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- [00:01]
A
My name is Charles Goodheart and I'm your chairman for this evening, which means that I'm responsible for everything that goes wrong, like everything that goes wrong in the Eurozone. Now, before we start tonight's discussion, I'd like to take the temperature of the audience by having an initial vote before your ideas are corrupted by the comments of my colleagues. So I'd like all those who believe that the Eurozone will survive more or less unchanged, please to raise your hands. Now, all those who think that the Eurozone can survive more or less unchanged. Okay, Now I'd like all those who believe that the Eurozone will not survive unchanged to raise their hands. We have a lot of skeptics here. Right, and we'll take another vote at the end of the evening. Now, our panel tonight consists of four experts who are naturally, and like many of you, fascinated by what's going on in the Eurozone and on the continent. Two from the European Institute, Bob Hanke and Vasilis Monasteriotis, if I got it anywhere near correct, and two from the Financial Markets group, one Dimitri Vayanos, who's not yet here, and my colleague, John Danielson. So, as you will see, we have two from Greece, one from Iceland and one from Flanders and Belgium, which more or less manages to hit all the major trouble spots in Europe in one go. They have become expert in if it can go wrong, it will go wrong. Now, the agenda for tonight is as follows. I'm going to start with what I hope will be a very short background piece, and then each member of the panel will have up to 10 minutes to develop a theme. Following that, we will have a short interchange among members of the panel and then we will have an interchange with all of you. Questions and questions and or very short comments. If the comment is longer than one minute by my watch, we will move on to the next question and on this I will take no prisoners. Then, 10 minutes before the close, each of the four panelists can give their closing thoughts. Ah, here is our final panelist. We are now. And then we will end with a final boat to see if the views about the survival of the Eurozone remain the same. Okay, let me now move on to what I hope is a very short background. And I should perhaps add that I asked all of us not to use PowerPoint. I thought it would make for a better debate and less of a set of mini lectures if we got away from PowerPoint. Now, from the outset of the move towards a single Euro currency, it was recognized from the very start that the zone was not an optimal currency area. And it was also recognized that it really did not have the political cohesion, the centralized fiscal mechanism or the labor mobility to meet large asymmetric shocks. Instead, there was, and I should add, indeed remains a hope that crises to the Eurozone would subsequently lead towards more political and economic and fiscal unification. A hope and belief which I think still remains undimmed. Plus, I hope that the asymmetric shocks wouldn't be too large, at least until the Euro got really bedded in. Now, in fact, the very start of the Eurozone represented a very large but positive shock to the countries in the periphery, since what happened was that the interest rates in these countries which had been raised by concerns about various kinds of risk, now converge to the much lower levels which were in existence in Germany and in the core countries. The result of the sharp decline in interest rates in the peripheral countries was a very large and quite persistent expansion either in government expenditures and or in many of these countries, in housing construction, which was financed by large scale capital inflows via the banks and largely into the sovereign debt of these countries. And this capital flow was quite elastic in response to very small changes in the relative interest rates. Because until quite recently, Indeed really until 2010, people thought that the sovereign debt of all these peripheral countries was as safe as the sovereign debt of the core countries. Now, this capital inflow was matched by increasing wage costs, relative unit labor costs relative to Germany, and by a large and persistent current account surplus. Then effectively, in 2009, 2010, we got a sudden stop to such capital flows. And this was caused initially by the collapse in housing following and related to, but separate from the collapse in the US and then exacerbated by the realization of the weakness of public sector finances in some part in some countries because of the need to prop up their banking systems, which again had been overexposed to the housing and construction markets. Now, this has caused two problems. First, a liquidity and financing problem. How do you actually finance under these kind of pressures? Both the banking system and the sovereign, where the two financial conditions are closely interactive. But underneath there is a really more troubling adjustment problem. The financing problems so far have been met up to a point by a combination of bailouts, ECB support, ecb, the European Central bank support, and externally imposed or austerity programs. The greater problem is essentially one of adjustment, of restoring competitiveness and growth to these countries. Now, a few countries have achieved what is known as internal devaluation with major, major cutbacks in wages and prices. These Countries are Latvia in particular and the other Baltic countries to a degree, and Ireland to a fairly considerable degree, where the relative wages and relative unit labor costs are moving quite strongly in the right direction. Others, indeed all the other members of the periphery, particularly in the Mediterranean periphery, effectively have not been able or willing to undertake such internal adjustments. Now, under those circumstances, austerity by itself just leads to deflation and poverty. And what is frequently suggested as a way out, which is described as structural reform, though highly desirable in a number of cases, usually takes so long that it really is no answer to the short run problems that these countries have. So we remain very much in difficulties, difficulties which in a sense have been brought to a head by the recent extraordinarily surprising occasion of the proposed referendum in Greece, which I think surprised everyone, certainly surprised me, and it surprised the hell out of the market. So with that brief introduction, let me pass first of all over to Bob for his introductory statement.
- [09:36]
B
Thank you, Charles. Can everybody hear me?
- [09:40]
A
Good.
- [09:41]
B
I'm very glad to be here. When John and I discussed this for the first time, I didn't expect that the whole theater would be full. But then I didn't expect that the Greek crisis was going to hit exactly on this day either. And that's probably one of the things that helped. The theme that I wanted, I hope in the eight minutes that you gave me, is basically taking a few points from what Charles said and put some meat, as it were, on those bones that are there in the argument. My point is exactly the same one as you made at the end. That is that the fiscal crisis that we see in EMU at the moment is only the tip of the iceberg. There's something much more fundamental going on underneath. And what I want to do is sort of think through what that fundamental bit is. So solving the sovereign debt crisis is important in the short run, but it doesn't really get you out of the problems that have been there since the inception of the Eurozone, in fact, in my opinion, even before that. But they don't do all that much really in the long run. Now, the fundamental problem is that you have two. What I'm going to say is a variation on an optimum currency area kind of argument, but one that also looks at how real economies operate and how what economic policy is about is embedded in institutions and rules that exist in these economies. And the point is essentially that EMU consists of two, possibly more, but at least two very different economies. Fundamentally, what you have is what you would call Northwest Europe. And I take Austria as A part of Northwest Europe, for the sake of this argument, the same way that I treat Ireland in a few minutes as part of Southern Europe, although there are some distinctions there. Northwest Europe has a set of domestic institutions that allow actors in those economies to permanently monitor what goes on outside these economies and then look at how best to set wages in terms of unit labor costs, as Charles said, so that these economies can address the fact that they are trading with very different types of economies. The Southern economies are a mix of what I would call sort of liberal market economies, where the market as such is the primary driver of economic activity. Think of Ireland, but most importantly, what you would call sort of loosely mixed market economies, where the state plays a very big role, or played a very big role until recently. But if you look at countries like Spain and Italy, the state is not exactly unimportant there. Now, what's the problem here is that if indeed the crisis of EMU is a crisis of interaction between these two types of economies, as it is embodied in these current account imbalances that we have seen growing massively over the last 10 years, then these different shapes and the effect that monetary policy in EMUA as a whole has on these different shapes becomes quite important. Basically, Northwestern Europe started in EMU with on average, a slightly lower inflation rate than the Southern economies did. The ECB sets its interest rate commensurate with whatever its target is and whatever the conditions are in EMU as a whole, but it sets it in a way that it is. The nominal interest rate is the same for every economy inside emu. What that means, what that implies, is that a low inflation country gets punished for having a low inflation rate because it actually has a very high, compared to the others, has a very high real interest rate. And a high inflation country de facto gets rewarded because it then has a very low, often in fact, a negative real interest rate. Those real interest rates, as Charles pointed out, then fuel these economies primarily through asset inflation, as far as I understand, and the next time around, the same inflation rate. So it feels that in the low, sorry, in the high inflation countries, because it's a lower real interest rate, but it has the opposite effect of disinflation in the low inflation countries. So the implication of that is that if in the first period you have a small difference between the two through this nominal interest rate is that's the same everywhere. Which, which has the opposite effect in these two types of economies. In the second period you have a wider divergence of inflation between the two, because the interest rate always has to reflect in some way a mathematical average of these countries. And that effect is that pro cyclical effect. This is important to keep in mind here. A national central bank will reward a low inflation rate in an economy by lowering the real interest rate in emu. The central bank for EMU as a whole does the opposite for every one of the member states and thus fuels this entire asset inflation boom. Now, to a large extent, the domestic institutions in the north of Europe think primarily here, coordinated wage bargaining that keeps unit labor cost growth under control and the interaction with fiscal policy, which is usually more restrictive as well. That means that in those countries, the effect the second time around is that they actually have the domestic institutions to keep their inflation under control, even if it were to rise for whatever reason, say, economic growth in the south, those domestic institutions are entirely absent. You don't have coordinated wage bargaining systems in countries like Spain or Italy that manage to set fundamentally a wage through patron bargaining throughout the entire economy. The effect is that in unit labor cost terms, I'm jumping from macro to micro. This is how it works in unit labor cost terms. What that means is that Northwest Europe becomes permanently more competitive precisely through these mechanisms, part of it fueled sort of mechanically through the interest rate, part of it as a function of domestic wage bargaining institutions, while the south of Europe increasingly becomes less competitive as a result. And that bit, that dynamic, which is sort of embodied in the interaction between monetary policy on the one hand, and these domestic institutions on the other, that interaction leads to these massive current account imbalances. Why is that the case? Because fundamentally, emu, EU is a closed economy. That means that your competitiveness gain has to be my competitiveness loss. If we could export it somewhere else, that would be nice, but we can't. But the Eurozone exports only about 9% of its entire GDP outside the Eurozone. And if you take out the UK, Sweden and other countries that are wealthy but not inside the Eurozone, and in the eu, it's even less than that. So that means that there isn't really all that much of a possibility to have a safety valve outside the Eurozone as a closed economy, where you could, in the case of Spain or Italy, where you could export, and the effect is that you then have these competitiveness divergences immediately translating into current account imbalances across the Eurozone, as we saw over the last 10 to 15 years. And those current account imbalances, and this is where you come back to fiscal policy. To some extent, they have to be financed. And the way they are financed is Simple. It's through debt, either in the private sector or in the public sector sector. And that's one of the fundamental outcomes of this whole thing, but which is not particularly easy to resolve in the framework that we have. I think I will stop there, Charles.
- [17:34]
A
Exactly eight minutes.
- [17:36]
C
I'll try to follow, although I'm not known for keeping the time. Thank you everybody for coming and thanks for the invitation. I feel I'm in an awkward position being a Greek, but also now saying that most of you are very, very skeptical about the future of the Eurozone. The theme I want to argue doesn't look at the asymmetry. Actually I don't believe in the. I don't believe in the centrality of this asymmetry of the eurozone. Bulgaria has a peg with the Eurozone, but it hasn't experienced the problems that Greece has. Portugal hasn't experienced the problems that Greece has. Ireland has experienced problems, but because of different conditions in the banking sector. I think this is a Greek problem that somehow the Eurozone made a eurozone problem. And I'm going to focus exactly on that. Not on the interests of otherwise failures, different conflicting interests at the European level that created the crisis, but actually on a number of policy failures, I think important policy failures that translated what was an easy Greek fiscal problem into a very, very complicated sovereign debt crisis in the eurozone at large. And I'm going to focus exactly on a number of misguided beliefs that I think play a very important role in explaining why this problem was translated from Greece into the eurozone. So I'm going to focus on four things very briefly, I hope. One is a theme that says that the eurozone point political elites, the judozone leaders paid too much respect to the markets, they believed too much on the ability of markets to punish inconsistent governments. And I'm going to go to that. The second thing is that again the Eurozone tried to stick too much into rules that they set in good times and that they never followed anyway. So there's an inconsistency there of pretending to adhere to something that you don't. The third thing is putting too much faith on the political economy of incentives, thinking too much about how important moral hazard problems are, how much important it is to have to enforce compliance by member states. And then the fourth thing is relying too much on an economic theory that increasingly became less and less relevant, an economic theory of supply side solutions to problems that are not supply side. So this is the main thrust of my argument. I'm going now to the first of the points I want to make too much respect for the markets that don't necessarily deserve so much respect. So despite what happened in the supply markets market in the US still Eurozone elites believe in the primacy of markets. Angela Merkel was arguing against the primacy of of markets last year. But still we see the primacy of markets in that the European Union at large failed to keep the lessons learned from the European construction project after the Second World War where we defined the scope and the role of the markets and we determined the limits and the conditions for long run growth in Europe. Because we then failed to dictate the limits to market operations, especially in times of crisis, we allowed markets to first guess political developments and in that sense to impose economic policy responses. So we're running constantly behind markets who were dictating how much the spreads would be and whether it's worth betting against Greece or not. First, we're concerned for the markets not to not get upset. If we bent it, if you bent the EMU rules, then we got worried about whether they declared a default episode. Now we almost forgot about that. What we're worried about is if they are sticking to a voluntary private sector involvement, which seemed to worry too much. That's why we had a 21% haircut in July or agreed on one and now a 50% haircut when the IMF was saying that we need a 75% haircut. And when, if you look at the data, you need at least a 90%. Okay, but we agree on 50% so that we don't upset the markets. What happens with the Prime Minister of Greece yesterday is very telling. When the Prime Minister announced this thing about the referendum, the markets were among the first to respond to say that we want to stick with the 50% deal. Five days earlier they were arguing that we will never accept the 50% deal. The highest we can go is 40%. So maybe the markets do not dictate political developments. Maybe the markets are afraid about policy making shifts. Too much respect in the markets is not good. The second point, sticking to the rules and the institutions that are not working. It is true. EMU was built on two main institutions. Central bank independence, that is depoliticization of monetary policy and stability and growth pact, that is primacy of monetary policy. Okay, so tying fiscal policy onto monetary policy. This was meant to enforce intrastate adjustments. So Greece will become more productive because there's no alternative. They would have to do that. So we will contain divergence. This obviously didn't work. It kind of worked in Good times. But in times of crisis it didn't work. But what we forgot by sticking to these rules was that you cannot depoliticize economic governance no matter what you do. Economic governance is a political event. You cannot completely politicize that. In thinking that we can, what we did was that we bent the rules. We bent the rules, we allowed a bailout for Greece, but we didn't suspend the rules, we didn't go the full way. What would be the full way? It would be for Germany one and a half years ago, to buy off 50% of the Greek debt, write it off completely in exchange get an agreement for preferable investments in Greece, recover the losses they incurred from the investments that they do. This generates growth in Greece, reduces the asymmetry of the Eurozone. Political solutions are there. Economic constraints may be seen too strong if you adhere too much into the rules that you don't actually obey. The third point I want to make if I have two or three more minutes, is about the faith that the Eurozone puts on this kind of political economy of incentives. The political economy of moral hazard, as I like to call it. Moral hazard, time, inconsistency, external empowerment, tying one's hands, all these great words that say depoliticize. You know, governments are irresponsible. The idea was that if you bail out Greece, Portugal would become irresponsible. Okay, so because Greece will be bailed out, the Portuguese will enter into an uncontrollable expansion and then they will build more and more deficits. Countries don't behave like that. They follow norms, they have policy learning, positive integration, and they don't only rely on penalties in order to behave. I believe in this kind of mechanism also, when they don't behave, maybe it's not because they don't want to behave, but it's because they don't have capacities. So if you impose a conditionality on the basis of incentives in a country that cannot possibly comply, what you do is that you create austerity. That's what we see in Greece, the inability to comply. Greece ended up with the greatest fiscal consolidation ever. 5 percentage points of GDP in one year, and at the end of that year had a higher debt than in the beginning of the period. Okay, why? Because you cannot do fiscal consolidation on the spot without having respecting the conditions. And the last point then looks exactly at the logic of fiscal consolidation as an instrument of austerity. As an instrument. This over belief on an economic theory that says supply side solutions to any kind of problem. The supply side model came out of the failure of Keynesianism in the 70s. And it provided a very good solution to to the European problem, to the extent that it was implemented. But perhaps it provided too good a solution. So somehow we ended up from the point where we thought that supply side solutions, flexibility, deregulation, liberalization of capital markets, resolve supply side shocks, we ended up with an ideology that said that structural reforms are the answer to any sort of problem. Don't ask the question. Structural reforms is the answer. Okay? Even the United States needs structural reforms. I wonder who doesn't. Okay, so you always need structural reforms. Maybe it doesn't matter if you do them or not, you will always need them. In that, we also forgot what the IMF was telling us in 2003, 2004, 2005, that structural reforms shouldn't take place at a recession, they should take place at the start of the recovery. Because then you have weak interests, a society that is open to change, you have a government that starts generating revenues so they can finance the reforms. And also you have businesses that face declining borrowing costs, increasing demand. So if there's a liberalization of a sector, new investment can come in. But we applied that in Greece at the time where we had rising borrowing cost, increasing liquidity constraints, strains, the government had no money whatsoever. So we liberalize the markets, but there's nobody to come in because there's no investment, it's too expensive to invest. There's so much uncertainty. And what happens at the end is that we squeeze further incomes of the people who work in the liberalized sector. We have more austerity, more deficit problems. So I think this uncritical adherence to a perceived orthodoxy about economic policy sort of completes the puzzle. We believed in institutions that didn't work, we believed in incentives that didn't work, and we believed in economic theory that didn't work. So to sum it up, my main message is the following. Whereas the Greek fiscal problem may have been caused by creative statistics, by fiscal profligacy, by Greece, by non compliance, and perhaps also by weak monitoring by the European Union, too much risk taking in the financial markets. Whereas the Greek crisis may have the causes there effectively, the Eurozone crisis is a different kind of animal. It has been allowed to happen because of the insistence of the European political elite on a failed set of beliefs, on an ideology that puts too much attention on the primacy of markets, the centrality of private incentives, the depoliticization of economic governance and the role of supply side policies, of deregulation anywhere and everywhere. I think this puts too much Space for markets to speculate, to dictate outcomes, and too little room for governments to have active policy to dictate outcomes. There's no political economy where states set the limits to markets. We are today in a crisis because markets set the limits to the states.
- [28:39]
A
Thank you very much, Vasilis. From one Greek to another, Dmitry.
- [28:44]
D
Okay, so my theme, I will try to be kind of on the positive side. I will try to make some discuss the cause of the crisis, but also in the perspective of how the design of the Eurozone can be improved so that future crisis can be avoided. And I will also emphasize what I think is a key aspect of the redesign, which is the financial system. So, okay, so much of the discussion of the crisis has focused on first of all, difference in competitiveness between north and south, whatever the north and the south include. Exactly. And has also focused very much on the firefighting. So what to do in the short run. But I think that it's important to take a long term perspective and think how the Eurozone can be redesigned to be more stable even after this crisis is over. Let's say somehow this crisis is over, how future crisis are going to be avoided. Now as I mentioned at the beginning, some key source of instability lie within the financial system and I think this is not quite well appreciated. So and in particular within bank regulation. So this is not to say that difference in competitiveness are not important and to a large extent Greece's problems are. I mean Greece is responsible largely for its problems. But the faulty design of bank regulation at the Eurozone level played also a key role in making things much worse. So for example, I mean, let's think about it. How could the countries like Greece and other peripheral countries that had low competitiveness and low fiscal discipline, how could they borrow so much? I mean one can say markets were completely stupid and irrational. But you know, perhaps, perhaps there are other, there are bad incentives going on even within markets and perhaps these incentives we can try to correct them.
- [30:31]
A
So.
- [30:33]
D
Let'S talk about what some key deficiencies are in the way the financial rules of the Eurozone were. So first of all, I mean, I would say there are two key deficiencies. So after the introduction of the common currency, the debt of all Eurozone sovereigns, whether this was Greece or whether it was Germany, kept counting as risk free for the purpose of bank regulation. So, so they kept carrying a 0 Basel weight. So this is, I mean this is the way typically it works when a country controls its own currency. The banks that hold within the country that hold the Country's bonds. This is counted as risk free. But now we had the control of the currency went to the ECB was not anymore within the national each of these countries. And the same applied to the ECB hair to ECB haircuts. So when the ECB was accepting collateral sovereign bonds by different countries to lend money to banks, it was treating in a fairly similar way the bonds by high risk country and by low risk country. The consequence of that was that banks had very bad incentives. So that they had incentives, I mean, if they could, for example, if a French bank or a Belgian bank could buy, I mean, they could buy Greek debt more cheaply than German debt, they would be quite happy to do so. They were not really penalized effectively by the regulators for having a riskier security. And so this is okay, so this is an important kind of failure. Because one reason why things are so severe now is I will come back later is that so much of this bad sovereign debt, risky sovereign debt is held within the portfolios of these of these key players in the system of the banks. So bad incentives were a key reason here. Now a second deficiency. So the first one was the bad treatment of sovereign debt. The second deficiency was that, and perhaps it might be harder to fix, but it's also very important is that bank regulation was kept predominantly at the national level. So supervision of banks was done by the national supervisor, another by supervisor at the Eurozone level. And this had bad consequences. First of all, governments had more leeway to pressure the banks in the country to buy their bonds. And indeed there was a consent. Not only banks all around the Eurozone bought a lot of risky sovereign bonds, but also there was a bad diversification banks lots of Greek debt was holding was being held within Greek the Greek financial system. Same thing for Ireland. For example, 60% of bank held Greek debt was held within Greek banks. So for Ireland was similar comparable figure. So furthermore, an additional consequence of this concentration of supervision at the national of supervision of the national bank system at the national level was that governments did not have a strong incentive to somehow deter or I mean through the regulators not to deter banks from taking a lot of risk, because the country would receive the upside. For example, Ireland was doing the Irish government was doing very well. When its banks were doing well. It was collecting lots of taxes, employment was high. But when things could work badly, it's the Eurozone that gets the downside. So the combination of these problems was what one could call a diabolic bank sovereign loop. A feedback reverse two sided feedback from banks solvency to sovereign solvency. Solvency. Charles alluded to at the beginning. Solvency, solvency problems of sovereigns were transmitted to local banks because of local banks holdings of sovereign bonds and conversely because local banks were holding a lot of sovereign bonds of their own. Sovereign and conversely solvency problems of local banks were transmitted to sovereigns because for example sovereigns were guaranteeing deposits or guarantee some of the banks bonds and also because problems of banks were causing a contraction of lending, a recession and hence lower tax receipts. So this bank sovereign loop is a distinguishing characteristic of the Eurozone crisis. And this is what is making the crisis so deep. So the question, okay, so now let's come to the positive side of this whole thing. How to make the Eurozone more stable in the long run. So I would propose three key directions. One is that, I mean the first two kind of corollary of what I said so far. The first one is to give appropriate weights on sovereign debt both for bank regulation and for collateral so that banks, so that risky sovereigns get penalized and banks don't have big incentives, don't have the incentives to buy their bonds. Second, to move bank regulation to the largest possible extent to the European level. So we need the powerful European bank regulator. We don't need all this. The political union perhaps is a pipe dream. It's perhaps too difficult to happen. I mean it's certainly too difficult to happen in the medium run. But let's have, let's have a union at the. In terms of the financial system, this is where centralization is important. And the same applies to deposit insurance because the common currency makes it very easy for deposits to fly from one country to another. And the third pillar I think is to have a credible mechanism for sovereign bankruptcies. So somehow with what has happened with Greece so far, it was made clear that it was a bit of a mud through. Obviously it was a mud through because it was a first time it was happening. But the mechanism has to be credible and this is key. The Eurozone had the no bailout clause. This was the modus operandi. And this obviously was not credible. So we saw that it was completely uncredible. The key reason why this was not credible is that a lot of sovereign debt was held by banks. So if Greece went under, there would be a significant mess in the banking system in the Eurozone. So fixing bank regulation will also facilitate having a credible sovereign bankruptcy mechanism. So anyway, how much do I have like a couple of minutes or. Yeah, okay. All right. So anyway, I just wanted to make a short reference to some work that we're doing with a couple of. With eight other Eurozone economists. You can check this out at the website euro-nomics.com so Euronomics with a dash in the middle where we're making proposals in these directions. So in particular we propose the creation of European safe bonds which can be used for the purpose of bank regulation and can provide the Eurozone wide safe assets. So these are not euro bonds. They do not involve the massive subsidies that Eurozone the euro bonds entail. And so they can be politically feasible. More generally, what I think is the important policy agenda is to come up with a minimal set of reforms that make the. In other words, that can be politically feasible, do not involve massive transfers that can make the Eurozone work. And what we believe is that this concern mainly the working of the financial system. And this is why we think finance is such an important discipline. So now, now anyway, so just a few. Okay, let me say a few things about. Just a few things about Greece. So, okay, due to lack of time, I cannot really go very much to how the increase, how the bank sovereign looked happened in Greece. But the banks, this has happened in Greece in a massive way. First of all, it went from banks to sovereigns just after the Lehman crisis. So the problems of Greek banks after the Lehman crisis burden the public finances partially because through a government guarantee for deposits in early 2009, before sovereign risk was even in the radar screen of traders. But then banks got hit back by the sovereign problems when they appeared in late 2009. Now there is a big need to recapitalize banks. I mean, with a 50% haircut, all Greek banks will have to be recapitalized, will have to be essentially taken kind of would have essentially to be taken over by the state in one way or another. Now this recapitalization is a Eurozone issue, not to the same severity as in Greece. But what is key in Greece, and I think it also can be important in some other Eurozone countries as well, is that banks have suffered from their close proximity with the state. So this has. So getting politicians to get control of the entire Greek banking system would be a big step in the wrong direction. So recapitalization would somehow need some involvement by the Eurozone for Greek banks and perhaps also for banks in other countries to avoid these problems. But the appropriate institution is lagging. For example, the EFF does not have who can provide some. The capital does not have bank regulation expertise. And what's associated with that with the control of banking system by I mean influence of political interference in the banking system is this comes together with weakness of supervisors or institutions. So the financial supervision is quite weak in Greece and actually Greece is not the only country. I mean this also applies to some extent in some other countries but the weakness are particularly acute in Greece. So there is very little in terms of power like I mean for some capital market authority doesn't have enough resources, there are not enough resources for tackling white collar crime more generally. The justice system is very weak. So these are deep institutional issues that have to be addressed. And so I would conclude with the following point is that this is one of the reasons this need for deep institutional reform I think is why it's key for Greece to remain within the Eurozone. The exit in my view from the Eurozone will bring some short lived, might bring some short lived gains in terms of competitiveness but the same really terribly bad institutions will remain. So the same bad justice system, the same bad kind of problems with the financial supervision. So I think that engagement within the Eurozone would help Greece and perhaps other countries such as Italy also improve their institutions.
- [40:07]
A
Thank you very much Dmitry. And our final presenter is John Dennis.
- [40:13]
E
Now I do benefit from being the last in most of my colleagues who said most of the important things, so I probably will stay well within eight minutes. And I just did note that I did agree with Vasily's conclusion but definitely not his way of getting to it. So I think this means we might actually have an interesting discussion here. Now the conclusion I agree with Vasilis is this crisis is not about Greece. Just about the same way as the crisis of 2007 was not about subprime. Instead I think we should actually be thankful for the Greeks for being so irresponsible. The sooner we can focus on the real problem the better we are. So thank you Greeks. After all the costs of the Greek default will be couple of percentage points of the Euros on gdp. This is something quite manageable. A couple of hundred billion euros give or take. On a more general level we could say this is a systemic crisis in making with two sub crises, a banking crisis and a sovereign debt crisis. Let's talk about the banks first. Now the banks do of course have a considerable exposure to Greece. But we have to be clear about the reason for this. Exactly what Dimitri just mentioned. Greek debt is considered safe when it comes to capital while lending to a triple A rated company like Microsoft attached to a significant capital charge. Until the crisis Greece was rated single A which meant that European banks could lend to Greece or make relatively high loan at no capital charge. And it's interesting to note that when the European authorities run a stress test on European banks this summer, they explicitly assume sovereign default couldn't happen. So this does take me a little bit to my major theme here on the point of national supervision, which is something which is desirable, but it is a practical impossibility because you cannot have supervision without fiscal powers. And since Europe is probably moving away from fiscal powers, that means the Europe is moving away from being able to have a Central European supervisor. So banking supervision will be in the hands of the nation state in the foreseeable future. Fortunately, however, the banks have been quite active in writing down Greek debt, even though of course some are more vulnerable than others. So in a way, I think the crisis is also helping us to identify which banks are the weakest. And it might not be too bad if some of them fail, because after all, that might leave. The rest will be stronger afterwards. The second sub crisis is the sovereign debt crisis. Again, if it was only about green Greece, it wouldn't be a problem. Even though we can, of course we can question the morality of having poor, well run countries like Slovenia subsidize the much richer Greeks. However, the elephant in the room is really Italy. Italy is also irresponsible, but it's also much bigger. So what the European authorities are really debating is not the Greek bailout, they are debating the eventual Italian bailout. And within this, of course, these sub crises are serious, but they are not in any way shape or form systemic. What makes this crisis possibly systemic are European politics or European politicians. They have two choices. They can decide to bail out or they can set a default. You might have a preference of one or the other. We can talk about that later on. But either of these two options would solve the crisis effectively tomorrow. Instead, the European authorities picked the third option to muddle through. Every time Greece needs another billion, every Eurozone seems to need to agree. This causes a big political fight. Newspaper headlines spell doom and the uncertainty spirals up. It's this uncertainty, more than anything, that is creating a systemic crisis. That means if Europe will suffer a systemic crisis, it is because of its dysfunctional political structure and the short sightedness of European national leaders. And in a way this is as you expect. Because if you look at the history of big crisis events, government tends to be the worst culprit. And there is a sort of conclusion to that. If the inappropriate policy response is usually behind the world's biggest financial crisis, how can we then trust the government to reform financial Regulations as they are trying to do now, if the government can't even put its own house in order, to me, government reform is much more important than financial reform.
- [44:59]
B
I thought you'd say that.
- [45:04]
A
Right. I. Now, do any of you want to say anything about what any of the others have said? If not, I've got an idea how we might proceed. What most of us have done and what we're trained to do as academics is to try and analyze what has happened and why. What academics are less good at doing is actually foretelling the future and indicating some of the problems and what might happen. Now, what I thought might be useful is if I got all the members of the panel to role play an individual in an important position in this exercise. So I'm going to ask Bob to kick off by role playing what he thinks that Papandreou is hoping to get out of all this and what he is hoping to do. Then I go to ask for Sidis to to role play what Angela Merkel might be trying to do. Then I will ask Dimitri to try and role play what Mario Draggy might be hoping to do and hoping to achieve from all this. And I will end by asking John to role play what God would do. So can we start with pap and gray?
- [46:27]
B
Well, what I always find intriguing at the LSE is that each time. So this is week five of term, right? And in the political economy course that we teach in European Institute, week five of term is two level games. Two level games have a very simple setup for the purposes of this is that you tie your hands domestically so you can get a better bargain at the international level. That's the basic idea. So what, what, what? And then what we try and do is make sure that world events match more or less the kind of things that we teach during these, in this case, the fifth week of term. So what Papandreou me therefore has just discovered is the logic of a two level game here. Because he says basically what he must have said to himself over the weekend. I can't say this in Greek and I don't know whether they even do this over the weekend, but you know what I mean, he must have said to himself over the weekend, this ain't gonna fly at home. Yeah, I mean, I get the best deal I can get from Merkel and Sarkozy and who else? And God knows, John, who else. But it's just not going to fly at home. I mean, you know, the moment they find out about this, which they did on Friday morning, bang, you know, the entire public sector was on strike again, and so on. So clearly it isn't going to fly. What do I do? I can do several things. I can try and push it through it at home, but I'm already, not, put it mildly, the most popular prime minister in recent Greek history. And on top of that, I don't even. I'm not even sure anymore by Monday morning whether I will actually have a political party that supports me. Right? So that's not gonna. That's not going to be easy. You can't sort of put these reforms through and then hope that they fly. So I then have another option, and that other option is to tell Merkel and Sarkozy, look, I'm calling a referendum at. At home. Because if I do that, you know and I know, and I know that you know and you know that I know that this is not going to pass in the shape that it's in. And therefore what I'm going to do is basically blackmail the entire. I'm using the wrong word. I use the leverage that I have. Think of what. Think of what Keynes said about if you owe the bank £100, the bank controls you. If you owe the bank a million pounds, you control the bank. Well, that's sort of the leverage situation that I'm in at that moment. So I call the referendum at home and I make sure that it lasts just sufficiently long for it to be organized so that it can create a bit of a mess. Right. I call the referendum at home just the day before I meet Merkel and Sarkozy again in a very nice seaside resort on the Mediterranean where we can then discuss these options again. And that's what I'm trying to get out of this is not a 50% haircut, not a 60% haircut, but a basic restructuring of the entire deal.
- [49:12]
A
Vasilis, you're now Angela. You realize, because Bob has told you so, that you are, in effect being levered or blackmailed. How do you respond at Cannes over tomorrow and the next day? What do you do?
- [49:31]
C
I wish it was the case that Angela, me, was actually feeling blackmailed. I think what she may be feeling is that there's a consistent inconsistency in the Greek government. So the only thing you know is that you don't know what's coming next. In that sense, I think, you know, like the level that doesn't really work because not credible. I think, you know, the Eurozone leaders, including Angela, is more perplexed by what is happening and how could it possibly be happening than Threatened by the credibility of the threat to give a referendum because it is not even supported by the ruling party, by the position, by the power. So there's many things that can happen between now and the. I think what Angela would or should probably try to think about and what she should do is try to see exactly the point of how long can this take and how long can we keep the whole Eurozone and the whole population in the Eurozone and perhaps in Europe at large, hostages to this kind of slow moving game of pretending to be taking action and then not taking action, and then every three months having a solution which is not a solution, and following events and markets and everything. To me the main point is that one has to stop looking at the very static picture that says some taxpayers finance some other citizens in Europe who have been living beyond their means, the poor Slovenes, while financing the irresponsible Greeks. They have to think about what they've gained and what is there to be gained by unity in the European Union. And the unity implies also a process of integration. Because without the process of integration, stagnation also means a process of disintegration. National interests emerge and then we have more competition, we have competitive devaluations in the exchange rate regime, we have protectionism in trade, we have disintegration. If you look at the longer long run benefits of economic integration in Europe, what brought about political stability, about the credibility of institutions in Europe, then you can invest on European stability again and you're going to be a winner in the long run. So what you would do it would be to pursue a Marshall Plan or equivalent Europe. If Germany cannot do it alone, it should be a significant pillar in that a master plan that turns the table around, it pushes for growth, more investments, and then we can have reforms, we can have a reconfiguration of the institutional system. But in times of panic, of uncertainty, of austerity, to start playing bad games with a non creditable player. So with Giorgos on my left is perhaps the worst thing to do. I'm not sure that Angela would follow my advice, but one can only hope.
- [52:46]
A
I don't think that given her electorate in the political position in Germany, that she would have a chance. I think if she tried to follow your advice, I reckon she'd be out now. Let me turn to you, Dimitri. It is generally believed in the market that it is unlikely that the European financial stability, whatever fund will have sufficient firepower to hold the line on Italian and Spanish bonds unless the ECB comes in and supports. Now you are Mario Draghi, are you prepared to use the ECB's money to support, to expand the securities market program considerably?
- [53:38]
D
Okay, I don't think I can say anything very useful here, but so, okay, just, just to frame the issue more generally.
- [53:52]
F
So.
- [53:54]
D
The concern of the, I mean what the ECB has been trying to kind of balance between has been on one hand to the one bad has been to cause the collapse, I mean, to cause like, I don't know, some kind of panic within the European financial system. And problems may be in the wholesale lending markets for banks. So and to avoid that, it has pushed. It has been very insistent on having no bailouts. So the downside of that has been that it has accumulated lots of risky bonds in its balance sheet, lots of Greek bonds, Irish bonds. And now it depends quite a lot. I mean if there's a haircut or at some point or something happens, it will depend quite a lot on the sovereigns, on all the Eurozone sovereigns to be recapitalized. So this is I think the basic trade off. And as Charles said, so now the important part concerns for. And also John and Charles have said that the important part concerns now Italy and Spain. So these are really, these countries are not obviously insolvent. One could argue that their problem is more like a liquidity problem. So the question is what the ECB should do. Should the ecb, I mean given the limited firepower, given the limited amount of capital of the EFSF for now and much of the capital is not even there yet. So should the ECB get quite actively involved with continue and expand its purchase program, its program of intervening in the secondary market and buying that of these countries. So I mean in principle this sounds, I mean I think this, the answer to this question depends to signif. Depends obviously on how at this weather, we think right now that Italy and Spain are solvent. And if, if I were Mario Draghi would have to think. I mean, I think Mario Draggate obviously has a view on that. I don't think I can take a very sharp view on that. I think they're more likely to be solved than not so. But whatever the ECB does, it has to be done in a very, in a overpowering. I mean I think that probably is a good idea for the ECB to expand its program, but it has to be done in a very credible manner because if for some reason the ECB does a bit of that in a timid way and then stops and then continues, then it's going to start realizing losses on its Purchases because the spreads will keep going up. So I think the short answer is probably, I would say given the current institutional, the current mechanisms, the weaknesses of the FSF and the current uncertainty, the ECB is the main player who can move in fast. And I would say probably, I would qualify that. But I would say probably it would be good to. With a very committed way to. I mean, to commit to buy enough to keep spreads within an appropriate zone.
- [57:02]
A
Yeah. The only problem is it is going to be over the dead body of the Bundesbank and the Germans. And they've already lost two Germans.
- [57:09]
E
Two dead bodies.
- [57:10]
A
Yes. To lose one German from the board may be unfortunate, but to lose two Germans from the board is somewhat careless. Finally, John, you're now in the position of God. What would you do if you had the ability to get your. And how should, in your view, this crisis be resolved?
- [57:37]
E
Now, this depends on a crucial issue. Is God an economist or not? Now, if God is an economist, we know the answer. We make all of us Europeans German. Now, however, I don't really believe. I believe God has humor. So we have to find another Deus interpretation. I think me as a God, I like a little bit of chaos. So I would try to figure out what is the biggest troublemaker in the entire European Union was the one country that we all, except, they would like to get rid of.
- [58:11]
C
Right.
- [58:12]
E
It's France. Now, France does have. Because God is powerful, France has as part of a sovereign territory a small part of the western coast of Canada. Let's take the country of France, move it to the coast of Canada, let it join NAFTA. That will keep the Americans occupied for the next 50 years with different problems. Then, however, then I would still have to worry about my little wavered children in Southern Europe. Now, there are two choices. Of course. We could just create a proper northern European economic union, but that's equally boring. So I would then hire Bob as a consultant, have him impose the appropriate labor market and otherwise reforms in the Mediterranean countries, and let Europe prosper forever after.
- [59:05]
A
I think. On that note, we will now open the debate to you. So over there. I don't know anybody's name, so you're first. Wait a minute. Hold on, wait. There is a microphone and the people behind you can't hear you even if we can. So in order to get the rest of the audience to have a chance, that works.
- [59:34]
B
Now.
- [59:36]
F
Hi, Toby Chimbis. Dimitri, I'd like to pick up on some of your points because the debate has really been centered around protecting the Euro, not Letting Greece out of the euro. And I think time now is starting to really put policies in place to, to make sure that when that happens, Greece gets out of the euro, it'll actually default. And all the implications have to be sort of, all the policies on that need to be sort of carefully thought through because that probably could be eventuality in the very near future.
- [60:12]
D
So what's the question is whether Greece will exit the Euro or whether the policies will be in place or.
- [60:17]
F
Yeah, well, a lot of the policies at the moment have centered around just keeping Greece in the euro. Even in the bailout was actually sort of keeping Greece in the euro. But that really long term is unsustainable in terms of what I can see to transform really Greece's economy into something kind of vibrant, it has to exit the Euro.
- [60:42]
D
Okay, so first of all, I don't think that, as I mentioned, I don't think that Greece will really benefit. I mean, I'm not, you know, I think it's far from certain that Greece will benefit from exiting the Euro. So I think, you know, lots of people say that prices will go down and then there will be this, this big, whatever growth in Greece and people will invest in Greece, etc. People will not invest in Greece given the crappy institutions that are in Greece. So it's really important to fix the institutions in the economy, like as I said, like the deep institutions, the justice system, for example, not working. So I don't think that, I mean, I think that the economy in Greece has lots of unfairness built in. I mean, there are like some interest groups that benefit a lot on behalf of everybody, the average taxpayer. And I think that if this, if this, if this isn't, I don't think that exiting the Euro will help in any of that. So maybe, like Vasily said, perhaps, maybe there will be some growth and perhaps it will be easier to do reforms when, if in a growth environment. I mean, certainly it would be easy to do reforms in a growth environment. It's not clear that there would be growth, how fast there would be growth after exiting the Euro. So in any case, I don't. So I'm quite skeptical about the idea that Greece will benefit. Now as to whether the policies have been put in place, I think it was fairly, I think it was a relatively recent surprise about this whole new development, about the referendum. So I don't think that, I don't think this was quite expected anyway. I don't think that there had been adequate, I mean, the possibility that Greece might exit the euro. Was not really on people's, I think on kind of major decision making within the, within Eurozone leaders. Now it has become. And I think that. But anyway, yeah, so I guess the major consequence could be that the haircut might be even larger than expected. And so the question is, I mean there has to be more thought about whether various banks will, how they will withstand it. So.
- [62:33]
A
Bernard Casey from Warwick University and the Hellenic Observatory LSE A year ago the solution appeared to be maybe that Greece becomes a satrapy of Germany. The solution today appears to be that Europe goes kowtowing to Beijing. Could the panel comment upon the proposals of for rescues from the BRIC countries and the implications of these. Who wants to start? John?
- [63:05]
E
I could do that. I really did not quite understand this discussion this weekend. But we have to keep in mind there is no shortage of money in Europe. The problem is this money is not being put to any use. The money is just piling up. I mean banks are holding, companies are hoarding money and this idea of going to countries outside of Europe for funding is ridiculous. What the European leaders seem to be trying to do is to compete to see who could add more zeros to the packets to try to create what the Americans called shock and awe when it invaded Iraq. But it's not really working when you don't have Tomahawk missiles behind you. So they could just solve this problem out of European funding for the utility one and two.
- [63:59]
G
So I have an idea coming out of what you've proposed. So, and I'm German so I guess I can estimate what Merkel can do. So I actually think the only way she's going to be able to do anything is going to have a big coalition again. She'll, she'll agree with the Social Democrats to do this. Obviously in her current government she can but what she could do, I mean we often talk about ring fencing the crisis. So we have to ring fence Spain and Italy. So it could be that we basically changed the rules so that Greece, Portugal, Ireland debt is considered risky. It's no longer in the bank capital. We more or less agree to a Marshall Plan on those countries for certain conditions. We'll be restructuring the debt and the ECB will buy Italian and Spanish bonds, draw the line and Belgian bonds on that matter and draw the line that way. I mean how it can happen in time and how quick politicians can act. The German government has always been in financial matters, I hate to say behind German banks have made sure of that, typically have not deeply been involved in regulation. And so the Knowledge about the structure of the banking system is not there in the government, I think, and hopefully this crisis will drive it home. I mean, I hope some folks who know about this, like you will advise.
- [65:35]
A
I'm not sure that there was a question, but I've got one for you, which is my question for you is will the German electorate accept a Marshall Plan for the Ireland, Portugal and Greece? And will they also accept.
- [65:54]
E
The.
- [65:57]
A
Implications of a very major support for the bonds of Italy and Spain? And Germany holds the key and the question is, what do you think that your own country will do?
- [66:13]
G
I hope that Germans start seeing why we had the benefit from the European Monetary System, which was basically, we're exporting to Greece, indirectly to Greece, Spain, Portugal and Ireland. And whether we did it indirectly through China or directly is really of no concern. So German banks hold Greek debt because we basically sold our goods and financed it ourselves. So now the lender, the borrower is not liquid or is no longer able to pay. You finance what you have to do. So the German politicians have failed utterly to even mention this. They're just saying, oh, the Euro is good for us and just because we can don't have to exchange money when we go across the border, that's not enough for Germans to understand why they should be for the euro. So unless they articulate the advantage of the Euro and why we benefited, then it will not happen. The German election will not agree similar to the Finnish, and so then we will have a breakup.
- [67:21]
E
John, I'm just thinking about the German position here and Germany has fought very hard to keep the European, create this European Union and put it together. Does Angela Merkel want to be the Chancellor that causes the Euro to break up and quite possibly the European Union to break up. And do the Germans really want that eventuality? And isn't that exactly blackmail the Greeks have? It's not about this ballot, it's really about. It's gambling with the future of the European Union. And given the relatively small amounts of money at stake, how can the Germans do anything but pay?
- [67:57]
B
Sorry, can I. I'll just say I think, thank you.
- [68:03]
C
Sorry for intervening. I think, you know, it is many occasions in many different parts of the world where you see that the leaders have managed to convince the public, circumvent the public or inspire the public. And there are very good reasons, some of which we already discussed, why the public should be convinced and should be inspired towards a solution that involves rescuing the Eurozone and Greece for that matter, rather than letting everything collapse. In that respect, I think this is also a problem of leadership and being too afraid to take the political risk. In that sense. Yorgos Popanreu maybe, you know, has outperformed Merkel in that respect.
- [68:50]
D
Can I add something about this Marshall Plan? So, okay, so I'm a little bit kind of aware about these big plans like Marshall Plan. So I think that certainly what I think should be what I think was a problem with the support package that Greece got, and perhaps this might also apply to Portugal, is that it was focused very much on these macroeconomic targets, for example, like a deficit target, revenue from tax collection, as opposed to being more like development aid, really, how to targeted money for how to build specific institutions. For example. A problem is that the justice system is not. There's not enough, it's not computerized enough. So of course it's very slow. So instead of pushing the kind of a not very competent government to, I don't know, raise a given amount of tax revenue, which essentially means just tax and tax and tax and tax, just target money in a very kind of in a clever way towards the areas where reforms will bring big benefits. So I think that in favor of less scale and more focus on the micro level of the institutions.
- [70:03]
B
Paul, just one small thing is that it's important to keep in mind that the Germany that we see now is not the Germany that entered EMU in 1999. In fact, for a large part of the German electorate in EMU has not been quite the blessing that we all make it out to be. That has been true for the economy as a whole, but not necessarily for a large part of the electorate. We've seen real wages stagnate, job security fall. The entire welfare state as it existed in the mid-1990s basically no longer exists. My sense has always been you can push the Germans. So there's a dark side here. You can push the Germans quite a while, but at some point they say no. And one of the underlying things here is not just are we bailing out sort of, you know, irresponsible neighbors, is that this comes on the back of 20 years of reform in Germany that has seen this entire successful model completely turn around with rather negative implications for a large part of the electorate. And so it's not a. I predicted five predictions that come true, have met many fathers, so don't worry too much about that. But I predicted a few years ago that you would see a rise in euro skepticism in Germany, especially around the euro, because all these reforms don't seem to produce any effects. At the same time, the electorate was never all that keen on the euro. Had there been a referendum in Germany in the mid-1990s, it may actually not have happened. And so at some point pushed and it doesn't seem to produce any results. Well, either the political system absorbs that shock and then Merkel has to start thinking about how to either make the claims that you do or do something else at Boulder or else the political system produces its own instabilities. And that, I mean, the fact that the FDP is now a euro skeptic party is something that drives you up the wall. I mean, you know, these people were always massively in favor of that whole arrangement.
- [71:53]
F
Right.
- [71:54]
A
John wants to ask a question for the rest of us.
- [71:56]
E
I had a. Well, I had a question for one of the two Greek panelists and this is just about an article I read in the Guardian this morning. This was talking about what would happen to Greece if they actually left the euro. And as the worst case scenario. And what the article sort of seems to the conclusion by a political scientist, not by an economist, was that because Greece is running a primary deficit, this would cause immediate halt to supplies of fuel, disruptions in supplies of food. This could cause an immediate collapse of government services with government unable to provide those services at the best of times, this could cause widespread riots around the country and the military quite possibly must step in. So this is by Greek political scientists. What do the Greeks here say about that evangelist?
- [72:43]
A
The military got replaced yesterday morning.
- [72:47]
D
What I have heard is that the military does not even have gasoline to put in there. So it's not clear what they will.
- [72:55]
C
I think the primary deficit is not anymore as high as it was. So in some respect that's controllable. There's going to be some difficulties with paying pensions and salaries, but we already have difficulties with paying pensions, salaries. So nothing big news there. I think the immediate effect would be mainly sort of in the political field and then the whole uncertainty how it's perhaps the real economy rather than if you want, what happens to the government sector directly from the budget or to the financial system, although obviously the banking system will be completely destabilized. The problem is that Greece cannot get the, you know, follow the path of Zendina furloughed in order to get out of the problem once it devaluates and it adopts back the dogma and evaluates because it doesn't have an export sector, it, it has a very, very low export base, 6,7% of GDP and it has very low capacity. Small businesses not accessing big Distribution networks. So even if, you know, it's not a problem of price competition, Greece actually is price competitive. It's a problem of having the ability to capture or to access markets. And Argentina did have that and they managed to recover from the devaluation quite easily. In relative terms, Greece will have a much more difficult time. I think it's not only the immediate effect, it's the long run prospect that doesn't look very good, which makes the idea of a return to the national currency, you know, not very appealing.
- [74:26]
D
Can I add something to. I very much agree with Vasilis and I also would like to add that if Greece exits the euro, it would be a massive redistribution of wealth. So there are a number of, you know, rich, various rich Greeks and also various whatever who have profited from whatever the corruption of the past 10 years or more who have taken their money out in euros and you know, they will come back and buy lots of state property at very low prices. So I think that if Greece exits the euro, it's going to be, we might become, we might become, Greece might become like Russia was after the fall of, after the whole of communism. At least we would get this kind of state. So. Stuart Fleming, there's some evidence that the.
- [75:13]
A
European Central bank is contributing to the.
- [75:16]
D
Pressure on the Italian government to bring.
- [75:19]
A
In a new Italian government headed by Mario Monti.
- [75:23]
B
Would a change of government to a.
- [75:26]
D
Technocratic government in Italy significantly improved the general tone of the peripheral debt crisis.
- [75:33]
C
Or the sovereign debt crisis in Europe?
- [75:36]
A
Bob, that's a political science question.
- [75:38]
B
I think that's what it sounds like. The problem with Italy is that, so you have two views on Italy. One is that it's a gerontocracy and so you have these elites floating around and then you replace one by another. But it doesn't really fundamentally changed all that much. And the other one which sort of follows on from that is that if you want to change anything, you need to think about how to build a sort of new coalition. You have to go back almost 20 years ago, destroy the existing party system and try to build sort of coalitions between what I would call the enlightened left and the enlightened right that can then do these things. I don't think that any technocratic government which will continue consists of these gerontocratic elites is going to do all that much because I don't think that the problem is one that you can resolve from Rome in Italy. It's one that you need to figure out how to build institutions at the level where they matter for everybody who's involved. And I don't, I mean it worked for about three years under the Maastricht treaty with Champi, I think it was. And, and that's it. And that was because the pressure was big. Everybody was on board, the employers, the trade unions, the central bank and everybody was on board. That lasted three, four years. Then that clown came in and sort of destroyed the whole thing.
- [76:59]
A
I have to say I think you're rather pessimistic. Italy is running a primary surplus. Its current kind of position is not that awful. It's, it's got in many areas really quite a vibrant manufacturing and export area. I think that if it wasn't for a feeling that the Italian political scene is dysfunctional that Italy would probably be all right. And I think that they. And anyhow, three or four years of a good technocratic government might be enough to get through.
- [77:34]
B
Maybe, maybe.
- [77:36]
A
Next question.
- [77:38]
F
Will making a two speed euro ring fence any future issues and stop what.
- [77:43]
B
Has been described as the ultimate contagion.
- [77:47]
F
By a Harvard economist in 1999?
- [77:53]
A
I don't think we really got the question. What's the question? How do you avoid contagion if Greece goes down?
- [78:00]
F
No two speed euro. Stop the contagion machine that the euro.
- [78:05]
A
A two speed Europe. The difficulty is getting to a two speed Europe because the moment you actually start talking about it, you have the most enormous bank run and you can't organize a sort of a southern euro without talking about it. And the moment you talk about it, everyone takes their money to the Switzerland and flees. So there's a, even if it was a possible outcome, it's almost impossible actually to organize it in a way that you can get the thing going. It might be the result of a major crisis, but I don't think it is something that you can put in place. Certainly not. Not to avoid a crisis. And the very indication that the political leaders in southern Europe were considering it would immediately trigger off the biggest crisis you've ever seen. Kevin James wants to ask a question here.
- [79:13]
H
Several of the panelists suggested that the crisis we see is not. Is a consequence of much deeper, more fundamental flaws in the institutional structure. So does Demetrius talk about Greece's fundamentally dysfunctional deep institutions? We're talking about the need to completely reconfigure Italian politics as if the past 20 years hasn't happened. If that's what it takes for a stable Europe, it seems as for a stable euro, it seems like we're never getting a stable Europe because those changes are so dramatic. Well, John suggests moving France to North America. So these things are not going to happen.
- [79:42]
A
Right.
- [79:42]
H
And so, and it seems like there wasn't any sort of way of creating from what you were saying, a stable Euro unless some deep fundamental changes did happen. So given that Europe could survive perfectly well before the Euro was in existence, it seems more like what you're suggesting is that people would be better off without the Euro.
- [80:00]
B
There are sort of two points here. One is that so one is that once you create the euro, that's Charles point. Once you create the Euro, you can't undo it quite that easily. There's an irreversibility built in. It's not a symmetric process where everybody comes together, oh, now we decide to divorce. Right. There is no judge that didn't sort that out for you. And the second thing is that I think, okay, one of the important things about debates like this is that we discuss very different dimensions of a crisis that, you know, the headline bit, the longer structural bit, and eventually say, you know, the, the position I take is, which also speaks, you have two Europes in there. Good. Say that that's true. Just for the sake of the argument, say that that's true. That does not necessarily give you the solution. I mean, it's an important part to understand where the problem came from. It's a very different exercise to try to figure out how, if that's true, what that implies for the future. So I am, I mean, this is why I'm an academic and not a policymaker, as Charles started out, is that I find this a very, very difficult crisis to think through. And I mean, I'm mildly Euro skeptic, nothing like my friend John, but I don't want to see the Euro disappear, but I don't know how to keep it alive as cities. And it's not all that obvious how even a reconfiguration of that whole thing would be possible. Remember, it's like the Hotel California, you can never leave.
- [81:30]
A
I find it really quite difficult to see how this crisis is going to get resolved without a lot of crockery getting broken. It's so difficult and so many things can go wrong. I don't think any of us even foresaw the Papandreou referendum which suddenly came out of the blue. When you think of the other things that could go wrong and the likelihood of a crisis is, I think, very considerable. But when the crisis is over and done, which may cause a lot of harm, suffering, unemployment and all the rest of it, I think that the European Leaders will have to get back together again and think about a complete reconfiguration of what Europe might be in future. I don't think that the European ideal is. I don't think that a reconfiguration of the Eurozone is out of the question, but I don't think it will happen until the crisis has occurred, whatever form and however that may occur. Anyone else want to comment on that?
- [82:36]
C
I think I'm obviously not a Eurosceptic, but I think the questions we put about the stability of the Eurozone is, are in a way, you know, so they come from what we want to see as the outcome for the Eurozone. I could put the same question when I say a big financial crisis in a country in Argentina, maybe, you know, would I be justified to come and say, well, maybe we should abolish the nation state? Nation states don't work. You know, we don't need national governments, we should have local governments to cater for the local needs. No, we believe in nation states and we try to resolve the problems as they come. We believe in a European project to the extent that we do. And if we do and we come with, you know, try to find the solutions in the best way we can, we will never have perfect governments. But actually we don't always need perfect governments to have good economic performance. Even Greece experienced 15 years of very fast growth, being only second to Ireland in terms of speed of growth rates in Europe. Okay? So even this kind of failed state with failed institutions, with irresponsible citizens and everything bad, they managed to go by 4% for 15 years, year after year. So, you know, not quite bad. I think we have problems, we have to find solutions, but we shouldn't look, you know, we shouldn't use the problems as an excuse for justifying things that I want to put in the agenda. I believe in the European project and no matter how badly it does, I will try to find solutions. If I don't believe the European project, no matter how well it does, I would still try to undermine it, or I will still try to find some other kind of solution. So I think the two questions are separate in a way.
- [84:23]
A
We are coming up to the last four minutes. I'd be quite interested if each of the panel members would like to give a concluding short comment, starting in reverse order. John, do you have a final comment?
- [84:38]
E
I was just thinking about what Charles was just saying about what will be the political end game. And the way I see it, there are only two possible endgames out there. Either Europe will move to a full fiscal federalism, effectively create the European state or we will revert to reality as it was 1980, perhaps a loose coalition, but without economic integration. And I don't really see Europe moving to a full fiscal federalism. There's too much opposition to that. I hope Europe will find a balance, find a way to keep the European Union alive without the Euro, which is of course at the root of these problems. But the Common Market and the various other bits which are highly are useful. That would be my ideal outcome. But like I say, the crisis has to play itself out first and we can think a lot worse eventual outcomes than that.
- [85:29]
A
Vesilius.
- [85:32]
D
Dimitri okay, so, okay. I think that the Euro has broad benefits. So I don't think that the Euro was a bad idea altogether or anything. Of course there were some design problems, some things that were not really thought fully through at the inception of the Europe, both to let some countries in, but also, as I mentioned, some problems having to do with the governance of the financial sector. So I think that these problems can be addressed. I don't know. I don't share John's pessimism that the only way is for the Eurozone to break. I think that there could be some midway that makes the Eurozone workable and that is not the political union which maybe will take place in the maybe will never take place. But so I think that there is a midway and I think that this efforts and this midway should emphasize quite a lot the issues about the financial sector. And I think that this effort to redesign should. The earliest it starts, the better it will be because to will change drastically. Even though these kind of changes in bank regulation or in other aspects of the fundamental design of the Eurozone will take time, I think expectations matter and this can give a very strong signal to the market that the Eurozone is going to become workable. So of course one has to extinguish the current fires. But it's also important to pay attention to these kind of longer term issues as soon as possible.
- [87:03]
C
I think I will stick to the point where I started. I think the European Union has always been kind of a political project that used economic means mainly to advance economic and political objectives. Stability, prosperity, peace. And I think at some point we kind of lost track of what we're doing and we started paying too much attention to how markets feel and how specific interests are represented or not. I think what we're lacking is this kind of drive for European integration to guarantee prosperity and stability for the years to come. And in that sense we need the leadership that will put forward this vision. I think even today, I mean, John was at least half joking, but if we start talking about, about taking France to the other side of the Atlantic, getting rid of the Greeks and, you know, we don't really like the Portuguese or things like that, you can see that, you know, you can take that forward 10, 15 years and you can see that maybe this is not the Europe that you would like to be in. So I think, you know, if we reflect on that, then the question is not economic, it's not anything. It is about political vision and leadership.
- [88:19]
B
Well, yeah, well, here's my sense of this, right? If I were Monae, not the painter, the guy who built the European Union, and I sort of look at what happens now, I wonder whether, I don't think at that moment, it's like I didn't actually want these institutions to govern these problems. What I mean is that the EU has been a solution, an institutional solution to stop France and Germany having yet another war.
- [88:52]
C
And.
- [88:54]
B
It worked quite well to that effect. But we heaped a lot of very complex problems onto a relatively meager skeleton of institutions and policies that I'm not entirely sure that, you know, that sort of meager skeleton is able to handle. And I fear that what we're seeing in the EMU crisis at the moment, sort of the fact that it exists already to begin with, that there don't seem to be any decision making procedures or rules or anything of that sort that would help it move forward and so on, that sort of is symptomatic of the fact that we have built, that we're using a tool that was there for one reason to do entirely different things. And we're seeing the limits of what, what we can do with that too.
- [89:39]
A
Thank you very much. Now, before I ask you to thank my fellow panelists, I got a rather awkward exercise. Before Prime Minister Prabandreo dropped his referendum bomb. We didn't think that this occasion would get more than about 140 people attending, so that we had arranged a reception afterwards for not more than 150 people. There are far more than this number in the room. So I can't ask you all to come and join us at the reception of the sdr. And my problem is what to do. And what I've decided is that I'm going to discriminate on the basis of age. So all those age 25 or above are very welcome to come and join us for a reception and a drink in the SDR over the way. And all those who are under 25, well, you've got the enjoyment of youth.
- [90:50]
E
Or they got fake IDs.
- [90:53]
A
So would you all please thank my fellow panel.