Can the Euro survive?
Can the Euro survive?
Like the man falling from the Empire State Building who, after 50 floors, says “So far, so good”, civil servants and bankers periodically insist that the crisis is under control. In this lecture, it is argued instead that we cannot continue on this path, and a minimum (and realistic) institutional reform and change in policies are necessary for the euro project to return to being a positive component in the lives of European citizens.
would we have a problem in completing the architecture of the euro so we erase the with the issue about the potential survival of Europe but we know that there are many diverse positions the diverse stands in the euro area there are many different policies that have been implemented over the past few years that are now showing many weaknesses our economic solutions enough to solve a problem don't we probably need more of institutional solutions for the architecture of the single currency to be more complete so as to tackle the future ahead of us to talk about this complex and sensual subject because if their euro survives or doesn't survive obviously the course of life that our future are going to be badly affected what these different possibilities so we're not just talking about theory what does it they were talking about hard facts future wealth and well-being these sustainability of our welfare systems and certainly this also may have repercussions on the other quality of our democracy to start tackling this very difficult conflict subjects we have together with us Luis Guerra Cano an economist with extraordinary profit career he comes from Spain he got his degree in law and economics in Valladolid and Spain he holds two Maastricht two masters degree one at a College of Europe in Belgium and one in the US so with a PhD as well professor Gary Carr know how the chair for eight years he spent at the London Business School he taught at and he know has chair at the London School of Economics so he has an extended career I'm going to hint to a number of research projects of his professor Gary Gary Gary Connor works worked as an economist at the European Commission and gave the important advice to the Spanish government to promote the structural reforms in the field of the real estate building sectors in the health care system in the labor market and so on and he's also the person in charge of with another squad is the most famous economic blog in Spain nowadays gratis is probably only the access to the blog is gratis as we say in Italy ie for free and the name the name of the blog and says indeed nothing is for free I've been following his work over the past few days I know exactly about his career as advisor to the European institutions and as a university professor he has a very pragmatic hands-on approach so he's an economist that really has in hearts on knowledge he talked about for example the effect of credit crunch on corporate investments and he found out that in Italy and in Spain and wherever loans are difficult to obtain cooperation sir tend to invest short doing away where the medium long term investments following the rule that premium Bevere that what is most important is to survive but there has also negative repercussions on the survival of gorgon ization z' this is a problem affecting both Italian and Spanish companies because there are also much focus on their short-term survival that they forget about the long-term possibilities for them to survive to survive I better coordinate something that struck me quite a lot about that study on investment as connected to credit crunch in that document professor Gary garner can see those employee labor as a long-term investment of them because hiring people long term is an investment for a corporation because that implies also transfer of value I'm very interesting I found a research project carried out on Consultants very interesting information asymmetry causes has direct repercussions on the distribution of wealth and indeed it raises a problem as the market doesn't prevent us from getting in touch with consultants that are self-styled wise men in fact of being not wise at all and this proves that Professor Gary Khanna really again has a hands on grasps grasp on the things of life now without further ado I'd like to give him the flow but before doing so I'd like to hear a very small video on the festival oh so very Ginola la parola professor gagana you have the floor thank you thank you very much Marco thank you very much tool you do I'm very pleased to be here in this beautiful city talking English I'm so sorry that translator said that I speak very fast she said you know Spanish people who are fluent in English are the words to translate because the Spanish is spoken very fast and then if they speak English then it's just impossible so I'll do my best I'll try to speak slowly it's very much it's very much my pleasure to be here I want to start by talking about what I think is still the financial crisis in an ongoing financial crisis I think that I'm going to talk about work that I've done with with several large groups of economists and inet yeren omics and some of it was coming on the Jovians perspectives we all know that we are in a debt crisis and it does look like if you think of the four countries that went through rescues the four countries that underwent rescues are Ireland Greece Spain and Portugal in many ways you would think they are very different but there is something very common strikingly common when you look at that net foreign debt how much do they all foreigners and what you see is that post the euro crisis if you if you think the euro entry happened in 1999-2000 if you think about their debt positions on the euro entry all of those four countries had a situation that was not necessarily very bad and in fact some of them had a pretty good situation by the time the decade was over foreign that had exploded for all four countries strikingly at very similar levels close to a hundred percent of the GDP if you see Italy it looks much much better it didn't have the huge run out of debt that some of these countries had and this is the main framework that I want to have you think about to think about whether the euro can survive what you see here is what we have called the diabolic loop the diabolic loop is a loop linking the banks and the sovereigns and it's a loop that with sculling Diabolique is a feedback loop because it pushes both down as the crisis advances for some countries the diabolic loop starts on the banks for some countries what you have is a lot of private debt so you're on the right banks are bad that's particularly Ireland in Spain there is a lot of loans to firms that become bad there is a lot of problematic assets and that's gonna push up the need for the state to bail them out and is going to push Spain and Ireland in trouble the banks start but the countries end up holding a lot of these private debt for some countries two of the other four countries that were rescued what you see is that it starts from the sovereign and heads to the banks its first sovereigns which start by being bad I would say Greece and Portugal and also Italy and the banks which hold a lot of debt from those countries end up in trouble as well as icons quince now that loop reinforces itself okay now once the sovereigns in Spain in Ireland are also bad then that the terror eighths further the banks in those countries I would say we've been talking about this loop for a long time since the crisis started I would say politicians at this point are aware of this they're aware of let me just first before I tell you what the politicians are doing to solve it let me tell you why this is deadly and why it wouldn't be deadly without the Europe without the euro those debts on the sovereign side are nominal if the UK has two recapitalized Royal Bank of Scotland and Lloyds the UK has to recapitalize two gigantic banks two of the biggest banks in the world that doesn't make people think the UK is a bad country to lend money for and the reason that doesn't make them scared is because they know that the UK is never going to default at the end of the day those pieces of papers the pounds are printed by them they can always print more okay Spain cannot do that it's Spain rescues a bank it's actually giving it some money that it cannot print if Italy has to go out and rescue a bank it has to be worrying that people will stop buying Italian debt and that will push up interest rates and that will make growth which is the key thing here go down as the banks get worse people worried that the state is going to be caught and interest rates grow so the loop could be broken if there was not a monetary union the problem is we created the monetary union where the bank's just think about this same sovereign loop in the United States think that Arizona or New Mexico have a big housing bubble what happens well the banks in Arizona and New Mexico don't make Arizona and New Mexico state governments bankrupt because they're rescued by the federal government they well an instrumental instrument the Federal Deposit Insurance Corporation takes care of them right vice versa the u.s. is not the US credit is not getting worse the banks in Calif in Arizona don't have in their books Arizona debt the banks in California don't have in their books California that they have US government debt so they don't suffer from those banks that array from those states that aerating so both of the loop sides are closed if you don't break that loop you cannot save their Europe okay that is absolutely essential what is interesting is that if you remember the summit last year in June where Monti really made a very very sharp argument and he basically threatened to resign if a Europe was not acting actually he did manage to get in the communique of the summit in this statement this statement says the government understand the diabolic loop and they want to break it they do the government's say we think we have to break this vicious loop and we think that the ESM should be allowed Europe okay like in the United States the federal government not the little countries but the Union should be allowed to recap the bank's the problem of course is that just after the summit okay the summit was extremely good news the salmon means we're going to take care of this and just after the summit we start to see people taking steps backwards we start to see immediately after the summit if top official says in the Wall Street Journal well the the ESM will recapitalize the banks but the risk will be of the sovereign if Italian banks are in trouble yeah Europeans can lend some money but they will lend it to the Italian government not to the bank okay well the problem is of course once you lend it to the government you're putting the sovereign at risk and you're continuing this same thing okay example after this summit the ESM did recapitalized the Spanish banks but all the money was routed through the Spanish government so it increases the Spanish debt and it makes people worry about Spain it doesn't stop people were in note Spain he makes them worry more his second big qualifier was this summit okay there was a summit on the 29th of September between Germany the Netherlands and Finland big three creditor countries and what they said was you know what we might help banks in the future but the legacy assets are the problems of the countries if the banks in the past lend too much money in their own countries and if they have launched that they can't get back that's the country's problems it's not the joonyoung's problem okay the problem is the whole issue is the legacy that the whole issue is that those banks got lent too much all this is legacy everything that I showed you is legacy it already happened and as long as the legacy debt is not resolved the banks can't stop lending and I cannot start lending and the government's cannot start and of credibly lending to the bank okay what I'm going to show you the last qualifier wanted to show you is from Walden shovel the German Finance Minister who said German Treasury he said banking union only makes sense when we have European new European treaties I hear these a little bit like okay we'll have you know a banking union when hell freezes over there is no real demand for big treaty changes now you're gonna have referendums citizens will want to use the referendums to complain it's not really a very positive statement what I'm going to do is I want to show you I want to do a progress report I'm going to show you how is this sovereign loop moving along okay I'm going to show it we Spanish data but it would look very similar in other countries the reason I show you with Spanish their eyes I think Spain is the battleground for the euro the Euro will die or leave in Spain also in Italy but honestly I think Spain is first if you cannot save Spain Italy kind of will follow and if you can save Spain you probably do Broly Italy will also be alright so let me show you what happens so the first part of the loop was how much debt from the countries do the banks hold are the banks lending a lot to their own countries look this is at the start of the crisis at the start of the crisis Spanish banks were lending 80 billion euros to Spanish government by the time today they are lending over 250 billion 25 percent of Spanish GDP the sovereign loop on that side is sovereign banking loop is not getting weaker it's getting stronger what do I mean by that I mean the banks are more exposed to how well the state is doing if it Spain's does badly the Spain's suffer more no less but you would want to do is you want to break that connection what you see is the connection gets stronger second these are outright loans the banks not bonds but loans from the banks what you see here is the same thing the banks are lending more to the local government learning much more to the original government lending more to the central government of Spain done before now the second part of the loop is the rescues from the banks to the state are is the Spanish state or the Italian state or the Irish state are the states more exposed to the bank's troubles and what you will see is yes they are these are the guarantees that the Spanish government has been given on the right on the left you have the total amount of transfers that Spanish pay state has given to the banks and what you see in both cases is big increase what you see is that as the crisis advanced there is more of a tight link on that side as well and you could say it is affecting growth does this really matter do we care my view is it does it affects growth in a very fundamental way that's my third point there and I want to show you is there any causal evidence of this effect do we really have evidence that growth is suffering here some well when talita a very good labor economist in Spain and in 3/4 some from Bank of Spain what they've done is they've shown how banking being have been affirmed who's Bank is weak how it's affecting your firm okay if you the fury would be look if you're a good firm you should get funds if your bank is in trouble that's no problem you go to another bank what you see here is very different what you see here is the black line are the firm's who have links to weak firm to weak banks firms that have links to weak banks have seen employment drop by 20% they've lost 20% of their employees whereas firms that have links to strong banks have lost 10% of their employees so if you have a bad Bank you're a cafe and your machine your cafe machine breaks okay you want a new coffee machine and you go to the bank and they say well we are weak Bank we're in trouble we don't want to give loans normally you would say well this is a good restaurant it has good you know clients they should be able to go to another bank and get another loan what these research shows is that they don't they fire the employees and close the coffee they take a fee I have a paper that Marco very kindly referred to in which I show with Kirsten water also from Elysee that Spanish firms are getting hurt that if you compare a Spanish firm owned by a Spanish Spanish company owned by Spanish capital with a Spanish company owned by foreigners the Spanish companies owned by Spanish capital have much larger drops in employment much larger drops innovations the first column okay it's business Spanish firm means your employments dropping by six percent more your wage bill is dropping by four percent more you're increasing prices because you are against the wall you're trying to kind of get your consumers extract as much as them from as possible which means they're quitting as well and being Spanish is a course this is true for Italian firms as well okay if you buy a Fiat a field is today cheaper than the comparable Volkswagen okay but if you actually buy the field and you get a loan to finance the car Volkswagen will give you a zero in the restroom Fiat will not be able to give you a zero interest loan because Fiat is borrowing at three hundred basis points more time Volkswagen okay so the Volkswagen buyer is getting an advantage from the fact that Germany the bank the German banks and as a result German companies is able to borrow at much cheaper rates the Spanish of the Turin company is getting a big disadvantage from the fact that the Spanish and Italian banks are weak and cannot give those companies those loans this is undeniable okay in fact I think there is a lot of evidence that not only Germany hasn't been paying I'm not on the German and very predominant I think they've done a lot but the truth of the matter is in these crisis not only having out paid the cost for the crisis but Germany has actually benefit from the crisis by being able to borrow both at the state level and at the company level much more cheaply than it could have otherwise okay because people are taking their money away and putting it in Germany so I think the link in all of these countries between that we are doing research on it we're trying to get our hands dirty looking at the data carefully etc my sense is that the connection between the banking problem and economic problems that we see is increasingly clear credit is not flowing credit doesn't flow the economies cannot grow again look at the industrial production indexes the recession is getting stronger non-performing loans are growing so the banks are getting in even bigger trouble there are there is progress okay I don't want to deny there is progress the maturity of the loans is recruit reducing people are paying back some of the loans the principal is is being reduced but there are problems are we seen in the policy debate real measures to break this loop are we seeing that Europe is saying look we created the Union doesn't work the blood okay finding finance is the blood of this of the economic system if the money doesn't circulate the finance it doesn't circulate everything kind of dries off are we seen action my sense is that the measures we are seeing are not enough it's good that there's been big progress in the funding of the states it's good that if you go to the streets if you're an economist now he may or journalist here all your friends were asking you should I take my money out okay I don't know if you had this experience I mean in Spain last May last June everybody would ask me should I take my money out of the euro should I put it in Germany should I take it out of Spanish banks now this is gone okay so the sense of tragedy the sense of immediate crisis the media explosion is gone but I don't think we're doing nearly enough to break this loop that I was telling you about the banking union is a low-cost banking Union in which a lot of the change must happen before the banking union would basically Europe is telling to the states is look before we do the banking Union you clean up your mess and then we'll do it by the Union the problem is we are saying the states that sounds all great okay you clean up your mess don't bring them as to me sure but I don't have the resources to clean up my mess okay so I'll pass the recapitalisation in Spain it's too detailed for for what I want to say now just to say that the recapitalization is insufficient and we have a lot of weak banks that are not being able to lend and this is strangling their recovery so let me just give you a sense of how things are the state and this the graph for Italy and for Spain is very very much the same the state is able to have much better access to funding than in July to see that it has materially improved and private banks are also able to get back to the to the to the market what you don't see is that this is helping households and companies and let me show you two pieces of evidence this is data as of right now okay this is what's happening today the green is you River you river is low interest rates are low but that doesn't help you if you want to mortgage beget a mortgage that doesn't help you if you want to get your cafeteria to buy a new coffee machine mortgage rates are totally decoupled okay before mortgage rates and you River will move together now the blue sorry these were SMEs sorry mortgage is going to be the next the small and medium enterprise loans the coffee owner if you look at that graph but you is he sees that you rebar is really low and he's as great now I can finance myself but he goes for a loan and they tell him no no no you have to pay over five percent for this loan the spread is very big notice this is while inflation is dropping so the real interest rate the F what he has to make to pay this loan is huge okay so this coffee owner in Spain and in Italy is not able to benefit from this big new policies that we saw and nor is really the households who want to buy a house the young people who want to get a mortgage the blue again now it's mortgage rates the green is your River and you see the decoupling before the crisis these two things move move together now a one goes down the other one doesn't and the reason it doesn't is not monetary policy is not fiscal policy is the problems with a banking system we're all a bit distracted talking about austerity and talking about monetary policy the real problem is in my opinion the banking problems this was a financial crisis to start with it's still a financial crisis the banking problems haven't been solved let me just quickly talk about the two the three kind of extra problems just quickly that we saw emerge over the decade what we saw over the decade of the bubble was the big loss in competitiveness for all the periphery countries we saw a big increase in leverage as we saw an increase in debt but we also saw problems with institutions problems with human capital and problems with finance as we said before the competitiveness problem in in Spain for example is really changing okay labor market the pressure on the labor market is very large there's a lot of unemployment unit labor costs are dropping union labor cost means how much does it cost you to produce a unit of output it cost you less than before so competitiveness problems are on the way to be improved the leveraging problems there is some improvement the debt is dropping a bit but during the crisis some of these countries had problems that are very very deep let me tell you one problem that Spain had that Italy happily didn't have not much happening Italy in the last decade Italy even grow that's not a great thing but it's probably better than growing in the way Spain do Spain grew by putting a lot of bricks okay productivity didn't grow what change was there was all this free money people use it to buy lots of houses and try to become rich by buying houses and getting mortgages and all that look at this graph what it says is that the blue line is how many Spanish kids dropped out of high school and what it shows you is that at the start of the euro project at the start a single market that was as bad as Italy big dropout rate forty percent of the kids didn't finish high school now over time that was dropping and look at Spain in Italy is drop in the same way until 97 the green and the blue line are the same and then something happens in 98 of 99 Spain's dropout rate stops improving the kids don't want to finish high school what are they doing it's not as not very difficult to imagine okay we have a lot of evidence they went to the construction sector why would you stay in school you could earn three or four thousand euros you know on this big bubble that had come from the whole financing boom so the financing boom has had a big permanent consequence for Spain which is the human capital deterioration the housing excesses which I won't go into we're all so tricky and I wanted to make a point about institutions because I don't want to say look all the problems are Germany and our countries don't have anything to to deal with Spain Italy Greece and Portugal particularly also Ireland do have the serious problem to address institutions and my view is that the euro had a very negative effect on institutions and the negative effect it had was is like an anesthesia interest rates were low money was cheap and that meant you didn't have to solve any problem this is true for Italy it was true for Spain so a source of persistence of that loop that I showed you before one consequence of that loop is that because funding was very easy and a lot of money came in what we've had credit boom has led through his to institutional iteration every town hall every savings banks every city every public organism could just borrow very cheaply okay they didn't need to do the hard work of thinking how to run places or to select the best managers etc so in my opinion and this is some work that perishing in German perspectives is somebody wants to see more there is a Vox EU about it a big consequence of the whole boom is we now have to do the housecleaning we have to get institutional house in order so I think growth in the longer term is not solving the problems of the banks that's important to save the Europe but in the longer term growth is not going to happen without institutional reform in Spain in Italy in all these other countries so I want to finish by I want to finish by and then have a have a longer discussion with you by talking about what can we do to break this loop okay so let me just summarize the argument until now give you a sense of what we what I think we understand and tell you what are the suggestions for change the road so what the argument I've made is this we created a banking Union that is a financial integration that is incomplete we get the worst of all worlds we are financially integrated which means money goes to their place were there were big hot money flows from one hand to the other but we're not sufficient financial integration integrated because then the problems are not observed by everybody absorbed by everybody together they are absorbed by the individual country and individual country doesn't have the ability to solve these big problems so financial integration was done if you want in in the worst of all worlds it was done in a way that it accentuated the problems that we all know can come with my own capital mobility you do get the capital mobility in the good times we're all together oh you can have all my money in the bad times sorry you're on your own now you need the money now you can't have it okay so we created a banking Union that had at least two crucial things missing look at my graph the banks in California don't have as their main asset loans to the California government that would be crazy the banks in California have United States government debt when California is in trouble the banks are not scared because they have US government debt the banks in Greece however they held mostly Greek government debt when the Greek government was in trouble and there was a haircut all the Greek banks were under in fact even the serious Cyprus banks were under because they also were Greek strong Greek government that's the top the bottom says when the phoenix arizona bank the california bag the new mexico bank is in trouble it doesn't go to the state government for help because it would try to stay government down they absorb the losses together so those are the two things we created a union without two extremely important legs okay and the question is are we ready to put those two legs back the banks are the responsibility of the union and they borrowing they the instruments that the banks you as collateral is not there bonds of Italy for the Italian banks and the bonds of Greece for the Greek banks the instruments the banks use as collateral are they dead bonds of the whole Union so that they don't drag each other down my answer is not quite okay not quite and I want to show you why I want to make three suggestions for what would be needed but what would be needed and I'm going to argue that we are not advancing sufficiently in them it can happen there is some progress okay I'm not going to tell you that we are doomed and the euros dead or anything I think a lot of the bad scenarios have been ruled out but we haven't done the homework to solve this problem and I want to show you why first point the legacy debt so the banks we made a mess the first thing you need to do is to clean up the mess that we had because as long as this overhang is there the economy cannot start the problem of the overhang is if the bank is scared that is about to fall down it won't start lending it will be trying to collect as much money as possible to survive ok so the debt overhang is important that's what affects the growth that's what leads to the lower arrow on growth so the first thing you need to do is some partial neutralization you need to say look we made a mistake we made it all together we're going to clean it up altogether did this happen no ok we've done what I'm calling here a banking Union on the chip the idea is the legacy that will be absorbed by the Member States the countries in the north don't want to recognize that there was a common problem that we designed some institutions wrong and that we have to deal with it together I understand why ok I understand why here's what the answer ok suppose I tell this in Germany ok which I have done what will a German person tell you now think of yourself you're the banker and you have a shopkeeper the shopkeeper comes to you and says all sorry you know you gave me these loans I can't repay them but if you pardon me the loans next time I really will repay them hmm doesn't sound that great right the bank is gonna say oh sure that's what you tell me now and in 10 years you tell me again okay the Germans say you're calling it legacy now you want help for the legacy today then you'll do your back ones who help you will go back spend again bla bla and then you say oh it's legacy you have to help us okay they don't trust us they don't trust that this will be a one of recap so instead but they saying it is a problem you clean up the banks in the future we'll have a banking Union which will work better but today you clean up the banks the problem is how much can our countries take how much can Italy Spain Greece how big can low unemployment get how high can use unemployment get how much will things will people be able to solve this problems on their own if they are left you know people once people look at it and realize well we have 5 18 years of low growth of no growth and it's a really difficult future to try to solve these problems can countries really deal with it on the wrong can it possibly happen I don't know I mean things are peaceful there is no riots in the streets even in Spain with 27% unemployment I would say you might see some things on TV but the truth of the matter is most people are pretty quiet considering the situation so I don't think we can get out of there without some mutualization majority so means we pay the mess together we made a mess together as a union we pay the mystical second my second point is how do we break the sovereigns to the banks it cannot be that the Italian banks the main asset they have is Italian debt and the reason I've made this point I hope is clear by now to you is when the stallion state gets wobbly the banks quit wobbly but since the star is that in states the only thing behind the banks then the state gets even more wobbly and we are back to the trouble so that cannot be how do you solve it you have to force the banks to carry joint European Union that joint boring instrument now we all understand a euro bond is very far into the future okay for everybody to have the same bond everybody has to trust each other because otherwise you're going to go out and borrow a lot and then let me the bill okay I have an apartment we are four roommates and we say we are all going to have the same bank account but I have this roommate who we all know it's a little bit you know he likes to drink and I'm afraid that with my bank account he goes out drinking then he comes back says well it's all together it's a joint it's a joint loan so it's gonna be very hard to get a joint borrowing history instead what I proposed with this group urine omics is a securitized instrument the European that agency which is a new agency that you would create would buy sovereign bonds it would buy Italian bonds it would like a man bonds he would like by Portuguese bonds it would put them in a package okay he would buy them in fixed proportions it wouldn't be rescuing it would be in fixed portion would buy German it would buy a whole package it would make a cake with them and it would sell two tranches of the cake use a junior bonds and senior bonds the Junior bonds would be the first ones to collapse if one of the countries collapses then those people have Junior bonds will absorb the losses there wouldn't be rescues but the banks would hold those senior bonds which would be protected there is no bailout here there is no Balin there is joint borrowing without joint liability what's the advantage the advantage is the liquidity premium that the German banks get whenever everybody in Italy panics or the German state gates when everybody needs an appendix now it would go to those senior bones which everybody together issues so I think it does break it helps to break the diabolic loop it breaks one of the branches of the diabolic loop and it by forcing the banks do not borrow from their own Treasuries away at the bank so crazy that they borrow from their own Treasuries the reason banks borrow for their own Treasuries is twofold why today Italian banks have so much Italian debt why do they do Spanish banks off so much Spanish day there are two reasons reason one is the Treasury Minister gives them a call and says you have to buy this okay full stop this they're the ones who are supporting you you do what they say the second is a little bit more complicated but very interesting which is the bank things look if we default we're dead anyway okay so we might as well okay they're giving you a banking a go alone and you're buying at an asset from the state you think if the state if the Italian state fails the banking system is going to be in tatters so what's the problem with buying more and more Italian debt but of course that makes it more likely that the Italian state fails so with this solution you wouldn't have that the Italian banks would buy this European Union debt and they would not be linked in this loop the third and last issue I wanted to rise is the new resolution regime on the banking Union so we are I want to I mean this is the main thing that is happening in Europe now the main thing that has happened in Europe now is we are creating a banking Union okay we are creating a banking Union so if you go back to my loop we are creating a banking Union given all I said you would be very happy because that means when the banks fail they're not the responsibility of Italy there is possibility of Frankfurt if they fail this loop is broken okay nothing more can affect is the Italian state so that means all of the trouble whirring stops starts evaporating and we start going into a better world the problem is the the banking Union we are now putting together it's a bit lame it's a bit lame in a predictable way a banking Union has three legs okay think of it as a stool with three legs a chair okay where it has three legs leg one is supervision okay there is one guy in Frankfurt who looks at all the banks and says this Bank is good - the bank is bad that's great okay you need that we are going to have that leg that's pretty clear okay there is a treaty sign December on times are in agreement reached in December of 2012 on time and that agreement says by March or April 2014 we will have a single supervisor but there two more legs and the two more legs I have their resolution what does resolution resolution is very simple it means if the regulator says this bank is bad it can close the bank and the bank is going to take off some money to recapitalize is going to be sold off some of the bonds of the bank are going to be worth nothing etc you need a resolution mechanism but notice there is a sound here - money you cannot close the money bank for free we're a solution mechanism is going to need some money when you close a bank you know you need to there is some people who might lose money you need you need to put some money there may be as a bridge loan maybe you're going to make a lot of people pay but you have depositors that you have to ensure so there are two legs of that stool that you need you need a resolution mechanism at the Deposit Insurance let me be clear this is not in the cards there is no Deposit Insurance intention at all okay the basel insurance will happen in the future that nobody can imagine there is nobody in europe talking about deposit insurance nobody in northern europe so you your state is responsible for your deposits resolution is the big place where there is now an open question how centralized resolution authority will it have some money to make to make salute to solve the problems we don't know I don't want to go into the detail right now if he comes up in the Q&A I'll be happy to go to the resolution authority but the bottom line is of the three legs of banking Union their only leg that we have agreed is surprisingly maybe not surprising the one that doesn't cost any money the single supervisor that doesn't require any transfers so we're still confronting this wall which is we do lots of things as long as no money is involved when the fiscal transfer is necessary we crush against the wall can the euro be saved I think we created a monetary union without sufficient economic Union and without sufficient Banking Supervision integration and common resolution and what that means is that it's a banking union that is a monetary union that is lame that doesn't stand on its legs and it's only going to be safe and in fact is only worth saving if we are ready and in this case southern countries need to do a lot with their institutions northern countries need to start facing up to the fact that there are costs involved and we're not very willing to incur the cost then is neither possible nor probably worthy to save it thanks very much you say that I cook any catalyst that does throw me I think professor katakana always been crystal clear in his presentation he raised a number of issues I just really feel notes and I have some questions myself but before asking those questions I'd like to see whether there are questions from the floor please sure questions that we can have more answers your volatile Miss America we think we should centralize the liability for deaths in Europe as it is already a truism in the u.s. my question is as follows is it really me to the debt we can create because the European Union obviously may issue more guarantees than Italy or Spain can do individually but over time the debt for the European Union has to have some kind of ceiling and in the u.s. even the federal debt is creating problems I'd like to know what you think about it about that the potential amount of European debt the European debt has in the United States but there will be limit to this depth because even in a centralized that that can be a problem yeah I mean I think the comparison between the US and Europe is very instructive it's a bit hot I don't know if we can open a door and get some hair ah there would be nice right I mean I'm cooking I'm going to start evaporating very pretty cool to see gratzi so the limit the limits the comparison between the US and Europe is very interesting but I think we have to recognize political realities would it be better if we had a fiscal union you know at some point in United States they had a debt crisis just after independence and there is a famous Hamilton compromise where Hamilton basically had the southern here the South was reached in the north was poor okay so the southern states accepted to take over the northern states low debt in exchange for moving the capital from New York to the south to Washington DC which is Virginia's you know I mean he was no it's its own state and by moving the capital to the south and accepting a centralization of power I don't think that's realistic I mean I don't think we're gonna see a European public opinion come up simply because we all speak different languages I wish I could be talking to you in Italian today but it's just as difficult so we're gonna have to find ways that are we invent our own creatures we're not going to have the same as Europe as the US but Europe has always been a different thing it's never been a state it's never been an association it's always been something we've been created as we go along with Europeans know what the alternative is the alternative is going back to this integration going back to populism going back to permanent crisis we don't want that I think Europe is the solution I am a huge firm believer in Europe but Europe for Europe to be the solution Europe is gonna have to go some way I don't think there was a full fiscal Union but some way it was a fiscal Union including the banking maybe including some joint insurance for unemployment insurance and employment programs that maybe now we see some movement I was saying this morning somebody was interviewing the the radio in the square which I thought was a very cool thing a poor Seymour way okay it does move ok Europe is moving it's not huge but we do see progress isn't not fast enough but it does happen ok demanding now we're going to take a few questions all together sure blur in one of his statement has said that Germans are for the single surveillance mechanism but they don't want a guarantee for deposits up until a hundred thousand in Euro at a European level they don't want this guarantee because they see it as a children horse to the disadvantage of the German taxpayer so what I ask is is the follows is the following those who pave when the bank goes bankrupt are those that have deposits or those who have the shares of that Bank but don't you think we should have a resolution of banks with bonds and bad loans internationally would there be a guarantee for deposits up until a hundred thousand euro don't you think that we have to do our homework first and then satisfy the requirements of the Germans so let's do our homework first but my question is as follows should we resolve the banks with these bad dates would there be any guarantee for the deposits up until 100,000 euro and then one last consideration there were many local banks the cassini the in Spain that I lent money and then they have developed banks that are too big to fail and and then the money from the EU went to the state so the state Rea basically raised the debt so I think that the services the citizens should be paid for by the state at the state should is not there just to pay and bail out the bank for the banks so there's a lady and that is gentleman first thank you I have two questions first euro crisis and financial crisis that was triggered in the u.s. what is the relationship a number of economists Italian economists as well as stated that the euro has been a risk because the European Union is not would not be an ideal common currency area so much so that imbalances and inequalities would be created do you think that without the euro would have had the crisis anyway do you think that the crisis caused by the US has been the triggering element for our crisis but not the main cause I understand that this big political problem Europe is not progressing as fast as if we wanted to do the European ruling classes and I'm saying it's an Italian ruling class is terrible but the others are not so much better and the Germans are not ready to pay for the others don't do we have to have a big plan so rather than looking at the collapse of the euro don't you think that we should have another kind of exit solutions thank you the gentleman at the back nelle definite unit in the definition of the banking Union what about the role of the european central bank because often we wonder about that what is the role of the ECB going to be if a monetary union is set up will it print money we answer these questions and then accept an additional three so three questions the first one on the recap and the deposit insurance and who's going to take care of the deposits I think the experiment with letting the uninsured they insured the posters absorb losses is not going to be repeated I don't think that's going to happen meaning the below hundred thousand will be safe how good questions I think that they will be safe I think that the risks are too large and I think the European Central Bank if necessary would step in below 100,000 above 100,000 I think the story is different because we were mentioning the recap of the cars etc and you said well people can absorb some of the losses and the truth is yeah they can absorb so here's how the recap happened in Spain basically there were what is called super net liabilities which means everybody had subordinated debt so no depositors lost any money in Spain people lost money were the people who held subordinated shares and preference loans to the banks okay so the preference and subordinated debt holders were not quite wiped out but they lost part a little bit of money basically a twelve point seven billion was raised from them twelve point seven does my number to this state put another 37 billion okay so there has been a 50 billion recap 37 from the state 17 points 12 point 7 from their banks and then there was a bad bank that was created with a net asset 50 billion okay five percent of GDP is 50 billion okay one point of GDP is 10 billion so essentially a 50 billion bad bank and a 50 billion recap of which 12 billion were put by them by the by the shareholder by debt holders of the banks I think that's what we're going we're going to increase in differentiation between all the classes of people who hold capital in the banks I think the shareholders will be the first to be wiped out the preference holders and then probably there is a big issue between the senior debt holders the bond holders meaning and the postage the uninsured the positives who will go first I think that they probably will take the bondholders first and then the uninsured the positives I don't think they want to repeat what happened in Cyprus so that's I think where we're going these the problem is this is the right solution the right solution is the private money goes in first for sure everybody agrees with it okay there are two disagreements one is Europe has not ones that the bondholders take any heat that's wrong Vaughn hollered should pay as well and second is Europe should be ready to step in before the individual member states and the reason that happens and the reason I don't agree with the point well we should do our clean our house before Europe comes in is very practical I don't think the member states have the financial ability to do that on their own second question on what would a European crisis Boroff up in any way without the Europe because of the financial crisis that was a financial crisis we would avoid a financial crises anywhere I don't have that graph here you can see my my working paper on on the Joe of comics perspective that's coming soon but when the Euro came in the liquidity would have combat would have been more available to all countries because there was a period of excessively loose liquidity we all agree with that but the credit bubble on the credit markets of Greece Spain Portugal Ireland Italy would not have been as big if the Euro hadn't been there and the receipt is very simple look at the differential between the credit their rates the interest rates that Europe that Germany was paying and that Italy or Greece were paying in 2002 Greece paid the same to borrow as Germany people thought it's the same euro so it's the same depth like in the u.s. is federal debt they don't realize they didn't realize that Greek debt is greased his Greece's is not the union's so there wouldn't have been as big a financial bubble for sure I mean this undoubtable the interest rates would have drop as much people wouldn't have gone in as much trouble in Greece Spain Italy etc borrowing for the public in the private sectors without the euro so yes the euro had a lot to do with that crisis the third question was what's the role of the ECB in all of this I was trying to avoid be plans but I'll have to talk about the plans I don't really I don't see a bit I mean we were faced with a path we're in you know this guy who was you know in the k2 I know in the table Hari last week and he died here the an injury and he couldn't be taken out we're in the mountain we're in a very steep slope and we can just kind of walk down slowly the monthly client just the idea of okay then we jump down from the mountain if we forget about it I don't think it's gonna work okay if you try to jump down from the mug you're gonna crash so I think we scrambled this emulate pretty well this is the euro and we're not going to be able to unscramble it I think the euro a priori has a lot of advantages it has we create a level playing field for all companies but all the advantages require that the monetary union works I mean there's no level playing field the Fiat cannot borrow because it's Italian so we need to fix it I don't really see the alternative why not obvious alternatives that Germany exits Germany X's the Euro becomes cheaper it depreciates it becomes weaker we get more inflation Germany would be fine because they would pay their Europe that's much more cheaply they would be happy well they would have to export out the more expensive great but although all the loans they had would be repaid in the cheap currency and for the rest of the countries it would also be easier but I don't think that's doable and there is no other things doable is because the euro is at the end of the day a political process project and I don't think Germany would leave so I think the best we can do is just keep pushing for the best solution we can find third question was on the ACB's role it's really weird right the European Central Bank is the only European institution we have the only one that can make decisions without compromises the result of these is the European Central Bank is the sovereign in Europe we have an emperor emperor Draghi we're in the Roman times he says I don't like the labor regulation you know and there's a secret letter to the Prime Minister that says the level regulation has to go okay that's stunning I mean we're back to Rome where this person was unaccountable and elected it's not because he's bad he's trying to solve things is because he's the only one who has the power to make decisions without any body I mean all these countries trying to agree I mean just think that Italy instead of having a central government the way you run Italy was by having all the regions get together and decide what they were going to do and I don't think Italy would really get to any decision that's what how it works in Europe so the ECB is working by default this is not a solution anybody likes and I bet you they the ones who like at least are the ECB they don't like to be a factor the government of Europe deciding which country survives your country dies it Ireland went bankrupt the day the European Central Bank told them either you seek a rescue or we're pulling the plug Greece Cyprus the same thing the problem the rescue was triggered by the European Central Bank saying it's over we're not allowing your banks to continue getting this lot supply from us so right now the fact of the government of Europe is some gentleman who is very smart happily and well-intentioned but he's sitting in his office in Frankfurt without any accountability that's not desirable and we need to have a much better solution which is the Europe says the institution's are limits it has prego in your contribution you presented a number of possible solutions to the crisis a way out from the crisis and given the difficulty of neutralization of credit and Euro bonds you talked about junior and senior bonds would you please dwell upon that how do you identify junior bonds how long does it take for them to become senior bonds etc good afternoon you said that a growth recovery also requires institutional reforms my question is what about the significance of a real political integration in this difficult moment so situation where countries States pronounced to part of their sovereignty also the political level without having a system where somebody prevails over the others as is the case with Germany at the moment the diabolic loop that you have described so well it's just a part of the bigger problem I mean the eurozone crisis qualifies it itself as a but balance of payment crisis right I mean sudden stops in in the peripheral countries etc etc well and I'm wondering whether we are not we are focusing we are focusing our efforts on a small problem I mean the the true problem is to address if the balance of payment problem so my question is how can we fix the this problem and I think that the the institution of the macro economic imbalance procedure at the end of 2011 it's it's a first step but we should make the the mechanism within it more I mean more more binding for especially for sharpest can countries and I mean I think that the solution is not to find fiscal transfers for example but to find that coordination between countries so I mean if southern countries are now tightening on the fiscal side I mean austerity I think that surplus country countries should have expansionary measure so its coordination and not something as a fiscal transfer and and this is not only for public finances I think in every part of the car please explain jr. bones in Singapore okay the European that agency buys loans from all countries okay this is what it buys okay these are all the loans this piece of paper it says we've bought we've bought in your asset site we have all these sovereign bonds with both we've bought bonds from Portugal and we put them all in the box okay they're all in a box there's a shoe box with all of these points so we issue a piece of paper it says here instead of you buying the launch from Portugal you buy this which is the loans from Portugal from Germany etc but instead of issuing one piece of paper it is just to these and this this is a J and this is an S this is a junior bond and use a senior bond it goes to the people it says hey do you want the junior bond or a senior bond and tells people look the junior bond is great it pays 10% interest rate it's pretty good but it has a problem if any of these countries Falls you're gonna lose money okay the first 30 percent of the emission of losses is absorbed by this paper if he buys this paper it's good for him but he's gonna get good interest rate 10 percent but if any country fails he's in trouble because some of this paper will go through the trash okay if he buys this paper this is an S as a senior bond this paper says it's safe okay there will have to be three or four countries collapsing before you would lose any money normally it will have to be Italy and Spain normally this paper is very safe okay but I'm sorry you get a very cheap a very safe paper it only pays 2% okay so you can choose which one you get now what's the good things of this the good thing of this is if you want risk you have the piece of paper you can absorb that you can you can take it you're somebody who can observe risk if you're a bank or a pension fund and you don't want any risk because you're obliged to invest in safe assets or whatever you get this other one but we don't need now to go around and bail out the banks because now the banks are holding these safe assets and if somebody bought these asset we can tell them look it's your problem you the temper centers rate you got this paper now it has a haircut I know the haircut sorry that's what it's worth now until you get all of these haircuts until this moment the other person is safe and there is a lot of losses that have to happen for this paper three words you okay that's the junior and the senior bonds notice there is no bailouts here that's the key the capitalism capitalism only works on a white condition you take your risks if it goes well you're gonna be rich if it goes badly you are in trouble okay capitalism doesn't work if we tell people who invest oh if it works great for you and it doesn't work no worry we'll take the losses hello I mean call that socialism for the rich okay socialism for the rich is a crazy idea it doesn't work because it means that people are going to go around making crazy investments and then staying around saying sorry you know you see Morgan JP Morgan in London a month ago or a couple of months ago there was a report from the Senate committees of the US where they found the JP Morgan was doing exactly the same things as before the crisis getting all the depositors money and betting it on the casino if it works good if it's bad sorry the posture the depositors are in trouble the state should help them second institutional reform with real politic integration you know what the Germans wanted who was asking me this okay the Germans wanted the Germans are the only country withers today a political active political debate about getting democracy democracy and accountability Europe because they realize that a situation where they are the bosses we did all this Union to tie Germany down and instead what we have created is an Union where only Germany decides it's crazy so they realize that's not sustainable and they want a union they want a true political union the problem is I don't know that the other countries would want it I mean people the more we advance the more people are disappointed with Europe the less they want to hear about it third and last question bonds premium is this balance of payment or is this a financial crisis I really do think it's a fair shot the route do I believe in Spain Italy have a competitiveness problems absolutely certainly do I believe they have a deficit sure but you know what today March 2013 last numbers they came yesterday or today in Spain Spain is a current account surplus for the first time since the serious exists in the whole history of Spain I had never been in the current account service does it mean the crisis is over does it mean financing is coming no I mean there is a problem for sure on a macro side but I really do think and I think on but eveness important structural reforms important our economies are kind of in big trouble and they need to be loosened up but the euro is going to leave or die depending on whether we are able to solve the financial crisis that we face that's my view and I think the evidence supports it as I showed you some of the papers that are supporting that I think we are now I think we can get one or two more questions because we have ten minutes and I have to go to be lanolin that I yes just five minutes but it please okay coming from us as you were talking about the Union and everything I think I see some differences between United States of Europe and the United States of America as we have first of all I see the cultural barriers that exist here which I think are extremely difficult to eliminate over the period of time secondly what are your views on the target imbalances that exist you because usually people don't talk about that secondly as you mentioned you're in your plan about the junior and the senior debt agency I suspect if it would be able to work as you are proposing because what is the incentive for the Chairman bonds for the German government to cool it their bonds into this debt agency because they already have such a low interest that they have to pay and secondly just two case scenarios as some of the people were mentioning the planning and the plan B do you think with the current policies ten years of recession or is it better that some damage happens now and some countries go out of the monetary union no dear a massive or operable I would say that we do not accept more questions the very last one proposal that I found very interesting of the European depth agency when you answer this question please tell a joke Manya I have a different question you take for granted the Germany remains in Europe let's assume that in september the germans say we want to exit the union well all the other member states will would they be able to support the euro or not on your questions i indeed you talk about targeting balances the targeting balances were exploring basically the targeting balances just to put it very very quickly what was happening was normally you want to buy an Audi you get a loan from your bank your bank is getting a deposit for somebody else in Lanzarote at some point the Italian banks the Spanish banks basically couldn't get anybody to lend the money so basically they were taking the loan to lend you the algae they were actually taking the loan to the European Central Bank the European Central Bank was basically lending the money today to the Italian banks so in fact you were being lent the money to other youth the Oddie by the German central bank in some sense that was over simplifying the targeting balances problem I think has been largely addressed by Draghi's very strong statement of commitment to the euro that's magic right it's really amazing he announced a program he didn't put a program in place he didn't really say this OMT is outward monetary transactions would actually happen in fact they're tricky because they need political conditions but just the fact that he said believe me it will be enough was enough people did believe in and problem kind of went away it will maybe come back when there is the next stage of the crisis agency problems will germany want these things to happen yes there are agency provides but you know what Germany I think is very aware of how weak and tricky its position is in the reason the position is weak is because it's so strong because you know when you are basically making decisions for for a whole continent you know you're going to create resentment and you know that you need allies and so I think Germany would be willing to consider that is linked to what's the chance for the European debt agency I presented those ideas at the International Monetary Fund or the French the Germans the French interbank at the Dutch Central Bank many places my sense is that there are a lot of people who are receptive in the IMF for example there was a lot of sympathy to these ideas when we presented some of my colleagues as I was saying presented at other places but it has to be a moment of desperate crisis for these kind of changes it's a bit what was said about fiscal policy Union I mean you need a whole package you need a moment or we say look this thing is just not getting better but we need a package deal and we have to be ready in that moment to propose the right package deal and to push for the right package deal what happens if your germany exits the euro would this be the end of the euro but the other countries continue i think at that point i mean what would france do with france prefer to be in a ramp euro to exit I mean the euro would weaken substantially and the key issue is that either way a lot of the problems would be solved notice it's very different they exit and if you exit right if Spain or Italy exits the problem is your currency goes down you have debt which is denominated in an expensive currency so I owe 10 euros which are 10 lira today and when the leader exits are worth a hundred litre well that's a problem right whereas if they exceed it's the opposite you all the money in euros and the euro depreciate you come so it is very different and it would solve some of the nominal price it will be a big mess politically so I I mean I'm not proposing that as an alternative I just think it will be extremely complex thank you very much miss Umbra gale massage so I understand that the Euro will can stand but that there's going to be an uphill task and as Professor Gehrig and the website tells us there is nothing which is going to be indeed reference is going to be made to the euro and to the monetary union is you