to go much further in discussing these issues and if I believe you will agree that politics fiscal policies and finance are intimately intertwined I don't have time to cover that point in my discussion today but there is a written version which you can access if you are interested on the IMF website so let me now move to current fiscal policy developments and prospects for the euro area and then conclude with the case for public investment and in both cases I will be engaging on the discussion with Evipapa so if we look at what we put out in the fall in the fiscal monitor and the economic outlook we see that for the euro area there is an unprecedented jump up in public debt in 2020 of about 17 percentage points of GDP that is caused by the contraction in economic activity and the very strong policy response that you can see for example by looking at the secretly adjusted primary balance on the right hand side of the slide we want to stress however is monetary fiscal interaction in our prospects and what you see here is that in the period before Covid in brick in this orange brick color you see that the contribution of R-G to the decline in the public debt to GDP path that you had in the previous slide was helped by this negative R-G which is a stylized fact for most countries most of the time then you have the jump up in 2020 that I already commented on but in 2021 to 2025 you have a return to the path that was in place before the Covid crisis but you do see that R-G is more negative than before and that reflects on the one hand monetary policy lower for longer and of course the recovery in economic activity that we have in our projections now Evie emphasized in her presentation very much uncertainty and I want to remind you that our closing date for policies fiscal policy data was September 11 and our forecasts close in September as well and of course we have quite substantial news both on economic developments and fiscal policies so this trends are very much affected by uncertainty and the point that Evie was making that public debt risks have to be managed effectively from a medium to long-term perspective is spot on this slide I will jump over is just to show that expectations on monetary policy have implications for the cost of financing of governments that are quite measurable and important but what I want to emphasize is that despite the public debt risks that are quite substantial in our view the current dominant risk is the risk of premature withdrawal of fiscal support and that would be a repeat of what happened in the aftermath of the global financial crisis where in countries like Italy and Spain for example the tightening of financing conditions and the deterioration in cyclical conditions of the economy was accompanied by a tightening of fiscal policy that Evie has already commented on so let me move on to my last point which is the case for public investment you can make a case for public investment at this juncture based on low interest rates low interest rates for long you can say that uncertainty associated with the pandemic has increased precautionary savings you can speak about postponement of investment decisions and you can make all those very relevant points but here I want to focus on a argument that we've developed in chapter 2 of the fiscal monitor which is that in periods of elevated uncertainty we can expect the public investment multiplier to be exceptionally high now the first thing to bear in mind is that COVID-19 creates a substantial amount of uncertainty and you see on the left hand side that the uncertainty associated with COVID-19 is at an order of magnitude more important than what prevailed in earlier epidemics this is from Bararon Bloom's presentation at Jackson Hole and on the right hand side you see that this epidemic uncertainty translates into economic policy uncertainty but you could also document financial uncertainty or uncertainty about the prospects of the economy which is actually the measure that we use in our analysis and what we find is that in periods of high uncertainty like the ones we live in the fiscal multiplier can be even higher than the numbers quoted by Evi and the reason for that is that action by fiscal authorities to foster long-term growth in the context of the new generation EU with priority on green and digital creates space for private investment to expand and we have private investment increasing by 10% and that's what explains the unusual large magnitude of the fiscal multiplier so here clearly there is room for discretionary fiscal support exactly like the argument made by Evi but Evi also documented past effects of European funds and clearly it's very important to invest in high quality projects and to spend extremely well for that reinforcing transparency and accountability as well as reinforcing infrastructure investment governance are absolutely key and our themes that we at the fiscal affairs department always emphasize this issue is very important for the future growth of the European Union but it's also very important from the viewpoint of the interaction between politics, finance and fiscal policies which I believe is one of the favorite angles of the chair and I will stop now, thank you very much Vito, you have borrowed the minute that Evi did not use up we are now starting to have the question and answers and I want to remind participants to raise their virtual hands and not to be shy I'm quite aware that some of the colleague governors have been away in the FSB plenary where I just come out as well and I hope they will join us and I hope that those other invitees will also not be shy to raise their hands but as is usually the habit we give the floor first to the author to react to the discussion so Evi if you want to say a word on the comments by Vito yes I would like to thank Vito for his very complimentary discussion I mean I really had very little time to cover all the things that they did in the paper so he did a little bit of this back up framework discussion and I thank him for that now I was glad to see your last number about government investment because like the numbers that I have in mind and the works that I have in mind like there is a recent paper by Mario Alosa from the Bank of Spain that he shows that actually in an environment of uncertainty what happens is that we might sometimes the negative feelings of the consumers are going to become like self-fulfilling and so we might end up with multipliers that they are actually negative or zero in such environment so it was very nice to see that your estimates are better than this theoretical work and I also think that quality's investment is that what we should be looking at the difference and it's something that I haven't said in my analysis there is a caveat in my analysis why because these structural funds have been planned in advance they were plans that the EU governments have probably well designed in advance here we are in a situation in which we have to act fast and we have to act even without any planning and this is something that would probably bring down a little bit the estimates that I have reported along with other things like the fact for example that the new generation EU funds are not only going to be grants they are going to be also loans so this is another concern that we have to keep in mind when reading the numbers I just gave you I'll give the floor to Yves now. Thank you Yves we have the first questions coming from the audience it is from Daniel Gros from the Centre for European Policy Studies, please many thanks for these two excellent contributions and the discussion thereof when I hear talking about public sector investment this is sometimes to me like motherhood in apple pie nobody can be against it but is this really the key issue right now we are talking about fiscal deficit sometimes close to 10% of GDP public sector investment is perhaps 2 2.5% of GDP if you want to increase a lot by 20% you get half a percentage point is that really relevant when we are talking about 10 percentage points elsewhere and also when we look at the increase in public sector debt yes we agree that debt which has its counterpart capital created by the public sector might be useful but again most of the debt we are accumulating now and most of the debt we have accumulated from the past has little relationship with public sector investment so should we not really write a little bit this eternal issue that yes more public sector investment is good and concentrate more on the really relevant magnitudes which is this extraordinary increase in public debt and at the same time an increase in uncertainty which would mean that maybe we should be more careful as before with public debt thank you so much Evie would you come in for an answer actually thanks a lot to Daniel for his comments actually I would like to put you some numbers here in the argument so Spain for example is expected to receive about 140 billion euros over the three years with recovery fund okay this given the GVA of Spain 2019 was around 240 billions if the multipliers we obtain here are reliable estimates so we should expect Spain to get an increase in GVA which is between 3 and 3.5% and to employment which is about 2.5 to 3% cumulative over the three years that they are coming so given that there are 19 million people employed in 2019 in Spain that means that the fund is going to generate 500,000 jobs and these new jobs are far above the level that Spain had before the Covid crisis which were 420,000 so I think that the numbers that we have here are economically important even if government investment is a small portion of GDP and concerning why we want government investment well we have seen the last sluggish recovery in Europe has been everlasting because growth couldn't pick up so we need to use fiscal stimulus to do growth and housing kind of investments and this is something that it should work because it could also help also the debt accumulation that you have talked to I don't know now whether Vitor has another opinion so I'm waiting to listen to him yes Vitor could I maybe ask you to answer another question because in the paper she mentioned studies which show that in view of the very long time lag of investment it is very difficult to have an anti cyclical effect from investment if you need seven years before a project goes from the start of a project to the implementation or whether it would not be rather through spending or that you would achieve the right response Vitor could you also answer that happy to so I think that the point made by Danielle on the need to manage public debt risks or public finance balance sheet risks from a medium to long-term perspective is key and those risks are important and they justify attention that being said the business cycle that we are facing is not a normal business cycle the epidemic is a large but temporary shock that will be long-lasting and it's very uncertain it's also an allocative shock in the sense that the economy that we will have after the pandemic will be substantially different than the one we had before we're not going back to what we had before we will have hopefully an economy which is much greener an economy which is much more digital and so public investment in this context place two important functions one given the stance of monetary policy the complementarity between fiscal and monetary and given the long duration of the implications from COVID-19 public investment can be timely in the current conditions and we make a strong case for countries that can afford it to go for public investment that answers your point on time to build because given the lags that we have estimated in the fiscal monitor and given the duration of this shock we can still act but public investment does something else it gives clear signals to economic agents of where the economy should be going and facilitates the transition to this greener and more digital future that is the crucial those are the crucial elements for the case for public investment thank you Vito for reminding this the confidence effect the announcement of investment the next questions now come first from Janis Kronaras from the Governor of the Bank of Greece, Janis please thank you, thank you Liv I would first like to thank every and Vito for very nice and clear presentations I have actually three questions the first is to every in the beginning what are the changes in the EU fiscal rules so can I ask you personally a central fiscal tool can this be connected to perhaps a permanent use of the EU next generation fund so that is my first question my second question do both every and Vito believe that expensive fiscal policy effective lower bound is a better alternative than increasingly optimal inflation targets so it is perhaps a solution to the conundrum that Fabio mentioned earlier and my final question is also related to what Daniel Gross mentioned it is about high death countries is it perhaps better than the use of 100% transfers from the EU generation on loans to these very high death countries for the pandemic thank you thank you Janis I pass on to Evi and then again to Vito yes thanks a lot for your comments actually regarding your first question I think yes we should use the COVID crisis and the exceptional measures that they are taking into account to move forward in Europe so what I mean is as I said before a very nice work by Corseti, Dedola, Jaroczynski, Makovac and Smith from the European Central Bank in which they show that actually the institutional setup that they have to have in Europe has to have two anchors one anchor is the introduction to the European Fund which is something that it is kind of an embryo it is already going to happen soon and the second is the feature that is the ability of a Euro member to go for restructuring of the public debt so yes I really believe that they also have to take in order to revise the fiscal framework in Europe now regarding whether the fiscal policy alone should be used to help the economy out of the zero lower bound I think the suggestion of Jordi Galli yesterday of using a combination of factors so fiscal policy together with a variable average inflation targeting could be like the wise choice here so listen to what Argea Bordone said before and Cloud Conversations now in the issue about whether grants versus loans obviously all the European countries are going to use the grants first so I think the result that I gave you are pretty accurate now what about loans? I happen to have a student here in Carlos Der Thero Morteza Gomi that he is actually working on the effectiveness of loans from the European investment bank in different European countries and he finds actually that the effects of loans from the European investment bank could be very expansionary in longer horizons that the ones that I have shown you in my presentation so I am positive that both grants and loans can work and especially when they are well designed for increasing government investment that they are going to enhance growth so I will leave it now to Victor to continue thanks Evi and that works very well for me I think to cover very well the grants versus loans question I would just point out that if you are in a situation where a public investment is highly productive and the multiplier is elevated you have public investment creates good conditions for repaying public debt even if it is financed by loans but the point that I want to emphasize a little bit more is what is the role of fiscal policy at the current juncture and I think that is a very good question I do believe that fiscal policy can do basically two things one is support monetary policy in a situation where monetary policy is constrained by the effective lower bound or by the shadow of the effective lower bound in those conditions making sure that monetary policy is not the only game in town is very important the monetary fiscal policy mix becomes important and looking at how this will work overtime is crucial to contain risks to financial stability and the economy including the public debt risks that Daniel Gross was emphasizing but there is something else which is very important fiscal policy is much more granular than monetary policy fiscal policy can target specific sectors of the economy fiscal policy can provide incentives that are crucial for a speedy transition to a new growth path a fiscal policy can target support specific segments of the population to do specific firms it's much harder for monetary policy to do that without fiscal support so for these two reasons I see a strong role for fiscal policy at the current juncture thank you Vito we turn now to the next questions I am told this is only coming over by audio signal no video audio signal it is for Giancarlo Corsetti from Cambridge please hi I don't know my connected video sorry about this you rightly so mentioned the problem the risks from situations in which you can have multiplicity multiple equilibria and instability and we know that multipliers may be negative in those cases we know at this point that probably that is growing globally at very high level my question is clearly risk of multiplicity is not a reason not to use fiscal policy that is not the right question the right question is what can we do what are the instruments to reduce the possibility of multiplicity of an anchoring expectation of again something that happened at the beginning of 2010 2011 in Europe I just wonder whether you have any comment on this what kind of instruments do we need on top of OMTs we know that there is a way at the core of monitoring fiscal interaction a common interest in keeping the equilibrium on a good path what instruments would you think we need at this point facing the pandemic what are the what strategy could be best deployed for this target thank you well I mean now I don't like to be the first because this is a difficult question thanks a lot for your intervention yes anchoring expectations that is not going to be easy of course what we have to do if we want to reduce uncertainty is definitely to reduce the implementation lags and like when we say we're going to use a fiscal instrument to use it timely in terms of fiscal policy now we have to have a clear communication on what is going to be the goal for fiscal policy relative to monetary policy and somehow to raise sentiment I mean it is easy to say difficult to do in practice but I think that already cutting down the implementation lags in fiscal policy and being clear about the policy objectives would be already a good road ahead so it's an excellent and very difficult question as you said the way I see it is that at this point in time if you look at a geographic area like the Euro area there's a clear complementarity between fiscal and monetary policies exactly as you indicated as time goes by it will be important to provide a strong anchor to expectations which requires that one gives clear signals about a stability oriented overall macroeconomic policy framework where the institutional division of responsibilities between monetary and fiscal operates harmoniously one of I know I sound like a broken record but one of the crucial aspects to ensure that future stability is to have a robust approach to public that management and to the more general management of public finance risks thank you Vito I am struck that we do not seem to have questions coming from participants originating from low depth countries so I don't want to conclude that we had an interesting session on what are the advantages of a free lunch meaning no rules free spending no control I think that is certainly not what was intended if we have had a not so positive experience with a rule based framework my question would then be as last question that we should make the difference between the rules which are not bad because they exist but maybe they are bad because they were not implemented and then ask why were they not implemented do we not have an issue with governance and after all we see that some of the higher depth countries have tried to prevent themselves from changing the rules when there is a crisis including those rules in primary law in a higher law or by giving a control on implementation to an outside of executive body so is that not also a direction in which we should do some research how to have better more intelligent but above all how can we implement rules rather than doing away with all the rules and only favoring discretion we have two more minutes to give an answer Evi would you start or would you mute Evi yes Evi is muted I don't know I didn't do anything I can hear you so let's start with Vito this time and the last word will be for Evi okay thank you that's absolutely fine so I do believe that fiscal rules and fiscal discipline are very important I believe that focusing on the management of public debt risks and more generally public finance risks is crucial as you emphasize yourself repeatedly the issue of fiscal policy and politics are intertwined at a very deep level and I'm much looking forward to the outcome of the monetary policy strategy review of DCB and the subsequent revisiting of the European fiscal rules by the European Commission and I certainly hope that the new generation of rules will be better adapted to what we have learned from the accumulation of experience in the last 20 years or so I stop here Evi thank you yes I think that it is dangerous to ask the question about how the European Union would be without the rules so the desirability of fiscal rules is something that it can be subject of only a theoretical debate rules should be there and as I have shown you before the analysis I show you for different countries what we have to do is that we have to combine rules and also emphasize to the member countries the need for structural reform so I would say that the rules should be there and we should always keep in mind that structural reform should happen so we don't have to rely so much on rules in the future thank you very much Evi I think with those wise words dispenses me of making a conclusion because I would fully endorse what has been said and with these words I pass over from the master economics to the master of ceremony please Thierry indeed thank you very much Yves and speakers for sharing your thoughts on this important topic we now have another break and we'll see all of you back here at 4.30 sharp thank you