Panel - The future of EMU
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Fratzscher, Marcel
Gopinath, Gita
Hellwig, Martin
Rey, Hélène
Chair: Benoît Cœuré, Member of the Executive Board, European Central Bank. Marcel Fratzscher, President, German Institute for Economic Research (DIW); Gita Gopinath, Economic Counsellor and Director of the Research Department, International Monetary Fund; Martin Hellwig, Director (em.), Max Planck Institute for Research on Collective Goods; Hélène Rey, Lord Bagri Professor of Economics, London Business School
 So, good afternoon and welcome to this conversation on the future of EMU. I guess we are at the time in this conference where we can reflect on everything we've heard and learned over the last day and a half and pull the threads and weave the threads together and make it something useful for the future of EMU. We're here to discuss the future and we're not here to discuss the past. And it comes at a, I guess, at a topical moment where finance ministers last week and prime ministers and leaders tomorrow will also reflect on the future of EMU. And it's also an opportunity for the panelists to comment on what has been achieved so far in terms of deepening EMU, but more importantly to discuss what more should be done to make the life of the ECB easier. So we have a fantastic lineup. You had all the names and functions and we know all speakers and we are very grateful that they could be here with us today. So without due delay, Gita, can you start it? Thank you. It's a real pleasure to be here and to participate in this. This is my first time in Central. So this is a very beautiful place. Okay, so to jump in very quickly on the discussion of the future of the European Monetary Union, I will center my remarks around three broad issues. The first is about heterogeneity that remains and how problems get amplified by it and what needs to be done. And is about the reforms that are still required. And while many of us understand some of the broader issues over here, maybe I will narrow down on a few specific prescriptions. And this will require reforms not just at the union level, but also at the national level. And then I will finish up with a discussion of the international role of the Europe. So just as a flavor of where we're going, certainly there is heterogeneity and that heterogeneity remains. If you look at this chart here on the left is Euro area, you look at the unemployment rate. You had this big increase in divergences in unemployment rates soon after the crisis. Some of that has come back down. And while the average level of the unemployment rate in the Euro area is back to record levels, the employment rate is high at this point. You still see significant divergence across some countries in the Euro area. And on the right you have the U.S. and you see the dispersion on unemployment rates over there. And you see similarly there was an increase in dispersion following the crisis. But that dispersion has pretty much disappeared or narrowed again back to its original level in more recent time. So for me there are two things to take away from this. One is of course the classic textbook understanding that when you're in monetary union and you have one policy to affect regions that are heterogeneous shocks, there's only that much you can do. And there are limits to solving all of the problems. But the second thing also is that monetary policy can't solve all of this because there are structural issues over here. There are structural differences across countries in the labor markets, in the product markets. And in the absence of those reforms, the success of the monetary union will not be as good as one would like it to be. So I'd like to keep both of those in mind. And this is a picture that maybe some of you have seen before, but it also highlights the fact that alongside this heterogeneity and divergence there's a low degree of risk sharing. And again, if you compare the risk sharing channels in the US and Canada relative to the Euro area, in the US and China, as US and Canada, right after the crisis, so this is from around 2000 post-global financial crisis, you certainly saw more risk sharing that took place through capital markets and through a lesser extent through fiscal transfers in the US and in Canada as compared to the Euro area. So what that means is that if you live in a part of the Euro area where unemployment rates are high or incomes are low, you are going to also be living with lower consumption. So there's very little risk sharing that is going on. Now something that was less textbook about heterogeneity is that while yes, we all know that one policy for diverse regions is difficult and constrained, I think what was less appreciated that even the transmission mechanism can become highly heterogeneous during a crisis. And so we saw that early on when you have the, when the ECB started cutting interest rates after the global financial crisis, but you see that if you look at the lending rates between different parts, you know, Germany, Spain, Italy, France, and if you compare those, you certainly see an opening up. Now it is a high point of the ECB's work that solutions were founded to fix these problems. So the T-elitros certainly helped in narrowing those gaps earlier on. And you see that if you look at the column of the histogram on the right and you look at each of those countries, you'll get Italy, you see the kind of the blue portion relative to the white portion, which means basically Italy and Spain took up more of this particular channel of financing as compared to say France and Germany. Now the red bars are the newest form of long-term refinancing operations. And that of course is trying to fix a different problem. It's trying to take care of the possibility of a liquidity, potential liquidity crisis that one might need to worry about going forward. So of course that comes very quickly to my third form of heterogeneity. And the fact, I think there was much less appreciated the start again of the EMU and more generally in our textbooks was the importance of having a lender of last resort. And so again, this is a classic figure and it's, of course, was very tempting for me to put it out as President Draghi enters the Central Bankers Hall of Fame. I think this is a classic picture that we will do whatever it takes to save the euro. And that's the lesson to be learned that is clearly there's a need for a lender of last resort. It continues to be the case that debt levels are very heterogeneous in the European Monetary Union. Now, of course, there are sometimes problems with debt levels that have to do with fundamentals, in which case monetary policy should not play a role. But there is also circumstances under which there are problems with debt levels that have to do with liquidity, with runs in markets, with market failures, and in those situations it is important for a central bank to step in. And so that has to be a lesson that continues going into the future. And things have been done about that. Okay, so that was a quick overview of the heterogeneity that we're seeing and I'm going to jump in quickly into what needs to be done. So let's start with the one area where already work has happened and that's in the banking union. So I don't want to go into, everybody here knows obviously the details of what has been done so far. I'm not going to go into that. I'm going to make points that in the absence of having a common deposit insurance scheme, I cannot see sufficient progress being made in the banking union. So it has to be that an important act, next act, will have to be coming up with a common deposit insurance scheme. There needs to be a credible backstop and by credible backstop it has to be credible in two ways. One, it has to have the money for it, it is sufficient, but two, it also should be deployable very quickly. So both of those features need to be there for it to be credible and that's an important part of it. Second on capital markets union where there's lesser been done so far, but this is hugely important. We've done work at the fund on figuring out what are the main issues with having a common capital market in the euro area. And we highlight three features. One is insufficient transparency, which means that if you look at reporting standards in terms of how firms report, there is not enough uniformity in disclosures. So one could make an argument for having a common minimum disclosure requirement. Secondly, is having a minimum standard for insolvency. There is a great deal of heterogeneity and insolvency regimes across the euro area and again, one should argue for having a minimum standard for it. And third is a centralized supervisory power for non-bank financial institutions, which is again can generate some uniformity. Now this is of course very important for many reasons, there certainly needs to be a diversification away from firms relying very heavily on bank financing to other forms, sorry, bank financing to other forms of capital financing. And secondly, we certainly could use to have more safe assets in the euro area and this would be one way of creating triple A securities. Lastly, I suspect the piece that's the hardest to bring about, which is essential fiscal capacity, but it can't be emphasized enough. We are living in a world where the outlook remains precarious. The possibility of a downturn is, while not imminent, certainly is not that far off either. And therefore it's very important to have a macro stabilization tool in the euro area to deal with that. To the extent that union-wide reforms remain a political challenge, I think in the meantime it's very important for countries to undertake reforms at the national level. You have to build resilience, so some new work that we came out with that we just put out a couple of days ago points out that countries that did do labor market and product market reforms at home had greater resilience to the shock. So there is evidence that that works and it should be done. And once again, when you say labor market regulation, reform, that doesn't mean just one size fits all deregulating the labor markets. It doesn't mean making it less friendly for workers. There are very many models for it. There are the Nordic models where you have a very strong unemployment insurance net. You have great support for people to find jobs, but at the same time you have flexible labor markets which reallocate resources, and that's very important. So lastly, I'm in negative time duration now. I'm just going to jump into the international role of the euro. So this is a figure that comes from the most recent analysis that was just put out by the ACB. Two things to point out is one is that there was clearly a period from around 2005, 2006 onwards where you saw a decline in the international role of the euro. That seems, and there is an uptick now. I mean, we'd have to wait and see whether this is signs of actually a reversal in trend because some of this is a reflection of central banks around the world using their dollar reserves to defend their currencies in 2018. So it's going to take a few more data points to see whether there's been a reversal. But I'm just going to end with my absolute last slide, which is the fact that... So this is work that I've done which tells you that if you want to internationalize a currency, you really have to work on multiple fronts. A currency's role in trade, in finance, and as a reserve asset, complement each other. So this is a simple picture that shows you that countries that rely very heavily on dollar invoicing in their trade, and this is... I'm looking now at countries that are not dollarized economies, but countries that rely heavily on dollar invoicing in their trade, are those that also have a greater share of their banking liabilities that are in foreign currency are in dollars. So you see dollarization of the banking sector. And once you have dollarization of the banking sector, then of course that gives the central banks a very good reason to also be dollarized because if you had to pick one currency to defend your financial markets, that would be the currency that's predominant in the banking sector. So these three things come together. So we would have to have a push for more euro contracting in trade that would then spillover into finance and into trade finance, and that would then spillover into central bank reserves. And with that, I will stop. Thank you. Thank you, Géta. So we'll come back to the international world of the euro with Marcel later on. So we'll have opportunities to dig deeper into this, and meanwhile, let me give the floor to Martin. Oh, and by the way, it may be time to disclose one thing, which is a reason why you have so many jokes about time becoming negative, that we have this big clock here which you don't see, which is normally green, and when it reaches zero, it turns red and negative. So that's why all speakers are making jokes, and there is no zero lower bound, but there has to be an effective lower bound, I guess. Martin. Well, thank you very much for the invitation. Future of EMU. There is a temptation to talk about the long run, but there is this quote from Keynes about the long run. And in fact, one of the questions about EMU is whether it's going to reach the long run. And the risks to the existence of EMU, I think, have played too little of a role in the past two days. The rise of populism, which is partly anti-EU and partly anti-Euro, must be a cause for a thong. And the underlying problem is that politics is local and national, and the source of political legitimacy is again local and national. We heard about the first 20 years of the Euro. One thing I find striking is that the first 10 years were a period of depolitization of monetary policy. One was talking about inflation targeting or tuplers and things like that. And the second 10 years were a period of repolitization of monetary policy along nationalist lines. I will focus my remarks on issues involving banks. We like to talk about the need to eliminate, to cut the nexus between banks and sovereigns. And pessimistic that this is ever going to come to a conclusion. The problem is this. Banks are essential to the monetary system. Banks are also an essential part of national political systems. From the perspective of the ECB, banking union was needed in order to get control over an essential part of the monetary system. That enabled to some degree the ending of the procrastination on how to deal with banks in trouble. In 2012, on the occasion of the long-term refinancing operation, I sometimes said, weak banks are wonderful for national politicians because they provide an indirect avenue to the printing press, which of course creates an incentive to keep them that way without cleaning the system up. The SSM as a device to aid the cleaning up has been a remarkable success. But bank resolution doesn't work. The single resolution mechanism is not viable. And it isn't just the question of the fiscal backstop. It's also the simple problem of a need for liquidity during the resolution procedure. And that's a need, even if you don't wind the bank down, while you're sorting out the alternatives. Bank of Popular Española had to be resolved overnight through a sale to Santander because there was no liquidity. Now, if we're talking about liquidity in the case of BNP Paribas or Deutsche Bank, we're talking about a quadruple digit billion number, which of course would be politically infeasible as say a task for the ESM. The backstop for final losses would be much lower. But we don't have any arrangements for these purposes at all that are rarely workable. I think reform in the area of resolution is really needed. Can we hope to break the nexus? Well, in 2002, the Swiss municipality of Leukabad was insolvent. It didn't get any aid from the Canton or the Swiss Confederacy, and the bank didn't want to provide more loans. Can we imagine the president of the French Republic to be placed vis-à-vis BNP Paribas in the position of the mayor of Leukabad vis-à-vis the banks? I simply cannot imagine that. And the same would be true even of many of the minister presidents and the heads of the regional governments in Germany. Influence and power over banks has in tradition been regarded as a major element in particular in Europe as a major element of national sovereignty. And there are many more avenues to exercise that power than just supervision and resolution. And the sovereigns so far are the centers of political power and political legitimacy. From their perspective, banks are important and are political because they are a source of funding, and money is a tool of power. The German Lundisbanken provide an example. It may be a wonderful field for fantasies about industrial policy. National champions think about the recent endeavors to have a merger of Deutsche Bank and Koerzbank initiated by the Berlin Finance Ministry think also about the French Bank merger some 20 years ago. It's important for voters. And in this context, we must mention the fact that the outcome of the Italian election a year ago was dramatically influenced by the experience of bail-in in the case of various Italian banks. Investors are voters. Sometimes the large investors may be even more important for voting power than the small people whom we think about for deposit insurance. And the power of investors is one of the things we need to keep in mind when we talk about the politics of banks. Thinking about EDIS I think focuses on really the smaller part of the problem. In Banco Popular Espanol it was the municipalities with large deposits that ran. And I have a suspicion that the authorities in Madrid were not even unhappy about this because if Banco Popular Espanol had gone into such trouble that these municipalities had gotten losses, that would have been the real scandal. From the sovereign's perspective and from the populist voters' perspectives, BRRD, SSM and state aid control are all intrusions on national territory. And we need to think about the politics of those intrusion. The problem is reinforced if the ECB uses the power that it has over the funding of banks, in particular in emergency situations, in order to exert further influence over national policies. Ireland and Greece provide instances of that. At some level all this means we need, we have a need for a supranational source of political legitimacy which basically means a stronger parliament and a stronger executive. A budget just by itself is not going to help, especially if the budget is just seen as a device for distributing money rather than a device for doing things. We have enough distributional conflict already. Underneath all this is a really much deeper challenge. The past ten years have taught us to think about these matters in terms of real estate bubbles inducing banking crises that over task the sovereign or in terms of sovereign borrowing leading into all sorts of problems. Sort of misbehavior that through suitable controls before one might actually get under control and eliminate. But going back to the discussion of this morning, if you ask what has happened in some of the instances, take the case of Northern Italy, the banks that were involved there, we're talking about changes in comparative advantage. Asymmetric shocks, this morning we heard about the role of competition from transition countries, competition from China. And that creates changes in economic activity in these areas. And the regional drought that's in use affects not just the real economy but also the bank and to the extent that the banks are regional banks, they're ill diversified against such shocks and the governments. How to deal with all that? It's a task for supervision and resolution to clean up and regional policy and then also perhaps national and EU policy. In the US, the risk sharing that Gita referred to has a lot to do with the fact that national spending is an important stabilizer. I actually once heard a talk by the Swiss Defense Minister about the problems of Swiss defense policy. And the entire lecture was on how they were using their spending to provide for fiscal equalization across cantons. That's in even that relatively small scale. In the US also mobility provides a very important way out. West Virginia may be a problem and the Rust Belt may be a problem and they vote for Mr. Trump. But there are lots of people leaving. The problem of radicalization in Rust Belt including Northern England, Northern France, Saxony and I suspect also parts of Northern Italy is of course a major problem for our political systems right now. Underlying this is the problem of capitalism, how to deal with the vagaries of economic development in open economies subject to technical changes including those that occur elsewhere. To some extent this is an old story. We've had this with coal and steel, we've had this with textiles before. But then there is a question of governance, who is in charge of this and how does this relate to the financial sector and to monetary policy? Switzerland is an example where most of this is handled at the cantaloupe level in a very decentralized way. Germany has some of that as well. And I mean the Neuerländer, the Excessionländer are the example that proves the rule largely through fiscal federalism. But we need to find ways to come to terms with that. The legitimacy crisis which is induced by these vagaries of economic developments. Sometimes a crisis of Brussels, that's what many of the interested parties say. It's also a crisis in the very centralized states such as UK or France of London and Paris, perhaps also Berlin and Rome. Like the underlying issues, what governance do we develop in the EU context to deal with that kind of problem? And it's not a question of transient shocks, asymmetric transient shocks. It's a question of asymmetric structural shocks which are there to stay where some of the ability to adjust must be at the regional level and the extent to which that works depends on incentives that we have even at the regional level. So we've gone into the depth of negative time but I guess that's because you were talking about Switzerland so it's okay. Ellen, please. Thank you very much for having me. I'm going to talk briefly about three topics which have been alluded to in various times yesterday and today. First one has to do with external imbalances within the EUR area. The second with macroeconomic stabilization tools and I will have brief thoughts on monetary sovereignty. So you've seen this graph before. It's about the EUR-Area current account imbalances and there are two clear phases. The first one between 2003 and the great financial crisis and the EUR-Area crisis where we have divergence. So we have in particular in the lower negative territory here we have Spain, we would have Greece, Ireland and then after the EUR-Area crisis we have a compression of domestic absorption in the periphery and we have a set of very important current account samplices in particular. So in the positive side you have Germany and the Netherlands. Now a reflection of these current account imbalances of course is the net international investment positions of EUR-Area country and so here I have single dot in yellow countries with very negative international investment positions. You have Ireland south of 100% in terms of GDP, Greece, you have Spain and Portugal for example and on the positive side you have again Germany, Netherlands for example. Now I would argue that the first set of imbalances was already so an existential threat for the EUR-Area in the sense that what we have seen during the period 2003 to 2008 was a risk buildup with large inflows into the periphery correlated with large asset valuations, real estate bubbles and we all know the story crisis risk premia going up, the doom loop in full play and finally intervention of the ECB. But the second set of imbalances so this second phase we are currently in and looking forward also causes an important threat for the EUR-Area and there as mentioned by Olivier and by Ricardo for example the way to rebalance to get out of that has to be through a change in relative prices and real appreciation of Germany and the Netherlands so that has to happen for an inflation differential for example inflation above 3% in Germany and the Netherlands for a while and below 2% in the periphery. This is exactly how the EUR-Area is supposed to work, this is nothing special. From the transitory point of view this is how the relative price have to adjust and I guess this is how it should be also understood by citizens in various countries of the EUR-Area. Now why is it important to have rebalancing and to take a look at these excess current account surpluses because there is a number of negative externalities which come with these current account surpluses and the period of too low inflation in the core that we are living through. So one set of negative externalities is purely to do with deflationary pressures in the periphery, depression of aggregate demand, negative effect on debt sustainability given that we exit the crisis with high levels of nominal debt so this matters. There is a slowdown of relative price adjustment because of a low level of inflation in aggregate which makes the EUR-Area more fragile to shocks and excess savings put downward pressure on the real rate knowing that the monetary policy is already close to the effective lower bound. I would add that we also could get some more random tweets correlated somehow with the size of bilateral surpluses putting us more at risk of higher trade war. Now in absence of additional tools what needs to be happening is expansion of aggregate demand and inflation higher than 2% in core countries. It is often claimed and we had a very good paper actually this morning discussing the virtue of having current account surpluses and JNI bigger than GDP in case of aging population. So it is often argued that in the case of aging population it is prudent to save and therefore to have current account surpluses. However what was missing in a way from the discussion this morning is that one could equally make the case that not investing is actually not prudent in a world in which we are living through climate change and the prudent policy in such a world has to do with increasing public investment to realize energy transition now as cost are rising quickly and we are seeing cumulative processes. Otherwise of course the bill will be higher later when population is older. So in other words what we have not talked about in the discussion this morning is that climate debt is actually building up if public investment is not increased right now to perform energy transition. On top of it it is now the time to do it because we are living through a period of very low real rate. And here I could have picked other countries but here is the German gross public investment over time compared to the decreasing 10 year yield and one can see that there is not much price elasticity here in this graph. Now in terms of where we are of macroeconomic stabilization tools to help with the current situation and looking forward there is an asymmetric game which is played between the ECB which has a Euro wide objective while fiscal policy is determined still by perceived national interests. So of course we are in equilibrium in which if countries with fiscal space actually do not expand enough monetary policy has to do and will do the extra mile and is more likely to be at VELB. So excess burden is placed on the ECB. Lose our monetary policy implies countries with fiscal space actually perceive even less of a need to expand and therefore as a result we are in a situation where core countries have a wrong macro policy mix with monetary to lose fiscal to tight. We do not have a Euraria budget for stabilization purposes. We could have had one in the last days but it just did not happen. So we should at least have more transparent less pro cyclical fiscal rules compared to the ones we currently have. About that I will refer you to the CPR 7 and 7 report which discusses this in great detail but we should also at least in the spirit of what I just said have a sizeable investment budget for decarbonization artificial intelligence research financed by cyclical revenues for example share of corporate taxes in order to decrease climate debt etc. So looking forward this would be the present thing to do and this actually would be counter cyclical. Now another tool in the panoply that we have looking forward and that could be useful is the macro potential policy that is deployed at the national level and provided macro potential authorities put up their counter cyclical buffer during economic upturns gradually building it up with as the literature tends to show now little effect on activity during the the upturn then the buffer can be actually released quickly if credit conditions tighten in a downturn which is very welcome to reinforce effect of monetary policy easing. So looking forward in the URR macro potential policies could actually turn out to be also an important tool to fight downturn and credit tightening conditions for our munitions. Finally I would like to talk a little bit about sovereignty and during here on the speech that Mario Draghi gave in Bologna in 2019 where I said no truth sovereignty is reflected not in the power of making laws as a legal definition would have it but in the ability to control outcomes and respond to the fundamental needs of the people. Now if I think about that and apply it to monetary sovereignty so we can see that to some extent monetary sovereignty is constrained by a number of factors. One is the global financial cycle, the Fed being a key driver, another one being the current invoicing patterns in the international economy where pass through from exchange rate to price is determined by invoicing and the dollar is very much a dominant currency in invoicing. Another one is the payment system where we have extra territoriality and issues of the US law there being applied in various traditions and the final one very important one being the fragmentation in the URR with a doom loop which puts some constraints also on what monetary policy in certain states of the world can actually achieve. So I think if we think about the future of EMU again part of it will have to be about increasing sovereignty and relaxing some of these constraints starting maybe with the last one. So to conclude I think so it's nice to be here for the 20 years of the euro we have got a long way since 1999 however there are lots of important issues facing the EU right now but we should not lose track that reforms of the EU area are really important and should really be in the agenda in the most pressing way. So we have to deal with these imbalances and this is linked to macro stabilization. We have to think about this notion of what is prudent investment particularly in a time of very low real rate and in terms of monetary sovereignty I mean relaxing those constraints has to do with improving what Gita has mentioned in her discussion before. Improving banking union actually doing capital market union and the creation also of a safe asset for the euro area. Thank you Alain. If you allow me a personal comment I'm really glad that you brought back into the discussion the issue of fiscal rules which seems to have totally vanished away from the European discussion both in the academia and in Brussels actually and so we can very much on Nils Teegerson who is here today to help us one day fix the European fiscal framework which has so obviously failed but Marcel the floor is yours. Thank you very much for having me. I want to talk about the political economy of EMU and the euro and echo a little bit also what the others have said before and focus in particular on the question if monetary union is to succeed in the long term it needs legitimacy, it needs credibility, it needs strong institutions and we should not be taking that legitimacy and credibility for granted and I want to talk in my few minutes of the comments about where I see the risks to that and I want to argue that we need a different narrative for why it is important to complete monetary union, why it is important to do the different reforms that we need a positive narrative and that strengthening the international role of the euro actually really trying to develop the euro and having a truly global role actually could provide such a positive constructive narrative that could convince member states to do more to complete the monetary union and I want to start with paying respect to what was my first boss at the European central bank and when I joined I remember he was talking about an experience in Germany in the 1960s where politicians had attacked the Bundesbank for doing the wrong policy and they were basically slaughtered in public because the Bundesbank had such strong public support that basically the politicians committed political suicide, they had no career in the future because they dared to criticize the Bundesbank and you probably remember the quote by Jacques Delois who once said not all Germans believe in God but all believe in the Bundesbank and I think that that kind of shows that having a high degree of credibility is incredibly important to deliver on the mandate what central banks are supposed to do and that was one of the strength of the European central bank that allowed it also to be so effective in the last ten years. Now my three big worries concerning monetary union but more broadly also economic reforms in Europe what I would describe as three P's populism, protectionism and paralysis, lack of reform. Martin Helbig talked a bit about populism and in Europe the big worry is that a lot of this populism is an anti-European populism. If something goes right it's a national responsibility, if something goes wrong it's Brussels, it's the single market, it's the common rules, it's the Euro, it's monetary policy and that of course so exactly the opposite what I said in this example of the 1960s you have the feeling today politicians want to gain credibility or votes it's very easy to use or abuse Europe or the Euro as a scapegoat for national policy mistakes. I wouldn't underestimate this and this is not just an issue of a small group but when I look at my own country if you look at the discussion on target tomb balances you see how far this discussion is going even among economists where you get the impression Germany or Bundesbank has net claims of almost 1,000 billion euros you have some would describe say look this is 5,000 euros for a family of four and if something happens that's what people lose so there's this really strong emotionality and strong negative sentiment to say this is a problem and so I see these three P's in particular this populism as a major threat to monetary union in the long run and again I don't think we should underestimate that. So far the narrative for saying look we need important reforms at the European side the others talked about it on capital market union banking union was a lot negative narrative in particular in Berlin the perception is they want to force the German government to agree to fundamental reforms against their own will there's a feeling there's an attempt to create a transfer union so there's a very strong asymmetry who has to burden or has to carry the burden of adjustment of paying for those reforms who's taking the risks example of target two and so in some sense it's not surprising that there's a very large reluctance of governments to actually agree in particular in Berlin because of feeling is look we don't want to be forced or pushed into doing reforms where we are not convinced and therefore the illusion that I see in particular in Berlin is this view time is on our side if all other national governments would just reform and do the right reforms everything would be fine and we don't need fundamental reforms in Europe and I think this is a very dangerous illusion and shifting to a positive narrative I think we need to first of all again have more of a global perspective I think we have been engaging in too much naval gazing in Europe we have forgotten that there is a global competition with Asia with China with the United States who are becoming increasingly affirmative and nationalistic and that includes also the monetary system the US has been using the US dollar very aggressively and also now the recent discussions on Iran on the payment system you see how strong also that can be as a policy tool China has pushed the renminbi the international role of the renminbi very aggressively with some success clearly since 2015 that was a bit of a weakness but if you look at the role of the renminbi within Asia you see that many of the Asian countries actually manage their currencies against the renminbi just as much vis-à-vis the US dollar so in terms of managing the currencies the renminbi already has a regional role so I think the big choice that Europe will have to make is whether in the future this will be a truly tripolar monetary system global monetary system with the US dollar the renminbi and the euro or whether the euro will lose and Gita showed the chart on the international role of the euro that comes from the international role of the euro report by the ECB which is a very informative very detailed an excellent report and you see this decline in the international role of the euro actually not just since the global financial crisis of the European crisis but actually before since the mid-2000s and I think looking at that trying to understand what actually is driving that declining role of the international role of the euro is important clearly it has something to do with the relative economic weakness of the euro area at the moment it also of course has to do something with political decision-making in Europe but in particular it has to do with the fact that monetary union is not completed or not complete as it should be to really give the international role of the euro a bigger role a truly global status and Helen Martin Gita talked about some of the elements our report of the 14 economists the French and German economists last year and we had a shorter update this year underlined that and said look to complete monetary union we don't need this big big change we don't need political union we need a set of really what we believe fairly realistic reforms on capital market union on banking union creating a common safe asset and you can go into detail how specifically that look should look like but clearly it is important to have a common safe asset on fiscal policy not just to have fiscal rules that make sense that are more counter cyclical and give governments more space but also we need both on the macroeconomic stabilization a better buffer against asymmetric shocks and also more of a common fiscal policy stance in Europe to help convergence to help integration and make financial markets deeper so I think these are some of the more important reforms to push ahead and my key argument is we should really think more of a positive narrative to convince governments in Berlin and Paris elsewhere to say why is it actually so important to complete monetary union and it's not just that you know you need to do it because otherwise you'll be sorry later on but there is substantial potential for the euro the big economic benefits through much better financing conditions deeper capital markets more stability in particular when a crisis hits so there the economic benefits from having a strong global currency are very clear again in a increasingly polarized world I think is very important to have in international world of the stronger international world of the euro to transform it into a truly tripolar global currency system so to prevail in that monetary system I think that also would go a long way in strengthening the legitimacy of the euro giving the ECB more again full de facto monetary independence to act and it would kind of pick also the pressure of the European Central Bank to do what's yeah to stabilize where it's clear national governments need to do more both on the fiscal side on macro potential policies to stabilize the euro thank you thank you Marcel thank you for advertising the year ECB report on the international world of the euro which you can download on the ECB website we have 25 minutes or so for a discussion which is a which is ample enough and before opening the discussion to the audience I would like to ask the panelists if they have want to come back on any issue or comment on each other before we open more broadly so it's just an option I'm giving Martin I want to make a remark on public investment I haven't talked about that I fully share the view yesterday in response to so in seeing the picture that Marcus had on the Franco-German divide with the line in between and then there was a bridge my comment was a lack of public investment or paucity of public investment in Germany is making the bridges across the Rhine fall apart and that's actually true literally the bridge on the Audubon the highway that crosses the Rhine north of Cologne which is the major highway from the northern France and Belgium into the core of Germany is no longer passable for trucks and they haven't just prevented the passing they have introduced traps to make sure that the trucks don't cross it because there is a fear that it'll fall apart to the south of Cologne they've just put up signs trucks no longer allowed I think the phrase catches the problem I also think and this this was very much at the back of my mind when I said I don't just want to have a European budget which is distributes money I think we should think very in very concrete term about joint ventures that induce public spending at the EU level with the fiscal capacity at the EU level and then can deal with well both youthful purposes and to some extent fiscal equalization without any newspaper ever noticing it if I think for instance about something like protection of the borders it's clear that this is something that we need it's also clear that this is something where a lot of the spending would be of the money would be spent in the Mediterranean countries for very simple reasons I much prefer moving in such concrete terms where you talk about what is it that we need rather than grand principles of risk sharing and stabilization because those grants principles can easily give rise to too much controversy those were the two points I have in response thank you very much Ellen I just reinforce that swing so indeed this is a wonderful metaphor that bridge falling down in between and Germany and was I when I was applying the good example collective investment in terms of climate change evidently so if we think about you know the cost are rising if we wait and and if we want to meet our target which is pretty much also survival issue we have to to get going now that's that's clearly prudent policy but to some extent investment in infrastructure shares some of these features as well it should add things fall down it's a lot more costly to rebuild later when your population is aging or when you have you have less resources and we can think of a number of collective goods indeed where if we had a fiscal investment capacity we could put money indeed to to good use and that would have some stabilization effect which is also the point that I was trying to make when I was discussing that in the context of climate change thank you just once it's sure the problem is of course political economy with an aging population together with the prohibition on debt finance meaning finance by those who will end up benefiting who are not involved in today's decision processes I think that plays a major role so let me open the floor now we'll take I'll take questions by three by three to try to not over burden the speaker so let me start with Sylvester yes thank you Benoit as I'm one of the few Dutchmen left class cloth has left and so I feel very alone but I think I have to not justify but explain the Dutch position you know general the go one said to let that have some day caliph in East let me translate so all the Dutchmen are a Calvinist even in the south where they're Catholic and that's true that's true Dutchmen try to see surpluses current or sub-count surplus now in the Netherlands is 10% and increasing increasing yeah well I don't say that is justified I try to explain the position of the Dutch and especially the minister of finance he gave a lecture at the Humboldt University beginning of May and he tried to explain his position and the position was that our rights and duties it's a very normative approach to European integration I agree and what he I would say the Dutch government I should speak about the Dutch government has a perspective is that of course there are current account surpluses of Germany and the Netherlands and there is no public investment like Martin said not in the physical infrastructure not in the human infrastructure digitization artificial intelligence and all that stuff and actually I pleaded for that many years already but the idea is that the Dutch government and maybe also the German government see that as a kind of bargaining chip for the other countries Italy maybe France to exchange structural reforms it's a kind of well power play or tit for tat or how you want to call it that they are I think prepared to invest but they want to for in in exchange also structural reforms and maybe maybe it would be possible this is coordination problem this is really a coordination power on a macroeconomic on a European level maybe we could have you know for the next European Commission and the new that we can go to the next level that we can solve this problem in the interest of European integration thank you thank you Jean Claude here thank you very much indeed I would say that the exposition were wonderful and the list of reform is impressive I would personally underwrite absolutely all what you have said let me only mention that we had also done a lot of reforms in the most recent period in the second two years I'm speaking under the control of Mario the setting up by a treaty of the ESM with an enormous amount of callable capital more than 700 billion euros we have the macroeconomic imbalance procedure starting from scratch we have the banking union that Mario mentioned as one of the most important reform we have the fiscal compact all this has been done recently so I would draw our attention to the fact that it's a historic project that it takes a little time nevertheless and when I look at the US the coinage act dated 1792 matured a lot until there was the Federal Reserve Act in 1913 so 120 years and since 1913 of course we have also 106 years so I would draw our attention to the fact that it's a historic process which takes necessarily a little time a lot has to be done a lot have been done in the most recent years and on the international currency I will again underline what has been already said the absence of capital market union the absence of real banking union is terrible it was said also by Mario and by all of you because we do not have the market that would be deep and liquid as is required so we have a very good performance in terms of global payment currency these figures are not known but they are in the report you mentioned Benoit with 40% for the US and 35% for the euro so we are very close where we are desperately behind is when markets are concerned and then very low level of forex proportion for the euro and 1 third of forex and 1 third in international debt denomination so there is a big difference between the potential and reality thank you so much Sajan Claude for being positive I somehow fear that the conference will end with the image of a crumbling bridge between France and Germany which would have been pretty depressive but there are solid bridges between France and Germany and another country so thank you Sajan and then we will go back to the panel. Thank you I had a question about the fiscal framework which was somehow the common thread between many of the presentations Elaine talked about safe asset without saying who was going to issue the safe asset Martin talked about the fact that we don't really have a resolution authority in part because we don't have anybody to deliver liquidity and and and and solvency in instruments and Gopin had mentioned the central fiscal authority we we seem to be in a framework where we don't have a euro area budget and we're maybe not going to have one anytime soon we don't have the second best which would be the coordination of national fiscal policies because we don't have an effective coordination framework and so we're left in the third best which is fiscal rules that we are not following and the form of chaos where every member state does as much as it can to deliver some level of stabilization and so I was curious to to ask the panelists what do you think would be an ideal form of euro area budget yesterday Mario Draghi mentioned that even if we didn't have one immediately the commitment of European governments to have something at some stage would be enormously powerful do you believe that the agreement we had last week in the euro group amounts to that commitment and if not what do we need to change to have that sort of medium term commitment thank you Shayna back to the panelists and then we'll have we'll have other rounds of questions so don't worry about that be patient Gita you want to start so on the the fiscal rules and how much success there was from the euro group meeting week ago I mean I think it's fair to say that there that there was you know probably great intent and some progress but but a lot to be done and this is both in terms you know there wasn't a clear agreement about the size of the budget what that would be the emphasis continues to be on support for competitiveness and structural reforms which is a good thing but there's also a need for macro stabilization and that that has to be done so this will be on the wish list and of course it always seems very ambitious in questions whether that will ever come about but but more narrowly in terms of just the fiscal rules for now I would say that maybe what could be done and I can't see why it shouldn't be is a simplification of the fiscal rules and making it more transparent more clear with the what the escape clauses are it's fairly complicated at this time and I would put that out to something that can be done thank you Martin two responses first one to Jean-Claude Trichet I didn't say that nothing has been done I fully appreciate that a lot has been done the one reservation I have about the process is that quite often there's been too much belief in the power of labels and too little analysis in the case of resolution this phrase never again will taxpayers be involved dominated the political discussion and anyone who understands the subject knows it's not true one moved away well one consciously and I know this because I talked to people involved in the negotiations and said you must do this deal with this one consciously avoided the problem of liquidity because it would have been politically unpalatable I think the willingness to engage in compromise in order to get somewhere well that's fine but then to say we've solved the problem if you know the major part of the problem has not been solved that's dishonest and then to move on to capital market union as though it was the natural complement to banking union when banking union was something that was needed to solve problems in an existing sector that was essential for monetary policy and capital market union is intended to solve the problem that a certain sector isn't really there with no concern about the heterogeneity of the underlying legal infrastructures in the different member states think about German code determination and stock market law takeover law I mean there are lots of things affecting capital markets that would have to be addressed but of course capital this wonderful label never was meant that way and I'm concerned about the facts that even in the progress of the negotiations we've had too much of that kind of hiding things for basically the purpose of media success on the question of the fiscal authority that really raises the problem of political legitimacy a sort of narrow avenue that I could see would be that for some of the purposes that we've introduced one creates specialized agencies gives these specialized agencies funding from a former procedure that's well established well that needs to be well codified and let them proceed on that basis there are many examples of that in different countries the moment you go to an institution that gets the power to raise money and gets this question over what it's going to do with it you need parliamentary involvement and that of course which I think is extremely desirable requires a major way a major change in the way the EU operates. Yes of course there's a focus on public investment which is right we have too low public investment but we shouldn't forget that private investment is a lot more important public investment 90% of all investment is private and we have equally as for the public sector we have really a deficient private sector investment companies investing too little clearly there's a complementarity between public investment and private investment but all I'm trying to say is if you talk about private investment and how to push that we need to think of completing the single market for services having common standards deregulating having more competition if you look at Germany the big reason for the huge current account surplus comes from the services sectors comes from having too little investment and that's that sector therefore too little imports and therefore at a very high current account surplus so really focusing on private investment I would would add is very important the second point on public investment it's a lot more complicated than saying look the government needs to spend more if you take Germany Germany has a federalist structure more than half of all public investment is done at the municipal level at the local level and we have 30% of local municipalities that are over indebted that don't have the ability to spend so thinking about the federalism federalist structure both within countries but but also within Europe I would say is very important that brings me to the issue of the budget and we have the European the EU budget 40% of which are structural funds 40% roughly is the cap the common agriculture policy and there's a lot of scope I mean we're talking about 150 billion over seven years so it's not a huge amount but still there is a budget and I think we should also think about how you are to use that money more sensibly for for instance issues of public investment and also to to help trigger convergence thank you Marcel yeah so I just wanted to yeah yeah very briefly so on the safe side so true that on the payment side there has been a rise now if we want to go farther and you know think about the reserve currency etc so clearly there what what happens during a global crisis time is very important and so we have this weakness of a doom loop within the euro area that we really should fix because precisely when there is a big shock and that you need the safe asset to be resilient is the time where it's just not working the euro area so for the sake of financial stability and also for the sake of international role of the euro that should be one number one on the agenda thank you let me let me allow for another round of questions so there will be many of you won't have an opportunity to ask your questions and I take the entire blame that's exactly my job so let me give the floor exactly in chronological order so status with starting with Yanis Stornas thank you it was an excellent discussion I'd like to pose a question regarding the relationship between banking union particularly the European deposit insurance scheme and capital markets union I have seen certain arguments recently that if we if we achieve a perfect capital market union then we don't need a European deposit in insurance scheme in my view this is wrong I we need both the we cannot have a substitute in the form of a capital market union for European deposit insurance scheme but I'd like to have the views of the panel on that thank you thank you Yanis hi Joe Huang I want to provide a quick comment on renminbi internationalization and then propose a suggestion for the panel to consider on how to you know in large the safe asset I think that several one you know Elaine and also Martin talk about that renminbi internationalization has not you know gone very far one you know as you can tell I'm the only representative from China you know that's you know that's a is it I think that there is a long way to go China's sitting on three trillion US dollar reserves the market estimate of that is about a 70% in US dollar I think China will be more than happy to invest one trillion in euro but of course that you know is is related to Elaine's question you know euro I think that the safe asset there is a short of that in euro in big amount of in liquidity and also that I think that they need to generate a higher return nominal return you know say it's German bound zero return a negative I think that for PPOC the holder a trillion of that sitting negative return that doesn't look very good so so I think that in a way that to massively increase safe return with the positive nominal you know interest rate that's vitally important so here's my proposal for the panelists to consider of course that you know both Martin and Elaine and other talk about the lack of public investment how about you basically that they ask the EIB or EBRD to issue massive amount of bond and the ECB to provide some credit enhancement and the PPOC can buy one trillion US dollars right after that so that's that's that's one suggestion the second suggestion of course I think that the ECB will also need to need to be prepared for a bigger crisis not in your area in global you know I think that when the next big crisis coming out I'm not sure whether the Fed is ready so maybe we need another version of do whatever take internationally whether ECB is ready for that I think that a RIMB is not ready for that yet if China and if PPOC and ECB can collaborate on that I think that that would probably help save the world and hopefully the Fed will come along thank you thank you for your question I mean note that we do have a swap line between the ECB and PPOC which is a can be the start of that discussion yes please in the back yes Christian from Barclays a very straightforward question this is a panel of the about the future of the European Monetary Union and I just wonder whether they're still ambition to actually grow it you know there's still a lot of EU countries that are presumed as assume at some point to to join and obviously this process has come to a hold and you know in financial markets that was all the you know the talk before the crisis about which country would be next to join and you know the kind of convergence that would take place and I wonder whether you believe given the problems that we have right now it's better to wait and keep countries maybe waiting for longer and deal with the all the issues that we defined already or whether one should continue to press on and invite more countries and encourage new countries to join thank you let me take two more questions and that will be it given the time constraints so that's Chris informed and Michael border Chris informed from MIT so many of the reforms that have come up again on this panel as well as the last day and a half have been things like fiscal policy migration things that central bankers can't do too much about given that this is a room dominated by central bankers especially in Europe are there any specific reforms you'd mentioned for them that the people in this room can do more about one example in the US there's a big discussion now on changing the mandate of the Fed should those types of issues or anything else be on the table given the audience here Michael Bird of Humboldt University I have a related question given that Europe as a whole can't coordinate fiscal policy wouldn't it be a good idea to do something like Helmut Schmidt Giscard de Stang meeting and deciding to do something bilaterally and asking other European countries if they want to join in I'm thinking of two things I'm thinking of fixing all those bridges across the Rhine that would cost several billion and then the second thing would be to get rid of the second parliament in Strasbourg and turn it into a European Institute of Technology in the sense of MIT why couldn't Europe do that I mean there are no French smart French people and a lot of smart French German people who could get together and take over this capital stock in Strasbourg and make it into a serious university which Europe has been looking for for a long time so I won't step in that minefield but I'm happy to listen to the answer so please yeah well if you want to not into that minefield but on some of the other questions that came up so clearly the banking union and capital markets you these are not substitutes they absolutely don't substitute for each other you can have a very good capital markets union the US is an example of that but you at the same time you need a banking union you know the capital market union is not going to ensure you against runs on banks or against liquidity crisis in the banking sector and and so not having a common deposit insurance scheme it would be would be would be a mistake to the question to Kristen's question about why we're talking about everything that's not monetary policy I think the way I would say it is that we're trying to make the job of monetary policy makers easier a little bit by saying that it would be really helpful if these other mechanisms were in in place we know I think I think there's been a lot of innovation on monetary policies that have happened over the last decade and while there certainly has been more progress also in other fronts I think that the most important ones are where countries can have greater resilience to shocks that's don't necessarily rely entirely on monetary policy tools on this issue of our banking union and capital union substitutes or not I have the following wrinkle in 2015 there were substitutes because when the new commission came in and said we've dealt with banking union now let's talk about capital capital markets union that meant that for a few years banking union was off the agenda in terms of political energy that can be devoted to subjects there is a budget constraint and there I thought that the displacement of endeavors to think about banking union by concerns about capital market union which to some extent had to do with promoting interests of the city trying to make EU attractive for the UK and things like that that was a mistake in particular since if you look at the actual measures that were being talked about it was piecemeal a little bit here a little bit there but nothing that would get at the fundamental reasons for why we don't have wonderful capital markets on the safe asset real safety I think would require fiscal capacity and would require the discretion to adapt taxation to if necessary the need to pay one step and we have far removed from them the various proposals for safe assets such as SBs our devices to get around them but they all have sort of little pieces of lack of safety that are problematic and ultimately their functioning will depend on the ECB's willingness to buy the stuff which brings me to the observation that at some level the arrangement we have under QE already has some version of SBs namely the different national banks buy and fix proportion in the proportion of the paid and capital share of the different national central banks having said that I would like to draw attention to the fact that we that in introducing QE there has been a step back from the sort of communism in terms of income income accounting by having each national bank by its own government step under a rule that allows it to keep the interest on that debt to bear the risk associated with that debt so that the extent to which that debt is treated as part of the common income of the central banks in the system is very much reduced now that's a form of SB which in terms of thinking of the ECB or rather the euro system as a supranational institution which is one whole is actually a step backward and I remember Peter making a critical comment about this when it was to me in conversation when it was introduced on the other hand and this illustrates the conflict where we are having this rule means that potential exit incentives are unaffected by QE because if you think about the real incentives for exit a government that wants wants to leave what do they have to gain what do they have to lose they lose their share in euro system profits and they gain the assets that they withdraw from the euro system now the difference between those two is neutral to QE under the procedure that has been followed and I've been discussing this with a number of people is this a good thing or a bad thing I see pros and cons but very definitely the splitting up and treating these acquisitions as if they were each national central banks own business except for the fact that's under the control of the euro system is a step back thank you Martin you know QE is a monetary instrument right so whether it's a good thing or a bad thing from a fiscal standpoint yes he's not really the point yeah Marcel just to to comments also one way I think I wouldn't agree that QE has an element of SBs but I want to answer two two questions one is by Michael Borden but the other one Chris Seed Forbes you know when we started this group of 14 economists French and German our thought was exactly the same thing that different views and you know in a way they're compatible they're not contradictions but they're two sides of the same coin now thinking back I think it's very important to be more inclusive I think it's actually not a good idea to have a tune to narrow it down to two countries and there are actually a lot of proposals on European universities excellence universities by President Macron so there are some proposals out there and I think I agree with it would be good to move in that direction on Christine's question on the on the on the mandate on the reforms I do think we need to have that discussion about the mandate what central banks should be doing I think the result would be not so different from what central banks do today but I think again for the issue of legitimacy to say look we are looking at that issue it is important we need to really think very hard about a changing global environment financial stability having become a lot more important for central banks than it was 10 15 20 years ago for me the question is what's the right timing and you probably want to do that discussion and those reforms when things when when when they're smooth sailing so when things are relatively calm and if I may one comment to Olivier Blanchard on Monday evening I actually would think that it's actually very dangerous in times when you still have zero interest rates when it's difficult to achieve price stability to move up the inflation targets so talking about credibility I think you really want to do this reforms about manage the board discussion about the mandate of central banks in good times when things are well and not rock the boat when it's difficult and then you have the last word just wanted to briefly add to the answer to hi-jo so the safe asset proposals come in many different flavors so we discussed SBs which are about you know putting together a national debt and then somehow tranching but there's also some alternative views which could be that the SM body you didn't actually cite could could also issue debt but of course the devil is in the details and then you have to think about a lot of issues about implementation seniority etc. but definitely this all should be in the agenda. Thank you Ellen I've been instructed to catch up on the later start of this session which I'm doing diligently so I guess it's time to hand the floor back to Christine Gaff and to the president thank you very much to all speakers and thank you for your questions.
 So, good afternoon and welcome to this conversation on the future of EMU.  I guess we are at the time in this conference where we can reflect on everything we've heard  and learned over the last day and a half and pull the threads and weave the threads together  and make it something useful for the future of EMU.  We're here to discuss the future and we're not here to discuss the past.  And it comes at a, I guess, at a topical moment where finance ministers last week and  prime ministers and leaders tomorrow will also reflect on the future of EMU.  And it's also an opportunity for the panelists to comment on what has been achieved so far  in terms of deepening EMU, but more importantly to discuss what more should be done to make  the life of the ECB easier.  So we have a fantastic lineup.  You had all the names and functions and we know all speakers and we are very grateful  that they could be here with us today.  So without due delay, Gita, can you start it?  Thank you.  It's a real pleasure to be here and to participate in this.  This is my first time in Central.  So this is a very beautiful place.  Okay, so to jump in very quickly on the discussion of the future of the European Monetary Union,  I will center my remarks around three broad issues.  The first is about heterogeneity that remains and how problems get amplified by it and what  needs to be done.  And is about the reforms that are still required.  And while many of us understand some of the broader issues over here, maybe I will narrow  down on a few specific prescriptions.  And this will require reforms not just at the union level, but also at the national  level.  And then I will finish up with a discussion of the international role of the Europe.  So just as a flavor of where we're going, certainly there is heterogeneity and that  heterogeneity remains.  If you look at this chart here on the left is Euro area, you look at the unemployment  rate.  You had this big increase in divergences in unemployment rates soon after the crisis.  Some of that has come back down.  And while the average level of the unemployment rate in the Euro area is back to record levels,  the employment rate is high at this point.  You still see significant divergence across some countries in the Euro area.  And on the right you have the U.S. and you see the dispersion on unemployment rates over  there.  And you see similarly there was an increase in dispersion following the crisis.  But that dispersion has pretty much disappeared or narrowed again back to its original level  in more recent time.  So for me there are two things to take away from this.  One is of course the classic textbook understanding that when you're in monetary union and you  have one policy to affect regions that are heterogeneous shocks, there's only that much  you can do.  And there are limits to solving all of the problems.  But the second thing also is that monetary policy can't solve all of this because there  are structural issues over here.  There are structural differences across countries in the labor markets, in the product markets.  And in the absence of those reforms, the success of the monetary union will not be as good  as one would like it to be.  So I'd like to keep both of those in mind.  And this is a picture that maybe some of you have seen before, but it also highlights the  fact that alongside this heterogeneity and divergence there's a low degree of risk sharing.  And again, if you compare the risk sharing channels in the US and Canada relative to  the Euro area, in the US and China, as US and Canada, right after the crisis, so this  is from around 2000 post-global financial crisis, you certainly saw more risk sharing  that took place through capital markets and through a lesser extent through fiscal transfers  in the US and in Canada as compared to the Euro area.  So what that means is that if you live in a part of the Euro area where unemployment  rates are high or incomes are low, you are going to also be living with lower consumption.  So there's very little risk sharing that is going on.  Now something that was less textbook about heterogeneity is that while yes, we all know  that one policy for diverse regions is difficult and constrained, I think what was less appreciated  that even the transmission mechanism can become highly heterogeneous during a crisis.  And so we saw that early on when you have the, when the ECB started cutting interest rates  after the global financial crisis, but you see that if you look at the lending rates  between different parts, you know, Germany, Spain, Italy, France, and if you compare those,  you certainly see an opening up.  Now it is a high point of the ECB's work that solutions were founded to fix these problems.  So the T-elitros certainly helped in narrowing those gaps earlier on.  And you see that if you look at the column of the histogram on the right and you look  at each of those countries, you'll get Italy, you see the kind of the blue portion relative  to the white portion, which means basically Italy and Spain took up more of this particular  channel of financing as compared to say France and Germany.  Now the red bars are the newest form of long-term refinancing operations.  And that of course is trying to fix a different problem.  It's trying to take care of the possibility of a liquidity, potential liquidity crisis  that one might need to worry about going forward.  So of course that comes very quickly to my third form of heterogeneity.  And the fact, I think there was much less appreciated the start again of the EMU and  more generally in our textbooks was the importance of having a lender of last resort.  And so again, this is a classic figure and it's, of course, was very tempting for me  to put it out as President Draghi enters the Central Bankers Hall of Fame.  I think this is a classic picture that we will do whatever it takes to save the euro.  And that's the lesson to be learned that is clearly there's a need for a lender of last  resort.  It continues to be the case that debt levels are very heterogeneous in the European Monetary  Union.  Now, of course, there are sometimes problems with debt levels that have to do with fundamentals,  in which case monetary policy should not play a role.  But there is also circumstances under which there are problems with debt levels that have  to do with liquidity, with runs in markets, with market failures, and in those situations  it is important for a central bank to step in.  And so that has to be a lesson that continues going into the future.  And things have been done about that.  Okay, so that was a quick overview of the heterogeneity that we're seeing and I'm going  to jump in quickly into what needs to be done.  So let's start with the one area where already work has happened and that's in the banking  union.  So I don't want to go into, everybody here knows obviously the details of what has been  done so far.  I'm not going to go into that.  I'm going to make points that in the absence of having a common deposit insurance scheme,  I cannot see sufficient progress being made in the banking union.  So it has to be that an important act, next act, will have to be coming up with a common  deposit insurance scheme.  There needs to be a credible backstop and by credible backstop it has to be credible  in two ways.  One, it has to have the money for it, it is sufficient, but two, it also should be deployable  very quickly.  So both of those features need to be there for it to be credible and that's an important  part of it.  Second on capital markets union where there's lesser been done so far, but this is hugely  important.  We've done work at the fund on figuring out what are the main issues with having a common  capital market in the euro area.  And we highlight three features.  One is insufficient transparency, which means that if you look at reporting standards in  terms of how firms report, there is not enough uniformity in disclosures.  So one could make an argument for having a common minimum disclosure requirement.  Secondly, is having a minimum standard for insolvency.  There is a great deal of heterogeneity and insolvency regimes across the euro area and  again, one should argue for having a minimum standard for it.  And third is a centralized supervisory power for non-bank financial institutions, which  is again can generate some uniformity.  Now this is of course very important for many reasons, there certainly needs to be a diversification  away from firms relying very heavily on bank financing to other forms, sorry, bank financing  to other forms of capital financing.  And secondly, we certainly could use to have more safe assets in the euro area and this  would be one way of creating triple A securities.  Lastly, I suspect the piece that's the hardest to bring about, which is essential fiscal capacity,  but it can't be emphasized enough.  We are living in a world where the outlook remains precarious.  The possibility of a downturn is, while not imminent, certainly is not that far off either.  And therefore it's very important to have a macro stabilization tool in the euro area  to deal with that.  To the extent that union-wide reforms remain a political challenge, I think in the meantime  it's very important for countries to undertake reforms at the national level.  You have to build resilience, so some new work that we came out with that we just put  out a couple of days ago points out that countries that did do labor market and product market  reforms at home had greater resilience to the shock.  So there is evidence that that works and it should be done.  And once again, when you say labor market regulation, reform, that doesn't mean just  one size fits all deregulating the labor markets.  It doesn't mean making it less friendly for workers.  There are very many models for it.  There are the Nordic models where you have a very strong unemployment insurance net.  You have great support for people to find jobs, but at the same time you have flexible  labor markets which reallocate resources, and that's very important.  So lastly, I'm in negative time duration now.  I'm just going to jump into the international role of the euro.  So this is a figure that comes from the most recent analysis that was just put out by the  ACB.  Two things to point out is one is that there was clearly a period from around 2005, 2006  onwards where you saw a decline in the international role of the euro.  That seems, and there is an uptick now.  I mean, we'd have to wait and see whether this is signs of actually a reversal in trend  because some of this is a reflection of central banks around the world using their dollar  reserves to defend their currencies in 2018.  So it's going to take a few more data points to see whether there's been a reversal.  But I'm just going to end with my absolute last slide, which is the fact that...  So this is work that I've done which tells you that if you want to internationalize a  currency, you really have to work on multiple fronts.  A currency's role in trade, in finance, and as a reserve asset, complement each other.  So this is a simple picture that shows you that countries that rely very heavily on dollar  invoicing in their trade, and this is...  I'm looking now at countries that are not dollarized economies, but countries that rely  heavily on dollar invoicing in their trade, are those that also have a greater share of  their banking liabilities that are in foreign currency are in dollars.  So you see dollarization of the banking sector.  And once you have dollarization of the banking sector, then of course that gives the central  banks a very good reason to also be dollarized because if you had to pick one currency to  defend your financial markets, that would be the currency that's predominant in the  banking sector.  So these three things come together.  So we would have to have a push for more euro contracting in trade that would then spillover  into finance and into trade finance, and that would then spillover into central bank reserves.  And with that, I will stop.  Thank you.  Thank you, Géta.  So we'll come back to the international world of the euro with Marcel later on.  So we'll have opportunities to dig deeper into this, and meanwhile, let me give the  floor to Martin.  Oh, and by the way, it may be time to disclose one thing, which is a reason why you have  so many jokes about time becoming negative, that we have this big clock here which you  don't see, which is normally green, and when it reaches zero, it turns red and negative.  So that's why all speakers are making jokes, and there is no zero lower bound, but there  has to be an effective lower bound, I guess.  Martin.  Well, thank you very much for the invitation.  Future of EMU.  There is a temptation to talk about the long run, but there is this quote from Keynes about  the long run.  And in fact, one of the questions about EMU is whether it's going to reach the long run.  And the risks to the existence of EMU, I think, have played too little of a role in the past  two days.  The rise of populism, which is partly anti-EU and partly anti-Euro, must be a cause for  a thong.  And the underlying problem is that politics is local and national, and the source of political  legitimacy is again local and national.  We heard about the first 20 years of the Euro.  One thing I find striking is that the first 10 years were a period of depolitization of  monetary policy.  One was talking about inflation targeting or tuplers and things like that.  And the second 10 years were a period of repolitization of monetary policy along nationalist lines.  I will focus my remarks on issues involving banks.  We like to talk about the need to eliminate, to cut the nexus between banks and sovereigns.  And pessimistic that this is ever going to come to a conclusion.  The problem is this.  Banks are essential to the monetary system.  Banks are also an essential part of national political systems.  From the perspective of the ECB, banking union was needed in order to get control over an  essential part of the monetary system.  That enabled to some degree the ending of the procrastination on how to deal with banks  in trouble.  In 2012, on the occasion of the long-term refinancing operation, I sometimes said, weak banks are  wonderful for national politicians because they provide an indirect avenue to the printing  press, which of course creates an incentive to keep them that way without cleaning the  system up.  The SSM as a device to aid the cleaning up has been a remarkable success.  But bank resolution doesn't work.  The single resolution mechanism is not viable.  And it isn't just the question of the fiscal backstop.  It's also the simple problem of a need for liquidity during the resolution procedure.  And that's a need, even if you don't wind the bank down, while you're sorting out the  alternatives.  Bank of Popular Española had to be resolved overnight through a sale to Santander because  there was no liquidity.  Now, if we're talking about liquidity in the case of BNP Paribas or Deutsche Bank, we're  talking about a quadruple digit billion number, which of course would be politically infeasible  as say a task for the ESM.  The backstop for final losses would be much lower.  But we don't have any arrangements for these purposes at all that are rarely workable.  I think reform in the area of resolution is really needed.  Can we hope to break the nexus?  Well, in 2002, the Swiss municipality of Leukabad was insolvent.  It didn't get any aid from the Canton or the Swiss Confederacy, and the bank didn't want  to provide more loans.  Can we imagine the president of the French Republic to be placed vis-à-vis BNP Paribas  in the position of the mayor of Leukabad vis-à-vis the banks?  I simply cannot imagine that.  And the same would be true even of many of the minister presidents and the heads of the  regional governments in Germany.  Influence and power over banks has in tradition been regarded as a major element in particular  in Europe as a major element of national sovereignty.  And there are many more avenues to exercise that power than just supervision and resolution.  And the sovereigns so far are the centers of political power and political legitimacy.  From their perspective, banks are important and are political because they are a source  of funding, and money is a tool of power.  The German Lundisbanken provide an example.  It may be a wonderful field for fantasies about industrial policy.  National champions think about the recent endeavors to have a merger of Deutsche Bank  and Koerzbank initiated by the Berlin Finance Ministry think also about the French Bank  merger some 20 years ago.  It's important for voters.  And in this context, we must mention the fact that the outcome of the Italian election a  year ago was dramatically influenced by the experience of bail-in in the case of various  Italian banks.  Investors are voters.  Sometimes the large investors may be even more important for voting power than the small  people whom we think about for deposit insurance.  And the power of investors is one of the things we need to keep in mind when we talk about  the politics of banks.  Thinking about EDIS I think focuses on really the smaller part of the problem.  In Banco Popular Espanol it was the municipalities with large deposits that ran.  And I have a suspicion that the authorities in Madrid were not even unhappy about this  because if Banco Popular Espanol had gone into such trouble that these municipalities  had gotten losses, that would have been the real scandal.  From the sovereign's perspective and from the populist voters' perspectives, BRRD,  SSM and state aid control are all intrusions on national territory.  And we need to think about the politics of those intrusion.  The problem is reinforced if the ECB uses the power that it has over the funding of  banks, in particular in emergency situations, in order to exert further influence over national  policies.  Ireland and Greece provide instances of that.  At some level all this means we need, we have a need for a supranational source of political  legitimacy which basically means a stronger parliament and a stronger executive.  A budget just by itself is not going to help, especially if the budget is just seen as a  device for distributing money rather than a device for doing things.  We have enough distributional conflict already.  Underneath all this is a really much deeper challenge.  The past ten years have taught us to think about these matters in terms of real estate  bubbles inducing banking crises that over task the sovereign or in terms of sovereign  borrowing leading into all sorts of problems.  Sort of misbehavior that through suitable controls before one might actually get under  control and eliminate.  But going back to the discussion of this morning, if you ask what has happened in some of the  instances, take the case of Northern Italy, the banks that were involved there, we're  talking about changes in comparative advantage.  Asymmetric shocks, this morning we heard about the role of competition from transition  countries, competition from China.  And that creates changes in economic activity in these areas.  And the regional drought that's in use affects not just the real economy but also the bank  and to the extent that the banks are regional banks, they're ill diversified against such  shocks and the governments.  How to deal with all that?  It's a task for supervision and resolution to clean up and regional policy and then also  perhaps national and EU policy.  In the US, the risk sharing that Gita referred to has a lot to do with the fact that national  spending is an important stabilizer.  I actually once heard a talk by the Swiss Defense Minister about the problems of Swiss  defense policy.  And the entire lecture was on how they were using their spending to provide for fiscal  equalization across cantons.  That's in even that relatively small scale.  In the US also mobility provides a very important way out.  West Virginia may be a problem and the Rust Belt may be a problem and they vote for Mr.  Trump.  But there are lots of people leaving.  The problem of radicalization in Rust Belt including Northern England, Northern France,  Saxony and I suspect also parts of Northern Italy is of course a major problem for our  political systems right now.  Underlying this is the problem of capitalism, how to deal with the vagaries of economic  development in open economies subject to technical changes including those that occur elsewhere.  To some extent this is an old story.  We've had this with coal and steel, we've had this with textiles before.  But then there is a question of governance, who is in charge of this and how does this  relate to the financial sector and to monetary policy?  Switzerland is an example where most of this is handled at the cantaloupe level in a very  decentralized way.  Germany has some of that as well.  And I mean the Neuerländer, the Excessionländer are the example that proves the rule largely  through fiscal federalism.  But we need to find ways to come to terms with that.  The legitimacy crisis which is induced by these vagaries of economic developments.  Sometimes a crisis of Brussels, that's what many of the interested parties say.  It's also a crisis in the very centralized states such as UK or France of London and  Paris, perhaps also Berlin and Rome.  Like the underlying issues, what governance do we develop in the EU context to deal with  that kind of problem?  And it's not a question of transient shocks, asymmetric transient shocks.  It's a question of asymmetric structural shocks which are there to stay where some of the  ability to adjust must be at the regional level and the extent to which that works depends  on incentives that we have even at the regional level.  So we've gone into the depth of negative time but I guess that's because you were talking  about Switzerland so it's okay.  Ellen, please.  Thank you very much for having me.  I'm going to talk briefly about three topics which have been alluded to in various times  yesterday and today.  First one has to do with external imbalances within the EUR area.  The second with macroeconomic stabilization tools and I will have brief thoughts on monetary  sovereignty.  So you've seen this graph before.  It's about the EUR-Area current account imbalances and there are two clear phases.  The first one between 2003 and the great financial crisis and the EUR-Area crisis where we have  divergence.  So we have in particular in the lower negative territory here we have Spain, we would have  Greece, Ireland and then after the EUR-Area crisis we have a compression of domestic absorption  in the periphery and we have a set of very important current account samplices in particular.  So in the positive side you have Germany and the Netherlands.  Now a reflection of these current account imbalances of course is the net international  investment positions of EUR-Area country and so here I have single dot in yellow countries  with very negative international investment positions.  You have Ireland south of 100% in terms of GDP, Greece, you have Spain and Portugal for  example and on the positive side you have again Germany, Netherlands for example.  Now I would argue that the first set of imbalances was already so an existential threat for the  EUR-Area in the sense that what we have seen during the period 2003 to 2008 was a risk  buildup with large inflows into the periphery correlated with large asset valuations, real  estate bubbles and we all know the story crisis risk premia going up, the doom loop in full  play and finally intervention of the ECB.  But the second set of imbalances so this second phase we are currently in and looking forward  also causes an important threat for the EUR-Area and there as mentioned by Olivier and by Ricardo  for example the way to rebalance to get out of that has to be through a change in relative  prices and real appreciation of Germany and the Netherlands so that has to happen for  an inflation differential for example inflation above 3% in Germany and the Netherlands for  a while and below 2% in the periphery.  This is exactly how the EUR-Area is supposed to work, this is nothing special.  From the transitory point of view this is how the relative price have to adjust and  I guess this is how it should be also understood by citizens in various countries of the EUR-Area.  Now why is it important to have rebalancing and to take a look at these excess current  account surpluses because there is a number of negative externalities which come with  these current account surpluses and the period of too low inflation in the core that we are  living through.  So one set of negative externalities is purely to do with deflationary pressures in the periphery,  depression of aggregate demand, negative effect on debt sustainability given that we exit  the crisis with high levels of nominal debt so this matters.  There is a slowdown of relative price adjustment because of a low level of inflation in aggregate  which makes the EUR-Area more fragile to shocks and excess savings put downward pressure  on the real rate knowing that the monetary policy is already close to the effective lower  bound.  I would add that we also could get some more random tweets correlated somehow with the  size of bilateral surpluses putting us more at risk of higher trade war.  Now in absence of additional tools what needs to be happening is expansion of aggregate  demand and inflation higher than 2% in core countries.  It is often claimed and we had a very good paper actually this morning discussing the  virtue of having current account surpluses and JNI bigger than GDP in case of aging population.  So it is often argued that in the case of aging population it is prudent to save and  therefore to have current account surpluses.  However what was missing in a way from the discussion this morning is that one could  equally make the case that not investing is actually not prudent in a world in which we  are living through climate change and the prudent policy in such a world has to do with  increasing public investment to realize energy transition now as cost are rising quickly  and we are seeing cumulative processes.  Otherwise of course the bill will be higher later when population is older.  So in other words what we have not talked about in the discussion this morning is that  climate debt is actually building up if public investment is not increased right now to perform  energy transition.  On top of it it is now the time to do it because we are living through a period of very low  real rate.  And here I could have picked other countries but here is the German gross public investment  over time compared to the decreasing 10 year yield and one can see that there is not much  price elasticity here in this graph.  Now in terms of where we are of macroeconomic stabilization tools to help with the current  situation and looking forward there is an asymmetric game which is played between the  ECB which has a Euro wide objective while fiscal policy is determined still by perceived  national interests.  So of course we are in equilibrium in which if countries with fiscal space actually do  not expand enough monetary policy has to do and will do the extra mile and is more likely  to be at VELB.  So excess burden is placed on the ECB.  Lose our monetary policy implies countries with fiscal space actually perceive even less  of a need to expand and therefore as a result we are in a situation where core countries  have a wrong macro policy mix with monetary to lose fiscal to tight.  We do not have a Euraria budget for stabilization purposes.  We could have had one in the last days but it just did not happen.  So we should at least have more transparent less pro cyclical fiscal rules compared to  the ones we currently have.  About that I will refer you to the CPR 7 and 7 report which discusses this in great detail  but we should also at least in the spirit of what I just said have a sizeable investment  budget for decarbonization artificial intelligence research financed by cyclical revenues for  example share of corporate taxes in order to decrease climate debt etc.  So looking forward this would be the present thing to do and this actually would be counter  cyclical.  Now another tool in the panoply that we have looking forward and that could be useful is  the macro potential policy that is deployed at the national level and provided macro potential  authorities put up their counter cyclical buffer during economic upturns gradually building  it up with as the literature tends to show now little effect on activity during the  the upturn then the buffer can be actually released quickly if credit conditions tighten  in a downturn which is very welcome to reinforce effect of monetary policy easing.  So looking forward in the URR macro potential policies could actually turn out to be also  an important tool to fight downturn and credit tightening conditions for our munitions.  Finally I would like to talk a little bit about sovereignty and during here on the speech  that Mario Draghi gave in Bologna in 2019 where I said no truth sovereignty is reflected  not in the power of making laws as a legal definition would have it but in the ability  to control outcomes and respond to the fundamental needs of the people.  Now if I think about that and apply it to monetary sovereignty so we can see that to  some extent monetary sovereignty is constrained by a number of factors.  One is the global financial cycle, the Fed being a key driver, another one being the  current invoicing patterns in the international economy where pass through from exchange rate  to price is determined by invoicing and the dollar is very much a dominant currency in  invoicing.  Another one is the payment system where we have extra territoriality and issues of the  US law there being applied in various traditions and the final one very important one being  the fragmentation in the URR with a doom loop which puts some constraints also on what monetary  policy in certain states of the world can actually achieve.  So I think if we think about the future of EMU again part of it will have to be about  increasing sovereignty and relaxing some of these constraints starting maybe with the  last one.  So to conclude I think so it's nice to be here for the 20 years of the euro we have  got a long way since 1999 however there are lots of important issues facing the EU right  now but we should not lose track that reforms of the EU area are really important and should  really be in the agenda in the most pressing way.  So we have to deal with these imbalances and this is linked to macro stabilization.  We have to think about this notion of what is prudent investment particularly in a time  of very low real rate and in terms of monetary sovereignty I mean relaxing those constraints  has to do with improving what Gita has mentioned in her discussion before.  Improving banking union actually doing capital market union and the creation also of a safe  asset for the euro area.  Thank you Alain.  If you allow me a personal comment I'm really glad that you brought back into the discussion  the issue of fiscal rules which seems to have totally vanished away from the European discussion  both in the academia and in Brussels actually and so we can very much on Nils Teegerson  who is here today to help us one day fix the European fiscal framework which has so obviously  failed but Marcel the floor is yours.  Thank you very much for having me.  I want to talk about the political economy of EMU and the euro and echo a little bit  also what the others have said before and focus in particular on the question if monetary  union is to succeed in the long term it needs legitimacy, it needs credibility, it needs  strong institutions and we should not be taking that legitimacy and credibility for granted  and I want to talk in my few minutes of the comments about where I see the risks to that  and I want to argue that we need a different narrative for why it is important to complete  monetary union, why it is important to do the different reforms that we need a positive  narrative and that strengthening the international role of the euro actually really trying to  develop the euro and having a truly global role actually could provide such a positive  constructive narrative that could convince member states to do more to complete the monetary  union and I want to start with paying respect to what was my first boss at the European  central bank and when I joined I remember he was talking about an experience in Germany  in the 1960s where politicians had attacked the Bundesbank for doing the wrong policy  and they were basically slaughtered in public because the Bundesbank had such strong public  support that basically the politicians committed political suicide, they had no career in the  future because they dared to criticize the Bundesbank and you probably remember the quote  by Jacques Delois who once said not all Germans believe in God but all believe in the Bundesbank  and I think that that kind of shows that having a high degree of credibility is incredibly  important to deliver on the mandate what central banks are supposed to do and that was one  of the strength of the European central bank that allowed it also to be so effective in  the last ten years.  Now my three big worries concerning monetary union but more broadly also economic reforms  in Europe what I would describe as three P's populism, protectionism and paralysis, lack  of reform.  Martin Helbig talked a bit about populism and in Europe the big worry is that a lot  of this populism is an anti-European populism.  If something goes right it's a national responsibility, if something goes wrong it's Brussels, it's  the single market, it's the common rules, it's the Euro, it's monetary policy and that  of course so exactly the opposite what I said in this example of the 1960s you have the  feeling today politicians want to gain credibility or votes it's very easy to use or abuse Europe  or the Euro as a scapegoat for national policy mistakes.  I wouldn't underestimate this and this is not just an issue of a small group but when  I look at my own country if you look at the discussion on target tomb balances you see  how far this discussion is going even among economists where you get the impression Germany  or Bundesbank has net claims of almost 1,000 billion euros you have some would describe  say look this is 5,000 euros for a family of four and if something happens that's what  people lose so there's this really strong emotionality and strong negative sentiment  to say this is a problem and so I see these three P's in particular this populism as a  major threat to monetary union in the long run and again I don't think we should underestimate  that.  So far the narrative for saying look we need important reforms at the European side the  others talked about it on capital market union banking union was a lot negative narrative  in particular in Berlin the perception is they want to force the German government to  agree to fundamental reforms against their own will there's a feeling there's an attempt  to create a transfer union so there's a very strong asymmetry who has to burden or has  to carry the burden of adjustment of paying for those reforms who's taking the risks  example of target two and so in some sense it's not surprising that there's a very large  reluctance of governments to actually agree in particular in Berlin because of feeling  is look we don't want to be forced or pushed into doing reforms where we are not convinced  and therefore the illusion that I see in particular in Berlin is this view time is on our side  if all other national governments would just reform and do the right reforms everything  would be fine and we don't need fundamental reforms in Europe and I think this is a very  dangerous illusion and shifting to a positive narrative I think we need to first of all  again have more of a global perspective I think we have been engaging in too much naval  gazing in Europe we have forgotten that there is a global competition with Asia with China  with the United States who are becoming increasingly affirmative and nationalistic and that includes  also the monetary system the US has been using the US dollar very aggressively and also now  the recent discussions on Iran on the payment system you see how strong also that can be  as a policy tool China has pushed the renminbi the international role of the renminbi very  aggressively with some success clearly since 2015 that was a bit of a weakness but if you  look at the role of the renminbi within Asia you see that many of the Asian countries actually  manage their currencies against the renminbi just as much vis-à-vis the US dollar so in  terms of managing the currencies the renminbi already has a regional role so I think the  big choice that Europe will have to make is whether in the future this will be a truly  tripolar monetary system global monetary system with the US dollar the renminbi and the euro  or whether the euro will lose and Gita showed the chart on the international role of the  euro that comes from the international role of the euro report by the ECB which is a very  informative very detailed an excellent report and you see this decline in the international  role of the euro actually not just since the global financial crisis of the European crisis  but actually before since the mid-2000s and I think looking at that trying to understand  what actually is driving that declining role of the international role of the euro is important  clearly it has something to do with the relative economic weakness of the euro area at the moment  it also of course has to do something with political decision-making in Europe but in  particular it has to do with the fact that monetary union is not completed or not complete as it  should be to really give the international role of the euro a bigger role a truly global status  and Helen Martin Gita talked about some of the elements our report of the 14 economists the  French and German economists last year and we had a shorter update this year underlined that  and said look to complete monetary union we don't need this big big change we don't need  political union we need a set of really what we believe fairly realistic reforms on capital  market union on banking union creating a common safe asset and you can go into detail how specifically  that look should look like but clearly it is important to have a common safe asset on fiscal  policy not just to have fiscal rules that make sense that are more counter cyclical and give  governments more space but also we need both on the macroeconomic stabilization a better buffer  against asymmetric shocks and also more of a common fiscal policy stance in Europe to help  convergence to help integration and make financial markets deeper so I think these are some of the  more important reforms to push ahead and my key argument is we should really think more of a  positive narrative to convince governments in Berlin and Paris elsewhere to say why is it  actually so important to complete monetary union and it's not just that you know you need to do  it because otherwise you'll be sorry later on but there is substantial potential for the euro  the big economic benefits through much better financing conditions deeper capital markets more  stability in particular when a crisis hits so there the economic benefits from having a strong  global currency are very clear again in a increasingly polarized world I think is very  important to have in international world of the stronger international world of the euro to  transform it into a truly tripolar global currency system so to prevail in that monetary system  I think that also would go a long way in strengthening the legitimacy of the euro giving  the ECB more again full de facto monetary independence to act and it would kind of pick  also the pressure of the European Central Bank to do what's yeah to stabilize where it's clear  national governments need to do more both on the fiscal side on macro potential policies to  stabilize the euro thank you thank you Marcel thank you for advertising the year ECB report on  the international world of the euro which you can download on the ECB website we have 25 minutes  or so for a discussion which is a which is ample enough and before opening the discussion to the  audience I would like to ask the panelists if they have want to come back on any issue or comment  on each other before we open more broadly so it's just an option I'm giving Martin I want to make a  remark on public investment I haven't talked about that I fully share the view yesterday in response  to so in seeing the picture that Marcus had on the Franco-German divide with the line in between  and then there was a bridge my comment was a lack of public investment or paucity of public  investment in Germany is making the bridges across the Rhine fall apart and that's actually true  literally the bridge on the Audubon the highway that crosses the Rhine north of Cologne which is  the major highway from the northern France and Belgium into the core of Germany is no longer  passable for trucks and they haven't just prevented the passing they have introduced  traps to make sure that the trucks don't cross it because there is a fear that it'll fall apart  to the south of Cologne they've just put up signs trucks no longer allowed I think the phrase  catches the problem I also think and this this was very much at the back of my mind when I said  I don't just want to have a European budget which is distributes money I think we should  think very in very concrete term about joint ventures that induce public spending at the  EU level with the fiscal capacity at the EU level and then can deal with well both youthful  purposes and to some extent fiscal equalization without any newspaper ever noticing it if I  think for instance about something like protection of the borders it's clear that this is something  that we need it's also clear that this is something where a lot of the spending would be of the  money would be spent in the Mediterranean countries for very simple reasons I much prefer  moving in such concrete terms where you talk about what is it that we need rather than grand  principles of risk sharing and stabilization because those grants principles can easily give  rise to too much controversy those were the two points I have in response thank you very much  Ellen I just reinforce that swing so indeed this is a wonderful metaphor that bridge falling  down in between and Germany and was I when I was applying the good example collective  investment in terms of climate change evidently so if we think about you know the cost are  rising if we wait and and if we want to meet our target which is pretty much also survival  issue we have to to get going now that's that's clearly prudent policy but to some extent  investment in infrastructure shares some of these features as well it should add things  fall down it's a lot more costly to rebuild later when your population is aging or when  you have you have less resources and we can think of a number of collective goods indeed  where if we had a fiscal investment capacity we could put money indeed to to good use and  that would have some stabilization effect which is also the point that I was trying  to make when I was discussing that in the context of climate change thank you just once  it's sure the problem is of course political economy with an aging population together  with the prohibition on debt finance meaning finance by those who will end up benefiting  who are not involved in today's decision processes I think that plays a major role so let me open  the floor now we'll take I'll take questions by three by three to try to not over burden  the speaker so let me start with Sylvester yes thank you Benoit as I'm one of the few  Dutchmen left class cloth has left and so I feel very alone but I think I have to not  justify but explain the Dutch position you know general the go one said to let that have  some day caliph in East let me translate so all the Dutchmen are a Calvinist even in  the south where they're Catholic and that's true that's true Dutchmen try to see surpluses  current or sub-count surplus now in the Netherlands is 10% and increasing increasing yeah well  I don't say that is justified I try to explain the position of the Dutch and especially the  minister of finance he gave a lecture at the Humboldt University beginning of May and he  tried to explain his position and the position was that our rights and duties it's a very  normative approach to European integration I agree and what he I would say the Dutch  government I should speak about the Dutch government has a perspective is that of course  there are current account surpluses of Germany and the Netherlands and there is no public  investment like Martin said not in the physical infrastructure not in the human infrastructure  digitization artificial intelligence and all that stuff and actually I pleaded for that  many years already but the idea is that the Dutch government and maybe also the German  government see that as a kind of bargaining chip for the other countries Italy maybe France  to exchange structural reforms it's a kind of well power play or tit for tat or how you  want to call it that they are I think prepared to invest but they want to for in in exchange  also structural reforms and maybe maybe it would be possible this is coordination problem  this is really a coordination power on a macroeconomic on a European level maybe we could have you  know for the next European Commission and the new that we can go to the next level that  we can solve this problem in the interest of European integration thank you thank you  Jean Claude here thank you very much indeed I would say that the exposition were wonderful  and the list of reform is impressive I would personally underwrite absolutely all what  you have said let me only mention that we had also done a lot of reforms in the most  recent period in the second two years I'm speaking under the control of Mario the setting  up by a treaty of the ESM with an enormous amount of callable capital more than 700 billion  euros we have the macroeconomic imbalance procedure starting from scratch we have the  banking union that Mario mentioned as one of the most important reform we have the fiscal  compact all this has been done recently so I would draw our attention to the fact that  it's a historic project that it takes a little time nevertheless and when I look at the US  the coinage act dated 1792 matured a lot until there was the Federal Reserve Act in 1913  so 120 years and since 1913 of course we have also 106 years so I would draw our attention  to the fact that it's a historic process which takes necessarily a little time a lot has to  be done a lot have been done in the most recent years and on the international currency I will  again underline what has been already said the absence of capital market union the absence  of real banking union is terrible it was said also by Mario and by all of you because we  do not have the market that would be deep and liquid as is required so we have a very good  performance in terms of global payment currency these figures are not known but they are in  the report you mentioned Benoit with 40% for the US and 35% for the euro so we are very  close where we are desperately behind is when markets are concerned and then very low level  of forex proportion for the euro and 1 third of forex and 1 third in international debt  denomination so there is a big difference between the potential and reality thank you so much  Sajan Claude for being positive I somehow fear that the conference will end with the image of  a crumbling bridge between France and Germany which would have been pretty depressive but there are  solid bridges between France and Germany and another country so thank you Sajan and then we  will go back to the panel. Thank you I had a question about the fiscal framework which was  somehow the common thread between many of the presentations Elaine talked about safe asset  without saying who was going to issue the safe asset Martin talked about the fact that we don't  really have a resolution authority in part because we don't have anybody to deliver liquidity  and and and and solvency in instruments and Gopin had mentioned the central fiscal authority we  we seem to be in a framework where we don't have a euro area budget and we're maybe not going to  have one anytime soon we don't have the second best which would be the coordination of national  fiscal policies because we don't have an effective coordination framework and so we're left in the  third best which is fiscal rules that we are not following and the form of chaos where every  member state does as much as it can to deliver some level of stabilization and so I was curious  to to ask the panelists what do you think would be an ideal form of euro area budget yesterday  Mario Draghi mentioned that even if we didn't have one immediately the commitment of European  governments to have something at some stage would be enormously powerful do you believe that the  agreement we had last week in the euro group amounts to that commitment and if not what do  we need to change to have that sort of medium term commitment thank you Shayna back to the  panelists and then we'll have we'll have other rounds of questions so don't worry about that be  patient Gita you want to start so on the the fiscal rules and how much success there was  from the euro group meeting week ago I mean I think it's fair to say that there that there was  you know probably great intent and some progress but but a lot to be done and this is both in terms  you know there wasn't a clear agreement about the size of the budget what that would be the  emphasis continues to be on support for competitiveness and structural reforms which is a good  thing but there's also a need for macro stabilization and that that has to be done so this will be on  the wish list and of course it always seems very ambitious in questions whether that will ever  come about but but more narrowly in terms of just the fiscal rules for now I would say that maybe  what could be done and I can't see why it shouldn't be is a simplification of the fiscal rules and  making it more transparent more clear with the what the escape clauses are it's fairly complicated  at this time and I would put that out to something that can be done thank you Martin  two responses first one to Jean-Claude Trichet I didn't say that nothing has been done I fully  appreciate that a lot has been done the one reservation I have about the process is that  quite often there's been too much belief in the power of labels and too little analysis in the  case of resolution this phrase never again will taxpayers be involved dominated the  political discussion and anyone who understands the subject knows it's not true one moved away  well one consciously and I know this because I talked to people involved in the negotiations and  said you must do this deal with this one consciously avoided the problem of liquidity  because it would have been politically unpalatable I think the willingness to engage in compromise  in order to get somewhere well that's fine but then to say we've solved the problem if you know  the major part of the problem has not been solved that's dishonest and then to move on to  capital market union as though it was the natural complement to banking union when banking union  was something that was needed to solve problems in an existing sector that was essential for  monetary policy and capital market union is intended to solve the problem that a certain  sector isn't really there with no concern about the heterogeneity of the underlying legal  infrastructures in the different member states think about German code determination and stock  market law takeover law I mean there are lots of things affecting capital markets that would have  to be addressed but of course capital this wonderful label never was meant that way and I'm  concerned about the facts that even in the progress of the negotiations we've had too much of that  kind of hiding things for basically the purpose of media success on the question of the fiscal  authority that really raises the problem of political legitimacy a sort of narrow avenue  that I could see would be that for some of the purposes that we've introduced one creates  specialized agencies gives these specialized agencies funding from a former procedure that's  well established well that needs to be well codified and let them proceed on that basis  there are many examples of that in different countries the moment you go to an institution  that gets the power to raise money and gets this question over what it's going to do with it you  need parliamentary involvement and that of course which I think is extremely desirable requires a  major way a major change in the way the EU operates. Yes of course there's a focus on  public investment which is right we have too low public investment but we shouldn't forget that  private investment is a lot more important public investment 90% of all investment is private and  we have equally as for the public sector we have really a deficient private sector investment  companies investing too little clearly there's a complementarity between public investment and  private investment but all I'm trying to say is if you talk about private investment and how to  push that we need to think of completing the single market for services having common standards  deregulating having more competition if you look at Germany the big reason for the huge  current account surplus comes from the services sectors comes from having too little investment  and that's that sector therefore too little imports and therefore at a very high current  account surplus so really focusing on private investment I would would add is very important  the second point on public investment it's a lot more complicated than saying look the  government needs to spend more if you take Germany Germany has a federalist structure more  than half of all public investment is done at the municipal level at the local level and we  have 30% of local municipalities that are over indebted that don't have the ability to spend  so thinking about the federalism federalist structure both within countries but but also  within Europe I would say is very important that brings me to the issue of the budget and we have  the European the EU budget 40% of which are structural funds 40% roughly is the cap the  common agriculture policy and there's a lot of scope I mean we're talking about 150 billion  over seven years so it's not a huge amount but still there is a budget and I think we should  also think about how you are to use that money more sensibly for for instance issues of public  investment and also to to help trigger convergence thank you Marcel yeah so I just wanted to  yeah yeah very briefly so on the safe side so true that on the payment side there has been a rise  now if we want to go farther and you know think about the reserve currency etc so clearly there  what what happens during a global crisis time is very important and so we have this weakness of  a doom loop within the euro area that we really should fix because precisely when there is a big  shock and that you need the safe asset to be resilient is the time where it's just not working  the euro area so for the sake of financial stability and also for the sake of international  role of the euro that should be one number one on the agenda thank you let me let me allow for  another round of questions so there will be many of you won't have an opportunity to ask your  questions and I take the entire blame that's exactly my job so let me give the floor exactly in  chronological order so status with starting with Yanis Stornas thank you it was an excellent  discussion I'd like to pose a question regarding the relationship between banking union particularly  the European deposit insurance scheme and capital markets union I have seen certain arguments recently  that if we if we achieve a perfect capital market union then we don't need a European deposit in  insurance scheme in my view this is wrong I we need both the we cannot have a substitute in the  form of a capital market union for European deposit insurance scheme but I'd like to have the views  of the panel on that thank you thank you Yanis hi Joe Huang I want to provide a quick comment on  renminbi internationalization and then propose a suggestion for the panel to consider on how to  you know in large the safe asset I think that several one you know Elaine and also Martin talk  about that renminbi internationalization has not you know gone very far one you know as you can  tell I'm the only representative from China you know that's you know that's a is it I think that  there is a long way to go China's sitting on three trillion US dollar reserves the market estimate  of that is about a 70% in US dollar I think China will be more than happy to invest one trillion  in euro but of course that you know is is related to Elaine's question you know euro I think that  the safe asset there is a short of that in euro in big amount of in liquidity and also that I think  that they need to generate a higher return nominal return you know say it's German bound zero return  a negative I think that for PPOC the holder a trillion of that sitting negative return that  doesn't look very good so so I think that in a way that to massively increase safe return with  the positive nominal you know interest rate that's vitally important so here's my proposal for the  panelists to consider of course that you know both Martin and Elaine and other talk about the  lack of public investment how about you basically that they ask the EIB or EBRD to issue massive  amount of bond and the ECB to provide some credit enhancement and the PPOC can buy one trillion  US dollars right after that so that's that's that's one suggestion the second suggestion of course  I think that the ECB will also need to need to be prepared for a bigger crisis not in your area in  global you know I think that when the next big crisis coming out I'm not sure whether the Fed is  ready so maybe we need another version of do whatever take internationally whether ECB is  ready for that I think that a RIMB is not ready for that yet if China and if PPOC and ECB can  collaborate on that I think that that would probably help save the world and hopefully the Fed  will come along thank you thank you for your question I mean note that we do have a swap  line between the ECB and PPOC which is a can be the start of that discussion yes please in the back  yes Christian from Barclays a very straightforward question this is a panel of the about the future  of the European Monetary Union and I just wonder whether they're still ambition to actually grow  it you know there's still a lot of EU countries that are presumed as assume at some point to to  join and obviously this process has come to a hold and you know in financial markets that was all  the you know the talk before the crisis about which country would be next to join and you know  the kind of convergence that would take place and I wonder whether you believe given the problems  that we have right now it's better to wait and keep countries maybe waiting for longer and deal  with the all the issues that we defined already or whether one should continue to press on and  invite more countries and encourage new countries to join thank you let me take two more questions  and that will be it given the time constraints so that's Chris informed and Michael border  Chris informed from MIT so many of the reforms that have come up again on this panel as well as  the last day and a half have been things like fiscal policy migration things that central  bankers can't do too much about given that this is a room dominated by central bankers especially  in Europe are there any specific reforms you'd mentioned for them that the people in this room  can do more about one example in the US there's a big discussion now on changing the mandate of  the Fed should those types of issues or anything else be on the table given the audience here  Michael Bird of Humboldt University I have a related question given that Europe as a whole  can't coordinate fiscal policy wouldn't it be a good idea to do something like Helmut Schmidt  Giscard de Stang meeting and deciding to do something bilaterally and asking other European  countries if they want to join in I'm thinking of two things I'm thinking of fixing all those  bridges across the Rhine that would cost several billion and then the second thing would be to  get rid of the second parliament in Strasbourg and turn it into a European Institute of Technology  in the sense of MIT why couldn't Europe do that I mean there are no French smart French people  and a lot of smart French German people who could get together and take over this capital stock  in Strasbourg and make it into a serious university which Europe has been looking for for a long time  so I won't step in that minefield but I'm happy to listen to the answer so please yeah well if  you want to not into that minefield but on some of the other questions that came up so clearly  the banking union and capital markets you these are not substitutes they absolutely don't substitute  for each other you can have a very good capital markets union the US is an example of that but  you at the same time you need a banking union you know the capital market union is not going to  ensure you against runs on banks or against liquidity crisis in the banking sector and and  so not having a common deposit insurance scheme it would be would be would be a mistake to the  question to Kristen's question about why we're talking about everything that's not monetary  policy I think the way I would say it is that we're trying to make the job of monetary policy  makers easier a little bit by saying that it would be really helpful if these other mechanisms were  in in place we know I think I think there's been a lot of innovation on monetary policies that  have happened over the last decade and while there certainly has been more progress also in  other fronts I think that the most important ones are where countries can have greater resilience  to shocks that's don't necessarily rely entirely on monetary policy tools on this issue of our  banking union and capital union substitutes or not I have the following wrinkle in 2015 there  were substitutes because when the new commission came in and said we've dealt with banking union  now let's talk about capital capital markets union that meant that for a few years banking union  was off the agenda in terms of political energy that can be devoted to subjects there is a budget  constraint and there I thought that the displacement of endeavors to think about banking union by  concerns about capital market union which to some extent had to do with promoting interests of the  city trying to make EU attractive for the UK and things like that that was a mistake in particular  since if you look at the actual measures that were being talked about it was piecemeal a little  bit here a little bit there but nothing that would get at the fundamental reasons for why we  don't have wonderful capital markets on the safe asset real safety I think would require  fiscal capacity and would require the discretion to adapt taxation to if necessary the need to pay  one step and we have far removed from them the various proposals for safe assets such as SBs  our devices to get around them but they all have sort of little pieces of lack of safety that are  problematic and ultimately their functioning will depend on the ECB's willingness to buy the stuff  which brings me to the observation that at some level the arrangement we have under QE already  has some version of SBs namely the different national banks buy and fix proportion in the  proportion of the paid and capital share of the different national central banks having said that  I would like to draw attention to the fact that we that in introducing QE there has been a step  back from the sort of communism in terms of income income accounting by having each national  bank by its own government step under a rule that allows it to keep the interest on that debt to  bear the risk associated with that debt so that the extent to which that debt is treated as part  of the common income of the central banks in the system is very much reduced now that's a form of  SB which in terms of thinking of the ECB or rather the euro system as a supranational institution  which is one whole is actually a step backward and I remember Peter making a critical comment about  this when it was to me in conversation when it was introduced on the other hand and this illustrates  the conflict where we are having this rule means that potential exit incentives are unaffected by  QE because if you think about the real incentives for exit a government that wants wants to leave  what do they have to gain what do they have to lose they lose their share in euro system profits  and they gain the assets that they withdraw from the euro system now the difference between those  two is neutral to QE under the procedure that has been followed and I've been discussing this with  a number of people is this a good thing or a bad thing I see pros and cons but very definitely  the splitting up and treating these acquisitions as if they were each national central banks own  business except for the fact that's under the control of the euro system is a step back  thank you Martin you know QE is a monetary instrument right so whether it's a good thing  or a bad thing from a fiscal standpoint yes he's not really the point yeah Marcel just to  to comments also one way I think I wouldn't agree that QE has an element of SBs but I want to answer  two two questions one is by Michael Borden but the other one Chris Seed Forbes you know when we  started this group of 14 economists French and German our thought was exactly the same thing  that different views and you know in a way they're compatible they're not contradictions but  they're two sides of the same coin now thinking back I think it's very important to be more  inclusive I think it's actually not a good idea to have a tune to narrow it down to two countries  and there are actually a lot of proposals on European universities excellence universities  by President Macron so there are some proposals out there and I think I agree with it would be  good to move in that direction on Christine's question on the on the on the mandate on the  reforms I do think we need to have that discussion about the mandate what central banks should be  doing I think the result would be not so different from what central banks do today but I think  again for the issue of legitimacy to say look we are looking at that issue it is important we  need to really think very hard about a changing global environment financial stability having  become a lot more important for central banks than it was 10 15 20 years ago for me the question  is what's the right timing and you probably want to do that discussion and those reforms when  things when when when they're smooth sailing so when things are relatively calm and if I may  one comment to Olivier Blanchard on Monday evening I actually would think that it's actually very  dangerous in times when you still have zero interest rates when it's difficult to achieve  price stability to move up the inflation targets so talking about credibility I think you really  want to do this reforms about manage the board discussion about the mandate of central banks  in good times when things are well and not rock the boat when it's difficult and then you have  the last word just wanted to briefly add to the answer to hi-jo so the safe asset proposals come  in many different flavors so we discussed SBs which are about you know putting together a national  debt and then somehow tranching but there's also some alternative views which could be that the  SM body you didn't actually cite could could also issue debt but of course the devil is in the  details and then you have to think about a lot of issues about implementation seniority etc.  but definitely this all should be in the agenda. Thank you Ellen I've been instructed to catch up  on the later start of this session which I'm doing diligently so I guess it's time to hand the  floor back to Christine Gaff and to the president thank you very much to all speakers and thank you  for your questions.
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