 to be here at least once a year so there are many things which bring me from time to time to not only to London but also to Dublin as I follow finance regulation. There are many issues which are also of interest to Dublin as a financial center as a financial center which is strong certainly in fund management which I follow for example but also as a center which has got also huge problems in its banking sector support strong support by the state for its banking sector on which I also wrote report about two years ago on state aid and banking a very topical issue for Ireland which we were still discussing this morning and I think which I will discuss this afternoon let's say also with somebody else in the Ministry of Finance anyhow let's say really it's a pleasure because you may think let's say you're a small institute but I think structure-wise CEPS and IIEA are very similar let's say any kind of activities which would do the way we are organized we may be different I mean in size but of course yeah we are located in Brussels and you know let's say that Brussels is a center of decision-making and I think our budget has grown from about 2 million to 9 million this year from about 2 million in 2000 to about 9 million now because there's so much going on in Brussels and we have to be on top of so many different issues and one of the things which we do with the multinational team in Brussels at CEPS is trying to follow or trying to participate in tenders for EU studies for the EU and that's one of our kind of has become one of our niche markets if you see let's say you go to the official journal you see how many studies the commission commissions on many different things which is a public and open market and we have become very kind of very successful in that let's say that's one of the reasons for our growth as an institute but separately from that we also have like IIEA we have sponsors who support us we have task forces as you do working parties on many different issues I would like to have been in the one this morning on the UK and in Europe or the UK it was UK and Europe or the UK and Ireland the one this morning that's also an issue of debate and in Brussels so oh that's the conclusions I have to go to the start on this paper which I wrote which is in fact about a year old which that I wrote it I myself am Belgian speaking about federalism and Belgium is no nothing new I mean Belgium has been debating federal a more federal model since about 40 years has advanced to some degree in that direction the reason why we it took us such a long time to have a government last year after about 500 days what's also related to this F word I mean in the sense that the disagreements on both sides let's say about what do we call the Brussels and the definition of Brussels and how you restrict Brussels which to some extent had to do let's say with respect of change in some of the federal kind of the consensus which was there between the two groups essentially two groups in Belgium but anyhow if you if you go a bit further and other member states in the EU you will see that federalism is not such a common word and basically if you go walk around or you travel around in the EU I presented this paper for example in the Netherlands in February this year and I felt immediately to my great surprise that federalism is a no word in the Netherlands I don't speak about France or I don't speak about the UK no it was in I mean they said very clearly to me even after my presentation no the EU is not a federal construction there you are I think let's say that's how I discovered let's say that basically it's a taboo I mean federal the word federal you cannot use it we're just discussing over lunch where has the EU used the word and it's indeed as you mentioned let's say in the state of the union of Barroso in the month of September he used a federation of states he didn't use federalism as a word he used a federation of states and I think let's say there was even some discussion about the French versus the German translation of his speech how that word was translated in fact let's say the the EU defined itself in a word which I've known all the time but which I've never basically understood as the myth of community that's how they call it in Brussels as part of the old French tradition which was very strong in Brussels until I would say until about 20 years ago the EU was all about the myth of community I mean define it as you can but also let's say it has to do with the origins of the EU the EU and that is often also forgotten let's say we speak about the EU today the EU is a top-down model was created after the war let's say just to make sure that there was no more war it was the heads of state and government which is also one of these new abbreviations I know do not know but you know that one HS HOSG which has come up above all in the in the crisis it's the heads of state and government which decide things I mean if you look at all kind of constitution as we have it for the moment that's basically signed by by some kings some presidents some some I mean and other countries that may be head of state or maybe the president of a federal republic or maybe maybe a king in the United States basically it's I mean the first sentence of the constitution is we the people so basically what we have to do is in the current context we want to become a more federal union but we have to turn the parliament around let's say from this top-down method let's say from the creation by a series of forward-looking heads of state and government who said we never want wars in the EU anymore we'll have to become a union now which is supported by the people a bottom up approach where it's really becoming this I mean a federal model let's say but everything is done and at level where it should be doing where it should be happening and if it cannot be done at the lower level it goes up and and that's the way it should be in a kind of a clear and a well functioning federal model but my big question remains can we reverse this kind of this approach let's say or can we turn around this pyramid if we have been created always as an EU I mean top-down can we make it bottom up if you look around in Brussels and if you for example at the functioning of the commission still the core of the EU institutions the commission's until today is still very much a top-down institution in the way it applies policies the commission thinks it would be useful to liberalize this sector or to regulate that sector and it makes proposals without in fact no it has to consult but without basically acting on for example what the parliament would would ask us no it's because the commission with some very strong forward looking civil servants is thinking we should regulate in this area and they start to regulate and this goes on until today I mean you look may look an area which I follow closely this Liknan report which was published two or three weeks ago reports written by commission officials know they think as a result of the financial crisis that banks have to be split up in one side investment banks in the other side commercial banks I mean it's basically a proposal by the commission of course there has been some pressure from some groups in the parliament to do something on that but it's basically if it's not coming out there's a commission who's asked Liknan and whose staff the group to make these proposals which they on which they may not be legislating in the coming weeks and months so the question remains I say to what is the federal model which we have today and how do we give it content in this crisis I mean if we speak about this of course what will come up certainly in the in my talk let's say is then federal for who federal for the 27 for the 430 or only for a smaller group I mean the issue of concentric circles and that's that is part of this but this is just as a way to remind you that the EU is composed already today of many different circles and probably an important one to remind you Schengen on which island is not a member but then in Schengen you also have Switzerland so Switzerland is a non-EU member state is involved in many forms of cooperation with the EU has many bilateral deals with the EU and a very important when one with a fully part of it the Schengen where the UK and Ireland are not part of it of course you have to have Eurozone which you all know very well let's say then we very soon have a new member Croatia which most people are not aware of let's say that the EU is still expanding we're also negotiating with five other member states for the moment Serbia was the latest which was I think agreed upon only a few months ago I think it was in the June European Council that they started negotiations with Serbia so the EU is still expanding while we're trying to deepening the construction which we have at the moment if you look at let's say what has happened through the financial crisis and that was in fact one of the reasons why I wrote this paper is that you see kind of some duality and approach to some extent let's say we are strengthening we are more and more deepening improving our structure but on the other hand sometimes it is unclear let's say whether it's really sufficiently strengthening the decision making making a more federal economic union yes or no but I've summed it up here and if you look over a two and a half year period of sovereign crisis sovereign crisis for Greece started somewhere in February 2010 February March 2010 so it's about two and a half years ago but there's five year financial crisis Northern Rock was 2007 so that's already quite a quite a time but if you now look at this in kind of in one one slide you effectively see that a lot has been done over a five over two and a half year period in the direction of a more probably a more federal economic model one important thing is that we have basically no just implemented it was a great march but we have basically just now implemented this new stability mechanism it was formally I think last week at European Council in Brussels formally inaugurated the ESM so we now have something like an IMF for Europe and that's I think a big step forward that was a change to the treaty which remember also because I'm speaking in Ireland before the crisis changes to the treaty were almost impossible simply to imagine politically we also have let's say the growth and stability back changes one element of that is still hanging which is what they call the duo back which is still before the parliament and if you look at the council conclusions from last week they urged the parliament to adopt the duo back but in the six pack there are some very important measures that we learned the lessons from the crisis and we say we have to look at the broader set of economic variables and only those which were defined in the master treaty master treaty was basically the 360 no digs I mean they broaden this to for example also looking at the current account let's say at the sustainability sustainability of the public finances and so on but one important element in there is that the commission can directly impose fines and this can only be undone with the reverse majority so if there is no group voting in the council against what the commission proposes say if for example members say it doesn't respect what it has agreed with the commission in the context of the growth and stability act the commission can directly impose fines without waiting for the council of course the procedure is it first has to propose something to the council a recommendation to council the council doesn't react commission can in the next step directly impose fines in the past before the crisis it had all to go through the council know it's a commission which is in the center and that's why in fact basically before the crisis why was it that we didn't choose the means which were there it was always pushed up to the council handled diplomatically and basically nothing nothing happened you may remember that in the case of Greece for example already in 2009 there were very clear warnings against Greece but Greece didn't act Greece didn't do anything because you had diplomatically coming from the council but the council didn't have any teeth now the commission formally has teeth but we'll have to see that's too early to say whether it will really use this on the financial supervisory side of course I follow this very closely as I said already I will speak about this in a moment I mean there's for me the most important progress on that side is banking union dossier we'll come back to that in a moment but basically we're moving towards a federal supervisory authority like you have the united states with the fed federal reserve like you have in canada both federal constructions with the bank of canada I mean but so far let's say we are not entirely consistent in that and that's again let's say why this is important so far for the positive insurance and liquidation of banks that remains national I mean there have been contradictory positions on that recently but if you look at their last european council conclusions the one from last week basically that issue very as they said in june we need to have this europeanized as well all of a sudden it has dropped from the agenda and they simply say we need to have the commission proposals in this field adopted nothing more I mean for a moment they don't speak yet about truly european white deposit insurance and liquidation procedures for banks and then we'll also have some governance changes probably the most important one is that of the two last important ones let's say are the most important ones that more powers for olirene and the commission the vice president in charge of economic affairs that was for example repeated last week again by chauble in a speech that was already to some extent to some extent agreed but also let's say that it would be a separate eurozone president I don't know whether this dossier is formally but this was agreed I think about a year ago that it would be a separate present for eurozone council separately from the euro group that would be apart from farron pie for the european council there would be a farron pie beast for eurozone council but I do not know exactly where this dossier is for the moment this is just to put it somewhat into into perspective I mean if we speak about this crisis we often forget let's say that eurozone overall let's say is not doing too badly economically I mean we speak all the time about the figures of the member states with eurozone let's say now I'll do what the problems feature are but basically I mean eurozone is doing better or much better in many regards to the United States and the figure for example which is not on here which could which I could also mention is that if you look at eurozone and eurozone's export potential of course you see that the current account is more or less in balance but the eurozone has been expanding its exports an important issue also for island over the last 10 years where for example the united states or japan has been declining so we have been capable in a multipolar world to become more competitive and you look at the economic figures which we have I mean they are not I'm not as bad but we tend to forget this for example you look at public debt budget deficit inflation the bad the worst things are of course economic growth which is discussion at the moment let's say that there is too much austerity and too little economic growth I mean that depends on the forecast which you follow the commission stairs that may be still status quo for the moment so zero percent some other forecasts are at minus 0.5 percent but also unemployment a big problem as we all know certainly in the southern european countries and it has been raising and the beginning of the crisis we were lower than the US US has been declining and EU has been increasing or eurozone has been increasing also let's say as a result of let's say in fact what is ongoing is there have been radical adjustments and labor costs so we are adjusting european countries are adjusting meaning also that we have to reckon that in a few years from now let's say some new kind of heavens of competitiveness could emerge in the south of europe who knows let's say we shouldn't be all be doom thinking so the in certain countries like also in ireland I mean I think that's the steepest increase but also the steepest decline but also Greece Portugal to a lesser extent Spain you see that there is an impact let's say of what has been discussed already at the moment let's say the fact that they have to adjust their public finances and bring their households in order you see it very clearly on the map in fact these are these are data from the european commission so but if you look at the solution which have been proposed to deal with the crisis what I fear the most let's say is that so far we have in fact a bit hesitated between more federal approaches in fact giving EU institutions the commission dcb others more powers and more intergovernmental solutions and my central thesis is that as long as we are in unclear enough about this that will not be good for your and let's say we are not kind of really managing to emerge from this crisis of the role with the problem problems to really take decisions at european level if we need to take decisions on the one hand let's say I mentioned already some of these things in the more central role for the commission in the economic governance measures I'll speak about the role of the ECB in a moment because I think it's the only the most federal economic policy institution which we have but you also see it in the other supervision with the emergence of a european white banking supervisor that is clearly federal also more technically let me look at the financing cost also important for this country's this country through the fsf and the sm is basically using the low I mean refinancing cost of the best countries of the eurozone and and to use that average let's say to reduce the financial burden for countries in problem like also for portugal or for for Greece on the other hand if you look at let's say at the way in which the fsf or the sm today is functioning it's clearly intergovernmental meaning the most not all but most decisions in the fsf if you have to support the country have to be decided by unanimity if there is no lot of decision about for example the aid to spain and aid to the spanish banks some people are concerned let's say that the banks in spain will be bailed out at 100 percent I don't think so I mean there was a lot of discussion I think again over the weekend and after last week's european council that all of a sudden people now realize that spanish banks wouldn't get 100 percent a blank check I think let's say that was for my part already clear in the month of june because it was very clearly said that it will be the ESM which will decide applying EU competition policy rules and applying EU competition policy rules which I should have probably added us one of the federal elements of our economic governance model which means let's say that first a viable plan for these banks has to be presented to the commission and on that basis some capital injection can be agreed upon but also let's say that will be even more the case in the ESM so far most banks have been aided I mean be helped by their local authorities if no spain since it's insufficient has insufficient cash has to I mean it's calling upon the ESM the decision basically is taken by the board of the ESM and has to be taken by unanimity so I think it will be even more applicable to spain that that will have to put its banks in order first before it's will get money because of this unanimous decision of the ESM certainly if you ask the Netherlands Finland and Germany to agree with this I mean one of the big part of the ESM that will be very important for Spain but some other aspects let's say also you may have forgotten about some of these other elements which I mentioned of the crisis like the euro plus pact was something which was agreed upon about two years ago about let's say how we can strengthen the competitiveness of the eurozone was basically Germany imposing its views on the rest of the eurozone let's say on how they should be competitive fiscal compact in the meantime is something intergovernmental as well let's say it's a separate intergovernmental treaty how to improve stability and economic governance in the eurozone it's already been forgotten in the meantime I at least I think let's say it's not that new but I mean the thing is it about is it was an intergovernmental treaty also if you look at for example some documents from Varompi and others about defining the words competitiveness and what is what should be done to improve that you'll see there is a certain view on that that should be all kind of a strong manufacturing industry which exports you need to have current account surpluses you need to have export surpluses but if you were to be a eurozone of 17 or the EU of 27 all exporters I mean we couldn't survive I mean the rest of the world should be buying of our goods but also let's say I mean the issue I think where we have failed most let's say in this crisis who speaks for the eurozone we certainly don't have one person who speaks for that of course we have it for the monetary policy side but not for the economic policy side and that's I think what has cost us dear certainly over the last two years because many people speak and many people certainly ministers of finance or heads of state and have different messages I think as I said let's say the ECB is probably the most federal institution today and we know let's say certainly if you read the German media there are quite some disagreements about its its its role but it's basically because there's no other institution doing a task I mean the ECB has been asked now in its recent in this recent new action which will start let's say in the outright monetary transactions the omt at the bottom basically has become a fiscal agent and that's what if you follow German media German academics we're saying the ECB cannot do this because that is a fiscal action so this is not a monetary policy action this is a fiscal action why because the ECB will support it if these states are under a program basically which is linking a monetary policy decision with a fiscal policy one and that's why I mean many very well known academics also in Germany I mean argue let's say that the ECB what is doing is illegal and if you read German media you will read every day day after day let's say many articles about this and you would often think let's say that the whole thing will be falling apart I don't know I don't know we had a discussion over this about this over lunch how to interpret this this debate in Germany it's probably more let's say a kind of a backward fight let's say to try to get back some powers for the Bundesbank but I don't know essentially I don't think let's say personally there is a problem let's say because the ECB as there is as I said let's say no other strong fiscal authority in the eurozone and also as the ECB can act very rapidly basically the ECB can act in a matter of a few weeks or a few days if it's needed it can act also decide very rapidly it can act very rapidly as a federal institution and we also have to remember let's say that since the announcement of the banking union at the end of June and also since the ECB announced this at the end of July that basically we have got an enormous decline in the refinancing rates for Italy and above all for Spain and much more calmer financial markets and we used to have over many summers during this financial crisis physical compact I shouldn't say too much about this let's say but anyway was about a year ago an important issue as a bit disappeared from the agenda we still have to remember that two states did not sign it so it's an intergovernmental treaty between intended to be 27 member states but the UK was very famous I mean Cameron walked out of that meeting and said he will not sign it but also the Czechs have not signed it we have to remember but a very strange thing about this is that it will enter into force after one year so it should be somewhere March or so next year if a majority of member states have signed it so it's applicable as an intergovernmental treaty if a majority of member states have signed it so in this sense it is somewhat federal even if it's an intergovernmental treaty I think the biggest example now and that's where my expertise on financial regulation is extremely useful for the degree to which we're becoming a more federal model is this banking union proposal which has for many people come off the blue came off the blue the commissioners saying let's say that they originated it but many people in Brussels or in the EU are still arguing about where is the word coming from um but it was done all of a sudden proposed in the European Council at the end of June that the ECB should become the federal supervisory authority for the eurozone following an article in the treaty article 127.6 which basically says if there is unanimity vote in the finance council the ECB can become the federal banking supervisor and I've written several commentaries on this I'm fairly in favor about this I think that's a very good development because what we have seen in the eurozone is that there was far too much as we call it in Dutch we know I mean within national constructions the national supervisors knew the national the local banks and they knew each other far too well in the meantime they didn't want to see the problems in which the banks or say the kind of how bad the balance sheets of the banks were I think we've seen this in this country as well but we've seen this in my own country in Belgium we've seen it in the Netherlands we've seen this in then I think almost all EU countries and that's why I think let's say they move towards a federal a more distant supervisor with multinational supervisors sitting on a team of what they call a college of supervisors to supervise banks will become for all of us for taxpayers certainly uh much better I mean much more of a guarantee for the future than the system which we have today and it's basically following the system like you had and other federal constructions as we have it today it's also let's say will eliminate a kind of a fairly important dangerous gray area which we have today which is what we call the emergency liquidity assistance which can still be done until today so national central banks come from their own means provide support to the national banking sector in fact even without formal authorization of the ECB there is an informal authorization but it's not seen as a monetary policy action so it's done like also happened in Belgium in the case of 40s the Belgian central banks gave 50 billion to 40s in the midst of the crisis from the means of the Belgian central bank which are in fact the senior ash benefits which were redistributed to the national central banks which that central bank used to support its own banking sector if we now move a banking union to the ECB basically saying that financial stability becomes a task for the ECB and there's no longer a task for the national central bank what it is until today if you look at the treaty very carefully financial stability as a task of the national central bank so you can ask yourself the ECB and the treaty says it says ECB can contribute to financial stability but the task for financial stability is formally with the national central banks or with the national authorities I think let's say by moving banking supervision to the ECB we're kind of clarifying let's say that that field and we're moving to a three peaks model which I think is also for Ireland important let's say we're basically saying only prudential supervision only what can better be done at European level so following subsidiarity debate will be moved up let's say to the eurozone level but the other things where there is no kind of overriding argument to move it at the european level like conduct of business control product regulation take for example control of investment funds in Ireland where we may not at the local level I don't see any reason that it will change um and also see no kind of I don't think let's say that will change in the future so on that level we'll continue to have harmonized regulation at european level but the supervision will remain locally it's only for banking supervision where they say look I mean if a bank fails in one member state um it has an impact in other member states as we've seen it certainly in the case also of Spain with even smaller banks there let's say the argument is very strong let's say to have it controlled at the ECB level for other forms of supervision which have to do with the way banks behave for the way for example directors work in the um and the board of directors of banks let's say that will remain a local competence but if we see let's say already now let's say I don't know whether some of you have followed the debates a bit in the media about this banking unit you see already today how complex this discussion is becoming for example you have some countries from the outs which are saying we would like to be part of the banking supervision by the ECB like Hungary Sweden Poland but we want to have something to say which that means let's say you have to adopt the voting modalities within the ECB but the voting is made for the monetary policy not for the financial supervision and they on top say let's say these banks within the eurozone get cheap liquidity from the ECB and the outsiders don't get this you have the whole debate about the rules let's say which rules will apply for which banks let's say you have the rules for the 17 and for the 27 you have the whole debate about accountability how will the ECB be accountable for its supervised reactions which are different from the monetary policy actions so that's all in going at the at the moment the issue had to be resolved for last week's European Council but is not entirely resolved for me the important thing is that they have maintained the target date of the 1st of January 2013 to start it I mean it will be gradual process but at least to start but we'll have to see in the coming weeks and months let's say whether this will effectively be the case I think it will be but I think it will be a gradual process from the 1st of January onwards before last slide let's say what could a more federal union be many people forget let's say there are many other areas where the EU could be much more active and where in fact where there is limited or no federal competence in fact it's sufficient to look at some initiatives which were taken over the last two or three years there is for example the Monty report on the single market which outlines some of these areas where I mean there could be more federal competences or more federal action you could also see a growth letter signed by 12 his ministers prime ministers in February 2012 which is also signed by Monty so he used part of that report which he did for the commission in 2010 but if you think about it I mean I've only summed up some let's say there is much more what could be done at European level I think the most important ones are for example energy supply policy energy supply policy today is entirely national it's not coordinated or very little coordination at European level so everybody negotiates basically with Russia separately there's no an important very important case ongoing of Gazprom being challenged by the EU competition policy authorities for its action in Bulgaria and Romania that maybe I mean maybe trends towards more European-wide supply policy but it's far too limited for the moment the whole domain of R&D research and development is insufficiently I would say coordinated at European level only 7% of R&D spending today goes through the EU budget some people may say that EU spends a lot on that field no mostly to large extent is still at a national level and I think insufficiently coordinated there's also industrial policy overall let's say which is insufficiently European we now see this very clearly in the post crisis context issue for Ireland very touchy I know let's say harmonization of direct and indirect taxation which is always coming up we came up in the euro plus pact certainly France and Germany are always insisting on that certainly direct taxes corporate taxes but also indirect taxes so we have common basis for VAT but not common rates within the within the EU labor market policies also we have almost nothing have few things let's say but very little now Germany is pushing some of these things like job qualification because Germany needs qualified labor we know what that's related to the euro plus pact and the fact let's say that Germany is pushing a bit its view on competitiveness but there are many more things I think about portability of pensions I mean if you look and work an institute like seps if I engage people from abroad let's say portability of pensions is an issue if you want to engage somebody only from for example the Netherlands and somebody has worked there 20 years it's not easy at all to compete so I think there's much more could be added to that list it just let's say to remember let's say that the EU is still only a very emerging federal structure for the moment and that I think let's say and that's not a matter of money it's more a matter of policies of coordination I just mentioned the word policy it's not that you should have more money but if the EU kind of do better coordination of money and have the competences to do it I think it could work more more efficiently so to conclude I think and that's probably important sometimes in the past we said less there isn't sufficient debate about what the EU is doing if you look around in the EU not in all the member states but in in certain member states and very strongly like for example in in Germany or in or in Spain there is a very deep debate ongoing about what is the raison d'etre the rationale the aim that seal I mean the German word of the EU why do we have the EU and I think this is leading to this debate about probably we need to have a truly federal model and I think let's say it's the strongest in Germany at the moment sometimes echoed by showbless comments in the media like last last week again also by by others like Merkel also I think has mentioned is the word federal in the context of the EU which EU policy makers do not necessarily do we have made adaptations on the level of the MU I mean but that's too early to see whether it will work I mean basically the means are there to have a more federal economic governance model at least for the for the Eurozone but that's too early to say let's say whether it works I will have to see this and of course we are in a very deep crisis at the moment the ECB has a central role and will become like the Fed and the Bank of Canada this federal supervisor I think that's also a positive development but I think a lot remains to be done and there are a lot of dangers also on the horizon essentially about the relationship between the ins and outs some people have argued for example that if we have a stronger we need a stronger accountability for a parliament in the context of the banking union debate and for economic governance basically the parliament will do this only for the 17 what then about the other 10 countries will the parliament only or will we have a dual EP which will do with accountability for Eurozone 17 and then not for the rest these are open questions so that's part of the debate which is ongoing do we need to have another treaty change to to accommodate for a more federal union but I think that debate has only started and as we know today treaty changes remain even after this crisis difficult that will take another two or three years before we probably have something clearer on the agenda what has to be changed at the EU level thank you