 Let me give you the floor. Thank you, Frank, for the nice remarks. We'll make sure understand how to use this thing. Yeah. Good morning. What so as Frank said, I wrote the presidential address and presented it last December. It was a fairly abstract discussion of the optimality of fiscal policy in an environment of low interest rates. And what I've done since is tailor the conclusions to various parts of the world, thinking about how this applied to Japan, how this applied to the US, how this applied to the euro, and going around the world pontificating and proselytizing to try to convince you and policy makers that they should change their ways or at least think about it in a different way. So this is an attempt to apply what I concluded to the EU fiscal framework. And that's what I'm going to try to do for the next 40 minutes or so. So again, it's always useful to start with a slide which states everything that you want to say before the chair tells you that time is up. So the first two points is really just a restatement of what I had said at the AEM meetings in last January. The first one is interest rates. Interest rates are going to be low for a long time. I think the idea that tomorrow morning they'll start increasing is probably something that we should give up and think that there is really a regime change. It may not be forever. It's unlikely to be forever. But it's there for long enough that we have to think about how we behave in that environment. The second is the implications for fiscal policy applied to any EU member, any country on its own. And there are two aspects to it. The first is low interest rates imply smaller costs of debt. That's nearly an arithmetic conclusion, if nothing else. But at the same time, and that's a separate argument, because they put such limits on what monetary policy can do, and I was here in the last day when this was discussed at some length, there is a need for fiscal policy to do more. So there are both larger stabilization benefits of fiscal policy and smaller costs. That by itself implies that we should think about fiscal policy differently. Now when you come to implications for EU level rules, as opposed to rules or modes of behavior at the individual country, the only reason why we should have EU level rules, namely, supranational rules, is the existence of externalities. Otherwise, there is absolutely no reason to interfere in what various governments think is best for them. You can only intervene if you think that what they do is going to create risks for the other countries, and that becomes relevant. So that's the way in which the EU level rules should be thought of or assessed with a different criteria from national rules. And here, what I argue, actually I should have said, this is a paper with Jérôme Zettelmeier and Alvaro Leandro. What we argue is that the main externalities that were in the mind of the people who designed the EU level rules were that externalities. That basically a country going bankrupt would be unpleasant for itself, obviously, but would be unpleasant for the others as well, and therefore had to be prevented. And if you think about most of the rules which were put in place, they really were based on this idea. What we argue is, yes, it's still there, although it's much less likely to be a risk for the reasons that I already mentioned. But there is now something which was always there, but is more important, which is demand externalities, which is that in a world in which fiscal policy is really the only tool remaining, it may actually not be used enough because each country is going to see a leakage from what it spends to the other countries and, as a result, may not want to do what is needed. And I'll argue that that's relevant in the context in which the ECB cannot use my trip policy anymore. Then the last part of the talk is proposed free reforms. And I think I would have no problem convincing you that the goals are the right ones. And then the question which I think many of us are struggling with is, what are the remedies? And we offer three dimensions of reform. The first one is how to deal with demand externalities, namely the case where national fiscal policies are just not enough on their own and what needs to be done. The second, which is based on the dramatic decrease in public investment in the EU at the time at which most of us think that actually there should be larger public investment, is to introduce some kind of capital expensing. And I think that the golden rule accounting is a way to go. It's not the only way, but I think it can work. And I'll come back to this. And then the last one, which is surely the most controversial one, is that the problem with the rules is not only that they are not right in the current environment, but we are in an environment in which strict rules are unlikely to be right. The environment is so complex that basically designing ex ante, the state of contingencies, that it is going to react to, is just too hard. And we argue for a shift from rules, the existing system, to standards. Standards don't have numbers. And then there are all kinds of issues about how you do this and how you enforce it exposed. But it turns out that this is not an issue which is specific to this particular issue. It is an issue which has been discussed in the legal literature for a long time. And in many cases, lawyers have advised to use standards rather than rules. And I think that's a discussion we should have of how realistically and not to be optimistic that we'll give up the numbers that we have at this stage. We may change them, but I don't think we'll give numbers. Anyway. So let me just, for those of us who want to know where it's going, there are about 20 slides, I think 19, of which 10 are kind of simple exposition of what I've already said, and then 10 are really applied to the EU issues specifically. So the first point is interest rates. And I've been struck in my discussions with policy makers with the idea that, oh, interest rates are low, but we cannot count on this. They could just turn around tomorrow. And then everything you've said becomes irrelevant. And I think that's wrong. I mean, we never show. Surely they may go up. They will probably go up one day again. But I think there's plenty of evidence to suggest that this is really a low frequency lasting movement. This looks back. It constructs the real interest rate for the eurozone back, constructed before it existed, and the growth rate. The blue line is the real interest rate. The red line is the growth rate. And as you can see, the steady decrease in the real interest rate, which since the mid-80s, fairly steady. And the fact that growth is a bit lower, but now is substantially above the interest rate and expected to be so. So on the expectations, again, these must be familiar graphs, at least the top one. The yield curves are incredibly low. In many cases, the rates are at zero or below zero at long maturities, which means that even if you worry about risk in your government, you can borrow at a negative rate or at a zero rate at long maturity. And then if interest rate goes up during that time, you're basically hatched. So it's clear that the markets are fairly confident that rates will remain very low, even at very long maturities. You can go a bit deeper and look at the option prices and then look at the implied probabilities that markets give to increases in interest rates. And overall, this may be too small to actually read. And this is, now I think, a month old. You can see, for example, that the probability that the market put on the three-month labor rate being above 3%, which would still probably be less than the nominal growth rate in five years, is 1%. So it's clear that not only is the mean, which is the yield curve, telling us, yes, markets believe, but they actually are fairly strong in their beliefs if you think about the positions that they're taking. So conclusion is, again, I'm surely not going to argue that rates will be low and lower than gold forever, surely not, even bet against that. But I think we have to take this as the most likely outcome for a long time to come. So let me turn to fiscal policy implications. And here I'm going to distinguish between what I call pure public finance and functional finance. Pure public finance is the kind of public finance in which you ignore macro. You ignore nominal rigidities, and you just say, OK, from a pure public finance point of view, what is it that we should do? And there are four implications, I think, of low interest rates from the point of view of pure public finance. And then the next one, functional public finance, is the idea that public finance affects macro, which is indeed the case and is important. But let's leave this aside. So here I'm going to go through steps that those of you who have either read my paper or looked at the arithmetic of that dynamics all know, but I think they're still worth saying. The first one is lower fiscal cost of debt. That is nearly by definition. If interest rate is lower, the fiscal cost is lower. Now, it takes an extreme form. When r is less than g, the rate on debt is less than the nominal growth rate. Then you get these paradoxes, which is that you can actually decrease taxes today. And you do not need to increase them ever after. Or in terms of primary balance, you can have a primary deficit today and never repay it back. Basically, never generate a primary surplus later. And for those of us who have gone through equation with r greater than g, it comes as a surprise, but that's what arithmetic is good for. It is clearly an extreme case. And again, it may well be that one day r will be greater than g. But it says that the trade-off is fairly appealing in terms of taxation, in terms of the burden of taxation. I think the more general point when you talk to an audience who doesn't understand the algebra is just to say low cost of debt. And that's very, very relevant. And the point worth making. Law of fiscal risk, cost in terms of taxation, increased taxation in the future, risk is something different. It's a probability that the level of debt becomes so high that the primary surplus, which is needed to keep the debt to GDP ratio, is politically infeasible, which is typically the way in which this crisis happened. And what you get here is, again, if r is less than g, and again, that's an extreme case, then there cannot be a debt explosion. Physically, you can run any level of primary deficit forever, and that will not explode. So you never have a need for a primary surplus later. Again, that's arithmetic. It's not deep, but it's still surprising to some. That will increase, but it will not explode. And there is indeed a level of a primary deficit, which you can maintain forever and still have a constant debt to GDP ratio. So if r is less than g, you do not need to generate the primary surplus. If you think primary surpluses are the source of danger of political problems, then the danger is much, much less. Again, r will one day be greater than g with some probability, and therefore, we should be careful. Now, there is one caveat to it, which is suppose that I was so incredibly successful in my talks that governments just went ahead and increased debt. It is still the case that an increase in debt will increase the equilibrium rate. And so at some stage, if you keep pushing, basically r will be greater than g, and then the arithmetic goes the other way. So this is not an unconditional statement, but it says you have quite a bit of room. The third point is, I think, the point which, for a economist, is the most important one. And we care about the finances of a state, but we care about welfare. And this was really the motivation for the paper that I gave at the EA meetings, is, well, the government could issue debt, but is it good? And there is this old discussion about dynamic inefficiency, which says compare r and g, and if r is less than g, then actually debt is good. Because that's an environment in which there is too much capital. It's unproductive, and therefore, that is actually good. Now, we used to think of this as just a theoretical case and dismiss it, but we are now in an environment in which the safe air, r, is less than g. And so the question is, well, is it the case that actually the cost of debt, the welfare cost of debt, is really positive, or indeed, more debt would be good? Well, it turns out that the right way to think about this is to realize that the safe rate is the risk-adjusted rate of return on risky stuff, on the rate of return on capital. And therefore, that's indeed what matters for welfare. From a welfare point of view, you want to adjust for the risk. And I showed that it was a bit more complicated than that. But the simple bottom line is when r, the safe rate, is less than g, it could be that actually more debt would be good, that actually, even from a welfare point of view, more debt, which squeezes our capital, is still worth pushing. Now, I had a political decision to make at that point, which was I going to go out saying that is great for growth. And I decided that I could sell it. And so the way I've said it is that is bad, but not so bad. I just played it that way. And if you use it for the right things, then it's worth it. But if you actually sit down with them all, you may come to the conclusion that with the best parameters you can put in. I say you calibrated the DSGE, you would actually conclude that because we basically, the safe rate is so low, the risk-adjusted rate for return on capital is actually very low, and having a bit less capital, which is what debt does, displaces capital, is actually a good thing. And not pushing it, but more for political reasons than for deep, deep, deep academic reasons. So then there's a fourth aspect of it, which is very relevant, which is that unless you think that risk-adjusted social rate of return on public capital has decreased in line with risk-adjusted rate of return on private capital, then clearly we should have more public investment. And basically we have a decrease in the cost of borrowing. And if the risk-adjusted social rate of return on public investment has not decreased, it makes sense to have more of it. Now given this, if you look at the data, then one of the main results of fiscal austerity is basically that it has taken place where the short-term costs are limited, namely in public investment. And that graph shows you how much public investment has decreased, and that clearly in the light of what we think should be larger public investment, namely due to global warming, is a major issue. So I think these are uncontroversial conclusions for fiscal policy from a pure public finance point of view. Now functional finance is, I think, a term which was introduced by Aba Lerner to indicate that fiscal policy should be used for macro purposes. If you introduce nominal rigidities and then policy effects aggregate demand and therefore effects output, suppose you have a negative output gap, should you use monetary or fiscal policy? And I think the answer is, well, in our malls, and I think in reality, monetary policy is the right tool. If nominal rigidities is the distortion, then monetary policy in our malls is literally the right tool. It can be used more quickly, more nimbly. It is less political. It's great. But we have gotten to a point where there are limits on what monetary policy can do. Now that, again, is a statement about the zero law bound on nominal rates, but in the presence of low expected inflation. Low real rates and low nominal rates come together. And what we've seen is monetary policy is constrained. So if monetary policy is constrained, maybe not absolutely constrained, but can only do things at the margin, which is what I believe at this point, then you have to think about fiscal policy as the main stabilization tool. We've seen it's less costly. It is actually more useful in this case, because nobody else can do it. So I want to show you what this leads to, and that's, I think, the last slide on the non-EU specific part of the talk. I want you to think about the effect of fiscal consolidation of 1% of GDP for the eurozone as a whole. And I want you to think of the ECB as being at the effective lower bound ELB, so basically unable to decrease the interest rate or to do whatever else it has in its toolbox. Now, what are going to be effects? The effect on output is going to depend on the multiplier. And this is a fairly intense discussion, so I'm going to take a number which I think is in the range, which is 1. So this is going to lead to a 1% decrease, did I say? I said increase in output, but it actually is a decrease in output. Sorry about the typo. I wish it were, but it's not. It would be nice if it led to an increase. Maybe Alberto Alizina would have said increase, but I would say decrease. So it decreases output by 1%. And what is the effect it has on the debt? Well, it reduces the debt, but less than 1% for 1%, because you have this automatic stabilizer coming in. So the ratio of the deficit is decreased to GDP, decreased by about 0.7%. The stabilizers are more or less 0.3%. So what is the effect of these measures on the debt to GDP ratio? It's going to depend on the initial debt ratio. And the simple arithmetic is given that. Little d is a debt to GDP ratio. So the change in it is the rate of change of debt minus the rate of change of output. If we can rewrite in the way, rewrite in the next step. And then I give you a formula at the end. The conclusion is if you start from debt at 100%, which is the case for many European, European countries, then that ratio will actually go down, not up, because basically the effect on output will be offset by the effect on debt. And so debt will go down by minus 0.3%. If that is 50%, then you'll get an increase in debt of 0.4% of itself. So the point is not that one is plus and the other is minus. It's just that the effect of fairly substantial fiscal consolidation on output, a decrease in output of 1%, will have political implications, lead to extremely small movements in debt, either one way or the other. And it's ambiguous which way it goes. And it's probably not worth it at this point. I mean, think about the size of the output gaps that you'd have to do in order to decrease the debt from 100% to 60%, say the last reach number. So the point is not that we should never be done, but in an environment in which might we policy cannot help, fiscal consolidation is extremely costly in terms of output, in terms of how much it delivers, in terms of debt to GDP reduction. And so it should not be done now. It should be done. And it's not essential that it be done now for the reasons I've given. It can be done only when the ECB will have again the space to help upset some of its adverse effect of fiscal consolidation. And that's not now. So let me now move to the second half, which is the more relevant one here, about the implications for the EU fiscal framework. So the first question is, why should there be an EU fiscal framework? We don't ask that countries should be free to do whatever they want in terms of the composition of their budget and their choice, their intertemporal choices, intergenerational choices. We may have views, but I don't think that the EU should impose these views on that. It should probably come in only to the extent that what a country does is going to affect other countries for externalities. So what are the two externalities which matter? The first one is that externalities, and these are the ones which have shaped the existing rules. There was a worry that if a country went bust, there would be spillovers from default. And we had plenty of worries about this during the crisis, which is what, if a country was to default, what would happen to banks in other countries and what would be the effect on the financial system and so on. And there was another one which, I think, turned out not to be terribly relevant, which was fiscal dominance of the ECB, that basically if countries were starting to have very large debt, they would put pressure on the ECB to monetize it. I think that one hasn't turned out to be very relevant. But the first one is clearly potentially relevant, which is if a country were to default, then it will have an effect on other countries. Now, the point is, a very simple point is that these debt externalities, if the event takes place, can be quite bad. But the probability that the event takes place is much lower in an environment of low rates as I've shown. Basically, the risks associated with that are much less now than they were when the interest rates were higher. So it's clear that whatever numbers we came up with or people came up with then cannot be the right numbers. The other is the debt externalities. And you have all kinds of interactions between countries in a common currency union. But one of them is that some of the demand, if you want to have an increase in demand, and you use your usual tools, and you can no do home bias to the extent that it was done in the previous papers. A lot of the demand is going to fall on foreign goods. I mean, when Luxembourg decides that it has an unemployment problem and it increased spending, it's going to help Belgium and France. It's basically not going to do much to Luxembourg. So the optimal thing for Luxembourg is not to do too much. That's true of all countries. So these externalities that are going to lead countries not to want to do enough from an EU global point of view. In normal times, that's not a big issue because even if there's insufficient fiscal expansion as a result of this, the ECB can come in and just use my trip policy to basically fill the output gap. But if ECB cannot, then you can have a situation in which you have all the countries having an output gap. None of them being willing to do quite enough to fill it. And in this case, you need some coordination device. You need something. Now, again, that sounds very exotic. If you go back 10 years ago, people have said, yes, it could happen. But it is not at all inconceivable that we are and we will be in a situation like that. So these are the issues. So when you think about EU rules, you have to think externalities and what they imply. This is the highlight of the talk. It comes from Alvaro who had this marvelous idea of comparing the fiscal rules as they have developed over the years since Maastricht to today, to the cathedral Seville. It's basically an aggregation of stuff and great logic is gone. It's still a very beautiful cathedral if you have been there, but as giving a sense of coherence, it doesn't totally succeed. I don't know if this is the best analogy, but we love the picture, so we've kept it. In the paper we have tried to understand all the rules and explained them. I'm not going to do that, but there have been extremely many criticisms of the rules and the complexity of the rules and are really incredibly complex. It makes filling forms on the internet look like child's play. The fuzziness of enforcement, we want to go beyond that and we agree with many of these things, but we want to go beyond that. So the three points that to us characterize the existing rules, the first one is the main focus is on that externalities. Basically, this is clearly where the 60% and the 3% came from, didn't come from worrying very much about stabilization. It came from, okay, let's make sure that they don't have too much debt, right? In an environment which is not the one we are in today and was probably already much too restrictive a set of rules. The second is the common treatment, largely common treatment of current and capital spending. Now there are exceptions to this and if you read the footnotes and all that, there are circumstances in which you're allowed to do a bit more capital spending while satisfying the rules, but the restrictions are such that basically it's irrelevant. I mean, I think it's more nod to the need rather than the accommodation of the need. And then the third is that it is set as a set of rules, quantitative rules with specific numbers for the targets, for the speed of adjustment in the MOT medium terms. MOT medium term, what is it? MOT medium oyster. Okay, objective. And it's clear that even if it were right, which I will not argue, it is truly not right today. So we want to go back to that. So this is what the rest of the talk is about. And this is, again, a bit repetitive, but this is what we push. We need to rethink the trade-off between debt and demand externalities. Debt externalities are less important. Demand externalities are more important. We need some way of protecting public investment. And here we push for the golden rule, but the golden rule has two parts. It basically is a set of accounting rules which separates current spending from capital spending. This we buy, this we think is useful. We know the limits, it has been discussed many times. It goes beyond that. And for example, the golden rule is sometimes stated as saying that you have to balance the current account and you can issue debt to finance the capital account. We don't buy that, we think that actually this is not right. And this could be very dangerous, and I'll come back to this. And then the shift from rules to standards which I've mentioned, which I'll come back to. The main reason is we're dealing with an incredibly complex problem to solve and thinking that we can write down the right contingencies, both for this environment and the next, is just an illusion and we should not do that. Okay, so I want to start with this, which is how should we think about the change in the relevance of the externalities? I think the first thing to say is debt externalities are not smaller if they happen, or maybe with regulation, maybe if we can reduce the doom loops and other things like this, they would. But the probability that they happen is much smaller. And so given this, you want to basically leave more leeway to countries to do what's needed for stabilization. So I think the first principle, and maybe even more important than anything else I say, is that the EU rules should do no harm. They should basically allow countries which need to use fiscal policy for stabilization to do it, unless there is a debt externality, which is potentially there. Otherwise, they should basically leave the room that countries need, okay? And it's clear that the current constraints are too strong. Now, separate from that is the issue of demand externalities, okay? So, again, more formally, if you have N countries and they all do what's optimal for them, given what the others do, so it's a Nash equilibrium, you're going to get too little fiscal response, because, again, everybody's doing something for the others, which they put no value on. And so in this case, what you need is coordination, is something, okay? Here, it's a very old discussion which was largely based on risk sharing and the notion that sometimes countries need to be held. The argument here is different. Basically, think of a case in which all countries have negative output gap. It is better for them to actually meet and all do stronger fiscal. There is no risk sharing involved. It is basically a way of achieving a higher level of output by coordination. And the reason they're willing to do this is that they know that if they do it, the others will do it and it will compensate. So, it is another argument for having a central EU facility. The success of pushing this on the grounds of risk sharing have gone nowhere and I'll give a second reason to do it. Maybe it will still go nowhere, but it is clearly the way to go. I think it's quite essential. And basically what this facility should do, if it existed, should be financed by Euro bonds, which we know has good aspects. It may face one of two situations. So, one is one that my friend and co-author, Larry Summers, believes may well be the situation in which Europe will be, which is a secure stagnation, which is persistently low demand and a persistent need for higher fiscal expansion on a very sustained basis because the private demand is just not enough. In this case, the way to respond to this is to have at the EU level some program which basically has a fiscal dimension and can basically increase public investment on a sustained basis. So anything, now here there's a marvellous coincidence which is the one with global warming and the need for green investment. It's clear that the externalities also at that margin that the country doing it alone is not getting the rewards. So I think that having the public investment, public green investment at the Brussels level would solve all kinds of issues and would be very much needed if there is a secure stagnation. If you believe that, no, it's just flirting with the whole of Ireland but we're not there all the time. It's still the case that you could have transitory shortfalls and recessions of the old fashioned recessions, in which case if the ECB cannot respond, you again have a problem of coordination. And for this putting in place a cyclical tool, I've explored, for example, temporary decreases in the VAT coordinated across countries is a way to go. But these you need to have the risk that you'll find yourself having to use them and not having them in place is an issue. Okay, so if it doesn't work, well, you know, there can be agreement among the willing and able but the question is how many of those would come in and it's clearly not ideal. So golden wall accounting is, as you know, is basically the idea that there's a capital budget and there's a current account budget which separates basically what is capital accumulation and not that what we argue is for the existence of such accounting. Okay, there are all kinds of discussions which we're going to the paper at length. I mean, you know, it was considered even by the EU at some point and rejected there was a commission which rejected it. Much of the issue is what is considered capital spending and then you get into the usual examples of other wages of educators, capital spending or not and therefore an increase in wages for capital spenders, for educations for teachers, capital spending. It's clear that when you start going there it becomes very fuzzy. Another example that I was given when I gave a talk in Italy is and you're going to like that is the decrease in the retirement age which the previous government had considered. And it was explained to me that this was actually capital spending and the reason why it was capital spending is that it would get rid of people like me, you know, that's just at the end of their life, right? Or placed me by somebody young with much more ability to contribute to golf and therefore the golf effects would clearly dominate and would help Italy go at a faster rate. I'm not absolutely sure that the logic is impeccable but the political aspect of it makes it a non-starter. So you need a commission, you need basically a committee which decides what it is that you can put below the line and you clearly want to be very restrictive and not allow for crazy stuff and it has to be done at the EU level but I think it can be done. Now on, this is really just a side remark, the third point there. I do not agree or we do not agree on the golden rule as a normative rule. So the normative rule is well, current account needs to be balanced maybe not every year but of a cycle and the capital account, yes, you can finance by that. That would be wrong. First, if you're in a situation of secular stagnation then the notion that the current account must be balanced becomes a constraint which is a counterproductive one. You may actually need to have a current account deficit for a long time. If a private sector doesn't do it, who is going to do it? So having a constraint that has to be balanced over three years or whatever is dangerous. The other is public investment presumably has sufficiently high risk adjusted social rates of return but it may have zero financial returns. In which case if you issue debt, right, then what you're going to have to do is basically find the money to pay interest on the debt and so the notion that you can fully finance your capital account by debt is not responsible if a capital account is in projects which have very low financial rates of return. Now one way out which has been proposed is have only projects which have high financial rates of return but that defeats the purpose. Presumably the reason we have public investment is that there are projects which have high social rates of return and low or zero financial rates of return so that's not the way. Okay, let me move to the last three slides. I don't know how much time I have from, I have two minutes. Okay, so I really have to make my case in a tight and convincing way. You're absolutely right, he said behave, right? He didn't say two minutes or anything like that, right? But exposed, he will be allowed to basically decide where I was, now, okay. The point is we are going that we should give up on numbers and that we should move from rules to standards and we discovered in the process of doing this and interacting with lawyers that this is a very long discussion in the law literature and it's not a hawks versus doves. Rules is not hawks, doves is not standards. It's not that discussion. It's basically different trade-offs, right? Rules, you basically ex ante, you say you define the contingencies, you define the escape closes, then you decide about numbers and adjustment rules and all that, okay. Standards is say, you define principles, you define what an appropriate, unquote, fiscal policy is, country comes, say this is what we want to do and you assess that that's acceptable or not but you're not basically about numbers, you're about something else. And there's an exposed assessment. Now that's something that you see everywhere. There is an example below in terms of speed limits. Rules would be 55 miles limit, 35 miles if rain, signs that you see, the other would be drive carefully, right? Which would give much more flexibility but clearly some dangers as well. Now, when would you choose one or the other? I think the answer is when a poem is incredibly complex and you cannot think about the relevant contingencies. Then there's what I call nitrogen uncertainty. It's very, very hard to think about what may happen. Then the case for standards is extremely strong. The case for rules means that if you do it, you'll have to cheat, not respect the rules, pretend you respect them but destroy their credibility, okay. And the last point on this slide is that there are plenty of places where standards are the standard rather than the rules. All on tight trust is basically based on standards. There is no such thing as if your firm exceeds X, then you have to do something. It's always considering the market and so on and so on. So the two slides is how it could look like. We tried to make this more, put more flash. So the EU primary legislation, namely the treaty, could have that. A member state shall avoid excessive government deficits, that's unchanged, that's fair. When the European Commission deems a deficit to be excessive, member states shall reduce it at a speed which minimizes harm to their prosperity and those of a member state would replace the numbers which are there by a statement like that. Then there would be a secondary legislation and more work. Basically would say a member state is not excessive, either that sustainability analysis indicates that that is sustainable with high probability. In determining the speed of adjustment, if the need is there, member states shall take into account the probability with which that is unsustainable, market conditions, state of the economic cycle of your member state and so on. And this could be backed by a tool that I actually love and have pushed for at the front is stochastic DSAs, which is basically looking at all possibilities, being very generous about the distributions, what's the probability that DEC will go berserk? And that's what I think should be based on. The last slide before the conclusion, this is a big issue and this is where I basically get, we get attacked and rightly so, which is how do you enforce standards? I mean, how you enforce rules is not obvious. I mean, the history of the rules is not a very pleasant one and they have been cheating right and left, but it seems even more relevant for standards. So we proposed two options. The first one is just a tougher approach, tougher version of a current approach. So the states state what they want to do, okay, and basically they show, then the commission looks and say, no, it's not in the spirit of the standards. We don't think it's acceptable. It asks for revisions. If a member state doesn't comply, then the council of the European Union adjudicates. So this has a combination of technocrats playing the role and the political body coming to an end. The other one is to have an independent body as an adjudicator. So it could be the European Court of Justice, which would have to be expanded to have people who know something about fiscal policy, which they don't. Or it could be the European fiscal board, which looks like a perfectly good institution to build on, has done extremely good work and could be done. Then if there was, and then this would leave it out of the European Council, of the politicians and would develop a jurisprudence. What you learn from reading the law literature is that a lot of that leads to the building up of principles based on jurisprudence. And so you need a core of lawyers to actually get there. So we think it's worth discussing, even if it will never happen, but it's important. And these are the conclusions, which I'll just repeat. Interest rates are going to increase soon. You need to reassess fiscal policy deeply. You need to reassess the EU fiscal framework deeply to quote one of our European leaders who didn't say that, but should have said that. Pudence is to change, not to keep. Short run, I see a danger. I think that the risk has come down a little bit. If there is a big recession at the European level, you basically, under the existing rules, do not have the tools you need. And then the last point is, what should we be thinking about? I think public investment, global warming is, should be on the agenda. It is increasingly on the agenda. And then the right short-term tool with coordination, which I think is a VAT rate temporary decrease. Thank you, Frank. Thank you very much. You have about 10 minutes for Q&A. So I'll collect a few questions. Gustav. Thank you Olivier for this very inspiring talk and for drawing lessons for the European debate. I would have three comments, questions. The first one is when you talk about standards versus rules, also the idea to downgrade the importance of numbers. I'm just wondering when we think about monetary and fiscal policy, when it is about framing of public debate or anchoring expectations, as we call it in central bank jargon, there is a lot of attention being put to simple numbers like 2% for the ECB or close to, but below but close to. And as Benoit yesterday said, they may be married even in being simpler and focusing on just one number. We know that the 3% Maastricht deficit reference level has a lot of importance in a lot of countries even though it's not a target. But so I'm just wondering whether giving up numbers altogether would not complicate the communication with the broader public. The second point would be on the EU antitrust analogy. I think one thing we are struggling about, it's not so much the distinction between standards and rules, but where is actually sovereignty? And also President Draghi made that point very often that there is this trade-off between institutions and rules and where sovereignty is placed. Fiscal policy is a matter of national sovereignty and probably we cannot get around that. As you said, having a strong fiscal capacity would be the first best, but we're not going there right now. So we need to do the best out of the rules. Last point on your article 126 proposal. I'm a bit surprised that it's only about what to do when deficits are excessive. I thought your lecture was a lot about the symmetry of approaches, so also what to do when there's too little support from countries where everyone would agree that there is enough space to act and so there would be no obligation to act and that's one of the things that have been debated a lot. Thank you. Maybe it's better. Yeah, these were three questions, right? These were three extremely good questions in the sense that these are questions that we've asked ourselves along the way. So on the standards versus rules, I agree that numbers sometimes are helpful. I suspect, for example, that at the beginning of the euro, credibility was a very big issue and therefore having numbers, a 60% number, were right or wrong, kind of focused the mind. So I think there's a sense in which at the beginning, you know, this is the same thing when you do disinflations, you actually want to kind of link yourself to numbers or simple rules for credibility reasons and there was a lot of questions as to whether there would be responsible policies. I think to a large extent when the credibility has been achieved, largely achieved, then you can move to something smoother, less constraining, to take examples against from disinflation episodes. You may want to fix the exchange rate, but if you fix it for too long, you get Argentina, right? So there are basically, I think, in all these cases, there's a transition period in which you may want to rely on the explicit guidelines. Once you think you're closer to a steady state, you may want to be more relaxed. The other remark is, I hate the Taylor wall for my trip policy, but I accept it because of the nature of my trip policy and the political, of the apolitical, largely apolitical aspect of my trip policy. In the case of fiscal policy, I'm very worried about the complexity of fiscal policy relative to my trip policy and the notion that John has pushed of a simple fiscal wall strikes me as having more type 2 risks than type 1 and so on. Not for me, but you've raised a very good point, which is, yes, these are anchors. I mean, numbers are anchors. And if there are no numbers, then how do people come to? So I think the 2%, whether it's the right number for inflation, is an anchor for these people, too. So I think there's a trade-off, I accept that. On the compisant to antitrust, you're completely right. And this was actually, I think it was at some stage in one of the slides, and we took it off, is that there is a difference. One could argue that maybe the difference is not clear. But in the case of fiscal policy, it really looks like the responsibility of a government. And therefore, the ultimate decision should probably be taken by governments in some form. This is the reason for feeling that while not competent, having the European Council be there is probably needed, otherwise it looks like a bunch of techno class just decided. There's a risk, which is that, yes, they are representing the will of the people, maybe. But they're highly political and may not agree to the right thing. But that's an issue we already have in many ways. But you're right, that there's a difference to antitrust, which is about firms in principle and government. And then on the article 126, it's interesting. I tried to make the slide slightly less busy than my co-author in the previous presentation had. And I took one line out, which was in the discussion of how the treaty could be modified. So the primary legislation and the article 126, he had added something which said, if the ECB is unable to help, it is incumbent upon the countries to actually help with fiscal policy or some. And I took it out. But you're so for it. Yeah, it should be there. Thank you. OK, I have a question. Second row? Yeah. You may stand up for the camera. I very much liked your reclaiming of Abbalon's functional finance, which makes you closer and closer to MMT, but also to Paul Samuelson. Because in the Paul Samuelson's economics, there is a number of statements that are considered today MMT about debt. Functional finance has a more extreme approach to debt, where debt is just the record of past net spending minus the money that has been used to pay taxes. And debt in Abbalon's functional finance is never a target, it's never an objective, it is a residual. And now the problem with functional finance is that it can be used and it's been used today as an argument to reclaim monetary sovereignty of individual countries. And so I think we should also consider another argument in the tradition of limits to fiscal policy. And this is James Buchanan argument, which is really very much political. It's very much about limiting the otherwise unlimited power of politicians to control the national currency. And in this sense, I think if we consider the political economy of fiscal policy, then moving to a coordinated fiscal policy, and more or less along the standards that you are suggesting, is politically a way superior approach to country-level flexibility, meaning that this leaves much less freedom to democratically elected governments to use limits, to use flexibility to construct political consensus. And so in that sense, the political economy of fiscal policy matters in this respect. OK, I suggest we now collect some questions. So I have Lucia over there. If you can stand up for the camera. I have a question and a comment. The question is on the golden rule. Actually, it's two points. One, at the beginning of your presentation, you argue first that low interest rates may be an indication of low return of marginal product of capital, if I understand. Then my question is, what leads you to believe that social return may not have gone down in lockstep? At least one thinks of the difference between public and private capital in terms of appropriability of the return. So this is a bit of a theoretical question. Then on the golden rule, if you allow me, I take your point that you don't take it as normative. Still, does not your advocacy for this capital account presupposes that the existing set of rules constraint investment? In other words, if politicians were not constrained by quote, stupid unquote rules, they would invest more. I ask you the question because we have carried out some empirical work that doesn't support this intuitively appealing proposition. My final point is a comment on your solution, the political versus the judiciary adjudication system. So my contention, I may be a bit biased there, but at the same time, I think considerable experience being one of the architects or the artisan of the Cathedral of Sevilla is that what you have in place now. You look very young. Thank you. What we have in place now, if you strip, OK, many complication and ornaments, comes somehow close to your first model that is, yes, there are rules, but then they are adapted and things are put to the council and we have certain outcomes. The problem with this, however, is that the council is dealing with different tables. So to be concrete, you may have come to the conclusion that Italy is an unsustainable path. So it would fail your standard. But still, Italy is important because issue of migration and, I mean, other tables. And you are going to have this problem, I think, even in your first, because what you propose in term of your first solution, in my view, is closer than you may think to what's really happening. But the real problem with that is not the lack of technical expertise of judgment, is the fact that consideration other than economic ones intrude into the deliberation. And I have a rule. Who will be the judge? Robert Batesma, European Fiscal Board. Thank you very much for your inspiring lecture. One of the, well, as European Fiscal Board, we are obviously in support of fiscal rules and we are not pleading for dismissing all the work that Lucio has done. Now, one of the, so in our review report that we wrote for the commission president some other go, we also suggested that, you know, maybe going beyond the treaty, one could have a differentiation in debt targets across countries. And someone could maybe have a contract over a seven-year period in which debt targets would be differentiated across countries because of, you know, different projections of healthcare, pension, expenditures, maybe also climate-related expenditures, which would maybe also make debt targets more realistic because we cannot expect Italy to reduce its debt to 60% within 10 years, say. So I'm just wondering how you think about, you know, differentiated debt targets. So still have debt targets or debt ceilings, differentiated debt ceilings, but, you know, tied to the two countries' needs. There may be last question, Neil? Or no? So thanks, this was really a great talk. And, you know, I see, so to speak, the fundamental economic points that in an environment of low interest rate, the debt externality may become less relevant, relatively speaking, to the demand externality. But, you know, after all, we are in Europe and here strange things can happen and out of the blue in some countries, maybe rates can hike up and then we do have a sustainability problem there. So I wonder when it comes to reforming the overall architecture, whether you can combine, so to speak, the reform of the fiscal framework with the ongoing reform of the ESM because after all, the ESM is the institution addressing sustainability concerns. And if as a hedge, as a backstop, we would have a better procedure to more orderly restruct that in case of need, this would make room, I think, for having more flexibility to address the demand externality. So I wonder how you see this trade-off. Okay. Olivier, Laura is yours. Thanks. I'm not sure I got the gist. Rates can increase again and then whatever rules we've put for this set of rates is going to be obsolete again. I think that's more an argument for having either incredibly complex rules which take into account all the changes in the environment or saying that, you know, basically you don't want to get stuck with a set of rules and that leads you to standards, I think. But yeah, I mean, suppose we were to design a system. Suppose I was totally convincing except on the standards part, and I convince you that now we can have rules and 60 should be, the new 60 should be 120 and the new three should be six and so on, so on. And you all bought that, unlikely, but you would. Okay, and then interest rates increase much more than the gold rate. As long as the two move together, it's not the end of the world. Okay, then we'd be in the opposite situation of having something which is much too loose for the new environment. And so it is that worry that basically the world is changing in very complex ways. Nobody would have thought about the great the sacred stagnation, you know, until recently. Nobody thought that we would be stuck at zero rates. So this is where principles, standards, I think have a flexibility which dominates any set of rules. So I'm not sure I answered your question, but at least I answered mine. So. So on that target, I mean, this is probably where it will go, which is, I don't think we'll see standards. We'll see more and more complicated rules which will be more and more country contingent, state contingent and so on. I'm not sure it will work, I mean, it's clearly progress. If we really can get to a kind of contingency tree and have a good sense of it and write in the decisions associated with each of the branches of a tree, it's progress. I'm just skeptical that the world is a complex place, the tree will change, and that having principles is our standard, is the way to go. Again, I think that when I was at the phone and working with it actually, you know, I thought that stochastic, that sustainability analysis were incredibly useful in allowing to think about all the contingencies in a way which would have made it very difficult to say, well, this country is not satisfying these four numbers and therefore is in trouble. So I think we have better tools. I think these tools do not lead to specific numbers. They say the tools at best say, well, given what we know about the political system, initial debt, those characteristics of the political process, the probability that that is sustainable is at least 98%. Seems to me to be what we can hope for and then we can decide whether that's acceptable or not. But again, I think what we're going to see is, you know, just the cathedral is going to get another two or three floors on top of it before we're done. On investment, I don't know where the question was. Yeah, if you think that public investment has decreased and that the risk-adjusted rate of return, social rate of return on public investment has decreased with a private one, then you don't want to do it. Same applies to private investment. You don't want to do it. I'm profoundly skeptical, although I've not done a kind of marginal product of capital computations. For two reasons. The first one is it is absolutely obvious and I think even Victor will not object if I say that fiscal austerity has come on the back largely of public investment. And this was a political decision, was the easy decision, but it's unlikely that it was from an economic point of view the right decision. So it must be that we killed project which probably were justified. And then again, the issue of global warming, of green investment is going to be much more important than anything we've discussed here today. It's going to require very large amounts of funds. So I'm quite sure that in terms of saving the planet, the marginal return to public investment is fairly high. But these are words they should be backed by facts. I think that was one more question. Thank you for the kind of history of where all this comes from. But to be honest, I want to stay with what I say and not associate with some of the alternative arguments which have been made. For reasons I do not want to go into, I think MMT is badly, badly fall out. An adventurous thing and sometimes allies on your side that you're not totally happy to have. And this is a case of one. The other issue which I think you touched is that of coordination. So I've said the role of EU rules is only a role if there are externalities. Well, maybe not. Maybe somebody could have a much more a European view of things, much more interventionist and say no, no, we basically want to uniform, make more uniform all kinds of dimensions of fiscal policy. We may want to have the same generosity of transfer benefits and so on and so on. I took it as not the case. But basically the only reason why there are rules at this point is if you do something which is going to affect me, I want to be able to say something. But again, the integration of Europe may go far beyond that and say, well, we have to do many things the same way. Coordination of many of our aspects is probably important. I've left it out. I'm done. Okay, thank you very much, Olivier. I think now it's time for lunch which is just outside and we will be back at the quarter past one. No?