 Good, welcome everyone and welcome to our speaker, Professor of Economics Siobhan and also a board member of the Central Bank of France. She's had many different roles over her career. The issue she's going to speak about today is a very interesting paper put together by a number of French and German economists on the future of the eurozone, something that we have great interest here in this country and in this institute. The title looking at how the sort of risk reduction part of the moving ahead can be reconciled with the risk sharing dimension of monetary union, banking union, etc. Thank you very much for the introduction. Thank you even more for the invitation. I'm very happy to be here to have these discussions so I tried not to be too long so that we can have an exchange but you need to tell me when I'm sleeping. So I'm going to present quickly the Franco-German report on a risk sharing and risk reduction that we have to reconcile the two concepts and starting with the why we move this report, why does the euro area need fixing and actually it's not so easy to understand especially for politicians. We've met with many politicians and when problems may be discussed afterwards is that it's not a good political object. It's much better to talk about security, public goods, immigration for a particular politician than the euro area which seems very technical and obviously you don't want to go on TV and say oh guys look maybe your bank deposits are not so sure so we are going to fix it. So why does the euro area still need fixing after years and years of reform? We identified four issues. The first one is that the financial market is still fragmented which means that there is more instability. I suppose that there is a financial crisis say in Ireland. It's a purely theoretical example and then the SMEs in Ireland will not have less have the opportunity to get funded from other countries because of the fragmentation. So there will be more deeper crisis in Ireland due to this lack of support from other countries and on the top of that fragmentation means that the opportunity of the monetary union is not fully agreed in terms of better allocation of capital across the euro area. The second problem is that mutual trust has to large extent been lost because fiscal rules are perceived as opaque and inefficient and there are disputes over the ECB or the OMT whether it's legitimate or not for the ECB to have these two and on the top of that the SM programs have divided the countries where both creditors countries and debtors countries seem to be unhappy. Maybe Ireland is one happy debtor country but there is a lot of dissatisfaction at least in Greece maybe also well there has been a lot of dissatisfaction and the probability that a country would ask the ESM for help is quite low today because the political cost is very high. The third problem is that for sure there will be crisis in the future people come to me and they say you think there will be a new crisis in the future of course there will be a crisis and the question is how to react to the crisis and minimize the cost of the crisis and here the macro policy toolbox is close to empty we know that government debts have already high today so the space to perform counter-technical policy is reduced and on the monetary side we know that the balance sheet of the ECB has been inflated and it will be very difficult for the ECB to start again QE for instance. So banks are now better capitalized but still there is a new loop and a conundrum between no bailout and no crisis and this is very important in our report if you want to make the bailout the no bailout close of the of the treaty credible then the risk is to trigger a crisis so we try to address this problem and the fourth issue is the lack of macroeconomic reconvergence the European semester is quite weak and the medium-term surveillance is split between different processes so this is not in the report if we have time I will cover that because I think it's especially interesting for island so our our proposal uh there are a number of proposals I will not enumerate everything but give the logic the general logic of it so the first idea is to make the new area more resilient by better controlling sharing the risk and diversifying the risk and by setting the conditions for a genuine banking union where there will be no longer any argument for ring fencing of liquidity or ring fencing of capital so give the floor to give the possibility for development of pan-European banks like in the US. Second idea is to strengthen the fiscal framework with more active but also more responsible fiscal policies at national level because now fiscal policy will continue to be carried out mainly if not only at national level but also to create tools at the new area level. Third idea is to fix the institutional setup by giving more responsibility more leeway and accountability to for the ESM who will be in charge of entirely in charge of the depth assessment and the programs and accountable to the European parliament and a separation between the judge and the prosecutor we think that it's not good that the commission is both a judge and a prosecutor the commission is in charge of checking the stability and growth path and also of making well it claims itself as a political body and the two together so we are not in favor I will come back to that we are not in favor of having the commissioner for ex-commissioner being the head of the Europe the chair of the Europe so in one just one image our view is that so here you have solidarity does it work yes solidarity on the x-axis responsibility on the vertical axis and most people would think that as a trade-off between solidarity and responsibility and actually the French think that we are here a lot of responsibility and we need to move to more solidarity and the Germans will be here they think that there is a lot of solidarity they want to move to more responsibility and what we say in the report is that we are not on this line we are below we are not on the possibility frontier so we can improve on both solidarity and responsibility and make the area more resilient with that and the two go together because if you want more responsibility you create new risks and you need more solidarity to tackle to tackle the risk to to control that so I will explain that into two steps first making the EU area more resilient and then stressing the fiscal framework so making the EU area more resilient first the idea is that risk reduction and risk sharing must go together and give a number of examples if you want to reduce the risks in the banks by reducing non-performing laws by diversifying sovereign exposures you create a risk this is in itself it is risky so you need some form of risk sharing for instance in the through a deposit reinsurance to avoid a run at the time where you make the changes on the asset side you need to secure the liability side second example if you want to reduce sovereign risk then you need to have a more responsible fiscal policies and with high debt to GDP ratios there is a risk that in a crisis national governments will perform proselytical policies that all together will be self-defeating so then there is a need for support for some form of support from the from the EU area which can come from the ESM or from from fiscal capacity so what we we come back to that in the fiscal framework third example one problem that was very evident in the case of the Greek crisis in the middle of the crisis in 2015 for instance there is there was a close relationship between the sovereign risk and the re denomination risk in a sense that people were talking about not only the the debt crisis but also the probability that Greek Greece would actually leave the EU area and the risk was very high at some point and so if you want to reduce the re denomination risk and I think it's it's central to the stability of the new area because you say that there's a probability that the country leaves the new area man immediately you have multiple equilibria and it's very unstable so how to reduce the re denomination risk in case of a crisis you need that all the banks in the in the country have access to a liquidity and we saw in the case of Greece that every week the ECB would allow a certain amount of ELA just to keep the banks afloat maybe something similar happens to ILO and the day it gives the ECB a lot of power which is actually kind of political power because the ECB will decide at the end whether the country stays or because if the banks become illiquid then the only solution to avoid a complete meltdown is to introduce a new currency so this is really critical so how to maintain bank liquidity in the middle of the crisis you have a solution on the asset side and on the liability side on the asset side you need to have collateral a good quality so the idea is to diversify the asset side and especially the sovereign risk so holding sovereign holding government bonds is is very good for a bank because it gives access to liquidity but when the government national government is in trouble then the the the value of the collateral goes down and then there may be a shortage of collateral which happens actually in crisis countries so the idea is to diversify these sovereign exposures so as on average to always keep good collateral on the asset side and get access to the liquidity and on the liability side you need to avoid a run and there was a huge run in a grid bank so to avoid a run what we propose is to introduce a system of deposit insurance that would be completely transparent from the point of view of the depositor the depositor would get exactly the same protection wherever he or she is but from the point of view of the the deposit insurance system there would be a national compartment and a euro area compartment and the euro area compartment would be that only when the national compartment is empty which would allow for national responsibility because there would be a cost for the national government but it's very important to reassure the depositors in fact with the new bailing rules it is very unlikely that the deposit insurance will need to be to be activated but still you have this and it's much more transparent from the for the depositor if you tell the depositor in the street you are safe because you know we have no bailing rules and so there is a long list of bailingable assets before we have to tap you it's very difficult to understand whereas if you say you have a deposit insurance and if your government is foolish and and does the wrong things that you still have a european insurance and so your deposits are insured not only by your own government but by the whole euro area community it's much more transparent so the risk of a run is much reduced and finally how to eliminate multiple equilibria you need the ESN and the OMT of the ECB to be credible and so we know the OMT has never been used in fact and the day it will be used there will be a complaint that it is fiscal policy not monetary policy so to do that to make the OMT credible you need to separate the sovereign risk from the denomination risk and this is really key the problem with the status quo is that today there is no real land of last results land of last result for the government there are there is a majesty assistance with with conditionalities so there is no real not really land of last result so for instance in italy italian banks have have been used to act as buffers they will buy the government models okay and this they perceive this as stabilizing and it is stabilizing in a sense the problem is that it makes banks vulnerable to stress on the sovereign debt market which i just explained because there will be a shortage of collateral if if there is a debt crisis in italy very soon there will be a shortage of collateral and then the bank will be in trouble so it makes the sovereign risk and the redenomination risk intertwined and so the OMT the ECB cannot ensure the redenomination risk because there is a sovereign risk inside okay so you need to separate the two and so the sovereign risk is something you accept in a sense sovereign risk you accept the ideas that at some point maybe there will be needs to restructure some sovereign debt and you free the redenomination risk the redenomination risk is purely liquidity risk and the job of the ECB is to be a land of last result to the banks it's not to finance the government it's to but it's to be a land of last result for the banks so if you separate the two you allow the ECB to play the role of a land of last result and ensure the liquidity of course you never avoid a political shock where our new government will decide to renew the new area so this is something different and if if you never think and this is something i've been discussing again and again with the italians if you never envisage at any point a debt restructuring in the euro area then there is a problem with the treaty because the treaty says no monetization no bailout so how are you going to to to respect the treaty so of course there is a need to be very careful about that so our approach is not to introduce a new rule about debt restructuring is to make debt restructuring a possibility by reducing the costs of a debt restructuring so this is the main idea to say that today the ESN is not supposed to land to an insolvent country but tomorrow there is a crisis of course the ESN will land to an insolvent country to avoid a big crisis we need progressively to to make debt restructuring a possibility without triggering a huge financial crisis in the euro area and at this stage debt restructuring will be credible but only at this stage so in practice how to how to break the doom loop so you know the loop between sovereign risk and banking risk the banks finance the government and the government will help the banks in case of crisis so already one arm of the of the loop has been cut with the bailing rules but the other part has not been cut so as I said so in practice what we want is to diversify the asset side of the the bank's balance sheets so through concentration charges on sovereign exposures so there has been a lot of discussion about risk weights on sovereign exposures or or or or exposure limits you know that today when a bank holds a government bond there is no weight for for capital requirements and there is no limit whereas if a bank holds a private bond there are both an exposure limit and a weight so the idea here is not to go in this direction because it would be very prosecutable because it depends on the rating agencies so the rating agencies if if a country is downgraded then automatically automatically the banks would be enjoyable so but the idea is to introduce concentration charges so the idea is that so for instance in Italy and Germany these are the two countries where banks hold a lot of national government bonds okay a huge amount of their own country's bonds and the idea is that to say okay you can keep them but above a certain level you have an additional charge and the additional charge is the same in Italy and in Germany doesn't depend on the rating because the objective is diversification the objective is not to to reduce the recent relation with the ratings is to diversify and so normally the total holdings of sovereign bonds should not be affected it's just a distribution across countries so this is the idea of course it's very tricky to to perform it so we have a proposal to do it very progressively maybe with the help of a safe asset so the idea to have kind of assets that would be constructed through a bundle of national bonds and that would be exempted from the concentration charges so it would be a way to alleviate the charge for for the for the banks and on the liability side as I said we think that European deposit insurance could be introduced even before NPLs have been reduced to a minimal level you can have fees that are different across the banks depending on the stock of NPLs like in an insurance if you are a bad driver you pay more so so there's no contradiction with that and what is interesting is to have it because we think that the deposit insurance will will make the transition more secure so if you have a deposit insurance only at the end of the process given the fact also that you have new bailing rules it's less useful it's more useful in in the transition and now maybe I will skip the single financial markets the idea is that there is a lot to do in terms of the banking union to achieve a full banking union in terms of reducing the idiosyncraties in national regulations in the way resolution is applied things like that and on capital market union almost everything needs to be done and give in the first place give more more role for the ISMAP the European Securities Market Authority that today has very little responsibility and now I move to the second big topic which is strengthening the fiscal framework so maybe there are differing views in this room but the group thinks that the record of the SGP the Sabine-Tenguas Pact is quite disappointing technically because there is a lot of discussion about how to measure the structural the structural deficit the structural balance fiscal structural balance and also the fact that even having a even an SGP centered on a structural balance is still prossequical to a to a certain extent economically because we have rules that are too stringent in hard times but too much in good times and we well actually we see it in France today is a resumption of growth and it's very relaxed about about fiscal adjustments and politically because it's a good it's a good occasion for for national governments to to blame to blame Brussels so but still we think that fiscal rules are a necessity some people think that we just we should just abandon fiscal rules and rely on market discipline this is not our view because markets are often wrong not just in the new area they have been wrong in Asia for instance 1997 the the markets just didn't see the crisis coming so we need to think about new fiscal rules renovated the fiscal rules another problem is that as I said a no bailout rule is still not credible there is a in case of a no bailout there would be high costs in terms of contagion collateral damage and so what should be the objective in the medium term is to allow for in last resort for restructuring within the new area within EU and finally EU lacks resharing and stabilization tools so in the years to come as I said fiscal policy is going to be very much constrained so if we want to avoid pro-secular policies then we need to think out of the box so today there is no fiscal stabilization at your area level neither at EU level actually the EU budget doesn't do fiscal stabilization and we think that public and private resharing mechanisms are complements for instance in the middle of a crisis it's very important to have a fiscal backing of the single resolution fund and this is how you keep the banking union together so responsibility and risk sharing this is the objective how to do it so as I said what is important is that sovereign debt restructuring should be a possibility in last resort when debt is unsustainable and the ESM would say whether that is unsustainable of course there are always some a gray area gray area but this is life and so there are technical technical issues about debt restructuring I will not go through now the fiscal rule so we make a proposal to change completely the SGP to drop the reference to deficit and structural deficit and rather adopt a spending rule expenditure which is easier to explain to the public which says that over the medium term government spending nominal government spending should grow no more than nominal GDP and for countries that have a high debt to GDP ratio spending needs to increase less so there is a debt break and the the the speed of the reduction of the debt needs to be negotiated at EU level but this is the this is the idea if a government wants to increase taxation to increase spending no problem but you need to rely on the independent and fiscal watchdog to calculate the what the tax reform will will produce in terms of revenues and to correct the spending the spending path for that so it allows in fact for much more much more democratic choice you can change the the the spending to GDP ratio up or down and what is interesting is that the AMF has shown that it tends to be more reliable in terms of responsibility it's easier to explain it relies on a measure of potential GDP growth which is always very tricky but just to be clear you're you're saying that expenditure can rise above nominal GDP no no just below nominal GDP but if there's a tax yes you change the path so you so the independent watchdog would calculate the amount of additional spending that is allowed by the new tax so it would adjust the path so it does allow a government to bring up yes yes it allows that so and and then there's a debt break the idea is to give much more responsibility for the independent council the fiscal council that would be in in charge of calculating the the spending growth and also a GDP a potential GDP growth which is always tricky but today what we have is a structural deficit that depends first on potential GDP the forecast of potential GDP second the forecast of GDP itself and third the elasticity of tax receipts in GDP so there are three unknowns and we propose to reduce to only one potential GDP growth and if you are wrong in terms of the position in the cycle it's not such an issue because for instance you you start on the top of the cycle you didn't know that but you are on the top of the cycle and then so growth will be lower than potential GDP in the future but then it means that the debt to GDP ratio will increase so you get that back in the rule so I don't think this is such an issue and what and on the top of that what we say is that we should drop the sanctions because it doesn't work even with the inverse rule it will not work and it's not very reliable to have colleagues sanctioning each other rather we want a market sanction market sanction so the idea is that if you deviate from your spending rule then the excess spending will be put in an adjustment fund like in Germany a buffer and if the buffer reaches one percent of GDP then you need to issue junior bonds and these junior bonds so superminated bonds that will be that will be restructured first in case you go to the ESM they will be restructured so this is this is the we introduce some market discipline at the margin of the margin okay and this is actually I can afterwards in the discussion I can tell you the reaction of the French government with that very interesting and what I wanted to say also but the fiscal rule yes is a good property is it's much more counter-psychical in the upturn you want to you have a lot of receipt you want to spend them but no you cannot have the spending growth and in the crisis you can have a deficit of 12 percent of GDP it's not a problem to the extent that the spending is respected so more so more and better risk sharing so two things here so today we have on the one hand fiscal policy at the at the national level and on the other hand we have ESM programs for crisis countries and in between there is a nothing so we want to fill the gap for countries that for instance could suffer from contagion from another country so liquidity crisis that could be pre-created pre-created to get ESM funding at low cost in case for instance suppose there is a crisis in Portugal and then spreads increase against an island but there is no sovereignty problem in island then and island has respected the SGP in the past years so automatically island would be entitled to get a credit line from from the ESM without further conditionality and the second thing is for countries that is hit by a big shock so what we propose is an increase in unemployment by more than two percentage points or a fall in the employment rate by more than two which is passed better because less manipulation less point to manipulation then there would be a rainy day fund that would make a transfer so this is not a loan it's a transfer a one-off transfer to the country to help to help transfer money to the unemployed maybe extending temporarily the unemployment duration and keep investment public investment alive so we have been attacked for that because of course it's it's so we don't propose a borrowing facility because this was a step behind for so for symmetric shock what is our response for symmetric shocks the they kept close of the SGP so basically this is our response we have already the tool and we need to activate them and so strengths so I finished with strengthening institutions well I already talked about that so how we address the problem so I come back to the initial problems in terms of financial fragmentation what we propose is to make the conditions for pan European banking and we have also a chapter about capital market union mutual trust trust has been lost we propose a more transparent fiscal rule more national ownership because of the responsibility of the fiscal council and more responsibility because we have these junior bonds and also more responsibility of the ESM on that sustainability assessment now third there will be no price new prices in the future what are the tools where we have a rainy day front we have ESM precautionary lines and we have more capacity at national level for fiscal stabilisation what is left aside is macroeconomic convergence and we have been criticized for that so perhaps in the discussion I can talk about that I've written some pieces for the European Parliament about that it was very difficult to introduce this block in the discussion for German discussion for obvious reasons so we prefer to deliver on the rest and maybe there will be at some point another piece on the macroeconomic framework thank you very much for your attention