 Thank you very much. More than 2,500 years ago in Greece, which is the cradle of European civilization, a man called Aesop, who may or may not have existed, told a story which ended up being written down about an oak tree. This oak tree was very proud and very principled. It believed in rules which were to be followed in all circumstances. It tended to rather look down its proud and principled nose at its neighbour, the reed, which was a flexible type of a plant. It would blow this way and that according to the prevailing winds. It believed in discretion rather than rules. In general, it displayed a lamentable lack of fibre, both moral and vegetable. We know how the story ends. This goes on for many years. One night a big storm comes along and the tree ends up on its back. The reed survives and the moral of the story is that shock absorbers are useful, they're useful in cars, they're useful in plants. It is also useful in economic and political systems. An economic and political system that was particularly inflexible was the gold standard of the late 19th century and the 1920s. The first thing that I want to say about the gold standard, is that we would all have been in favour of it in the 1920s, or nearly all of us would have been. John Maynard Keynes wasn't but he was unusually brilliant and he was unusually contrarian. Most people would have seen the gold standard fydd yn y bryd yn yny'r ffordd o'r bodod o yw rhanol a'r hyfforddiadau iawn o'r cyfnod ffiydiadau cael eu wneud furth o'i rhanol i'r rhanol i holl gweithio rhanol o'r llaw. The G Globe dyn을 yn ystod y bydd yn y 1114, a erbyn y ffordd a'r ffordd wedi cyfloghau Paeth Speiddur i'r bydd yr unig o celf sy'n holl iawn, ac mae'r bobl Llywodraeth Aelod. Fy yw'r gwrthau'r gwrthau sy'n rhai o'r dweud â'r gwrthau sydd llawnau. The gold standard was very inflexible economically, money supplies were tied to gold reserves which meant that quantitative easing was ruled out by definition. You often found yourself having to raise interest rates even at the worst possible time if doing so were required to stop gold from flowing out of your central bank to other countries. And finally the gold standard was a mindset, a mentality as they would say in French. It was a mentality that emphasised the virtues of fiscal prudence that had an absolute horror of budget deficits and the thought that when you have unemployment the only reasonable solution to that will be lowering wages, lowering prices and restoring competitiveness or as we would say today internal devaluation. The results of the determination of policy makers in the late 20s and early 30s to stick to these gold standard doctrines can be very clearly seen in the economic record. The red line is the trend in world industrial output from the peak before our own crisis in April 28, whereas the blue line is what happened after the peak in June of 1929. Our own crisis was extremely violent to begin with. It fell everybody as rapidly as industrial output had fallen during the Great Depression. The difference is that the policy response was very different and so during the Great Depression you had industrial output collapsing as it did during 2008 and 2009 for year after year after year. This is true of output, this was true of trade and this was true of world stock markets as well. This distinction can be plausibly explained by differences in policy responses. As we all know during our own crisis, world central banks lowered interest rates very rapidly and in the United States and United Kingdom central banks engaged in quantitative easing as well. No hint of quantitative easing between 29 and 31 anywhere. As you can see in many countries they actually perversely increased interest rates in 31 and 32. This was because of banking crises that spilled over and became currency crises and so in the time to stay on gold countries tried to raise interest rates before they eventually had to give in and admit the inevitable. Secondly, in the 1920s budget deficits increased of course, budget deficits always increased at a time of economic crisis as tax receipts fall and expenditures rise but the budget deficits deteriorated by much less than during our own crisis. This is because during our own crisis automatic stabilizers were more or less allowed to operate. In other words, when countries went into recession they didn't immediately start cutting welfare payments and raising taxes and cutting expenditure. That happened in some countries, it didn't happen everywhere and the fact that governments automatically let those budget deficits increase helped to moderate the decline in output caused by the collapse in private investment and private consumption. That wasn't what happened in the Great Depression period. I have prospered countries budget deficits and I've helpfully compared them with the Maastricht criterion of 3% of GDP which has taken on this extraordinary significance in Europe for reasons that remain unclear to me. The good news as you can see is that these countries by and large did a pretty good job. They kept their deficits pretty well within the Maastricht criteria but of course that wasn't good news. That was very very bad news because what that meant was that they had to cut and cut and cut and raise taxes like crazy at exactly the wrong time. Multipliers then were high just as they are right now and the result was the collapse in output that we saw earlier. As an aside, Britain in the 1920s had a huge debt problem that it needed to resolve as a result of World War I. You will be delighted to see that they managed to run a 7% primary budget surplus throughout the 1920s. What would Minister Noonan give to be able to do that? They also had a very successful internal devaluation strategy as we would now call it, their price level declined substantially. Did this help them reduce their budget deficits or did it help them reduce their debt burden? It didn't. That GDP rose by 75% points during this period. The reason is obvious. Inflation is what you want if you want to reduce your debts. Deflation is not what you want if you want to reduce your debts. And economic growth is also very helpful if you want to reduce your debts. When did countries start to recover? They started to recover when they left the gold standard. Britain leaves gold in 31, it starts to recover in 31 and so did Ireland by the way. I've often wondered whether our relatively good 1930s had more to do with our leaving gold along with the UK rather than anything that might have happened politically. The story that we normally tell. The US leaves gold in 33, it starts to recover. The French stick with gold until 36 and their depression lasts until 36 as well. Now we shouldn't forget that these economic events had political consequences. What myself and Barry Eichengreen and a grad student at Oxford have found is that there is no robust correlation between one bad year of economic activity and votes for extremists in the interwar period. It's when you get to three bad years or four bad years or five bad years of growth, of depression, in other words, that you get a significant increase in the extremist right wing vote. And I think that makes sense intuitively. If things go on beyond a certain point and you can no longer see any light at the end of the tunnel, that's when people's patience begins to snap and they start reaching for alternatives. And I suppose in that context you have to conclude that it's very important in Europe that we do something about these unemployment rates. They're important in themselves, of course. This is an appalling failure of Eurozone policy. And I know that we say this. I think you only really feel it when it happens to your own country. And one of the things that I've been noticing recently is how my Spanish colleagues are quite visibly becoming radicalized in real time as their country teeters on the brink of the precipice. So we urgently need a bit of flexibility in the Eurozone right now. I completely agree with everything that Guntherham was saying about the long run solutions to our crisis. If Eurozone is going to work, we have to make a big leap forward federally. We need a proper federal banking system and we need a common fiscal policy of some sort that will smooth out regional shocks. Not a control union that will exacerbate regional shocks. We need a proper fiscal union that will provide insurance to member states and smooth out regional shocks. We also need to deal with our short run crisis. We have a short run legacy debt crisis, financial crisis. We also have a short run legacy macroeconomic crisis because those unemployment rates there are also as a result of an EMU that was badly designed. By the way, there's a recent book by Harold James that has just been published by Harvard looking at the negotiations in the late 80s in the run up to Maastricht. They were completely well aware of what was required in order to make EMU work. They had thought of a lot of these issues like banking unions at the time and for various reasons this wasn't acted on. So these legacy problems, both the debt problems and the unemployment problems as a result of joint failures to set in place a sensible EMU structure and they required therefore joint and fair solutions, including emergency macroeconomic measures to support nominal GDP and to facilitate real exchange rate adjustment. Just to list all of the things that we need is to highlight how inadequate the union's response has been to date, I think. In that regard, I think we also need to try to knock on the head the notion that there's going to be some miraculous fairy godmother solution that will just arise from somewhere else, hopefully from the best of the world. There are various myths and fairy tales that our politicians sometimes have a tendency to tell themselves and these fairy tales are destructive because they avoid our taking the decisions that we need to take in order to solve our problems. The first myth is that something will miraculously turn up, that growth in the rest of the world will miraculously provide demand for our goods and services that we're producing in the Eurozone. Sorry folks, the world recovery is clearly stalling. It was only ever really a recovery of the emerging economies and more particularly of emerging Asia. If you look there, what you can see is that momentum is falling. These are growth rates, three month growth rates, if you like. What you can see is that these three month growth rates have been declining pretty systematically. Among the advanced economies, the most successful economy has been the USA. I think it's got everything to do with their policy response that's been a lot more flexible than the Eurozone policy response, partly because their institutional structures allow that and ours don't. I mean to be fair to ourselves. Another fairy tale that we need to knock on the head is this notion that we're miraculously going to see enormous declines in our wages that are going to lead to the unemployed pricing themselves back into jobs. Sorry, this is just not going to happen. This is what's happened to Irish manufacturing wages since the crisis started. As you can see, the answer is absolutely nothing. It's very easy for Minister for Finance to cut public sector wages by 10%, 15%, whatever. There's no mechanism in a modern economy that ensures that those wage cuts will spill over to the private sector. And indeed, if your company is doing well, why would you cut your workers wages? If wages are not falling in Ireland, which is the most flexible of the peripheral countries by common consent, then there's no way that this is going to be a solution to the problems of Spain or Italy or Portugal or Greece. It's just not going to happen. We may gain in relative competitiveness insofar as core wages increase. That's a realistic way of thinking that we might gain in relative competitiveness. And so one thing that's been very positive is the sign that wages in Germany are beginning to increase. We need more of that, please. But the notion that we're going to get out of this through cutting wages and the periphery is simply not on. The inevitable result of all of this has been a collapse in public support for the union. I've been following this fairly regularly, but the last Eurobarometer survey shows declines in support for the union that really are astonishing. This is, I think, inevitable. If you think that the European Union is something that is imposing macroeconomic policies that are leading to unemployment rates that are going up, I mean, of course, people are going to say we no longer support the European project. It's a little bit like the gold standard issue in the interwar period. The problem then was that they threw out the baby of internationalism along with the bathwater of the gold standard. The risk in Europe is surely that something similar may happen. So the problem is, if you think about all of the things that we need, we need a short run response to deal with the macroeconomic problems that we face, but then we need a long run response, but the long run response is inherently federalist. And so the longer the short run crisis goes on, the more difficult it's going to be politically to put in place these long run federal solutions that we need. And so, in conclusion, which is it going to be? Are we an oak or are we a reed? That's largely up to people like you.