 I should say my next book, which will be out in September, published by Penguin all over the world, is going to be called The Shifts and The Shocks, and it is about, I think it will be reasonably the broadest book that has appeared about the global financial crisis. That is to say it will cover both sides of the Atlantic, roughly equally. It covers the macroeconomics of the crisis, by which I mean the global macroeconomics of the crisis, including the role of the global imbalances and shifts in income distribution in the macro preconditions, as well as the change of the financial system and the pressures on the financial system. About a quarter of it is directly about the eurozone, and there is even some discussion of Ireland. So I feel that you all have to buy it and read it. Reading it without buying it is no good, though actually in truth I will be earning out the advance for so long maybe the cost all falls on Penguin, so I don't really care. That's also on the record, though I'd rather you didn't tell Penguin that I said it. Okay, what I am amazed by the size of the audience, impressed and slightly disturbed. If I prorate this for a London audience I couldn't imagine any comparable audience there. So I'm beginning to wonder whether Dublin has as many interesting activities going on as I used to think. So what I'm going to do is set out in about 20, 25 minutes my view of the broad eurozone crisis. Why it happened, what has been done to deal with it and what is needed to fix this. I have the fear that talking to you here about this is a pretty silly idea because you know already everything I'm going to say, either because you've experienced it or because some of you have even read what I've written. But I don't have a completely new set of ideas, so I'm afraid this is going to be a case of repetition. When I first joined the FT, my then editor, I went to my then editor when I just wrote an editorial, I was then the chief leader writer and I said, you know, we wrote this last week and he said, that's not a problem, Martin, repetition is the essence of journalism. So you are going to get repetition. So what I, if this all works, it's called the future of a bad monetary marriage. And these are the things I'm going to cover. I think the idea of a marriage is a nice metaphor. I found it very useful. One of my chapters is about this, essentially, and I followed these very, very closely because I've been in this position or more or less the FT for more than a quarter of a century. So I followed all the negotiations from the De Law Commission onwards and I know and have talked to pretty well all the major participants in those discussions. And it seemed to me all along that what was being created was essentially a marriage without divorce, without any possibility of divorce in practice or in theory. And that's not the sort of thing that nowadays we think is rather very sensible among couples. But we decided, it was decided in Europe this is what was needed in money. And it was clear why, because of course if it's, if it can be revoked, it's going to create crises of its own. We know that. So the idea was that this would be a permanent monetary marriage. When my view, more or less completely consistently, I'm actually consistent on this, is that none of the necessary conditions, economic, political, or financial, for making such a monetary marriage work actually existed. There are crises were likely, though I have to say the actual crisis was far worse than I'd envisaged. I lacked the imagination to envisage this scale of crisis. And then the interesting question would be, what would happen next? And that's what we're living through. And we found out some very interesting things about what would happen next. And one of them is that indeed, as I thought, breaking it up, divorce is almost impossible. And that has its own consequences in the way the marriage will work. One of them pretty obviously being that if divorce is really unthinkable, the creditor country or countries have absolute power in the system. That's an unnecessary part of a monetary marriage without a credible divorce, because they have nothing, they have no reason to buy off the potential, the potential levers. That's a very important point I'll come to later. So I'm going to cover four topics. First, the illusions in the honeymoon period, which was essentially the first 10 years of the currency union. Then what it's like living in a bad marriage, you know all about that, but I'm going to just make this a bit broader. Then I'm going to stress this point that I've just made, which I think is really important, that is not made often enough, which is the fact that really nobody regards exit as plausible or desirable strategy has profound implications for the nature of the bargaining on how a crisis is resolved. And then I'm finally going to discuss what I think would need to be done to make this a pretty tolerable marriage. And by a good marriage, I should say this now, I've got this in my book, by a good marriage I mean one such that every member country would, if asked now, knowing what it does now, be very happy to join, which I think is probably not the condition today. So let me start with the honeymoon illusions. Essentially the first 10 years of the Eurozone delivered more or less what everybody wanted. And this is one of the best examples. I have no in economics of being, be careful what you wish for. You might actually get it. So essentially it delivered to northern Europe a return to large export surpluses, prudent fiscal policy, external competitiveness, and a powerful credit opposition. And meanwhile it delivered to what is sometimes called the peripheral, I think of the vulnerable countries, massive credit booms in many cases, huge current account deficits, really huge, financed by these credit booms, very low interest rates, and really in a number of cases, certainly including in Ireland, an extraordinary boom. And that is very briefly the picture I want to show you. I don't know if anyone at the back can see these charts, but these just remind you what a remarkable period this honeymoon was. And I focused here on the two most important of the vulnerable countries, merely to avoid cluttering everything up, namely Italy and Spain. And this looks at the spread on government 10-year bond yields over bunts since January 95. And it's sort of a wonderfully symmetrical picture. Many of you, I'm sure, are familiar with it, but it's so remarkable because, of course, if you remember, and I do, back in the mid-90s, spreads were very high. These reflected exchange rate risk, which in turn reflected inflation risk. And in the mid-1990s, there was, in addition, genuine default concerns, particularly about Italy. I remember these very well, real interest rates, shot to very high levels. And in the run-up to joining the Eurozone, as it became credible they would join the Eurozone, and then throughout the first 10 years of the Eurozone, 10, 12 years, all that's disappeared. There were tremendous windfall gains for everybody. And things were absolutely wonderful. And you will remember, because it's very noteworthy, I think it was in 2006, it might be in 2005, you will know me. You will know this. There was actually a brief period when Irish sovereign spreads were negative. That is to say, the Irish government was deemed more credit worthy than the German government. And I remember thinking at the time that this was interesting. It was one of the things I used to use when I went around doing rather plaintive presentations to people in markets back in 2006 and 2007 when I said, when I was asking, where's all the risk gone? What on earth is going on here? Does this make any sense to you? It doesn't make any sense to me. Anyway, as you know, from the crisis onwards, that reversed, it reversed almost perfectly. That was a single of the crisis until the summer of 2012. And I'm going to come to that later. We all know what happened in the summer of 2012. The ECB decided to act as lender of last resort. Now the second chart, what I call the structural mercantilist, is I think a chart of absolutely decisive importance in understanding what's happened in the eurozone. And it focused obviously on the most important credit nation, Germany. And how Germany has managed its macroeconomic policy situation over the last 20 years. Now the interesting point is that Germany has historically, of course, had a large foreign surplus for most of the last half century, 60 years, actually. But in the early 90s, well, in fact, the whole of the 1990s, this disappeared. It ran a large government deficit, which is the red rectangle. It ran a large current account deficit. It ran a small current account deficit. Not a small largest, a small current account deficit. And it ran a large fiscal deficit. Its private sector had its normal surplus, but relatively small. And this was, of course, the unification boom. And then at the end of the 1990s, it lost competitiveness in the process, though the current account always was close to balance. It never had a huge deficit. But basically, Germany saw the opportunity to pursue in the eurozone, in the euro area, a totally different macro policy. Or as I put it, it went back to its traditional policy. It eliminated its fiscal deficit. That is the pink square. So you can see by 2005, it was basically back to 2006. It was back to balance. It was all the unification deficits had went. The private sector increasingly retrenched. And it became a gigantic surplus country. And that's the green, which is chose, by the way, a negative sum, because it's the net capital outflow, which is just the inverse of the current account deficit. This structure, and this is the crucial point, has remained absolutely unchanged throughout the crisis. So Germany has remained throughout a large current account surplus country with an enormous private sector surplus, absolutely enormous private sector surplus, no government deficit whatsoever. It is a country looking for places to invest. It is now actually the world's biggest creditor country on a flow basis. And that is the economy at the heart of Europe. And it has a very important implications. As long as it has this structure, it cannot be a net contributor to demand in the eurozone. It can only be neutral or a net withdrawal of demand in the eurozone. As it has been throughout. And this is a very, very important, decisive, contingent fact about the eurozone. And it hasn't changed at all in the crisis. Today, by the way, if you look at the most recent figures from the IMF, it has no fiscal deficit. So its private surplus goes directly into the current surplus. But of course, the current surplus is no longer with the eurozone, but with other countries. And this brings me to my third chart, which is about the imbalances within the eurozone as a whole. And this is a decisive part of understanding what has been going on through the crisis, which I think is essentially a capital flows external imbalances crisis, not a fiscal deficit crisis. I don't have time to go into that in detail, but I've made this point many times. I'm going to come to it briefly. This shows what the current account balance of the eurozone has looked like since 1998 with the IMF forecast up to 2018. So the surpluses of Germany and other surplus countries, of which the Netherlands was the most important, by the way, are at the top. They're above the line, so Germany is red. And the other surplus countries are pale blue. And that surplus went from very, very small, about 2,000. Germany had actually a small deficit to an enormous surplus relative to eurozone GDP in the 2000s. And the surplus of these surplus countries, as again, in the crisis, not changed at all. They continue to be massive surplus countries. But through the period of the great boom in the peripheral Europe, which I've already talked about, there was enormous deficits emerging in the rest of Europe. And that's where, effectively, most of these surpluses went. And of those countries, what I call the vulnerable countries in dark blue, by the way, in absolute terms, incomparably the most important is Spain. Because of its size and economy, it became, actually, I think the second largest deficit country in the world after the United States, which is an extraordinary fact in its deficit, ran to 10% of GDP. Needless to say, it hardly needs to be said. Now, every last sue of this capital inflow, I'm slightly exaggerating, was wasted. Now, that's quite important. It would have been rather different if it hadn't been, but it was. Most of it went into construction booms, housing booms, or very large fiscal deficits. But the latter was basically only true in Greece. The overall balance is shown in the Eurozone line, which I've shown you here, which is roughly in balance. And since the crisis hit, and this is immensely important in understanding the dilemmas the Eurozone now faces, all the deficits have been eliminated. All the surplus remain as they were. So the Eurozone is now the biggest surplus region in the world, which is, of course, not surprisingly why it has a very strong exchange rate, and would likely have a persistent, these strong exchange rate. And it has, is therefore, in aggregate now, looking for good opportunities to invest outside the Eurozone. Net, it is a huge net creditor, and it is, of course, finding huge problems in finding those good opportunities elsewhere, particularly given the difficulties the emerging economies are in. And it's one of the reasons I'm really quite pessimistic, more pessimistic than many about the future of the world economy, because I don't think that the world can easily absorb the excess savings that have now emerged in the Eurozone because of the smashing of the economies of the previous deficit countries. So let me move on to what happened then, the depressions, what happened to competitiveness, what happened to secular stagnation, the Larry Summers theme, I know he's been here, he's probably talked about that, and what's happening to deflation, low-fation, and the pains of adjustment. First of all, just to remind you what you all know, I don't include Greece here because it destroys comparisons. The Greek economy is shrunk by 25%, but I'd just like to emphasize the, what actually is quite interesting is up, this is up to the end of last year, so I don't have the very latest figures, no, sorry, it includes the first quarter of this year. Essentially, the crisis hit countries, except Greece, are all between 7% and 9% smaller than they were in the first quarter of 2008. None of them are showing really strong growth, but Portugal and Ireland are clearly the most successful recovery cases, neither Spain nor Italy. Italy is terrible, Spain's recovery is also very weak, but more important for our purposes, and I will come to that in a moment, the entire Eurozone economy, which I have in green, is showing essentially no growth whatsoever for the last four years, and though it's got a very weak recovery at the moment, it's still smaller than it was four years earlier, let alone six years earlier. And part of the reason for that is Germany, the motor of the economy, the Eurozone economy itself are actually growing rather slowly, much more weekly than the United States, I don't have time to go into that, and in addition to that, Germany, as I said, is not a net exporter of demand at any point in this whole crisis. Unemployment rates have exploded, this just shows the picture for all the countries, Eurozone unemployment rates are about 12%, Spain and Greece are in the mid-20s to 30, which is catastrophic levels, Irish unemployment rates are falling, as you know, though still very high, actually very, very close now to the levels for Italy, and you've actually come out underneath them, the Irish unemployment performance is the best of the crisis countries, but these are very dismal figures and they are almost certain to stay at these sorts of levels forever. There were massive losses of competitiveness, this has been recouped successfully to a remarkable extent, these are whole economy unit labor costs relative to Germany, by Ireland, which is in dark blue, Portugal has been much less successful, but it is recovering, unfortunately and crucially, I think for the future of the Eurozone, the one major economy that is not restoring its competitiveness at all is Italy, and since it's far and away the most important, this is really quite worrying, remember Italy's as big as all the other countries put together that are in crisis in terms of the economy, actually it's bigger, so it's failure to restore competitiveness, which has to do of course with the Italian labor market and its long-term productivity stagnation is a very disturbing sign for the future, now I want to look at what's happened more closely because it bears directly on what the ECB has been doing and what I regard as the complete failure of monetary policy in the Eurozone, to look at what has happened to nominal and real GDP for the Eurozone as a whole, so let's think of the Eurozone as like the United States, except that the ECB can only deal with the economy as a whole, it can't do much about the individual components, so this is what has happened, the red line is real GDP and it just repeats what you've seen but it's shown more clearly the extent of the stagnation of the Eurozone is really quite striking, I mean that really is a dire performance, in fact, in terms of periods below the starting point it's dramatic, it is worth noting, though I don't have it here, if you allow for the shift in the external balance, which I already mentioned, which is more than 3% of GDP, real domestic demand in the Eurozone is now between six and 7%, I don't know the exact figure, I think it's about 6.5% below where it was in 2008 and that's what the central bank controls or might control in a low inflation environment, it's got no constraints, so it has failed. The blue line shows nominal GDP, many people argue, monetaries argue, that nominal GDP is a variable that a central bank could reasonably be expected to do, to target, if even if it can't target, it should actually at least be doing fairly well on nominal GDP again. What is striking is that nominal GDP in the Eurozone is 4% higher than it was in 2008 first quarter, over six years that is, so essentially it's been growing by about 0.7% a year, less than that, 0.6% a year over this period and I have to say, I regard that as a completely appalling performance by the central bank. Normally, if things were growing reasonably, say nominal GDP was growing at 3% a year, which is, it would of course have increased by more than 20% over this period. This is what's happened to monetary growth in the Eurozone, focus on the blue line which is broad money, remember this is supposed to be the air of the, the ECB is supposed to be the air of the Bundesbank, well essentially monetary growth has stopped and it stopped because of course credit growth has stopped, again a very clear and massive failure of policy. The, this picture shows again what's happened to GDP in the Eurozone relative to the 95 to 2007 trend and the blue line shows the deviations from that trend and essentially the point I want to make is that at the end of last year, the economy was 14% smaller than would have been implied by the utterly miserable trend that existed before that. So again, the economy has basically fallen into total stagnation. Core inflation has been below 1%, below 2%, which is allegedly the target since early 2008. There was a brief uptick to one and a half percent in 2011-12, it's now fallen well below 1%, so it seems to me absolutely clear that in their terms of their own inflation target, ECB has failed utterly and of course this is a mess, but this has very big consequences for the adjustment process. So here I'm looking at the core inflation across Germany, which is the purple line, so it's this one, Italy, Ireland, Greece, Portugal and Spain. Greece is in full fledged and massive deflation, Spain is in deflation, Portugal is in deflation, Ireland is in very low inflation, Italy is roughly at Germany's level. These very low inflation rates are of course necessary to regain competitiveness, particularly in economies with very low productivity growth and some of them are very low productivity growth, but of course that has the terrible tendency that it raises the real value of debt in the denominated in euros. So the adjustment process in this very low inflation environment creates a debt deflation problem, which is ongoing and as things are, is likely to get worse. So in my view, this amounts to a very big mess and a very major failure of policy in dealing with the crisis that hit the eurozone, which I would like to point out and I just have to bring back, in terms of its relationship to the total economy, the total economy of the eurozone, this fund crisis was much smaller than that in the US because it was concentrated predominantly, the financial crisis concentrated predominantly in quite a small part of the economy. Spain was much the most important, but Spain itself is not that big a component of the eurozone economy. My memory is it's about 10%. So it's extraordinary how damaging this has been and this underlines the point I made about the problems of this. Now let me go to the last bits, which are much shorter, but get to the real heart of it. When the crisis hit, all sorts of questions were arose about whether it was possible to imagine breakup and at various stages as my recent, the recent excellent articles by my colleague Peter Spiegel has brought up, there was actually serious discussion of breakup, but it became obvious to everybody who thought about breakup that it was almost impossible to imagine any way of doing a partial breakup that even a Greek exit, a Grexit, which wouldn't lead immediately to contagion, panic, an enormous crisis, which the eurozone had no way of dealing with. Comprehensive breakup was never even considered. And so in this situation, since the, as I pointed out already, the countries that were vulnerable in trouble really couldn't even think about breakup, that meant they more or less had to accept the terms since they'd lost creditworthiness, the terms imposed upon them for staying in. And the terms, as we know, were very tough in terms of fiscal policy, very tough in terms of structural reform and very tough in terms of long-term fiscal rules and the emergence of what I think of, I've described in some of my columns as a discipline union, a union in which essentially incredibly tight discipline is imposed on member country governments through essentially judicial and technocratic procedures and associated with that with a loss, a major loss of sovereignty. That's basically the outcome. And of course, one of the reasons a breakup is unthinkable is it certainly would have enormous global consequences. So that then leads me to the last point I wanted to make. Is it possible to go beyond this discipline union? I think it is ultimately unworkable, unwise and politically intolerable. I cannot imagine that in the very long run, democratically elected governments can survive in a system in which they have so little sovereign discretion and in which there is also essentially no democratic governance at the center. And this supports the view that I've always held that in the long run, a monetary union, a fiat money union, it's not a gold standard, truly requires a democratic legitimacy at the center and that is raised, that's a fundamental political issue. But there's also of course, a fundamental analytical issue and that is to recognize that the core problem here was never fiscal, it was financial. And because it was financial, that means that the creditors are just as implicated in this as the debtors. The creditors were the one who lent the money foolishly in my view is that foolish investors are just as much to blame as foolish borrowers for the outcome. And that, if it had been properly understood and accepted, would have could have led or should have led in a different bargaining process to acceptance of what I think of as an adjustment union namely one that is committed to symmetrical adjustment and an insurance union, one in which the ECB is not the only or main provider of insurance to sovereigns. So what I think is needed for the future is to manage this now and in future crisis because there surely will be future crisis is a system that enforces symmetrical adjustment of income and spending across the union, which is now totally utterly and completely lacking as I've demonstrated to you in terms of the absolute non-adjustment of the core countries of the crisis. There's been none whatsoever, not even a little. Second, there has to be an adjustment, a mechanism for just financing adjustment, preventing unbelievably deep crises through fiscal support and monetary support. The ECB's outright monetary transactions program was astonishingly successful, but nobody really knows whether it will be workable if actually called upon and I must say I remain a profound skeptic about whether it could actually be made to work. There is a third fundamental issue which is that sovereigns, which are only semi-sovereign in the currency union are probably going to have to accept debt restructurings in extremis and certainly in the case of the present crisis, I cannot imagine that Greece can survive without the debt restructuring and I am increasingly concerned about the path of Italy, whose debt is enormous and whose economy is growing very, very slowly. So there's a big issue about how debt restructuring and finally, we clearly need a minimal federal union, something that very different from what there was beforehand and beyond what they have now. To me, a banking union is more than what is currently being planned because a banking union has to include in a genuine, really serious crisis the possibility of government support for the banking system. I don't believe you can resolve a first-class panic through resolution processes without exacerbating the crisis. That was a view I held when I was operating in the Independent Commission on Banking. The only way out of that will be to have immensely much more capital in banks than we do now and nobody is really contemplating that solution, the Admarti-Helvick solution. So the banking union is to me very questionable because it's not clear that it has a fiscal backup. Second, a banking system, this is a point that Kevin O'Rourke has made, among others, a very great Irish economist, a banking system needs genuinely safe assets, unimpeachably safe assets to hold liquidity, it's liquidity in, at the moment, the only such assets in any large quantity are German debt. It seems to me very strange that it should be the debt of one country that performs this role and it is the most important function for a future Eurobonds and it's one of the reasons why I think some form of Eurobond will ultimately need it to back up the banking system. Third, the ECB and or fiscal policy but most of the ECB has to be feel freer to act in support of the economy from a macroeconomic point of view. It's been far too constrained, felt far too constrained and as a result is now very close to allowing deflation and of course all this requires a degree of fiscal union. There's a question of how that might work and the details we can discuss afterwards and of course that, as I've already indicated, means a degree, a greater degree of political union to make a fiscal union work. I should stress and I'll leave you with this last chart, right now largely because of the OMT but also because of the efforts of member countries, spreads have more or less disappeared, you all know this, so everybody thinks everything is completely and utterly safe. I hope I have done enough to indicate that might be seriously over optimistic though of course Ireland will be fine so don't worry about that but there are other countries that are in real trouble and I think it's not difficult to imagine situations in which some form of crisis will recur. As I said I'm already particularly concerned about the Italian situation and in any case in the long run I remain convinced as I've been for 25 years and most German economists thought 25 years ago, 25 years ago that a stable, durable currency union requires a greater degree of political integration and a greater degree of mutual support and assistance than is available in the current one. Some genuine improvements have been made in the last few years, they are genuine improvements but in my view they're not enough and as long as that's the case the next financial crisis is likely to be a systemic crisis again because it interacts with this very weak institutional framework that the Eurozone has and in the long run therefore these failures and defects have to be fixed if it is to work well for Europe because I accept, this is my very last point that break up really is unthinkable because the carnage it would cause. I'm sorry I went on too long but I hope I've at least introduced my perspective on this crisis satisfactorily.