B (15:08)

Thank you.

A (15:09)

Thank you very much.

B (15:10)

Our next speaker is Professor Luca Fantacci from Moccone University.

E (15:25)

Thank you and good morning. It's a bit embarrassing to be the second Italian to speak on a panel concerning Europe's problems, but you shouldn't blame us. I mean, it's ulf's fault. It's not some kind of Italian connection.

D (15:41)

Here.

E (15:43)

I do agree with, surprisingly, you might think with most of Ricardo's remarks, and in particular on the fact that until now addressing the European crisis has perhaps excessively focused on country specific issues. Of course this is again one thing we don't like, because in the case of Italy, it's particularly embarrassing. But I also dislike it because I think that it misses the crucial of the peculiarly European character of this crisis. This crisis, I mean, Italian problems have been going on, we were discussing this with Ricardo for decades. The Euro crisis broke out only several years ago. And what we ought to understand is why national problems become Euro wide problems, and more specifically why this union, and particularly the monetary union that we have created, successful as we might have expected, in producing unity, despite the efforts towards convergence, we have witnessed an increasing divergence in many respects. And I will focus specifically on one aspect of this divergence that Ricardo mentioned before, and my main argument, which is implied by the title, is that perhaps we do need, as is being discussed, a banking union, a fiscal union. But apart from that, and perhaps even before that, we need to accomplish the monetary union. There are certain missing aspects. What am I referring to? I will tell you right away. When we look at a monetary union, the condition for sovereign states that are adhering to this monetary union to actually stay together have to do with their external balances. A monetary union is an extreme form of fixed exchange rate system. And the fixed exchange rate system will only work if there is an external balance, at least in the long run. As much money flowing out of the country as money flowing in the country, which does not mean that year after year you have to commit to a balanced trade. It means that you can have debts and credits, you can have external finance, but eventually it would be good that these debts are repaid and not simply shifted around as Adair Turner was suggesting in his previous in his lecture. Now, this is exactly what has not occurred in the monetary union since the beginning. It has been referred to appropriately as the original sin of the monetary union. We had several convergence criteria and none of these mentioned the balance of payments. And this did not occur by chance. This was deliberate. On the basis of the assumption that financial markets would take care of the imbalances. It was assumed that through the creation of the common currency, money would flow from the center to the periphery. But it was also assumed that this money would be efficiently invested, invested in productive undertakings. And again, we could refer to what Lord Turner was saying before and eventually go back to the center, which is not what has happened. This is a graph showing you what Ricardo described before. The fact that since the beginning of the European Monetary Union, you have in fact, a very clear separation between surplus countries and deficit countries. Here you have Germany on one side and the periphery on the other side. And you can see that since 1999 you have mounting current account surpluses on one side and current account deficits on the other side. If we look at more recent years, we see that these imbalances within the Eurozone have been to a certain extent, to a large extent, reabsorbed on the side of the deficit countries. But this is mainly a consequence of the depression and not a step towards recovery. It's the fact that deficit countries have reduced their imports and not increased their exports. And on the other side, surplus countries have increased, sorry, have reduced their exports, but they have not increased imports and domestic demand. Which means that in the meantime there continues to be a buildup of net international investment positions and these have been fueled. This is the case of Italy. Cumulative financial account inflows throughout the period leading up to the crisis. Then you have the sudden stop of private inflows, money fleeing from the periphery, and you do not have, in fact, the interruption that you would expect in total inflows due to the fact that at this point, when private capital movements froze, the European Central bank stepped in and the European Central bank stepped in, both refinancing the debts of the banking system and through facilities that financed directly the external imbalances. So since the outbreak of the euro crisis from May 2011, Italy, as other peripheral countries, has accumulated liabilities towards the European Central bank within the clearing system of Target 2, which I refer to here as a clearing system that doesn't clear. It stopped clearing accounts ever since the outbreak of the financial crisis in 2007, and increasingly up to the famous declaration of Mario Draghi that he would do whatever it takes. And there you have a slight contraction of these imbalances. Now, these imbalances primarily reflect not current account disequilibria, but capital flights, where the capital flights, however, are correspond to capital inflows that had previously financed current account disequilibrium. Now, it's interesting, we were discussing before in the previous session, the nature of money. Target 2 imbalances are a particular type of money which I would not consider fiat money in the common sense. You cannot consider it private bank money. It is a sort of official bank money. These are referring to assets created by the European Central bank to allow payments between member states. And it is an interesting third way that until now has played a decisive role in financing imbalances within the euro area. It has done until now very little or nothing to reduce these imbalances. So in the remaining time I have, I will illustrate a proposal to reform the current rules of the monetary union and in particular the functioning of the Target 2 clearing system of the European Central bank in order to encourage the reabsorption of external imbalances within the eurozone. And this proposal refers to a problem experienced by the central bank which normally goes under monetary fragmentation. Despite the massive intervention of the European Central bank, we continue to have a euro which is very different according to the country in terms of interest rates to businesses, from banks to businesses. You have in the periphery still today interest rates in excess of 5%, whereas in the center you have a very lower cost of capital. What can be done to address these issues that are a prejudice that run the risk of impairing the union, the monetary union itself, and of causing a breakup in the long run? Well, one source of inspiration could come from the proposal that Keynes made at Bretton woods as an international monetary system. As many of you will know, his proposal was in fact to create a clearing system with the explicit goal of facilitating the finance of temporary imbalances in external relations and avoiding the buildup of major imbalances. A system which is Quite similar to Target 2 even here it was the idea of providing overdrafts to member countries that would allow member countries to fund temporary external imbalances simply by recording under balance negative imbalances when they were importing and positive balances when they were exporting. One major difference between the clearing union of Keynes and Target 2 is that the clearing unit was supposed to be restricted to the current account, whereas as I observed before, Target 2 is financing both current account and capital movement. And of course this is one major difference. A further major difference is the fact that Keynes imagined within the clearing union that not only debtors were supposed to pay an interest on their debts, but also creditor countries, surplus countries were supposed to pay charges on their credits for the reason that this should induce both debtors and creditors to converge towards equilibrium from both sides. This was the basic idea. And further idea is that the creditors are benefiting from these facilities just as the debtors, because the debtors are buying more than they could otherwise afford. But also the creditors, the surplus countries are selling more than they would otherwise be able to sell. So they have the benefit of a larger market. And the idea is that they should be paying to contribute to that. This, this is of course another major difference with the target to where debtor countries pay and creditor countries earn an interest. A further point in Keynes plan is that there should be quotas, maximum levels of positive and negative balances and eventually exchange rate adjustments in case of persistent imbalances. How can we refer to to these principles and reform target 2 in order to respond to these principles? Of course we live in a very different environment with respect to the post World War II period where you have very tight capital controls, where you don't have the importance of capital movements and financial markets. Well, of course you cannot go far, so far as to imagine restricting the use of target to imbalances just for current account because it would create major disruptions in the banking system. But what you could do is to distinguish, and even here Lord Turner made reference to this possibility, different refinancing operations according to the purpose. If you are financing trade or foreign direct investments purpose, perhaps the central bank could have refinancing operations on more favorable conditions to the refinancing operations for movements on capital account. The idea of symmetric charges could I believe be applied to Target two imbalances without. I mean, of course it requires a political consensus. But I don't think it departs from the principles of the treaties imposing symmetric charges on negative and positive targets to balances. Of course you cannot imagine imposing limits because the fact of not having limits on T2 imbalances was what saved the Eurozone in the first place. But you can perhaps impose increasing charges as countries depart from equilibrium in both directions. Directions we don't have the last point, the lever of changing the rate of interest because of course the monetary union does not allow adjustments of nominal exchange rates, we have adjustments of real exchange rates. But even here a principle of symmetry should apply. And Ricardo was referring to this before, in the sense that as we require deficit countries to adopt more restrictive budgetary and wage policies, we should also effectively encourage surplus countries to adopt expansionary budgetary and wage policies in a symmetric fashion. I think I have taken already a lot of time. I will run to the conclusions. What would the advantages of the this system be? Very briefly, first, the fact of imposing a sort of circulation, or rather hoarding tax on excess reserves at the European Central bank would stimulate money circulation. A further advantage would be reduce external imbalances and avoid the fact of having external debt continuously being floated, shifted around and not paid out. Countries would converge through a cooperative mechanism, which I believe is coherent with the principles of the monetary union. Debtors and creditors would be freed from deflationary pressures, which of course are a burden for peripheral countries, but by repercussion also cause a slowing of growth in the central countries. Creditors would pay in proportion to the benefits that the system provides to them. Trade and real investments would have a cheap and stable source of funding, independent from fluctuations of the conditions of liquidity on international markets. So money in this sense, I say it's a different kind of money because it's not a money created exogenously by a central bank. It's not a money created by market discipline. It's a money created according to the needs of commercial transactions, according to the function that it has to perform. And finally, if you have symmetric charges, you're not simply shifting interest from debtors to creditors. You are creating a source of funding that could be used for the purpose of international investments through the EIB or eif. I think I have taken more than my time, so I will stop here. Thank you.

B (32:10)

So we can see that Keynes continued to have great influence on our thinking. He's one of these defunct economists that continue to influence practical men. We are not really a practical man, but at least continues to influence us. I would like to abuse my position here. Your proposal to have different financing facilities and reminds me of the dual exchange market in Belgium, where you had something similar. If a straight transaction could go to a cheaper foreign exchange deal than if it was financial and it really requires a lot of controls. I'm sure you are aware of this, because arbitrage between these two kinds of operations and over invoicing under invoicing becomes extremely important. So you have to control. So we go back to some kind of control. But that's also the word of Keynes. So now we have our third speaker, Ulf. Dr. Ulf Daustin from the London School of Economics, you have the floor.

A (33:24)

Thank you very much. So I will add two aspects to the discussion that are linked to the theme of this conference. The first one is have we done enough to stabilize the financial market? And secondly, what about governance in a more and more global world? So starting with the first one, I think it's generally dangerous in this situation to be complacent and believe that we actually have fixed the financial system. Right now it is calm. It's actually when things are a bit calm that you should do what you need to do to avoid future problems. And the financial system is inherently unstable. Well, that's clear. Booms and busts cannot be avoided. That's also clear. We'll always have them. But we can reduce the risks that those busts develop into systemic crisis and we can reduce the risks for bailouts of banks. So there is a good reason to actually do what needs to be done. And Adet Honor has really been into many of these questions. I wanted to remind you that the system still has an extreme pro cyclicality that the endogenous risks are underestimated. Which means that in the cases of a bust, the risk for fire says that actually will develop into a systemic crisis or financial crisis. Systemic crisis are there. And the liquidity that we create through quantum easing is not perhaps always in the right assets. And the system has become so interconnected and complex. We have too many institutions that are too big to fail. And if one of them fails, all of them will fail. There is a lack of transparency still, although not has been done to increase transparency. It's still an issue. You and uncontrolled third party risks are all over the place. And then we have the problem which we actually have created more or less in the last few decades. An increase in maturity mismatches, especially in the mortgage industry, where you had much better balance between the asset and liability side before the mortgage industry was moved into the commercial banks. And there are too many incentives still in place in favor of risk taking. And as pointed out by Turner and then added on by LUCA here, the global imbalances are not addressed. So what to do? I just want to show you a big list of things and I don't want to comment on all of it. I just want to with this list show that there are a lot of ideas out there, a lot of proposals that should be taken seriously. I just want to highlight three of them which I have making a bit More jello here. The first one is have we really done the right thing when we merge banks all the time when they fail, we're getting larger and larger banks are less and less diverse system. Local banking is disappearing as we are merging them into larger, larger units. And those are systemically important and therefore risk to the whole system if they fail these increasingly large banks. And it creates also a moral hazard because the bank managers know that if they fail, not only will they be bailed out, they also have the chance to become managers in an even bigger bank because they know that when they fail they will what will happen in the worst case is that they will be merged with another bank. Not so bad outcome. Now think about the other alternative saying okay to get a more diverse system. If a bank fails, we're actually going to split it up following the business logic and the territoriality and using the opportunity to create a more diverse system that would create strong incentives for bank managers to keep their business under control. And then this mark to market accounting, irrespective of if it's motivated or not. John Danielson, professor here has shown how this actually creates endogenous risks that in the case of when you get into the bust, the way to this mark to market accounting will drive dry fire sales and increase the risks for this crisis to develop into something serious. Shouldn't it be the other way around? Should really accounting rules drive the business logic or shouldn't the business logic drive the accounting rules instead of instead turn it also that upside down. Alan Greenspad the third example here, I think it was two weeks ago, was saying that the biggest mistake done during the 70s was when you took away the partnerships in investment banks and made them into ordinary banks. I'm not sure if it was the biggest mistake, but I think it was a big mistake. And I think the idea of recreating partnerships in investment banks is another idea. And as you see, there are many other ideas that I don't have time to comment on now and many that are not on this list that are worth considering to make the system more sustainable and stable. I know Charles has for instance, proposed that bonuses should be based on return on equity instead. I mean there are a lot of issues that you can actually do. The. This can of course not only be done on a local level, European level. Many of these things actually need a broader perspective because we are now entering a period of globalization. The European project started as a peace project, but we all know that it developed quite rapidly to an economic project, a single market project, and that has in many respects, been quite successful. But meanwhile, when we have developed that project, we have taken away hindrances towards competition, seen to that externalities like environmental rules are implemented the same way in the Holy Union, etc. Etc. At the same time, we have a globalization process going. And the fact is that today many of the European countries have China as the second or third trading partner. And this is the reality of globalization. Moving on, it's obvious, but it has to be said capitalism is the best system ever created to create wealth. But it also has to be checked. And we learned that 150 years ago, during the first phase of industrialization, we saw that a rise of unemployment at the same time as some workers were exploited. We saw the rise of skewed distribution of income and wealth. We saw that companies establish monopolies and abuse their market powers. And we saw an abuse of nature. And that was driving the development of the labor unions and of democracy, great development. And after that, there was a marriage developed. Some in the Americans call it liberal democracy, a marriage between the capitalistic system and the public order. Many on the continent call it embedded capitalism. And as a Swede, I mean, we love to call it the Nordic way in Scandinavia. This is a marriage with many names, and it has been a successful marriage overall. But the glue that is keeping this marriage together is the rule of law. And that rule of law is withering away as we are getting more and more into a global society. So there is a growing mismatch in territoriality between a global market economy and mainly national public orders. So we had this crisis once before, worth remembering. And many have talked about this already, giving evidence from what we learned during the crisis 100 years ago. And I think this should be re. Read a lot of this. There's a lot there that we actually still should look into at the time, after a number of dark decades. The result in Bretton woods was a form of supreme, a national regime. But that regime was not felt to be to be working that well after a while. And as you know, in the 70s, it was abolished, but it was abolished in favor of what? In favor of nothing, really. And this is the problem, because what we have now is a networked governance on global level. People are meeting, discussing, talking, trying to agree things, but it's all depending on the implementation in the different countries, if something is really coming out of it. And Charles could have done a fantastic job on looking at what happened in Basel during this first period and showing how national interests were blocking a lot of good efforts and also avoiding People to address the systemic risks. So what we have is a governance that has a limited scope. There's a lack of authority, there's a lack of transparency and there's a lack of accountability. And actually, meanwhile, the situation of the nation states is undermined by a development of a global market economy that have less and less possibility to influence. So what can we do? Well, there is a dream of a global government, but very few, very few want it. The UN with one country, one vote is clearly not acceptable to the leading market economies. Self regulation, well, that's more or less what we tried. Did that work out? Not really.

C (45:11)

Did it.

A (45:15)

So, and then we have, of course, okay, give up the globalization de globalize as proposed by Daniel Rodrik and others. But that would be to deny the hundreds of millions that are now lifted out of poverty in China and other places is the benefits of globalization. So it's really not an alternative what I propose. And now it's the second proposal, controversial proposal you are putting on the table. LUCA did. The first one is a World Market Charter to be discussed and developed by the main countries, like they did when they created the UN Charter and when they created the Bretton Woods. I propose an assembly where people are represented, the countries are represented in relation to their economic strength. And I propose a council that involves NGOs and other global networks to be able to create transparency in the legislative process. But to create the rule of law, you also need a judicial system. You need courts and prosecutors. You don't need new exercises, executive institutions. We already have imf, we have in Basel, and we have others who can take on the executive roles. But we do need a transparent process. I don't have time to go into that, but this is actually something where I think the research community has an enormous important role into helping creating a transparent process in the common interest. That starts with evidence building, a scrutinizing global reasoning, developing proposals for actions in transparent way, a legislative process that is open and transparent, implementation and enforcements, and then back to evidence again. I think I've used my time, so I stopped by that. But this is not, I want to point out, I think Luke agree with that. These are not proposals set in stone. But I think there are ideas that should give you an input for thinking about those issues. And if you think, oh, is this really possible? Well, I would ask you to think about the alternative. Thank you very much.

B (47:58)

Well, the nice part of Dr. Dalston's proposal is that it let us dream about the future. Okay, this being said, I think the floor is open for discussion. Who would like to start? Yeah, please. Can you also present yourself?

D (48:20)

Eric Lonergan from M and G. I'd like to ask the panel why they think that policymaking ideology in Europe is so resistant to overwhelming empirical evidence that it's wrong. And I just cite two striking examples to me, particularly Paul, given your presence on the panel, but also having just listened to Adair Turner. The first one is the whole analysis of the euro crisis. Mario Draghi did us two favors when he made his comments in London, whether they were off the cuff or not, which is one, he stopped the European crisis in its tracks, but he also settled the debate once and for all, which is he made it absolutely clear it's a financial crisis. He didn't reduce the stock of debt of Portugal. In fact, Portuguese debt today is higher. He didn't reduce the stock of debt of Ireland or Greece or anywhere else. But he caused spreads to collapse and an economic recovery to begin by ushering words. To my knowledge, you can only solve a financial panic with words. You can't solve competitiveness or debt crisis if there's a genuine one. So to me it's over. Blindingly obvious now. And Italy is a very good example because Italy had none of the indicators. It didn't have a big balance payments problem, didn't have a big buildup of debt. Italy's problems were caused by the ECB because the ECB didn't do qe. And just a final point, your observation, which I think is a minority again, which I can't understand, why is that view a minority in continental Europe or just even amongst policymakers and academics in Europe seems to be a minority, minority. It's probably a majority view in financial markets. My second point is the success of fiscal policy in America. Blindingly obvious. They actually did what a Dare Turner suggest, which is they monetized fiscal deficits. That's what QE is, they loosened fiscal policy in response. The only mistake Adair, I think made was he said that US debt GDP ratio went up. It didn't. Because the monetary base is clearly not a liability of the state. That I think is debatable, but I think is overwhelmingly clear that it isn't. In which case the net debt of the the United States is unchanged. So the beauty of American policy, And indeed the UK's policy is the net debt of the government is actually unchanged by the financial crisis. Growth has resumed and now in America you've got a banking system, financial system in good shape. So monetizing fiscal. Oh, and by the way, inflation in the United States is lower than when they embarked on qe. These facts seem to me to be entirely ignored in the policy debate in Europe.

B (50:32)

Okay, you want to respond to this? Yeah, please.

C (50:36)

Well, maybe I'll respond to one particular point, which is quantitative easing. If I go back to the early months of 2009, when the Fed started QE, there was a debate in Europe. Will DCB do the same? And I thought the simplest form of QE would have been just to look at the capital keys in the ECB and say how big should the program be? On the basis of some factors that might have been what kind of expansion do we want in money supply? Or other ways in which central banks have sized their QE program. And obviously it wasn't done. And even when the ECB then created the S and P program to try and rescue Greece and then the other referral countries, it was a big deal. We know that there is is huge German opposition to this. So I think it's largely a reflection of the fact that it's thought as something that will only happen in a worst case scenario. That is if things get even worse than they were in 2011, perhaps we are in outright deflation, then the ECB will consider QE. Views in Germany differ. I mean, I have a good dialogue with policymakers in Germany, with the Bundesbank and some members of the Bundesbank are open to the idea of qe. But there seems to be a difference between what the leadership of the bank and other, you know, people, senior people in the bank think about qe. I think at the moment the reason why we don't have debate is because we think the US is exiting, things will get better and we know the Germans will not accept qe. So it's just this very firm position. And in my comments I mentioned other areas where we have seen a similar situation. We have a view about the current account not being a problem. We have a debt break in Germany that that requires the government to reduce its debt to GDP ratio by running balanced budgets and surpluses would actually be welcome. So the fact is that the view we have at the moment in Germany is essentially contrary to all the mechanisms that we can think of as rebalancing the Eurozone and promoting growth. And I don't want this to sound like a biased view given my nationality. Right. I do think that there's a lot to do in countries like Italy. Italy is clearly the country that has reformed the least, I think among the countries that were under pressure. So if I could point to A solution moving forward. It would be a combination of reforms in countries that need them, but at the same time a degree of, of fiscal and monetary stimulus that we haven't seen so far. And again, I think the view of the German government is that after the European elections, we start talking about fiscal union on their terms, which means we set even additional rules over and above what we have in the fiscal compact. I think someone will have to break the news to them that this is not going to work. And I think the other countries should also make the point that they would never sign additional fiscal rules unless it is within a framework that promotes economic growth.

B (54:20)

Okay.

F (54:27)

Howard Stewer from the European Commission. Digimarkta actually, I liked a lot UL's presentation because, because you may know that your dream of the assembly and the Council is exactly what the World Federalist Movement is fighting for for the last 60 years. So I have some good friends there and I think you should maybe join forces with them. There are many very detailed proposals and they work in Washington, in New York with UN reform. Exactly on this idea. So I share your dream and I think this, you could also name it the recreation of the European Union at the European level. I mean, this is also a way to see it. I also share the problem that was mentioned in Luca's presentation, that the breakdown of the Bretton woods institutions, or let's say the breakdown of the system in 71 was not really replaced with something at the international level. You know, the European replacement that was created gradually after 73. And I would like to point out to a note from Italy that is not, maybe not publicly available. No, it's now publicly available because it's in the historical archives and it's more than 20 years old. So I can send it to you if you want. The Italian members of the Monetary committee in spring 73, before the oil price shock hit the country, which was in late 73, as you know, rang an alarming bell that the IMF does not have sufficient funds at this juncture to provide sufficient balance of payments assistance for a severe downturn. And this was a very, very forward or looking almost prophetic note because half a year later the oil price shock really hit Italy very strongly. Whereas UK was already in bad shape structurally, but also there it made things worse. And the EU actually very quickly came up with complementary resources to complement the IMF resources. And actually finally in 74, 75, the payments gap, the balance of payments gap of Italy was more than financed with the joint resources from IMF and the new European facilities When I studied this using historical archives documents, I was surprised because the parallels with the current crisis, of course, are quite strong. And maybe we should be a little bit more, I mean, more appreciate what we managed. We did many things too late. The 2007, 2008 crisis, 2009 crisis was misinterpreted in Europe for a long time. But after all, maybe it would be worthwhile mentioning that there was the biggest, the sovereign debt restructuring in history in Greece and that much of what Ann Kruger was proposing in 2002, 2003, which was discarded later on as unrealistic, was nevertheless. Exactly. No, no. And the last question was, I mean, the last point was in the first presentation. The output gap, the measurement of the output gap. I don't know how we can quickly change this because it's also a rule of law problem because you know that the measure, how the output gap is computed in the European Union is actually a rule of law really set agreed by all member states. So you would need unanimity to change the rules, how you compute the output gap.

E (58:17)

Thank you.

C (58:20)

You want to do that, Luca?

E (58:22)

Thank you. Yes, Just briefly, thank you for your remarks. Ascribe to the view that the main point is the lack of international monetary institutions at a global level and even at a European level, certain flaws in the construction of the monetary union. As you know, Keynes proposal at Bretton woods was not adopted and this was one of the reason why the IMF did not face the challenges for which it was designed. I would like, since you were mentioning the history, let's say, of European monetary systems, to mention the fact that between 1950 and 1958, Europe had a clearing union which was actually working according to Keynes principles in the form of the European Payments Union, which did in those years an incredible job in opening up the economies to foreign trade, increasing liberalization of foreign trade, promoting development and avoiding the buildup of major imbalances. So I think that is another incident in European history that we should be looking at, if you want to comment.

C (59:37)

Yeah.

A (59:38)

Although I'm very happy for your positive comments, I want to be guarding one.

G (59:43)

Thing and that is I don't really believe, and this has very much to do with how we function as human beings, that we want to have the social and cultural conditions designed as close to us as possible. I don't believe in sort of a world federalism because of that reason. What I believe in is a very.

A (60:06)

Limited restricted.

G (60:09)

Legislation for the markets, which basically should be about the financial markets, about competition rules, IPRs, about the domiciliation of income and the management of externalities, and that's it. If we try to stretch that in any way, I think we actually come counter to the perceptions of many people of the kind of life they want to live because they want to have these kind of decisions that concern the social and cultural aspects very close to them.

C (60:44)

Just a quick comment on the rule to compute potential output. I think the difference here is that as I mentioned, I think there are flaws in the fiscal compact, but the fiscal compact is now a treaty. The way in which we compute output gaps and potential output is not a treaty. So I think in terms of the flexibility of the two things, it's where we should be working rather than the copy.

B (61:12)

One interesting thing to know is that when you take the structural budget and compare it to the headline one, the structural budget is more volatile than the headline one because it's being recomputed all the time. And as a mistake. When you look at historical figures on the structural budget, you will find that it's more volatile, which is amazing that we now want countries to set their policies based on something that that is extremely volatile because we have to be computed all the time. Yeah, Paul, yes.

E (61:53)

Thank you.

H (61:54)

Yes, thank you very much. Paul Van Denorth, Autonomy Capital and Chatham House. Very stimulating discussion. I have a question, a really open question for Professor Bavieri. It's not a comment in disguise, but really no question. You refer to the Ukraine crisis and suggested that or explicitly said that the euro area would not survive another recession. I find it a very interesting comment. You could also have referred to the possibility of a credit event in China, but given the fact that it's more, presumably more the core that is exposed to those potential shocks rather than the bridge. My question is why would your area not survive a recession prompted with those types of shocks? And have you thought through a scenario.

C (62:50)

You could share with us? Thank you. Well, it was maybe a bit of an overstatement, but I do think in the event of a triple dip of a serious recession, there is a severe risk of breakup of the euro. I mean, you have to consider not only the economic dimension of it, but also the political dimension of it, which I think will be very evident with the forthcoming European elections. There are many anti euro, anti EU parties around the European Union and I think they would gain further support. It would be very difficult to tell public opinion there's another round of austerity, there's another round of rising unemployment. It would be very difficult to find a way to accommodate monetary policy given the framework of the ecb, I would find the policy response very problematic. And when I think about the debt ratios of countries like Italy, now 133% of GDP, as you know, in 2007 that ratio was 104%. So it was almost 30 points below where it is today. So a deep recession can cause a rise in debt to GDP ratios to levels where there is a significant risk of unsustainability. And let's not forget Spain is approaching 100%. France is estimated to reach 96 or thereabouts this year. And when you are above 100, your dynamic becomes less stable, I should say unstable, because it magnifies the effect of the difference between the interest rate you're paying on your debt and the growth rate of the economy. And you need a much bigger primary surplus which then becomes procyclical. So I think a period of again zero growth close to zero would not be fatal. But what I have in mind is something more serious where you have combination of shocks that causes a significant drop in GDP around Eurozone at that point I think particularly if it was asymmetrical with Germany still outperforming the issue, or whether Germany should leave the euro or the rest of the weaker countries more probably should get out of the Euro I think will become more significant. I will also make one last observation that in response to the crisis there is greater segmentation of financial systems within the Euro. So today the implications of a medium sized or large country living in Europe would be, I think much less serious than they would have been in 2008, 2010 simply because the rest of the world is less exposed to the likes of Spain and Italy. Although we are seeing a return of investment in recent quarters, still we are less integrated within Eurozone than we were four or five years ago.

B (66:15)

Okay, we have one minute and my forecast is that the question, the four minute question is more than one minute and to give an answer is even more than one minute. So I think I'm going to close here now. I think we had a very interesting discussion, a very wide ranging discussion and we have even been dreaming with them. So now it's time to have lunch and I thank the members of the panel for their insightful comments.