 Okay, welcome everybody and welcome our guest, Martin Sambu, who many of you will know from the Comancial Times and will read them regularly. Martin is going to talk, we just had lunch and we've been completely dominated by a subject, guess what? He's not talking about the B-word today, he's talking about the future of the Eurozone, a subject on which he has written not only regularly in the FT but also book, thank you. Martin's been with the FT for almost ten years and has done a range of other things in his life before that and has degrees from both Oxford and Harvard. Good, Martin. Thank you very much. Thanks for having me. Yeah, it does feel a little bit surreal to be here and talk about an issue that isn't related to Brexit although it may come up in questions afterwards. But I've been asked to talk about the future of the Euro and I think it's timely because my sense at least from kind of travelling around European capitals is that there is quite a lot of momentum at the moment that we will see something being agreed this spring by June. And so I think when I suggested a title for this talk I said who will govern the Euro and who should. So I'd like to structure the talk and I don't want to talk for too long because I'd like to get a discussion going by talking a bit about what I think might happen now in the short run and then give my view of what should happen in terms of Euro governance. So just starting by where we are politically at the moment as I said the time seems ripe for arriving at some sort of compromise of Eurozone reform that brings the whole construction a significant step forward. Partly that's because all the technical work has now been done to death if you like to such an extent that everyone knows what the various options are what can be done depending on what you want to do. So in a sense there's not much left to do but decide what we want or what the Euro area governments want. Of course that's the hardest part but the technical work has been hard too. But the second bit is that there seems to be to me at least to be more will more desire than there has been in a long time to actually kind of get this get this issue a bit more settled and pick some of the technical options come up with some sort of package that will put the Euro structure in a safer place and a more solid place than it is perceived for a bean in the past. I say perceived because it's not obvious to me that that is entirely correct. But I think you know one sort of straw in the wind that is both technical and political was when was it a month or two ago a group of 14 economists seven French and seven German very carefully picked and counted came up with a series of technical proposals for Euro governance reform covering all the bases from types of fiscal risk-sharing to restructuring to capital markets union and so on. It was very good paper it was quite technical but it just felt to me like there's an appetite in the technocratic world and in the political world for getting this done whatever this is. So what is this are going to be? There are at least three levels at which you can interpret the question who will or who should govern the Euro. One is is the Eurozone economy going to be governed at all if we understand by governed governed by decision-making by policymakers or will it be governed by rules which is one alternative or simply market forces which is a third alternative that the answer is obviously it'll be a mix but I think it's useful to ask the question in the form what will be the mix between policymaking rules set down one set the start and then in principle applying forever and third the mechanisms of the market to the extent that it is policy decision-making that's going to govern the Euro which policymakers and especially at which level national policymakers or decision-makers at the centralized level and that's maybe one of the biggest axis axes of debate and finally who is going to govern or decide the answers to those questions in the few months ahead and that's where I think is useful to to start what is happening right now there will be a summit in June that in principle is supposed to decide on Eurozone reform it's very much driven by a Franco-German agenda whereas you'd say a French agenda and the German agenda because as always much of the answer to who governs will be whatever the French and the Germans managed to agree on but they're not the only ones and so I take note of this paper signed by is it eight or nine finance ministries a couple of weeks ago including the Irish one in this new northern grouping that now seems to be called the New Hanseatic League which I think is the old Hanseatic League plus Ireland which seemed to me to be a fairly German if you like take on what the Eurozone needs and then you can think about the other wing of the European continent or the geographical Eurozone area where you see that the countries on the Mediterranean are largely missing in action or if they are contributing by now it's largely deciding behind a French position I'll make an exception for Portugal which is doing something interesting that I'll come to later but not so much in influencing the principles debate that's happening right now now I'm not going to spend much time on this the Franco-German divides because you all know them very well and they are you know that they kind of keep coming back and slightly different guises but there's a French proposal or push for more common decision-making but also more common funds the risk sharing part of this debate if you like versus a German insistence on rules and self-reliance and discipline the risk reduction side of this debate so it's a little bit of an impoverished way of putting it but it's still a useful dichotomy between risk reduction and risk sharing now it seems to me that what is likely to happen is more or less something quite close to the German position since Emmanuel Macron was elected we heard a lot about the need for a Eurozone finance minister the need for a Eurozone common budget some sort of proto or mini fiscal union from the French government that hasn't really got very far and it seems to me from conversations in Paris that it's not a priority for the French to actually get that secured this time around the French are surprisingly keen on banking union one reason for which is that it will favor big pan European banks and many of those are French so they're actually quite on board with what one might naively think is a more German vision of getting the eurozone to work through market discipline in the private market through banking union with its bail in provisions and so on the French are quite keen on working on tax harmonization corporate tax reform which is obviously an issue that matters a lot for Ireland and it's not really logically a eurozone issue but in Paris you often hear it as one of the main pillars mentioned when you ask about what are the priorities for eurozone reform in the next months and years finally the focus on a eurozone budget and a fiscal union is still there but it seems to me that it would be possible for France to agree to some kind of roadmap for what might happen later and letting all these other building blocks be put in place first so my best guess is that what will happen in this phase is that by June or shortly after if the agreement hasn't quite been struck there will actually be a strong agreement on finalizing banking union various ways moving ahead with capital markets union beefing up the European stability mechanism into something called a European Monetary Fund fund an important package of things with some promise of looking more at a eurozone budget in the future but nothing very concrete decided on that particular part of the of the package so you may call this perhaps a a German victory the places where the Germans will probably give in I think is that there will be some agreement on a pan eurozone deposit insurance scheme there will be some agreement on backstop funding for bank resolution which will be seen as a German concessions but really things that I think the German government has come to feel that it can live with so the question is I think is that enough so there are many people who will say that that does not really fix the problems in the eurozone so if we want to move from what will happen to what should happen you really need to ask the question which is not asked often enough in my view which is what is really the problem that we want eurozone reform to solve and there could be many answers to that and I think some of the difference you see in choice of instruments and technical solutions and policies really come down to different views of what the problem is that we're trying to solve so let me give you at least two ways of answering that question what is the problem that eurozone reform is supposed to solve maybe four two and two one is crisis management the idea the purpose here should be to avoid a crisis like the last one managing it better if it happens or make sure it doesn't happen but crisis management essentially so the view here would be the eurozone wasn't really fit for purpose in terms of fighting the crisis that needs to be fixed and that's what these reforms are about and they kind of you could divide this up you know one is one part of crisis management is what do you do when a eurozone country government suddenly cannot borrow in the markets and needs to finance its deficits so this is something about just the ability for a government to refinance its debt in a balance of payment crisis another side of this question is how do you avoid the damage prevent the damage to the real economy from being too great which it quite clearly was in the way the eurozone handled the crisis last time round so that's one sort of problem you might think you need to solve another sort of problem is the general functioning of the eurozone economy in normal times and here again it could be you know related a bit to the crisis but rather than how you manage the crisis how do you make a crisis less likely to happen in the first place how do you prevent balance of payments crises to occur in the first place or more ambitiously how do you ensure better convergence between the members of the eurozone a convergence is one of these words that people tend to use everyone uses it in a slightly different way one view of convergence has to do with sort of income convergence and it leads you in the direction of thinking there has to be transfer mechanisms from richer to poorer eurozone countries another view has to do with policy convergence that there are some policies that make for better growth and in order to make all eurozone economies make the poorer ones catch up with the richer ones they need to have better policies and eurozone governance has to do with getting those policies implemented labor market reform and so on now my general take on all of these questions is that we're probably closer to a well functioning eurozone than we often like to think and I say that because I think that the problems that the eurozone has been through both in the crisis and in the lack of growth until recently don't have all that much to do with the architecture of the eurozone and have a lot more to do with the policy choices that have been made within that architecture in terms of crisis management things could have been better handled in the crisis but above all there already are a lot of new tools available there is a European stability mechanism to help a government that runs out of market access and in terms of having a less counter cyclical less pro cyclical sorry response to crises well that's sort of a question of what policies are imposed from the central level or from the entity that gives rescue loans in the first place but it's not as if there were any tools preventing the Troika from recommending or requiring slightly different policies that wouldn't have been quite so pro cyclical and hindered growth quite as much as they did in many crisis hit countries so on crisis management I submit to you that actually the tools are pretty much there the existing institutions can do things differently and everything really depends on what political choices are made in a crisis and the question we should ask is will these eurozone reforms that are on the table or others that are being proposed actually make it any more likely that the right choices are made when a future crisis hits the answer to me seems to be no I don't see much reason why it would change what politicians and technocratic policymakers would do unless they themselves have changed their mind about what the right thing to do is on convergence I think there's a hidden premise in the idea that eurozone reform has to have as its goal to help the poorer countries catch up with the richer ones and have a more convergent eurozone economy as a whole maybe two premises actually one premise is that the currency regime actually can do this that which currency regime you have actually has a significant and an important impact on whether you grow faster slowly that's quite an ambitious demand from a currency regime that may not actually be warranted growth depends on a lot of things what currency regime you have maybe one of the less important things so you may always have been a bit too ambitious to either expect the euro to improve growth or to think that it has to be fixed so that that happens but the other premise is that it is possible to bring good policies to bear on countries that don't want to adopt them themselves that through some sort of centralized eurozone policy architecture you can get better economic policies structural reforms and so on to happen then you would have otherwise now that's true in the narrow sense that if somebody wants your money and you can tell them what to do in return you can force some policies to be adopted there wouldn't be adopted otherwise but the political sustainability of that I think is very much to be doubted so the politics really is what we're coming to here and I think on on an economic from an economic point of view there's less that need to be fixed than we often think but the politics of the eurozone means that you need to be very cautious about the way you try to implement whatever economic fixes you think you need because you need to do it in a way that will command enough political support over the long term and so here I think we come down to the very deep division one view is that if citizenry's in crisis hit or slow growth countries feel that the economy isn't delivering for them the euro itself will lose political support and eventually it will break up therefore the most important thing is to through whatever means impose to use a hard-word policies that will work better the other view which I think is more or less diametrically opposed is to say that anything that any kind of policy that's imposed that doesn't have the buy-in from the people who are imposing it on will itself erode the political sustainability of the euro so these are incompatible views and they take you in very opposite direction it was how you think about a policy and governance architecture now my my view is I'm in the latter camp I think that the worst thing we could do to the euro is to push very hard for reforms that have very little political support on the argument that this is necessary because otherwise the euro won't work well in an economic sense that is in a sense doubling down on the disenchantment that many citizens of eurozone countries fell into after the crisis where they had been promised 20 years ago that the euro would lead to prosperity it would lead to political equality it would mean not having to follow Bundesbank dictats anymore for example and on the side of credit to countries the promise was this will not force you to have to bail out countries in trouble or responsible countries those promises maybe not legally but politically were broken by the choices that were made in the eurozone crisis and to now go down the route of saying well this time trust us we need to do even more of the things you don't like because otherwise we won't fix the problems that we caused by doing that in the first place in the first time around I just don't think that is politically sustainable and if you think like I do that economically there is less that's dysfunctional about the eurozone and many people will claim then it would be downward right reckless to start imposing politically controversial reforms for no very good economic reason but that would erode the already threadbare trust we see between publics and their governments especially at a time where growth has returned and you can hope that things will actually start improving themselves just in the way they do when people get jobs again when they start to see their wages increase and so on still a long way to go for that but at least things are now going in the right direction so all of that to say that if what we get in June is what some may think is a modest package of finalizing steps on the banking union beefing up the crisis fighting mechanism putting some funds in common for through European deposit insurance and and a way to make bank bail ins and bank resolutions happen more smoothly if that's all we get that's not just good enough but I think politically maybe actually a very good outcome one that will not test the political support for the euro as a as a whole any more than it's already been tested and something that economically speaking is certainly better than what existed back in the crisis but more importantly I think on the whole adequate and indeed contrary to what some say fit for the task I will stop there and I hope we can have a discussion about you know from that starting point so thank you very much for coming in for your attention