good morning where is the global economy now and where is it going this is the title of the session uh today and how does the european crisis effect on the perspectives of the global recovery especially what should europe do to address its main problems which are very very evident that means the consequences of the fiscal adjustments or the very hard physical adjustments in some cases its financial instability the fragility of its banking system and of its common new currency the euro we will speak about this today with the nematjafik minus but we will also speak about the glasses through which this crisis is seen and analyzed because minuschafi comes from the imf i will present her in one minute and the imf the international monetary fund is the first important international institutions which adopted a new pair of glasses let's say to analyze the economy and to analyze the crisis and the imf questioned in the last three years some pillars of the economic theory and analysis like the fiscal multipliers or even the freedom of capital flows and more recently it came out with a paper maybe we can talk about it about how to restructure public debt which is a main also topic which we discuss in europe now so let me introduce our discussion today i'm very very pleased to introduce you um to minus shafiq she is a deputy managing director of the international monetary fund she was born in egypt and she previously previously served as a permanent secretary of the uk's department for international development the dfid and she has been the the youngest ever vice president of the world bank where she started to to work some years ago when she was only 36 years old i would like also to mention and then i will i will let her speak of course that she was named in 200 2009 the woman of the year for global leadership and global diversity thank you thank you i think i'm going to okay good morning can you hear me in the back yeah good um first i wanted to say how delighted i am to be here this morning um you know people the people i work with are often lamenting the fact that there isn't enough public discourse about the big issues of the day and particularly some of the big economic challenges that the world faces and i just wanted to congratulate the people of trento and the organizers of this event for creating exactly that an opportunity for experts the public the media to talk about the big issues that we face and i um i was just saying to one of the organizers you need to globalize this event and there should be a trento in every country so and i would be happy to attend all of them so what i thought i'd do this morning is speak very briefly about three things first what are the big long-term global issues globe global trends that are shaping our world today second how what is what is the current state of the crisis particularly in in europe and third how do we manage this crisis in light of these wider global trends so let me start with four uh four trends that i'm going to highlight and some of them will be most of them will be pretty familiar the first is obviously the changing balance of economic power in the world today we all know that economic and political power is moving from west to east and from north to south if you look at this chart which shows where gdp shares are today and where they'll be in 2030 which is really very very near and what this reflects is the huge progress that asia has made in recent years over the last 30 years asia's share of world gdp has gone from 10 to 30 percent living standards have increased six-fold and a half a billion people have lifted themselves out of poverty that's a phenomenal achievement uh in historical standards so by 2030 the economy of india will be roughly the same size as the european union and the economy of china will be more than double the size of the european union so that's the first big global trend the other big global trend is demographics this shows you what's happening to population growth rates now for the next until 2025 for 25 years thereafter and for the remainder of the century we all know the story about europe aging in in other parts of the world though of course the story is very different in the middle east and north africa 60 percent of the population is below the age of 30. in sub-saharan africa 70 percent of the population is below the age of 30. figure that really strikes me by 2025 2025 which is 12 years away very soon two-thirds of the world's population will be asian i'll say that again two-thirds of the world will be asian one-third will be non-asian and but of course aging will also come to asia and so in the second half of the century you see that it's not just europe that's aging and going through demographic decline aging also will come to asia and to latin america in large part because of china's one child policy so that's the second big global trend let me turn to the issue of climate we all know that the climate has been very weird lately 2012 was the hottest year uh one of the hottest years on record the projections about what's going to happen to global temperatures are very wide and there's a lot of uncertainty but the impact of even a relatively small temperature change of two and a half degrees celsius in terms of the impact on economics is pretty significant on the left you see the impact in terms of percent loss in gdp and you see for countries like india and for africa one is seeing very big four five six percent loss of gdp from climate change the last and the fourth theme i'll talk about is income distribution this data is for the united states it shows how what share of national income goes to labor versus capital and you see a very sharp decline from having had about two-thirds of national income 67 percent go to labor has dropped to about 50 below 58 57 58 this is a product of many things globalization technology policy choices that have been made but it's a phenomenon that we're seeing in many parts of the world in europe in china in africa someone told me that trento is uh is the democratic davos well even in undemocratic davos when people were asked participants were asked to vote what was the number one issue that they were worried about it was inequality it's interesting and a recent pew poll in europe showed that particularly in southern europe people were worried that economic systems were highly unfair and the prospects for their own children were bleak and they thought their children would be worse off than they were so inequality huge huge issue so let me turn to my second theme which is where are we in the crisis where are we today and where is the world economy today if you look at financial markets they're booming financial markets are looking quite uh quite robust stock markets in the u.s in europe and asia are rising to levels that we haven't seen since the crisis in 2008 and spreads for european sovereigns have come down pretty considerably but what we see when you look beneath that is actually when you look at the real economy you see a much more complicated story on the real economy side we see what we're calling a three-speed recovery you have those parts of the world which are growing at high speed mainly the emerging markets in low-income countries and then you have the economies that are growing at medium speed essentially the us which is now starting to see some recovery will grow by about 1.9 percent this year and somewhere near possibly three percent next year and then you have the parts of the world that are growing at a slow speed and that's essentially europe and japan underlying this three-speed recovery is also the fact that the real economies are growing very slowly and have generated a huge unemployment crisis in many parts of the world this graph on the left shows you what unemployment looks like in europe and the middle east where the problem is most acute compared to the rest of the world and while the rest of the world is facing unemployment rates of five six percent in europe and the middle east we're seeing rates that are double that in italy for example we recently had results which showed an unemployment level of 12 and for young people about 38 really unacceptably high levels of unemployment now the research is very clear how do you get employment up economies have to grow you can do some micro things to alter employment levels but the real solution to unemployment is economic growth and in europe growth is very held back by the financial fragmentation that we're seeing across the eurozone this is an illustration of that fragmentation we know the ecb is keeping interest rates very low to try and encourage the growth of credit and the economic recovery but that low interest rate for corporates in france and germany is translating into borrowing rates of four percent but for countries like italy and spain firms are facing much higher rates of five six percent and if you looked at portugal and greece you'd see even higher rates and if you looked at small and medium enterprises in those countries you'd see that they were facing borrowing rates that were far higher so a huge problem in terms of getting credit flowing in the economy getting firms able to invest and create jobs now it's important to remember that we've actually done quite a lot i mean i know that um europe bashing has become fashionable but it's important to look back and see all the things that have happened in europe sometimes a bit inelegantly probably too many late-night summits with bleary-eyed ministers emerging making somewhat coherent statements but in the end at every critical juncture some key decisions were made and if you go back you can see that both at the pan-european level and at the national level a whole variety of good decisions were made and i'll the one i would highlight really is having been a key turning point was last summer when super mario draghi uh announced the so-called omt the outright monetary transmission program where he said we will do whatever it takes to save the euro and that took away the the fear of imminent euro breakup and calmed markets down considerably but despite the fact that quite a lot has been done there's still a long way to go and there are three areas that i'd highlight that are necessary to to to to solve the euro crisis the first is banking union and again there are three key elements the single supervisory mechanism bringing all of the key european banks under the supervision of the ecb the single resolution authority so that when a bank fails in some part of europe that the burden of saving that bank doesn't fall on the sovereign of one country and so it would have to be supported by a common backstop a common pool of funds to bail out that bank and then thirdly a common safety net so that deposits across the euro zone are equally safe and people feel confident leaving their deposits anywhere in the zone so banking union is still a key missing piece of the architecture the other key missing piece of the architecture is fiscal union in most monetary unions in fact in all monetary unions there it's normal that there are periods when one part of the union is suffering a difficult economic shock relative to others and in most unions you find some way to cushion those shocks either through a central budget in the european case it's quite small the central budget about one percent of european gdp in most monetary unions you seek something between five and fifteen percent of gdp uh and you find ways to cushion the risks so that for example if unemployment goes up in one part of the union you have a central pool to pay that unemployment insurance until the cycle has passed so it's a very political set of choices around what a fiscal union would look like in europe that's up to the politicians to decide but there are many models out there i would be happy to talk about them about how different federations organize cushioning and sharing risks across an economic union and then the third area where we need to complete the architecture so banking union fiscal union and then structural reforms for growth and i'll say a little bit more about that in a moment but just to illustrate the kind of structural reforms that one would want to see to to get a recovery in europe here's an example for italy now we know there's a long list of reforms that italy could do to improve the productivity of the economy reforms of product markets labor markets and so on we did some initial estimates about what would the impact on italian growth be if these measures were taken and of course what you find is that any one measure changing the way the labor market works changing the hours that shops can be open changing the way some of the professions are regulated has a very modest impact but if you accumulate them across all of them and accumulate them over time over five years you can see a gain in italy's gdp of between five or six percent which for an economy that has seen almost no growth in the last decade is a huge impact so the payoff to structural reforms can be significant but it takes time and you have to do a lot of them any particular one doesn't achieve very much so let me come to my final theme which is how do we cope with the current crisis in light of those long-term global trends that i mentioned at the beginning and now i can put away my clicker the shift in global economic power there is a bit of a how can i put it a little bit of a kind of doomsday scenario when people talk about this shift in global economic power you know the west is finished this is the decline of the advanced economies etc etc i don't believe that one can't think of the global economy as a zero-sum game these gains in per cap in income in particularly in asia also create huge opportunities the biggest risk today for europe is the risk of stagnation the risk that it won't be possible to pull together these reforms at the national and the european level to see a recovery in growth and one has seen what that does to a society if you look at what's happened to japan over the last 20 years where there has been almost no growth in an aging society so what does europe need for the period ahead we need a period in which monetary fiscal and structural policies need to be completely focused on restoring growth in europe europe's relative economic size in the world economy may decline but in absolute terms you can still be much better off and if you think in per capita terms you can be much much better off so i think that's possible it can be done but it will require an ambitious set of reforms at both the national and the european level how do you cope with the changing demographics that i mentioned in the beginning aging societies and so on well i'm afraid we've all reconciled ourselves to the fact that we're going to be working much longer that you know that retirement when you're 60 kind of thing that we'd all been hoping for is probably not going to happen so we'll all have to work a little bit longer and the other key key way of coping with this demographic challenge is the role of women i know today is the day the anniversary of when women first voted in italy so congratulations to all of you and it's a good day to remind ourselves that italian women are an incredibly underutilized resource in this country and across many countries in southern europe highly educated highly skilled but one of the lowest labor force participation rates in the oecd economies why is that inadequate child care not affordable not high quality a tax system that doesn't for second earners that doesn't necessarily encourage uh women to join the labor force and i hate to say it italian men who have to help a little bit more at home but if those things could change think how much more productive italy could be and many other countries in southern europe and japan for that matter because japan has an identical demographic and labor force labor force pattern now what about inequality um inequality is a huge economic and political problem we've done some recent research in the imf which shows that countries that are highly unequal have a hard time sustaining growth over the medium term so huge economic problem but also a huge political problem and we've seen it in countries like greece where people felt that the burden of economic adjustment and the crisis has not been born fairly and in particular higher income people who haven't been paying their tax so the inequality issue is is a huge challenge which does need to be addressed if we're going to get out of this recovery and sustain the progress and then finally on the issues like climate change and the pan-eu issues like banking and fiscal union the theme of this conference in some ways is very appropriate to those challenges that sovereignty is is being challenged and i fear that by definition the nature of this interdependent world in which we live will mean that we will have to sacrifice sovereignty all of us we need we need increased cooperation at the eu level to complete the architecture of the monetary union and to make it work we need sacrifices of sovereignty at the global level to cope with problems like climate change to better regulate financial systems and banks which cross borders to reinvigorate world trade and to address address problems like climate which by definition need need global global interdependence i was trying to think of a good metaphor to describe this this world this increasingly globalized world which requires uh requires more cooperation in order to uh to uh to to manage its affairs and i was reminded of the poem by a 16th century english poet called john dunn which uh if you recall said no man is an island entire of itself every man is a piece of the continent a part of the main and if a clod be washed away by the sea europe is the loss it's interesting he mentioned europe any man's death diminishes me because i am involved in mankind and therefore never send to know for whom the bell tolls it tolls for thee and that is the world even though this was in the 16th century that he wrote this that we live in more than ever so none of us is an island and sovereignty will have to be sacrificed a bit in order to solve these challenges but uh but there are some advantages to not being an island and being together and i think those advantages exceed the costs of the sacrifices of sovereignty so i will stop there and look forward to tonia's i'm sure very challenging questions and yours thank you thank you very much well i'll go back to europe where we're going through a very severe recession and especially in italy and i will go back to the question i mentioned before of the fiscal multipliers because this is not only a question of interpreting uh the reality or the economics and of revising the outlooks continuously in a very hard way this is also about politics because this for example explains why the managing director of the imf christine lagarde was so i was the first to say well for greece there will be we will have to restructure the debt no it won't be enough to make fiscal adjustments to go on with this very hard austerity so i think this is a a wonderful opportunity to speak about this question of the fiscal multipliers and of the uh with you uh minus and um even maybe to um to comment on the last developments because someone is saying well greece is back on track already and someone else is saying no it will need another restructuring of the debt uh what where is the truth okay maybe i'll start just by giving a bit of background on this fiscal multipliers debate because it was a very hot debate in economic circles but i'm not sure uh the rest of the world followed it as much as we did but we had a an analysis that appeared about nine months ago which looked at what happened to economies when they uh contract their fiscal policy and normally in the imf we kind of have a rule of thumb if you cut a fiscal deficit by one percent of gdp the economy will decline by about 0.5 percent of gdp so our multiplier our rule of thumb multiplier was about 0.5 but what we found is that in some countries in one or two years where there was a so-called liquidity trap and interest rates were caught at the really at the lower bound of what's possible that the multipliers were actually far higher so in a country like greece in 2010-11 the multiplier was much higher than 0.5 so when the government reduced the budget deficit the impact on growth was far more negative than we had anticipated and it's important to emphasize that this applies to a few countries it doesn't apply to emerging markets the research shows that it doesn't apply it didn't apply later it only applied in those couple of years so it's a it's a it's a limited result but it's also a very strong result i think with that when that result emerged from our research uh we we immediately started to adjust our programs in many of these countries so we argued that greece that spain that portugal needed more time that the so-called austerity policies needed to be phased in more gradually because the impact on growth was so severe that we were actually in a situation where you were fiscally adjusting growth was declining and debt was actually going up because the contraction was so severe now in terms of the the issues around uh public debt you know i think what we have said uh in countries like greece is that you know economics is uh there's about as much art in it as there is science and you know sometimes people call us the economic doctors and we come and we deliver this nasty medicine that countries have to take but you know just like with real medicine different bodies react differently to diff to the same medicine and so what we have to see is what happens to the greek economy over the months to come and if growth begins to recover but if it doesn't uh i think we have to look again at how sustainable the debt is in greece and we will continue to monitor it and see whether it can sustain its current debt levels there is also another country with a big debt and it's italy and um i said before that you came up with this paper about um deb restructuring i mean uh in in in the end the the the first step restructuring was a success in greece now so it was uh um some say would be a disaster it wasn't a disaster at all do you think that i mean we're trying to get back on track also and to come out a very hard recession one of the most severe recessions in europe now we have a primary surplus a very generous one we have a good deficit we came out of the um you know procedure the european procedure of uh excessive deficit so we are um but still the debt is rising so what do you think we should do in italy you mentioned the reforms to uh but do you think we will have to fix more uh sooner or later the problem with a restructuring of a haircut um you know i think um i think italy's a very different situation than the situation that we have in greece um you know in greece we did a private sector debt restructuring and there was a haircut on private creditors um this recent paper that you mentioned that looked at some of the recent experience with debt restructuring i think argues that uh debt restructuring usually is too little too late that's the main problem it comes too late and if you do it earlier you can get an economic recovery going much more much more quickly with much less suffering but the argument hinges on debt being so big that investors hold back on their investments because they're worried that eventually they're going to be expropriated because there's this big debt overhang hanging over the economy and if you know if you think about the current situation in italy the reason people aren't investing isn't really because of the debt overhang the reason people aren't investing are because of all of these structural problems in the economy that that i mentioned briefly earlier so i guess our view is that you know italy's achieved quite a lot on the fiscal side and the fiscal adjustment has been dramatic and impressive uh and we don't think there needs to be more fiscal effort but we also don't think now is the time to loosen up fiscal policy we think it should be maintained at the current level we do think that tax is pretty high the tax burden in italy is pretty high and it would be desirable to shift the balance toward reducing spending a bit more and trying to reduce some of the tax burden but really the the big payoff in italy will come from structural reforms and to restore growth and i think that will be far more important than thinking about debt restructuring in the last years we have been we have seen very often the imf and its managing director christine lagarde um well quarrelling is a bit hard but she was often in control to to anger miracle now um do you think and many uh there are many fears in the markets that europe may split one day you know in a sort of uh core europe and core euro and um in the southern euro last year the super mario draghi as you as you called him um well he reversed the process which was already going on to split europe and now we are in a financial in a different situation you mentioned it also uh probably because japan also helps but do you think that this there is still a danger that we have a northern and the southern europe one day you know i think um the editor of the economist i was at an event with him and he once said you know the the anglo-saxon world has consistently underestimated the determination of european politicians to keep europe together and to keep the eurozone together i think ultimately it's a political decision and i've seen no evidence of a political willingness to to to do anything but keep the eurozone together you know even if you look at polling today in greece where you would think dissatisfaction with the euro would be very high on balance public opinion is such that people want to stay in the euro and i think that uh you know last summer when uh when angela merkel made it clear that greece was going to stay in and that europe would do what it could to keep greece in the eurozone i think that was a hugely important signal to markets and actually if you look at what happened to spreads for sovereigns in europe at that point they came down even further than when omt was announced so it showed how uh how politically important that signal was so you know i think it's a political decision i think the the imf's view is though is that if you've made that political decision you can't leave the monetary union incomplete you have to finish the pieces that are missing the banking union the fiscal union you can't you know build this building and leave out these these critical pillars because otherwise it will collapse so i think that's really where the debate is today um everybody knows that the imf is part of the troika so-called and someone says someone is saying well look they have the debate about the fiscal multipliers they say that these countries need more time they say that they need maybe sometimes a structuring of the debt but when they are in these countries no they behave differently they're very hard they go through with the ecb and the european commission uh they torture these countries you know as if there were two positions in the imf a sort of uh position of well olivier blanchard because it's with the chief economists of the imf that these changes came this new pair of glasses no let's say uh and there's a part of the imf who doesn't agree is this true yeah i think um i think the imf has actually been pretty consistent throughout this crisis the the thing that happens is that people who disagree with the imf use uh imply that there are disagreements within the imf to make their points um so i think you know our view has been uh very clear from the beginning that there are three different types of countries affected by this crisis there's one group who are under huge market pressure who have no alternative but to adjust their budgets and to fiscally consolidate and those are countries like greece and portugal for whom there is really no alternative until the market pressure abates the second group of countries is countries that can afford to let their automatic stabilizers take effect the automatic stabilizers are things like unemployment insurance and other things that fluctuate with the cycle and may increase deficits or not and there's a group of countries in the middle who fit into that category and then there's a third group of countries that actually have some fiscal space and can afford to spend a little bit more in the crisis and that's a very small group of countries unfortunately and we've kind of said that throughout throughout the crisis um so i think we've been consistent now different people who have different views use that somewhat complicated message of three different groups of countries to imply to to bolster whatever arguments they have about austerity versus growth but you know frankly i think this debate about uh about austerity is getting a little bit stale i think even you know within the troika and i think it's probably no secret that you know within the troika we had lots of discussions about this about this issue uh you know the commission now agrees that fiscal deficit targets should not be done kept in nominal terms you know it's not three percent or die uh we should think in structural terms and so we have been pushing for structural fiscal targets and that means targets that you know you don't stick to a fixed number you take the policy measures to achieve a number but if the economy goes a bit more slowly than we expected and the deficit comes out a bit bigger than we expected that's okay you you make up for it later and so i think the acceptance that structural fiscal targets are the way forward has now become the consensus view which i think is correct and something i think that the imf has advocated really since the beginning of the crisis two days two days ago we interviewed mario monte in civilized they wrote a book about and there was a big question about troika because um said uh there is no um say um in the in the in the treaties there's nothing about troika as it is as if it was a sort of invention of of the crisis and no legitimacy of the troika and she said i'm sure that one day the troika will be only the european commission because the imf and the ecb will get out will step out do you think this is possible you know i think the troika was a product of the crisis um you know normally when the imf works with a country in crisis it's a bilateral relationship the imf works with the country and we negotiate a program and we agree on what they're going to do in order to get out of the crisis and so it's a it's a pretty simple process um in europe the troika was necessary for two reasons one most country well the countries in the eurozone don't have their own single central bank we had to bring the ecb in because they set monetary policy for the zone and so you couldn't have a discussion about the macroeconomic strategy without the ecb present and then the commission was became the uh the representative of the other member states who were in the end providing most of the financing in these programs so if you look at the greece program or the portugal program the imf's share of the total financing for these countries is is a minority share you know it varies by program but it's you know between you know one-third and in some cases just one-tenth in some of these in the recent cypriot program for example so if the major financiers i mean the major financiers will of course demand a role at the table you know i know that there was uh much debate in europe about whether the imf should be brought in to help manage the crisis and i think those who are closest to the actual management of the crisis will say uh we'll say two things one i think i can quote this i think mario monti once said you know europe was not designed for crisis europe was only designed for good times so the mechanisms for dealing with negative shocks with bank failures with sovereign debt crisis were not there they were never designed and so you know that timeline i showed of all the things that have been done in the last year and a half were europe's scrambling to put in place the mechanisms for handling bad times and frankly bad times is what we do with the imf you know that's our core business and so you know we have frankly for better or worse unparalleled experience in managing economic crises and i think europe felt that if you're in the middle of a crisis you know you want someone who's done this before so i think we brought that expertise on crisis management and frankly i think the other thing we brought which was very valuable is complete objectivity we we don't have skin in the game in the sense that we're not a member state we are there to provide objective economic analysis of how we see the numbers and how we see the outcomes and what our experience work managing other crises in other parts of the world tells us and i think it's an advantage in this situation to have someone who's a sort of neutral party i think it's no secret that you know enforcing rules in a club of 17 is quite difficult you know the eurozone is a club of 17 and member states have a very hard time enforcing rules on each other which is what we learned from maastricht and the fiscal compact and so on the imf is a club of 188 countries and it's much easier to enforce rules in a big club so i think that's another very important thing that we added to to to the crisis management was that the objectivity that comes from being a very big club but during the crisis some nervousness came out uh in the imf among the emerging countries for example so another question of course is um how long will you you paid a quote of the of the bailouts i mean which went a little bit smaller in the case of cyprus so this was for someone the sign that the imf is facing um big pressures from inside to say let's stop with the support of europe is this true well i think it is fair to say that there was we were criticized for uh the european bailouts because there was a view that europe is a very rich continent europe can afford to bail out itself it doesn't need financing from the rest of the world but and it's true that a significant part of the imf's exposure now is to europe most of our largest programs are in the eurozone but i think uh you know the fact that europe is so big and the fact that many of these countries became systemically important for the world economy and you know our our our job one at the imf is to preserve uh the soundness of the international financial system and to support the world economy and if we weren't in these programs and didn't help solve them there was a real risk that the world economy would be thrown into another massive recession so i think there's a very clear case for why we we were involved but i think you will see over time a natural evolution whereby as europe builds its own crisis management mechanisms the european stability mechanism the the move toward a single a single regulator for the banks eventually the creation of a common bank resolution framework i think as you see those that completion of the european architecture being put into place there will be less need for imf financing and i think i hope we can continue to contribute to economic recovery in europe through our economic advice uh and objectivity that that brings but i think it is the natural evolution of things that the the need for our financing will diminish over time um i would like to come back to um to the global the world um but it's about europe again uh one of the one of the we often forget that that the imf is also much about currencies um and now there is a discussion about currency war no sort of uh well first i would like to know what you think about this incredible uh case of japan because i mean most of the of the finance financial world is now um looking at japan that's one of the reasons why we are a little bit stiller now um there's a little bit more silence on europe um what is this japanese experiment about in your opinion and is it uh is it threatening the euro because i mean now the euro is like in between two very aggressive uh um monetary political politic policies it's uh that of bank of japan and that of the fed no um do you think this is uh dangerous for euro and on for for the ecb which is much more conservative in his uh monetary policy i mean i think we think that this talk of currency war is overblown frankly um and i think if you look at the specific case of of japan we've just done our annual assessment of the japanese economy what we call our article for and i think what we conclude in that is that for most countries in the world including europe the possibility that japan recovers and starts to grow again the benefit of that far outweighs any negative effect from the japanese yen depreciating there are a small number of countries maybe like korea who compete directly in certain markets with japan who might see some negative effects but for most countries in the world getting japan to grow again is to every in everyone's interest i think the other thing we think about japan is that the current you know aggressive monetary policy is positive but it is no substitute for dealing with japan's fiscal and structural problems which also have to be addressed so you know as always monetary policy can only do so much you have to complement it with other measures to get the recovery so you can get a a temporary boost in growth but in order for that to last japan needs to do some more um a last question on one of your fields of expertise which is the middle east which is happening what is happening there because i mean there was much much attention and much i don't know hope for these countries and what is happening now what do you think will happen in the future and then maybe we can open to the audience after yes i mean i guess you know after every spring there's a hot summer and i think we're in the hot summer in the arab world um you know on the economic side the the numbers don't look very good uh they're all sort of moving in the wrong direction uh deficits are up unemployment is actually there are now more than a million more people unemployed than when the arab spring happened in the region debt numbers are up reserves are down investment is down tourism is down so the overall macro numbers are not looking they're not looking great um but uh you know i think we looked at similar crisis similar transitions in other parts of the world uh you know we looked at what happened in eastern europe if you look at what happened in south africa with the fall of apartheid so we looked at a bunch of other countries to try and understand the path of these transitions and what we found is that in most cases what i've just described all these numbers going in the wrong direction is pretty typical and it lasts for about four or five years until economies restructure and change and evolve so in some sense this is normal i think in the region it's particularly difficult because they're trying to have a political transition and an economic transition at the same time and rewriting constitutions and having lots of elections and as you well know those political processes always create economic uncertainty you know i think the medium-term fundamentals are quite compelling the demographics of the region the strategic location the economic potential is there but i think there's a few tough years ahead now many of the countries have come to the imf for support we now have programs with morocco we're about to agree with tunisia we have a program with jordan with yemen so we're actively trying to support that transition and i think the key thing is for the neighbors and partners of the region to stay focused on the long term in terms of where we want to get to which are countries that are more democratic and economically efficient and provide them with financial support so that that transition goes relatively smoothly rather than explosively thank you um are there some questions we take uh three and then first opportunity to answer maybe no okay um so this is italy can hear testing testing okay thank you so this is italy and we're celebrating the festival of economics and i'd like to re remind that among the different papers that led the questioning of multipliers there's a study of three italian researchers bottini caligari and melina so italy has contributed so in our country we contributed the knowledge so they are not in italy they went to work for the international monetary fund but apart from that there's also a question there the internationalization processes are not irreversible if we look at the world today is there a risk to go backwards questioning globalization is there a risk there for protectionism here was yes yes here thank you this is back to inequality we are used to studying equality and study inequality between unskilled and skilled labor between labor and capital but there is another kind of inequality which is very dear to me to my daily life in italy that is the inequality between the young and the old the old people are richer and the young people are poorer so how do you think this kind of specific inequality can affect the growth issue in italy and what could be the policies to tackle it third question and then yes here i have two questions you talked very political especially when you were referring to greece over the past three years there are people in the u.s who had anticipated that the policies by the troika were basically similar to committing suicide you talked political um in a couple of opportunities you were referring to greece most specifically over the past three years there are those in america of the canadian school stating that the policies adopted by the choice are suicidal for greece but nobody commented on that so we know what the situation is for greece there are those that still refer to the problems of greece and what about the arab spring i i understand that they are going through a hot summer but this hot summer is closely related also to the upsurge of fundamentalism because wherever there was an arab spring there was a strong support also fundamentalists and this is true in yemen in tunisia and elsewhere as for jordan well that is an exception and morocco as well so again you uh talked political words very good questions let me try and do them a little bit of justice on the risks on the risks to globalization uh and and a sort of backlash i think those risks are very real very real so far if you look at things say like protectionism uh in trade there has actually been surprisingly little protectionism you know pascal me the head of the wto periodically comes out and gives his assessment on where we are and of course we're nowhere on the doha trade round that's not good but in terms of the wto's monitoring of protectionist measures taken by different countries since the crisis it's actually been relatively modest so that's a good sign and you know every time the g20 meets all the leaders recommit themselves to resisting protectionism but i think my microphone has died oh there it is i think it got back okay good thank you um so i think there is a risk but i do think that unless we find better ways to manage globalization the risk of that backlash will always be there and the ways the better ways to manage globalization are things like multilateral organizations like the imf who try and you know look at the collective interests and the spillovers and the impact of different policies on the world through things like you know the negotiations on climate change through international banking regulations and the trade negotiations all of those things that try and make sure that the way globalization works is fair are essential underpinnings to sustaining support for it on inequality uh i think you make a very important point on the inequities between the young and the old you know the the levels of youth unemployment in europe and the middle east today are intolerable uh you know there's 200 million people in the world looking for work about 70 million of those are young people and we know that the impact of episodes of youth unemployment are very long lasting if you don't get into work early in life you have lower life expectancy higher risk of suicide crime rates go up i mean the the social consequences are huge and of course the economic consequences are huge so it is a huge problem part of the problem particularly in southern europe is this phenomenon of dual labor markets where there's one part of the labor market which has high levels of employment protection generous pensions high severance payments very difficult to fire workers and so on and another part of the labor market which is where all the young people are which is informal temporary contracts high turnover very little employment protection we think trying to get some convergence in those to have one labor market would be hugely beneficial there are for example and you asked for specifics uh you know there are proposals for example to have more flexible contracts for new workers and to have employment protection increase with tenure so you start with relatively lower levels of employment protection by employment protection i mean you know firing severances redundancy payments etc etc and so that it increases over time but at least young workers then have an entree into the labor market early in their career so that would be the kind of thing that i think would be very welcome you know i'm told in many countries if you go to some place like spain for example which has now unemployment has reached 26 percent for all workers and for young people it's you know almost half of young people are unemployed you know i'm told the way it works now is that you know it's the grandparents who are keeping the families alive through their pensions and the sort of family solidarity which is a wonderful thing but in the end uh those young people have to actually be given economic opportunities to contribute rather than being dependents of their grandparents and so that social contract between the old and the young does need to be renegotiated and then on the uh on the question on greece and uh the arab spring i mean i think on greece greece had a huge economic adjustment to make huge and there were many aspects of the greek economy which were clearly unsustainable both the fis many fiscal aspects the early retirement ages the level of public spending the level of public employment and also huge issues of competitiveness and much of the boom years in europe when greece was able to borrow at very low rates much of that money went into consumption and real estate and unproductive activities and then it became unsustainable and i think you know i think in the end the greek political system chose to stay in europe and that was a clear choice if you look at the election outcomes the parties that supported remaining in europe won most of the votes and so if greece is to stay in europe some of those unsustainable policies have to be addressed and i you know it's not for the imf to make those political decisions that's up to the citizens of of greece but then what we have to honestly say is okay if you want to stay in europe these are the consequences in terms of your economic policy and you know i you know we have to see what happens there at least the situation has stabilized and there are some signs of recovery in the markets now and one has to hope that that will continue and then uh the arab spring uh the question was really on the the role of fundamentalists i mean i think it's a bit more complicated than that because the arab spring wasn't really driven by the fundamentalist movement but they were the ones who were organized they were the ones who had a polit you know they had they had you know they had people on the ground they had they had an ability to mobilize and organize and bring out the vote and i think it's not surprising that they've done relatively well in these early elections but i think this is a dynamic process and we will see how other political movements organize in in the years ahead uh we take some three questions more here about the problem that we have in europe about unemployment and borrowing costs for companies in the periphery of the eurozone do you think would be good for europe to solve these problems to have the ecb doing even more for example buying assets or loan banking non-performing loans or things like this to help a credit flow to the real economy thank you second question was out there carol weber i'm coming from austria so we don't have a real unemployment problem here but my question is in the interest of the unemployed people in southern europe so i questioned the economic theories of the imf i really don't understand why why there is no reference to the paradigms which have been developed in the 30s 1930s in the great depression in my opinion greece portugal and spain are in a debt debt deflation situation and overall gdp is just money times velocity of money and i never see analysis of of this kind maybe not enough money or not enough velocity of money is in this in these systems in the greek economy in the spanish or portuguese economy uh to produce enough uh gdp so i questioned the approach of the of the reforms you addressed which might also be helpful of course but at the basic i would like to address the analysis which has been done by by marina echols in in february of 1933 where where this these concepts of money and velocity of money were put forward to address the prosavity of the great depression thank you third question there is one out there thank you wow so we have heard about some important issues one of these being the north south gabe worldwide the other one being linked to the fact that we have an age gap a gap between the old and the young today we have problems of democracy when democracy is supported it should also contribute to the development into the economic growth therefore allowing millions of individuals to come out of poverty but i've heard also two words these are structural reforms and i've always heard about them at every meeting everybody claims we need structural reforms you have listed them and that was very clear we have finally understood what it is all about but on the other hand there is another new word which is debt restructuring so my question is why do we yes yes you spoke about this yes but which is your question yeah i'm coming to the question now sorry sure i do not want to give a presentation myself but i'm going coming to the question the question is i mean if we believe that there is a correlation i mean why don't we give more time to our structural reforms if this is going to sort out the whole issue because in this case we would have more democracy because everybody would feel responsible and uh this would put together the north the south the young and the old democracy that's a word why do we go on talking about these structural reforms the first question on the ecb you know i think we have been of the view that uh the ecb could do more we've been very supportive of the measures they've taken so far in terms of keeping interest rates low in terms of the omt policy but we do think that uh that more could be done because it's clear that we haven't solved the issue yet of financial fragmentation across europe the you know the the evidence that we see in terms of borrowing costs to firms across the south shows that that the monetary transmission mechanism is not working yet and i think the ecb is looking at a variety of alternative mechanisms that it could use to try and and fix that problem so we would be very supportive of that i think on the issue about the imf's response to the crisis and uh the 1930s and so on i mean i think it's important you know to be frank i think there's a slightly out of date view of the imf um you know when the crisis hit in 2008 and lehman collapsed the imf who uh you know some of you may know the the joke that imf stands for it's mostly fiscal because no matter what problem we saw we would say oh it's mostly fiscal you need to reduce your budgets but actually in 2008 we did not say it's mostly fiscal we said actually you need to spend more we told most countries at the time of the crisis that in order to avoid what happened in the 1930s which is when the crisis hit everyone consolidated at the same time and you had a great depression we told countries to spend and we told them to uh to cushion the shock of the of the adjustment so i think it's i think it's unfair to say we didn't learn the lessons of the 1930s in fact we were at the forefront of trying to prevent a repeat of the 1930s and then since then i think we've been very strong advocates for giving many countries more time because of course when everybody spent more in 2008 deficits grew and then countries had to unwind that and figure out how to get their budgets back into order and we have argued for many countries including greece including spain and including uh including portugal and including countries that went into the crisis quite early like iceland who we told we agreed that iceland should not should actually spend more when the crisis first hit and actually only very gradually uh restore fiscal discipline so we've been we've been quite heterodox and unorthodox in the advice we've given to countries and then just one last thing on the kind of view of the imf you know there's a little bit of a perception that the imf goes around and imposes austerity on poor countries and we recently looked at a study we put together a study of a group of countries a group of countries that had programs with the imf and a group of countries that didn't have programs for the imf and we looked at what happened to spending that was focused on the needs of poor people in those countries and what we found is that the countries that had imf programs actually were able to spend more on poverty-focused spending than countries that didn't have imf programs and that increasingly in the imf programs we set floors on the minimum amounts you must spend on the needs of the poor or on education and health so i think the imf has moved on quite a bit but the perception of us hasn't quite caught up with with the new reality and then lastly on the structural reforms questions you know it's funny you know i too get sick of hearing about structural reforms because it's become this kind of catch phrase for all the difficult things that aren't monetary and fiscal um and it's hard to really know what it what it means you know i'll give you an example which we often cite which just illustrates structure what it means structural reforms and i'll use an example from greece which we often tell you know greece uh greece is a very sunny country right very warm and but greece imports tomatoes from the netherlands you may ask why and the reason is is that the internal trucking costs within greece to transport tomatoes from one bit of the country to the cities are so high because the trucking union has such a tight monopoly on internal transport that it's actually cheaper to fly the tomatoes in from a greenhouse in the netherlands into athens that is structural reform fixing the issues about domestic internal transport which create these huge inefficiencies in a country and the problem we have with structural reforms is i could give you 10 anecdotes like that similar anecdote about electricity prices in italy and spain which are far higher than competitors because of the way that utilities in the non-tradable sectors are regulated in these countries there are lots of these small micro economic stories each of which reduces the competitiveness and productive capacity of a country and they're not very sexy uh you know they're not one headline where a politician can go out and say i'm gonna change this and we're gonna grow by two percent more and they also each one doesn't produce a big benefit but it's pretty it's an important part of the reform process but each one has an interest group that is deeply attached to that protection and for a politician to have to tackle each of those interest groups the accountants the lawyers the truckers the shopkeepers is very difficult and you don't get a big payoff from each one so this is why structural reforms are so difficult and that's why i think the point i was making is they're very difficult but they're really important and if you do enough of them they add up to big big gains in growth and that's where europe is today that's where the big challenge is for europe is to to try and restore worth by doing these difficult things and that's why this forum is so important because unless there's public consensus about the importance of doing this it's very hard for politicians to get it done maybe we can take the last three questions if you're still sure okay other other questions one two the microphone is stuck somewhere my question my question goes back to the to the lessons that we should have learned from the depression from the 30s and i fully agree with the need of structural reforms and the examples that that you gave are they just speak for themselves and i fully agree on that but i think there are some economists who sustain that the road out of the of the depression is very clear and proven it has been proven through through the depression of the 30s and there are lessons that should have been learned and these lessons have not been brought to bear in the european crisis we need someone that spends our way out of this depression maybe as a in italy we are not in a position to do that certainly greece was not in a position to do that but other countries are in the position to do that and i wonder why you as an objective third-party worldwide organization you didn't put forward this issue strong enough maybe because you didn't want to get in trouble with the main leading powers in europe thank you the second question was there i think i know here yeah thank you i had yeah one question which is very similar to the other one the first one is if austerity nowadays is a kind of modern new adapted phase of neoliberalism so a kind of neoliberal neoliberalism with a german face thanks to the german school of economics just to say the second question is there is a strong debate and i think colin crunch talked about it about the topic of the strange known death of neoliberalism and why in many ways we are still in the washington consensus so are we stealing the washington consensus because the canadian consensus was not good enough and so it is better to to keep to have devotional consensus or just because it's much more complicated to reverse and finally just accuracy if because sometimes reading papers and listening to debates there are some scholars uh maybe much more from the warwick university than the others but there are many who say that the troika is implementing for europe the same medicine for latin america in many ways and but in the end it is not clear how we will manage to come out of the crisis thanks thank you and the third and last question no third last question no last question okay okay okay i think that those were big enough uh let me try and take them as a group because they're related i mean first i'd say on the um the issue of why didn't we tell the surplus countries in europe to to support the recovery uh because they had room i mean the fact is we did you know in the the triage of countries i said we did say there were some countries that had fiscal room and if they uh if they stimulated their economies that would have spillover benefits for the rest of europe there were very few there was germany there was the netherlands when the crisis started who had some fiscal room and we urged them to use it now they didn't necessarily listen to us although you know despite the german rhetoric if you actually look at their numbers german fiscal policy has been mildly you know not hugely stimulative but mildly stimulative in the recent period but they weren't super stimulative the other thing i'd say is that i don't want to leave you with the impression that we think the entire answer to the european crisis is in national level structural reforms we also argue very strongly that there needs to be pan-european action and that a key part of that pan-european action is dealing with this financial fragmentation you know when when firms and particularly small and medium firms in spain in italy in in in portugal in greece can access credit you know firms that are commercially sound and in good shape can access credit for the same low rates of interest that we see in in in northern europe then we'll start to see signs of recovery and that can only happen with pan-european action we also need to see pan-european action on the banks you know there are still banks in europe that are constrained that don't have enough capital that haven't dealt with non-performing loans on their books again we need pan-european actions so that there is a common pool to recapitalize and help those banks restructure clean up their balance sheets and get back into the business of lending to the economy so there are a number of areas where we think there needs to be collective action at the european level including on fiscal union we've just put out a paper which says that as i said that there are many models for european fiscal union but having some mechanism for sharing the risks so when unemployment shoots up in one part of the union that there's some central pot of money that helps pay the increased burden of unemployment payments until that until the cycle passes and one of the interesting things that that study shows is that you know we we did some what we call back casting you know you go back in time and say if you had had a fiscal union in europe from 1999 onwards how would the money have been transferred because there's a perception that a fiscal union means that basically germany pays for everybody else it's not true if you go back to 1999 every country in europe has had ups and downs there are periods historically when germany would have been a net recipient of eu funds and there are periods when they would have been a contributor that's the point about risk sharing and risk pooling is that everybody it's normal in business cycles that their ups and downs and if you pool your resources you're able to cushion those ups and downs a bit more easily so we've been putting these arguments and this research out there to try and shape and contribute to the debate in europe and uh i hope we've been even-handed in in that process in terms of the the so-called washington consensus i mean i guess i would um i think that's an a phrase that's a bit out of date now um because there really isn't a washington consensus i think there's a more pragmatic consensus if you look at the kinds of policies that we've been advocating in recent years they run counter to what the conventional is wisdom is on washington consensus we've argued for monetary accommodation we've argued for more gradual fiscal adjustment we've argued for capital controls in many countries uh and we've had capital controls in some of our programs in countries like iceland for example so i think that you know the crisis was a critical moment for us at the fund um i think you know frankly we didn't predict the crisis we should have uh but i think it made us realize it was very important to uh to be self-critical and very you know open to some unconventional thinking and also much more cognizant of the interconnections and spillovers in the world economy and i think all of that has informed our thinking and you know i you know i often like to quote keynes who once said you know when the facts change i change my mind and so the facts changed and the imf changed its mind on many policies and i think that makes us a much more relevant institution for a world economy that's very different today than it was 20 years ago let me pose your last question because you mentioned it so um the banking union well one year ago we had a very important agreement in europe about this banking union you mentioned it twice or three times so but now at one year of distance the impression is maybe that well the markets are calm now or more common one year ago because they're distracted by japan and the impression is that this process is slowing very much down i mean the supervision is going on uh but the resolution mechanism is stucking and the the guarantee fund is talking aren't you a little bit afraid that this apparent calm on the markets may slow down um in a very uh risky way the the the integration process of your european union also in the banking union you know i sometimes say that the process of resolving the crisis in europe has been what i call just in time integration so you know a crisis hits you get together you have a late night summit and then you agree and you kind of go one step further it hasn't been a a kind of strategic long-term planning approach to crisis management but you know that is the political reality i'm afraid that you know it's when pressures come that people it focuses the mind and you know you have to act it's not as i said it's not always elegant but uh but that is that is the reality now on the banking union uh we did have some important progress i think that um that uh there's been a there's been a decision to phase it and i think you know there was a view that the single supervisory mechanism whereby the key european banks will be supervised by the ecb was seen as a precondition for having a common resolution mechanism and the key issue there as you probably know are legacy assets who's going to pay for the legacy problem of banks and i think there was an appetite for european solidarity going forward but not necessarily for cleaning up the past and so it's key to get the single supervisory mechanism in place first and then i think we'll we will see progress on on resolution i think we have argued that a common resolution fund is an essential precondition if you're going to break the link between the sovereigns and the banks and so that they're not completely interdependent um i think there's an emerging consensus on that although i do think that there is a timing issue i think we all agree that deposit insurance can wait a little bit that's not as pressing as as the other two pieces but um but you know the single supervisory mechanism will take some time to put into place and you know for the you know the ecb is hiring hundreds and hundreds of bank supervisors at the moment to put in place the capacity to be able to supervise these uh these hundreds of of european banks so that will take some time but but i think we all agree that the sooner we can make progress on this the better because it's the only way that you're going to start to see some improvement in some reintegration of european financial markets and the beginning of of more affordable credit for firms particularly in the periphery so it's a key precondition thank you very very much minou shafiq and prosecutor you