 Mr. Chairman, distinguished members of IIEA. I'm delighted to be here and to be able to address you. It has been a very difficult time for the world from 2007 or 2008. I have watched it. Actually, I've been very lucky because I've had a bit of a bird's-eye view from different places when the crisis was coming on in the United States, 2007, 2008. I used to live in the United States. Two years later, it was exported out of the United States to the rest of the world. And I moved to the rest of the world. I moved to India in 2009. And by then, you could feel the pressures of the crisis in India. And it is a global phenomenon. I'm back now in the US. So I've been sort of viewing it from various different points of view, the crisis that is going on. It's been difficult for your country as a part of the eurozone the last couple of years, though there have been some distinct improvements in Ireland. And I will actually focus a little bit on that, on your employment performance, which in some ways is exemplary. I don't understand every aspect of it, but I will nevertheless raise that so we can get into maybe some discussion on that. The facts, first of all, let me start off straight away with one picture which is going to show you what the world went through. And then I'm going to take it through a little bit of analysis. This is the global crisis that you see in front of you. It's with the eurozone countries. From 2007 and 2008, you see the big dip over there, growth rates plummeting all over the place. Initially, the talk was that it's going to be a V-shaped recovery, and you can see actually the V-shaped recovery taking place over there. But when, again, the second dip started, you were being told it will be W-shaped because there's going to be another dip and a recovery. And the last couple of months, we are running out of alphabets, a Treble-U kind of possibility is indeed arising because of the bigger countries now, Germany distinctly slowing down. It is possible that there's going to be another smaller dip. So fortunately, it's smaller and smaller dips, but nevertheless, this seems a possibility that that's the direction in which it's going to go. The analysis of this, I'm going to argue, my basically, let me give you the gist of what I'm going to argue. The bulk of the discussion takes place in terms of the macroeconomics of this problem. For instance, a lot of the debate is austerity or the use of fiscal stimulus. The two poles of the debate, a lot of energy gets spent on that. I personally believe that there should be much more attention being paid to the micro structure of this exercise, the eurozone and the problem that we are facing. And the micro foundations of the macroeconomic policy is something to which there ought to be greater analysis and you ought to get lessons out of that. That's the direction in which I will go through a series of examples and arguments. Let me, macroeconomic policy also, there are I know policy makers in this room. Unlike a lot of micro policy, part of it is works, macroeconomic policy works in the same way that evolution makes it possible for you to do things without quite understanding why you do what you do. It is the wrong policies have been weeded out. For instance, if there is inflation, you're told that you have to do something to the interest rates to correct that. Typically you begin to move the repo rate up in a country. If there is deflation, you begin to move that down. Sweden has gone down now very recently to a zero repo rate. So those are rules that you follow and I will come back to this because I feel at times these rules which were learned in industrialized countries get picked up by developing countries and used mechanically and that can lead to a lot of problems. Economics is today such a vast discipline that it's impossible for anyone to have a bird's-eye view of the entire discipline. We all learn little bits of it and there are these big gaps that you never come across. A very distinguished economist, I will not reveal the name, tells me that he had no idea what the repo rate is. You can't blame people. Economics is big enough. So if you're working on something else on Nash equilibrium, you need not know anything about the repo rate. But he was in a small country where the governor of the central bank asked his opinion on the repo rate being 8% in that country. He said he was hugely handicapped because he had no clue what this repo rate was. So he did not have any opinion, but he didn't want to shock his interlocutor. So he decided that the only way to get into this conversation is to ask some counter-questions, elicit information about what this strange animal is and then partake in the conversation. So he began by saying that are you sure you need it at 8% to which the governor reacted with shock and said, if you feel that's too high, I could lower it by 50 basis points. He said he was alarmed, but he had no idea still what was being lowered. And he knows that over the course of the evening, he said that he had no idea at the end of it what the repo rate was, but he felt he had lowered it by 150 basis points, whatever it was through his conversation. Economics is a very troublesome subject because it is so big and some people, especially policymakers at the top, have to sort of have a buzz eye view of this. And it is not surprising that we pay very little attention to the micro foundations that that's what I will go into, inflict on you a little bit. So let me with this tell you a little bit, it may be a bit of a boring thing for some of you about the start of the crisis where it is American rather than European, but nevertheless it's the start of the global crisis. And I spent a lot of time trying to understand because initially living in the US when the crisis first came 2008, it's true. I was reading in the newspapers about it, but could not feel it at all myself. And I was wondering, is it true that something is dreadful is going wrong? And I remember in the Economist magazine, a very lovely write up, saying that when things begin to go wrong in the financial sector, monetary sector, ordinary people don't feel it immediately. It's like pipes beginning to get clogged up in your home. For some time you won't feel it at all, but something is going wrong. It's later when the water actually begins to get cut off and your tap goes dry that you realize and something very similar happened in this case. We know the start of the crisis and there are some parallels with your country. I know there was a lot of effort in the US to reach out to poorer people so that they could own homes and the subprime crisis had a root in that. And so what happened was lots of people took loans, bought homes in the US. This started around 2004 and this continued up to 2008. And then things began to go wrong in the following fashion. Suppose you've taken a loan of $100, let's keep it very simple, to buy a home which is $100. I'm assuming that the whole thing is on a loan. The bank that has given you this loan on the bank's balance sheet, it will show up that the bank actually has $100. Because the loan has been given $100, but the $100 is probability. There's a certain probability that the $100 will come back. But there's also probability there'll be a default. If there is a default, the bank will foreclose the home, will sell it, and earn back $100. What happened in the event was once the prices of these homes began to drop, lots of people calculated that it's pointless for me to pay this huge loan because the house is now valued at $60,000. I've taken a loan of $100,000 to buy this house, but the price has dropped. What if I just walk away and not pay this loan? I've actually, since I was paying more than the value of this good, lots of people started to walk away. Once this began to walk away, yes, the banks could come and foreclose their homes, but what they were foreclosing on now was not the $100,000 that was showing on their balance sheet, but $60, because the price has come down. So the balance sheets of banks began to deteriorate and the credit crisis spread all over the world. And it was coming in very small ways. In India, the problem was arising because trade credit, which only these are the kinds of things where once you have a crisis, you realize how important it is. Lot of international trade when we talk about, we are talking of skills, engineering skills, how well you manage to market yourself, etc. What we very often forget is that oiling the system is a credit, small credit, but very important credit because when you get a huge order to send, say, clothes, shirts, you're producing shirts. There's a little credit involved. Either you produce the shirts and sell it to the international buyer, and then you will get paid, so initially you take a small loan, you produce the shirts, sell it, and then you get paid. Or else, if you get paid upfront, someone somewhere takes a little bit of credit, pays you upfront, they haven't got the good as yet. Later on, they get the good supply. So during that interim, you need trade credit. If trade credit begins to dry up, then everything else may be fine. You've got the same factories and same everything, but you're not being able to trade. And so for a lot of developing countries, the international crisis came through the form of trade credit drying up, and you could see growth stumbling in emerging economies out of that. There are historians who have studied the Great Depression. And the Great Depression at that time, India, for instance, was not linked to the world too much, accepting through the British Empire. But the crisis nevertheless came to India, and historians have argued that it came to India actually through the credit market. And you could see that even in sort of village rural credit, interest rates beginning to increase. So the crisis can very often go through these channels, financial channels. So anyway, it comes there. But when the financial problem was being taken account of, and I'll be very happy to go back into this, I'm skipping over some details. We get the next big crisis, which is the Eurozone crisis. For that, to me, the best picture, and really, to understand the Eurozone crisis, there's one picture to me is the most important, not this one, not this one. It is this one. Let me explain this. Let me also have the picture in front of me to be able to. This has been used in many places. I've used it several times. This is from 1999, the Eurozone starts. And you've got a cluster of countries over here, of which you're basically the borrowing costs of different governments. So different governments are borrowing money. And in the Eurozone in the beginning, up to 2008 or nine, you can see that all these countries are borrowing at exactly the virtually the same cost. So the interest cost treated as that is virtually the same for all the Eurozone countries. Then after the US subprime crisis and the whole financial world gets shaken up, suddenly the borrowing cost begins to fan out, open out. And right on top, you have Greece over there. The Greek government is finding it phenomenally costly to borrow money. And it's spreading out all over, the bottom orange line is other Eurozone, which means Germany are a whole host of other Eurozones. Actually, the borrowing cost goes down slightly. What happened is, and that's the reason why, you cannot fault the construction of the Eurozone, despite the fact that there are fault lines in the construction of the Eurozone. To me, it is a belief of mine, that the world will have to move more and more towards currency unions. You can't, in today's globalized world, you can't have the number of currencies that we have, which was very good, well and good for in the era in which you had small countries, small economies, each one has its own currency. But in today's world, you can't do that, and so to that extent, the Eurozone, the creation of the Eurozone is exactly right, what had happened. But there were fault lines, and a fault line that today we understand very, very well, is that countries have fiscal autonomy, a lot of autonomy, but it's a monetary union. This did create a fault line, and a fault line that was not understood by virtually anyone. No matter what we say now, and you can see this in this graph. Both lenders and borrowers were treating different countries, whether it be Greece, Germany, Ireland, all as identical. I mean, because it's a monetary union. So if you lend to one government, it's like lending to another government, but of course it was not. Because the default responsibility is an independent responsibility of default among governments. Once that realization comes, it comes on all sides, and you realize that when you're lending money to Greece, you're lending money to Greece, and the repayment responsibility is a responsibility with the Greek government, and the fact that it's a monetary union does not help. In fact, it makes things a bit worse. I'll come to that in a moment. And once this realization came, the interest rates fanned out, and to some countries you don't want to lend because you know that that country might default. There's another problem, which is related to this, which comes up, which I learned very bluntly in August 2011. I was that time the chief economic advisor to the Indian government. And if I'm not mistaken, it's the 5th of August. If I'm mistaken, it'll be a mistake by two, three days, so it's not a dramatic mistake. S&P's downgrades the United States, standard and poise. I was in the evening after my day's work in Delhi. I was actually at a fish market buying fish when my cell phone kept ringing. So many times that I realized something had happened, and I called them. I heard that standard and poise has just downgraded the United States. And we were being called to get into a meeting, which is also a sign of a changed world that even 15 years ago. In India, if this had happened in the United States, you'd say, okay, it's big news, but that's it. We'll talk about it next week maybe at leisure. But now you knew that within days, this is going to have a global impact. And we met that evening, had a conversation. The global impact that happened was a very, very curious thing. Contrary to the first expectations, the dollar started strengthening after the standard and poise lowering, and money started being pulled out. From not just developing countries, but even from European countries, and going into treasuries. Despite the fact that the problem was with the US being downgraded. What had happened was another realization came that if there is global turbulence in the economy, now European countries were riskier. Lending to European countries was a little bit riskier than before. Because in the olden days, a European country that borrow from another country. And then meets with difficulty and has to repay. In the worst scenario, they will call up their central bank and say print some more money, we don't want a global default, we will pay back. The global lenders to us, which the US can still do. The realization came that that is no longer possible for European governments because you'll have to call up your central bank and ask them to do the printing and there is no guarantee that you would be able to do it. So the creation of the European Union and in particular the Eurozone means that one kind of autonomy has gone, the currency creation, money creation autonomy is gone. But you've got the autonomy of the fiscal autonomy and that is causing a huge amount of strain. The strain you can see in some of these pictures. This is a public debt. I've got Ireland over there, the orange one and this is the rest is the Euro area. And as you know, when your private sector begins to tether, it is only natural to expect that the state will step in. And when the state steps in, the state's debt begins to go up a lot. And that is what was happening in Ireland very strikingly, but it was happening in other countries as well. And you are getting into what was initially a problem in the private financial sector. It becomes a sovereign problem because the sovereign steps in. And as I showed with the previous picture, it is a sovereign debt crisis full blown that you're having. Now, I want to actually, I'm going to skip over. I wanted to go into the microstructure of a credit crisis. But let me skip over that because I want to touch on a couple of other things. The unemployment, where it's a very half-baked knowledge of what you're doing here. But I want to never less go into because it interests me a lot as to what you're doing. This is what I'm, you'll be grateful that I'm skipping over this. Yeah, yeah, okay. I'll share it with your chief economist later, the little bit that I skipped over. But here is the unemployment problem. So it starts in the financial world, becomes a sovereign debt problem. And then really the clogged pipes beneath the house result in water drying up. And you see this in the unemployment rising all over the Eurozone countries. And actually it was happening all over the world because by then it is a global crisis. So the interesting thing is there's virtually every country up to 2013. You will find that unemployment is on the rise. There's one country where it is bending over the last two years, that's Ireland. And I'm a bit curious as to why Irish employment situation is improving out of line with the rest. I have little bits of thoughts on this and I will come back to that in a moment. But I'll give you one more employment graph. This is the youth unemployment rate and once again a very similar picture. Youth unemployment is getting worse up to 2013 everywhere. And a slight improvement in Ireland over the last two years. We do know that during the, in the United States, unemployment situation has been improving over the last couple of years. It was dreadful, but it's improved. But a part of that in the US, I have to say half of that improvement, there is real improvement in the US economy among the industrialized countries, is growing very well. But a part of the drop in unemployment is because labor participation rate has gone down. So not so many people are looking for jobs. So the situation is good, but not as good as may appear at a first reading of that. This seems actually a distinct improvement here. What is going on? I don't know, but from my little bit of reading on this country, and I would like to engage a little bit after I've finished with this men. But is, I have been arguing for a long time that when you go for macroeconomic policy interventions to ease up a crisis, part of it should be micro-focused. So for instance, if you are going to go for a classic Keynesian policy, that you're going to have a bigger fiscal deficit for a short period, you're stepping up your expenditure through some kind of a program of generation of liquidity. Part of that, I believe, ought to be directed to labor policies. So if we even use blunt instruments, after all, during a crisis, we use very blunt instruments, some forms of subsidy for a couple of years to employ more workers. That's going to serve two purposes at one go. It's going to inject liquidity in your system, more buying power in the hands of people, which across the world this was being done from United States to India during the crisis, you're injecting buying power into your economy. But if a part of that buying power is done through a micro-planning, which is going into the labor sector, then you're getting the buying power. So it is giving a boost to demand, which you want to. In addition, you're generating employment. My impression is that what you all did, whether with full understanding or partial understanding, the best policies in life come through. You experiment with policies, you get it right, and then in retrospect, you realize that you had done something nice, which you want to codify and do. I get the impression that something similar was happening over here. And that while the growth rate begins to pick up, and it's a slow pickup that is taking place in your country, you're getting a bigger bang on the employment front, because there's probably been more innovative intervention on the employment front in this country. I've got a few other graphs which I want to jump over. I will not show you, because I want to briefly talk, and I'm going to take another five minutes if that is all right, because I do want a bit of feedback to speak to you about what should be done, and also I want to step into the developing country's problems. As the World Bank, we are very interested and engaged with the developing world, and in some ways rightly so, because yes, in a rich country, when you go through a crisis, it is very, very difficult for the poorer sections of the country. And in the World Bank, we have decided for every country, we will focus on the bottom 40%. But if you think of in developing countries, people live in conditions permanently, which is way below where the bottom 40% lives in, and you do want to pay some special attention during these times of crisis about what's happening over there. I want to touch on that. Now what should be done in a situation like this? I just heard that Joe Stiglitz has been the only other World Bank chief economist who has spoken here. I have actually last year, Joe Stiglitz and I worked on a paper where we argue that there are certain provisions in the Treaty of Lisbon, which ought to be amended for the European Union to be able to function more effectively in certain ways. And some of the banking work that is now taking place, resolution mechanism, actually talks to that as much as you can do without amending the Treaty of Lisbon. But that is something that I'm not going to go into over here. What I want to talk about is that what do we do about this crisis is too much of the attention has been focused on austerity or no austerity. To me, and on this I actually have a difference of opinion from many of my friends in the profession. I feel that when there has been a period of profligacy, there has to be a correction that has to take place. Whether you do it immediately or slow it, time it, there has to, that has to take place. If you look at today the fiscal balance sheets of industrialized countries, the total debt to GDP ratio, the fiscal deficit, which has now begun improving but two, three years ago, much of this is actually worse than what you see in emerging market economies. I mean, typically, since I know the Indian data very well, India would have worse fiscal figures than most rich countries. But over the last five years, that is not the case anymore. The public debt situation because of the crisis has worsened immensely. That being so, you will have to make a correction on that. So to me, this extreme debate on whether you go for austerity or whether you go for fiscal stimulus is too polarized. And that debate, you need to burrow in deeper into that and describe on the austerity that will happen in some form, how do you do it? To me, the main thing is that you have to plan the microeconomics of this very, very carefully, in particular making sure that the distributional impact, whenever you are going in for a period of tightening, and that is going to happen in eurozone countries, if not today, and the timing is important, you don't want to impact on growth by being too hasty. If not today, if not next year, it's going to happen. Certainly over the next 10 years, there will be a period of austerity when you're trying to pull back. The microeconomics of that needs much greater attention than we have paid. One of them is to do with labor markets. And I feel that this is an area where we need to do much more research as to what you do about interventions in the labor market. I mentioned about your country, but there are many other details that you need to look into. For instance, along with unemployment, one figure that we do track is off those who are unemployed, how much of it is long-term unemployment? We know in the US there has been a worsening on this, that there's a proportion of people who happen to be long-term unemployed has gone up, but actually it's worsened much more in European countries and even in Ireland. The long-term unemployment has indeed gone up, which means even if your overall unemployment is doing better, there are lots of people who those who are unemployed are remaining unemployed for a longish time. When that happens, there is some erosion of labor market skill that takes place. This is very well documented, which means with the same unemployment, if a big proportion is long-term unemployed, you can get a productivity loss in the long run because these people are getting some productivity erosion that is taking place. So you need to borrow into that and think in terms of policies where long-term unemployment begins to be curtailed. So there are details of this kind that need to be worked out as we are climbing out of the Eurozone crisis. My own expectation is that the Eurozone crisis, the big crisis is over and behind us because the fault lines have all showed up. We today understood that you need a certain amount of fiscal coordination. You can't do without that. You do need some common banking resolution mechanisms. You can't do without that. The current plan is slightly too small. 55 billion euros is not big enough for a region which is so rich. You do need a bigger plan, but at least it's moving in the right direction, the banking resolution mechanism. So on most of these, the corrective measures are coming in. So I don't expect a big dip anymore, but what can happen is it can remain sluggish for some time and during this period, you have to work much better on the microeconomics of the reforms than we have paid attention to and a few minutes on developing countries. In developing countries, when you do macroeconomic policy, these are usually rules that have been picked up from rich countries. What used to be done by the US Fed or even longer Bank of England, which is much more ancient or even more ancient than Bank of England, the RICS Bank, the sort of rules that have been used by these central banks, you get to see them and then you gradually begin to use these rules in your policies. If there is inflation, you raise interest rates. If there is deflation, you lower interest rates, you also go out and do some asset purchase of different kinds. These are rules that are followed. However, the world is a complex place and there are country specificities and I feel at times developing countries are too imitative in their macroeconomic policies and there ought to be more experimentation. One kind of difficulty, let me just point to and I will stop because I don't have a solution over here. I'm opening up a question that you can't do these policies so much by imitation. You have to occasionally pause, do unusual things, check out the data as to what is happening and then develop your own rules of intervention. Let me give you one particular problem which is a problem of today's globalized world. When there is high inflation, as was happening in a host of countries three, four years ago, India was inflating very rapidly, emerging economies, this was happening. Vietnam had very high inflation, Brazil had a decent inflation, China had a high inflation, all emerging, most emerging economies were inflating. The standard policy that time was you begin to raise interest rates in order to suck out some of the liquidity but what was happening in today's globalized world which would not have happened earlier was carry trade begins to take place. People then borrow money in a rich country where the interest rate is very low and then you lend in a poor country where the interest rate is very high so while within your country you're raising interest rate and trying to suck out some of the liquidity, money is flowing in from elsewhere in the world because it's a globalized world that we are living in and this problem meant that it's not very clear that the old rule that you follow that during inflation you raise interest rate is always the right thing to do because you're living in a globalized world and the globalized world's difficulty in creating macroeconomic policy is very visible today because when it was originally it was decided and this was sometime in the 17th century that one economy should have one central bank so one area where you don't want competition in general competition is good you want lots of people producing shirts lots of people producing cars so that there is competition one area you don't want competition is money creation and central banks were formed one after another that one economy, one money creating authority but as the world has become globalized increasingly the world economy is beginning to look like one economy so see what's happened we've gone back to a predicament we tried to get away from one economy, a global economy with lots of money creating authorities that is the reason why what I began with I believe that given the nature of globalization currency unions will have to crop up you can't have so many money creating authorities and the difficulties of that were felt not only in emerging economies but even in rich countries in the olden days if your growth is doing very badly you pump in liquidity you'll get a little bit of inflation but growth will get back again working what has been happening over the last five years countries have been pumping in liquidity which is sloshing about all over the world that liquidity is going into your growth is not being pushed up sufficiently by that nor is inflation picking up because it is a globalized world that we live in so the structure of the world is beginning to change and with that we have to get into policies in more innovative ways the demands for that are huge in developing and emerging economies but all over the world thank you very much