okay good morning everyone and welcome to our debate on on european debts the future of the eurozone and how the two are linked i also like to welcome my produce cousins especially here in italy the question about the future it is an interesting question that we're debating what's happening advertisement today is the measures from our sponsors okay let me just start again welcome everybody to our discussion on the future of the euro and the future of european debt to issues that are inextricably inextricably linked i also like to welcome my co-discussions lucrezia richlin and lorenzo binizmargi we're going to have an hour and 15 minutes of uh of of a relatively loose discussion we won't make long statements like we will all say a few words and then enter into a discussion also with you allowing you giving you the opportunity to ask questions um the the timing is obviously no incident we are talking about european debt in particular now because of the situation in greece which is there is a reasonable likelihood that it will lead to a discussion on the level on the stock of that a discussion on debt restructuring um and how that and how that can come about there's also possibility that greece might default that it might default unilaterally so we are in a very interesting time something that was not supposed to happen at least can happen now and in this discussion we would probably at least i would like to extend beyond the issue of greece we need to discuss greece there's no way we cannot discuss greece but there is a broader issue about about about about about debt about how we how we deal with that whether it matters at all whether we should focus as much on debt as we do in the eurozone whether the rules that we've set ourselves a 60 debt to gdp ratio whether that actually still makes sense in the environment in which we live in today in an environment of very low growth potentially low growth over long periods you know secular stagnation as as as um as it is known as larry summers called it um or you know whether we should we should take time to actually assess the situation and and and adjust our rules accordingly my own view is on that that it needs to be resolved that when you have a debt crisis in greece you really should end it and end it through resolutions i remember lorenzo and i we had a discussion i think four years ago on the on the issue of that resolution obviously lorenzo had a different position then and may not have spoken uh purely in a personal capacity in the time at the time but um but the question was should we should we uh allow bank debt should we allow banks to default at least on the junior creditors the discussion at the time related to ireland where you know i i made the point that it would have been advantageous if irish banks had been allowed to default on their debtors the bailout would have been much much much smaller um you know several of us also made the point five years ago and then again three years ago when it came to the two debt renegotiations on greece that it would have been cheaper for everyone economically more beneficial for greece but also cheaper for the european taxpayer not to have bailed out greece to the extent that we did but had allowed a greater degree of a bail in by investors bondholders and we would probably not have had that not greece would not have suffered the consequences of five years of depression had the debt restructuring been approached in a different way back in 2010 and back in 2011. and then there's the third point and that is the question is whether that to gdp is the issue we should be worried about at all from now on and whether these rules we've given ourselves you know on deficits but also on that we have a dual rule both on deficits and on that whether that is still the appropriate rule the 60 percent were numeric uh um residual of the growth rates prevailing in the early 90s of the inflation rates prevailing in the early 90s and of the then prevailing debt to gdp ratios and deficit that that countries um that countries were running and the 60 seemed to be consistent with that environment prevailing in the early 90s we're living in a very different environment today the question that i would you know ask my my my co-discussions and all which i would which i would you know put to them is you know should we you know reconsider those rules uh scrap them replace them with new ones or whether we should basically go back to what i would prefer a much broader debt sustainability uh policy that is not tied to numbers like three percent or sixty percent uh but that is that is subject to a much more analytical analytical understanding of eight countries a you know sustainability and these numbers may be different for different countries germany could presumably sustain a higher gdp ratio than than other countries but the situation actually is reverse germany is the country that actually tri strives to achieve the 60 that is where the policy is while others you know don't seem to care bring great danger to them to the to the eurozone so these are the the broad the broad outlines of the questions i will obviously try to answer some of them as we as we go as we discuss and i like now to pass on to lucrezia thank you thank you thank you tito for inviting me again to this festival i understand that is the 10th anniversary so happy birthday um now wolfhang has made few points let me uh take them one at a time uh first of all is the debt overhang so the amount of debt that is in our economy beyond greece a problem for our future is this something that we should worry about and then here i would say that we should worry about two things one is sustainability sustainability by sustainability economies means you know the fact that the debt to gdp ratio is going to increase forever and the other problem and this is actually you know it depends on a number of circumstances mostly uh the future growth of our economies and the second thing is the level of interest rates now we are in a recovery so things look a bit better than they used to be and also now we have the ecb very actively in the market keeping interest rate very low so some of the you know big concerns that we have in 2011 2012 in a way they are gone at least for the moment okay that doesn't mean that all of a sudden you know the market may change their mind we have seen that the market is very volatile and then we we go from periods of risk on where you know very high risk premia and periods to where everybody falls asleep again but you know things may switch okay so we have to kind of put our economies uh protect our economies for this sudden you know changes and you know sustainability may become a concern again you know in current uh uh in the current situation with the current projections of interest rate and uh and gdp doesn't seem to be a concern except for greece okay however we there is another concern which i think in my view is very very important which is the fact that the high level of debt even if they are sustainable i think of japan which has a very high debt to gdp ratio they the fact that we have this debt it means that our economies uh they do what they don't do what we should do for example our tax rates is too high this creates distortion and the reason is that we have to keep those data gdp ratios under control and you know there are sort of externalities okay that's the weight of the debt of the stock weights on the economy and our ability to growth so on pure economic circumstances as a uh on pure economics you know kind of objectives it would make sense collectively at the euro area to think about this issue that that overhang and how to deal with that overhang this was something that was discussed a while ago and this now is sort of out of the of the policy discussion for the moment but i think that now especially in the occasion of the for president's reports and you know a new conversation about where we are going the eurozone would be uh desirable to open this conversation okay also because whatever uh reform of the fiscal framework we may have in mind and here i come to your other point rules versus discretion or you know this discussion is also very complicated by the fact that there are countries which have a very high level of public debt and here i'm talking about italy but not only italy still portugal still ireland france is getting there very rapidly spain and so on so if we could deal with this issue in a in a in a we are made proposal i made proposal with a number of colleagues there are several proposals around i think it would be easy to discuss about what we want in the steady state so in the long run what kind of fiscal framework we want to go to and there once we get rid of that overhang i i would agree with you that it would be more desirable to go for a less for for some rules but based on a more realistic analysis of that sustainability we should have a system of early warning i mean when countries get to a high debt to gdp ratio then we should have prevention we should have you know a number of you know we should have a framework which is much more complete and i totally agree with the fact that uh that should we cannot just have an objective of that uh uh you know you know we had i think and here i come to greece the fact that we have imposed to certain countries an unrealistic objective about that to gdp ratio it has implied that the fiscal surplus that was needed to get to that objective was totally unrealistic and this has been true to greece okay and this is one of the reason why the greek economies the the first program and the second programs have not worked because the primary surpluses have been too high and this had you know very bad consequences on the economy but in a way we can also say that in italy we had the same problem we have run uh primary surpluses between three and five percent now for the last 20 years or something like that and look at what that did to our debt to gdp ratio okay we are still the debt-to-gp ration in italy still now stabilized so i think we should think of what do we want okay we want to have fiscal stability but you know debt and deficit are linked and i think it's it is inappropriate to have an objective on that and just let the fiscal deficit the fis the serpent sort of determine the require uh uh fiscal surplus in relation to our drafted to that i don't think that this is a rule that works and we have now plenty of evidence that this does not work um so uh i think that for the moment i would i would stop here okay something yeah okay it works so maybe for the sake of clarity of the debate it's uh easier to be straightforward in saying on what we disagree and so without forgetting that we have been central bankers and we used to speak softly um my first contention is that today the in the european level there is too little debt not too much debt and at the global level there is too little debt this is the reason why we have an excess of saving compared to investment the problem is that the debt is a is in the wrong place maybe or is issued by the wrong countries so this is the first challenge now in terms when you're a policy maker you always have to think about alternatives if you don't like something you need to have an alternative so the alternative clearly would be to have countries which are uh in a more solid fiscal position to issue more debt and countries that are in a weaker position to issue less debt but this is not easy because there is a some path dependence but at the aggregate level in europe i would say i don't think there is too much debt the problem is that sustainability how to make this debt safe and the best way to make that safe in my view is not to talk about that restructuring because if i talk about countries not repaying their debt i don't know who of you in the audience or outside this room have savings but if i tell you that i know that in three hours time mr reigns is going to come and tell you that he's not going to repay 25 of the debt you're all gonna rush out of the room it's a saturday but you're gonna call your broker and say please sell my btps and whatever and this is exactly the reason why i think it's very difficult to design a framework for that restructuring put on stone the us has always opposed and and many european countries in the context of the mf have always opposed to have what was called the sdrm the sovereign debt restructuring making that is to write down precise rules for restructuring because it's the best way to scare away people and that's the reason why in europe in 2011 when we started discussing the restructuring of debt of the greek debt the the whole system was very close to collapse now in some cases restructuring is necessary but you have to address this only when it is necessary and really the last resort because as i said the reaction of the markets can be totally unforeseen and the contagion of course is huge and if you go back and think when did the contagion start in europe it was exactly in the spring of 2011 when european countries started discussing the restructuring of the greek debt and immediately the spreads of italy spain and all the others went up and it was very difficult to to stabilize that now uh we may discuss greece later clearly we have to think how to avoid the contagion in case these things happen how to insulate financial markets but this is very difficult to forecast alexander how the markets would react as i mentioned i think all of you would move out and probably would be some people being hurt at the door because financial markets like like any markets when they react on panic uh tend to create huge problems so that restructuring is is is really the last resort i think we have to think more about the other two issues that affect that restructuring interest rates and growth now in europe if you compare europe to the us or even europe to the uk i think there is unfortunately i i cannot show you some charts but you can do the the graphs yourself one interesting thing that has happened after uh the crisis is a substantially different monetary policy in the euro area compared to the uk and the u.s the quantitative easing policy which was implemented lowered interest rate much below the rate of growth of the economy both in the u.s and in the uk and this has created the conditions to make the public debt and also the private debt sustainable so the leveraging the sustainability of the debt have been made possible by monetary policy in in europe we are doing this now for a series of reasons we can discuss but there have been constraints on monetary policy that have made these uh deleveraging these sustainability conditions much more complicated but now we are there certainly working on the interest rate is key and on the on on on on the greek case we can see how this has worked and and and how this is working the second element is growth you can do all the debt restructuring that you want if there is no economic growth i think it's uh it's useless you're going to go through restructuring and restructuring and on top of that at each restructuring if you need if you have a deficit in the budget you need more money and who is who is going to give you money if you just reneged on your debt i think this is the key challenge not only for greece but for any country that would have to to address the issue of of reneging on its debt or that restructuring so to conclude maybe and to go on the next round i think the key challenge for europe today and for greece also is economic growth is reforms is making italy if you want to discuss about italy more competitive the problem in italy is not fiscal the problem is is that it doesn't grow if italy was growing at one percent on average one half percent it would not have a fiscal problem the fiscal problems come from the fact that it is not growing and i think the same applies to greece if greece was growing one percent one and a half percent the debt sustainability would come so these are the key factors on which i think policy makers have to to focus the debt may become an excuse to the extent that policy makers give up on making on implementing policies which would allow the country to grow maybe stop there's here fairly high degree of agreement among us a few areas where we do not have to speak hello there is a fairly high degree of agreement among us uh and also a degree of disagreement let me focus on the latter for a moment um where i where my emphasis would be different is to say that you know i i take the point that you do not restructure that lightly and that you do not talk about it all the time and that you do not do what we did restructure that greek debt in 2012 and then retain the uncertainty and talk about restructuring again in 2015. now that produces very negative confidence effects but the purpose of a debt restructuring is to recognize that something that is unsustainable uh cannot continue and to end the uncertainty that would have been the goal of any good debt restructuring mechanism uh if it produces the outcome that you uh posited then yes then that would be that wouldn't work but if it was done right if the 2012 greek debt restructuring had been done in a way that would have allowed greece to grow and as lucrazia was saying if if it had imposed a lower fiscal surplus requirement than it actually did it might have worked the reason it didn't work was because we we clung to the illusion of a in the greek case of 120 dead to gdp target which is an intermittent target because even greece is subject to the 60 degree gtp target eventually so the idea for greece is to re return to uh debt levels of 60 in the long run and 220 by 2022. these were illusory targets and if we had recognized that this is not possible to achieve unless there was a greater debt restructuring and if we had recognized that early we might not be in a situation in a situation today my other point of i agree very much agree with lorenzo on his on this argument that that that the debt that the eurozone does not have excessive debt but that it's misdistributed across countries but i think one needs to take the the next logical conclusion from that there is no way we you're going to get germany to incur more debt if you follow the discussions as i do over there you know the the discussion is framed in terms of domestic law which has a constitutional requirement to keep the to run essentially permanent permanent surpluses and to reduce the overall debt to gdp ratio to 60 which germany still exceeds but that is a very serious a a very serious target the debt to gdp ratio is now is now less than 70 they're almost on target and the surpluses will uh you know are likely to continue for a number of years so we're going to we're going to have a 60 data gdp ratio very soon and on my calculation if germany continues that way it will eradicate all that it will do what it says i think in the program is how do we repay all the debt you know i mean it's a nonsensical a nonsensical claim but germany will most likely do that so if we want to get to an adequate level to an adequate level of european debt uh and you know it might be 120 130 percent debt to gdp the eurozone could probably easily handle those kinds of level the only way to do this in in such a diverse union is to is to achieve a fiscal union that is otherwise not possible you will not solve this or you will not get to that position through the coordination of member states and i think that is what ultimately is required for it for that for a debt sustainability problem i don't think the ecb can stem that alone through keeping interest rates low but it will ultimately require a degree of fiscal union rather than cross-state transfers which is which is which is something that's politically going to be very very difficult and that's um you know it further complicates the solution of the problem but i think that would would be a very important component to a to a solution of the problem and in my view in fact an inevitable component for the long-term sustainability of the eurozone it can't continue on the basis of rules uh of the kind of rules we have at the moment okay so let me also try to see what we're i mean what is there of consensus and what is not their consensus as well focus on the latter as wolfgang so to clarify when we talk about restructuring we are talking about greece so nobody is proposing to restructure the italian debt okay so that this is what we're talking about uh and then now exposed i think that most people would agree that not to have delayed the distract the restructure in 2010 has been very costly for the greek economy however you know i also understand and lorenzo was at the acb and you know had just left the ecb at the time that you know the concern from the part of policymakers was that restructuring at that point before uni before europe had given itself a banking union and you know kind of protect itself to the risk of contagion it would have been very costly for the financial sector in europe as a whole and this would have had very bad consequences for the whole area okay so this is why there was a big resistance in particular from the side of the european central bank this is why germany in fact you know was very much more of the opinion of going towards restructuring now okay history is gone so i think you know it's fairly useless to go back to you know to that debate at the time but the question is now whether you know greece now or maybe another country in the future whether we could live in a monetary union in which the fear of contagion lead us to rule out the possibility of restructuring in any possible scenarios i mean this is not going to work okay because as we know in the case of greece it creates a particular bias in which for the fear of contagion the public sector has to assume all this debt and then all the citizens you know fa you know end up by bailing out the banks okay and you know nobody likes that okay nobody around this table likes it our citizens don't like it has voted against it quite vocally and you know we can see it in the periphery so this is why we need a reform of the fiscal framework we need a fiscal framework in which there are some state of the world in which it is possible to uh you know to go bankrupt to you know and then you know we have a set of rules that allow you know to do that in the least disruptive ways okay so this is the discussion in my view that should be at the center of the european reforms at the end of course we would need a fiscal federation in order to do it properly we don't have one but maybe we can think of a series of steps that would uh uh you know would allow us to to deal with that problem in a more uh you know in in in a better way okay we cannot live in in that impossible trinity he has been called by one of our colleagues in which is not possible to exit from the euro area is not possible default and nobody be and that is not possible to bail out the countries okay we have one of these three things has to go okay you decide which one so this is for for the restructuring issue the second issue is is do we have too much debt you know the problem of uh you know this is a has been very much at the center of the imf discussion that you know there is not enough that in the world and so you know there is all this liquidity chasing safe assets and there are not enough safe assets because it is the government that produces the safe asset through through debt uh i mean i have not an enormous sympathy for that argument but let's keep it aside for a moment i think that there are costs of that overhang there are particularly large costs in a monetary union or because the monetary union is different okay these countries the issue debt but they don't have their own central banks so this debt is not safe okay the italian debt is not is not safe and we have seen it in the crisis so he was not really safe at the asset to buy italian bonds and i think this is what wolfgang was saying i mean that you know we are in a monetary union a monetary union we you know each country is like it is a little bit like a fixer-change rate system in which uh uh you know you cannot issue your own your own debt okay so that everything is foreign so it's not it's like we are more like each countries is like more argentina potentially or like an emerging market okay so in this so this is why we have to be creative and and and this is why to reform the fiscal framework is very important also in the world the imf has set rules on restructuring i mean to have rules and restructure it doesn't mean that we have to restructure but we have to have rule you know rules that you know kick in in the moment in which and you know these rules that the mf has maybe they're not totally appropriate for us exactly because we are a monetary union so that we should think about these rules now on the third point the interest rate and growth of course okay if we grow and we have a low interest rate that's great okay however even in the best possible scenarios even our best brothers the germans are not going to grow that much because they're aging because there is a general slowdown of productivity in the world and so on so we are talking about uh potential growth between 1.5 and 2 percent if we are really really really lucky and you know there are lots of things that we are not understanding why are in the investment so low in germany and in the u.s not only in italy and they periphery and so on what is the real level of the equilibrium interest rate economists call it so that interest rate in which saving an investment are in equilibrium we actually don't know it may actually be very low if we believe in this idea that there is cycle stagnation that the growth that is actually um declining so you know it will be very difficult for the central banks uh you know given the fact that it's difficult to be below zero although it's possible but um to keep interest rates so low that uh you know ensure there's the social sustainability in a situation in which potential output growth is actually weak and uh also actually i don't believe in in the analysis i think that interest rates i mean at least you know the work i've done shows that interest rate uh in the euro area uh has not been at uh excessively high at least until uh uh 2012 let's say okay so that is not true that because the central bank was late in intervening with quantitative easing then we had a problem with that uh with that sustainability i think that overall the fiscal stance of the euro area was too restrictive and this is actually something that the ecb itself has said and when i say overall i'm saying that if we look at the union as a whole from germany to portugal and so on you know what is the kind of total deficit to gdp ratio that the euro area had even you know you know it was basically the half of that of the us and you know this is not necessarily a causal statement but it is associated to the fact that uh you know we had a much worse crisis than the us crisis and uh you know we had two recessions rather than one and a very very slow recovery so i think it's the combination of monetary and fiscal policy i don't think that the ecb alone can do it and i think it would also be very dangerous to think about monetary policy as a tool to deal with that that's fiscal policies not monetary policy okay i i have some doubts that you can interpret the the debt sustainability analysis of the mf as a rule for that restructuring and actually we have applied the imf that sustainability in 2010 and this was the basis for the amf supporting a program in greece we can you can see that with the benefit of insight maybe that turned out to be overly optimistic but this is the framework that we have and it's not a rule and it's a discretionary instrument to assess whether that is sustainable or not and if it's not sustainable you have to to to deal with it and to restructure what i would say is that it's first very difficult to have a debt sustainability and second it would be a mistake to get it into an automatic rule it's very difficult because that sustainability is based first on economic assumptions which can turn out to be right or can turn out to be wrong in the irish case they turn out to be right in the portuguese case they turned out to be right in the greek i don't know yet we don't know in the greek case in the greek case they turn out to be wrong but to some extent after the restructuring of that in 2012 which wolverine said was so bad until uh if you if you go back to october 2014 it looked that they were right because greece was going back to the market there were people willing to lend to greece again so the concept of that sustainability is very complicated depends on the mood of the market and it depends crucially also on the politics if politicians say i don't want to implement this policy i want to restructure the debt of course that sustainability is gone so that was looking sustainable eight months ago in greece now it doesn't look sustainable i'm not saying that this is the fault of the government but it is it has to do with the political environment also of the country which makes the debt sustainability analysis very complicated and you cannot translate this into a rule saying you know we implement a computer program and if it's red it becomes unsustainable and green sustainable it's it's it's much more complicated because as economists are our instruments are very i think a very are very fragile and not that sophisticated i think also that it's very difficult to say that if greece had gone into that restructuring 2010 it would be better off today i think it's just these counterfactuals are very difficult what we observe is that the 2011 restructuring led to a lot of problems and some of these problems had to do with the fact that restructuring that in advanced economies is very complicated because first you have to deal with the financial market panic and whatever you have to deal with the fact that the financial system collapses the banking system collapses you have to recapitalize the banking system and i think something we have not and the amf i think has not dealt enough with is to look what happened with the banking system and the financial system in greece incidentally we should also look what happened with the banking system and the financial system in portugal and spain in italy this has led i think the the the fact that the the state reneges on its debt leads to a series of consequences on the financial transmission mechanism of the economy which which is quite devastating and some of the debts increase in greece has been due to the fact that when when you restructure the debt then you need more money to recapitalize recapitalize the banks you need more money because the country has to continue to deficit incidentally if you want less austerity it means that the country needs more money i think maybe we will discuss greece today that's the real problem it's not debt it's not the greek debt the problem in greece is that they need more money and who is going to give them more money it means more debt more borrowing and if they cannot borrow from the markets they need to borrow from the rest of the international community so you don't get anything for free in this mechanism when you destroy part of the debt you need to recreate part of it and it's very difficult to make it sustainable unless you grow out of it unless you do the kind of things that are needed so i think that's that's fundamental and the idea that you can get out of the debt and sustainability by by by by borrowing much more i think it's an illusion i want to to conclude maybe we should discuss greece today i think the relationship between interest rate and growth is fundamental for the sustainability that's one of the key equations and if you look at spain if you look at italy if you look at all the other countries in the euro area the interest rate has been systematically higher than the interest rate than the greater growth of the economy i think pkt has made this equation uh now known to everybody but it's a fundamental equation of the you know the sustainability the higher the interest rate compared to to to growth the higher is the primary deficit the higher is the austerity and therefore the more difficult it is for the country to reduce the debt and the fact that we had italy had to borrow at five percent interest rate uh or seven percent interest rate in 2011 and the interest rate went down very gradually i mean led to more austerity to maintain uh that sustainability so having a very low interest rate is fundamental to ensure that sustainability i'm not saying that the no the fact that we didn't have a low interest rate is the fault of the of the was the fault of dcb because i was there the problem is that there were a series of problems in the institutional framework of the european uh monetary union which created the which impaired the ecb from doing what it should have or let's say from doing what the fed was doing or the bank of england was doing and that was you know the lack of a banking union the lack of fiscal commitments which were credible having to deal with the fact that when you implement purchases of government bonds you de facto are very close to fiscal transfer so all these had to be dealt and we lost three years during the crisis to build the institutional framework which we now have but having low interest rate is is fundamental and we were not able to to achieve that partly because of this time that we lost in building in building the union and i think the if we move to greece today if you look at the interest payments of greece they are lower than italy they are lower than portugal than most other countries basically they don't pay interest on their debt because the debt is is 50 years old 50 is long so the problem is not in greece is not the debt it's not the restructuring of the debt by the way i think they don't even ask for it anymore the problem is how to finance more deficit because they need more money to pay for uh for wages for pensions and so forth and the only ones who are willing to give greece money is the international community and the international community is not able and by the international community means germany italy estonia slovakia they are not able to go to their own parliament and say we ask you for more money to give to the greeks in exchange for nothing we need something in exchange in particular something that reassures the citizens of these other countries that this is the last time there won't be another one this is the political issue today in the debate with greece it's not so much economic it has nothing to do with that is money against what okay let me take you on on greece a year ago as i said there was a lot more optimism i was not optimistic i didn't say it's not going to work i actually welcomed the market the return of market access because it gave greece more bonds to default on later and more public more private sector bonds than public sector bonds it didn't surprise me at the time because i i felt that um that this episode would end with the with the following election i didn't predict the elections to happen as soon as they did i thought they would be happening about now but what what has happened is when you have a restructuring program and if it doesn't work for five years it doesn't work i think that is basically the recognition one has to do and in theory it might have if they had been infinitely patient and if the greek people had infinitely elected you know center-right governments that might have worked i i would i would say that in that theoretical construction you know an austerity-based program will work eventually yeah sure after 10 15 years that might have that might have been been possible but the reality is they have now voted for a government off the left and we see it in spain a country that is actually recovering where you know unemployment is very high but the um thank you i'm not speaking close enough okay making the comparison between greece and spain spain is actually doing comparatively comparatively well unemployment is very high still but uh you know podemos another left-wing party is riding high in the polls there as well so any you know austerity-based restructuring has a you know an egg timer on it and that timer run out in greece and it's running out in spain too and therefore therefore one would basically have to conclude at one point this this strategy has to not only work but it has to work within a given time and if that time is three years i think countries usually go through adjustment processes of three three years they might go through five years but they won't go through ten years you know it didn't happen in britain in the early eighties and in other countries where these very strict you know austerity-based uh you know changes happened there is a limit to where people when people stop stop supporting those those those policies now in greece i would i would i would dispute the view that greece just needs money that that restructuring is irrelevant um the syriza government is still asking for one they may not prioritize it right at the moment because they're still discussing the second the second program but you know if they were to default on that the only reason they're not defaulting on that that is because that default would cause serious problems for the greek banks it might it might stop funding of the greeks bank so it might force greece to have having to issue their own currency in order to support their own banks if the banks had been european us if we had a genuine banking union that are banks that were not backstopped by their national governments and that were not subject to national bankruptcy laws uh where governments didn't impose as they do in greece chief executives onto the banking system so where it's a genuine european as it is in america the banks are not in under the auspices of the state they are under the auspices of the of the federal government if that were the case greece could easily default there wouldn't be any penalty on defaulting it would default it would probably it would lose market access it would not default on the creditors it would actually default on the ecb that would be the institution to default on for them for the moment because there's no need to default on the europe on the official creditors of the eu because those loans won't come to you until 1919 and the second one until 2020 i'm sorry 2019 and 2023 so that would allow greece to run potentially a lower primary surplus than the one that the creditors will impose on greece now as part of the negotiations now my advice to the greeks would be take the deal if it's reasonable if the primary surplus is something that you can live with like two percent two and a half percent is a reasonable is is as reasonable as as it will get you will have to run those surpluses anyway even if you default but if they're asking you to run four percent primary surpluses you're coming close to a position where you might as well default because you might be better off if you didn't have to pay those surpluses to incur the surpluses because you know you might just need to incur a smaller surplus uh if you if you were able to default on the on the on the on the ecb and obviously you do not default on the private sector that's probably not not a wise decision to do so now because the private sector might be a source of funding after a short period of time when optimism returns now the critical aspect about what's going to happen in greece in the next two months maybe next two weeks even is that at the end of this process in that period we need to return to some optimism uh you know we we need to stop to talk talking about brexit the minute we talk about grexit no one is going to invest in greece because that is that is the you know nobody's going to invest you know it's not just default but it's also that devaluation we need to be in whatever we do it needs to end default talk and brexit talk and we may be able to do that you know obviously grexit will end greg's a talk that's one way of doing it i mean that will then end all speculation and maybe people come back maybe maybe investors return and say okay this is now the value this is now a good good moment to get into greece uh and maybe a default is a is a way to end the speculation on default because people after they have defaulted you're not going to default again that soon and now you have um you know now now it's time to lend them again and as you've seen in argentina you know it doesn't always take a long time for investors to return having been been defaulted on so you know i i would not completely exclude that that scenario but whatever scenario we choose the scenario i would favor is the one that ends the speculation one way or the other i want to clarify one issue on the interest rate because i think it's important to understand what the acb is doing today of course i agree with lorenzo that it would have been desirable that the ecb would act as lender last resort in the middle of the of the debt crisis of 2011 2012 and no spikes of interest rate made it very difficult for some of the stress countries uh you know to sustain the debt however i think now we are in very difficult different circumstances and i think that to think that the quantitative easing that we are doing now is a tool to deal with that i think that's the wrong way to think about quantitative easing and ultimately we need to be able to use the combination of the monetary and the fiscal tool and the two things have to you know go together and this is a big difficult uh for a monetary difficulty in the monetary union in which we don't uh uh you know we cannot really think of fiscal policy in a federal way okay but you know this is a complex issue the ecb is not cannot be you know not only the lender last resort but the you know this problem solvers of all kind of problems from competitive to fiscal and to monetary i think this would be a very uh you know dangerous way to go however you know it is true that uh not to to have the ecb intervening at the at the height of the liquidity that crisis 2011 was a problem okay so that's one thing on greece on greece i think the discussion here amongst us i think is at two levels what's going on thank you for distracting me lorenzo you saw me you sent me that thing okay so i hate that picture and i but i we want to discuss about this picture no if you want i can i can i can you can reply okay so let me finish on greece and then okay so at some point they have to go also but uh uh okay so in greece there are two issues first of all what greece means for us okay the way we dealt with it in 2010 etc etc so and there i've already said i think it was a mistake i mean maybe it was a mistake not to restructure however i also had some sympathy for the concern at the time that the restructure in 2010 without the banking union and so on and so forth would have been dangerous from you know because would have created contagion in the financial sector in europe however this is uh tells us that we have a problem because if we don't have a way to deal with these issues because of fear of contagion and you know then the only solution is the fact that official sectors ends up by the debt and this is exactly what happened and so we have to kind of deal with this problem in one way or another okay so we need if there is a country which is at risk of default we need to have the private sector in which eventually did but we did it too late we did it in a messy way and so on and for that we need to write down rules okay and this is the issue of the uh the fiscal framework okay so that we cannot possibly think that in the euro era is impossible to default because this is actually a very non-market-oriented view i'm surprised by lorenzo who is a very pro-market guy to think that we are in a situation which is impossible to default because otherwise there will be contagion okay so that you know then then there is no market discipline anymore it's behind the market discipline so in that sense you know greece is an important uh example that tells us that we should think about a certain number of things now the greece today i agree i agree actually that you know that restructure is not at the center of the negotiation now or you know this is not the issue the issue is to go from negotiating about little fiscal minus little things to close the second program which has been a complete collapse catastrophe and sit down around the table incredibly write down a third program that you know takes you know starts from a realistic analysis of what the greek situation is now lorenzo thinks that is a problem of real wages i think that the problem of greece is a general problem of competitiveness but beyond that is a problem of a state that doesn't work of a traditional system that doesn't work a tax collection system that doesn't work you know a lot of things that actually us as italians we know very well so to think that we take greece as it is now and we force it to become like germany in three years i think the old history of development economics tells you that it's not gonna happen so i mean if we don't have a realistic approach about that issue we're gonna fail again that's my point from your progress okay let's see this um no i wanted to show these charts because in my view this is the whole story about the discussion the negotiation about greece let me just it doesn't work how long do we have because then i want to be able to answer this update so this is a chart about the debt is a chart about the debt which has been annexed by the in the greek by the greek government to show that they themselves understand that the greek debt is sustainable is the net present value so the real line the the green line is nominal value the blue line is the net present value given that they pay very low interest rate that is a 50 years debt they know that the problem is not debt the problem is purely political and it goes back to and this is nominal compensation public expenditure it's all the same chart and so this chart you can see it in two ways you can see until 2008 you clearly see that what's going on is unsustainable but you can clearly see that what happened between 2008 2011 is a very sharp adjustment is a dramatic one so you know it's fine now i think the whole debate is where do we want to go from now do you want to grow like the rest of the euro area where spending remuneration all the nominal values go in line with the rest or do we want to go back to the pre crisis level where wages go up independently of productivity pension levels go up i think this is the real debate the syriza government wants to go back to the pre-crisis level they want to increase pension levels even above the average of the euro area they want to do the kind of rehire people one out of two workers is in the public sector so they think that they need they want to go back to the goldilocks the rest of euros say if we go back to the goldilocks it's useless to talk about is is we we we will not be able to make it credible that the brexit world world is out of the dictionary we will talk about the grexit work a word in two years time because if we go back in this dynamics they will run out of money and we will need another package and people will again start discussing about brexit the only way to stop talking about brexit is to try to put in place a series of administrative reform whatever you and you don't need to become german in two years you need a process and this is the process that all countries are entering but part of the people who have voted for this government don't want and i think this is the real dilemma that they are discussing at the table or the political there is a pure public politics has nothing to do with that and you cannot credibly i say stop talking about brexit unless there is an agreement about what kind of economic system you want to have and is it sustainable for a country which goes back to 1968 where you know in the universities uh you you stop having uh exams i mean the kind of reforms counter reforms the country reforms of the last few weeks is it possible for a country like this to stay in europe and and and receive money from the rest of of of the country so i think in the context in which in other parts of the euro area you have also the tendency to believe that maybe you know we can have a better deal than the one the previous government had and so you understand that you know the conservative government in spain in portugal are very tough with greece are even tougher than germans because they say okay if we now accept that greece has this exception we give them donate with money without any condition that you know and they can start hiring people again in the public sector start hiring wages hiring hiking pensions somebody will come to the election next year with the same program and they will win and we will get into the same issue of hispanics span exits and and and portuguese exit and italian exit so i think this is a key moment in european history in my view of political integration is what the greek people asked in the elections more important than what the other 18 countries and it's a clash of democracy i think this is the integration of europe by by having this kind of fights and if greece exits this will be one result where which will explain why the rest of europe doesn't want to accept an exception because it needs to pay for it you know it's the same issue in the u.s with puerto rico if you ask the americans and the americans say oh you know we will pay for it but you know the puerto ricans if we could kick them out they will be already out we cannot because we have a constitution yeah i think we i want to open this up i actually agree with lorenzo on the on the political dynamics of all of this this is exactly the way he he describes it uh especially in view of portugal and and and spain um which is why the situation is so difficult and you know very likely to you know to to not very likely but i think brexit is still a a high probability event that or at least a sufficiently high probability event that we cannot that we cannot ignore it so any questions okay it's the wolf microphone okay i'm martin wolf and i'm wolfgang's colleague i just got two two questions um one about europe is the eurozone as a whole and one about greece on europe as a whole i'm really confused about what you guys think um and i'm i'm um bold enough to assume that if i'm confused maybe some others are too uh i did the case lorenzo that you're essentially arguing that the only way you can find make the eurozone function is in a world in which sovereign default never happens and if not when um and how it's really not not clear i'm not um going over the history but it seems to me pretty obvious that it has to and the only question is when and how it's arranged um and i think you would probably agree wouldn't you on that that the way that it's going to hap that it has happened in greece which is that the public sector assumes the obligations of the private sector and then reduces the interest rates without admitting the losses to a hugely sub-market level which is a essentially a way of doing a default that's is that a good way of doing it or is as i would say it's a it's a covert confused and confusing way of doing it the second thing is on greece um you're saying one of the lore and so i'd say i'll focus on the that greece needs money but you also seem to be saying it doesn't need money so let's be clear it does it or doesn't it it seems to me you you say the greeks want money free no disagreement on that that's obvious that's not need that's what but your position seems to be and i would agree with it that given that we've gone in this ridiculous way of doing a default one important qualification we've reduced the present value of the debt to negligible levels by by reducing the interest to a huge rate to a very low level and much of it this is the eurozone sovereign loans to to a very long term we've effectively done a default that's happened we just haven't admitted it okay that's european politics crazy but it's done the greece has something like a primary balance if they're not completely screwed up if they're not completely screwed up external balance close to zero so the only reason they need money now is because they have some short-term liquidity problems on the debt side imf and ecb where this this debt deal hasn't happened and which clearly in some way has to be done and that was obviously clear once they started borrowing from the imf and ecb you would have some problems because it's too short-term you can deal with that but that's the only debt points a liquidity problem not a debt stock problem beyond that as you precisely said the obvious thing for the europeans to do is to to to accept that they have written down the debt possibly even more generously and say there is no more money end of story finished why shouldn't they stay in the eurozone then it comes up to them to decide whether they wish to stay in or or or not and i certainly agree with you don't have to turn into germany mississippi has never been turned into into massachusetts now if i can answer briefly my my view on on default on sovereign default is the following is that it is a dramatic event a dramatic event it has never happened in in in advanced economies without drama and it is an illusion to think that it's easy it's very difficult it has to be very managed very carefully to avoid a contagion and to avoid a innocent bystanders getting hurt and that's exactly what happened and it would have happened in 2010 also uh uh uh if so it's it's i think it's we have to avoid the the easy way out of economies that you know we assume that it's easy no it's going to be very complicated very difficult so we have to try to avoid this as much as possible which doesn't mean that it can may not happen it has happened and it's happening again second does greed need money my impression is that yes they need money because the economy has turned negative they are not in a primary surplus anymore i think the forecast of the emf is that they will go they're running into a deficit again and second they need money to implement their program because the program is increasing spending so going back into that dynamics now they need money yeah no well so they they need a program to some extent they want they said unless you you so the illusion that they have is that if they default they would save enough interest to have a primary surplus but now i think the assumption in general is that they don't have a primary surplus they will run into a budget deficit and in order to implement their increasing spending they need they need more money and of course the only ones who can give money is the europeans unless they start printing their own money and that's what people are thinking how can they and you know maybe that's what sometimes is is mentioned they will pay their own pensioners their own public servant with treasury bills the only problem is that treasury bills don't allow you to to buy food and they will go to the bank and the banks will not be able to discount i mean or they will pay in euros at a discount rate and this will be the start of a parallel currency system i think but as you mentioned the whole issue is do they need money i think the the forecast now is that they need money not only for liquidity not only for reimbursing the imf which but also to implement their program for which they have been elected can i can i say something hungry i mean i think you put it in a very clear way thank you very much i mean but i mean the the what we uh the the whole issue of default and sort but on greece i mean actually i must say that i am myself confused after having talked to also to some of them and then to some of the europeans to the european side to the greek science and so on because i mean to me okay now there is an issue of liquidity and there is this thing of closing the second program and to agree on the on the last tranche and i think this should not be a big deal okay because i mean what matters for us as european as much as for the greek is that these guys are not going to be in a mess in three months from now right and so for that i think that what would be uh you know i think it's important to give priority to you know to close as soon as possible close the uncertainty on the last range of the second program and then to write down uh you know some condition some agreement on a program of reform uh for ensuring sustainability in the long run and paradoxically i mean i've been to cintra the acb conference there seems to be quite a bit of agreement on uh what type of reforms all of us should be doing okay so for example there is an agreement that we should have a right sequence of reform we should now start from cutting pensions and cutting public wages in the moment in which the economy is deeply in recession this can be done you know at the time of the recovery so there is a sort of a timely the right timing of of of reforms there is we should now maybe give priority to tax law collection administrative and so on and so forth so i mean if we really believe that you know we this all european construct is based on conditionality and to the fact that you know all parties sit around the table we should be able also you know to have a real discussion about what are these kind of reforms and they you know to just look at unilateral costs i don't think is particularly useful because unit labor cost is actually quite complex to understand what is behind a lot is productivity and productivity is a very complex things that depends on a number of factors so i think basically what the the fact that this process is totally scrapped it just says that you know the the capital of uh trust is now basically gone okay so it's really very difficult to have a clean political process and therefore you know maybe you know that's it but you know i'm very worried because you know greece is you know it may happen to another country in the future i'm not at all that optimistic about portugal or even italy frankly so you know of course it's a very different situation and so on but we are putting a lot of our capital on this competitiveness so let's all sit around the table and then we are not able to sit around the table so i think it's food for thought well eighteen sorry uh okay eighteen countries are and one is not for any such a political challenge it's a it's a precedent well you can make sure that italy without qe would have been uh in trouble right now it was very important exactly yeah but not for monetary policy reasons for other reasons can i just briefly come back to greece for me it's not clear whether greece wants to stay in the eurozone it's i find that finding find the signals read how to read the signals from athens very very confusing it is quite conceivable that this is all a show that we have been being played with that they're going to the line that they need the creditors to pull out in order to be able to justify grexit to their own audience this is not a scenario that i i could exclude as a possibility it's not that i know it but it's something that that is always at the back of my mind as a as a possibility we will see how they will how they will act in the next and in the in the next week we hope i suspect we will probably know something by the end of of the coming weeks i know there have been many deadlines and you know be very careful when someone says we are very close to a deal that's usually not true but there seems to be a moment nearing where a decision has to be made one way or the other it's possible that the creditors will make them will make a you know a take it or leave it offer by the end of by the end of this week um yeah can i ask you a question yes sure is it i mean what i was thinking paradoxically the greeks as far as we know want to stay in the euro right the polls suggest that and so this makes the things even more complicated because to some extent the knowing that the exit is prevented because the government would not be able to to have a support they had the incentive to negotiate until the last minute for a deal because in the end uh um they are protected by they will agree but they they have no incentive to have an agreement earlier than needed and this creates a perverse uh incentive in europe that in the end uh staying in the in in the union and if you want to stay you will receive the support leads to protracted the negotiations and a much more complicated political process i think it's that's the potential i mean the polls are very hard to read um i mean the poll we just saw french poll which says that uh the majority of french would vote against the a treaty change then when they had treaty change vote 10 years ago exactly 10 years ago yesterday and they voted no and they would do it again but the saint paul also said the french would want a european army which of course requires treaty change to put it mildly so you know the pulse basically tells you that the people who've been asked other people ask the question you know ask silly questions or that the people who answer the question didn't know what they were what they were what they were talking about you know the polls recently told us that miliband would be the british prime minister today and you know the polls in greece are telling us that you know the greeks won't don't want brexit aggrexit but they do want syriza to um you know to hang on tough and not yield to the credits i don't think the polls tell us anything i think the polls tell us there is a lot of confusion by a lot of people and you know these are contradictory statements what we do now is what you said earlier lorenzo is that the politics of uh of this is poisons and you know it's not just spain and and uh and portugal it's the the baltics uh slovakia greece has a pensions a minimum where the minimum wage in these countries is about a quarter than the minimum wage of greece the pensions there is a third of the level of greeks the latest greek pension reforms would have put the greek pensions at the german level not only that it would have actually started five years before the german side that's very hard to negotiate to you know national elections and this is going to be very tough to to uh to achieve an agreement so there is a you know this is why these finance ministers and i'm what i'm hearing is that there is no mood in the moment the finest ministers are really contemplating saying let's cut this because this is so poisonous this is not going to work we're going to you know this is this the charade of these negotiations is looking really bad and you know there's a great a great a great mood to end this um you know maybe not this weekend but maybe next weekend but it's going to happen you know sooner rather than later and then greece is in that position where they have to make up their mind they will have a referendum then maybe a referendum maybe new elections syriza is ahead in the polls quite by a long margin so he could the prime minister could say okay if i want this deal i could forge a different majority there are two opposition parties that would support him he could strike a new coalition he could get himself re-elected with a new majority and get rid of the left of his party so he has political options available to him uh but it depends on how he chooses what choices he's going to make it's very much his choice his call is not the decision is not taken in any negotiating table in brussels or anywhere else and you know it's very hard to read so he could he could they could they could they could what i'm just saying is the negotiating tactics is you know there isn't going to be any better but you're not going to get a better deal by waiting because the creators understand that game and they're not there they have no cd the imf is very tough and in fact if they revert to a position where they have to make it take it or leave it offer it won't be the offer of the last stage of the negotiation it will be a reverse reversion to what was on offer in february yeah so agree that this take it or leave an offer for greece will be worse than the offer they will they could negotiate now so that's going to make this even more interesting and they will vote in favor of it i think and they might even vote in favor of it yeah the greeks will vote in favor of a deal in the end it's defensive it could also be and let me let me just know why and then what no and so they will they will uh then we are going to be around the table in six months again yes probably but that's that's unavoidable it's very hard to see how these reforms can be implemented i mean we've seen it even in advanced countries i remember the the when when gerhard scherder did his labor market reforms we talked to him at the time he said okay i've got them through the parliament my big fear is not my big fear is not you know that the parliament will not vote for him that's you know that was well on the way my big fear is that once we've decided them that they will not be implemented on the ground uh and you know in greece that probability is much more likely or in most countries is the implementation between the parliamentary approval and the actual implementation on the ground that's where most of reforms fail so i'm you know this is going to be very open question and for these reforms to work you know there needs to be a fairly strong commitment to them and not a reluctant commitment to them i don't think countries should be asked to reform reluctantly because it's not going to work so you know this this is probably why some of these reforms in spain work because there was a strong commitment to it in ireland there was a strong commitment to it even skeptics that for demos now is going to reverse you know he's calling for reverse in the labor reforms so that yeah but spammers will probably not win an outright majority yeah okay but you know strong and strong results elections i think we're done any further questions we have are we over time over there check the we have one question our last question and then we will wind this up thank you thank you very much for very interesting uh debate um i know this may be long but uh the point is that i think it this came out from the last uh point of the discussion i don't think in the general public debate or the understanding there is enough discussion of about what is good debt versus what is bad debt because this is my view is very critical thing in a sense then to to to give away money for salaries or for subsidies for hiring legions of people i mean public money taking up debt we know very well in italy how a public debt have been wasted in in you know enormous ways as opposed to use public debt to fund essential maybe infrastructures of elements that could contribute to the competitiveness and the future of a country and i think that this type of debate in my view would be very important to understand and maybe also to introduce programs and i don't know what are i know the difficulties of the problems of issuing level of controls and uh how to say governance to ensure that maybe debt is used for real good things as opposed to you know throw away taxpayers money particularly for other countries and but i think this will be a very very essential discussion for the public to better understand how to say the issue of that and how to handle and maybe how to share between counters well thank you well we teach these things i tell you what i teach in my mba class you know that we should think of you know the posts were period for example in which i mean the uk came out from the war with very high debt to the gp ratio and then it took a long time to kind of to go down it took more than 30 years to now the the thing is that this is very difficult i mean you know everything works in sweden nothing works in in greece i would answer in that way okay so that uh there are countries which uh you know the public sector is dysfunctional and this i think is more an issue of uh uh you know is is a very complex issues it has to do with uh you know with social capital with history and this and that and so this is why i think the emphasis on purely the fiscal is wrong okay this is what i tried to say before and i think it's related to this question okay i think i'd like to wind this up now thank you very much to my co-discussions and and to the audience thank you very much we agree that this game is not peaceful we agree that it's not peaceful about uh you