 Greetings everyone, I hope you enjoyed your lunch. I'm Steve Clemens, Washington Editor at Large of The Atlantic and we're here now to take some of the themes that we discussed at lunch. Perhaps the theory, the purpose, the practice of Adam Smith and think about the real world in a real sense, the future of the Eurozone, what's going on, and to verify this in my own way is how to look at governance from the perspective of whether you'll ever have it one for all and all for one system or it's one versus all inside the Eurozone. And we have an outstanding panel. We should also say that we're gonna try to get to questions. We're gonna have mics up here in both wings here. So as you think of your questions, we'll try and do a lightning round at the end. But let me introduce who we have here. We have Gustav Horn who's Director of Macroeconomic Policy in Dusseldorf, great to have you with us. Servas Storm, who's going to serve, who is Editorial Board of Development and Change, a member of the Working Group on Political Economy and Distribution for INET. Carl Holt-Frederick, Chair of the J.F. Kennedy Institute for North American Studies at the Free University of Berlin. Anna Maria Simonazzi is the Professor of Economics at Sapienza University of Rome. Giancarlo Corsetti is Professor of Macroeconomics at Cambridge University, thank you for being here. John Pierre Landau is Associate Professor of Economics at Sciences Po. And our discussion today also with ISET is Ursula, Ursula, I'm trying to get the emphasis right, Ursula, Konstantini, I want to work on this by the time this session is over, Senior Economist at INET, and she's Associate Editor of the International Journal of Political Economy. So I'm going to ask Gustav, take us home, start us off. Thank you very much, Steve. Ladies and gentlemen, I think most of you would now prefer to take their power nap after lunch, but I'm afraid we have to discuss some serious things. Well, the future of the Eurozone, that's humor. And so I think this is an issue which is certainly not an issue which is very easily taken. And since we have, and I might take that for you, since we have to discuss very serious things, we have had a very severe crisis in the Eurozone. And in my presentation, I will take you right back to the origin of that crisis when I'm talking about the role of wages in creating current account imbalances. Because at the core of the Euro crisis, we had these current account imbalances, many countries had deficits, and a few countries had surplus, and among those countries having a surplus, the most prominent is certainly Germany. And I will develop my presentation on the case of Germany, how Germany could reduce its structural surplus in due time so that we're not heading for another crisis within the Eurozone because as we all know in the meantime, what has not been known before is if we have these kind of structural imbalances, there will be countries heading for a debt crisis which is certainly very detrimental to the cohesion in the Eurozone. So how could we avoid this in the future? How could we develop a policy strategy to avoid structural imbalances and in case of Germany, structural surpluses? I will first tell you some side aspects about the German surplus. I will discuss the role of wages in the external imbalances, and we did some simulation on our models, and I will show you some conclusions. So what's about the German structural surplus? As you can see here, we have a high surplus in the current account balance of over 8% of GDP, heading sometimes for 9% and more. The requirement of the macroeconomic imbalance procedure by the EU Commission says that Germany should not trespass 6% of GDP, which is already a high, I would say, an unreasonable high number. Rather, two or three percent I would prefer to have as a ceiling, and we have 6%, and even we do not meet 6%. So there's a serious issue. And what we see here is, if you see that in billions of structure of Germans' current account balance, you see that it's especially net exports of Germany that form this kind of structural surplus in the current account balance. And so it's straight, basically, that has, it's a cause of this, it's at the root of this structural surplus. And if you look at this in billions of euro, you'll see we have the biggest surplus with a country named France. And there are certainly a lot of French people here, and you know in your country it's a big discussion that you have a deficit with Germany, and it's used in the political discourse always as an indication that France is not competitive enough, and that you must make, for example, labor market reforms in order to be competitive. So that is affecting your life in a very serious extent, and therefore it is important that you also know how Germany could overcome its surplus. Well, how is the role of wages in this setting? And I want to explain it to you to some extent and then say what that means really. Certainly wages influence productivity to some extent, and wages certainly determine this together, determines union labor costs, and wages have also an important role in forming domestic income and domestic demand. We have heard about the importance of that issue in the first panel this morning a lot. And certainly union labor costs are important for export prices, which determine the competitiveness situation of an economy. And they have also role in forming domestic prices. We have foreign demand, or as we heard this morning, autonomous demand, that is certainly also influenced exports together with the export prices, whereas domestic price level and domestic demand certainly influence imports. That determines net exports, which we have seen are the major dominant factor in the current accounts in balance procedure we have seen. So it's this issue we are discussing and that's the way wages influence that. You see from this picture already, it's not a direct influence, it's a rather indirect influence over many intermediate values in the economy, and that says already something about its importance. And we also see that exports, to make things even more complicated, also have imports at its roots. If you export more, you need to have more imports in order to produce the goods you need to export. So there's also another interdependence. We also have fiscal policy, and that's what Mike talked to me about, which also fiscal policy plays. Fiscal policy also by increasing domestic demand influences nominal wages and also domestic demand in this economy. And the rest of the relationship certainly stays the same as we had previously. In this setting, we are now simulating what kind of strategy would be appropriate to overcome this net export surplus. But before we do that, we have to make another step to determine the current account, because real exports and real imports, which form the net exports, are not the current account. It's not, when we measure the current account, we leave the sphere of real, of real variables and go into the sphere of nominal wages. This is certainly very important to understand here and also to understand also the effect or the impact wages have on this. So we're talking now about nominal exports or export values or nominal imports or import values. And these determine then the trade balance, which is decisive in order to form the current account together with net income from the board and net current transfers. To be clear in Germany, net current transfers are negative because we are very much, very many foreign workers in Germany who transfer via remittances and part of their income abroad. This is negative, but we have a positive net income from our wealth abroad. We have invested there in earlier times, but the trade balance is very, very positive and determines the outcome. So what do we then see if we would dwell on wages? One recipe to overcome the surplus is to say wages in Germany should rise stronger. There is certainly something in it. And we have seen there is a relationship, although indirectly to the trade surplus, but there is a relationship. And but it's easy to say that wages should rise stronger. The tough question is how much stronger? And well, you could apply several rules which are from a macroeconomic point of view very reasonable. For example, that wages should follow the productivity trend and the inflation target of the ECB. So you come up when you apply this rule for Germany with nominal wage rise around three and a half percentage points per annum. This target has not been met by far in German wages in the past. We have had long times of zero, almost nominal zero wage growth during the past decade. Only recently, German wages have accelerated and now grow at a rate of two and a half to 3% in Germany. So it's only a very recent development the last two or three years. What we did in our simulations is we counter factually assumed that Germany's wages would have been rising by the three, three and a half percentage each year. And our question was, if that would have happened, would then the current account surplus have been removed or not have been existed? If yes, we could easily say increase wages in a very reasonable manner and the problem is solved. Our results, however, show that this is not the case. First of all, yes, what do you expect? You get as far as real net exports are concerned. Real net exports go down and that's what many people show in their analysis and then they stop. And we say, no, don't stop because the current account is, as I told you earlier, a nominal concept. You have to include the nominal values into it and you have to take into account that the higher wages lead to higher prices, caterer's variables increasing the export value. And you also have to take into account that lower exports also means lower imports because you import a lot of goods to produce exports. And if you take it into account, you end up with the right graph. And there you see that at the beginning of the strategy, net nominal export even increased because the demand for German export goods is in the short run price inelastic. And then you get exactly that result and at the same time, import value does not increase that much because a lot of the imports are no longer existence because real exports also decline. Only after a very lengthy period, you see a slight reduction, which is by far not enough to meet the standards of the EU commission in the macroeconomic imbalance procedure. The conclusion I draw from that is just the wage strategy on its own is not enough to solve the problem. So what we did is we applied an additional shock, a fiscal policy shock and said that fiscal policy should have increased its spending one percentage point above what it has in fact done. And we put that together and the graphs from this log it should say. Real net exports decreased in this case too, but as we know, this is not decisive. What we now see with nominal export at the beginning, still they're unchanged, but then they significantly start to decrease. The reason for this is the fiscal shock increases domestic demand and that increases imports to a larger extent than wages and they do not increase the export value because prices do rise much, but they rather have a more direct impact on imports and that is certainly very important. And you see that the red line is even much stronger declining than the blue line. The difference between these two lines is the following. If you have higher wages, you will have higher incomes and higher tax revenues. And in the blue simulation, we assume that the state will collect these additional tax revenue not spent. In the red simulation, we assume that this additional revenues will also be spent. You see there you have a booster with which you can also increase the dynamics of the adjustment process and that's exactly our recommendation. If you wanna overcome this structural surplus in Germany, you have to do both. You have to have higher wages, but they have to be boosted by an expansionary fiscal policy in order to get in due time, I would rather optimistically say, to meet the standards of the EU commission. So what conclusions can we draw from that? First of all, obviously, wage adjustment is not sufficient to balance the current account in Germany. So it's fairly too easy to say, just increase wages stronger than you will have to solution. Secondly, fixed policy must happen. We need a more expansionary fiscal policy in Germany. That's an issue we have in the German debate since some years because on the other hand, we also have to debate about a lack of public investment in Germany and a declining infrastructure. So even for this reason it's reasonable to do so. Thirdly, we need a combination of both. That is certainly sufficient. Fourthly, it is still a lengthy process. Nobody should expect to overcome this situation very soon. And we can only hope that the present situation of the eurozone goes on for some time where a weak euro allows all the countries which are a little bit weaker on exports to export a lot because they're presently very cheap on the global market so that they don't have many deficits within the eurozone. We have rather surplus in the eurozone. And there's certainly, as long as this holds, we have time, we have bought time, but it should take long enough and we have to do some policy measures in order to overcome it. But is this realistic that Germany will enter this kind of enhanced wage strategy and enhanced expansionary fiscal policy? If you want a true answer, no. I don't believe that German politics is ready to enter such a strategy, especially not after recent election. So in the end, we must find other mechanisms to balance the eurozone economy. In the end, I think President Macron is right. We need some sort of fiscal capacity on a European level. And we also need some sort of emergency institution that helps countries to overcome current account crisis if they occur again. There's one suggestion on the table right now which I find quite reasonable to transform the ESM European stability mechanism into a European monetary fund like the IMF. That could be a very reasonable step into the direction to establish a crisis management in the euro area if there is another current account crisis. And at the same time, to establish a European institution that is able to enhance investment, to enhance demand, the lack of which we have complained this morning very reasonably, and that certainly together could determine a structure where Europe certainly enters a path that is more stable than in the past and where we could avoid another European crisis that otherwise is still imminent. Thank you very much. Thank you. Thank you, Gustav, for a beautiful presentation. I also, before Servas speaks, just want to do a call out to my friend Miriam who shared with me that I talk faster than the road runner. There are people from all over the world here who are not native speakers of English. So I want to salute you for being here and for communicating. And that was a beautiful presentation, both substantively, but also in pace. So I'm trying to learn from you and speak more slowly. So my hat's off to Miriam and her friends. So thank you. Servas is yours. Okay, thank you very much for... I'm very happy to be here. Please take a look at my title. In a way, this summarizes the whole paper. If you digest this title, this is more than enough. I'll try to use my about 40 minutes to convince you that the Eurozone has a flawed structure and that actually it is sort of self-inflicting. It's creating self-inflicting damage. Yeah, now, first of all, good news. The good news is you saw Mr. Junker in the financial press. He's very upbeat. The Eurozone is finally growing. It took long, very long, but now it seems there is recovery on the political side. There is still anti-Euro resentment. There is populism and the recent elections do not sort of indicate that that Eurozone resentment is actually declining. Actually, what is worse, the so-called non-populist traditional parties, their agendas are becoming very, I mean, they are moving in the much more Euro, anti-Euro zone or European Union direction. So in a way, the populist discourse is becoming mainstream. Okay, now, I will argue that, let's say, these are four. You can read them. They are four reasons why I think we have to be a bit careful about being optimistic about the economic recovery. One is the fact that monetary policy is still extremely unusual. The Eurozone financial system is still weak. Policy buffers, this is recognized by the European Commission as well and by the ECB. Policy buffers are very weak or very thin. And point number four actually is the most important point that is there's simply no convergence. And I want to elaborate on that issue because that is actually the main dimension of the weakness of the Eurozone. Convergence is very often defined in terms of inflation, in terms of per capita income levels and so on. I think that's all useless. The real point is productivity growth and I, productivity levels and productivity growth and I'll concentrate on the manufacturing sector. And I also will take a slightly longer perspective starting in 1995. So we have 20 years of data, OECD standard data and what they show, this is productivity levels in the four southern European countries compared to the weighted average productivity level in the Eurozone core. This is Belgium, Austria, Netherlands, France and Germany. And what you can see is, especially for Italy, Greece and Spain, enormous divergence. Actually Italy has lost 28% of its productivity level compared to the core countries. This is something which goes mostly unnoticed but it is a very strong trend. And my basic point is that the Eurozone structure itself is not stopping this trend, halting it, it's actually reinforcing the trend. Yeah, that is the argument. I think the deepest question to ask going beyond simple saying what is happening now and what is likely to happen, the biggest question to ask is, to what extent is membership of the economic and monetary union itself helpful to economic performance? Or would it have been better for a country to have stayed out of the union? Now this is possibly impossible. This is like an impossible question to ask. But anyway, there are three Dutch economists who very recently completed a work in which they tried to estimate the net benefit or net cost of being a member of the Eurozone. It's basically setting up a counterfactual and anyway, you can critique the methodology but the basic result is this. Before the crisis happened, being a member of the Eurozone was beneficial for all except Germany. After the crisis, in a way, being a member of the Eurozone was not beneficial to anybody, any member country except Germany. Yeah, and that's the basic finding. Now this has to do, I would argue, with the structural divergence and productivity and competitiveness and I want to highlight four mechanisms which in my view reinforce this, what I call structural divergence. I will go through them one by one. Number four in my view is most important so I'll go through the first three ones slightly quickly. The first one is the monetary policy frame which is one size fits all which basically means it doesn't fit. It doesn't square with conditions of members. The second one is the exchange rate which is hurting and benefiting different countries at different times. The fiscal austerity straight jacket is absolutely unhelpful and then the fourth point is the emphasis on unit labor cost competitiveness which I would argue is actually that belief that competitiveness has to do with unit labor cost. This is also what Gustav Horn basically tried to show for Germany price sensitivity of exports, hardly there, that means unit labor cost sensitivity of exports hardly there. The adjustment in the trade balance or the current balance happens through demand or incomes. That is the basic point. This adherence to this competitive myth that is sort of a very strong prediction will kill the Eurozone at some point. Anyway, this is the one size fits all monetary policy. I think people know that before the crisis the interest rates were too high for Germany or were okay for Germany, maybe for the German and French conditions but they were too low for Southern European conditions. It basically created a financial bubble. After the crisis happened, also because of the zero lower bound, credit the interest rates were too high for the Southern European countries you could say and they are definitely too low for Germany. If you look at the German stock exchange, it has doubled in seven years time whereas the German GDP increased by about 12%. So it's like 100% higher stock market. German firms have doubled their stock market value whereas the economy is sort of, well, not growing spectacularly. Okay, then the exchange rate is sort of, this is more true earlier than now but let's say before the crisis especially, some countries had very strong surpluses, other countries had deficits. In a way you could argue that there was a misalignment. The Euro was undervalued in its value for the surplus countries, the Netherlands and Germany and it was overvalued too expensive for the Southern European countries. This is not a small point because especially given the fact that the Southern European countries are specializing in low and medium tech manufacturing, they are competing much more strongly than for instance Germany on costs and the fact that for them, the exchange euro exchange rate was overvalued, hurt, hurted, yeah. The whole point is that both the interest rate policy the common interest rate policy and also the common exchange rate are out of tune with actual conditions and I argue as I write down on the slide that this is reinforcing the structural divergence. Okay, the fiscal austerity, well I mean it didn't help to reduce deficits and debts in the midst of a very deep crisis and we all know the notion of hysteresis, the fact that if you do this, I mean it's increasingly becoming clear that short run sort of reductions in growth and demand do sort of spill over into longer term declines of potential growth. Yeah, I can't go into it but I think the list of mechanisms is clear. Then I come to point number four which I think is the most important point. It's basically based on a misreading of the German success, relative success after the crisis. The basic idea is that Germany is very strong because it is competitive and then with slate of hand, the notion of competitiveness is reduced to unit labor cost competitiveness. I'm not saying that competitiveness is not important. It is very important but it's simply not costs. It is technology or tech non-priced competitiveness which is extremely important and Germany is very, very strong exactly in that particular dimension. It is sort of operating in high tech, medium tech, often niche markets. If you want to have the shorthand description, German firms are not really competing with Chinese firms but the Southern European manufacturing exporters are in direct competition with Asian firms and obviously they will lose it when they compete based on cost. Yeah, the German notion of reducing cost has to do with the wage restrained due to the Hartz reforms which did supposedly turn Germany into an exporting powerhouse. And this is very important because European policymakers basically have accepted this and the new French president is also trying to copy paste this particular aspect. I said non-priced competitiveness is much more important. I try to explain it here. The whole point is that if you look at the manufacturing sector in Germany and also in other manufacturing sectors where productivity growth is actually quite high, wage growth is also high. Yeah, it's like unit labor costs are not really declining. And then the Hartz reforms, the labor market deregulation which actually created enormous amounts, numbers of low-waged, flexible and very, very insecure jobs, that actually reduced average German productivity growth. It did not boost German productivity growth. This is a table again for the period 1995 to 2015 which looks, I mean, when we talk about unit labor costs, unit labor costs consist of nominal wages and productivity. And what you can see here is that overwhelmingly unit labor costs in Southern European countries increased because their productivity growth was lagging behind productivity growth in the core. Spain is the clearest example, unit labor cost over the 20 year period is comparable to nominal wage growth is comparable to nominal wage growth in the core. But you can see that productivity growth on average for the 20 year period is below. So why did Spanish unit labor cost increase by 0.75% on average per annum during 20 years? Answer, productivity decline in relative terms. Yeah, it is true for the other countries, Italy and so on as well. The whole point is that unit labor cost is a very overstated concept. The main point is simply the productivity performance which has to do with specialization, high tech, innovative firms and so on. Now the European Commission in its recent policy document on deepening the economic and monetary union has sort of recognized the problematic aspect of divergence. It sort of also accepts or very strongly stresses the fact that that particular divergence has a very risky or very heavy political price. I mean, it basically leads to increasing regional inequalities and so on. It leads to a lot of populist resentment against the EU and it also recognizes the fact that the Eurozone is not shockproof and that the policy buffers as the instruments are very thin. Now, the whole point is that if you go, and what is the Eurozone doing? It's going for labor market deregulation which euphemistically are called structural labor market reforms. It sounds nice, structural reforms. We all want to reform the structure but what it means is slashing wages, doing away with employment protection, all these things like social welfare state and so on. The whole point is, what is the impact? Does it lead to more innovation, faster technological progress? Does it really sort of help firms upgrade and the economy to diversify into more dynamic economic activities? The answer is no. What it creates is a low wage employment, insecure jobs, many wages, in-work poverty, dualism. The main theme of this conference is the dual economy. Actually, this is one of the main drivers of the dualization, the two-tire labor market in which wage inequality, I mean, first of all, profit shares increase relative to the wage share and within the wage income, it is enormous increases in wage inequality. The whole point is that this is also hurting the overall economic performance that was very clearly argued in the first panel this morning but I want to make it a little bit sharper from my perspective that is higher inequality is depressing demand and lower demand growth is also hurting productivity growth. There are various reasons why demand growth, lower demand growth will spill over into lower, slower productivity growth. One is it slows down embodied labor-saving technological progress, which is sort of a very Caldorian assumption. We are here in Edinburgh. Adam Smith talked about the division of labor. The specialization is limited by the extent of the market. This is sort of exactly the point. If you slow down demand growth, you limit the division of labor and you slow down productivity increases. There is also a theory of demand pool innovation which you can also add into this. Okay, then the question is what is to be done? The first... 45 seconds. Aligned, the first words I cannot pronounce but that is actually what Lenin said in 1902. When you say what is to be done, this is what Lenin said before the Russian Revolution. I don't want to have a Russian Revolution. I just want to put on the table that yes, this is the urgent question, what is to be done? I listed a few things. You can look through them. I want to emphasize just the final one which is active industrial policies. This is absolutely non-mainstream. Professor Bovinger in Germany mentioned this as a very necessary intervention and his colleagues in the advisory council almost lynched him for mentioning the fact that governments' state should go for industrial policy. Anyway, I think Europe has to have it and without it and then I'll stop. Divergence will just continue and the question is how long can it continue? Okay. Thank you. Both presentations so far have done a beautiful job of kind of diagnosing a lot of the divisions and as I'm thinking about the INET conference 10 years from now, one of the things going through my mind is we haven't talked much yet. I'm sure there are experts in the audience about automation, robotics, a whole new era of participants in the economy and as I think about those, I can't see any of the divisions that you've outlined getting better. It's one of the interesting points of discussion that perhaps Orsola will get into but Karl Thor is yours. Thank you. Well, excuse me for not using slides but lecturing in the old fashioned way. I have chosen Eugen von Bümbarwerk's classic article of 1914 for the title of my paper. You see it here. As demonstrated by the example of the wage level, Bümbarwerk concluded the range of power and its execution would be quite considerable in the short run. In the long run, however, it would strongly shrink in favor of what is subjected to economic laws. Today's question is, does ECB power or do market forces undermine, determine, not undermine, determine the low level of interest rates? The assumption of most people around the world is that central banks alone control interest rates. I will take issue with this view and present some evidence that market forces play a more important role. The ECB's monetary policy of not only low but even negative interest rates and its QE policy have met with especially strong criticism from the German side. It is well known that the Deutsche Bundesbank has acted in opposition to Draghi's monetary policy program and even leading government members such as Finance Minister Wolfgang Scheuble have labeled Draghi's monetary policy as dangerous and have asked for a tighter policy since the spring of 2016. The other side of the coin, the cheap credit for investment purposes or real estate finance is practically not talked, let alone complained about by people in Germany who make use of it. Because Germans are notoriously risk and debt averse, Germany with its very high savings and very low net investment ratios has been running current account surpluses since 2002. Gustav Horn told us all about that. It is textbook knowledge that monetary policy of central banks has direct influence on money market conditions but even their conditions are also shaped by other actors in the economy both from the financial and non-financial sectors. It also used to be textbook knowledge that central banks have no direct influence on capital market conditions but arbitrage between short-term funds on money market and longer-term funds on capital market would eventually draw capital market interest rates in the direction of money market interest rates. The supply of funds on capital markets does not flow out of usual money creation of the central bank, except when QE is practiced. The supply is rather determined by the volume of savings worldwide. The demand for such funds comes from all kinds of economic actors and institutions, the financial sector, the non-financial business sector, private households for mortgage and consumer credit and the government in times of running deficits. Like on all markets, the price of capital on the capital market, the interest rate is determined by the intersection of supply and demand curves. The downward trend of capital market interest rates has been going on since the 1990s. We saw slides on that by Adair Turner this morning. What has happened on capital market supply and demand side since then is the question. On the supply side, the volume of worldwide saving has increased much stronger than worldwide GDP. This resulted mainly from extremely high growth in emerging economies like the BRIC states where social security is still relatively underdeveloped compared to advanced economies. Well-to-do middle-class citizens now constitute a large and growing portion of society in those countries. They have the means to save and thus to care for their social security individually. These developments on the capital market supply side were labeled saving glut by Ben Bernanke. I assume that you are familiar with his findings. A contributor to the savings glut has also been the balance sheet recession. A theory that Richard Kuh first used to explain the post 1990 sluggish development of the Japanese economy. But he diagnosed it also for Germany since the collapse of the IT bubble in the year 2000 as well as for the Euro area and for the US since the Great Recession. It occurs after bubbles burst. Businesses and consumers then prefer to save and pay off their debts rather than spend and invest despite very low interest rates. This increases supply and reduces demand on world capital markets thus driving interest rates down. Karl Christian von Weizsäcker explains the saving glut from a different angle. Taking Böhm-Barberg's capital theory and Knut Wichsel's interest rate theory as point of departure, he focuses on the effects of demographic developments in the OECD countries and China on supply and demand for capital. In contrast to Karl Marx and Böhm-Barberg's expectations the capital coefficient during the spectacular economic development since the last third of the 19th century did not increase but remained practically constant. This means that the demand for capital by the production sector of the economy grew in tandem with the level of production which means roughly at the same rate as GDP. But the supply of capital by saving has grown by far faster, especially after the integration of formerly or still communist countries into the world economy, especially China. The reason is that simultaneously with rapidly rising real income and living standards including much improved medical care, life expectancy has risen dramatically while the retirement age has not. Rich societies therefore want and care for private wealth growing in tandem with the average period between the age of retirement and death because this is the only way to maintain consumption levels of the working age period throughout the retirement span. The growth of the supply of capital far outperforming the demand for capital in the production sector of the economy turns the natural equilibrium real rate of interest in the Vixellian sense negative. This is incompatible with price stability. I'm still reporting what Weizsäcker thinks on this subject to ensure price stability, public debt must exist and curtailing it violates the price stability goal, argues Weizsäcker. I would go even further and content that government debt in order to keep the economy in a stable equilibrium has to fill the gap between rapidly growing supply of capital and the slower growth of the demand for capital from the production sector. Another factor that has recently been pointed out is the increasing share of global players at the technological frontier in the service sector. The concentration of economic power in the so-called FAANGs, which stands for Facebook, Apple, Amazon, Netflix and Google. Joachim Fels presented what this means for capital market supply and demand. Just a sentence from a summary, Superstar firms make higher profits, save more than they invest and pay out a smaller share of their value added to labor. Larry Summers listed some further developments that contribute to the saving glut, like rising inequality. Now let's take a look at the demand side on world capital markets. Big or small businesses in the service sector require less capital per unit of output than in the manufacturing sector. And of the service sector's investment, more and more is self-financed instead of debt financed. Larry Summers has pointed out that the relative price of capital goods has declined reducing the amount of saving that are absorbed to satisfy a given real demand. Similarly, the government sector has reduced its demand for funds from capital market, especially in Germany, but under German pressure also in other euro area countries. Now let's quantify what the ECB has supplied to funds on euro capital market since the start of its QE program in March 2015. According to statistics of the European system of central banks, the latest figure for the volume of all tradeable bonds, including those in the portfolio of the ECB now, at the end of July 2017, was 13.4 trillion euros. That of public bonds, a little more than half of that, 7.3. The 60 billion euros of bonds that the ECB is buying monthly is a tiny fraction of those figures. The 60 billion monthly ECB purchases of bonds is a flow value. Rather than relating it to the two stock values used in the calculation above, it should be related to another flow value, namely the volume of new issues of long-term euro denominated securities. Total new issues from the start of the QE program sum up to 5.4 trillion euros. The volume of publicly issued bonds amounts to 2.5 trillion euros. During the same period, ECB purchases totaled 1.7 trillion euros. This means that the ECB has absorbed about a third of all new issues of long-term euro denominated and about two-thirds of publicly issued bonds. There can hardly be a doubt that capital market interest rates would be slightly higher without the ECB's QE program. At first sight, the complaints over ECB monetary policy, especially by Germans, seems to be justified. But they are not an expression of an enlightened view of private interest. This requires taking into account the consequences of private interest demands for the general welfare employment situation, for example, and of the repercussions from there to one's own private interest. The ECB, like the US Fed and the Japanese Central Bank, has been fighting deflation to avoid all its disasters, effects on growth and employment that we know from economic history. Despite its extreme efforts, the ECB has thus far failed to achieve price stability of an inflation rate under but close to 2%. The reason is that money and capital are no longer scarce as they used to be. Capital supply has been growing strongly, resulting in Bernanke's saving blood. This caused the marginal productivity of capital which determines the natural rate of interest to fall significantly. Knut Wichsel himself coined the term to differentiate natural rate of interest from the money rate of interest set by the banking sector in its lender of last resort, the Central Bank. Wichsel already came to the conclusion that the money rate of interest will always follow the level of the natural rate of interest and not the other way around. Therefore, the Central Bank's power to determine money rates of interest is within small temporary margins restricted by developments of supply of savings and the demand for such fund on capital markets is a globalized word. Now, the future of Europe and my view will be bleak if we don't change the government's position on public debt. Thank you very much, Carl Ludwig. I should mention, since you read your paper and I wanna go back and look at it again, that all of these papers and all of these graphs and slides are on the INET website. For those of you so excited to wanna go back and read Carl Ludwig's paper again, feel free to do it on the INET website, but thank you very much, particularly for the last comments. And now we have Anmaria Simanasi. Anmaria, thank you. Well, in Rashomon, several people describe the same event in drastically different ways. So I will give you my idea of what are the causes of the crisis in order to see what are the solutions and what are the possibilities that the solution that are put forward can perhaps help in overcoming the crisis. And I will ask you to take a long view. The title is Beyond the Short Run because I think that the crisis has a very, very distant cause. And if we don't see what led to the situation where we are now, we cannot find the right solution. This is part of a book which is coming out in January and which is co-authored with Tralee, Ginsburg, and Guarassio. So let me give you the background and the motivation. The European project was based on the assumption that market forces could promote convergence and harmonization between and within countries. The experience has been very different. We have had an incomplete institutional framework and weak political cohesion in the Eurozone which finally led to multiple interlocked crisis and the increasing divide between groups of countries. This crisis forced partial and belated reforms and mostly financial backstops. The weaknesses and divergences in the real economy are bound to recreate financial fragility if permanent transfers must be ruled out. And real divergences must be reversed. If we want, as the Germans are saying, we don't want permanent transfers, but then the receiving countries must be put in a position to pay for themselves. And the difficulty of achieving convergence between countries at different levels of development in a free trade area with free capital mobility and the common currencies relying only on market forces, I think has not been able to deliver the convergence. So the outline, I will take you very, very briefly on the distant roots of the crisis. And I will argue that it has been built up on the diversion path even before the European Monetary Union crisis. And it has to be looked at as the interdependence between economies with different productive capabilities. Look, interdependence is important because we cannot study the crisis in the southern European countries in isolation. They are interacting with the rest of the European Eurozone, with Germany, with other countries. And if we only look at one country trying to find out what are the causes for his crisis, then we miss the whole environment. So the second point is how did we achieve the process of integration? And here again, the process of Europeanization and globalization, how they did interact with the European countries is still important in order to understand what made them reach their level of development and the divergence. And here again, we need to think that there has been a development in the way with the single countries participated in the AMO. The things have not been the same. We had the development of two different peripheries. We had the emergence of a central European manufacturing core. And once again, the fact that there has been this build up of a power house in manufacturing has not been without effect on the southern European countries. And so if I can reach that, I will go to the short and long term policies for the most abilities. So let me go to the way in which the integration of the European Union has been achieved. And here we have that important discontinuity with the golden age, which can explain a bit why the divergence start so far away. We had a decline in capital accumulation. We moved from the glorious thirties from two engines of growth, investment and exports to only one engine, exports. And we had the transition from a politicized management of economic policy based on discretionality to a depoliticized management based on the automatism of rules. The European Central Bank is one instance and the master treaty and the fiscal component is another, the rules. And there has been the passage from the inflation phase of the 70s to the next phase of financialization, which we define as a process in which financial activities become increasingly more important in the formation of the profits of the economy. Not much in terms of employment or value added, but profits. And here you can see simply for the United States and Germany, the divergence between investment as a share of GDP and exports, which is of course much more important for Germany. And so when the European way of integration started, we had this break of the 70s, which is important because it is the time in which most of the European countries, the southern European countries joined the European Union. And we had countries with unequal capacity to restructure the economy because they renounced the industrial policy. They had different costs of this inflation because this inflation has not the same effect in the corporate country as in the periphery countries. And we had this interdependence between core and periphery. And so we had two levels of deregulation, which was guiding the Europeanization process, the global and the European one. And we had two role models that all the European countries tried to follow. The German model of disinflation, Germany had been successful in disinflating almost without cost. And all the countries, the other European countries thought that this was what they should have done. And there was the second model, which was the United States financialization. The United States in the 80s were growing very, very quickly and all the in Europe, you know, Euro crisis and all that. They thought that it was the deregulation of the financial markets, of the labor markets, of the product markets that led to this higher growth. So the interaction between the German and the US model led to the European way to global finance and to monetary integration. And so what were the consequences for the late comer countries? The early liberalization policies prevented public investment guidance. Industrial policies were refined as policies for the guarantee of competition. Partly as a consequence of their policies, growth in the peripheral countries fell behind in the 80s and the crisis associated with deregulation opened a gap in aggregate demand that was eventually filled by welfare and construction expenditure. So here, also with reference to this morning, I would point the emphasis on the composition of demand. It is not enough to have enough demand and to have an expansion. The composition of demand is important. This premature industrialization, restructuring without industrialization, expose the peripheral countries to standard growth and persistent fragility with respect to external changes even before the formation of the monetary union. And here you can see that there has not been no convergence at all. And now we come to another part of the rational story, the German trade surplus. There are different determinants of the surplus from the exports and from the imports side. What I want to emphasize here is a southern perspective looking at the trade surplus of Germany. Of course, the quality is important. German goods are good. But there is another aspect of the increase in the share of low paid workers and working poor, which interests me most. And it is the indirect effects on export competitiveness that they have led by reducing the cost of services to export industries and by increasing the real wage of insiders, the skilled workers in the export sectors that has favored wage moderation. So when we are talking about, well, trade sector and non-tradable sectors, they are interconnected. If you make a policy of wage moderation or compression in the services sector, this affects the competitiveness of your open economy or your open sectors. And this is the side of the exports, the effect on exports. But there has been from the southern point of view another effect from the imports side because if you have a high percentage of working poor or family which are impoverished, their quality of consumption decreases. And we can show in the book that the quality of imports of consumption goods has changed. I mean, in 2001, China entered into the World Trade Organization. But you can see the increase in imports from China, from other low cost countries. And this has diverted exports from the, made in Italy, from the southern European countries which were producing consumer goods, selling these goods on the German market on a not so cheap basis. So, and I will skip the desynchronization of the German house market, which is important. So we have the reorganization of the German industry and its eastward extension, which has played a major role in the expansion of its trade surplus, favoring the emergence of a new periphery. Since the Euro inception, the southern periphery experienced a weakening of its industrial base. In contrast, the eastern periphery, dramatically enlarged and strengthened its manufacturing base as the result of its participation in the German value chains. So we have the eastern periphery manufacturing productions closely connected with the German based firms, partly crowded out suppliers located in the southern periphery. And here you can see that there is the power point and you can see that the black line is the eastern periphery production of goods and high tech goods. So it's a very, very steep rise. So there has been a hierarchical reorganization of the European industry. There has been this emergence of a central European manufacturing core, which is headquartered in Germany. And we have two divergent peripheries, the eastern periphery, which is becoming a location of the utmost importance for manufacturing production and enlarging and upgrading its manufacturing base, partially crowding out the suppliers in the southern periphery. And the production base weakens in the southern periphery and perhaps also in France and gets worse with the crisis. So the divergent trajectories must be understood in terms of interdependent economies with different productive capabilities, interdependence and differences in the level of capabilities of development. You cannot put different countries with different levels of development together in a monetary union without any kind of support. And so the story of the southern periphery cannot be told in isolation. That is without taking into account the repercussions of the choices of the core, which does not imply exonerating national actors from their responsibilities. Well, just as a conclusion, we need to diffuse the debt loops and to complete the monetary union. I mean, I'm not arguing against any macroeconomic, any financial measure in order to decrease the problems that are now in the Eurozone. So fully agree with all what has been said before and what will be said after. But if permanent transfers must be avoided, debt or countries must adjust. And we have different options, austerity and domestic devaluation. This is what we have done. This is what we have had and it didn't work. Selective reflations, countries with fiscal space. I have not space here, not time space to enter into this, but it is important. We cannot rely only on the trickle down effects of a German expansion because German expansions will respond to the need of the German economy. And these are not really sure that they can correspond to what the Southern European countries need. And so we need a coordinated expansion, fiscal union, wage policies all together and we need a development policy and industrial policies which focuses on what the later comer countries need. Thank you very much. Giancarlo. I need that. So thank you for inviting me to talk about my least favorite subject. I've been working on the European crisis since I was in graduate school in the 80s. So I completely identify with Michael Corleone in the Godfather. The more I try to get out of it, the more they pull me back to talk about the crisis in the Euro area. So but I will not use a Sicilian accent. The second thing that you should notice here is the fact that, what is it? My slides, I guess like this. No. So I have this Cambridge Inet logo there because I'm also the director of Cambridge Inet. And if you're curious tonight, there is a panel on it. And then I will say that I need to say a disclaimer that whatever I say is not the view of Cambridge Inet nor the view of other quarters on mine in the European Central Bank that helped me doing some of the analysis in this slides. So what about the presentation? The presentation is about macroeconomic stance in the Euro area. And it starts with a flash of envy. The US is doing much better in the Euro area now. Not that the US is sunshine and bunny rabbit land, right? So they have problems there. The issue is that given the problem, here we are talking about avoiding something very small like 7 to 8 million unemployed people in Europe that we could have avoided if there was a little bit of sense in economics in the way we do economic stabilization. So I am embarrassed because I'm saying very stupid things that when there's a crisis, monetary policy and fiscal policy together must act. So one of the questions is why we didn't? And second, what can we do about it? I will basically do the analysis first, leaving a little bit like a pilot for like a Game of Thrones thing. You can always read the paper. I never seen Game of Thrones, but they told me that it's very interesting. The paper is similar. But you can get the proposal later. So what is a large adverse shock? What is a great recession? What is a great depression? A great depression is something where this idea that there is fundamental stuff there is not the whole story. Most of a great depression, most of a large shock is endogenous risk, something that we create, okay? Because there is maybe fundamental deteriorated, but you know, basically coordination problem, a strategic complementarity. I don't invest because I know the bill is not investing since bill is not invested, the firm does not happen. That is completely endogenous. This is the main lesson of crisis. Risk is endogenous. Now, this is why we pay our policymakers because the choice is difficult. There are, you know, they need to get a balance between two different things. One is to go completely for liquidity and basically avoid any form of crisis by flooding the market with liquid means, like money, so that, you know, we save the debtor. We save people so that they can continue to do what they're doing. But there is a problem there which is the fact that creates very strange incentive that may undermine sustainability. The other side is to go completely for punishing the ruthless debtor, denying the issue that there is a liquidity problem, okay? So you see that countries that did well during the crisis got a better balance between these two streams. And the two streams are actually, remember there are firms, households, banks, and the government. And the government is where problems start in the Euro area. Basically the backstop. Now the idea that, you know, for the UK, the US, the central banks, no question asked, is there to guarantee a backstop to govern debt? Central banks will not allow a run on government debt. The UK central bank bought, at some point it was holding about one fourth of the gills. Then you can say, oh, it's QE or whatever. But the point is, markets know that the central bank will not let a crisis, a risk crisis, get into government debt. This is exactly what went wrong in Europe. So let me tell you the problem. And then point to the, this working paper, macro-climbing stabilization, monetary-fiscal interaction, monetary, you know, I'm very proud that it was actually published as a working paper of the ECB. Because you'll see that the questions that we're asking there are questions, are important questions, and sometimes it's good to push a little bit the institutional view. Although this is not the institutional view. Okay, so how, why do we need both fiscal policy and monetary policy during a large shock? You know, there are people who can be borrowing constraints. There is this idea that the fiscal policy help fighting, expectation of deflation. There is this strong idea that if I lose my job together with a million people, I know that it will take a long time before I can get another job. And my neighbor who doesn't lose, has not lost her job and see me losing my job together with a million people, we start to save like crazy. Because she knows that if she loses her job tomorrow, he will stay with me for a long time. So this idea of the security risk explodes during a crisis. So monetary fiscal policies, spending, avoiding separation, finding ways to not, you know, help the dissipation of human and physical capital during crisis is very important. We know that multipliers can be very large during crisis and they're very large on both sides, both in a sponge or both in contraction. So why didn't we do it? One problem in Europe is the fact that basically there is no, there used to be no backstop of government debt. So a country, government know that their debt is perceived to be defaultable, meaning there is no central bank that guarantee the nominal value of their debt and subject to the risk of restructuring to some degree. So, you know, if you try to expand during a crisis, you're always subject to a run, the possibility of a self-fulfilling expectation of a defaulted restructure that become then unavoidable. So the point that was not very clear because of forgetfulness, I guess, because of lots of translation from other crisis, is the fact that the sovereign risk can have a very strong, has a very strong transmission to the real economy. So let me just show you a couple of things. So what I want to say is basically that we were for the longest time, especially between 2010 to 2012 and later also, very worried about this issue. So most countries were either no space that either no space for fiscal dysfunction or they were very keen on contraction as sort of precautionary, precautionary motive. So, you know, if you look at the peak of the crisis between 2010 and the 2011, let's say July 2012, what we observe is basically the consequences of this backstop, the missing backstop for government debt. For many reasons, the ECB was an incomplete central bank. All other central bank could do it, they could not do it, they could not touch government debt. On the ideology that touching government debt is by definition an immediate inflationary. So many people have been talking about this loop, sovereign risk, bank, non-financial firm, demand sovereign. Let me just show you a couple of problems. This is, everybody knows this, but I want to insist on this fact that you enter a situation in which, the moment in which people expect a country to do badly and forecast debt and deficits, immediately forecast the higher sovereign risk. This higher foreign risk goes immediately into higher borrowing costs for firms, higher borrowing costs for households, banking fragility, lower demand. And this is a loop that makes people, if there is nothing that cut that loop, that interrupts that loop, it's very easy to have a situation in which people are convinced to do, same fundamental analysis, but in reality are simply circulating into this kind of reflection of expectations that start to reflect mirror on each other. Just to show you, this is those two lines, I don't have time to do it, but these two lines just show you this is like a large corporation in Europe. Take those lines as a proxy for the borrowing cost or large corporation. Those are not corporations that depend on the local banking system. Those are corporations that happen to be in France, happen to be in Italy, happen to be in Spain, but can borrow anywhere. Yet their borrowing cost is tightly linked to the sovereign borrowing cost. Those are like a cost of borrowing from banks in different countries, right? And this is industrial production. Going from through the 90s to today, I just put down Germany, France, Spain, and Italy. So all I'm saying is that what we observe in Europe is a total polarization of financial and economic condition. Where being a firm in Italy and Spain, being a firm in Germany is a totally different thing. Prices are very different, borrowing conditions are very different. The rest is very different. So it's not the first time we have a polarization of situation in Italy. We had a polarization in 92, 93 through 95. And notice that the Madrid summit in 95 was a little bit like 92, the Draghi speech, so a moment of turnaround. But what I want to show you, just looking at industrial production, that the polarization in 92, 93 was peanuts compared to the polarization that we have today. Peanuts. And there, you know, you may, it would be another talk, but it would be a change rate maybe, banks. Not because there were no banking crisis in 92, 93. The point is that you don't know that there were banking crisis. And Sweden had the crisis and clean up the banks. The other government decided to basically build them out. Maybe not, there was also a little bit of the root of the crisis that we saw later. It's a book to write. We are writing, actually, with Barry Ackengren. By the way, so this is the main point of my discussion. Polarization and absence of aggregate demand in Europe is the same thing. There are two phases of the same coin. Because if you have such a big polarization, means that a monetary policy decision in Frankfurt means very different thing across countries. Because everybody is so scared of spending that everybody tries to do conservative construction and fiscal policy. And when we sit at the table, we don't trust each other by the passport. I've been standing in 92 in front of half the executive of the Netherlands trying to address the fundamental question whether it's true that Italians spend their time on the beach. I felt like a Berlusconi joke there. But it was true, I'm not making this up. So there is complete lack of trust on monetary, so the question is that the moment in which you need coordination to think about monetary fiscal stance, bank resolution, deposit guarantees, still there, not the incomplete part of the banking union, and the data structure mechanism. It's very difficult to do it in a total lack of trust. So basically this is the situation in which we are now, and I want to make clear that the European Commission is now struggling to resist the pressure to say that it's time to go into a contractionary mood in fiscal policy, which is absurd. I guess they're going into neutral stance, but the point is, I just want to make this, maybe let me quote Modigliani, Nobel Prize, Italian, MIT. We used to say that fine-tuning in fiscal policies, a little bit, there was the time in which people were not gender aware, right? So just flag, gender, gender joke. So Modigliani used to say fine-tuning is like trying to get into the shower, the water, right? While your wife is cooking. At the time there were no thermostat. So when somebody opened a faucet somewhere else, you get hot water, cold water. So I'm not talking about that. I'm not talking about fine-tuning. I'm talking about equipping the Monetary Union in Europe with the tool to avoid another disaster, like 2010, 2011, 2012. Minimum a large shock that has no framework that allow people not to discuss the root of the difference within German thinking, or the liberalism, and New Canesans, which frankly speaking, we don't care, but to act and avoid millions of unemployed people that we have suffered now. So I have 30 seconds. I just want to say that is a turning point was in 2012, was not only OMT and by the Central Bank was also the European stability mechanism, but the OMT is not enough because the OMT is basically conditional support by the Central Bank to avoid the full stability. But the conditional support is still subject to approval. So it doesn't solve the problem of the contractionary bias. So I finish here. I did some, the Game of Throne is waiting for you in the folder, you can read the paper and you'll see one attempt to address the issue of how to create this tool I was talking about. Jean-Carlo, thank you very much. And on this, continuing this issue of pricing, thinking about pricing risk and these different pools, I know tomorrow afternoon there's also going to be discussion about sort of debt, private sector, public sector debt. What I found fascinating is your graph show the public expectations of output, driving decisions at the public level and then driving outcomes on the private level. I think there'll be some presentations that invert that tomorrow so we can have a real debate, so it'll be very fascinating. So Jean-Pierre Landau, you have the floor. Thank you very much. I'm going to talk about, make some general remarks about the future of the Eurozone. And before you talk about the future, you have to look at the present of course. And I've been allowed and actually instructed by the moderator to make a joke. So basically, we may be in a situation of that gentlemen lost in the Scottish land. And he goes and see a local gentleman asking the way to get to Edinburgh to attend the INET conference. And the local gentleman's got his head and said, you know, maybe you shouldn't start from here. And that's where we may be with the Eurozone right now. I may not like the situation that said it is. So what are, in my view, the two main legacies of the crisis? The first one is that every single policy initiative is looked at through the filter of how much it will redistribute money between states. And that makes any kind of policy initiative extremely difficult to implement. The UK themselves, they are experiencing right now what it means to have the money questions preempting all kind of discussion and policy debate. And that's what's happening today between member states. It's quite natural to look at the redistributive aspects of policies. That's part of public policy making. But it's quite unnatural to make those redistributive aspects the main focus of any kind of policy initiative to ask whether you undertake monetary policy, whether it will have a redistributive aspect if you change banking regulation, whether you have a redistributive aspect. And then to turn down any kind of policy initiative which has a redistributive or a resharing aspect. That's where we are today. It's not a happy situation. We have to live with it because it's not gonna change in the short run, but we have to incorporate that in the way we think about the future. And the second thing is, of course, what we call in our book with Professor Harold James and Professor Bruno Meyer, the Euro and the Battle of the Fides. There are deep differences, not diverges, not oppositions, but differences in the way different countries think about economic policy. And those differences which have been sort of papered over during the last two decades, they came very much strongly up in the front when the crisis occurred. And they sort of hinted a little bit of future policy making. So to make it a little bit oversimplified between a German view and the French view of conducting policy making, the French would rather distribute liquidity as Giancarlo has said. The German would like rather to look at the sovereignty and take the necessary adjustment measure. The French would paper over the problems like throwing liquidity at the problem. And then there's a rule versus discretion and of course, a rule-based approach to economic policy is much more familiar to German thinking than to French thinking. Obviously other countries have their own sort of approaches, but this is a kind of caricature way of looking at the difference. And that's what we do in the book and looking at how it influenced the attitude of any single country during the crisis and how it influences the way they look at the future. So I think what we need is a strategy to not to paper over these differences because they are there, they have been there for two centuries. But to manage the situation in a way that there is better understanding and that we can come to common objective. So what would be that strategy? There's certainly a long-term aspect to it which is to keep having long-term ambitions. And clearly what a lot of what has been said by previous speakers means that part of those long-term ambition is to have a kind of macro stabilization tool at the European level. I'm not going to talk much about it, whether it's going to be European budget, whether it's going to be stronger coordination mechanism. But it's pretty clear from what we heard from everybody that this is needed. It's not going to come easy. It's not going to come in the short run. But I'm very happy that the French president is pushing that even if not going to produce tangible results in terms of the amounts to be spent or to be mobilized in the short run. But the second point of course is to work to strengthen the robustness of the whole Eurozone. And I agree with Professor Hong. The imbalances are going to be there. They're going to stay with us. And basically in the monetary union some people want to spend more than they earn and some people want to earn more than they spend. Some people want to save and some people want to invest. And that's what imbalances are about. And it's quite normal. We wouldn't want to run a monetary union where any single country has to balance their current account and a single period of time. It wouldn't make any sense. What makes sense is to have the financing of those current imbalances being robust. And my own analysis, I think a lot of people analysis of what happened in 2010, 2012 is a kind of collapse of cross border financial intermediation because it was fragile. Some countries had current account deficit of 5% of GDP, which is okay. But they were financed by three months interbank loans which were periodically rolled over. And that's of course the recipe for disaster. And that's what happened when those interbank loans collapsed. So it collapsed our financial intermediation. We don't want to see that again. We want to have a robust financial intermediation. How does it fit into the broader project? Well, most of the criticism which are leveled to against the euro area are clearly it's not what economists call an optimum currency area. So that's basically the one theme of Joe Stigli's book about the euro. It's not an optimum currency area. And in an optimum currency area, one thing which is important is that people can move around and that capital can move around safely. Well, maybe that's true. I would note nobody says it. India is not an optimum currency area. China is not an optimum currency area. And I haven't looked at the numbers precisely, but my guess is that labor mobility and capital mobility inside China or inside India are not bigger than inside the eurozone. Of course, they have a government. That's another issue. That's a political issue. But economically speaking, I'm not sure that the eurozone is further from an optimum currency area are those big countries like China and India. So what we want to do is to get a little bit closer to the model. And again, having a system of robust financial intermediation. This watch should be, in my view, an ambitious capital market union. And an ambitious capital market union has five components. An harmonized legal environment. The commission is taking care of that, but it's going to be 15 years before we get there. And people will lose patience if we only have that. I saw a few words about debt. And maybe some insiders wrote about that. There has to be some kind of banking sector consolidation because the best way to share risk between countries is inside the balance sheet of big banks. So at the moment, banks in Europe are too country-based, too linked to some kind of a country. That will make a time that will, my guess is that the moment the banking consolidation in Europe starts, it will happen very quickly, but nobody knows when it will start. They had to be very important. And I elaborate on that. Cross-border financial instruments and safe asset. And there has to be an efficient crisis management mechanism, the monetary phone that Professor Holm mentioned. I would say a few words about sovereign debt. There is this idea which is gaining ground and which is sort of fashionable that we should be able to restructure the debt of sovereigns, right? And that if a sovereign has difficulty, there shouldn't be, especially in the periphery of Europe, there shouldn't be asked to pay back their debt in full. That happened to Greece, of course, but there is kind of fashionable idea about the economists and a lot of bank practitioners that this should be a general system. And there is this idea that the debt should be considered as risky and treated as risky under production rules. So it's attractive, intellectually speaking. It creates market discipline, so people would defend those ideas, especially maybe some in Germany say, well, we could not impose fiscal rules or fiscal discipline for rules. So why don't we let the market impose fiscal discipline on the country? And that means that they should be able to treat debt as risky and we should take as regulatory debt as risky. And it gives the sovereign some flexibility when the sovereign has problems then there are structures like that. Well, a lot of people think it's a very good idea. I think it's a very bad idea. It's a very bad idea because public debt is the pillar of any kind of financial system. The moment you make public debt information sensitive, the moment you make it any news can change your assessment of the public debt, then you create a lot of financial stability problems. And you should that graph where the CDS of banks and corporates were jumping off at some stage and they jumped up at a very specific moment which is October 2010, I've noticed that. And in October 2010 there was this meeting in Deauville which we tell a lot in our books about. And in that meeting in Deauville, the French president of the time and the chancellor that decided that debt should be possibly restructured. And the very moment that debt should be restructured then you could see immediately people starting to price that possibility of restructuring in domestic debt. And as you clearly mentioned that replicated on the bank that had effect on the corporates and that's what started the segmentation of the whole eurozone with big danger, big danger. There was a risk of breakup. Even officials were talking in March 2012 about the denomination risk which is basically the return of national currency. And that could only be stopped by the whatever it takes speech of Mario Draghi in June 2012. We tell all that in the book, right? So we have to learn from this. Once you make public debt information sensitive everything diverge, everything breaks down and this is the recipe to break down the eurozone. So financial stability is extremely important. Public debt has to be treated as safe. It has to be made safe by appropriate fiscal consolidation of course but it has to be treated as safe. It would be a fatal mistake to do it otherwise. I know this is controversial so that's what I'm making that point very strongly. Next thing we need of course, if we want to have a true union we need financial instruments with no passport. At the moment any, when you buy a public debt you know it's Spanish or French and Italian or German and the private debt is the same. So it should be pretty easy and there are a lot of discussion to create cross border financial assets. We have no link to any kind of country risk. So that would be truly euro assets in terms of their content, their risk profile and their sensitivity to use. They could be public and my co-author Marcus Brenner Maria is pushing for an idea of European safe bonds which is not mutualization on risk, which is not a euro bond which has no fiscal implication which was basically using fiscal financial engineering to create safe bonds which are extremely needed as a basis of financial system. And I also think we could do it private and I think the commission and maybe the ECB are very timid in pushing from a euro and 10 type asset backed securities. It's a little bit technical, I'm sorry. But then you could have securities which are backed by loans or assets coming from all the countries of Europe, of the euro zone, very diversified. So that the price and the risk attached to those security could not be linked to any kind of country specific risk. And all this would go a great way. We would have a cross border collateral. We would have rich sharing embedded into the instruments and we would have less price to quality as it happened from the South to the North in 2012. So the main message here is that we may be thinking too much in terms of institutions and not enough in terms of instrument. We should have a system which focus more on getting common instruments to help us finance. And finally, the last point is the European Monetary Fund. You mentioned it, Professor. I fully agree with three very important points which again are going to prove extremely controversial. The first one, it has to be a monetary fund. So what we have now is a European stability mechanism which is a fiscal fund. It's financed by loans, by borrowing, guaranteed by the government. So fiscal fund and the monetary fund is not different. So a monetary fund must have access to the financing by the ECB, very important. And that's important because then you're not limited in case of crisis by the fiscal limitation of the governments. You can fight the liquidity crisis if it occurs for the mobilization of official monetary liquidity. That's the big Bazooka symbol. And the existence of the big Bazooka, the ability of authorities to fight a speculative crisis or liquidity crisis with sufficient resources by itself as an enormous dissuade effect on the existence of the crisis. That's going to be tough. A lot of people are not going to, especially maybe in Germany, but in other countries are not going to accept the idea that the European monetary fund should be monetary. But the international monetary fund is monetary. It should be monetary. Second, it should have an IMF type governance and that's very important. Which means that no country on its own should be able to block a decision except for the major decision in a big country, so qualified majority, weighted constituency, whatever. The IMF is working very well on that. And the two reasons the IMF is working is that they have monetary resources and they have a governance which allow qualified majority decision plus blocking by the important countries if it's very important. And then I think, if we do that European monetary fund, that would be exactly the ideal framework where we need to discuss operationally for the future on whether we are facing solvency and liquidity crisis, whether we should have a tougher or stronger fiscal conditionality. This is a forward-looking approach to solving our differences. So in addition to its direct effect on helping us to fight crisis and facing emergency situation, it would provide a framework where we can discuss our fundamental, maybe sometime divergence approach to economic policy and conditionality. The striking thing that will be my last point, the striking thing about conditionality during the crisis, it has been outsourced, so to speak, to the IMF and the ECB. It's not the job of the ECB to do conditionality. It's not a job of central bank to tell governments what they should do. It's not. And it compromises its integrity and dependence. And the IMF, as we can see, does not see always eye to eye with the European approach. So having such a phone would give us a framework to work together and looking at the future. Thank you. Thank you, Jean-Pierre. John Carlo is so animated by what you said he already wants a debate, but you can't do it yet, because we've got it at 4.30. I'm gonna give Ursula 10 minutes, but before I say that, I wanna thank everyone except Jean-Pierre for your candid deep pessimism about the future. Jean-Pierre did a wonderful job of trying to be cautiously optimistic of a pathway to a warm and fuzzy and happy, less dysfunctional Eurozone. I just wanna ask you one question. Did, who convinced you, the pessimist or this cautious optimist? For me? Yeah. Yeah, which side are you on? Their side or his? Pick a side, pick a side. Well, it's hard to be optimistic this time. Okay, there you go. Sorry. Jean-Pierre, you're gonna have to work on it a little bit. Okay, the floor is yours. You've got 10 minutes. Thank you. Let me start by actually acknowledging the very hard work that all my colleagues at INET have put into this conference and the very, I don't have, the very good job they've done so far. So let me start from drawing some key, I think, commonalities and differences among the presentation we've heard, which were all very interesting. So I guess that most of the speakers actually took a look at the very long-run dynamics of the economy and put the crisis and ensuing stagnation as a coherent part of that. Only, I think Professor Corsetti and a little bit Professor Landau instead looked, were more concerned about how the economy reacts to exogenous shocks and instead of a long-term analysis. And because actually I read the papers and I didn't really only listen to the presentation, I would like also to highlight other differences. Most speakers looked at adopted historical and empirical or just empirical analysis. Some others instead, and I'm again talking about Professor Corsetti, decided to rely on some quite strong assumptions and quite redacted like rational expectations and the idea that the economy oscillates around the potential output, which is essentially supplied to our mind in the long run. And let me say a few things about that and especially about the policy suggestion that derived. I think that most importantly, even if there were a fund that can support and buy the bonds of the sovereign debt bonds in case of emergency, still according to your view, austerity should be in place and would be in place, especially because we know the estimated budget rules in Europe are based exactly on the theoretical framework that you have in mind. And those rules are those that exactly reduce the automatic stabilizers, which according to you are so important in normal times and not in terms of large shocks occurring. Also, there's no real redistribution among core and periphery, between core and periphery. So let's say that the divergence of which many speakers have talked about wouldn't be really solved. And then there's a problem of democratic accountability of this when you say that, you know, the fund shouldn't support a country which doesn't comply with the fiscal rules. Well, then I mean, that's definitely an undermining of the democratic capacity of a country to determine its fiscal policy. And moreover, and this is also regards, Professor Holt-Prelich's analysis, I don't really understand this worry about it. Well, let's say the way in which is framed worry about excessive savings, especially worldwide. And I think that especially since given what we've heard from other speakers, perhaps what is most worrying is the distribution of these savings. Let's say that I don't agree with a loanable fund approach. And of course, I mean, I think there's also some confusion sometimes between ex antequilibrium between investments and savings and ex post. But however, I think that I really agree and I like parts of your analysis and which actually, as I said to you before, remind me of one of my favorite known Keynesian economists which is Gunnar Mirdel, although even he rejected the notion of natural rate of interest, I must say. So perhaps you should consider that too. And I agree with your policy conclusions for sure. I would like however to point to something that I think you underestimate a little bit which is the need for credit. That the large fabric of small and medium firms, especially in the South or periphery have, they demand credit actually, but they don't have access to it. It's also because of the banking rules that are in place. And in fact, this is perhaps related to what Professor Landau talked about. Well, first of all, let me say because I really worked on this topic as a famous economist once said, automatic rules are set up by discretion are maintained by discretion and discarded by discretion. And in fact, that's exactly what Germany did in 2005 and in 2011, they changed the rules according to what they want, how they wanted basically. And so they did with the banking union. And the banking union acts very asymmetrically within countries and it's impairing the capacity of the banking system, especially in the South and periphery but also I think in Germany somehow to give credit to the productive system and instead leaves the capacity of speculating on derivatives quite free and possible. So let me get to Professor Simonazzi's analysis who I really enjoyed was a very great analysis, historical analysis of how we got here and an analysis of the productive networks that can give a hint on about where we are going. And so I have a couple of questions for you. So one is in a paper especially you talk about some short-sightedness of the Southern peripheral countries and Italy especially was the first country to actually separate the central bank from treasury and the one that really embraced quite early along with other Southern countries, the new liberal setting of Europe in 2005, not Italy but other peripheral countries were against the relaxation of the fiscal rules. So can you perhaps discuss why this has happened if there is a good reason at all? And also about the defs inflation in Germany, you said that it happened without cost but perhaps the cost was really inequality as we, and there is also a political cost that derives from it. And so finally Professor Storm and Professor Horne, you both talked about inequality, income inequality and you both agreed that wage policy is not enough to solve the current imbalances, but wage inequality affects the situation both in terms of growth and in terms of political consequences and you, Professor Storm talked about populism and as a perhaps something that's not just a result of the mean ignorance of the masses but something that has very materialistic explanations unfortunately and my question to you and also one important point you make is that inequality also reduces productivity growth in spite of what we are talking about usually in terms of competitivity. My question to you is what do you think at this point is the interest of Germany to remain in the Eurozone because what we've heard is that perhaps the only interest is under evaluation of the currency but politically and economically what other reasons would there be that would push Germany to act for a more harmonized environment in Europe? Of course we know given what you said that there isn't one Germany, there are many Germanis given the inequality situation and perhaps instead of just causing inequality that could be a hope for solidarity among countries. Thank you so much Ursula, thank you very much. So the truth is folks, while I wanted to have questions, debate, exchange and we were gonna pull out our best jokes, we have four minutes. Are all of you going to the coffee session after say yes, you're gonna go? So those of you who have burning questions, zingers that you want to provoke our speakers, I'm going to encourage you at our coffee session to take advantage of an exchange. Thank you very much for your reviews. Everyone can submit their answers to your questions in writing. But along the lines of that first of your final question really on Germany, it was on an INET stage that Martin Wolf said that Germany does not recognize its hegemonic responsibilities within the zone. That it's not performing in that way. Wolfgang Schoibler who also appeared in an INET forum when we were in Berlin gave a provocative comment that I think doubled down on many of the concerns that all of you sort of outlined, many of you outlined that you're trying to solve. And so just in just quick lightning round, I'd love to get either a zinger that you think we missed that we didn't emphasize very quick form or I'd like you to ask the fundamental question that Ursula raised which is can Germany shift if Germany is of such consequential weight and footprint within the question of the future of the Eurozone, can its behavior take a new course? And why don't I start with our lady here in the middle? But real brief, yeah. Well, I can simply quote Schoibler. He said that Germany has an interest in staying in the Eurozone. Well forget what he says, what does he do? I mean, he's gone. Do you think his departure matters? Well, as I said, the premises are not very good. I don't know what you mean. Karl, will there be some move in the direction of Macron? Macron is a key now to Germany's change of position, I would say. Servas? I will be very honest because I think it's an important moment in history and we have to be honest. I have been interacting with a lot of German economists and in a nutshell, my summary of their view is that the Eurozone is a bad marriage. We don't want to break up, we don't want to invest in a better relationship and that is the situation. So will the topic of this event or session five years now from now be the same? I think they are not, or they are, I think there is in, this is true for the Netherlands as well, there's no willingness to actually sort of engage and commit to anything which has to do with the Eurozone. And in a way, if this continues, not maybe not the hope, but let's say one sort of, what they maybe see as a possible solution is that countries opt out themselves. Gustav? Every German is a... Every German is a Schreble. Oh, and what? Oh, he said not every German is a Schreble. It's a good thing to get, yeah, to correct. Because that was going to become the most tweetable comment of the whole conference. Yeah, go ahead. I'm going to hand you a mic, something's happened to your microphone, so there you go. But that doesn't give you much more time, so. Okay, that's good, yeah. Because Germany has a very strong interest in having a stable currency circulation. If we would reintroduce European currencies, we would, in a situation where currency attacks, speculation, all that stuff, would certainly also hamper German exports. And that's not what we would like to have. Right, Jean-Claude? I'm sorry that that was considered pessimist because the honest answer is that we don't know. This is... Mike. No, I think his mic is on. I, yeah. So we don't know. I hope that... Just, there is a political process going on. Part of what Jean-Pierre is saying is already there. You have the European stability mechanism that is landing 35 years at under-basis point. You know, the IMF is losing hair. Right. So what I'm saying is that things are happening. There is a debate. We don't know where we go. But the country risk issue is what, at this point, is the one thing that is basically blocking the situation. I just want to say that I'm sorry I misread your pessimism. I, as a journalist, am very attracted to darkness and pessimism and cynicism. No, you need to be pessimistic in the analysis and then you're missing the solution. You don't need that. Yeah. Okay. About the bad marriage. I think what happens in Europe right now is a reflection of what happens in the world. You should be aware of that. You don't have any country right now with the sole exception of the French president who say I want to develop international cooperation. I am not aware of any country saying I want to go for one international cooperation. This is a phase of countries retracting against their own interests, looking at their own vision. So the momentum for international cooperation and for committing yourself, the world commitments, is nil today in the world economy. This is a special phase. This is a post-crisis phase. It has reflection on Europe. I would ask strongly that it is not a European phenomenon specific and it is less intense, I don't have to mention other countries, less intense in Europe than another. That's why I'm optimistic. 15 seconds. Yeah, I think the marriage between Germany and France is much better than the marriage between Germany and Southern Europe. I mean that's my own point. This is what we... Can I make a member of a quote? We need to decide... I'm trying to get you to copy. We need to decide whether it's a marriage of interest or a marriage of love. Remember, Europe was born as a marriage of love and ideas. So it will be... Anne Marie, any final comment? Well, the program perhaps is France that is making a marriage with Germany and forgetting all the other countries. It could be a very important pivotal country in the European Union. Sort of mediating between Germany and Southern Europe. Welcome to this episode of Oprah. So glad you could all join us today and I wanna thank our entire panel. This is what we call a 360 degree discussion. I love the fact that you're all on different islands and I hope you all get together someday. Thank you very much. It's worth a lot. Thank you very much. Now we're gonna enjoy coffee and whatnot and take a break. Thank you.