 So, let me present in a nutshell what I think the design failures are of the Eurozone, and then I will elaborate a little bit on this, and then in the second part I will talk about how to correct for these design failures. So first of all, what I see as a design failure has to do with the following, capitalism is a fantastic invention, but it's also very unstable, producing booms and busts, bubbles and crushes all the time. This has been for centuries like that, right? And these booms and busts have been there, and those who designed the Eurozone thought that they would be transformed into booms and busts at the Eurozone level. But no, they remained there, but at the national level. You had a boom and bust in Ireland and none in Germany. And so all this remained at the national level, creating potential for huge divergences and imbalances to which I will come back and that you know quite well, right? So that was in a way something that escaped the attention of those who created this thinking that if you bring money together, then you will have the same cycle, and we didn't have the same cycle. In fact, some people have argued that by the very fact that you are a monetary union, you might even have exacerbated these national booms and busts rather than making them more convergent. So that's one. The other one has to do with the following. For the centuries, we have introduced stabilizers in this capitalistic system, right? But they were organized at the national level. And when we created the Eurozone, these stabilizers at the national level were dismantled and nothing was put into place at the Eurozone level. So that essentially some key stabilizers did not function. I will elaborate on this. So let's first say a few things about these booms and busts dynamics that have remained national, right? What we did in the Eurozone was to centralize money fully, but most of the rest of macroeconomic policies remained organized at the national level, creating this potential for national booms and busts to continue to do their work, right, unhindered by the fact that there was a monetary union. The monetary union, in other words, was no disciplining force in terms of these booms and busts, and it did not at all bring them together into a Eurozone one. That would, of course, that was, in fact, the intention, because we know from the literature on optimal currency areas that the problem of monetary union is asymmetric developments, asymmetric shocks, and they continue to work unhindered. In fact, as I said, one can make the argument that the existence of a monetary union exacerbated this, because, as you know, the ECB had to put an interest rate that would prevail for everybody, and therefore it was way too low for Ireland, right, and too high for Germany, and as a result exacerbating the boom in Ireland and in other booming countries and making the boom, and later on the bust, more intense, right? So that is, I think, a major problem, design failure in a way that has very much to do also with the fact that we left the whole of the Eurozone unfinished business, right? We centralized money, but it's so little in terms of centralizing other parts of macroeconomic policies, right? That's what was left out of the agenda. We are now trying to do that, but certainly too late to have avoided the crisis. Here I show you the difference in inflation over the period prior to the crisis. This is probably something you have seen. Here you have Ireland, Spain, Greece, where the average inflation rate over the period of 80 years prior to the crisis was significantly higher than the other countries like Germany. That's the vertical axis, the horizontal axis, the unit labor cost that also tended to increase much faster in the booming countries, creating then the imbalances that we know, current account imbalances, the surplus countries increased their current account surpluses up to the crisis while the booming countries and deficit countries then increased their current account deficits as the boom, the consumption boom led to increasing current account deficits. This is the story that we know that has been very much emphasized as a design problem of the Eurozone, but let me concentrate on the other one that I think is equally important if not more so and has for a long time been totally unrecognized by those who created and then later on run the Eurozone. Prior to the existence of the Eurozone, each country had its own central bank and as a result also a lender of last resort to provide liquidity in times of crisis. This means that prior to the crisis, these governments had a backstop that they lost at the moment they entered the monetary union. Let me elaborate a little bit on this and this will then put at center stage the fragility of the government bond market in the monetary union. Governments in the monetary union when they're issued debt have to do it in what they factor is a foreign currency and as a result cannot give a guarantee to the bond holders that they will be paid out at maturity. It's literally possible that member countries of the Eurozone find themselves in a situation where they have no cash to pay out bond holders. That contrasts a great deal with standalone countries and all these member countries of the Eurozone used to be standalone countries that give an implicit guarantee to bond holders which is that they will always be paid out at maturity because there is a central bank that will be forced to do so in times of crisis. No sovereign will allow to be pushed into bankruptcy by the markets if it can avoid it by telling the central bank produce the cash so that I can pay out the bond holders. As a result, a standalone country can provide a guarantee to bond holders that they will be paid out at maturity while member countries of the monetary union cannot give the guarantee to bond holders that this will always be the case. That creates a huge fragility of a monetary union. It also produces a potential for self-fulfilling crisis. Here's the scenario that will occur when at a certain moment bond holders are fearful, they see some of the numbers that don't look right, they sell government bonds, interest rates increase, but more importantly, liquidity is withdrawn from the national markets. When the bond holders sell Irish bonds, the euros they obtain will be invested elsewhere and are drained out of the Irish money market and the government finds itself unable to roll over instead. No liquidity is available. It cannot call the central bank if the governor of the Irish central bank calls Draghi, Draghi will not take up the telephone. As a result, in a panic, the government has to introduce immediate and intense austerity. There's no cash. What do you do when you have no cash? You have to immediately cut spending, raise taxes, producing deep recessions and increases in debt to GDP ratio. That in turn can lead to a default crisis. So here we have scenarios that we have seen all the time. Countries that I think are solvent, I think for example that Ireland is a solvent nation pushed into a liquidity crisis that can degenerate into a solvency crisis because the country is pushed in such austerity that the capacity to service the debt declines, the debt to GDP ratio increases and as a result the capacity to service the debt declines. We see that what started as a liquidity crisis can become a solvency crisis. This of course creates strong fragility of these systems. The paradox is that when we entered the monetary union, we were told that because we are together in a club in the union, we will be stronger. The facts are is that by becoming members of this union, each of us became more fragile, more slaves of the financial markets because financial markets now in the monetary union have the power to force a default on a government. They don't have the power to force a default on standalone countries because a standalone country is always stronger than a market. They have a central bank that will produce all the liquidity of the world that is necessary to pay out the bond holders. And as a result we have a regime change here and this also explains the kind of macroeconomic policies that have been imposed on the eurozone, panic in financial markets that forces governments into excessive austerity that in the end instead of improving the capacity to service the debt makes the capacity to service the debt weaker. And this I think has been a story of, oops sorry, island, Portugal and Spain. I would have a different story about Greece. I think Greece was insolvent but we didn't know. So there you have to solve it differently. And this to restructure the debt and recognize that the claims we have on Greece should be abandoned or at least deep haircuts should be allowed. But so for the other countries I do think that this is a key problem and so we get here two interconnected issues, stabilizers that existed that have been, that have unraveled. Prior to the eurozone each of these countries had the last result that was willing to provide liquidity in times of crisis. This has been abolished in the eurozone and as a result of that the automatic stabilizer in the budget has also been disconnected because once you get into a crisis which is typically in the recession you have to increase taxes, you have to reduce spending, in other words make the budget torsiclical while in well-behaved countries that have a liquidity backstop, you have the capacity for the budget to do its work of automatic stabilizers. Not indefinitely of course but surely you have a possibility to do so. So we eliminated important stabilizers that we had built up over the years, over the decades to make capitalism more stable with lenders of last result, also in the government bond markets, not only for banks but also in the government bond markets and a capacity of budgets to do some stabilizing. All of this was de facto abolished in the eurozone creating the kind of crisis that we have seen. So let me skip a few things because of time constraints but this is a recent piece that I did for Fox where I show measures of austerity on the horizontal axis that were implemented in 2011 and the subsequent GDP growth and you can see that not surprisingly countries that introduced the steepest austerity measures also experienced the strongest decline of GDP. Ireland is a little bit above that line, did a lot of austerity but somehow managed to avoid the kind of recessions that other countries that did similar austerity went through. And then of course the other part of the story is that again when you put austerity measures on the horizontal axis the same austerity measures that I showed you, those austerity measures that were implemented in 2011 and the subsequent increases in the debt to GDP ratio and then you find a positive line that is the more you did austerity the worse became your debt to GDP ratio. So this is subsequent to avoid possible causality in two directions. So that illustrating the point that I am making that I have been making before. Let me summarize this. So the eurozone was left unprepared to deal with endemic booms and busts in capitalism. They are there. They will always be there. We should have no illusions that somehow we will avoid booms and busts, bubbles and crashes. They will come again. But we are totally unprepared. Probably the monetary union might have exacerbated these. And nothing was in place to stabilize an unstable system that pushed some countries into bad equilibria. Ireland was pushed into a bad equilibrium, so was Spain, etc. And others in good equilibria. Germany was pushed into a gentle good equilibrium. All the money of the West arrived in Germany and they could do nice things about it. For example, keep their banks afloat costlessly, almost costlessly, because they could borrow at almost zero interest rates. So it's easy to solve a banking problem. Germany also had a banking problem that could easily deal with it when the money is almost for free. And so that created huge antagonism also between these countries. Now we feel how the political tension that arises when some have it good and others have it bad in the same crisis. How to redesign the eurozone? That's the second part. How much time do I have left over? Okay, fine, perfect. How to redesign? I'm going to talk about three levels at which one should work. One has to do with the role of the European Central Bank. It will already be obvious what I want to say there, given the nature of the analysis that I've been making. The other has to do with what I call the medium one here, the macroeconomic policies in the eurozone. What's the nature of macroeconomic policies? How should they be designed, especially now in a crisis situation? And then the long run, that's when I will start dreaming about budgetary union, fiscal union, political union. They are important, but they are far, far out in the future there. So let me start with the role of the ECB. I think here what we certainly need to do is to re-institute a central bank at the level of the eurozone, because there's only one central bank in the eurozone that is willing to be the backstop, the lender of last resort, not only for the banks, but also for governments, in the government bond markets. I think that is key. That has been the great invention in stabilizing capitalism, the fact that the central bank is ready there to provide liquidity to solvent but illiquid banks and to solvent, but illiquid governments, because banks and governments have the same problem. Runs on banks exist, runs on governments also. And as a result, a central bank has to do its work there. It has taken some time for the ECB to recognize this, but as you know last year, the ECB finally acted and announced its willingness to buy unlimited amounts of government bonds. That's the key, unlimited. Prior to that, it had an S&P program, a program of buying government bonds, but this was announced to be limited in size and in time, and that's the worst thing you can do. If you say, I'm going to buy government bonds, but it's going to be limited, the amount that I'm buying, and limited in time, you give a signal to all these bond holders to sell when, now. If you were, in fact, planning to sell later, the announcement meant that all these bond holders said, now is the time to sell because they will stop soon buying, so it's the time to do it. So this was incredibly stupid, so now they have found out, usually you find out stupidity afterwards, but it's also the same holds for me. I'm not saying that it's only the ECB that does these things. So but now they have announced this outright monetary transaction program, OMT, that has this intention to be a backstop in times of crisis, and in fact, in defending OMT, Draghi used the same kind of analysis that I've been using, that is that the euro area, large parts of the euro area are in a bad equilibrium, in which you may have self-fulfilling expectations that feed on themselves, and you have to stop this, and central bank has the capacity to stop this. And as I said, in fact, spectacular effects on the spreads, since the announcement, the spreads have gone down dramatically, and the higher the spreads were, the stronger the decline was, therefore the great decline in the spreads was the most pronounced, and so forth. So I think this was the right step, the ECB, in fact, saved the eurozone, but I still feel a little bit uncomfortable because too many conditions have been attached to this, the ECB has announced that, well, you should go into some austerity if you want to have liquidity, and I personally feel that austerity has been too intense. But anyway, I think it's important. Yeah, I'm going to skip a few things. There's been a lot of criticism of this program, not going to go into that. Maybe during the question time you may want to raise these issues. What about inflation risk? What about the moral hazard risk of all this? And what about fiscal implications? But I will skip that so that if you want to come back to that, so I'm just going to skip quite a lot of these slides here. If you want to come back to this, I will be happy to do so. Now I come to my second dimension. I talked about the role of the ECB. What kind of central bank do we need in the Monetary Union? Now I come to the nature of macroeconomic policies. How should they be designed today? And here my fundamental point is that countries, the way it has been dealt with is very asymmetric. And we should move towards a symmetric adjustment mechanism. Here is the nature of the asymmetry. I show you the relative unit labor costs in the number of countries that have been experiencing financial difficulties. Prior to the crisis, you can see how these relative unit labor costs in all these countries increased. So the relative unit labor cost is the unit labor cost of a particular country divided by the average unit labor cost of the other countries so that it's a measure of competitiveness. If that line goes up, it means that unit labor costs increase faster than in the rest of the eurozone. And here you see Ireland with a very substantial loss of competitiveness prior to the crisis and since then quite a significant adjustment. And you see the same pattern or similar pattern in most of the other countries, although not as strong as in Ireland. Here is Greece, also significant adjustment. Here economists call this decline here, internal devaluations, you lower wages and prices so as to restore your competitiveness. I don't have to explain you that here in this country. I also don't have to explain you how painful that is and how that initially turns into a recession. And the positive effects that you may hope for, competitiveness improvements, take more time to work through and especially if everybody is doing this at the same time. That's the difference, for example, between what is happening in the eurozone and what has happened with one Baltic state that also does an internal evaluation. But being a small country and doing it more or less alone creates then a much more potent positive effect of improvement of competitiveness relative to the negative effect of a reduction of purchasing power of people. So this has been a very painful process in all these countries. One might have hoped that the other countries, these are the debtor countries, the creditor countries would have done the opposite, did they and the answer is no. Nothing, almost nothing happened there. So we have a very symmetric adjustment system where the debtor countries are forced to do all the adjustment. There are imbalances in the system, current account deficits of some, current account surpluses of others and it is the deficit countries that have to do all the adjustment while the surplus countries do very little. And that creates a deflationary bias. And in my view also the reason why we have turned into a double-dip recession. So this is the growth of GDP in the eurozone and you can see the big but relatively short recession in the period 2008, 2009, then there was a recovery and we turned back into a recession last year, essentially. And the question is, will we get out of this? But my point is that we got into that double-dip recession precisely because the macroeconomic adjustment was asymmetric and it created a deflationary bias. If only the deficit countries, the debtor countries have to do the adjustment by reducing spending relative to output while the others don't do the opposite, that is increasing spending relative to output since they have a current account surplus, then the whole system turns into a deflationary machinery. So towards more symmetry, how to do it? Well, clearly the debtor countries somehow are condemned to go on with some form of austerity but I would argue spread over a longer period. But this must be compensated by a willingness of the creditor countries to do the opposite. You have to reduce spending relative to output. The creditor nations should increase spending relative to output and they have the means to do so. Here I show you the debt to GDP ratios in the creditor countries and you can see that with the exception of France, all these countries have stabilized their debt to GDP ratios. So my rule would be just go on stabilizing your debt to GDP ratio. That is you can have some deficit, especially for Germany it's important. Germany is the major country among the creditor nations. Germany now tries to and has achieved a balanced budget, that is it's now pushing the debt to GDP ratio downwards. I'm saying stop this, take as a rule to maintain the debt to GDP ratio fixed and that allows you then to have a budget deficit of about 2 to 3 percent because the denominator in the debt to GDP ratio, GDP is increasing at a nominal rate of 2 to 3 percent and that allows your deficit also to be around 2 to 3 percent. You add some debt while your GDP grows nominally. But that is not what Germany wants to do today. Today they want to go to balanced budget like in the 1930s. In the midst of a recession, balanced the budget. So that should be the rule. The debt countries of course are on a very different path, an explosive path of debt to GDP ratio. I was told during lunch that it's going to stabilize here. Is that right, around 123 or 4 something, right? So most of the debt to countries are an explosive path. Italy is not really, they have not much choice but they should count on the others willingness to stimulate their economy so as to make it easier to stabilize their own debt to GDP ratios. Okay, so that's what I've, and then let me conclude by saying a few things but very short but come back to that at the later stage if you like. In the long run, economists have recognized right from the start and we talked during the lunch also about the McDougal report which was produced in the 1970s and which was a view about future monetary union. And the key element or the key proposal there was that if we do a monetary union, we should also have some form of fiscal union. We have completely disregarded this when we created the monetary union. Those who designed the monetary union said, we don't need the fiscal union. This turns out to be wrong, right? We now know it's completely wrong. So ideally we will have to go to a full fiscal union but what is a full fiscal union? The example of the United States that would be like a federal nation but with the union, fiscal union and that's 25% of GDP. So the budget, the EU budget is 1% of GDP and a discussion in Brussels to raise it from 1 to 1.1 leads to terrible conflicts, right? So it's clear that in the foreseeable future we will not go there maybe in 100 years. Who knows? But not in our lifetimes, okay? So that seems to me to be something we have to take into account. So the question is what can be done? Should we despair and say well it's lost? Some people say that, yes. I would say no, we can do a number of things that also have a signaling function, right? We all know that this full fiscal union is too far but by doing a number of things we can signal that we really want to go in that direction, right? That's the direction of the fiscal union. Well let's start moving in that direction and not in another one, right? That's key to maintain confidence in the future of that monetary union, right? And what do we have to do? Here are some things that have been floating around. I'm not inventing anything here. I do believe that partial pooling of debt is part of this, right? Where we issue euro bonds in a limited way, right? We take enough care for more hazard issues that arise there and there have been several proposals to do that, right? But that again is a signal, there's a signaling function, right? If you start doing it, it's like tying your hands and making it clear, yes we are, we want to stay together, right? That's what you want to do. The banking union is another important element in all this and we have moved forward. So we have done a number of things. Banking union has different components. One is the common supervision and that seems to be accepted. And the other one is a common deposit guarantee system and a common resolution mechanism. These are the weak points, especially the common resolution, because that also implies some type of fiscal union. When you have to resolve a banking crisis at the European level, then you need to pool resources to do so and some institution must be able to garner these resources quickly. In times of crisis, you really need a powerful institution that is capable of doing the trick of resolving banking crisis and that can only be if that is an institution that has some capacity to raise taxes or that can, through rules that are credible, obtain tax revenue from the participating countries. These are key elements that we have to introduce, but as you know, this is now very much contested, especially in Germany, and therefore it's unclear whether we will move towards a banking union soon. All this requires transfer of sovereignty. We shouldn't have no illusions. So sovereignty is key in this whole process. And as a result, we can also say that political union must remain and will remain the necessary condition to make this whole project sustainable in the long run. So one way to put this, the euro is a currency without a country, so we have the choice either we create a country at the European level and then we can keep the euro, or if we don't want to create a country at the European level, we should say goodbye to the euro. Thank you for your attention.