 There are three types of people in the world. Some people act, politicians, businessmen, central bankers. Other people contemplate the world. Philosophers, economists. And then you have some people who try to combine both action and contemplates your. I tried myself. I went to Belgium Parliament. And I found out how bad I am as a man of action. So I decided to go back to academia. So I failed dismally in my attempt to combine action and contemplatio. But that's not what happened with Vito. He was highly successful in combining contemplatio in actioni, like the Latinist among us would call it. So that's why I admire him. And that's why I'm so happy to be here today. So I was asked to talk about corporate within the Eurozone. Basically, this was the same theme as what we have been hearing before, in a way. But I will try to look at it in somewhat different way. Sometimes one picture is worth 1,000 words. You must have seen this before. These are the spreads, the spreads of 10-year government bond rates, spreads vis-à-vis Germany, starting in 1990 or 1991, up to last year. And what you find is the striking feature that is in the 1990s, the spreads were high. Then they collapsed to essentially zero and shot up again. And we know all what is behind this. In the 1990s, this was essentially devaluation risks. This was a protection system for most of these countries. And then during the period 2010, 2012, this was essentially default and liquidity risk that sovereigns were experiencing. So this is the important part that I want to mention here is that those who were in the 1990s experiencing these high spreads, those countries that experienced these high spreads in the 1990s, turned out to be also the countries that experienced the high spreads associated with default and liquidity crisis later on. So that leads to the following question. Is there an original sin by you? Of course, the notion of original sin is a very old notion. I almost said by invented this notion, which obviously is not the case. But he applied it to Latin American countries. And I'm asking the question here, is there something similar? That is, the countries that experienced the exchange risk in the 1990s happened to be also the countries that experienced the sovereign debt crisis later on. And therefore, the question that arises here is the devaluation risk that we observe in the 1990s, a good predictor of the subsequent default crisis in the eurozone. And that is my question of the original sin. Is there something in these countries that somehow determined that when they were in trouble during the fixed exchange rate system, they would also be in trouble in a monetary union? So what I did here is the following. I looked at the average spreads for each of these countries during the period 1991, 1999. That's the pre-eurozone. And then during the, in fact, it should be 2010, 2012. I don't know what happened there. Must have been late at night. So it's 2010, 2012. And here you can see that, yes, indeed, it looks like countries that experienced high spreads in the 1990s also experienced these high spreads during the subsequent sovereign debt crisis. And this is a very tight relationship. There are a few exceptions there, Ireland and Finland, to which I will return in a second. So it turns out that the spreads of the 1990s are good predictors of the spreads later on. That is, countries that got into trouble during the 1990s in the fixed exchange rate regime also turned out to be gotten into trouble later on. And the intensity of the foreign exchange crisis is also correlated with the intensity of the sovereign crisis later on. This is quite remarkable because there is a lag of 10 years, right? And it seemed that something deep down there was working. So it looks like that the periphery countries, because we call these countries, the periphery countries, seem to carry the burden of an original sin. There are a few exceptions that I showed to you. Ireland apparently did not carry an original sin. In other words, in the 1990s, the spreads were lower, but suddenly appeared to have gotten into trouble. And Finland is the other way around. It seemed to have escaped from the original sin. What happened after the crisis? Does the original sin continue to do its work later on? Here, I show you the same spreads in the 1990s, average spreads in the 1990s, and then the spreads after the crisis. And you can see, again, a very strong relationship. So that's, I think, quite remarkable. And then the question is, where does that come from? Is there something? Is there a story we can tell that is behind, is underlying this original sin? And I'm going to talk of the German school, but I could also call it the German Dutch school. The governor of the Dutch Central Bank is here, and I'm sure he would be offended if I only called it the German school. So what is it that produces an original sin? I hear this, weak legal and political institutions. That make it difficult to maintain fiscal discipline. That lead to macroeconomic and monetary instability, a little bit like the Latin American story that Barry was telling about these countries. And these countries, when they are in a pegged exchange rate system, then will experience speculative crisis, because they cannot credibly fix an exchange rate. And when they are in a monetary union, that problem of regovidence will reappear, not in the form of high inflation, because inflation is not out of their control, but in the form of fiscal crisis, budgetary and sovereign debt crisis. So in this view, there is the same source of weak governance that drives this origin, that is at the basis of the original sin, and that in a quite deterministic way condemns people to be always in the periphery. Now, that has been a very influential analysis, and I heard some comments today already that seem to tell us, yes, that is the way things work. But is it so convincing? If it is a good story, we would in fact observe that prior to the sovereign debt crisis, the countries that experienced the sovereign debt crisis would have experienced the biggest explosion of the public debt. Let's look at this, whether we find this. And here I show you, on the horizontal axis, public debt accumulation or decumulation during the period prior to the crisis, 1999, 2007, the euro, the period of the euro. And so you can see here the numbers are percentage points of GDP. Note the following, most of these countries were on a declining part of debt to GDP ratio. Portugal was different, Greece are outliers there, but most of these countries are a declining part. And on the vertical axis, I set out the bond yield as my measure of the intensity of the sovereign debt crisis. And what you can say is that the debt accumulation prior to the crisis is not a good predictor of the sovereign debt crisis that erupted in 2010. And here I show you the yield in 2012, at the peak of the sovereign debt crisis. So the public debt accumulation is not a good predictor of sovereign debt crisis. So what could it be? Well, here I show you private debt accumulation. On the horizontal axis, I show you the same or similar numbers, private debt accumulation prior to the crisis. And you can see most of the observation are the positive, large private debt accumulation prior to the crisis. And that turns out to be a much better predictor of the sovereign debt crisis, which is quite remarkable. You would think, and the idea of, well, why do we have a sovereign debt crisis? It's government profligacy. We have discipline in them. It turns out it's private debt accumulation that is the better predictor of the sovereign debt crisis. So that's quite interesting to see, I think. So what I get from this is that with the possible exception of Greece and Portugal, this law, discipline, original sin may explain the foreign exchange crisis, but does not explain well the sovereign debt crisis that emerged in 2010. So the latter may have little to do with the original sin, condemning periphery countries to be hit by a sovereign debt crisis. So my interpretation and is the following. The sovereign debt crisis was as a result of a classical boom, bus dynamics that has been described by people that have died some time ago, Kindleberg, Minsky, and many others. You have a period of boom, euphoria, debt accumulation, bubbles, and then the crash. That leads to debt-delveraging recession and all that. And then governments have to step in to save the system by increasing their own debt. And if you take that view, you might even argue that sovereign debt crisis is the result mostly of responsible behavior of governments faced with the collateral damage created by booms and busts. What could they do? Let the market system collapse? They couldn't, and they acted, and they did the right thing. But what I will argue now is that these booms and busts dynamics create special problems in a monetary union. That's the focus that I really want to give now. But before I do that, a note of warning here. What I do not say is that countries of the periphery have no deep-seated governance problems. They probably have. But so many other countries also have that. But it means that these governance problems are not good predictors of the sovereign debt crisis that developed in 2010. That's the major point that I want to make here. Now let me turn to the eurozone. Booms and busts in the eurozone. Here I show you the business cycle component of GDP, which is obtained by just filtering out a trend. And this shows something that, in fact, we already found in Barry and also a little bit in Lucrezia. The business cycle in the eurozone was highly correlated. This is the business cycle component. It was highly correlated. When you look at the correlation coefficient, it's quite high, 0.8, 0.9 even more. The asymmetry was in the amplitude of these things. You see that some countries like Ireland, Greece, Spain, experienced an extremely strong boom and then a very deep crash. And countries like Germany had only very small movements. So the asymmetry was not in low correlations but in the difference in amplitude. And that creates a problem, of course. Here I show you the following. This is a regression of the domestic cycle on the euro cycle. And the slope that I get there tells you something about the amplitude. The countries like Germany, Belgium, Austria had a very low slope. And then other countries in the periphery had a very high slope, much higher amplitude. And that created, of course, problems in the monetary union for two reasons. One, it led to a large buildup of divergences in competitive position and external imbalances, things that we all know. But also, it made clear how unstable the government bond markets can be during a downswing. These are the two things that I want to stress. Oops. Yeah, here are the divergences. Maybe I can go a little quicker. Divergences in the competitive position where the direct result of this difference in amplitude can't be extreme. The experience is extreme boom. So the competitive position declined fast, accumulating external imbalances. And we're then forced to adjust the hard way with internal devaluations and leading to political upheaval and even dynamics of rejection. And then what appeared is the second problem, namely the instability of the government bond market in a monetary union that I want to talk a little bit about. And that has to do with the fact that governments of member states in a monetary union cannot guarantee the bondholders that the cash will always be there to pay them out at maturity. And that creates potential for a self-fulfilling crisis, which typically appears during a recession when budget deficits increase leads to distrust of bondholders. They dump the bonds, interest rate increase, liquidity is withdrawn from national markets, and governments find themselves unable to roll over their debt. And they are forced to introduce immediate and intense austerity, intensifying the recession. So the scenario that we have seen during the sovereign debt crisis. But note that this has to do with the fact that there is no backup of these bond markets. There is no one ready in times of crisis to step in. And it's the countries that have experienced the largest boom and subsequent burst that are singled out by financial market pushed into a bad equilibrium, leading to massive capital flows within the monetary union, where those who sell the bonds, the first set of countries, channel it to safe haven countries, and thereby intensifying the asymmetry and the conflict in the union. And this problem is likely to reappear with each recession. As these recessions will vary in amplitude and therefore create problems. So my conclusion, in fact, is from all these that there is no original sin. But where does the high correlation that I noted in the beginning come from? Here is my explanation. Essentially, the countries that experienced this foreign exchange crisis in the 1990s were indeed countries with high inflation, monetary instability. And when they were promised entry into the monetary union, the effect of this was a massive reduction of real interest rates. Because the real interest rates before expressed the risk attached to the fact that these were high inflation and viable inflation countries. And as a result, essentially what happened is an asymmetric shock in the form of decline in the real interest rate in these countries, something that did not happen in the low inflation countries. And that led them to the boom and the bust that was so intense in these countries. So it was a kind of legacy that appeared from some sins in the past, you may say. But the question is, is that something that has a deterministic component that will continue to affect these countries in the future? And I'm saying no. The correlation that I observed earlier is in a sense a spurious one. The missing variable is the asymmetric shock in real interest rate that led to this extreme boom bust scenario later on. And there was no need here to invoke some dark force coming from weak governance that condemned these countries into a part of sovereign default once in a moment there. You and I will continue to condemn them in the future. So I'm not an adept of original sins. I have a Catholic upbringing. And I was told when I was a kid that the original sin is something that weigh on you. And that's some of the fictions that I threw out as soon as I left school. So again, it doesn't mean that these countries may not have problems with governance. I don't want to minimize this. There are governance problems in many countries. But capitalism will continue to produce booms and busts. And the impact of these booms and busts will continue to be very different. And we do not know which of these countries will be on the right side of the fence. It could be countries that are today in the core and find themselves on the wrong side of the fence in a future crisis. Let's keep that in mind and not continue to think it's always going to come from the periphery, right? Because they have something deeply sinful in them. Now, the previous discussion tells us is that the eurozone, in fact, is not well prepared to deal with booms and busts that capitalism produces and that will continue to produce. And then the question is, how should we redesign the eurozone? I have very little time to say much about this. But I will try to say a few things now. How to redesign the eurozone? I have identified essentially two problems. One is that the eurozone has poor instruments to deal with asymmetric shocks, right? This is where the asymmetry is in the amplitude of the movements. I call that the OCA problem, right? And the second problem has to do with the instability of the government bond markets in the eurozone. So how to deal with that? The standard theory of OCA theory has told us, well, if you have asymmetric shocks, be flexible. Structural reforms. That was the main message, right? We continue to say that. And then you will go to Nirvana. It has been very influential. The eurozone countries have gone into programs of structural reforms. I think this analysis is very much based on the view that these asymmetric shocks are somehow exogenous and permanent, right? They supply shock quite often. And then, yes, you have to be flexible. But if they are temporary, business cycle shocks, as I have illustrated, it's not clear that you have to be more flexible, right? And then it's probably better to look into stabilization efforts. It's a stabilization problem that we have to work on, right? And of course, there are many ways we can do it. So it certainly means that we have to create mechanism, aiming at stabilizing the eurozone business cycle instead of focusing on structural reforms. Again, structural reforms we may want to do for other reasons, right? That are worthwhile. But it's not the kind of thing we have to do to solve a eurozone problem, right? So there have been proposed common and employee benefit schemes. I'm not going to go into the detail here. I think this is one possibility to move forward. But let me say a few things about the instability of the government bond markets. How should we deal with it? Here, of course, key. And this is a conference about the ECB. Finally, I can say something about the ECB. Here, it's key that the ECB stands ready to provide liquidity support in times of crisis. And that's what the ECB actually did in 2012, right? It didn't call this lend-off last resort. It would have been more appropriate to say, we are the lend-off last resort. I understand the ECB didn't want to say that and call this terrible name outright monetary transactions. Anyway, OMT was the trick that did wonders, right? The yields collapsed without ECB actually having to do anything. They could sit back, relax. You relaxed after the OMT announcement, right? And the private sector did it for you, right? They did it. So it was a beauty. But of course, the issue that arises here, how credible is that OMT program going to be for the future? Is the ECB going to be willing to use it in the future? And that we are not sure. One can have doubts, right? Depends on who will be president of the ECB. That's one of the things it may depend on. I see negative. OK, that's not something it will depend on. But I think that the issue is one of credibility, right? How credible is the OMT? And here, I think we have a fundamental problem which has to do with the fact that OMT should only be used to deal with liquidity problems, not with solvency problems, right? But in real time, it's extremely difficult to decide is it a solvency or a liquidity problem, right? And this, of course, will always put the ECB, whatever it does, at the center of controversy, political controversy. And therefore, it's unsure whether the ECB will be willing to act in the future. That's very different in standalone countries. There, there can be no doubt that if the sovereign is in trouble, the central bank will act. Whether it solvency or liquidity becomes unimportant. But in the case of the ECB, where you have one central bank and 19 sovereigns, it is key. It is a key issue, right? And therefore, we should not count on it. And that lead me, then, finally to the idea that we have to use towards a budgetary and political. We are condemned to do that, right? Because that's the only way we can stabilize the government bond markets by consolidating significant parts of national debts into one eurozone debt, right? Now, whoops. Of course, these are very intrusive, even revolutionary transformation of the eurozone. And there is no appetite today to do that. Official circles certainly don't want to do that. They understand that. I mean, there is no way we can move in that direction today. There is a risk, though, that we start believing in technical solutions. Let's try the financial engineering part, right? Save assets and other things that will do the trick for us. I just want that this may not work. Conclusion, I mean, OK. So I do think that the long-run success of the eurozone depends on the continuing process of political unification. And that political unification is needed because the eurozone has dramatically weakened the power and legitimacy of nation states without creating a nation at the European level. That's the key problem that we face. We have whipped off the possibility of nation states to do stabilization. And we have not created some institution that the eurozone will do it. And that, of course, will have to be solved. Today, there is integration fatigue. The willingness to go in that direction is non-existent. And that will continue to make the eurozone a fragile institution. Its long-run success, therefore, cannot be guaranteed. Thank you for your attention. Thank you, Paul. So let me turn to John. Thank you. Thank you. I'm also, obviously, very pleased to be here to honor Victor. And thinking about his achievements here at the ECB, it reminded me of this famous sentence by Jean Monnet, rien ne se crée sans les hommes, rien ne dure sans les institutions. So nothing can be created without men. In that time, it was men. Today, it's very different, obviously, as can be seen in the composition of this room. And nothing can last without institutions. And it's fair to say, then, when you took charge, this institution was not prepared for what you had to do. It was not within its mandate. It was not within its worth thinking. And at that time, we were lucky that we had men who were able to think out of the book and prepare for bold decisions and a change in the institutions. Paul gave his taxonomy, let me give mine. You have people who are very good at choosing between A and B when they are presented with A and B as possible solutions. And this is a basic training of politicians. And you have people who are able to define C when they are presented with A and B and you have to think about C. And these are people we need in these kind of situations. Let me move to the paper by Paul and Numeji. This is a very quintessential Paul de Grau paper. It starts with strong stylus facts. Then it develops a sort of a conventional explanatory model. This time, the model is a little bit less unconventional. But it ends always with provocative policy conclusions. And they are there. So let me go through some of the observations and some of the more disputable claims that are made. I think it very much in line with what was developed by Barry and Lucrezia, the way that we had this sort of underlying model of shocks. And we shouldn't think in terms of shocks. And I think that's interesting because that's a way that reconciles different views of the crisis. I think the German-Dutch view doesn't think in terms of shocks. When you speak of shocks, people always answer, what are shocks? I mean, those crises that were hit for a reason. It was not just at random. And I think that's right. And we have to think in these terms. Then you say that it was a crisis credit balance of payment story, not a fiscal story. That public debt accumulation is a poor predictor. That history matters because the spreads of the 1990s are good predictors. And that it very much can be explained by the initial conditions and the convergence play that triggered this boom. So I think on that, I wouldn't have this agreement. Now, where I would be focusing, because there is room for discussion, is on the fact that institutional quality has become a second-order factor. And the core and periphery can essentially trade places, which is something you actually say in the paper. The second is your amplification story and whether it's a permanent feature in the euro area. The third is about the common budget and the fact that the common budget would be the most effective way to address this problem if the problem is amplification. And the fourth is your most provocative conclusion about the type of solution to the fragility of the debt market and the need for a full-fledged political union. So on the situation today and the reason why we had that, I think you're convincingly argue that initial conditions mattered. That initial conditions, in a way, were related to the quality of institution pre-crisis because the reason why we had this fast convergence is because we had economies that started from higher inflation rates and higher exchange rate stability and that reflected in the nature of the policy institution, then they converge rapidly and distribute the boom. So that's right. Now, is it true that we are facing now a situation where, I mean, reforms have been done, convergence has happened even in tears, but that we can think in terms of equal opportunity threats? That would be neglecting some of the scars that are there. And I have very simple statistics here about the share of the six crisis countries in GDP, bank loans, but public debt, NPLs, and at the same time manufacturing capital stock and unemployment. I mean, there is a high degree of asymmetry in the present initial conditions that is going to be inevitably reflected in the reactions to the next recession. So the next recession will see countries that have not caught up yet that are still affected by the scars of the crisis and there will be inevitably weaker and at risk of being hit harder by the crisis. What does it tell us? It tells us that we have to recognize that. And there is no value of ignorance. We can't have this discussion about the policy system under a value of ignorance. We should accept the reality that a system, a solidarity system, will have inevitably a bias. It will, at least in the short run, and I think in the short run, it will have a mechanism that will benefit certain countries more than others. So the fact that in the long run, banking crisis, as Ken Rogoff said, are equal opportunity threats, it's true in the long run. But in the short run, we still have initial conditions that differ significantly and that may be reflected in the next crisis. So asymmetric cycle amplification. There is some degree of contradiction in the paper because on one hand, you say the crisis was contingent, it was not about institutions, but we have cycle amplification as a permanent feature. So why is it that we should have cycle amplification permanently if it's linked to a sort of particular boom bust financial cycle and that this is not rooted in the quality of the domestic institution, this is only rooted in the initial conditions pre-EMU. So amplification may be in fact contingent and I don't think actually we are with through an amplification cycle and I think Lucretia very clearly showed that this is not a fair account of what's happening at present. There is evidence of amplification in the US, it's more linked to structural factors, it's more linked to the share manufacturing, it's more linked to the resilience of individual states. So I think in terms of thinking about the policy reform, we have to be careful not to wage the last war and to think about what's needed in the future. So banking union obviously was absolutely right as an answer to this type of vulnerability. But the stabilization mechanism may not have to be thought in terms of addressing this amplification problem. Assuming it's an amplification problem, would a common budget would be the right solution? I mean the case for a common budget rests on the sort of randomly distributed shocks. So it's a pure veil of ignorance approach. It can be thought in terms of providing insurance for more risky activities. So if some countries would specialize in innovation type of activities that have high variance or a long distance export that also involves exposure to external shocks, there might be a case to say in the name of the common welfare, you would insure this type of civilization. And obviously there is also the case for a common budget that rests on a different argument, which is the need for a common fiscal instrument to address common shocks. But if we speak of pure cycle amplification, I'm not sure the logical conclusion is that we need a common budget. I mean they can be individual stabilization or they can be rainy day fans, but it's not obvious that the sort of mutualization component is needed if you think in terms of pure amplification. Finally, on your last point on the instability of the government bond market, so it goes back to your famous paper of 2011, where you identified the roots of fragility and the risk of multiple equilibria and the need for conditional support. Now, the way I read this paper is that liquidity is essential, that you need a central bank or you need an agent, let's say, to avoid being pushed into the bad equilibrium. But that's this liquidity support can be conditional on sovereign solvency. So that means it is compatible with the Nobel out-close being interpreted as meaning you don't provide liquidity support to an unsolven state. And so that leads to provision of liquidity through the OMT. But the OMT is conditional on an ESM program. I mean I would wish to have liquidity support that is not conditional on an ESM program because it's basically helps avoid the bad equilibrium. So there could be, for example, and this is one of the things we propose in the Franco-German paper, liquidity support, possibly backed by the ECB, conditional on some pre-qualification, but not conditional on an exposed program. Now, you go much further in this paper because what you're saying is that in a standalone country, and I quote here, the commitment of the central bank is unconditional because in times of crisis, the sovereign prevails over bureaucrats at the central bank, which means essentially fiscal dominance. So what you're saying is that what you need is fiscal dominance. This is a very strong statement. And you say actually this is because this risk is being taken in standalone countries that they avoid the fragility or instability of the government market. And the fact that we don't have that, and we have the opposite in the euro area, means permanent instability of the government market. So I think that the controversial policy recommendation that you're providing, I would not agree. I would say that support in standalone countries is not unconditional. I mean, it is tell the Bank of England that essentially they are under the threat of being pushed into financing in an insolvent state. And that the reason why they're providing stability, I think they would dispute it. I see Charles, maybe Charles has a view on it. And I don't think it is necessary that it's unconditional in the euro area. I think we can design mechanisms that provide liquidity, that are conditional on insolvency, but that help avoid the bad equilibrium. Let me end here. Thank you. Thank you, John. OK, so let me.