good afternoon everybody thank you very much is he said he was looking forward foreign uh is two years ago purchased some bonds bonds as well and other products 80 billion but the most important things is to foreign a long interest rate for a long time is is foreign uh uh so he has focused which is one of the most important economic think tanks um so i'll switch to english now if you want to put your headphones on um so i'll start with lucrezia and my question for lucrez is where the we are actually about to see qe start the end sorry um whether the eurozone economy is strong enough to withdraw to see a withdrawal of kiwi and yes so your assessment of where europe is at the moment okay thank you very much ferinando i'm my english is very similar to my italian so i think i will be very comprehensible um yes where are we now um qe started as you know in 2015 is not just the asset purchases but also a series of other policy tools the most important of which is the negative deposit rate so we are in a situation in which the ecb is buying mostly government bonds but also corporate bonds every month for 60 billion and we also have a negative interest rates on deposit that commercial banks have at the central bank so it's a situation of extreme exceptional monetary policy measures they were introduced in 2015 when actually growth had come back already in the euro area after you know very tough years as you know of a very of growth close to zero and for our economy in particular in italy negative growth but inflation had been dangerously gone towards zero so the situation so we started end of 2014 and then 2015 today we are in a very different situation or not only the recovery is very convincing now so we have had 16 quarters of continuous expansion in the euro area so it's not just this quarter is 16 quarters of expansion the euro area is growing at a faster rate than the us which is really good news because remember that you know the first in the years or just before the the great crisis uh you the euro area did very poorly with respect to the us now we are actually doing better and actually inflation is creeping up so as you know i mean qe should be understood as a measure for economic stability not a measure to save the italian states or to save greece or to say whatever it is a measure that is has a target the inflation in the euro as a whole okay the ecb is bounded by the treaty to have an inflation rate which is close to two percent or just below two percent so if we look address at the data we have we see today that inflation is probably going to be for 2017 1.7 so very close to that target uh so you know many people are saying okay so inflation is almost two percent so maybe we are ready to go we're ready to dismantle these measures maybe gradually and you know go back to normality however we have to look at other things and uh first of all uh inflation the the two percent target that the ecb is giving itself has to be uh not only a number for this quarter or for the last quarter but it has to be a sustainable inflation around two percent or just below two percent it has to be sustainable in a way that is not dependent on policy so we don't want to be in a situation in which if the easy monetary policy is discontinued then we go back to uh to a very low inflation so i think the ecb is looking at these three things so the target the durability of the you know the kind of the persistence of the numbers and the self-sustainability of these numbers so i think these are the three things to look at and then um here is kind of the uh the counter argument for this continuity is that although we are uh now at 1.7 the very recent number in may have a surprise on the negative so we went from 1.9 to 1.4 so that was not so good and also that the core inflation which is a good predictor for the medium-term inflation which is the inflation without the very volatile components which is food and energy is just below 1 so inflation is back but is not very convincingly back and this has been actually forcibly argued by members by mario draghi but also other members of the executive boards at acb and one thing that they have been looking at is for example wages now wagers are important because you know the wages are a predictor of inflation this is how you know central banks look at wages now since 2014 annual change in compensation per employee has been 1.2 percent uh now we are at 1.5 percent and and we are at 1.5 so below the historical average in the euro area history even if unemployment is going down and employment is going up so we are in a very strange situation in which labor market is strengthening not only growth not only gdp the labor market is trending employment is increasing but wages are not picking up so why is this the case so if you look at what kind of employment the euro area has created one third of the change of unemployment is temporary contracts one-fourth is part-time employment so employment is going up but is very fragile so it's a type of employment that does not create any pressure on wages because these people are very marginal in the labor market so the hours overemployment which is a very important the indicator of the strength of the labor market is actually flat is not going up so this you know makes me think and makes the ecb think that there is probably more slack in the economy that what is suggested by the gdp number so you know the ecb obviously that has a mandate in terms of inflation so they are not as a target and they don't have employment but these numbers of the labor market you know suggest that inflationary pressures are not convincingly back so having said that i think that in the next june meeting in few days when the ecb meet they will make they will present a new forecast and i think that their message will be okay there is a strengthening of the euro recovery but you know the inflation numbers are not 100 convincing they do not move motivate an immediate exit having said that however the strengthening is there so we can expect that in september they will start they will start preparing for a gradual exiting and we should maybe expect that in the second part of 2018 we will eventually see an exit from this extraordinary policy so here there are two issues and then i will leave you know the floor to marcus we will get more in detail so what how should we balance the risk of exiting too early or exiting too late and also or the other issue is should we first discontinue the asset purchases or should we first discontinue increase the interest rate the deposit rate which is now negative now the ecb has communicated unless they've changed their mind recently that they are actually targeting not just one interest rate but they all ill curb so they are looking at the difference between the long-term and the short-term interest rate and for that reason they will like to exit qe first which has an effect on the long-term rate and then go on the short rate so i think we should look at this signal and we should expect a low interest rate for a longer time but maybe qe as i said in the beginning of 2018. um i will uh obviously there are some risk in exiting especially for countries which like our countries uh have high debt and rely on long-term low interest rates for refinancing our debt however i think that the moment in which the ecb will relax it will also be a moment in which the economy will strength will be strong enough so uh i think that maybe this risk should be not to emphasize too much but definitely there are issues delicate issues of how you'll calibrate the exit and i think that this is what marcus is going to talk about okay marcus has a short presentation as well uh and the question is precisely the first one which ukretia asked which is how do we how do we exit all of this thanks a lot ferdinando um let me just add to one of your comments where mario draghi was lightening a cigarette or cigar with a dollar with euro notes by doing so he of course reduces money supply and actually decreases inflation anyway so what i look at already mentioned what i will focus on is that two ways you can get out of the unconventional monetary policy so on the one hand we have a negative interest rate deposit rate so ecb said to said negative so you can actually increase the interest rate or it can actually reduce quantitative easing or even go in the opposite direction and sell off the bonds the ecb has bought and then the question is you know how would you sell it off and this has different implications for the yield curve and different implications for the economy and i would like to just spend some few words on this which ways one could go and what are the different implications without giving a clear recommendation there is uh one concept i've worked on is the reversal interest rate and the argument of the reversal interest rate is essentially that you know there is an interest rate if you go below this reversal interest rate then actually monetary policy becomes ineffective it becomes even worse it reverses the effects or essentially of becoming accommodative it becomes contractionary and the argument essentially is that you know you ruin part of the banking system because you decapitalize the banking system then the banking system cannot lend anymore to the real economy and that's actually is bad for the economy so one thing you to watch out for is your how does interest rate policy the negative interest rate in particular how does this affect the bank's lending behavior so that's essentially what the first thing if you focus very much on that you would say oh let's focus more on the interstate policy before we do something on the qe side and let me just argue uh point out certain elements on this reversal interest rate so when you look at this reverse limit so more generally on the transmission mechanism of monetary policy you can see that a cut in interest rate or an increase in interest rate similarly has two effects on the one hand if i cut the interest rate it will actually lead to a capital gain on the bank's balance sheet so the banks have a lot of long dated assets they have lot of long bonds and if you cut the interest rates the value of this bonds will go up so this actually strengthens the balance sheet of the banks and then they have more money to lend out to the real economy on the other hand if you cut the interest rate the net interest margin so the profit the bank makes per loan is going down so there's a positive effect and there's a negative effect and you have to see you know which effect is dominating uh the bank's balance sheets so if the banks have a lot of long dated assets for example if they have a lot of you know long-dated italian bonds on the bank's balance sheet then the first effect is very powerful so an interest rate cut is very powerful and you can sacrifice the fact that the net interest margin is going down on the other hand if if they don't have so many long dated bonds they have more short dated bonds on the bank's balance sheet then the net interest margin effect might be the dominating one so you have to look at these two components and saying oh based on this there will be a reversal rate will reverse the rate be one percent or minus one percent so if you go below you know you say minus one percent it's counterproductive in some countries in other countries might be plus one percent if you go down there it's counterproductive so the things to look out for is really to look at the bank's balance sheets and what's the interest rate sensitivity of the bank's balance sheet with respect to its current capital gains bond holdings and with respect to future profits from the net interest margins and that's essentially what determines then how low you can go in terms of the interest rate you know can you go down even further or can you know is it better to come back up again in order to you know make the net interest margin better for the banks and that's essentially the second component i want to say is that let's suppose currently uh the optimal boundaries let's say minus 25 basis points or minus 0.25 percentage points and you should not go below that so this would argue let's move up again and at least hit this minus 25 basis points but over time this minus 25 basis points doesn't stay constant it actually creeps up there's a creeping up effect okay so over time it will be the case that what was effective initially when he cut the interest rate down let's say the minus 25 basis points was very effective but now over time actually now it's zero percent so you should come back up with the interest rate and why is that the best way to see this is this little chart i've made here let's say let's do a hypothetical example let's suppose you do some policy for four periods let's say that four years and you have as i mentioned that there's two effects if you cut the interest rate you ruin the profits for the banks going forward because the net interest margin is going down but you create some capital gains because all the positions on the balance sheet the gain in value that's the capital gains effect but if your bonds are only two periods long in this hypothetical example the capital gains effect only lasts for two periods after two periods these bonds have matured and then they're gone from the bank's balance sheet they're replaced with some other newborns which are priced at the new interest rate while the net interspersion effect the profit effect will last for all of the four periods so what you learn from this a simple example is that your net interest margin effect is lasting much much longer as long as the low interest rate you put on the market while calculating effect only lasts for two periods or put it differently after two periods you should actually increase the interest rate again in order to switch off this negative and add this margin effect so the interest rate the reversal rate is creeping up over time so again what you want to do is you look at the bank's balance sheet you look at the maturity of the bonds they're holding if this is fairly short you want to actually come back with your negative interest rate come to normal levels again now that's essentially for the interest rate i wanted this was the first point i wanted to make so there's a there's a creeping up effect so this argues for you know increasing the short end increasing the interest rate again the other argument is that okay instead of increasing the interest rate we can actually also first stop qe so we let it run off in december when it uh you know according to the newest announcements uh is going on then there are two issues so one is we have to avoid some taper tantrum like in the u.s when the u.s announced that we'll taper the qe there was a huge unrest in the market this might happen in europe as well so we have to be very careful about that and then the second step is you could even say you know if there is um uh you know qe we can we have bought all these bonds we can also sell it back to the marketplace and then the question is how do we sell it back to the marketplace so let me first go to the first element and location alluded to this already so i've plotted here some as a meal curve there's some big debate going on whether you know the market is right to do the maturity transformation is it actually ideal that the banks take short-term deposits and then lend long-term to firms or other households to get mortgages or should some of this material transformation be done by the central bank because there's some market failure and there's a big argument if this is the case if the latter is the case the balance sheet of the dental bank should be larger in general and we should not go back to the old size of the bank's balance sheet that's a big debate in particular in the us where the balance sheet really exploded and the some people argue you shouldn't go back to the old size of the bank's balance sheet but in any case going back to what we said earlier if you were to raise a raised interest rate on the short end of the curve so here on the x-axis you have the maturity the length how long it takes until the bond matures on the y-axis there's the interest rate or the yield of this bond and you can see one option is to just increase the interest rate and it's primarily at the short end for short interest rate for short maturity which will go up and the long end will not go up so much on the other hand if you stop qe that actually works differently it doesn't do so much on the short end because that's been done by the policy rate but then you will have a much steeper yield curve and the term spread the difference between the long term and the state and the short-term interest rate will move much more and that has implications as i mentioned earlier for the profits for banks as well because if there is a term spread if banks essentially land long and the ball was short they earned the term spread so they actually this affects the profits of the banks as well so you have to calibrate these measures quite extensively to seek what measure is better stopping qe or even undoing qe or increasing the interest rate especially on the short rate so what i will argue later on and i think we will come back when we come to the governance structure there's a particular way if you want to stop the the purchase of the government bonds and corporate bonds that's one thing and if you want to sell off the existing positions the ecb has or the national center banks have uh that in a particular way and as we will argue there's actually a nice way not to sell off the bonds directly but also to repackage them in a particular way and then sell off packages of a package of national bonds stranged in in ways but rather than selling them right straight away thank you very much and yes we'll return to that after afterwards a very relevant policy discussion by the way so it's uh i would urge you to to listen carefully afterwards but i would go to john and ask him about the second question which actually lucrezia raised which is how worried should we be about dcb exiting qe uh is there a risk of a crisis i mean some more people are worried of a crisis immediately for example after the end of qe or as lucrezia said well growth will if this be exits that means the growth is strong so we shouldn't worry about it i will answer thank you for this question but let me go back first to what lucretia said because i think the analysis she provided is important um the the paradox of the situation being that we have growth picking up we have unemployment going down and we have no significant increase in wages and i would like to argue that it's actually uh very good news on one on the one hand is very good news on the other hand it sort of complicates the the reading of the situation the reason why it is very good news is that the sort of conventional wisdom was that unemployment is high for structural reasons in europe and that the fact that unemployment is going down means we're going very soon to find ourselves in a situation where wages go go up and this careful analysis by the by the ecb actually has shown that what matters is not only the the unemployment rate on the aggregate the headline and employment rate but also what we call the hollow around unemployment all these people who are at the margin of employment they're part-time their own temporary contract etc and the fact that these people are very numerous in our countries explains in part why wages have significantly underperformed with respect to what was expected to with respect to what sort of traditional forecast would would say but the good news is that it means that these people they are not excluded from the labor force they are not out of the labor force like what has happened in the u.s where we have seen a sort of withdrawal from the labor force of some of the unskilled people who just have stopped being being counted and they have they have they're inactive they are on on you know sickness allowances and that sort of thing and this means they have permanently or more or less permanently withdrawn from the labor force this has not happened so much in europe and and that's good news because this means that we can bring them back into uh into employment um and that that means that in terms of the the consequences of this crisis is much more favorable now what also it is what it also implies is that the the sort of speedy exit from qe that some people expected may not be the right policy to to follow and that unconventional monetary policy is here for a bit longer remember that it started it started late now on on the exit let me first say a word about what marcus said um it's interesting and you may not realize that you know 10 years ago certainly 10 years ago 15 years ago the approach of economists about negative interest rates and uh nqe uh was not at all the same i mean there was this view that the uh the sort of the threshold was a zero interest rate that you couldn't go below the zero interest rate and in fact central bank has started testing the zero interest rate and have effectively brought interest rate below zero and then the question has become what is really the threshold and i think what what marcus has developed in with his reversal rate model is a very interesting approach to what is the threshold uh in in reality that central banks should have in mind and and where is the threshold at which the uh there can be a reversal of the effect of bringing interest rate below below zero so i think that's an indication of how um how economic research can can help understand new phenomenon bernanke ben bernanke famously said qe is something that works in practice but we don't know how it works in theory and i think slowly but it has to be slow because it's some work uh the theory uh develops now let's me uh and on you on your question um i think we should be looking at what's happening in uh in the us in the uk in countries which uh have exited from from qe because they started earlier they started much earlier actually you said the the ecb started late and so the normalization is far ahead as in comparison to the to the eurozone and um in the in the us the asset purchases ended in the autumn of 14 interest rate increases uh began in the in the first quarter of 16. so we have we have some some evidence to look at and the evidence is that inflation adjusted uh real interest rates uh for for long term in interest rate are still extremely low they are remarkably low compared to what they were before the crisis so essentially they are about 0.5 percent at present where they were uh 2.5 uh 10 years ago so this indicates that something um uh has happened in between what is what what is it is it something that's due to the the lagged effect of qe or more likely is it something that's due to some fundamental uh changes in the global economy that explain why we're having uh so low long-term interest rates and the more we look at it the more the evidence grows that changes in the saving behavior changing in the investment behavior and changes in the in the balance between the two and the demand for asset explain why we're seeing this type of situation so the saving behavior that the number of uh countries are saving more the eurozone is saving much much more the eurozone has become a major saver in the world economy in part because of the its internal adjustment and the fact that its internal adjustment has been essentially that the the low-saving economies have adjusted their savings uh upward uh and the and the high-saving economy especially germany has actually continued increasing its saving but other parts of the world have contributed to second investment is rather low and investment is rather low for a combination of relatively low growth rates which have implications for investment but also perhaps the fact that the the economy is less or gross is less investment in intensive than it was before and and finally we have uh this demand for safe assets that is high in the in the world because of the growth of the emerging countries safe assets are a scarcity in in the global economy they are produced by a few economies in the world emerging economies typically do not produce what we call safe assets so that bonds that can be relied on because of the quality of the legal system because of the liquidity of the bond market because of the stability of economic policies those are things that are difficult to combine because it's it's it's actually a sort of uh result of a high level of development so we have an economy global economy in which the emerging world has grown tremendously compared to what it was before i mean we we had an emerging world that represented about 40 percent of the global economy 20 years ago now it's 60 percent of the global economy and they are demanding safe assets and the the developed world is producing these safe assets but the demand for them is growing has grown tremendously so so the result is is low interest rates and so we we're in an environment in which for these reasons or which are structured which have actually nothing to do with uh with monetary policy with qe uh we we're in this low interest rate environment if this is correct and you know that's uh something that's it's still disputed some people say the opposite some people have the view that it's all due to uh to monetary policy and that um they're going high interest rates are going to come back with a revenge but the the evidence it seems to me that there is something structural going on uh there if this is correct this means that the the exit from qe which means will mean much less of a return to the sort of previous state of affair that people anticipate that relatively low interest rates are here to stay now this doesn't mean that in terms of the risk appetite and and the valuation of risk we're not going to see some degree of normalization because qe has worked as an aesthetic with respect to to risk aversion so this means that inside the euro area there can be a different appreciation of the risk involved in the various bonds issues but issued by by sovereigns and this brings us to the question i think we want to discuss now which is you know what does it imply for the euro area and how the uriah should get ready for a different type of environment that's the question i'm going to ask lucreza to answer first and it's basically um you know you've done a lot of work on this question with a number of colleagues what what's needed what's i mean we know there are lots of things which the euro zone should do in theory but many of these ideas are politically very difficult to sell uh to some countries um i mean people talk often about euro bonds which have a mutual guarantee but obviously mention euro bonds in germany and you will get a lot of uh bad uh replies and uh so my question is for you is what's the minimum level of integration which we need for the eurozone to work and which at the same time is also politically acceptable in all eurozone countries well always the easy questions to me right so that okay so let me just first just some very general principle i think that whatever one thinks about the detail of accident timing uh forms of exiting and so on it is clear that we cannot ask a central bank to do everything okay and because the ecb is the only federal reserve federal institution that we have it has become sort of the institutional last resort okay so whenever other parties cannot get there out together then the ecb has to intervene this has been the history of the crisis i think that now we are going towards a gradual normalization but it's also a moment in which the other parties so governments have to start taking their responsibilities and in my view we have to think exactly like ferdinando said we shouldn't think of doing too much all of the sudden having you know common welfare state common unemployment insurance commodities and common that because this is just not feasible there is not enough appetite you know in the community of uh the eurozone to go for this is one bank federation so we have to start thinking about what is the minimal set of reforms that we need to implement in order to ensure financial stability now there is a bunch of things that we have to do and they have to do with migration security blah blah blah here we are talking about the eurozone so a subset of the eu so the country we share the common currencies so for these countries there is a need to do more because sharing a sovereignty which is basically means to have the same money uh implies uh also that you know we are much more tied together uh in the financial markets and also on the fiscal sphere so what can we do to do the minimum what can we do so that if there is going to be another crisis tomorrow we are not going to be found ourselves and prepare i think this is the way to phrase this question so if you have to ask me of course it doesn't make any sense to ask me because you know i don't have any any responsibility but if i if i were in charge i would say the following i think that the fiscal framework based on rules uh on your rules uh has not worked very well these rules were very tough accented but then you know when the crisis comes you know rules and nobody follow them so we have to start thinking about a framework which is less based on rules and a little bit more on discretion which uh is similar you know uh if you want to to something that you know the so-called french point of view okay with referring to you know to the debate that we that uh the presentation of the book by marcus and other economies that was presented yesterday however if we want to go in the direction of more discretions then we have to have to allow the market to enforce discipline we cannot say for example no states will ever be bail out all banks will be saved and so on and so forth we cannot have it both so if we have to have less rules we have to have mechanisms which allow the market to to vote again you know when you know some entities states banks and so on are clearly insolvent we have to allow the market to do their work so to me like if we were in a kind of optimal world coming you know scans coming from zero then i would say we need a set of institutions for example we need uh a debt restructuring mechanism that would allow countries uh if they come to insolvency to restructure and we need to uh to have the rules and to know the rules excellent so that we don't get in a mess like in the case of greece in which it was not clear what we were doing eventually we restructured we went through a huge restructuring but we we did it in the you know you know putting a lot of uncertainty because it took time the rules were not clear and so on and at the end with greece what happened we ended up in the worst possible situation in which we we lend excessively to insolvency and at the same time but in but we ask the greek to do an adjustment adjustment type of policies that actually kill the economy so i think it would be you know in in a steady state in an optimal world it would be better to have a scheme which would have a preventing lag so when countries get close to that area of insolvency we'll start discussing about reforms and then if they really get there then we sit around the table and with a set of rules which are known exactly we organize a restructuring now um also i would say that in the steady state would need a safe asset what does it mean to have a safe asset it means that right now what what is the safe have to say for the euro area is uh is the is the is is the treasury bonds for the german for the german state now the boon is a safe asset which this creates a lot of distortion because whenever there is tensions in the market everybody goes and buy the german bonds so the interest rates in germany are extremely extremely low and you know this create a bias that has to be corrected and so to have a safe asset we have to think about some financial engineering will which will involve bundling the um the the sovereign bonds of different states and uh you know there are there are proposals on the table and marcus has been a very forceful proponent a proposal proponent of this kind of approach in which uh you know regulation will be changed so that uh the market will be encouraged to bundle the um the asset the the foreign the sovereign bonds from different states and in in a in a synthetic bounds which would then be trench and where they risk uh where there will be a seniority tranche and zanin and the junior transfer so i think that marcus will want to talk more in detail about this distinct now to do these two things okay is not that easy debt restructuring a safe asset it means that countries which have high debt like italy or which have banks with in their balance sheet the stuff like italian government bonds or portuguese government bonds and so on if we go straight into that kind of steady state new situation we will be hit okay the italians will be hit the portuguese will be hit so there we will create a lot of volatility in the market so the compromise with the germans to say okay we go to this synthetic bonds in which there will be some risk attached to you know to to to bounce from countries which are uh more unsafe like for example italy or portugal and so on so and will have that restructuring which is something that the german would like however the compromise should be that we get institutions which help in the transition so institutions like for example the european stability mechanism that will cope with this kind of volatility and here again there are a number of proposals in the uh in the table enhancing the european stability mechanism uh making it like a really proper stability funds which will be allowed to to buy back that and issue that guarantee for joint you know with a by guarantee by by the governments with some schemes which will involve maybe future fiscal uh resources in a combination with the current maybe increasing taxation in certain areas okay so i don't want to get here in the details not to to kill the audience but i mean the basic concept is think of a new concept which would be you know probably create a lot of volatility in the short term but enhance our institution and particularly the european stability mechanism in order to cope with volatility to do that will imply some risk sharing so will imply that the german have to accept the concept of a minimal risk sharing without that and i'm not talking here about the eurobond okay i'm talking here about something slightly different i mean i think that this could be a basis for a compromise so i wish that uh messi mcmahon or whatever because the italians are not at the table anyway so we'll go in this direction just a very small question for you because there was something i was expecting you to mention but it didn't come it's about bailing which as we know is a big subject okay so in your in your world when lucrezia raiklin is dictator of europe okay is there space for bailing or not of course there is space of berlin however i think that uh the the the new banking union has been uh again has been designed without thinking of the transition so the bailing rules in countries which are still weighted by legacy issues in our country uh you know in the banking sector not only banks at public sector is has that problem so these bailing rules uh in my view uh don't work so i think however that to cry against europe and saying ah the germans have used their money and we are not allowed to use our money and so on is very counterproductive i think that we should work in collaboration with europe is first of all to have a national solution to that i think that when there is a crisis that the state has to be allowed to intervene and recapitalize banks the u.s have done it a lot of countries have done it successfully this should not be however a blank guarantee that every stupid bank has to be saved okay so the governance is very very important and i think to have maybe national and european governance on a recapitalization funds and an asset management company which would you know buy the mpls and repackage and sell them in the market i mean i think we could work as italy on such scheme we have been very late i don't know what they're doing why they are now working on that scheme and this could be maybe the you know the blueprint for something that then we could work at the european look thank you um so i'm going to move to marcus because lucrezia rightly mentioned this idea of which are called sb's european safe bonds which are one of the big ideas which marcus has been working on i should also mention i've forgotten the mark was written this great book which in english is called the euro and the battle of ideas which is just come out in italian and it's precisely about that debate between rules and discretion which has dominated really eurozone integration for decades and which i allowed you to read because it's it's fascinating uh but going back to sb's um can you tell us a little bit about them why are they so important because this week the european commission included them in a policy proposal which obviously still needs to be debated by governments we know this take things take time but it's in this document which means that actually it's not just an academic dream but it's really very much at the center of the policy debate so tell us a little bit more about them thanks a lot uh so essentially what let me come back to the book i mean the book essentially says you know there are different economic philosophies across europe and people think very differently and what the book tries to do is to contrast these philosophies and also then let's think about solutions which are consistent with both philosophy so first let's try and just try to understand each other much better and second there might be some solutions which work with under both philosophies and the asps or the what's now called sbbs so the sovereign born backed securities you can still pronounce it aspies there essentially is one of these solutions where you can actually you know on the one hand you satisfy both philosophies on the other hand you also provide some solution to certain problems so if you can go back to the slides um so essentially what what the idea is of of the aspies essentially is that you would bundle sovereign bonds let's say in the long run up to 60 percent of gdp so according to the ecb key or according to some gdp weight over five year moving average and then you bundle this in a synthetic bond essentially you have uh diversified to risk and after you have diversified the risk you issue the special purpose vehicle whoever is doing that uh issue a senior bond and a junior bond and the purpose of the junior bond is to protect the senior bond so whenever there's something is going wrong there is some restructuring or some losses on one country or the other country these losses will be captured by the junior bond so we did a lot of simulations and we have shown you know if the juniper is 30 it will really capture it will protect enough the senior bonds the senior bond is a safe asset because it's protected by the junior bond so unlike a euro bond where the euro bond is protected by joint liability by joint guarantee which is very much against the german principle of this liability principle that the person who gets into debt is also liable for the debt here the senior bond is protected by the junior bond so it's there's no joint liability and hence it's consistent with the german philosophy it's also consistent with the sense of risk sharing solidarity which is very much in the french tradition and what happens then essentially uh if there's default the junior bond will eat the losses where it will be shocked by the losses but this senior bond is protected so we proposed this in 2011 a group of economists across europe we called ourselves the euronomics group and and pushed it from then onwards and worked out the details but let me just highlight two problems this one proposal would solve the first one is this diabolic loop between sovereign risk and banking risk and actually two diabolic loops so the first one everybody talks about you know if the sovereign debt is getting more into troubles and difficulties and banks have a lot of the software that on the asset side of the balance sheet then the banks are in difficulties as well they make losses and hence the bank the government has to potentially bail out these banks because they made these losses and because the government has to bail him out the governed paper the sovereign bond is more difficult again on the you have this loop going around but there's even more important loop then second loop is if the government pushes the sovereign bonds into the banks the banks will not lend to the real economy because the bank is lending to the government and not to the real economy and they make the banks make losses if something goes wrong then they stop lending to the real economy and then the real economy tanks and as the real economy tanks tax revenue goes down and that hurts the fiscal authorities or the government as well and then you have another loop going on so you have two loops one is this bailout loop and the other one is the credit to the real economy loop so both loops connect the sovereign risk with the banking risk and the question is how can we break this diabolic loop and if the banks are holding these aspects the senior bonds then you break this diabolic loop because the senior bonds are really the safe part of the sovereign debt and the junior bonds has to be held outside of the banking system insurance companies hedge funds and others and even private households can hold the junior bond but it shouldn't be in the banking system the other problem is uh with the safe answer and lucretia alluded to this as well that at the moment germany has sort of a monopoly on the safe asset in europe so it's not supplied symmetrically across the euro area so some germany is supplying it and that has the advantage whenever there's a crisis there will be flight to safety and the flight to safety will lead to flight to safety across borders so from the peripheral countries into germany and germany as a very low interest rate peripheral countries have a very high interest and this leads to volatility and interest rate moving around what this new brand proposal would do is would re-channel this flight to safety capital flows instead of going across borders that will go across asset classes that will go from the junior bond to the senior bond but both bonds are european so they're not going across border anymore so this really channels the whole flight to safety capital flows and stabilizes things because it doesn't benefit one country at the expense of the other country but it both are european bonds it goes from the european junior bond to the european senior bond and these are the two things which would you the asps or the sbbs would solve down the road it would not solve all aspects and it shouldn't solve all aspects of the euro crisis but i think these are two main components it would uh solve now can i just i would like to come back how could one implement these uh these bonds and different ways to do that and there we have written a whole paper on that there are many details which need to be sorted out but one way to implement is that when the ecb gets out of qe and to such an extent it will sell off bonds not to sell off individual bonds so it doesn't sell off the italian bonds the german bonds and throws it back to the market but then rather than throwing back it repackages them into the senior bond in the junior bond and then it sells these packages back into the market and this way you establish the market to establish a new market is always a huge coordination problem you have to get all bankers on board and then there has to be some liquidity and grading going on and then you would really by doing undoing qe you would immediately by doing this you would establish the new market so that's the idea essentially coming back one thing is was interested policy and the other thing was the quantitative easing undoing quantitative easing if you really want to undo it i we think it's a more clever way to repackage this bonds tcp is holding and sell it off back into the senior bond in a junior bond thank you very much and we're going to have a just a final question uh to champion ferry before we open it to the floor so i would like to comment on what's just been said but also if you can add a little bit of um you know you're being very close to the political scene as your in your role as uh advisor to president macron where do you see the candidate and now now president um where do you see the kind of political debate going are the stars aligning for uh greater eurozone integration or we are getting a little bit too excited and there are still big obstacles i would start from um the uh i think the high degree of convergence between the three of us uh basically between what ukrazia and what markus and i agree with a lot of what has been said with the fundamentals um and and i think it's not by accident so over the years we've among economies we've discussed many options and gradually something is emerging that i think among people like us uh you know looks like a sort of sensible solution and lucrative outlined the the components you know more more discretion less rules but then more responsibility for individual member countries a mechanism to deal with a situation of insolvency that requires also then having a safe asset that is a common safe asset and break the bank sovereign loop that has been at the root of the crisis and is still there and then we all agree that the transition is delicate so we can discuss the detail and we can perhaps disagree on the details but on the broad outline i think we we essentially agree now is the political discussion there i would say no it is not it is not the discussion at political level this tier is still far from from from what we are discussing here we have sort of very stubborn national positions so in italy you would never accept discussing that restructuring in germany you would never accept having a safe asset that's commonly designed because it would look like a common guarantee and a recipe for for transfers and i think in in in france you would much more put the emphasis on the institutions and less and on the system and perhaps more on the on on stabilization and there is also an aversion to discussing that restructuring so i think the the the challenge is uh sort of whether a political discussion based on the sort of underlying element that we are discussing here is possible i do think it is possible but i do think it's it requires um it requires it requires being much more genuine about what has to be built it requires a commitment on all sides so perhaps that's something we're going to to see and perhaps the conversation can start because precisely there is more commitment on uh keeping the uriah together on you know going beyond the the obvious national red lines to to save the euro area i think what uh chancellor merkel said when she said we are now reacting to the uh to the uh g7 and to the decision by uh president trump uh emphasizing that we are on our own and that's a broad statement that we have to take our uh destiny in our own hands that's uh something important i think the commitment by uh right now president macron to uh to europe is something important but a lot of work needs to be to be done um to me it's important to start from the end goal the transition and the current situation are all full of of difficulties because we know from the history and you know marcus wrote on that from this history of international uh monetary and financial relation that distributional issues are terrible to deal with time a country perceives itself as being on the creditor's side and another country on the debtor's side it becomes it's becoming a purely distributional issue and so the creditor doesn't want to concede anything because that would mean you know paying money to the debtor uh i think we we have to recreate some sort of veil of ignorance focusing on the long-term goal and knowing that what we are speaking about you know banking crisis remember that ken rogoff said that banking crisis are equal opportunity uh menaces so we've had banking crisis in all type of countries rich and poor developed or not financially developed or financially underdeveloped so that's what we have to deal with to to strengthen the uria and to make it able to withstand such crisis now having worked on the sort of long-term design then they can be obviously a negotiation a discussion to approach the transition um let me add a few words on on uh one thing that on two things what i think are important one is this issue of um why we need to accept more the debt restructuring and move away from reliance on strict rules but partly because the system of rules that has been built has become much too complex and has lost traction with respect to national decision makers no member of parliament in whatever country understands the details and the implication the full implication of the system of rules we have in place we're having conversations that focus on one particular aspect which is the the aspect of the rules that that actually is binding at a particular moment in time so in france we're discussing about the three percent rule in italy it's about the debt uh dimension but the whole system is simply not uh understood and not taken on board by uh national decision makers that's one reason the other one is that the political climate we're in means that it's likely it is likely to be extremely difficult to constrain a country uh in which the political mood would be basically a mood of resistance or refusal of of the rule system and this this has happened this can happen again and we have to recognize that market discipline is sort of more acceptable politically because you don't negotiate with with markets you're it's basically something you have to you know it's a it's a reality whereas if you're just have to accept what the commission is telling you uh you are or what the concept is telling you that they are partners so you want to negotiate politically but i think we have to recognize that but then if there is more responsibility at national and at least more autonomy at national level there must be more responsibility there must be mechanisms to deal with situations of unsustainable fiscal situation then the question of the safe asset is is becomes essential because you cannot you you described the criteria the situation in which uh you know the german point would be the safe asset for for for the whole no no rejecting it but rejecting it but you discuss this this is this i mean this can be this can be an outcome of the situation when the the german becomes become the safe asset that would uh be both uh financially and and politically extremely uh difficult to to uh you know to to accept that as a solution um also creating responsibilities for germany that would uh come from the fact that germany would acquire sort of hegemonic position in the in the euro area uh so so the the the creation of a common safe asset is essential now euro bonds sort of original eurobonds would require a rule-based system because if you're giving your guarantee to your neighbor you want that your neighbor abides by by rules so the fact that we're saying we have to accept there is more discretion means the sort of traditional the standard euro bond is is less visible although the the euro bonds i mean i was at rugel i was not the author but i published the original european proposal and it it involved the kind of synthetic asset and the sort of junior senior bond structure that uh marcus is thinking of because the idea with the eurobond would be the safe the safe part and the and the junior part would be of the responsibility of the individual member state so somehow it's the same structure now uh just to finish on that um uh on the on the particulars of the of the sb's there are things to discuss i mean there are there are various uh variants of of solutions of this type some of which would be purely market-based so much which would have more of an institutional backing and actually if you want this asset to be actually considered a safe asset uh it probably needs an institutional backing of some sort um and and there are issues with the volume of of safe asset that would be issued how much is needed to make sure that it could replace uh national bonds in the portfolio of banks so the question of how you can produce how much you can produce synthetic all those issues are worse discussion uh discussion but i think again on the fundamentals i would conclude that there is a lot of agreement in the fundamentals excellent thank you very much to all our panelists who will some of the discussion in the panel today reminded me there was a u.s president requested only one-handed economist in his team but the question i wanted to ask more on the most serious note is can we read something into the numbers that have been coming out of the target two flaws in the last several months inflation is a way to water down a date and we say that two percent was set as a target by the ebc following the heritage of germany at the beginning of 1900 where high inflation rates had a number of very bad implications then wages and oil currently are not helping but in the long term oil we're certainly not healthy considering that the renewable energy is growing substantially so what do you think the bbc should do to balance the no interest rates and the purchase of securities considering that the level of debt of european member states is different so different debt levels different percentages of mpl's on their balance sheet so my question may materialize on the securities of the peripheral countries in the eurozone so a sudden widening of the spread should the tapering start thank you very much so last question so first of all congratulations for your contribution my question is the following do you think it is necessary to exit the quantitative easing so quickly in europe it started only two years ago and in the usa lasted six years the weaknesses there still there are well known so prolonging the quantitative easing could be a good idea perhaps and the sps i believe are a nicer tool so do you think we really have to exit the quantitative easing so quickly considering that the germans have always been in a hurry you have referred to history and the trench has always been uh the same to me an intermediary between the latin world and the german world so don't you think we should slow down this process before we get to the end of the quantitative easing questions one on target two should we worry about it is two should do we need two nqe now three is how to balance rate increases and qe and is there a bubble on eurozone peripheral debt so i would say one inch so regrets your pick i know actually the last question is for marcus i think yes uh i don't know on target two um well i mean target two is uh um i mean what you're referring to is that the position the the the italy and spain have developed like big spikes on our debt position with vis-a-vis germany and this actually is something that happened to the crisis then it kind of disappeared when the crisis the financial stability issues were sort of semi-solved and now it has come back again partly as that effect of qe so it's partly a technical issues but it reveals the fact that banks you know buy these bonds and then they redeposits in banks which in countries which are safer so this is not a big issue if the euro remains the euro of course it has only a potential risk for creditors in the case the euro will disintegrate so uh again it's a matter of trust okay so that if uh will manage to save the euro if between mario dragging gas or you know our governments then i think this is just technical who cares about target two imbalances it's just an effect of our system of payments but of course if you think that there is a positive probability that the euro area will disintegrate then you know once this this integration will take place then we'll have to settle and the creditor countries will take a hit do we need 20. i would i would say the the qqe as we as we said has been introduced for the euro as a whole in view of the situation of the euro air as a whole so in this respect the fact that inflation core inflation is peaking up slowly the fact that we we're seeing this sort of ongoing wage moderation uh indicate that uh unconventional monetary policy may be uh wanted for longer than than expected a few a few months ago or when the ecb started alluding to to to exit now there are uh negative effects of of qe uh i think i would mention two of them one it's particular to certain countries that say you know it's uh it's especially i mean germany which is close to full employment in which interest rates are very low and that savers are not happy with this kind of situation now i would say the ecb is bound to decide on these matters as on traditional monetary policy with respect to the situation in the euro as a whole and there are symmetries uh that are inherited from the uh the crisis cannot be solved by uh moving to different uh type of policies that would be more suited to certain countries unless uh to other countries it has to stick to its mandate uh the the the other part which is sort of more common is the fact that this kind of environment may have side effects that are undesirable in terms of capital education in terms of the uh the quality of investment that is uh that is made by private agents uh those are issues uh that have to be traded off against the macro justifications for folkway so my answer would be um it has to be based on the same very same objective that the the ecb has put forward forward from the start the the inflation target and the ability to reach it let me just add a few sentences on the other two questions as well so on target two flows indeed they went up again and i know several people in france for example who actually moved some money out of france into germany because le pen there was a danger of le pen taking over and they were worried about their positions and that's why target 2 went up again of course in italy there's uncertainty too and it has implications if the euro breaks up but it has also implications if it doesn't break up because it changes the bargaining position of germany in the sense that the threat of leaving the euro is firing back to germany and they're aware that even you know the bargaining might be affecting dramatically whether you know a country has to leave or not on the inflation watering down debt i think there's good inflation there's bad inflation i mean typically everybody puts everything together but oil in particular if there's high inflation because of oil it doesn't help anybody within the euro area it helps premium or the oil producing countries and so you essentially just you erode uh purchasing power within the over area with high oil inflation there's other inflation where you might say oh this might help to get rid of debt that's another way of taxing people but the only tax people who have locked in existing bond positions with a long maturity because the newborn prices will actually react to that so you have to pay a high interest rate a high nominal interest rate which will reflect the higher inflation rate so you will actually only hurt the bondholders with a long maturity and this depends you know how much the italian government or any government has extended to maturity and they've extended their maturity so it helps to some extent on the exiting qe i think there's there's some technical limits as well so what the ecb is very concerned they don't want to hold more than a third of total outstanding government debt so in certain countries in particular in portugal that's an issue because they were already involved in the smp program very early on they brought a big chunk of debt and then about ukraine more and they're hitting their limits so they don't want to take over and be total the market maker and determining the price totally on this they still want to have a liquid market in these places and that's some constrained which is uh playing in as well and as jean pointed out qe is but has a feature is a very characteristic feature that it's actually determining the inflation rate so it's targeting the inflation rate on the euro euro-area-wide basis so it's not country-specific so it always is forced to do it according to the ecb keys you have to buy up that across all the countries if you go for country-specific programs that's the omt program but that comes then together with conditionality so we can imagine that if you know qe will be retired that for certain countries the yield is going up there is a danger i wouldn't roll this out but then we have the omt uh to move in instead and then stabilize this particular country but this comes then together with the esm and conditionality okay one has to be aware of that and that's also to some extent the countries have to prepare for themselves for themselves where the queue goes out there might be some spikes but ecb can still intervene but then a conditionality might come in as well okay i think we can end this very stimulating ah last question yes let's take it and then just one and then and this was a surprise not only the french german access but the french german italian access this is a wonderful opportunity we've been hearing about rules a two-speed euro not two-speed eu but a two-speed euro two euros well i mean i'll just start and then i think would be a very bad idea i mean in a way it's an old idea i mean we will go back to a situation very similar to what was the the the system the is similar to what was uh the situation in the 80s and in the 90s in which you know we would have to i mean we would either flat weight completely or maybe flat weights in a band okay so we will have to discuss you know and remember that in the situation in which we were fluctuating within a band given the interaction between our economies in any case the the bundesbank the central bank in germany had a leadership position so that we had we could not totally disregard the the monetary policy of the bundesbank and the level of exchange rate in germany because too much fluctuations in the exchange rate well in some situation because we were actually bounded by fixed exchange rate but also if we had been in inflexible exchange rate you know excessive volatility of exchange rate would have not been uh uh you know it was it's not a very good idea for economies which are very integrated so i think that the situation in which we participate to the government council to the collective decision of the euro area it's it's a better situation and we went there exactly to cope with the problems that we had when we did not have a monetary union so i think that uh a better c a better proposal is to try to complete our institution to make the euro you know a much more stable currency with you know the kind of things we have discussed around this table um to put it short i wouldn't want to choose between the great san marcos um so uh and i don't think any uh i mean let's let's take a very french perspective on that for france would simply you know not want to be part of a monetary union uh without germany nor could it be part of a monetary union with germany without without italy i mean that's as simple as that it wouldn't work it would just break up entirely yeah i agree with that i think the euro would break up entirely i think this multi-speed euro is problematic also there's a little a huge misperception out there that you know everything is default of the euro i think there are a lot of problems in each country which are not really you can easily blame the euro but it's not really the euro which is to blame for so just to give you some analogies so often it is said you know there was huge capital inflows in the peripheral countries before the euro crisis broke out and this actually caused all the problems but there were also huge capital inflows into romania which is part of the european union but not part of the euro there were also huge capital influence into serbia which is not even part of the european union so this capital inflows into peripheral countries was not specific to the euro and imagine if there would have been the same crisis for italy without the euro can you imagine what would have happened the exchange rate would have gone through the roof and many companies and banks would have gone bust because of the exchange rate movements i think with the risk sharing which is going on through target 2 and other mechanisms inside the euro italy was actually doing way better than it would have done outside there's this misperception you know if the euro were not there everything would be rosy the alternative scenario i think this has something you know that's very important political debate to make this clear if you get out of the euro you will be on your own and this will be a worse world it's not clear at all that this will be you know much better than the current situation marcus you may have a career as a politician in italy if you ever get bored of of becoming of being an economist in the us but anyway please join me in thanking our guest speakers and thank you very much for uh being here today graciatus you