 Now, today we're honored to have Neil Stegason here. His latest role is chairman of the European Fiscal Board, which is probably even less known than the Irish Fiscal Advisory Council, partly because it's only set up last October. And he will refer to the board to some extent in his talk. But he goes back a long way to being a member of the DeLore Committee on Economic and Monetary Union back in 1988, 1989. So he has a long record on economic and monetary union. And he's been chairman of the Danish Economic Council, advisor to the governor of the Danish Central Bank. And he is Professor Emeritus of International Economics at the University of Copenhagen. So he has a great track record there. His speech today is on the future of the euro area and how we can make the euro more, euro area more robust. So I have great pleasure in introducing him. And I've suggested to him that he might start, which is a little anecdote from a discussion with the taxi driver this morning, which I find quite extraordinary in Dublin. But it's worth repeating in this group. So over to you. Thank you very much, Mike, for your hospitality here. And this morning, indeed, with the Irish Fiscal Advisory Council, I arrived at that meeting with a taxi driver who didn't know what the Council know. He knew the economic and social research institute. He knew that. And he said, well, where are you going? Are you an economist? He said, this country ought to be run by economists. It is not. It's run by school teachers. It should be given over to the economists. We are having problems again. And they don't seem to learn. Prices are going up. House prices are going up. My rent is going up all the time. So I was quite impressed by that coming. I know nothing, of course. I know nothing about it. But he also said, you must be a genius if you're an economist. You must be a genius. There you are. And when I told I was going also to the Ministry of Finance, he almost bowed. So there's some support for economists, at least, in this country, I can see. But thank you very much for the invitation. When I got the invitation, I thought this would be optimal timing late May because there would be a lot of things to comment on, both European semester, this complex process that the European Union goes through twice a year with detailed submissions by countries that are then evaluated and criticized and so on. There would be a lot to talk about then. The Commission had announced it would publish a so-called deepening EMU paper in May that now turns out to be only the 31st of May. And I learned that other Commission's comments on individual country positions in the current round was only published this morning. So I don't know about really what is in there. I won't be that topical. Another factor that I couldn't quite foresee was that we have a new president in France that will create a new constellation of influences on the topic of how to move economic and monetary union forward and even to make it more robust. So there's always something to talk about, even less so than one might have expected some time ago. The flagship publication of the Commission on Europe by DG Ekvind, the Director General that deals with economics is the European economy. But the question, of course, is the European economy or are there still economies? Do we have to distinguish a bit more carefully all the time when we talk about developments in Europe? There are some features that are common to the European economies at this stage. There's a steady, slow recovery from the depths of the low, in fact, double deep recession we had. The last leg was in 2013. And the word now resilient about that upturn is becoming increasingly used. That is maybe a bit overstating it. Apart from Ireland and to some extent Spain, growth rates are still very moderate. They are a little bit faster than apparently the estimated rates of growth or potential in our economies. So the slack degree of slack in our economies is no doubt being reduced. And at a somewhat similar pace, apart from the two countries I mentioned, austerity is clearly fading somewhat further into the past. But this upswing has two unique features. It is underpinned by extraordinary stimulative monetary policies from the European Central Bank for now quite some time. And also in some, let's say, conversion of fiscal policies from the major corrections and consolidations in 2011 to 2013. Since 2014, there's been a switch into more neutral stance in some periods, slightly expansionary stance in most European countries. That is one feature of the economy. It's been stimulated by policy changes, particularly in monetary policy. It's a strange recovery in a second sense. It is one where the signs that, as I said, slack is being gradually eliminated, but there's little wage pressure, no signs of any pickup in inflation of any size. And the current account surplus of the euro area countries as a whole is sizable. It's aging down slightly to about 3%, which is historically high. And that is explained mainly by a shortfall in investment. In all countries in Europe, more or less, both public and private investment. So it is maybe a resilient recovery, but it's a highly atypical recovery. There are a couple of different interpretations that one can make of it and thereby what one should do about it. Some would say there is an underestimate. There must be something wrong in this calculation. The slack in our economy is surely greater than what is accounted for by the official statistics, the so-called output gap. The second one says no. That is not really just probably a reality. We are just in a period of much lower growth, partly for demographic reasons, partly for the reason that there's been a long period of low investment. So we cannot expect growths to be much faster than it is. And you can identify easily who are defenders of these positions. I should mention first that the ECB has been a defender of looking more broadly at the measures of slack in our economies. They have difficulties understanding why it's so difficult for them to get inflation up towards the 2% or just below 2% that they have indicated. And already in 2014, President Draghi was, in fact, the first senior policy officials to claim that monetary policy needed some relief from other forms of policies, notably fiscal policy. Yet there are further process because unemployment in some of the central countries in the Euro area, in Germany, in the Netherlands, in Germany, unemployment is now below 4% and in the Netherlands below 5%. There's still no wage pressures. We can look at participation rates in some of these countries as there's some reserve labor waiting to join the labor force that keeps the downward pressure on labor. I will not discuss this in detail. There's quite a bit of no doubt in voluntary part-time unemployment that could be mobilized. But on the whole in the ECB and the strong currency countries such as Germany and the Netherlands, say we are already close to having eliminated the slack and therefore the emphasis now should be on not doing much on demand without doing at the same time more effort in the form of reforms to improve our productive capacity. That should have been done maybe for quite some time ago. The weaker countries, let me be more specific, Italy, Portugal, France, to some extent Spain, believe that there's a need for more stimulus on the fiscal side in particular. And they stress the underestimation of the slack in their economies that the commission is relying on. There was recently a letter from the four finance ministers of the four countries I mentioned to the commission saying you must revise your methodology. This was a letter from earlier this month so I don't quite know what the reaction is. But there's a surprising attention in even at the highest political levels in the Eurogroup in discussing this kind of fairly technical issues and here clearly more work needs to be done both by commission and national officials. One could say that the former group, the stronger countries, they are more anxious to be in a situation where they prevent or make future crisis more unlikely. And they think the times are already good enough to attempt some consolidation to prepare for that eventuality that's making it more robust in a sense. The Germans point not least to their experience in 2005 to eight when Mrs. Merkel was elected for the first time and took over Germany economy on the upturn but with weak public finances which lasted ever since unification in the early nineties and she made rather major consolidation between 2005 and eight that enabled us to stimulate our economy without any major risks to it in 2009-10. She might not enter into that kind of argument but Mr. Schäuble and others in Germany would put it that way, no doubt. And that's why the Germans and the Dutch say, no, no, we don't need more stimulus at this point and we even critical that the monetary policy of the ECB is becoming too expansionary. You may also have seen that President Draghi when he was in the Dutch parliament last week, I think it was, had a rough time with parliamentarians who said about the same things as the German. Hold back now a little bit, the side effects of being so stimulative on monetary policy are now outweighing the benefits that we have from the stimulus. The weaker countries are more anxious to get out of the current crisis that they still feel they're not the crisis, maybe the low-growth tribe they are in and they have had great difficulties. They have used the benefits they have had from some relaxation of the rules and from the low interest rates that have saved them quite a bit of money in borrowing costs for the public sector. They've used that somewhat defensively rather than by expanding their future capacity. They have not really used their fiscal space very well. Now, in the most recent discussion, the commission again relies on the presentation of the measures that some countries are really doing better than they were expected to do. Germany and the Netherlands both have so-called outperformed their own targets in terms of public finances. Not very massively, but enough to give some significant stimulus if they wanted to. But all of this divergence in situations, of course, shows that it is somewhat questionable to talk about the European economy. One still has to use, I think, the plural, even in a period when growth rates are not too far apart. They start simply from very different points. So it's a bit of a dialogue of the deaf, the over-performers are very critical of so-called the under-performers and distrustful of the role of the commission that is supposed to be the independent monitor of performance. They are not as bound by the rules as they should have been and they should be held more responsible, accountable for maintaining the current system. They should become less political. That goes against what Mr. Junker has said when he was dominated. This is gonna be a more political commission, he said. That, of course, raises a problem if you want to have the role also of being an independent monitor, relying primarily on economic arguments. And that is no doubt one of the main reasons why the European Fiscal Board also was set up to tighten the economic-sense principles by which the commission evaluates countries. That's a tall order. We'll see how we can live up to that. But that inspiration was already around in the so-called five presidents report from the five institutions, the European Parliament, the Eurogroup, the Council, the ECB, and the Council of Ministers. That was already here in 2015. It's not very new. I think in order to go back to why there is this divergence over the interpretation of fiscal policy in particular, one has to go back to the Master Treaty itself and the compromise that was struck in that treaty, which is often labeled as faulty by most observers. You centralized monetary policy, but you didn't centralized fiscal policy. On the contrary, you left them almost entirely in national government hands. And critics not least from the US and the UK are very ready to say that this is not a tenable position. If you don't have a well-functioning integrated area that is truly one economy with mobility of capital and labor very well developed, then you need some kind of fiscal mechanisms to make up for that deficiency. To understand that, I think we have to look at the treaty itself. There was certainly oversized in Maastricht, particularly on the financial side that was totally underestimated. That was certainly the most serious defect from my perspective, also the absence of any safeguards. But the fiscal framework was discussed very carefully and there was agreement that there had to be some disciplinary role on fiscal policy now that countries were no longer on their own and could experience currency crisis. The risk that they would lose access to international financial markets as a result of the principle of not bailing out individual governments was seen as a bit remote and therefore there had to be some rules of behavior for fiscal policy. The DeLore Committee, which I had the honor to participate, there was some recognition that at times there could be a need for also looking at the aggregate or collective stance of the euro area to see what is really the outcome of all these recommendations that we make on the size of budget deficits in individual nations. That would be necessary was also said to take part effectively in international cooperation in the G7 framework. Somebody had to be able to say what fiscal policy is in the area as a whole, not just to refer to, this is left to national member states. So, but that principle was left aside in Maastricht. It was seen as a bit too vague. How can one stabilize a large area like the euro area is difficult enough to do it in individual countries and the idea that through oversight we can correct so how the sum of national policies is simply analytically too difficult. It will also be difficult, I think it was recognized at the time to reconcile it with the national fiscal rules that were put in place. So the basic bargain was a simpler one. I think Germany, for Germany it was essential that they had the impression they finally were able to export their so-called stability culture to the rest of Europe, which they had failed to do in earlier arrangements, looser arrangements. For the French to some extent for the Italians it was essential to share monetary leadership with the Germans. There was a constant irritation to particularly the French that Germany was the decisive factor. The Bundesbank was the decisive factor in monetary policy. But on the fiscal side they thought the Germans that they had designed an appropriate framework or helped to design that and got the others to accept it. One where the central bank was oriented towards stability and was independent of political influences and the fiscal rules were largely meant to maintain public finance sustainability for long periods of time. Not to limit the ability of countries to stabilize their own economies but precisely to leave them aside, recognizing that they would have different needs and that they should maintain a sufficient margin to the limits of action so that they could stabilize through mainly automatic stabilizers in their fiscal policies, their own economies. But that was in a sense the basic compromise. I think it was also a compromise that many economists were involved in. It was not just a political compromise, of course it was more or less what was politically feasible also at the same time. The arguments were made on economic grounds as well and if they had not been seen as reasonable compromise and feasible also by the Germans, they would not have been, EMU would not have happened. And that's I think these ideas were quite consistent with the experience that led up to the formation or the master treaty and the formation of EMU. Has the compromise worked? It's easy of course to say initially if you look at public finance sustainability, the answer must be no because we have debt levels that are now on average 90% plus in the Euro area, Greece is at 170 something, Portugal and Italy seem stuck at about 133, 233, Belgium more than 100, France and Spain in the high 90s. So the average is something like 90 plus. It has become a club of highly indebted countries, just contrary to what in a sense the Germans had decided. On the other side, we have to say that the compromise worked very well in creating a truly independent and well-functioning central bank, the only federal institution that currently exists. And that was quite an achievement given what had gone before that. So it's a mixed picture, but in a sense the German element of the compromise further from being realized than the French one of getting into monetary union and having a shared responsibility. The French of course, exaggerated the role they would play in making monetary policy because there would not be under political instruction, there would not be a government representative that did that, but an independent central bank from France as well. So, but should we be as concerned as we are and as critical of the environment? I don't think so personally, but I don't want to sound too sanguine. Some say it was in any case a totally arbitrary level of public debt that was used as a reference or as a norm in the Maastricht Treaty and as a requirement for entering EMU 60%. It was not totally arbitrary, it was had a certain link with the deficit rule, but it was linked to the assumptions at the time that economists would grow by 5% a year, then it would be quite easy, even if you were close to the 3% most of the time to end up with a 60% debt ratio. Now when the growth rate is only three to three and a half percent, maybe at best 2% inflation, one and a half percent on average real growth, then the deficit is still there, around 3% as it is in the Maastricht Treaty, then you would converge to about 100%. So that seems to be verified by the experience. So in that sense, the rules were too easy. But on the other hand, and maybe more importantly, there is some things that have made the system more stable, both the safety mechanism that now exists through the European stability mechanism and the efforts are not least and particularly of the ECB in its asset purchase program and earlier in its willingness to give a conditional support to national bond markets through its OMT arrangements in 2012 that had never been used because no country has ever taken on the political commitments that would be required for that, but it has had clearly a major stabilizing influence on markets and it has worked extremely well. So as the IMF also is beginning to sound more and more openly, maybe higher debt levels are sustainable than 60% on average. They must be individually assessed. They are clearly not the same, not even within more homogeneous areas such as Europe, but there is no precise critical threshold at 60%, which still is the main basis in the European semester for assessing country performances, where, how far you are from that. So where does that leave us? Do we have a little bit more freedom of maneuver? The commission tried to spin out, they had used a lot of flexibility, gradually introduced, not least at the instigation of large member states to delay adjustment to the 3% and to now particularly the 60% debt ratio where the PACE was finally prescribed in 2012 for the acceptable PACE, satisfactory PACE. So the commission has used that flexibility quite extensively, but clearly by last year it was not quite enough, so they proposed instead that under the heading of a Euro area fiscal stance there should be some extra effort to bring the whole of the fiscal policy stance in the Euro area in better balance with monetary policy and to eliminate a bit more quickly the remaining slack in our economies. Did not get much support in the Euro group. There were one or two countries that spoke up in favor of it, but not more than that. It was seen as coming in a sense too late in the upswing, the output gap was being too close to being eliminated, that is disputable as I said, but it looked a bit too much like the fine tuning that most government think is outdated as a fiscal strategy. And there was still the argument from the Maastricht days that Euro area fiscal stance sits somewhat uneasily with nationally formulated rules. How should one translate them into national recommendations and allocate them between countries? We now have the commission's latest forecast the spring 2017, it's just being digested. And we can see there that with no policy changes there would be a deterioration of the fiscal balance in the union. But without the corrections of course that countries are expected to do even within the flexible administration of the rules. If maximum flexibility is administered, one would get almost to the neutral stance that is suggested as broadly appropriate also by the Eurogroup, but only if the countries that have some fiscal space are overperforming use that fully in 2018. At least because refer to 2018 now. So there would still be next year a need for that kind of action that removes the current asymmetry between the strong countries and the weaker countries. Now, France and Italy are particularly difficult countries, Portugal too, because they have come to rely primarily on just observing the nominal principle of the 3% deficit, Italy with a slight margin to it. France apparently now according to the latest forecast getting slightly above 3% deficit in 2018. And that would indeed require even in the case of German expansion some reaction. How that would be resolved, I don't know. I think the commission had difficulty coming out with even tentative recommendations for 2018. That would not be necessary at this point because it's only in the fall that the definite recommendations will come out. But that will be the real I think clash if there is to be one. It passed more in silence or without much discussion also in public when a similar situation arose in the summer of 2016. Some would say it's too difficult to think of a rule for the fiscal stance that we could then allocate between countries until there is more of a federal system of public finances in the Euro area. And that's why of course the commission's reflections extending what was in the report from the five presidents two years ago. Why that is awaited with some interest and it's due to be exact on the 31st of May this year. That would be a more focused paper than the very broad ranging and other vague white paper that the commission published on a number of EU issues in February this year. There are basically two main options I think that will come out and that's what one can assess from what has been said by President Dombrovskis who is the main person in the commission responsible for this document. One is indeed the follow up to the federalist model of a more central capacity but in what form then that is the next question that raises I come back to that very shortly and briefly. And secondly and that would shoot more the point of view of the stronger countries. Let us return a bit more towards the original ideas of Maastricht that's complete the other things of banking union including also deposit insurance and that is then recognized that we cannot get any further with the rules and have some greater element of market discipline. I come in first on the first one of these models. There again there are several possibilities of moving towards central fiscal capacity. One would be to enlarge the so-called younger plan to do it by borrowing and lending under the broad heading with some leverage through contributions from the private sector some element of guarantees as is in the younger plan. Secondly some countries particularly Italy favor the idea of an unemployment fund or an unemployment reinsurance fund if some countries have a larger rise in unemployment than others there should be temporary transfers to that country but that should be reversible in the course of the business cycle. Thirdly there should be some allocation to your area budget with an allocative and distributive function. The latter is of course the most radical but it does have the particular interest that it seems to be among the things that the new French president has in mind how the Germans will react to it. I will not try to predict at this point but let me say one more thing about the two first ones. The borrowing and lending and extension of the younger plan is in a way a bit in the cars and would not require major technical revisions it is not very effective. The younger plan has not been a great success in terms of bringing forth projects that would not have been realized anyway or are not ready for being implemented anyway. So it's the least controversial the most politically feasible but also probably the least effective. The unemployment fund is too difficult probably to design because it would at times lead to transfers between countries that were in a sense counter-intuitive in terms of the justification you would give for them. Spain with now rapidly falling unemployment but still at 17, 18% unemployment would be transferring for example in the current phase to a number of northern European countries where unemployment is stable and low. It's a bit difficult to foresee and to manage it requires further standardization of labor market practices and it's therefore I think unlikely to be implemented. So the choices really between I think the more simple one of extending the younger plan which is not very effective or the radical longer term one that would really be also for the long term in terms of agreeing on it. Then about the return to Maastricht that I mentioned as a possibility favor still by the Germans. I don't think that would be certainly desirable at the present time given the differences in debt levels that we currently see. The interaction of the rules-based system and the market discipline has always been an easy one. At times the market's totally disregarded the building up of tensions inside the area then they reacted very strongly during the crisis as I don't need to remind this audience also respect to Ireland, certainly to respect to southern European countries. And subsequently they have again under the impression not least of the ECB actions compressed margins between sovereign bonds very considerably. So it's an unstable system and with the still unresolved issues in the banking sector and political risks it would be very dangerous to move to, in my view, to increase market discipline at an early stage until some more ideas have been developed on how to consolidate the debt position of the more exposed countries. So I think the former set of issues on the more federalist line are certainly the most satisfactory from an economic point of view but also politically extremely difficult. So that goes well beyond my time horizon. Thank you very much.