 Thank you. I mentioned that collapse that project I'm afraid and the in the So I'm not talking about the eurozone instead What I would like to do is I have 20 minutes and I would like to explain I mean people will see I look at me as a pessimist. I'm actually not that's actually not a true a true statement I'm reasonably open about About all the all the prospects what I see there are I would think there's sort of three strands which which which I see Ultimately tell me that this thing is unsustainable It doesn't mean it will collapse. It means that something will have to change can collapse But that you know all certain conditions can change to make it work But there are three things that are that I find ultimately unsustainable or that in their combination Produce an unsustainable mix. Let me start off with the first one, which is banking the eurozone has seen Or Europe eurozone banks have seen a number of successive crises each of them would have been a very big a very big Issue for them and a problem for its balance sheets. The first one was the US mortgage crisis, which wasn't even a domestic one But obviously during that period there was also bad that accumulated through bad through bad lending In the housing sector like as happened here in Ireland and in Spain So there were problems arising from that period. We've then had You know the beginnings of the Greek crisis This has resulted in in the restructuring of Greek debt that was certainly a a factor of problems for the for the banks In cases like Germany with with decade a decade of current large current account surpluses that were invested abroad Or shall we say capital account deficits that Germany had the Germany had to You know digest those You know, we don't know exactly where all this where all these investments went But I would assume that a large amount we know it from some of the banks were funded or were invested in in securities with a very dubious dubious pedigree and There are large hidden hidden hidden losses in those balance sheets and in the German banks We know that the French banks are in some in some difficulty more than what has generally been Been been acknowledged. So you have this combination Of crisis we have Cyprus. We have obviously a recession Normally any recession is a problem for for banking saying these are not just any little This was a double dip recession with the 2009 recession followed by yet another one and one in Spain And that depends very much on the outlook, but it doesn't look, you know, it's gonna end that soon It will it will last for this entire year. So this cumulation It's a cumulation of of shocks and losses will have produced Losses on balance sheet that would be that would not all be visible at this moment. You can make your estimates We don't know what it is the ECB will conduct what it calls a asset quality review in the in the first quarter second quarter of next year this asset quality review is meant to Honor some of look at these balance sheets in some greater detail But if you look globally the eurozone has 25 a balance sheet total eurozone banks of about 25 Trillion you take out the central banks that leaves you with 24 trillion Get very rough take or leave a trillion. That doesn't really matter ultimately If you're dealing at that scale if 5% of that is under water, which isn't in all that extreme estimate Then you come up to about a trillion a Trillion in hidden losses now that doesn't mean that you need a capital of a trillion because some of those losses could be funded by Existing capital, but it would probably given that the European banks are in general not over Capitalized and with two generous buffers, you know, it was a fairly significant part of that Would have to become we're raised in your capital now 5% is just the wild gas. It's a wild but conservative gas You know if you've seen as an exercise in Slovenia Where the central bank has actually looked at the banking system and they came up with a number of 19% of The assets of Slovenia being underwater now that may not be indicative of the average of the eurozone I would not you know, we cannot extrapolate, but it can easily be that if you are in the country where Where things went wrong in that period things could you know, there could be quite a The the the assets that are underwater could be quite could be quite sizable So we're looking at at a very large recapitalization need for the eurozone banking system That I don't see that the eurozone is not going to raise anytime soon They're presenting a banking unit and I will talk about the banking union in a moment but the the There is no realization among the countries this painted an exercise of an asset quality review They invited outside consultants that came up with a number ultimately that led to a recapitalization of 40 Billion the Spanish banking sector, I would have estimated the sum at least five times as much But it seems to be the political the way this works politically is that the governments don't want to recognize these losses because Because they want to maintain that they have a solid is maybe out of out of pride or maybe even out of you know Recognizing a 200 billion loss would have reverberations on the government if Spain had accept accepted that its banking system Were broke. Well, Spain might might already now be a full a candidate to be for a European rescue program because it would not be able to fund itself So, you know, we should not trust governments in general to to be honest about these exercises And in the way the eurozone works and the way these stress tests have worked this works through national regulators through national supervised This is not a truly independent process so My first conclusion is that we have a banking sector that is largely underwater I don't see it's it's likely to be fixed because the national interest will prevail over the over the common interest in fixing this banking sector And also in the realization that we don't have the institutions in place to fix the banking sector That's we haven't we haven't we haven't basically created there, you know, we don't have the trillion basically This is something which needs to be provided for and isn't being provided for The second reason for my pessimism is the you know, it's the macroeconomic policies In particular the way we have Applied austerity Now, what some people say austerity may be over. It isn't really over what we're seeing Italy is a good example It has applied severely significant austerity in 2012 and 2013 But now the government comes in and says austerity is over. There's a tax They will they will take back but they will increase the other another tax just compensate exactly compensate whatever is gained by But not rare by by by by suspending one tax Because the goal the ultimate goal of a of a nominal deficit to GDP target in Italy's case 2.9% is unchanged So, you know, if you call it austerity three months ago, it's the same policy. It's just a different distribution and in the short run it matters relatively little of whether your Your tax is VHE or your taxes are housing tax. There are different implications in the long run. There may be fairness implications But if you want to assess the impact of austerity on on growth It's it's it's not going to be the big difference if you take if you take the money away from people It doesn't really matter from whom you take it away The the overall macroeconomic impact is the same if you look at the economy of the eurozone It's often easier to look at the eurozone as a single economy If you look at it as sort of a series of states that are bound by some exchange rate regime It becomes very complicated but if you look at the You know the economic literature is fairly clear about about the impact of austerity in large closed economies The eurozone is a large closed economy with characteristic that's similar to that of the United States And you know, since we all apply your austerity is not applied at one country level and not anywhere else And since everybody has the same policy because of the fiscal pack because of the fiscal rules everything we do is symmetric Even Germany implies a degree of austerity at the moment So that combinae this combination of policies means that the so-called fiscal multiply in What I have to add in the presence of a zero interest rate where we are in a liquidity trap that that the presence of a Of a of an austerity policy means that it had the impact on growth is very significant Technically the multiplier is greater than one That means for each for each you know percent of austerity you lose that much in growth Because you take the money you take out of the economy is not compensated for by by other policies normally Interest for in response the private sector could could could consume more or invest more So they the effect would be somewhat compensated. That is not the case at the moment So if you apply austerity in a situation like that You get you get a very significant impact of growth. That's what the economic literature would tell you and it and it was Denied in the eurozone that this would would happen, but it happened and exactly you know We haven't we have seen in the last in the last in the last year a an economic response That was entirely predicted and predictable that austerity would have that effect And while we are now loosening it a little bit because in 2014 there won't be any net austerity Applied at the eurozone level though. We're not taking it back. It's just a level and and a level effect So we're gonna stick to this there will be additional austerity in the years 2015 2016 when the new fiscal pack that everyone had Signed kicks in because the new fiscal pack compels countries not just to keep their deficits low, but actually to repay debt If they're debt to GDP levels are over 60 percent, which is the case in most countries so that a percentage of that excessive debt a 20th of that excessive debt has to be repaid every year basically meaning that Countries would have to run excess fiscal surpluses simply to repay that debt now that People may hope that this this might be suspended or reinterpreted But that's what the fiscal pack says and it would require a you know It would require a fairly tight fiscal policy for the indefinite future if we I'm skeptical what it what it tells me that that even if I'm not sort of Even if I don't believe that the look even if we believe we get out of the liquidity trap And if we believe that things normalize in the global economy It means that the government will remain a restrictive influence on growth You know, it will not be a positive that that's a that's a forecast. I'm fairly certain certain of making If you combine that with my first observation that we have a fairly restrictive environment for growth With a dysfunctional banking system that is unlikely to provide credit because banks that are underwater are not going to expand the asset base They are restricting the asset base. We're seeing credit crunches in various parts of the eurozone In place that means we're going to look at a decade very similar in some respects to that of Japan in the 1990s of low growth With sort of as they call it the zombie banks is a large banks that are not that are That are there but they can't really act they can't really fulfill the economic functions of a healthy banking sex sector, but they're not They're not being wound down because governments are afraid of doing so because they're vested interest by politicians or or other other concerns About the consequences of that such a policy has so that scenario is already puts us sort of in a low growth Equilibrium now what could potentially solve the situation would be a genuine banking union and now we're coming to my third My third category of issues why I'm skeptical and I was briefly optimistic in the summer of last year when the European Council agreed the principle of a banking union a fiscal union and sort of a long time scale and I said okay It might not be fast enough, but at least they're going in the right direction But what we're seeing today is the banking union is not it is still called a banking union, but it doesn't fulfill The economic functions of the banking You know have the first agreement was to shift the supervisor for the large banks from the member states to the center That is an important step, but it doesn't change just the fact that someone else is supervises the banks Does not in the you know does not change any of the problem that we that we just identified the second Step that was taken was a harmonization of resolution rules. That's very important because if you step into another country's but you know Assume the ECB or whoever is going to be then the new resolution authority came to Ireland closed down a bank Obviously that had to be done under Irish laws No, there are insolvency laws their employment laws that tons of laws that affected So we need to we need to harmonize those laws in order for this sort of cross-country resolution to happen The third step would have to be a resolution authority We have to create an authority that actually does this that actually goes in to a bank on a Friday afternoon Merges it with another bank closes down does does something, you know basically to you know Something that isn't normally done in Europe Which is like closing and closing down a bank that isn't profitable if we believe that's going to happen that needs to be a very strong Authority that is backed by law that is you know It's going to be interesting to see how they're going to pin this under under the current legal system The main debate in Brussels is about whether the European Commission should do this or whether there should be another authority It seems to me that Germany that's my the information wants to prevent Absolutely that the Commission gets involved in this so there's going to be a typical Brussels into institutional fight that we're gonna that we're going to see in the next few weeks and which kind of deflects our attention from the Real issue because it doesn't really matter who does it the question is it that it needs to get done We need to we need to resolve the banking sector if we feel there is a billion a trillion of unresolved Losses in the system. It needs the job needs to be done And obviously there needs to be a fund to do it and the moment the fund that the Finance ministers are discussing is has an order of 50 to 70 billion Probably at the even at the lower end of that range And that is not going to be enough. That's not going to be enough to you know to deal with the fundamental Issues and because the fund is lower than the needs what I suspect will happen is that the needs will not be fully recognized This is what we've seen in Spain as a there was clearly a Banking system that's underwater. We see the bad news coming out instead of instead of trickle terms at the moment We see every day that's some some bad news about banks some unresolved issues And now the government admits that the recapitalization has to be a little higher You know and that was already you know an exercise that was you know this exercise They they had an independent quality review They looked at all the balance sheet that came up with a number then they did all sorts of manipulations and then came up with a number of 40 billion in in you in US I expect something similar to happen on the eurozone They will probably come up with a number with a number of hundred billion or 200 billion in terms of new capital That to be shared between the government and the ESM some some kind of coordination and bail in through shareholders, but it won't it won't exceed that level so you know The shareholders bondholders depositors will get bailed in in some cases Governments will co-fund at the ESM will probably spend its 50 to 70 billion Budget on it. So we're probably looking at a at something in the low three figures and that's not gonna That's not gonna be it's not gonna be sufficient So this banking union is not gonna resolve the eurozone banking crisis And then your way you were in a situation that can potentially last very long We can be in a situation that you know that can last a decade at the end of which it the eurozone can continue to live And it doesn't mean it doesn't even Forcibly say it's gonna break down. It's dysfunctional But it doesn't mean it's gonna break down because a breakdown would require would assume that whoever leaves it Would perceive it to be in a better position by leaving it. I was not necessarily to the case We've seen greed even the Greeks who who you know who I cannot see their future in the eurozone and Even even after my even starting today having gone through what they did I still see it's not it's not it is not working But even Greece is not gonna leave even not even the government there with all its unpopular measures It still has a majority in the in the opinion polls So, you know, it's gonna take quite a lot for country to conclude that it it's better off Outside the eurozone with all the political risks now because there's always the possibility that you might have to leave the EU Depends on the you know the legal interpretation of the day whether that is necessary or not But there's certainly a risk about the countries and then unless it is a big country You know, I would assume most small countries would be kind of intimidated to even try this experiment So this thing could could last long but the worst outcome is not necessarily a break of the worst outcome Could be a survival under sort of a permanent crisis You know if a station of social unrest high unemployment You know leading to a point in some kind in the future where Where there may be sort of a violent social eruption an alternative scenario would be a Changing policy because well possible. I can't exclude that Germany at one point and other northern countries say This isn't working for us. We need to really change it and you know, let's do this We denied the nest we denied the need for a euro bond But now we've had you know the crisis now in year number 15 It's probably time to realize that it probably our crisis resolution polls. They haven't been all that successful Let's do what we should have done 15 years ago and go for it. I can't exclude it I think it's unlikely given the way the debate has been going in in the northern European countries But who are kind of conflicted because they want the euros to survive There is no majority for break up of the euro if you look at the opinion polls They really want it but they don't want to do the things that are necessary for it to survive So it's an interesting how they resolve their own their own internal conflict And which is also part to do with the with their own narrative crisis narratives now I mean if you talk to the average Germany The people would say that the crisis is because the governments have been irresponsible Which doesn't really explain what happened in Spain doesn't explain what happened in Ireland It doesn't really explain much even Italy cannot be explained by that Greece could be explained by that But that's you know, so the crisis narratives are very much part of the way How these sort of this contradictory set of views has been Has been has been has been formed so I'm not making predictions about the eurozone, but I'm just saying it's unsustainable and You know as a famous American economist or economic advisor one said what's unsustainable will stop one day It's just we don't know what will stop what element will stop and I'll stop now. Thank you