 Good afternoon. Most of you here I'm sure have been we're here also for the keynote by Commissioner Gentiloni and of course in this panel we're going to come back to to many of the topics that wasn't our keynote but we asked the following questions to the panel members in order to prepare. One is the the potential importance of central fiscal capacity I suppose in any format but also in terms of the also the BICC that's in launch mode now. A second dimension is the question of how to think about possible interactions between monetary and fiscal policy and then the third question is the potential role for a safe asset and again linking architecture to fiscal any possible connections between the safe asset debate and national fiscal discipline. So I think that there was a the ambition in in composing the panel essentially and you know when I start think about it that probably includes asking me to chair it is having people who are have been involved maybe in true their academic research that they've you know have had a background of research and academic thinking about these topics but also true different ways are also contributing to the debate outside of academia whether in policy circles or in markets. So I'm very pleased to have this fantastic panel beside me. Someone quite often I hear chair saying it's person next needs no introduction and then starts introducing them but I thought I really I'm not going to do that. So I'm first of all at asking in alphabetical order so first of all Sylvia. Thank you so thank you very much Phil and the organizer of the conference for the invitation. It's it's a pleasure and it has been an excellent day of presentations and papers so I thought I'm going to be very practical and I will try to give you a bit more of the perspective of the financial markets on this team and because I'm a private sector I thought what should I you know with what should I start to address the three questions that Phil gave us which deserve clearly more than 10 minutes and I chose to start with a proposal that my competitor a black rock put together. Stanley Fisher when he presented in Milan he called it an erratic proposal because you know it's you know it is quickly put together as a helicopter money but I decided to start from this just because I think it's it's a way that we can you know refine in a sense and and think through you know addressing both the need of a central fiscal capacity the role of safe assets and the coordination between monetary and fiscal policy just starting from this you know proposal. So because it was the end of the day I also made it a bit colorful and for those who don't know I mean the the meat of these you know maybe call it provocative proposal was to have a standard emergency fiscal facility to operate on top of automatic stabilizers a discretionary spending with the objective of bringing price level back to target. The central bank would activate this standard facility when interest rates cannot be lowered and a significant inflation miss is expected over the policy horizon. The central bank would determine the size based on its estimate of what is needed to get medium term trend price level back to target and would determine ex ante an exit point. Monetary policy would operate similar to yield control holding yields at zero while fiscal spending struts ramps up. Now let me start very quickly for you know whites I think whites considered erratic right and I think when we talk about helicopter money you know what we have you know immediate and maybe also when we think about coordination between monetary and fiscal policy I mean I you know studied economics appreciating the the virtue of monetary and fiscal independence and central bank independence and that was created really because we learned you know very easily that operational independence in central banks also comes with lower inflation. We obviously you know live in a world where you know inflation is not the issue if you take a list from the financial market perspective you know this is the distributions of inflation being in the various ranges extracted by option prices and you can see that about you know there is about 70% mass that inflation over the next five year will be around 1%. So you know I think these proposals obviously you know as the big risk that we can end up in a big inflationary scenario but you know the other risk that we face is deflation and obviously we would all like to design an institution to be you know right in the middle okay and that's the challenge in my view. Now let me let me see how you know the rationale of this proposal and now maybe we can fit you know into something like this or refine it to get to the questions that feel asked us to address. Clearly you know I think we would all agree that when we consider monetary policy and its instrument that is used so far in terms of interest rates in terms of asset purchases you know it would not be controversial to say that there are not many ammunition right and there is limited monetary space if we have to face this low down. You know the there I show the initial levels of interest rates at the easing cycle starting from 2000 the amount by which the interest rate has been cut and where are we today. And the second chart basically just give you the percentage of assets that the PPS program has bought relative to the total outstanding securities and as you know there are some constraints that that that the ECB needs QE program is respecting. Now on the fiscal space right I think what is you know more of an open question we can have different views is how much fiscal space there is and you know Olivier or the paper that we have you know heard before clearly we would say that you know there as far as interest rates are low or interest rates are below G there is you know plenty of fiscal space you know we might get in trouble in other situations but you know fiscal space at the individual countries in the euro area some would claim it's pretty ample. Here I show you know Germany and Italy and we have the two extremes I mean R is less than G in Germany the debt is coming down significantly not just because interest rates are below the growth rate but because you know primary surpluses have been met and have been maintained over the past few years. On the other hand we have Italy where you know the average cost of debt is still not below it's still above the rate growth of the economy and public debt has continued to increase. Now I mean the scale is down to seems an outrageous increase at the end is just a four percentage points of GDP so Bastille is on an upward sloping. Now for me the you know as a practitioner the concept of fiscal space is very much associated with the concept of you know multiple equilibria and you know there are as Olivier was mentioning before there are many factors that can determine the point at which the interest rate moves from a low regime to a high regime and one here I want just to show something that is more technical but still matters and is you know the role that rating decisions play. So if you take an index of fiscal crisis fiscal distress that I think the IMF produces and you just run a probate regressions of you know what's the probability that the country run enters into a fiscal distress as a function of you know a variety of factors and here I plotted basically how this probability changes for countries with different rating levels as they do the fiscal expansion and you can see that you know obviously a triple rated country the probability increases very little as it expands but if you are a triple B country the probability increases very fast and obviously we can easily jump during a crisis from one rating to another because rating agencies pay a lot of attention to fiscal determinants and you know just for for those who are not maybe on the day today you know six months ago more or less Fitch published the report basically highlighting that if economic growth was going to slow down then maybe the fiscal positions of many sovereign was going to deteriorate and downgrades might have come so this is a real concern for people in markets because some investors are constrained by mandate only to buy assets that have a certain rating so this limits also the amount of fiscal space in the mind of people that one can have but then another question that you know that that I have when we think about relying on fiscal policy at the country level is the question of okay we have Germany but how large of a fiscal expansion should Germany do to really lift the euro area if we have a slowdown and you know I just plotted the amount the change in the total deficit to GDP ratio sorry in the primary the total deficit that there was between 2009 and 2010 it was pretty large as you can see but not just in Germany also in the other countries of the euro area and he came partly through automatic stabilizers partly through discretionary fiscal expansion the discretionary part back then for Germany was around 1.2 percentage point of GDP I mean France did a little bit more but also Italy Spain and the initial phase of the crisis were basically conducting an expansionary fiscal policy now where are we now I think you know again I I think it would not be that controversial to say that maybe in a slowdown the same amount of fiscal space that these countries had back then would not be available and if you think about you know the spill overs multipliers that the IMF would tell you that for a 1% fiscal expansion in country X country B benefits between point one and point three at best then ask yourself how large should be a fiscal expansion in Germany to provide support for the entire euro area so for me you know when we claim that Germany can basically lift growth I mean this is not an excuse right not not to do it but the con the conclusion that I take is that it's not going to be sufficient and so a central fiscal capacity that has a stabilization mechanism I think it's clearly needed so when I think about you know the three questions that Phil asked us to address I can see them as a package it's fashionable in this in this place and I can think you know at a central fiscal capacity that perhaps can be activated where there are common shocks that hit the euro area or if you want to support the ECB in achieving the inflation mandate but the central fiscal capacity does not need to be activated by the ECB why can't we have it activated by an independent fiscal institutions that maybe is created with the same characteristics of independence that you know the that the ECB was created and at the same time right as Olivier told this morning said we need this central fiscal capacity maybe we need a cutting VAT across the board but it needs to be funded by euro bonds again this would be the starting point for having a central fiscal capacity the response to common shocks when we you know a knowledge that we don't have the individual country space to do so and this could be you know financed by these ones of a safe asset at the euro area level at the same time you know for this safe asset to be really considered safe maybe you know it would require some sort of like coordination between monetary and fiscal policy and in a sense this safe asset is clearly believed by you know markets or or the demand for this safe asset would be high once it become you know eligible for maybe ECB QE purchases so you know the the the the the answers to the three questions that the field post post us in a sense I think it could be fit well in into this I think you know in terms of details again when I think about the stabilization mechanism for common shocks I think the instrument of choice should be something that you know could be very easily implementable and very you know have effects on economic activity in a speedier time so when we think about you know there is obviously need and talks about public investment but maybe public investment projects would not you know even though the multiplier can be high would not have this timely response if this mechanism should just be a stabilization mechanism a political consideration I don't know maybe I thought I know that it's very difficult to sell a central fiscal capacity in the euro area but at the same time if you sell it as something that could be you know used by all the countries when they're hit by a common shock I mean at least this would have the benefit of not having to discuss legacy debt mutualizations of past liabilities it would be something that would be starting from scratch and be used at the same time to all the countries the last point that I want to make is just you know for the use instead of a safe assets for breaking the bank and sovereign doom loom and here you know I show you what is the you know who holds government bonds in the majority in the major emu countries and how the holdings of Italian bonds changed over time in in the other chart now I obviously if we all the countries were to start you know with a low debt to GDP ratio or a debt to GDP ratio that is declining perhaps introducing concentration charges to hold government bonds or you know preventing somehow banks to hold or to buy a part of their domestic government bond would have no effect but I think in financial markets there is a risk that by you know limiting the ability of banks to be the lender of last resort for their own sovereign can create some some sites some negative sides effect and can lead to higher interest rates in particular countries and so you know substituting in and then you know it's not just banks the problem obviously you know other financial issues pension funds insurance companies you know would also face negative sides effect for debt I mean there are I was reading you know Silvana Terraro speech at the Mandel Fleming lecture you can also make a point that there is another risk that you know governments have an higher incentive to repay and not to default when they know that their banks hold their sovereign bonds so we might also want to keep that in mind when when we do so and last just to you know not to take these concerns in a very light way I mean I think we should mind these billovers when we consider you know these these changes and and here you know you can see the exposures of banks to Italy not just to the sovereign but also to the corporate sector or through derivatives and these exposures is expressed in a share of GDP of the country that you have on the X axis so you know Spain or France are exposed to Italy by you know an amount of 7% or 16% of their GDP so I think you know in 2018 there was very limited contagion from Italy to any other countries in the euro area and I think this part of this is due to the fact that now you know Europe has the OMT part of this was also because the council told that you know it could have been countries could have had some precautionary credit lines without programs if they respected the fiscal rules but yet and I think this is you know spillovers that could could happen from a highly in-depth countries are something to keep in mind so perhaps when we think about you know how to introduce safe assets how to change you know how to mutualize part of the debt somehow I don't know I think that you know we need maybe to think a bit broader and and think about we once we converted currencies maybe in 20 years we could convert bonds and rather than you know do intermediate steps which can be risky maybe we should have a path for a full integrated euro area in this respect thank you okay next up is Clemens so again we'll take all of the initial presentations and then we will move to Q&A okay thank you Phil and thanks for inviting me to this very interesting conference of course when I saw Sylvia's black rod heretic proposal I felt invited to unleash some German style inquisition on this thing but I will in fact do something else first of all I would like to say a few words about you know EMU reform and the fact that these reforms are interrelated so today I think we will focus on the fiscal capacity but I think it's very important to bear in mind that these things are interrelated I had to think about that when Olivier presented his thoughts about fiscal rules to illustrate this a little let me remind you of this Franco-German reform proposal where we emphasize this complementarity between different types of reforms very much so so we said reforms towards more market discipline are in fact complementary to reforms towards more risk sharing and I think that's very important for instance if we made progress on having less sovereign exposures or less less concentrated sovereign exposures in the banking system and more credible government debt restriction we could indeed be a lot more relaxed on fiscal rules so why not let every country determine its own fiscal policy and decide you know does it want high or low levels of debt if the spillovers of a restructuring are smaller than they probably would be today we could be a lot more relaxed so I think it's difficult that that's why it's difficult to discuss these reform elements in isolation I think we need to discuss them them together so today we want to focus a little bit on the question of the fiscal capacity that is very complex what I would like to do is just present a couple of numbers about one type of fiscal capacity that is discussed is being discussed which would be a European system of unemployment insurance and what I'd like to show you is just a few numbers from a simulation study we did about how much money would be needed and what it would achieve right so a fiscal capacity in the form of European unemployment insurance here the idea is that this system should provide some stabilization probably in the presence of large asymmetric shocks which by the way is completely different from this idea of overcoming secular stagnation here if you think European fiscal policy should overcome secular stagnation by giving a big push towards more debt finance fiscal policy that's something entirely different I personally have to say I wouldn't be surprised if that took us into some kind of Japanese situation they Japan has been trying this for a long time and didn't get anywhere but that's maybe we'll discuss that later so I will focus on something else which is the idea that the euro area may need stabilization against asymmetric shocks and large shocks and I think here it's useful to distinguish between what I call here interregional smoothing so you know there's an asymmetric shock shock coming yeah one country has a problem and it gets funds it is supported by the rest of the currency union the other question is so this could be achieved by a fiscal capacity that has a balanced budget each year okay and then there's something we call intertemporal smoothing which would be okay the fiscal capacity doesn't have to have a balanced budget each year so that could address obviously symmetric shocks make a contribution here so what we do in this study is they do a very simple counterfactual simulation of the fiscal effects of a European unemployment insurance system had it existed between 2000 and 2013 so if we had started with the currency started the currency union with an unemployment insurance system what would the fiscal flows have been what what the stabilization effects have been we look at a very simple base scenario so forget about national unemployment insurance systems and assume we have a eurozone wide unemployment insurance 50% replacement rate benefit duration is 12 months so focusing on short term unemployment of this is financed through social insurance contributions proportional to labor income so in this simulation there are no feedback effects so it's as Olivier called it today pure fiscal policy now it's more elegant than saying you know we don't take into account feedback effects because we don't we may be under overestimate the cost here in fact okay and we focus on the counterfactual financial flows here in these years between two and two thirteen we also look at so here the idea is it's very simple it's a permanent unemployment insurance system as a variant we look at a system which is only activated in the presence of large shocks so as I said in the beginning the main point about this fiscal capacity is to have something for large shocks but we do both in this in this simulation and the question is basically how large would this budget have to be and who would be exposed the winners and the losers okay the net contributors you know we have these debates about the Netherlands and Germany being worried about permanent transfers and so on and we only check this so in the in the in this very simple base version here is the amount of money we would need so on on average it's 47 billion euros I mean it's a significant type of unemployment insurance and the overall budget average budget per year would have been 47 billion euros so I don't know whether you think this is a lot and not very much my first my first impression was it's not very much you know it's just it's less than half of the EU budget so it doesn't seem out of this world and as we will see later when you look at variants that are less generous and we end up with the numbers that are a lot smaller still larger than the instruments for convergence and competitiveness but not out of this world okay so let's look at who pays and who gets money so this is the average yearly contribution of each country over these entire 13 years and what you see here is no surprise so the big net contributors would be as you see here Germany with 0.25 percent of GDP and the Netherlands in particular with 0.4 percent of GDP each year so these are the the countries that would have been the net contributors to the system over this entire time span you know you sometimes hear that Germany could have benefited because we had these very high levels of unemployment in the early years in fact that's not true partly because a lot of that unemployment was long-term unemployment which isn't covered by by this scheme and the biggest winner here is obviously and unsurprisingly Spain Italy isn't that contributor by the way of this time span and what you what you also see here is the maximum yearly contribution or receipt and there is some there is significant stabilization for instance for Spain here the biggest transfer in a year is 1.3 percent of GDP okay so getting that support from the rest of the the union would have helped you know it's it would have been significant so I guess the message here is this system does generate some relevant stabilization and the overall budget is maybe smaller than than most people would think okay so what is the what is the contribution rate of the tax rate in what I just showed you in this permanent system it would be 1.5 percent which is significant and maybe higher than what most countries have but you could do it differently so one one alternative setup would be one where this system doesn't exist permanently but only in difficult situations and there are so if you do that you need some kind of triggers when do you get money out of the system there are many triggers discussed here we we are discussing three so the idea is the unemployment rate is one percentage point higher than in the year before or in one of the three years before okay and depending on how generous you are you pay more but if you say okay you only get this if your unemployment rate increases by more than one percentage point in any given year the the contribution rate would be 0.4 percent which is just you know 25 percent of the rate of the permanent system okay so that would be that would seem feasible and the yearly budget would be 13 billion euros which is even less out of this world you know compared to the 47 I think the yearly budget of the budgetary instrument for competitiveness and convergence is 17 billion divided by 7 is that it so something like 2.5 so it's still you know a lot more but not so far away so we I think we could have a significant stabilizer stabilization function for 13 billion euros a year which doesn't seem so very much again as I said in the beginning for this to be to be well maybe not so much only economically reasonable but politically feasible we need to combine it with other reforms maybe you know some risk reducing reforms along the lines of reducing sovereign exposures but you know I think what these numbers tell you is we can get some significant stabilization effects with with a rather limited budget thanks so I've been I've been doing all the things I was voting this morning in Strasbourg I apologize for missing some of the talks this morning basically what I'm trying to work on this on the political economy with Commissioner Gettiloni there is probably having the same thoughts as I when I see some ideas and I have to talk to too many colleagues trying to to get them through so I'm going to just kind of focus on the political economy of some of these things and focus on the safe assets and then talk a little bit about banking union this is where we are I think monetary union and economic monetary union banking union is in big trouble I think banking union is really very stuck as I will tell you in a second and I think all these things are very related like like Clemens like Clemens said the three things that we have seen happen lately one of them is supposed to be on Commissioner Gettiloni's portfolio we haven't seen anything yet are the budgetary instrument for competitiveness and convergence which was the big promise of a eurozone budget it has ended up being very small and has this just just a two idea of 70 percent going back to the country that put the money in which doesn't really make it suitable for anything the ESM reform is being cooked as we speak but it seems like it's going to be very disappointed that they will not have really a stabilization capacity and the role of this backstop to the SRF is actually subject to parliamentary approval in fact because of the 85 percent threshold on votes there are three parliaments that can just block it on their own the biggest three countries as to the unemployment reinsurance we see the same kind of things that we have seen to the by BICC discussion the idea that there is no fiscal transfers possible that it would be some liquidity support it's going to be hard to see something happening there in terms of the broader picture picture I would say the sovereign loop the diabolic loop or doom loop is really alive and well we don't really have much in terms of reduction of sovereign exposures I will show you some data and we don't have much in terms of avoiding the bill for the banks going to the sovereigns we have seen as you know lately five banks the two veneto banks the two let the the tonion banks north elbe and then in which basically the whole system that we have started is the srb hasn't worked and i'm going to talk about the the safe asset bit i would like to talk about how we break those two components i start with safe asset which is the question that philip post and then i'll talk about the the the problem with the loop between banks and sovereigns isabel schnavel i'm using her data i have some some some data points in the same direction she showed there's basically no no drop in sovereign exposures whether the nominator is total government bonds or capital of the banks what you see is more or less sovereign exposures are are are still constant very high basically the average is six percent as a port percent of total assets it's easy to see in some many of these countries again the whole distress loop coming back so we some of us in this room suggested a while back this idea of the sbs the idea that we will have some way to have a diversified portfolio and a single asset in the in the in the books of the banks this is an idea that actually has gotten much further than you could have expected it actually passed parliament in april and he has died in parliament the reason that he has died in parliament it's our in council the reason he has died in council is because of some individuals who i didn't know existed who are called the debt management officers and this is not very senior you would think ministers of finance are needed to kill something like that but it was actually the they are worried about getting financing for the next cycle has been what has stopped stopped the the sbbs proposal being adopted in council so what can we do so um shorts shorts uh non paper from a month ago opens up a whole range of ideas and together with and opens up the possibility that we can start thinking in of of new ways of new things we can do um and the way that the bis has changed the focus and and there is some discussion now that we saw also now on concentration charges between instead of risk charges may open up a path and here's the four steps that i suggest to you that we do the first is okay we're going to to basically look at the treatment of sovereign exposures um in a way that forgets about the whole risk issue which is politically impossible and i'm going to to make a suggestion for a safe portfolio to proceed a safe asset and to then talk in tranches so it's three-step proposal that i'm going to to suggest to you to cut the first step of the loop so in terms of how the the concentration um charges as opposed to risk charges have have changed the date as you know nikola baron made a proposal that it's below the shorts letters shorts talks exactly about these numbers 30 so basically the idea is that if you are exposed to a particular sovereign below 30 then the charge continues being zero then it starts increasing to 15 30 50 100 percent to meaningfully discourage large sovereign exposures these these numbers from veron went straight into minister shorts proposal um i think there's a better way to do it and and the way and and and the reason is that it's it's not very smooth um two economists from here i'll confess in lambfield who i don't see here have actually been looking at at at how what kind of risk behavior do they encourage and talked about how that does induce more diversification but this type of approach doesn't induce risk reduction which is a problem so here's here's a proposal here's the capital kill of the of the european eurozone central bank and the proposal is very simple you have an exposure by in particular bank i is vector of securities uh from bonds from different countries uh you take the distance from that symmetrically okay you have too much or too little from a country i don't care you're excessively concentrated we get a distance metric that is going to tell you how far you are from the capital key of the european central bank this left is the capital key of this european central bank and then we have a concentration charge which we can decide to make as a steep or as flat as we want at the start we can say we're not going to give you much of a premium we're not going to charge you too much for being far from the capital key and little by little we can just be making that more steep or not i mean depending on how far we can go in in having those portfolios the ideas we're going to do this first step is going to give us this this this safe portfolio um banks the market uh Goldman Sachs and all the others are going to start offering that safe portfolio in the form of a safe asset we're going to introduce and that's the second stage let me go back one second we're going to introduce the same things that are in the SBBS directive which are we eliminate capital charges for sovereign security decisions with the right concentration not for all sovereign security decisions but for those ones and we allow banks to uh to to have this there is no asymmetric information so we can really have zero risk wait for them the next step will be that once people have these assets and the market have these assets we move smoothly towards SBBS by saying now we're going to uh tranche to introduce tranching in the security and we're going to uh to give those particular advantage we are giving only to the senior tranche um if you allow me i want to spend a couple of minutes telling you about the other side of the loop because i think it's as important and the proposal includes uh the two ideas and again political economy feasibility concerns are are are crucial just for those of you who are just looking at the fiscal side of the picture the fiscal side of the picture is very bleak if we have states continue being beyond banks and the news that we have had for not lb for carige and for all these other veneto banks is the srb system that we have created is broken and maybe it's dead for large banks srb never will have enough money to bail them out and for medium medium large banks we are saying oh there's no public interest test so the srb steps back and lets the states do their magic which in the case of the veneto banks has been a 15 billion dollar check 500 billion total rescue a funeral with golden coffins and diamonds started uh for these banks the veneto banks 15 billion dollars with 5 billion in cash okay the arrest warranties so that's happened there you've seen not lb okay it's a public bank so it's more difficult to know if it's state eight if a particular bank is saved by their own owners but same problem and we have uh a completely different liquidation regime which look what happens in in Latvia this is just unbelievable a blv the owner of the bank the bank is failing unlikely to fail it keeps the license because the Luxembourg court says it cannot be liquidated the guy goes around looking for grandmothers and farmers to sell them uh deposits to and to collect their money so that he makes himself politically invulnerable after it's been already failing unlikely to fail so i think the system is completely broken and i just have a very simple proposal what Schultz says is nice but impossible to harmonize liquidation procedures in europe that's going to take three or four decades just forget about it um so what can we do well we have a system we have the srb the problem is the public interest test has been extremely demanding and the srb doesn't have the power to do things well let's first of all clarify the scope of the srb we're going to say to the srb every bank that is ssm supervised or everyone bank that is over a certain threshold is going to be um is going to be resolvable um and it has to be resolved it's not a question of what we do liquidation at the end and resolution are really really in a continuum it's not such a different thing so second we give extra powers to coordination powers to the srb so that he can actually run the resolution systems we actually allowed to use the money from the deposit insurance and fourthly and finally we created the deposit insurance in a hybrid model with national compartments and and and a european compartment with two characteristics one is risk-based contributions the european central bank is already fully behind it one additional one which you will tell me it breaks the banking union but i think it's necessary politically at the start at least which is different sizes of the national components look look on the left there is the srb which has two parts the single resolution fund it already has and the european deposit insurance which is a new fund and look at the green component in each country has different sizes so the german one might be smaller because they claim they have these uh i d s protection for the savings banks many of us are skeptical that that protection really exists but okay they have it so that's smaller some others are bigger and this is in the steady state you have different levels of protection of the european fund because different countries have different cushions on the national level these two funds are run however by the single resolution board and little by little we go towards a full mutualization so i've told you in a very short time there is a paper that i'll circulate uh if anybody's interested is i just wrote it for today so it's off the oven uh today um so it's basically two sides uh a safe portfolio approach as a step-by-step path towards sbbs we know that their management offices are scared we know their management offices don't want a single asset that that disturbs their whole purchasing behavior and they think that's going to be a problem in their in their asset markets okay let's just get a safe portfolio securitize the safe portfolio and tranche the safe portfolio basically and second a simple fdic type is a solution that doesn't involve liquidating uh harmonizing liquidation and having a single liquidation procedure for european banks which is never going to happen and read my lips if if you spend six months in european parliament you'll get to the same conclusion which is the situation i am in right now and uh and and this srb plus has manages the european deposit insurance uh takes a leading resolution forcibly we don't allow it these political pressures to kind of have all let the italiens do their magic uh or the or the germans i mean it's not just italiens who are doing magic also the germans were uh minimize potential liquidations and for sure limit potential state aid so that we break the ability so to finish with diagnosis banking union is broken first pillar is their second pillar resolution is not there third pillar hasn't even been on the table um fiscal capacity i mean unlikely to exist i think a politically safe course or a safe fish i mean i realize this is very ambitious already is tweaking the regulation the the brd the regulation that the directive that runs this resolution uh system and tweaking the uh the the risk awaits to turn them into concentration charges that was a safe portfolio thank you very much so across the three contributions we've heard quite a bit i mean maybe one interesting dimension is and for further discussion is maybe what should be the priority for a central fiscal capacity is it a year area level macro tool to complement fiscal policy or is it to help with cross border uh inter regional asymmetries which as clemen said in principle is consistent with an having an annual balanced position uh throughout the the issue of a safe asset uh has been there which in part uh could maybe be lined up with the central fiscal capacity but more generally given that only such capacity can be pretty small compared to the overall amount of of the role of sovereigns in in uh our economies at one point made by sylvia was essentially don't forget the sovereign bank interaction is is a narrow focus it's a big focus but of course many other um interconnections exist between sovereigns and the wider pool of of investment and macro outcomes and then i think uh what Lewis just said is quite interesting because of course uh you know we were both involved with sbs and i was then involved with the task force where we where we had here's our pure version and uh apparently this uh feasibility uh constraint exists in the world of political economy of maybe to chop that up into into a sequence so having uh listened to quite a bit i'm sure you've all been absorbed all instantly and perfectly uh but maybe there's still some room for elaborations or clarifications so uh let me open it up for comments or questions uh please um royal uh just over here thank you i have a few points for uh claimants and and i'm trying to understand the system i mean when um i think the most important shocks hitting the eurozone are actually common shocks and my impression is that you look at asymmetric shocks but typically i mean when do you want to have a central fiscal capacity that is when most of the countries are hit by a deep recession so did you make any calculations um you know on that front um then i think you know well many many governments are of course also my government would be very much against the central fiscal capacity and so i mean there's a big political deadlock and you know one of the possibilities might be that you have some kind of conditionality and so if you adhere to the to the stability and growth pact you may be you know as a country you may be eligible for participation in such a central fiscal capacity so i'm just wondering how you watch your view on this thank you thank you um alan thank you my question is related to that uh i was partially overlap i i think i agree that the the common shocks the overall um smoothing of cycles rather than the asymmetry is something important to consider and i wanted some clarification about how the financing would work for this you talked about the over claimants you talked about the overall cost i mean one could imagine a smoothing over time basically building up a reserve fund for such dealing with such expenditures and uh presumably that could be done obviously in the short run you could have a depth you know you could run out of funds but it would be interesting to simulate over historical cycles how much of a reserve fund would be necessary in order with great likelihood that you'd have sufficient funds for dealing with a particular common shock please that over over here Olivier just just a follow-up on that different countries have different average rates of unemployment how much allowance do you do allow for i mean clearly spain has a much higher average rate than germany do we start from means or do we try to estimate the neutral rate of a natural rate okay uh luthier yes just on the same topics there is much work that has been done addressing some of the questions that have been raised for example the question raised by Olivier we simulated a double condition that looks at the change in unemployment but also the level of unemployment relative to some long term average we have also performed a simulation that go for a longer period that shows actually that what you see there the transfers say from the Netherlands and Germany for a longer period are smoothed out very much which also you could expect and then you could add the further clawback condition or like guarantees in order to double ensure that the dreaded transfer union is not there however experience with this file leads me to believe there are fundamental political economy problems so it's not a matter of mistrust problem it's not a matter of coming up with clever solution i think they are there but i have to say the progress is uh is zero on on this if i have to share my experience have you been involved in this in this file okay i'll continue to collect questions please Christoph yes thank you very much for the three interesting presentations i would have two questions one would be to Sylvia actually whether she could comment on what Louis said that Goldman Sachs would offer the safe asset because you seem to suggest that basically all proposals that avoid the mutualization which has become a forbidden word basically will not lead us anywhere so i would be interested in your views and the other would be to all three of you you didn't talk about the reform of the fiscal framework so in a sense where would you see the priorities especially if we cannot be very hopeful on a meaningful fiscal stabilization capacity thank you okay so with that let me first turn to Clemens and then Sylvia and then Louis yes okay thanks yes so first first of all the common shocks i fully agree so what we simulated here was was really employment and unemployment over these 13 years and we had this one big common shock indeed and we imposed revenue neutrality over the 13 years so you see that i mean here the assumption was that the system would indeed build up funds before you know mechanically and and one obvious political economy question is would that be possible would it would it be possible to you know build up these rainy day funds because they mean higher higher tax rates in the build up but you know these the the i don't remember what the reserve was but it's not very large it's like 20 or 25 billion in the base version of course that would require and that's the big obstacle that would require the right to issue debt at the central level and at least in my own country if you propose that everybody goes berserk not just the conservatives but you know it's not very popular and and it wouldn't be a big institutional shift we all know that there are some forms of debt issuance at the european level but introducing a fiscal capacity and allowing it to issue debt is certainly politically impossible if it is done in one step maybe you know we need to get an institution with the bernards budget first that can do interregional smoothing and then you know the intertemporal smoothing as a second step you know it's all all speculation but it's difficult i remember let me mention that two conversations one with the swedish minister of finance i think i can say that who told me you know i did presentation like that and and she told me if you do that we will never join the euro and you know i've heard that not once but twice so i think it's very credible and and i i i think um socials the german finance minister if i remember correctly he has said publicly that uh from his perspective giving loans to other countries in the framework of such a fiscal capacity is fine because as long as we are not as we as long as we are a currency union of fiscally sovereign countries but paying transfers is not fine because you know these other countries so there's this notion around that sovereign countries can give loans to one another but we cannot have transfers of course we do have transfers in the european budget but that you know seems to be just something out there a political view um out there which is which certainly is relevant um how do we deal with different rates of unemployment that's important of course now this mechanism here focuses on short-term unemployment so you get you get this money from the european funds for 12 months for your 12-month long unemployed and then it ends this limits uh you know so and i think you know that's a reasonable way of doing it because you know with the first big shock when unemployment increases you get something out of the european funds but if you get you know if this unemployment becomes structural eventually the the common funds are fading out and you need to deal with that of course you know it was mentioned earlier there are ways of dealing with that and we have also simulated that back clauses experience rating and you get the usual trade-off between risk sharing and incentives but i think that what's nice about taking unemployment as a reference you know it doesn't have to be direct direct system on employment but but taking it as a reference is really you focus on the short-term shocks but you avoid permanent transfers thank you silvia i think that the issue is not whether we would you know buy or sell the safe asset obviously there is a price right for everything i think what is more problematic uh in my in my view is what happens to the part of the national government debt that is not included in any of these quote-unquote safe assets right what happens to the demand for government bonds if you know banks are limited to buy uh the government government bonds of their own sovereigns by some sort of like concentration charges uh and and it's a matter i would say of of size right one if you think about you know the sb proposal what fraction of national government debt is included right is converted into this security and what fraction is left in the market what seniority structure this i mean by i would say that by default right the part that is not included into the safe asset is considered riskier by national uh you know government and the dm os worries i think is more that one right that they would not be able to fund it at the same cost average cost that they have today and that their cost of debt would go up uh instead when i think of the banks uh i again you know if you look at the charts for italy you know the percentage of btps that banks had uh as a fraction of their assets or as a fraction of their capital again depends on where you put the limit right if you put the limit for no concentration charges which is very binding then the cost for these banks might be so high that one you know the the the share prices go down and basically the capital position you know worsens and so you enter into these negative loops second think also of again if we only have these change but we don't have either a central fiscal capacity or a capacity that allows to uh fund and and you know to to respond to asymmetric shocks like the one you were proposing i mean you really are going to um remove to a country what is effectively a sort of like lender of last resort suppose you know country x gets hit by an idiosyncratic shock and they respond by issuing debt if you don't have that debt usually by being bought by their own banks where you know other investors see them as the marginal buyer it creates also an incentive for others to buy if that is not available anymore then how do you absorb this shock so i think you know it's not whether we would buy or we would sell the security i i shared some concern about okay tell me what the size tell me the details how much of my domestic government bonds then the other investors have to absorb in the market so that i can have an idea at which price and two tell me also what other instrument do i have if you start constraining my fiscal policy so much on the issuance side but you don't give a transfer system so i will i will ask my our chair of the session to comment on on that but let me just give my my comment i don't see why the low one price is broken here there is a secondary market we're not talking about the e- bonds where something gets uh in and something doesn't here we have an agency buying in the secondary market we find or or Goldman Sachs buying the secondary markets and bonds making the package to them giving to somebody else those bonds that have been bought and put into the package don't have a different price than the other bonds which are exactly the same so i i don't i don't i don't have i don't share that fear regardless of the size and i on the size i've always thought the nice thing of all these proposals and now that i break it into four steps is even more clear is that there is no reason why you cannot experiment i mean you just say okay we're going to start like this we're going to start with the curve this and we're going to put in more convicts and we're going to push people more towards this portfolio then once they have the portfolio we're going to start you know changing the the weight etc so we're going to to do all these steps little by little so that we see whether this is working and i don't think you have to say okay we're going to do 1.5 trillion of debt and let's see what happens so in that sense i think that that those fears are are not necessarily uh would not necessarily be be actually materialized in terms of the reform of the fiscal framework i would say three things the first is the six pack and two pack and all that is not going to is not going to be changed i mean there there are as many people in the parliament and in council who would want it strengthen as who would want it weakened there are you know what happens with the politics of these things the people in northern europe think that the the whole sgp is a complete disaster because the people in southern europe are getting with murder by having big deficits and the people in southern europe think this is outrageous they're all these guys not letting us run a deficit when we should so an interfering so so there is really a miracle of a convergence on how that fiscal framework was it definitely would need to change i can't even imagine even in my own group of of mps i coordinate the economics for the renew group uh and i have like you know i can tell you my mps are check danish luxembourg irish i mean germans i mean dutch is just not going to happen even inside a liberal group just not to tell you the entire parliament in terms of the way that you could weaken things and i heard from somebody who told me and i i again i'm sorry that i missed the rest of the conference because i had to vote but uh oliva blanchard mentioned this the way to get through that is the green issue clearly the green issue is the only way i could see the dead break in germany being broke and nobody can say oh we made a mistake for g we made a mistake for g highways all of the rest need investments and we are not investing i have never had as bad coverage anywhere in europe as i had this morning this afternoon coming from strasbourg to frankfurt never in my life i mean it was impossible to just even talk uh the possibilities that germany will decide okay we're letting our country just wither and we need to spend more it's not gonna happen but if you say germany needs green investment etc you i could see that the break having a little parentheses it says well green etc and that's the way that i think gentilon and dombrowski's and and and the rest of the commissioners probably will go around this potential flexibility station through through the green issue i mean everything you paint green now has a big chance of surviving because you have you have concept automatic automatic consensus from many sides of the spectrum the third thing i would say is on the liquidity issue i don't know who of you mentioned it oh you mentioned kemens when you talk about deposits insurance when you talk about unemployment insurance and we talk about all of these stabilization policies the only place where you get the start of a potential consensus but even very remotely and i've talked to all the ministers and i mean i've spent six months trying to learn what the hell is going on with with all these things getting stuck so uh is liquidity is lending okay so we do the post insurance but it's only liquidity we do an unemployment insurance but it will lend it will be re it's reinsurance to decrease moral hazard risk so there is actually a second action that decision maker can take if there is more hazard reinsurance and liquidity just alone i mean i think it's a bit of what i shouldn't say who said it but i think uh somebody said somebody said it's like if you're trying to buy insurance for the current they tell you okay if you have an accident it will lend you the money it's like okay i mean i can borrow money myself right i need when the car is broken i need i need to smooth my consumption so this is this is uh as far as i can see stabilization tools going to be honest i i don't see i don't see more action so let me uh comment on it but between uh commission's gentle only and what we've been listening to here uh and it's very interesting about on the one side i think everyone agrees we need to have a vision of the steady state where we're going to on the other hand how do you go from a to b um especially when uh you have trust issues and so on and and so it's it's you know uh in no way i think can we convert here today on all the answers but it's important if you like to try and build a constructive scenario so claven's is saying well maybe we start with the interregal you know maybe the as and it's always the way that do you say i'm going to hold out because i want the the perfect pure solution or do we recognize we start from from somewhere uh so i think that it's very interesting about how and of course it's an infinity of ways to combine pathways i i want to swap my hat to being the the chair of the safe asset task force for what sylvia said because you know it's very commonly said and i you know of course it's true at some level that uh banks are considered to be the purchaser of last resource but one thing we discovered in the safe asset task force is actually uh if you do have a machine like uh southern bottom back securities because there's we think there's quite high potential demand for that machine so the world looks super national that in fact it's not so clear that the average cost of funding it could actually go down because now you know if you're a small european sovereign uh convincing the world's and it's a lot of work to do road shows to build your investor book whereas through the sbbs in fact maybe the average cost of uh and it's not to do a mutualization it's just simply the the in the nature of the product uh and then in the simulations i know everyone here has read massive uh appendix two uh of the task that where we where so many simulations and so many experiments for ron uh and of course it's it's not for sure what would happen to the marshal cost of funding um but i think both matter average and marshal cost uh do matter okay with that but but what is your what is your view philip this discussion we were having i mean on the marginal cost of funding of course uh uh no i don't think i can give a very strong answer here today but the uh before we close because i know we know it's been a fantastic day of contributions and the highlight still to come the dinner speech by vitor gaspar but the uh for now let me just see if there's a last round of questions and before we close dinner otherwise uh let me i mean i thank the organizers for putting together a really good panel it's i i learned a lot it's been very interesting and for those of you going to dinner uh you know um i i regret i have to miss it and of course day two tomorrow uh so with that thank you to the panel thank you