Fallibility, reflexivity and the eurozone crisis. Soros on the eurozone crisis
Fallibility, reflexivity and the eurozone crisis. Soros on the eurozone crisis
As the eurozone crisis unfolds, mistakes matter, but so do expectations. And it is expectations that will decide in what direction Europe is headed, whether towards the collapse of the area and the single currency or its salvation. The problem is that expectations can also be generated by erroneous perceptions and still end up becoming reality. An original and unorthodox analysis of the economic situation by one of the great contemporary commentators and undisputed leaders of international finance.
so in the history of contemporary financial capitalism he has withdrawn from the daily management of quantum fund because he determined to devote more time to philanthropy to donating he donated up to date uh um a lot of money in philanthropic activities to favor the democratic transition in eastern central uh europe countries more recently uh he was one of the founders and financers of inet for new economic thinking it's an institute to stimulate a new economic uh thinking he believes that uh the crisis which just started in 2007 imposes a rethinking of economic theories you have the flora thank you very much ever since the crash of 2008 there has been a widespread recognition both among economists and the general public that economic theory has failed but there is no consensus on the causes and the extent of that failure i believe that the failure is more profound than generally realized it goes back to the foundations of economic theory economics tried to model itself on newtonian physics it sought to establish universally and timelessly valid laws governing reality but economics is a social science and there is a fundamental difference between the natural and social sciences social phenomena have thinking participants who base their decisions on imperfect knowledge that's what economic theory tried to ignore scientific method needs an independent criterion by which the truth or validity of its theories can be judged natural phenomena constitute such a criterion social phenomena don't that's because natural phenomena consist of facts that unfold independently of any statements that are that relate to them the facts then serve as objective evidence by which the validity of scientific theories can be judged that's what has enabled natural science to produce amazing results social events by contrast have thinking participants who have a will of their own they are not detached observers but engaged decision makers whose decisions greatly influence the course of events therefore the events don't constitute an independent criterion by which participants can decide whether their views are valid in the absence of an independent criterion people have to base their decisions not on knowledge but on an inherently biased and to greater less or lesser extent distorted interpretation of reality their lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects the resulting uncertainty hinders the social sciences in producing laws similar to newton's physics economics which became the most influential of the social sciences sought to remove this handicap by taking an axiomatic approach similar to euclid's geometry but euclid's axioms closely resembled reality while the theory of rational expectations and the efficient market hypothesis became far removed from it up to a point the axiomatic approach worked for instance the theory of perfect competition postulated perfect knowledge but the postulate work only as long as it was applied to the exchange of physical goods when it came to production as distinct from exchange or to the use of money and credit the postulate became untenable because the decisions involved the future and the future can't be known until it has actually occurred i'm not well qualified to criticize the theory of of rational expectations and the efficient market hypothesis because as a market participant i considered them so unrealistic that i never bothered to study them that is an indictment in itself but i shall leave a detailed critic of these theories to others instead i should like to put before you a radically different approach to financial markets it was inspired by karl popper who taught me that people's interpretation of reality never quite corresponds to reality itself this led me to study the relationship between the two i found a two-way connection between the participants taking and the situations in which they participate on the one hand people seek to understand the situation that's the cognitive function on the other they seek to make an impact on the situation i call that the causative or manipulative function the two functions connect the thinking agents and the situations in which they participate in opposite directions in the cognitive function the situation is supposed to determine the participant's views in the causative function the participants views are supposed to determine the outcome when both functions are at work at the same time they interfere with each other the two functions form a circular relationship or feedback loop i call that feedback loop reflexivity in a reflexive situation the participants views can't correspond to reality because reality is not something independently given it is contingent on the participants views and decisions the decisions in turn can't be based on knowledge alone they must contain some bias or guest work relating to the future because the future is contingent on the participants decisions fallibility and reflexivity are tied together like siamese twins without fallibility there would be no reflexivity although the opposite is not the case people's understanding would be imperfect even if in the absence of reflexivity of the two twins fallibility is the firstborn together they ensure both a convergence between the parties sorry they ensure both a divergence between the participants views of reality and the actual state of affairs and a divergence between the participants expectations and the actual outcome obviously i didn't discover reflexivity other others had recognized it before me often under a different name robert merton wrote about self-fulfilling prophecies and the band-bagging effect keynes compared financial markets to a beautiful contest where the participants had to guess who would be the most popular choice but but starting from flexible from fallibility and reflexivity i focused on a problem area namely the role of misconceptions and misunderstandings in shaping the course of events that mainstream economics tried to ignore this has made my interpretation of reality more realistic than the prevailing paradigm among other things i developed a model of a boom bust process or bubble which is endogenous to financial markets not the result of external shocks according to my theory financial bubbles are not a purely psychological phenomenon they have two components a trend that actually prevails in reality and a misinterpretation of that trend a bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced eventually the gap between the trend and the prevailing bias grows so wide that it becomes unsustainable after a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction bubbles are usually asymmetric in shape booms develop slowly but the bust tends to be sudden and devastating that's due to the use of leverage price declines precipitate the forced liquidation of leveraged positions well-formed financial bubbles always follow this pattern but the magnitude and duration of each phase is unpredictable moreover the process can be aborted at any stage so that well-formed financial bubbles occur rather infrequently at any moment of time there are myriads of feedback loops at work some of which are positive others negative they interact each other with each other producing the irregular price price patterns that prevail most of the time but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences in the market according to my theory financial markets may just as soon produce bubbles as 10 towards equilibrium since bubbles disrupt financial markets history has been punctuated by financial crises each crisis provokes a regulatory response that's how central banking and financial regulations have evolved in step with the markets themselves bubbles occur only intermittently but the interplay between markets and regulators is ongoing and since both market participants and regulators act on the basis of imperfect knowledge the interplay between them is reflexive moreover reflexivity and fallibility are not confined to the financial markets they also characterize other spheres of social life particularly politics indeed in light of the undergoing interaction between markets and regulators it's quite misleading to study financial markets in isolation behind the invisible hand of the market lies the visible hand of politics instead of pursuing timeless laws and models we ought to study events in their time-bound context my interpretation of financial markets differs from the prevailing paradigm in many ways i emphasize the role of fallibility that is to say misunderstandings and misconceptions in shaping the course of history and i treat bubbles as largely unpredictable the direction and its eventual reversal are predictable the magnitude and duration of the various phases is not i contend that by taking fallibility as a starting point i can make my conceptual framework more realistic but at a price the idea that laws or models of universal validity can predict the future must be abandoned until recently my interpretation of financial markets was either ignored or dismissed by academic economists all this has changed since the crash of 2008. reflexivity became recognized but with the exception of imperfect knowledge economics the foundations of economic theory have not been subjected to the profound rethinking that i consider necessary reflexivity has been accommodated by speaking of multiple equilibria instead of a single one but that's not enough the fallibility of market participants regulators and economies must also be recognized a truly dynamic situation can't be understood by studying multiple equilibria we need to study the process of change change the euro crisis is particularly instructive in this regard it demonstrates the role of misconceptions and the lack of understanding in shaping the course of history the authorities didn't understand the nature of the crisis they thought of it as a fiscal problem while it's more a banking problem and a problem of competitiveness and they applied the wrong remedy you can't reduce the debt burden by shrinking the economy only by growing your way out of it the crisis is still growing because of a failure to understand the dynamics of social change policy measures that could have worked at one point in time were no longer sufficient by the time they were applied since the euro crisis is currently exerting an overwhelming influence on the global economy i shall devote the rest of my talk to it i must start with a warning the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change but my conceptual framework based on the twin pillars of fallibility and reflexivity still applies reflexivity doesn't always manifest itself in the form of bubbles the reflexive interplay between imperfect markets and imperfect authorities goes on all the time while bubbles occur only infrequently this is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the glo on the entire global economy how could this happen my answer is that there is a bubble involved after all but it's not a financial but a political bond it relates to the political evolution of the european union and it has led me to the conclusion that the euro crisis threatens to destroy the european union itself let me explain i contend that the european union itself is like a bubble in the boon phase the eu was what psychoanalyst david tuckert calls a fantastic object unreal but immensely attractive it was the embodiment of an open society an association of nations founded on the principles of democracy human rights and the rule of law in which no nation or nationality would have a dominant position the process of integration was spearheaded by a small group of far-sighted statesmen who practiced what karl popper called peaceful social engineering they recognized that perfection is unattainable so they set limited objectives and firm timelines and then mobilize the political will for a small step forward knowing full well that when they achieved it it's inadequacy would become apparent and require a further step the process fed on its own success very much like a financial bubble that's how the coal and steel community was gradually transformed into the european union step by step germany used to be in in the forefront of the effort when the soviet empire started to disintegrate german leaders realized that reunification was possible only in the context of a more united europe and they were willing to make considerable sacrifices to achieve it when it came to bargaining they were willing to contribute a little more and take a little less than the others thereby facilitating agreement at that time german statesmen used to assert that germany has no independent foreign policy only a european one the process culminated with the maastricht treaty and the introduction of the euro it was followed by a period of digestion which after the crash of 2008 turned into a process of disintegration the first step was taken by germany when after the bankruptcy of lehman brothers angela merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately not by europe acting jointly it took financial markets more than a year to realize the implications of that declaration showing that they are not perfect the maastricht treaty was fundamentally flawed demonstrating the fallibility of the authorities its main weakness was well known to its architects it established a monetary union without a political union the architects believed however that when the need arose the political will could be generated to take the necessary steps forward towards a political uni union but the euro also had some other defects of which the architects were unaware and which are not fully understood even today in retrospect it's now clear that the main source of trouble is that the member states of the euro have surrendered to the european central bank their rights to create fiat money they didn't realize what that entails and neither did the european authorities when the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital and the central bank accepted all government bonds at this discount window on equal terms that made it advantageous to commercial banks to accumulate the bonds of the weaker euro members in order to earn a few extra basis points that's what caused interest rates to converge which in turn caused competitiveness to diverge germany struggling with the burdens of reunification undertook structural reforms and became more competitive other countries enjoyed housing and consumption booms on the back of cheap credit which made them less competitive then came the crash of 2008 which created conditions that were far removed from those prescribed by the maastricht treaty many governments had to shift bank liabilities onto their own balance sheets and engage in massive deficit spending these countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control due to the divergence in economic performance europe became divided between creditor and debtor countries this is having far-reaching political implications to which i will revert it took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default but when they did risk premiums rose dramatically this rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent and that constituted the two main components of the problem confronting us today a sovereign debt crisis and the banking crisis which are closely interlinked the euro the eurozone authorities uh are now repeating what the international financial authorities often did in the global financial system there is a close parallel between the euro crisis and the international banking crisis that erupted in 1982 then the international financial authorities did whatever was necessary to protect the banking system they inflicted hardship on the periphery in order to to protect the center now germany and the other countries are unknowingly playing the same role the details differ but the idea is the same the creditors are in effect shifting all the burden of adjustment onto the debtor countries and avoiding their own responsibility for the imbalances interestingly the terms center and periphery have kept into usage almost unnoticed just as in the 1980s all the blame and burden is falling under periphery and the responsibility of the center has never been properly acknowledged yet the euro crisis in the euro crisis the responsibility of the center is even greater than it was in 1982 the center is responsible for designing a flood system enacting flawed treaties pursuing flawed policies and always doing too little too late in the 1980s latin america suffered the lost decade a similar fate now evades europe that's the responsibility that germany and the other countries need to acknowledge but there is no sign of this happening the european authorities had little understanding of what was happening they were prepared to deal with fiscal problems but only greece qualified as a fiscal crisis the rest of europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis the authorities didn't even understand the nature of the problem let alone see a solution so they try to buy time usually that works financial panics subside and the authorities realize a profit on their intervention but not this time because the financial problems were reinforced by a process of political disintegration while the european union was being created the leadership was in the forefront of further integration but after the outbreak of the financial crisis the authorities became defendants of the status quo this has forced all those who consider the status quo unsustainable or intolerable into an anti-european posture that's the political dynamic that makes the disintegration of the european union just as self-reinforcing as its creation has been that's the political bubble i was talking about at the outset of the crisis a breakup of the euro was inconceivable the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown but as the crisis progressed the financial system has been progressively reordered along national lines this strength has gathered momentum in recent months the long-term refinancing operation or ltro undertaken by the european central bank enables spanish and italian banks to engage in a very profitable and low risk arbitrage by buying the bonds of their own countries and other investors have been actively divesting themselves of the sovereign debt of the periphery countries if this continued for a few more years a breakup of the euro would become possible without a meltdown the omelet could be unscrambled but it would leave the central banks of the credited countries with large claims against the central banks of the detroit countries which would be difficult to collect this is due to an arcane problem in the euro clearing system called target 2. contrast to the clearing system of the federal reserve which is settled annually target 2 accumulates the imbalances this didn't create a problem as long as the interbank system was functioning because the banks settled the imbalances among themselves through the interbank market but the inter market the interbank market has started properly functioning since 2007 and the banks relied increasingly on the target system and since the summer of 2011 there has been an increase in capital flight from the weaker countries so the imbalances have grown exponentially by the end of march this year the bundesbank alone had claims of some 660 billion euros against the central banks of the periphery countries the bundesbank has become aware of the potential danger it is now engaged in a campaign against the indefinite expansion of the money supply and it has started taking measures to limit the losses it would sustain in case of a breakup this is creating a self-fulfilling prophecy once the bundesbank starts guarding against a breakup everybody will have to do the same and this is already happening financial institutions are increasingly reordering their european exposure along national lines just in case the region splits apart banks give preference to shedding assets outside their national borders and risk managers try to match assets and liabilities within national borders rather than within the eurozone as a whole the indirect effect of this asset liability matching is to reinforce the de-leveraging process and to reduce the availability of credit particularly to the small and minty medium enterprises which are the main source of employment so the crisis is getting ever deeper tensions in the financial markets have risen to new highs as shown by the historic low yield on buns even more telling is the fact that the yield on british 10-year government bonds has never been lower in its 300-year history while the risk premium on spanish spanish bonds is at a new high the real economies of the eurozone is declining while germany is still booming this means that the divergence is getting wider the political and social dynamics are also working towards disintegration public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed so something has to give in my judgment the authorities have a three-month window during which they could still correct their mistakes and reverse the current trends by the authorities i mean mainly the german government and the bundesbank because in a crisis the creditors are in the driver's seat and nothing can be done without german support i expect that the greek public will be sufficiently frightened by the prospect of expulsion from the european union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement but no government can meet the conditions so that the greek crisis is liable to come to a climax in the fall by that time the german economy also will be weakening so that chancellor merkel will find it even more difficult than today to persuade the german public to accept additional european responsibilities that is why i'm talking about a three-month window correcting the mistakes and reversing the trends would require some extraordinary policy measures to bring condition backs conditions back closer to normal and bring relief to the financial markets and the banking system these measures must however conform to the existing treaties the treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur in the future it's difficult but not impossible to design some extraordinary measures that would meet these stuff requirements they would have to tackle simultaneously the banking problem and the problem of excessive debt uh because these problems are interlinked addressing one without the other as in the past will not work banks need a european deposit insurance scheme in order to stem the capital flight they also need direct financing from the european stability mechanism which has to go hand in hand with eurozone by supervision and regulation the heavily indebted countries need relief on their financing costs there are various ways to provide it but they all need the active support of the bundesbank and the german government that's where the blockage is the authorities are working feverishly to come up with a set of proposals in time for the european summit at the end of this month based on current newspaper reports the measures we'll propose that they will propose will co-cover all the bases i have mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment in order to reverse the trend that means that measures will again offer some temporary relief but the trends will continue but we are at an inflection point after the expiration of the three months window the markets will continue to demand more but the authorities will not be able to meet their demands it's impossible to predict predict the eventual outcome as mentioned before the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years and if it were not for the social and political dynamics one could imagine a common market without a common mark without a common uh currency but the trends are clearly non-linear and an earlier breakup is bound to be disorderly it almost it would almost certainly lead to a collapse of the schengen treaty the common market and the european union itself it should be remembered that there is an exit mechanism for for the european union but not for the euro unenforceable claims and unsettled grievances would leave europe worse off than it was at the end outset when the project over european over united europe was conceived but the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for germany it would leave germany with large unenforceable claims against the periphery countries the bundesbank alone will have over a trillion euros of claims arising after out of the target too by the end of the of this year in addition to all the intergovernmental obligations and a return to the deutsche mark would likely price germany out of its export market not to mention the political consequences so germany is likely to do what is necessary to preserve the euro but nothing more that would result in a eurozone dominated by germany in which the divergence between the creditor and that is better countries would continue to widen and the periphery would turn into permanently distressed areas in need of constant transfer of payments that would turn the european union into something very different from what it was when it was a fantastic object that fired people's imagination it would be a german empire with the periphery as the hinterland i believe most of us would find that objectionable but i have a great deal of sympathy with germany in its present predicament the german public can't understand why a policy of structural reforms and fiscal austerity that worked for germany a decade ago ago will not work for europe today germany then could enjoy an export-led recovery but the eurozone today is caught in a deflationary death trap the german public doesn't see any deflation at home on the contrary wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other european countries reluctance to invest abroad and the influx of flight capital are fueling a real estate boom exports may be slowing but employment is still rising in these circumstances it would require an extraordinary effort by the german government to convince the german public to embrace to embrace the extraordinary measures that would be necessary to reverse the current trend and they have only a three-month window in which to do it we need to do whatever we can to convince germany to show leadership and preserve the european union as the fantastic object that it used to be the future of europe depends on it thank you oh is i want to ask a couple of questions to mr soros and i'll do so in english then we'll have some questions from the audience you raised a number of issues and as you were speaking what one cannot help but thinking about history you were born in europe and you moved to the us because of what european history has been and so we have two models european history of the last century and the u.s that integrated politically and then financially through crisis i'm thinking about the civil war i'm thinking about the financial crisis in the early 20th century that led to the creation the federal reserve and then 1929 uh with the glass-steagall act would you accept this parallel that europe is integrating through crisis just as the us did in its past history over the last few centuries and so would you still believe that this is a positive story of a crisis that needs to happen for europe to integrate further and i would give you an example of that uh it would have been inconceivable even a few months ago thinking about what people now call a banking union a common resolution fund some level of common surveillance in the banking sector and probably a common system of european banking guarantee and yet those are issues that are on the table are being negotiated people expect to see something on this at the next european council at the end of june and so would you accept this parliament that europe is growing through the pains of crisis the pains of history just as the u.s did over the last few centuries but i think the real parallel is actually with alexander hamilton after the uh war of independence when the individual states which were only confederates uh incurred very large debts which they couldn't pay but hamilton persuaded them to ban together and to accept a common responsibility for for that that and that was really uh the the creation of the of the europe of the uh of the united states of of of america and i i i would very much like to hope that something similar is going to happen but i'm tremendously concerned that er the process is taking too long and the authorities are in fact discussing the uh the areas where they have to move in order to bring the problem under control and to to change the trend but they'll do the minimum where they where they reload where they really ought to be doing the maximum and with and that is what they have been doing all along if they had done anything any of the things that they were willing to do a year later the the actually the crisis could have been contained but they didn't and i think this is the last time when the last opportunity this is what the point that one of the points that i'm trying to stress that there's still a window of opportunity to recognize the need for something extraordinary something going for ahead of the curve instead of behind the curve because three months from now the situation will deteriorate and the willingness to take on additional responsibilities will diminish whereas the need for doing it will still continue to grow thank you can i ask you something on a more personal note we see the rise of populism in europe we have seen it in greece we have seen it in other countries in france in india even in italy and and populists on the left and on the right have a common team in europe right now they they go against financiers they say banks hedge funds essentially people like you are to blame for the current crisis your name uh is in in the memory of many in britain and even in italy as the person who who played an important part in 1992 in their unraveling of the pound and of the liver so some people consider you on the side of these people who are actually to blame for the crisis on the other hand uh i see your commitment personal commitment to solve this crisis intellectually politically and and your charity your commitment to a new economic thinking so i'm i'm trying to interpret what people have in their minds and i would ask you are you good or evil well you know i i i'm not holier than thou because that's a very difficult uh uh standard to live up to but i certainly have exactly because of my history and my childhood experiences i am passionately devoted to the european union as a fantastic object um and and uh i'm trying to help uh to uh bring this about uh now uh you know the uh you mentioned the um rise of populism and i have a lot of understanding and sympathy for people who are confused and angry and i do blame the the authorities not for making mistakes because we all make mistakes but for not recognizing their mistakes when when it's not only you know outside observers like me who are talking about it but the facts are showing that the policies that they are uh advocating are are not working uh so i i i think the responsibility is with the uh with the the primary responsibility is with the authorities now hedge funds and financial markets can influence the course of events what has really happened by when the member countries transferred their right to print money to the ecb is that they became like third world countries that are not in control of the currency which they have in which they their debts are denominated and therefore they are subject to speculative attack and and you can't uh uh uh uh let's say you can you you can you can blame the hedge funds for for doing it but yeah you realistically can't you can't really expect them not to do it when they have when they see an opportunity uh to make money because their job is not to support the system uh but to but to make money that's what that's what their investors expect from them that's their fiduciary duty in in in a sense so um the authorities and the the are so the deflecting blame uh from themselves by blaming the uh the um hedge funds but it's like shooting the messenger but they are the people who may who create the message so i would say that theirs is the primary responsibility thank you very much we still have some time to take a few questions from the public so whoever wants to ask a question please raise his overall good evening mr sodos good evening mr soldiers in august 1998 i bought one of your books the crisis of global capitalism and two months later there was the the situation of russian default these were terrible times it seems that the world was ending but then there was a slight recovery slow recovery and we moved from a depression to the 2000 technology bubble the emotional impact of markets on uh the people is so strong that the volatility becomes the very spirit with which we now speak to each other it now seems that the euro is over you say that there's a three-month window of opportunity um that's a way of feeling a little bit less pessimistic so basically my question is do you think that the crisis will be over reasonably soon within this three-month wind of opportunity i didn't couldn't hear the beginning of the question but uh um to want to answer the question uh unfortunately i do not this is why i'm trying to ring the alarm bell that this is the last opportunity to get ahead of the curve and to bring about or create a significant uh uh institutional or structural reforms that will provide convincing evidence for the markets that the euro is here to stay and i in particular i don't want to go into details because that would take another hour but you need to create a financial authority a european financial authority which because the the owners of the european central bank the the member states can do what the european central bank cannot do they can extend they can take over the the uh uh solvency risk that really does not uh should not uh uh be uh at the risk of the european central bank and if they created a european financial authority then the solvency risk would practically disappear so so by doing it they would actually member states in germany led by germany would actually eliminate all the risks that they are currently so afraid of that's what is needed good morning are you optimistic about the italian government the future of italy guided by professor monti now is left are you optimistic about the future of italy that is now the gold the government is now led by mahmoud look i i think that that the the munti government has embarked on a policy that was very promising and it also had considerable support from the public but it also needs support from the european community because without it no progress can be made and the the public support evaporates which makes it more difficult for him to carry out the program so he he embarked on structural reforms and those are necessary but not sufficient you also need structural reforms in the euro because that's what's that's that's where there are some very serious flaws and if the european union or the euro countries don't make those moves monty government alone will lose momentum and will not be able to carry out the reforms in which it on which it is currently embarked and already the the labor market reforms have been considerably diluted if there were a european financial authority let's say that would take over uh uh uh the uh much of the solvency risk in italian bonds so italy could uh refinance its debt uh at the rate which is closer to what let's germany is paying then monty could could actually carry out those reforms i think we have time for perhaps one more question you said that austerity policies are just the wrong way to go the wrong way of trying to solve the crisis of sovereign debts krookman yesterday on the new york times said that this is simply an attempt of the conservative elite to destroy entirely the european wealth of state would you agree on that they they they say that the crisis is just an excuse whether you agree with speaker please speak up because the question is whether you agree with mr krugman that says that austerity policies are an extreme attempt by conservatives to destroy the welfare state in europe and not a way to save the system to make the system safer and sounder no i don't think that that that i agree with that because i think structural reforms are in fact necessary individual in individual countries because conditions have deteriorated and the welfare state cannot be maintained quite in the in the form in which it it was uh flourishing uh in past years so there has to be some fiscal uh constraints but they are not they are necessary but not sufficient and you need a needs to be coupled i mean you could you can you could live with the fiscal compact if it was uh uh uh coupled with a growth compact that would actually be substantial enough to regenerate growth because then you could grow your way out of of the death problem so that is the the missing link and without it the the efforts at a structural reforms within individual countries are going to run out of steam mr source thank you very very much for this it was extremely interesting and people i think uh followed with great deal of attention so we thank you for this and i think uh in case we maybe if we have time for a very last question i would ask you uh i will take advantage of my role for asking you this question and it's about germany it's it is about germany uh germany reversed uh its historical position about europe it was very much in favor of political integration of a european federation at the time of maastricht and then france stopped it and probably the french regret it very much today they would like to have had this federation now today the germans seem to be the least keen in europe to further political integration at least this is the perception people have in southern europe and also in france how would you explain this uh incredible shift well i actually tried to explain it in my in in my uh speech uh that all right that you know up to german unification germany was in the forefront of integration now they have taken the cost of german reunification and they don't want to become the deep pocket for the for the rest of europe uh and i can sympathize with that uh position but uh they have to they have to find a way to reward the countries that are ready to er to abide by the fiscal compact and introduce structural reforms by giving them some concessions some guarantees and they could deal with the moral hazard then because withdrawing those guarantees would be as a very potent punishment that would stop any country from doing it so that that could work where you would have a certain symmetry between let's say incentives or guarantees that would come first and and punishments or withdrawal of guarantees that would come afterwards that would stop the fiscal compact from pushing uh europe into this deflationary spiral it requires some imagination but i am convinced that that would work uh so i just hope that that germany will actually see it but the reason that i'm sort of arguing publicly is because i just come from germany and i see no signs of this happening in germany and that that's why i'm ringing the alarm bell thank you very much you