 To carry on the conversation, we have an extremely distinguished panel to talk about the future. The title of the panel is about providing a diagnostic, if you will, for the Greek economy's future health and well-being, and we want to focus on that. And with us to talk about that is that we have three distinguished members, Dr. Konstantin Papadopoulos, who comes to us from the Greek Ministry of Foreign Affairs as Secretary General for International Economic Relations and Development Corporation. Dr. Papadopoulos has both experience in the foreign service, the Greek Foreign Service, as well as in the private sector having worked as an advisor on European affairs for Eurobank EFG, and he also serves as fellow of the Weatherhead Center for International Affairs at Harvard University. After Dr. Papadopoulos is finished, we will then turn to Jurgen Kroger from the EU, from the Commission, who is the Director for Economies of the Member States I, the Economic and Financial Affairs Director. He has been a seasoned veteran of the Directorate of Economic and Financial Affairs, serving in a number of senior positions, and we're very much forward looking for the EU perspective on this as well. And finally, Tim Adams, Managing Director of the Lindsey Group, former Under Secretary for International Affairs at the Treasury Department in the Bush Administration. And I have to say my favorite title for Tim is Senior Advisor to CSIS. He has been extraordinarily helpful to me in helping me understand the complexities of the economic crisis. So Tim, we're absolutely delighted that we have all three of you here. Dr. Papadopoulos, we'll begin with you, and then we'll work our way down. And then after our panelists are done with opening remarks, we'll open the floor and have a good dialogue. So again, thank you and welcome. Thank you, Miss Conley. I feel very honored to be here before such a distinguished group of people. The question is what is it that I can add to what we already heard about Greece, and especially to link it to the future as well. After the introductory remarks by our ambassador who really sketched in a very succinct way the things that have been done lately, and after Dr. Papadimos' analytical presentation, I think what I will try and do is try and describe the Greek economy. What is this Greek economy that we're talking about? Because all we've heard of is that it is in crisis. But I want to describe its characteristics before we came to this point. And so because any discussion of the future outlook for the Greek economy depends on an understanding of the economy's performance in the dozen or so years prior to the crisis. I wish to stress this aspect because there is an impression in many quarters that Greece all these years should never really have entered into a currency union like Germany, Holland, or even Ireland. But the fact remains that Greece was probably the member country that benefited the most from EMU membership. The Greek economy's rapid expansion during the past 15 years, which was triggered largely by the housekeeping that took place in the 90s as a necessary prerequisite for joining EMU, now that changed the face of the country. To make the case persuasively, one must draw a clear distinction between Greece's public sector, which was at the root of the current crisis, and the private sector. While the economy was preparing for Eurozone membership and during the years of membership itself, the private sector changed a lot. So much, in fact, that it propelled the Greek economy to the 23rd position in the world in per capita terms. This is the World Bank statistics for 2009. Whereas in 2006, just three years earlier, the Greek economy was in the 33rd position, and in 2000 it was in the 40th position. So all these years it really moved up the scale. This achievement is all the more remarkable, given the huge drag that was exercised on the economy as a whole all the while by the public sector, Goliath, that by the end of the decade had grown to such proportions that it caused the whole system to break down. It's often said that even before the true state of Greece's public finances became known in the autumn of 2009, Greece was known to suffer from a lack of competitiveness. We've talked about this this morning. How else would you describe a current account deficit of over 14% of GDP? Now, competitiveness is indeed an intuitively appealing term, but it is a term that can be misleading. Thus, some analysts have inferred that if the peripheral countries like Greece and Portugal cannot compete, they should leave the Eurozone. The same perception has led to fears, especially in countries like Germany, that we are about to see the creation of a transfer union and that the new stability funds that are being set up are nothing other than a vehicle for the permanent redistribution of income from the rich to the poor. But if the new stabilization funds were a mere instrument for income redistribution, then Ireland with its high per capita income surely would not qualify for support. So instead of the term competitiveness, let me use the term productivity. Productivity is more useful because it refers to the economy as a whole rather than just the external sector. Over the whole of the previous decade, annual productivity in Greece grew on average by 2.4%. That's between 2000 and 2009. That's three times larger than the corresponding rate in Germany, Spain or Portugal, and it's higher than what we had in Ireland. Indeed, it was faster than productivity growth in any EU country, EU 15 country. This is what lay behind Greece's growth. The Greek economy grew strongly between 96 and 2009 at an average annual rate of 3.7%. After EMU entry in 2001, growth accelerated even further to 4.2%, which was double the EU average. So why then was the current account deficit so large if productivity grew so satisfactorily? Here one has to look at the relative role of exports and imports. Though everyone knows that Greece is not exactly an exporting powerhouse, exports of goods and services in the period 1999 to 2008 nonetheless grew slightly faster than the eurozone average. So in this sense, one cannot speak of an outright collapse of competitiveness. The real reason behind the huge deficits in the current account balance was the surge in imports. And this is why we need to come back now to the role of the public sector. The rapid increase in the public sector size in just five or six years was perhaps not the only culprit responsible for the import-fueled consumer spending spree that we witnessed in Greece, especially during the latter years of eurozone membership. But it was the most critical one, I would argue. In just four years, between 2005 and 2009, government expenditure as a percentage of GDP went from 44% of GDP to 53% of GDP. That is the fastest growth in Europe, causing the Greek government to become the third largest in the EU. Right behind France and Belgium. But whereas in other EU countries, such government expenditure often translated into quality public services and in many of them also reflected the implementation of anti-crisis-reflationary policies, in Greece it only served to make an already bloated, low productivity and overstaffed sector even less productive. How was this increase in the size of the public sector financed? Well, through the famous budget deficits and increases in public debt. Public debt increased from nearly $170 billion in 2003 to almost $300 billion in 2009. That is a 77% increase. The trade deficit rose to an astonishing 6.4% of GDP in 2008, fueled by the increase in imports that I mentioned earlier. So it's surprising that the private sector did as well as it did under such unfavorable circumstances. To be sure, the Greek private sector is by no means perfect. We already talked about the rising relative unit labor costs. Large parts of the private sector are inefficient because of the small size of firms, tax evasion, we talked about that. That's a huge problem. And large parts of the private sector are dependent on government contracts and European community funds. But the private sector nonetheless has a history of responding positively to the right kind of economic reforms. Back in the 90s, for example, when Greece was, despite implementing probably one of the most stringent fiscal austerity programs in the whole of the EU, perhaps Sweden is another example, Greece enjoyed a growth rate that exceeded the eurozone average by about a third. Despite the fiscal crunch, growth was higher than average in Greece. Now, the simple explanation for this is that a long period of severe crowding out of the private sector more or less ended or was curtailed. And this dovetailed nicely with the liberalization of the financial system that occurred at the same time. And that's when we witnessed a new wave of outward direct investments principally in southeast Europe when what we were used to exporting was people, not capital. At the same time, Greece absorbed nearly about a million immigrant workers and their families and gave them jobs, which is no mean feat for a country of 11 million. Now, the following decade was poor in reforms, yet growth was high thanks to low interest rates and pro-cyclical fiscal policies. Now, the inadequacy of fiscal and structural reforms became all too apparent when the fiscal crisis hit. But it's precisely for this reason that one is entitled to be optimistic about the future. Because in contrast to what happens in contrast to what obtains in other countries in similar dire straits, for example, Ireland, in Greece there is no shortage of structural reforms that need to be undertaken. That's why future growth may well end up being higher than most people expect. Provided we are successful in implementing the right structural policies as Dr. Papakian was mentioned. This in brief is my argument. If we manage to fix the public sector, the private sector can be trusted to regain its dynamism. Here I mentioned again the government's pledge to privatize another 50 billion euros worth of assets. Already there are signs that the private sector is becoming competitive, more competitive if the recent very impressive jumps in exports are anything to go by. Monthly increases of 38 to 40 percent over the past four months, five months. Now this can be partly attributed to some very interesting developments on the labor costs front. The latest euro stat data show that in the fourth quarter of last year nominal hourly wage costs decreased more in Greece than anywhere else in the EU. They were actually negative by a minus six and a half I think when the rest of the EU had slightly positive growth there. So a substantial and orderly internal devaluation may be possible after all. Let's see if these trends continue. It's extremely important to follow these events. So those psychologically people in Greece are now at a low point. I think we may start seeing a turning point fairly soon. I have now the problem that I cannot disagree what I've heard and I partly wanted to say the same things. So I'm a little bit in trouble here, but what I like want to do is to underpin it a little bit to what has been said by some concrete experiences we made with the program. I think writing the Greek adjustment problem was not too difficult because there are so many deficiencies in the economy. You just have to dig here and here and you'll see what can be improved. It started with the notion that the government didn't know how many civil servants were there. So everybody had to declare himself as a civil servant in order to get paid later on. There were huge deficiencies in many sectors, in the health sector, no control in expenditures whatsoever, even buying equipment which is not really needed and this disappeared somewhere. And of course corruption there was on both sides, on the side of the buyer and also on the side of the seller and we know the stories about Siemens for example. The public sector was certainly oversized. What can you do? You use wages and you reduce the number of employees. Greeks have adopted very clear rules, one to five. So one employee or five employees who are leaving the civil servant are replaced by one new employee. Also the salary structure was very odd. In some ministries you had double the salary than in other ministries for example. The same is true for teachers. What are you doing? You engage in a uniform salary structure and you adjust downwards. In the military service, this has the largest army in the Union in terms of GDP. You may ask the question why. If both countries which are at stake are in NATO, also all islands have their own military people. Very difficult to remove and it will be timely but of course you have to address the issue. Labour market functioning, we talked about it. What are you doing? You engage in more flexible wage settlements and also in reforming the unemployment benefit system. The tax structure, we knew a lot of exemptions from very low taxation in items where you are asked why. It's just to protect some sectors including here, tourism, things like postal services. A lot of things which can be changed, quick fixes, much more easy to do in a country like Greece than in other countries where you have less corruption like for example in Portugal. You know what you have to do, you do it and then I agree implementation is important and implementation does not end just by the government adopting the laws but you have also to guarantee that it's really working at the ground level and there we see certainly some hesitations that the administration, the stakeholders are really doing their job. The short-term economic prospects. We have heard that there was a deficit slippage last year but we think it's not so dramatic because we know why it has happened and it has happened because the recession was deeper in particular in the last quarter of last year than thought and also the composition effect in particular private consumption was down much more than we thought and private consumption is a tax-rich component. On the other side, exports behave much more favorably but exports do not generate the same level of taxes. So in some sense it's also good news because the rebalancing from domestic demand to exports to the external sector went faster than we thought and indeed the net contribution of the external sector to gross was 2% of GDP. Of course, imports contributed as well but we can agree that exports are the favorable surprise of last year's development. Private consumption down in the order of magnitude of 15-20%. It's a huge number but we have also to see that per capita consumption in Greece over the last 10 years went up by 80%. By far the highest rate in the Union. In Spain it went up by 40%, in Portugal by 30%, in Germany by less than 30%. You may argue it should have been a little bit more buoyant over there, it would have maybe also mitigated some of the tensions in the new area. But if private consumption had increased by 80%, then you can of course squeeze if you are doing it in a socially balanced way, you can squeeze and we have seen that in the Baltic states it worked out also favorably. Going forward, what is on the short-term agenda, we have been there looking into the fiscal strategy. And there what the Greek authorities have been committed now is to formulate a medium-term strategy on the very micro level. So for each line ministry in the budget, line for line, there is now a benchmark projection scenario with the appropriate savings. And a commitment to very strictly control these items in the budgetary execution. It's I think important to get ownership also, ownership and accountability in the line ministries which for the time being we had the impression are not that committed, are not that aware of the crisis we are facing in Greece. The finance ministry of course knew, knows, but bringing it to the floor, bringing it to the other departments of government was very important. Tax evasion, yes, a very critical item. Again, I think we are quite optimistic that more fairness is important and how can you get it if you allow people to evade taxes because these are the rich people normally who gain most from this item. And it's also important in the rebalancing from domestic demand to exports because if you are an exporter you cannot evade taxes to the same extent as if you are in the domestic non-traded area. So if you can evade taxes in the domestic area it's more attractive to engage there. But if you reduce the possibility then you favor relatively the exporting sector and we think it's quite important mechanism to foster also export activities. If we look at the figures, sometimes quite difficult to see as to whether tax evasion works or not. If you now see last year we had an increase in the tax rate in where you added tax rate by 20%. But where you added taxes only rose by 7%. So then you may conclude the higher tax rates foster tax evasion. But at the same time the base, the tax base for where you added tax was also reduced by 20%. So the 7% increase in where you added taxes was a positive surprise there. Exports, we heard it's decisive that the exports takes a lead in the recovering of gross and we hope we think that the bottom in the cycle or in the crisis management will be reached this summer and we hope that in quarter 3, 4 we will return to a positive gross rate thanks to exports. What are the most promising export sectors in manufacturing? It's pharmaceuticals, it's the petroleum industry because Greece acts as a regional transport hoop in the region, not for the EU but in the region. Tourism so far has been stagnant in relative terms. We expect that this year also because of the events in Northern Africa tourism will perform quite well, quite favorably. The main problem of tourism is in Greece that 50% of revenues are generated within a very short period of 3 months. So you can do more there, you can become more attractive there. That's underway. Manufacturing also food and beverage industries have to our analysis potential to develop favorably. Structural reform all in all are very important also to foster gross. We have made some model simulations whatever it's worth but reducing for example reservation wages by 5% and to reduce the tax burden on labor can generate within 2 years a higher gross rate of 1.5 to 2% points in the longer term even more. Current account is down from 15% to 10% and we expect that it's going down further. I think it's very decisive to see the current account going towards balance because otherwise the growing net external debt will be a burden for income at home and in particular if the counterpart of the current account as it has been in Greece the counterpart is not investment but consumption it's a permanent burden on the economy. The same problem is due also in Portugal if not more severe there than in Greece. I think I would stop here but in general I could agree what I've heard so far. I'll attempt to be pithy and avoid redundancy given the tour de force that we've heard so far. The debate has been rancorous, full of acrimony, accusations flying across the negotiating table and of course that's just down the street as we negotiate the budget but that's a reminder that the problems and the challenges that Europe faces are a challenge that the industrialized countries face and we're having this debate in the US I had a cocktail last night with a British member of parliament and we spent a couple hours just discussing what's going on in the UK and the austere budget package that's being implemented and what that means and how that may play itself out so it's not a European problem it's an industrialized problem and it's a culmination of decades of making promises we simply can't afford and that's going to force some truth-telling and some transparency over the coming weeks and months and years and that's going to be very painful it's painful in the capitals of Europe it's going to be painful in this capital and we've just begun that process and it's also an indication of the competitive pressures we face you know de Gaulle said it's not the Europeans that will unite Europe, it's the Chinese and in some sense we all face the competitive pressures that are coming from the fast growing BRIC countries and other parts of the world especially for those parts of our economies and our societies that have low skills and little training we have large proportions of our economies that simply can't compete in any type or global marketplace but that all gets to why am I here and why are we talking about this issue here in Washington and I'll relate that with a story during the midst of the crisis last spring I was called up to Capitol Hill to meet with a number of elected officials who are still in the throes of no bailouts, no tarp you know we're going to run in the midterm elections on why we shouldn't be throwing taxpayers dollars at solving big problems you know where is Greece and why should we care and I try to make a very pro-Europe case to a number of very skeptical politicians who remain quite skeptical and Heather and I have talked about this a number of reasons why Washington should care one is just strictly trade flows we have about a quarter somewhere between 20 to 25% you count it if our trade flows go to Europe so that and the fact that many European companies employ thousands not millions of workers here in the United States go to South Carolina and look how many German name plates and brands you see who are paying good salaries good payroll we have a direct financial interest through exports and through just the success of European companies here so a prosperous Europe is in our own selfish economic interest market confidence you know the US economy was just beginning to come out of the throes of the crisis in the first and second quarter last year when the crisis in Europe broke and you could see it hit our equity markets we lost over a trillion dollars worth of market cap in May alone and relative to what was lost since the top of the market in 2006 with respect to wealth in this country it was small but a trillion dollars is still a trillion dollars we had a real hit to confidence not only from an investor's perspective but I think many CEOs who are beginning to think about taking the piles of cash they have stocked away and putting it to work either investment or hiring I think they decided it was a good time to retreat back into their board rooms and maybe wait a year or so and we are just now beginning to come out of this so there was a confidence piece of that in fact it was not only a market cap lost in the United States but in Europe matters in the U.S. and globally bank exposure obviously we learned during the financial crisis that what matters in one bank matters in others we see it just as we play out in Ireland John Henry mentioned this morning the debate that is going on the vote that is going on in Iceland today about whether they are actually going to end up reimbursing the Brits for covering the deposit coverage for their failed institution and what we have learned very harsh lessons about the importance of linkages between our systemic institutions U.S. debt, Europeans sold 3 trillion dollars with the U.S. debt that is three times what the Chinese sold and we spent a hell of a lot of time talking about what China does with respect to our debt but we have a vested interest in funding ourselves one of these days the Fed is going to stop buying treasuries the Chinese is going to stop buying treasuries and we are going to need to rely on others around the world to continue to fund our enormous fiscal deficit and lastly just national security if you walked in today and you saw this U.S. security strategies if you didn't get one I recommend that you pick it up it's a great succinct and a thoughtful piece on why as just sitting side economic interest from the national security interest why a growing prosperous and financially healthy Europe is in our interest and just in the events in the last month in Libya as a reminder that NATO plays an important part in bringing about not only regional security but also in promoting the values that we all have found here at CSIS where the founder David Apshire was a former ambassador to NATO so they're all interconnected we cannot secure the sea lanes we cannot deal with regional or geopolitical challenges if we're broke if we cannot find a way to succeed financially and we're all in this together let me just say a few things about about what's happened in Europe generally and I'll leave Greece to what's already been said because I really don't have much to add I have many Euro skeptic friends and predominantly in New York predominantly in London and a year ago all of them said aha we've been forecasting now for a decade that this was a failed experiment and it's just a matter of months before the whole process crumbles up on its own weight and I think what they didn't quite understand and what my European friends and officials here today who've helped me remember is just the political commitment to this experiment and the ongoing political experiment and I think what we've seen over the past year is European political leaders and institutions respond not as quickly as we like not as aggressively not as proactively sometimes forced into it by the immediacy of the crisis if you think about where we were a year ago we now have these new institutions the EFSF which I went and visited Luxembourg a few weeks ago soon to be the European stability mechanism an important new instrument in dealing with the financial security and economic security of Europe you're right it needs to have the ability to purchase debt in the secondary market they didn't give that institution that capacity I suspect the ECB is going to continue to have to play that role reluctantly and will probably pretend that they won't but they will and it's an important role to play a bank stress test which unfortunately was a missed opportunity but there's a second one in place which will be out I guess in June I saw some press reports this morning about some of the indicators 90 banks targeting a stress test of a 5% core capital a pretty rigorous test this is a great opportunity for Europe to address what everyone knows there's a capital shortage among banks it's not widespread it's among certain institutions in certain countries but until we deal with either the sovereign piece of this crisis or we deal with the bank capital piece you have a mismatch and I think here's an opportunity for Europe to do an assessment of where the capital shortage is under current Basel II and where it's going to be under Basel III rules and governments are going to have to find a way to recapitalize their institutions many political leaders have yet to tell their domestic population that there's a banking problem but they're going to have to because you can't run a real stress test that produces some estimate of the absence of sufficient capital and not be prepared to fill that hole fairly quickly again I talked about the ECB I thought Jean-Claude Trichet and his colleagues have done a remarkable job they jumped into the breach sometimes probably pushing what was their statutory authority they did it creatively they did it with courage facing great criticism but in the absence of those actions I suspect this crisis would have been much worse and I applaud them for that effort on economic governance we noted that part of this package is the growth of stability part 3 let's hope this gets it right there's still some weaknesses given that there's political monitoring rather than giving our friends in Brussels greater teeth to monitor and put in place in an automatic way sanctions but it's better than what we had and I suspect that it's an evolutionary process and if this fails to produce the kinds of fiscal discipline we need then I suspect leaders and the next crisis will produce the growth stability pack part 4 the euro plus pack which is focused on competitors as Antonio De La Sanos is one of my hobby horses that if you look at the expectation of potential growth in Europe it's about 1.5% between now and 2020 the Europe 2020 program designed to raise potential growth to about 2% some feel that they should be satisfied with that I think why to why not more given the enormous fiscal challenges the unfunded liabilities and the demographic challenges Europe faces fortunately US we have the ability to deal with some other problems through immigration this country will probably see its population grow by 100 million per century you can solve a lot of problems through immigration the politics in Europe doesn't allow that so I applaud the effort to look at competitiveness across the board but the efforts to raise potential growth and then again just some of the countries who've done really remarkable jobs certainly Greece in the past year Spain has undertaken substantial reforms what we're going to see is someone mentioned in Ireland even before the banking crisis and I think that we sometimes look at the glasses half empty rather than half full there has been really remarkable changes more needs to be done as we heard from the keynote there's implementation risk and there's political risk the farther you get away from the crisis the pressure to continue the implementation and to keep the political consensus wanes we see that in the G20 we see it throughout other institutions even in Washington we missed a good crisis to deal with some of our fiscal challenges so it's important that in the next 12 or 24 months that these programs whether it's privatization dealing with liquidity a medium term framework in Athens that these things are undertaken and undertaken quickly and let me just close by saying that one of my former bosses used to say a great aphorism which is with leadership anything is possible without it nothing is and in Europe we need leadership and right now I'm pretty depressed about what I see and it's not only in Europe it's in Washington as well I would argue actually probably in Tokyo and that is if you look around the political capitals of Europe the continent is crying for strong leadership and some in fact many political leaders are crippled by a variety of challenges we saw the elections in Germany in just a week and a half ago a succession of launderer elections which has Chancellor Merkel at a very weak position and now we all wonder whether she can continue to convince the German taxpayer to do the things they need to do in order to secure this union it goes back to bank recapitalization the Germans are going to have to provide additional funding to recapitalize banks in Italy we see Prime Minister Berlusconi facing his own series of personal challenges and how that plays out remains to be seen we have a lame duck leader in Spain a lame duck leader in Portugal we have in France President Sarkozy whose poll numbers are sagging we have the Finnish elections on the 17th in which the true Finn party which is anti-EU anti-NATO anti-forn assistance now polling second and we see, as I mentioned in France the right wing what's interesting is this crisis it wasn't the left wing that won that seemed to rise to the occasion what we see is the rise of right wing parties and so we either have politicians who are either crippled by their own domestic political challenges or the rise of anti-Brussels, anti-Europe anti-immigration right wing political movements which I think hamper what we really need is strong political leadership and I hope that over the coming weeks and months that we find political leaders in Europe who can overcome some of these political challenges and rise to the occasion with that I'll stop Thank you Tim thank you to our panelists what a tour de force that was a powerful presentation what I'd like to do is take the moderators prerogative I may to sort of ask the first question but we have a lot of wonderful time for discussion so we're just going to run as long as we want with good questions so my first question sort of seizing a bit on Jacob's question about the banking you've all touched upon it how central to resolving the European debt crisis revolves around the health of the European banking system and speaking particularly of some of the regional banks whether that's the Spanish, the Laundice Bank system that this is really the underline story and how do the current challenges how do we come to grips with that that's sort of the first question and then second question something that Dr. Papa Dimash had mentioned is about the favorability or the unfavorability of the market conditions and I have to say as I watch inflation begin to creep back in and we don't know how long commodity food prices energy prices will continue to increase I'm seeing the cost of the challenges in North Africa immigration, the cost of absorbing even temporarily refugees and things like that how does this play into even the best best laid economic plans and the market conditions in the short term really impact both market sentiment but as well as Tim rightly pointed out the politics of the moment so if each of the panelists can quickly share some thoughts then I will turn to the floor we'll just start down the line would you like to? Now on the European banking system we tend to focus in Greece on our own banks and leave those problems to our superiors but joking aside we don't have time for that sort of consideration even though it is probably at the heart of the matter because if anything goes wrong anywhere the transmission mechanism may well be the banking system so we have to make sure that nothing goes really wrong in that respect so but what we do from our side is just make sure that Greek banks are well capitalized to the extent that's possible and hope that the enlightened ECB will be able to handle the situation in the rest of Europe with similar policies or different slightly different policies and that's why the stress test come in that's very important that's what I can say on this score now on market conditions we have been as you know prime victims of market conditions and the excesses of markets and their volatility and we're still struggling to put some sense into the wider so-called market through our adherence to a particular program which we try to show to the rest of the world that we are very serious and determined about implementing it and hope that eventually the markets will come around they always find excuses for not complying with our desires because there are always little imponderables or little areas which are gray areas as far as the architecture is concerned but that at the end of the day when the whole system is in place because let's not forget we are in a transitional period we may not feel like that every day that we wake up but we are in retrospect we will look at 2009 2010 2011 as a watershed not just in the global economy but also in the construction of Europe so when you're in the middle of a transitional period you can't expect perfectly rational behavior from anyone let alone markets in the commission we very much agree that well-functioning banking sector is very decisive for getting gross money what problems do we have except maybe one comment on the German Lundesbanken I think it's easy to fix there because they do not have a viable business model so they have to be downsized and that's it it's also unfortunate I think that the German government may be not very keen in participating in a serious stress test for these banks but a functioning banking sector will be very very important one element is recapitalization but the other thing is also to have a deleveraging effect which is smooth is gradual and does not interfere too much with the non-financial private sector and there we have the threat if deleveraging goes too fast then we have crowding out of private companies in some countries at least and this may then lead to very low gross because corporations cannot get access to finance maybe these problems are very significant in countries like Portugal and Spain but also in some other countries then there's the issue also of small countries big banks who bailed them out Ireland is certainly stretched to the limit with taking the cost of recapitalization of their banks but the cost may be also quite big in some other countries including I would think Germany market conditions the spreads why are the spreads so high when we have all very promising programs, adjustment programs in Ireland in Greece I think that's the talk on restructuring of the debt which is triggering these very high spreads which in my mind are not justified given the economic circumstances and we have heard that restructuring is not the solution in particular I would think not for Ireland why do I believe that restructuring is not the solution first Greece has not a stock problem it has a flow problem the restructuring will not change anything in the economic challenges Greece has competitiveness we heard about it reducing the fiscal deficit it will be perceived by the outside world that the adjustment program has not worked it may be seen by the Greek authorities to relax in the adjustment efforts and then within a short period we will again be there where we are now and it may have very very dangerous contagion effects to other countries so to get better market conditions I think is influencing implementation of the program in Greece also tackling taboos like we have heard about it privatization and also many tax allowances still exist in the system and are conducive to personal interest confidence there is still enormous uncertainty about the fiscal sustainability I will add I received an e-mail from the daily rumor on Greek restructuring there is a whole cottage industry that has been put in place to evaluate and guesstimate on when Greece or other countries are going to restructure I have two headlines here I am picking on Bloomberg on April 6th 1am local time longer rules out Greek debt restructuring 5 hours later EU says Greece is on right track rules out restructuring I don't fault the 4th estate for trying to get good headlines that is what they are paid to do but you just see the volatility in the reporting and coverage of these markets and some small rumor reported in a German paper has outsized effects and will until there is a sense of market of the future on banking this stress test is critically important when the US did its bank stress test I was skeptical it was going to prove to be successful I was wrong it was successful because the market looked at the number it produced and said that may not be perfect it may not be exact but it is credible we need to put another 100 or 150 and Europe is that 3 billion euros just didn't seem credible the irish stress test which was released last week was seen as incredibly credible if you haven't looked at the documentation it was done by a private sector entity and it was quite good let's put all the information out on the internet and if you are not happy with the amount of transparency we have you can crunch the numbers and come to your own conclusions and I hope that the next European wide stress test which is in 90 institutions is as robust and as transparent I know there are political constraints to certain scenarios you can't stress the hold the maturity book assuming sovereign restructuring I get that you can't do it but you can put the information out so the private sector can do it and come to its own conclusions come up with some estimate of how large is the capital hole and then political leaders in Europe have got to be prepared to put money into the capital hole and as you know as well we have to think about what we do with cross border restructuring all these institutions now interlinked and we still are waiting for and it's a difficult task but we need some sort of system and institutional response to cross border restructuring and thirdly I suspect that we'll see across Europe some consolidation of the banking industry we're going to see it in London we're seeing it in Ireland we're seeing some consolidation to occur across border and that we don't simply draw lines around our national banks and say these are protected the M&A needs to occur someone else Yes, Nick Carambelis I'm an attorney in town Mr. Kroger and Mr. Papadopoulos mentioned the importance of exports to the Greek economy and now and going forward to expand exports you have to expand means of production means investment capital I was wondering where is that investment capital for Greece going to come from thank you That's a very good question when we know that investment private investment capital investment is falling so you may wonder maybe we have a lot of excess capacity so that's a start yes, yes remember this kind of garnishes the images we were presenting earlier but even today exports have not reached their peak of 2006 so in that respect there's excess capacity and then when we reach our potential then there will be new pressures for further investment which now there aren't you see so it'll be a positive development when we reach that ceiling and then people in order to exploit the advantages that are offered by exporting will go to the bank and ask for a loan to expand their business that'll be a happy development we're not there yet because we know credit to the private sector is stagnant it has fallen to net credit growth is now I think so it would be good to get rid of any excess capacity we have to start seeing the machine working again question I think we should see Greece as a predominantly service oriented economy and there you do not need so much capital investment to expand exports there's a lot of business services so the capital intensity of exports is maybe much much less than in countries like Germany that's first second of course you need first to establish high competitiveness this means the high expected real rate of return in the economy then of course you can be optimistic of FDI phone direct investment and here we hope I hope Greece has a large external community who may show interest investing in their home country also under this perspective I think privatization is very very important first as means to attract phone direct investment to the economy but also to foster business in this state owned properties I would say better business and here Greece I think is the highest is the country with the highest asset level in terms of GDP in the European Union so privatization is very very important indeed also under the aspect of fostering business I'm Jonathan Kimble with Pharma which is an international trade association representing the biopharmaceutical industry and my question relates to both the opportunity but then the unintended consequences that this type of reform offers Mr. Kruger mentioned that the healthcare sector is a sector that obviously needs reform and in the third review of the ECB the commission the IMF they actually laid out very extensively a lot of the proposals that are going forward to make this reform possible and our industry in Greece is on record of supporting the savings of 2 billion euros in the next 2 years in Greece the question I have is the proposal that goes beyond what was in the initial reform package has very significant potential to I don't want to go too far but really challenge innovation in the pharmaceutical sector and because of the structure of the global pharmaceutical industry has implications around the world the way global prices are set and so my question is when these unintended consequences happen out within the reform process is there a review happening within Greek or within the commission where the private sector can be part of that to explain in greater detail where this is going and some of the concerns we have? Yes I think the whole reform program is on the permanent review thank you for mentioning our quarterly review which indeed is extremely detailed of course if we see that something in a slightly different direction we would of course take this on board discuss it with the Greek counterparts and then take it on board in our program so it's not static the program it's prone to change and if you see the second, the first, the second, third and the fourth review you will always see some changes here and there yes sorry that's a question first directed to the European Union and our Greek visitor it refers to reform fatigue so I would like your comment on reform fatigue if that sets in at some point especially if that has been taken into account by the European Union in their projections both in the terms of the political context and the population the social context in Greece and on the other hand on the actual numbers, the tax revenues how is that going to be it's falling behind as we heard in our key note speaker and the second question if I may add to that is again for the European Union the rating agencies and the role they played in not only the European Union I'm afraid to the rating agencies and their role in the crisis if any and the reform there's been some consideration in the European Union to start an independent European rating agency what has happened to that I'd love to take that question I knew you would and I've come 180 degrees on this if someone would have said to me 5 years ago when I was the US Treasury that we need to rethink the way in which the rating agencies work we need some sort of official entity or some sort of collective entity a new institution I would say no the free market works these institutions do a great job they don't they failed it was a critical part of the failure of the system generally and they continue to be in this case very prosyclical and I think boarding on irresponsible and I don't know what the right solution is but what we currently have about which they function which is you're being paid by the issuer I don't think works I think it's a flawed system which we tinkered around with and Dodd-Frank but we really didn't take the issue on in a frontal way and I think elected officials and the EU and the US and others need to rethink this and I would hope that the private sector tries to innovate in a way that provides yet a different avenue but you're right they failed they continue to fail and they exacerbate the problem Reform fatigue I think our feeling was that at the beginning there was a lot of enthusiasm to foster structural reforms and fiscal consolidation then towards the second half of last year there was a little bit of lower engagement in structural reforms also due to the elections at that time but I think the momentum is now coming back in particular also in the context of the program because the program length is until 2013 and then the forthcoming general elections have to show that the program delivers in that regard I think we are optimistic that also some new topics are being addressed like again privatization of course one has to pay attention on the social balance in the country and there the perception is that too much emphasis was put on cutting wages cutting pensions and the issue of tax evasion was not of this high priority so far this should change and we very much press that more attention is put on taxing the richer part of the population rather than cutting more wages or raising taxes further on the rating agencies I'm not an expert I think their importance was overrated and I think we could distinguish maybe two phases in the run-up to the crisis when imbalances in the euro area were developing current account deficits became very persistent then the rating agencies did not react at all and we even discussed with them at the time why don't you react because we saw at least some problems coming up there but they didn't notice of macroeconomic imbalances and now they I think overrate the problem or underestimate the commitment of governments to reduce these imbalances I have the impression that in the political sphere the importance of the rating agencies is playing down, is being played down and in this context even also the discussion on the European rating agencies but I don't know where we are, how concrete it is I think it would take a while until we would have such a thing Hi, Jonathan Weiner from APCO Worldwide the tax evasion issue does strike me as pretty fundamental and that as near as I can tell Greece has comparatively under compliance with its existing tax laws and there's in particular a problem perhaps with tax compliance in the upper 70% of the population and one statistic I saw was that basically the bottom 30% pay a substantial portion of the taxes and professionals like doctors and lawyers and accountants and tax collectors don't pay very much in the way of taxes and there's a particular problem with tax enforcement that there's even a corruption issue that's been perceived in the tax collection area and it would be very helpful to have a sense of what particular initiatives the government is thinking about to address these issues if these kinds of concerns or criticisms are fair perhaps they're not but if they are fair and I've just heard from the commission that the commission seems to have concerns in this area that they've been not focused on adequately what are the kinds of initiatives that are likely to come up in the near term, thank you I think the problem is quite significant in particular in some professions but also in some sectors like tourism the many, many small and small medium sized enterprises are of course conducive to tax evasion in the area of direct taxes we recommend that one should really make cases if I have a clear defined case where tax evasion had been observed that putting these people into jail in Germany for example it worked quite well to put some high income earners who have taxes evaded into jail so this had a demonstration effect to others and I think we discussed that in these terms with the quick authorities in the area of valued edit taxes they have taken measures in better controlling the transfers payment there the activities so there are some efficient measures have been taken but the big problem is income tax corporate taxes in the tourism industry we have to make a distinction between the salaried people and the non salaried private entrepreneurs because salaried people cannot evade paying their income tax so the burden is on them actually and whereas everyone demands better public services and they complain when they don't get them they're still realizing that they are part of the problem so it's a deep-seated cultural problem and when you have discussions with people and say but wouldn't it be better if we all paid more taxes you say this from a position of safety in my case because everyone knows that I pay my taxes so it's not a question of any doubt in my case but when you have these chats with other people they say pay more taxes how do I know they won't go into the pocket of some official some high up official in other words will this translate into better services for people and people don't believe that they will this is the big problem but what is the government doing about it well they are reorganizing the tax authorities consolidating the various tax offices around the country and changing the tax laws because the tax laws leave much room for discretionary giving and taking you see so that needs to be clarified and there has to be less interaction between the individual tax men and the companies the little companies especially because large companies as you said are under a more strict regime but the small firms are always added I must say that over the past several months or a year or so one has noticed tendency for tax coffee shops whatever to produce the famous receipt because tax paying citizens have an incentive to declare how much they spent and to prove it by attaching those little receipts with their tax files so it is changing a bit we've seen these phenomena in the past and then they fizzled out but this time I think it's more serious so this is a huge not just management effort, not just administrative effort, it's a cultural effort that's what makes it so difficult thank you, John Shage of strategic petroleum consulting Dr. Papadopoulos is there any danger that the seemingly inexorable rise in the price of crude oil will swamp these attempts at reforms in economic growth and if it continues is there some level at which you would recommend that either the EU or the International Energy Agency release strategic stockpiles of oil to control the price because of the effect on the reek economy am I an expert on the oil industry well we're one of the most oil dependent economies in Europe but we also export petroleum products so I don't know if there isn't a compensatory effect on the export side there might well be actually because there's a lot of value added on petroleum exports which are refined products you see so I'm not saying of course that we look forward to the rise and the oil price but maybe it's not in terms of its global impact on the economy maybe it's not as severe as that it is severe now whether this will lead to strategic decision making at the EU level I really don't know whether we have that capacity in the EU just a little slightly when you have the increase in commodity costs food costs, energy costs let's make an assumption of a sustained period how does that impact policies on the EU level it's reform fatigue because there's an external stress that's occurring how do we do that you ask the similar constraints on the inflation rate does that come into any decision making factors as you're focusing on an adjustment program for Greece or for the other affected periphery countries I think it would be very difficult to control prices if we have these terms of trade changes they have to be absorbed in the economy so if you have higher imported prices the oil or food then over a longer period it has to be absorbed by lower consumption in the country that's as easy as it is but of course if there are special groups in the society in the country who are especially hit of course then you can think in some revolutionary measures but I'm personally against price controls then you should save oil and replace it by green energy or better isolation of your houses or what have you if you look at an oil price shock looking for two perspectives the policy response but also the consumer and corporate response it tends to come out of savings initially and then by the third quarter of the shock it's almost completely out of consumption what we're seeing now Brent's oil about 120 this morning something so there's a lagged effect on the consumption on the corporate sector they tend to absorb about a third of it initially and then depending on the competitive structure of the