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Monetary Policy Panel from the World Economic Forum 2017

Following are excerpts from a CNBC interview with Ken Rogoff, Professor of Economics at Harvard, Jeroen Dijsselbloem, President of the Eurogroup and David Lipton, the Deputy Managing Director of the IMF, from the World Economic Forum 2017 with Julia Chatterley.

JC: I have an esteemed panel with me to discuss some of these issues over the next 30 minutes or so. I'm joined by Ken Rogoff, he is Professor of Economics at Harvard. The President of the Eurogroup Jeroen Dijsselbloem and David Lipton the Deputy Managing Director of the IMF. Gentlemen thank you so much for joining us. Quick sentence to start. How is the Eurozone doing in your view at this moment, David.

DL: Growth is picking up and I think that's great, but in this world of incredible uncertainty I think Europe needs to tend to some of the legacy problems find ways to support growth and then continue along the path of improving the architecture within the European Union.

JC: Very quickly are you sick of repeating yourself on addressing the legacy issues?

DL: No I don't think so. I think there are these are difficult problems and they change in nature and they are different from country to country. I think it's an agenda that needs to proceed.

JC: Jeroen your view?

JD: I fully agree with that. I think one of the legacy issues that is finally being dealt with now is the Italian banks for example. You can look at it in a negative way and say Oh dear there is a new banking crisis. I look at it in a positive way. These problems have been around for some time. And finally now Italy's dealing with seven eight banks at the same time restructuring recapitalizing finding solutions. So that's a good thing because my main worry is paralyzed politicians and that has to do with the rising of populism. We really need to keep modernizing adjusting and if we get paralyzed that is going to be the risk for Europe.

JC: Ken?

KR: Well I certainly second that growth is improving. The IMF upgraded its forecast and also that the architecture is much wanting that reform has just been very slow. Will it come to France? That's a big question and banking reforms still very very important, banks are very important in lending and lending is still a challenge in Europe.

JC: Jeroen you've got an election coming up in a couple of months. Do you feel paralyzed as a politician here kind of caught between the markets and what Mario Draghi is providing with monetary policy but also populism at home?

JD: No we've not been paralyzed, we don't allow ourselves to be paralyzed, so we've been pushing a quite an extensive reform agenda in the Netherlands. We were slow coming out of the recession but we're now doing quite strong. In the polls the populists extreme right is actually leading. But in our system with coalition governments leading is maybe 20 percent. So in other words the next government will again in the Netherlands be a coalition governments of the moderate center parties. That's one thing that's pretty sure.

JC: David fear of populism in Europe. How concerned are you?

DL: I think the discontent we've seen in the US and in Europe is a central challenge. Here at Davos we see that the system of interconnected trade finance and what we call globalization is absolutely key to the future of the emerging markets and the developing countries. And that process of globalization has caused a lot of discontent in the US and Europe. Of course there are other things going on, migration in Europe, technological change , various other factors but it's really important that we find ways to promote growth and but deal with the negative side effects of interconnectedness and to deal with the discontent because there's really so much riding on continuing the process of interconnection.

JC: Let's pick up on the ECB today because what we've heard in the last week is the German finance minister saying that the ECB needs to start raising rates. That's his response. It seems domestically to the pressure he's facing.

DL I believe that the decision that ECB apparently has just taken to keep rates where they are makes sense. The ECB has been providing accommodation inflation in Europe remains below target and getting that back up is part of the process of encouraging growth. The ECB can't do it alone. That's been said for some time but I think one has to look at inflation in the whole zone. One can't look at inflation or price developments or monetary developments in one country and have a guide to what the stance of policy should be overall. And I think the ECB is understands the need to continue accommodation in order in order to achieve its goal.

JC: But do the German people understand that. Those that are savers that are not making any money and that's who he is trying to position himself with when he's making these comments. Ken you were nodding at that point?

KR: No you have to look at inflation in the whole zone there's no other way to do it and it's not been that high in fact, if you look at longer term inflation expectations they've been coming off for a while. So that could change. Growth is strong. I expect interest rates to go up in the United States and I'm not just talking about short rates both because I think growth will be strong for a while I think there'll be inflation and a risk premium in interest rates in United States. That's going to put pressure also in Europe.

JC: So talk about that in a bit more detail in terms of our expectations because obviously what the ECB does here is reliant on what Janet Yellen is doing it's reliant on what the President elect will ultimately do as far as fiscal policy is concerned. Does Europe get an effective bailout a bit more time this year from the United States A because of fiscal policy and B because of the stronger dollar?

KR: Well it cuts two ways. I mean it gets a bailout in the sense it's going to help with growth which is doing OK anyway. My biggest concern about the ECB is not so much if they raise interest rates. I don't think they should yet I agree with David that I think they did the right decision. It's quantitative easing which of course you know is a substitute for a euro bond at the moment. And the Italians are fixing their banking system but they need time. And if somehow the reversal of QE because it was hard to tell the story that you were trying to fight deflation that could really jolt eurozone.

JD: Well you know I cherish the independence of central bank and the mandate is very clear. Inflation has to go up , it has to go up to close to 2 percent. And as my two colleagues have said it needs to serve this whole Eurozone. So I'm not with Wolfgang Schäuble on this. I think that Mario Draghi's approach to QE is shown to be successful and it certainly allows us gives us politicians time and helps us to get these reforms done and the reform drive is slackening. Is that a good word. So a lot of work has been done over the course of the crisis. We were forced to do it. Some countries were made to do it by programs. And now the drive is is lackluster it's slowing down and it's a it's a risk because we still need to do a lot of work to become more agile more competitive to create more jobs more investment opportunities. And these investments will not come in the near future from governments from public spending. There is not enough space in some countries. Sure. But in general too little space it needs to come from private investments. And what we can do to create investment opportunities to get investment back in we should and that drive really needs to pick up.

JC: David you agree with that slacking on the reform front and not enough fiscal space to actually spend.

DL: I mean there are places where there's some fiscal space..

JC: Like Germany?

DL: Well Germany has a different problem. I mean it is at full employment but it has a very large current account surplus. And so some combination of more of a demand push could actually be quite helpful I think. And I think that that infrastructure spending in Germany would also have the effect of helping raise the efficiency the productivity of the country. I think that this structural reform agenda is very substantial in Europe and really Europe has to try to ..there's no single silver bullet. Growth has been sluggish. Europe has to look for every edge it can whether it's cleaning up banks getting credit flowing or the more traditional monetary fiscal and supply policies there should be an effort in every country to see what can be done. And every country considering its own actions. It would be best if everyone worked together you would find the total effect much stronger if all countries did whatever they could to help. We know there are positive spillovers and if all countries are trying to lift their economies I think there would be substantial mutual benefit.

JD: I think there's one topic that all of us and I mean in the Eurozone literally all of us should consider that's the tax reform. Tax wedge on labor in our countries is much too high which is hindering job growth and recovery in labor markets where at the same time large corporates being helped by also the Netherlands and other countries are not paying enough. We need to rebalance that. I'm arguing for that very strongly we are adjusting our legislation in the Netherlands. We have already done some tax reduction for lower income workers. That needs to continue. We really need to tax reform in Europe. To get people a little more spending power money in the pockets to bring down the cost of labor at the same time how to fund finance it we need the large multinationals to pay more tax. And that is a global issue which I'm raising everywhere in every talk in every meeting I have here. The big companies really need to start paying taxes and acknowledge that.

JC: Ken do we have time for all these measures. I mean you've just pointed out the risks of QE rolling off monetary policy rolling off and actually the structural inefficiencies that remain in Eurozone at this stage is still there and for all the things we just discussed about the populist pressures the paralyzation potentially of politicians who are afraid of their voters I'd argue at this point. Is the time frame valid here because the risk is that actually these things roll off and unfortunately the problems remain.

KR: There's time. I mean but is there will? You know as we heard that it's been slackening their interest rates very low on the government debt. There's no particular pressures in a lot of countries that there were. That's not a bad thing in itself. But we need to see the reforms and the populist pressures we will read them. I mean it was last year when I think every meeting I went to in Davos whether it was on the environment or health or whatever the talk turned to Trump and said this can't happen and it happened and we had Brexit also. I'm just keeping my fingers crossed that the three big elections coming up in Europe that we don't somehow get a shift. I'm told it can't happen but I'll feel better when I see it.

JC: We've seen that before. You're worried about France?

KR: I don't know my French friends say that just can't happen but their American friends told them the same thing last year.

JD: But I think like in America it depends on who's up against the populist. And to be Frank if I look at the French situation there are two interesting candidates , Emmanuel Macron and Fillon who are both very reformists and they at the moment if I look at the whole field of candidates having much better papers to win in the second round certainly than Le pen and these two guys both Macron and Fillon are reformists. So maybe in a year's time we will have a different way to look at France or to say wow there is now a government that acknowledges that France needs to do it's homework. So I tend also for France to be much more to the optimist than the pessimist side.

JC: So are you saying that you go through a period of populism and you pop out the other side you just have to hope that someone doesn't get into power and do damage potentially in the interim?

JD: Well it's not just about just hoping. I mean it needs it requires work and good campaigning and good candidates.

JC: On behalf of the populists or on the….

JD: …rather on the other side as far as I'm concerned. But the outcome of all of this could be that the end of the year the elections have turned out all right and moderate sensible people are still running France Germany and the Netherlands. And that would actually create an opportunity to also pick up again on the European agenda because here European initiatives at the moment in an election year are not very popular. Whereas we all know that we need to take further steps on the banking union on our fiscal policy on our reform agenda. So I hope at the end of the year after we've done all the elections we can really pick up on that agenda.

JC: But it is going to be a lost year?

JD: Well underneath all this turmoil the economy keeps picking up investments throughout Europe are improving. Unemployment is going down. People have a bit more money to spend and it's going too slow I'll be the first to acknowledge that. But while politicians are being very busy with each other. The economy seems to be recovering still but it needs another push.

DL: You know as a non-European it's striking that with so many countries there's always an election cycle. And of course we've been talking about agenda for change. That really has to happen year in and year out for a long time. So I think as a practical matter Europe has to find a way to do its work and do its work together through election cycles. If you ask when will there next be a three year period that's free and clear of electoral politics so we can take some important decisions and work together. The answer is it's not going to happen.

JC: It's interesting. You were recently asked why is Europe still so vulnerable and you said because actually we don't follow through on ambitious change. We don't complete the projects and actually that is read by the voters as a lack of commitment. And they actually find it quite easy to blame European and the institutions of Europe perhaps for failures at home at this stage. But you know I look at Seven years after the crisis and I still don't think we have a real plan for the eurozone for addressing the incompatibility within each nation of those that you pull together in the in the eurozone would you agree with that?

JD: I don't think you need you should expect a grand design or a grand plan.

JC: So we just keep in fighting?

JD: No Europe is still quite complex in the way it's run. And a lot of authority a lot of power is still with the national authorities and national governments. But to give you one example we dealt with the banks too late. The U.S. did it much quicker and that was much wiser. But after we decided to start the banking union we set it up in two years time and we really started restructuring and recapitalizing the bank. That is still ongoing. My point here is let's finish this project. The banking union is one of the more ambitious projects of last couple of years I've put a lot of energy in it and I want to finish it. It's not complete. We need to finish it in terms of capital standards and requirements we need to finish it in terms of a deposit guarantee system and having backstops where needed and those elements will complement the banking union and we'll make sure that it works. Let's do it.

JC: Arent big chunks of the population in Europe saying they don't want more. What ever it looks like they don't want more. Isn't that what the problems in France are telling us what the partial backlash in Germany, trouble that we are all facing, Brexit…..

JD: My experience was that yes in general there's a lot of skeptics because Europe has not been delivering in terms of wealth and security. But on the banking union support has been broad and we were actually able to do that to start that up. Why. Because people were able to understand we're not dealing with the banks right. And individual countries find it hard to deal with their individual banks. If you raise standards together if you have a joint or single supervisor that makes the process a lot easier and it actually worked that way.

JC: But it's become a kind of symbol now of what's wrong. The institutions of Europe have become a symbol of what's wrong not something that can actually bring people together. So somehow you have to get over that and I don't understand how how that happens how does that happen?

DL: I think it's what Jeroen said there need to be accomplishments. I mean if you can complete the banking union what people will see is better and cheaper financial services, they'll see credit flowing they'll see that if a bank gets in trouble in country A it doesn't it doesn't…. Fixing the problem doesn't depend on the finances of country A or the zone stands together and you'll see a safer system. So I think that Europe needs to cooperate completely complete these architectural changes that are needed and create benefits that people will appreciate. This is not about making Brussels big. This is about making the plumbing of the architecture work.

JC: Ken

KR: It's a very challenging environment for politicians, landscapes change you know the fake news Russian influence how you get sort of rational thought through was always hard and seems like it's got a lot harder.

JC: This is the point of Davos this year is responsive and responsible and the great thing that the populists have here is that they are responsive. They talk about the things they make promises about the things that people want irrespective whether they can afford to finance them or whatever it is. It may not be responsible but it's resonating with the people and I don't know how you reign that back. It goes back to your point about the fact that you know perhaps reform is the way forward. And you in France actually people want reform they recognize that change needs to come. But you have to go through crises a la Greece in order to get to that point?

JD: I'm struck by the fact that Macron of France who is actually sort of a liberal on the left , a complex politician took place and he talks very bluntly about the fact that France needs reform and needs to change and needs to modernize and needs to be part of the global set up which is not not always popular in France. Interestingly enough his popularity has shot up because he is a politician who addresses the issues and who's honest about it. He's not saying it's going to be easy he says it needs to be done. So it's also like I said it's also bit about the quality of the candidates to fight the populist easygoing agenda.

KR: I would just second Jeroen's potential optimism about France. I mean if France reformed even half way what Germany did at one time this would be you know sea change in European politics and European growth.

JC: Do you think sentiment would change too if Le pen doesn't win here. People go actually actually this is a vote of confidence in a country that we've been waiting to reform for a long time and perhaps now, now is the time.

JD: The sentiment will certainly change because it takes away a lot of uncertainty. France is the German political system the Dutch political system will lead to the populist being outside of government. The Alternative für Deutschland (AfD) will grow will become bigger but it'll still be a very small party in parliament and will not become part of the coalition government. I'm prepared to put a bet on that. France France is the most risky one. So if that's if here the new government would say look it would not be a populist would not be Le pen but will be a government that says we want to be back in the heart of Europe and we want to deal with our own problems and do some of these reforms. I think that would create a very good and positive atmosphere. I rather like to see France back in the lead in Europe also whereas everyone's been looking too much just at Germany which is a role that Germany doesn't really like. But they naturally seem to get it would help all of us and certainly also Germany if France would also be back in the lead.

JC: So Let's talk about Brexit and the challenges that that poses given the current set up in the Eurozone and the challenges that that faces because Mark Carney said recently actually that Brexit is going to be more damaging for Europe than it is for the U.K.. Agree or disagree Ken?

KR: Plenty damaging for the UK potentially , actually we don't know what it's going to be yet. So there's sort of two polar positions. One is they have a free trade zone already usually in a trade agreement you're negotiating you're starting from a very different place. You're trying to get to freer trade there starting with free trade and the British are going to of course say let's just not change anything and the Europeans might say wanting to spank the British that well no the WTO is the starting point. You're out. You said you wanted to be out. If you go more in that direction it is going to be very painful for both sides because trade agreements are really complicated. You're starting from scratch and it takes five years to implement after you put them in. I don't know. It's a political decision. But the British agenda you know is a little different saying look we OK we're not in the European Union. What is it exactly you insist we change. What is the starting point.

JC: Jeroen Do you want to Spank to use Ken's terms the British here?

JD: I'm not in the spanking business but…

JC: Is Europe?

JD: and I don't think it's in our common interest. But this is coming from the Netherlands. We have strong trade relations with U.K. I think after Ireland we are their second sort of trading partner. I don't think it's a good idea to get into this trade war business but it's going to be very complex because listening to Theresa May she says it's going to be a hard Brexit, we're out. We want sovereignty. Fair enough. But then. …

JC: Does that surprise you?

JD: No I mean I think that's politically a logical consequence from the from the referendum. But then what she says about where they want to be in terms of relations with the EU I don't think it's going to work. You can't for example you know be part of a customs union and have your own trade deals with third countries because that would mean that the back door of the EU is open. And we can't control it. So that simply can't work.

JC: You mean other countries in Europe might decide actually that might be better for us too. Maybe we'll hop it as well?

JD: No I'm not so worried about that. I think. The UK underestimates the complexity of trade deals like Ken just said and we have great advantages that we have these trade deals with the whole block. certainly from a trading nation like my own country that is a great advantage. So I don't I don't expect that. It's going to be complex. It's going to be very uncertain and it's going to take a long time. People are quite rightly now talking about some kind of transfer period. There needs to be that I can't envisage. First we need to agree on the divorce and you know how ugly that can get. So let's say we do that in 10 years sorry in two years which is already challenging then we need to start on future relations which is going to be challenging and in between we need time we need to create some kind of stability.

JC: British CEOs have said five years a number of them. Do you think that's a reasonable amount of time. Five years?

JD: I think they're optimistic

KR: very optimistic, very optimistic…

JC: really? More than 5 years?

KR: Total? The 2 years plus the phase out? Five years would be fantastic.

JC: And what does that mean in the interim in terms of uncertainty?

KR: perhaps a decade of uncertainty for firms in Britain but it also hits the continent there is no doubt about it.

JC: Do you think it hits investment?

DL: I think that we've talked about trade. The other important part of this is about the location of financial institutions and capital markets. And you know whether you can preserve passporting whether there's some kind of equivalence how that's done. You know the U.K. prime minister has clarified an important aspect of how they go about this. But there's still going to be a long period before we know what this means for banks for capital markets and for supervision.

JC: I've got a hundred questions I could ask you on that but we're coming towards the end of the time so I want to ask whether if we pull together all the threads that we've talked about here do we think that the president elect Donald Trump actually presents an opportunity here for Europe because he's been pretty critical. He said you know the U.K. is right to leave. And he said that more countries are going to leave the EU anyway?

JD: I would say there is one good side about it that I think we've been under the American umbrella for a very long time though whole post-war period. And if I take the president elect serious and I think we should, that umbrella is going to go away to some extent which may be a good thing for Europe. Maybe we need to leave home. Maybe we need to become more independent and really really think about our position on the global stage that requires perhaps more responsibility in defense and security working much closer together and making sure our interests are in the right spot in the EU and the Eurozone. The Brexit also forces us the remaining 27 to work closer together and to rethink our set up. I think that more and more countries out of those 27 will actually join eurozone in the coming years. Maybe I'm the only one who thinks that but I do think that because there is now a choice do you become sort of a 'B' member of the EU or will you join the others and progress in the economic integration which I think will take place.

JC: So time to step up? Opportunity or trouble?

DL: I think we have to admit that we don't really know what the Trump administration will do. Europe should take this moment of uncertainty not knowing whether Trump's macro policies will provide some lift or whether his trade related policies and other demands of Europe will provide some challenge but Europe to take this opportunity to pull together and move forward and and be in a stronger position as as it possibly can.

JC: Ken?

KR: So we don't know as to what extent and this is an example of many things, is this a negotiating position getting Europe to pay a little more basically ending up with the same thing or is it an abrogation of U.S. power and influence Russia steps in Europe and Central Asia China steps in elsewhere. I think that's a very critical question we don't know the answer to.

JC: Jeroen, a very quick question. You said to me recently that as fast as Eurozone banks can raise capital the United States pinches it in the form of fines. Obviously we've seen two massive ones settled in the last two days. How do you think that changes under Donald Trump? Do you think it does and have we paid enough?

JD: Well I hope that he's not going to completely deregulate the American financial sector. I think we've learned our lesson. I hope we've learned our lesson. I do hope that some of these fines come back to sort of more rational and effective level. And I was quite serious when I said that the capital being pulled into the European banks which we need to revive our banking system at the same speed was leaving us and going back to the legal authorities the judicial authorities in the US. So that really needs to be rebalanced. That was over the top.

JC: I have to wrap and Ken has to go but do you want to say something very quickly David because I can see your face?

DL: I want to go back to the subject of populism and discontent people don't like it when banks break the law and it appears that they get away with it and whatever, I don't have a view about levels of fines, but it is important that there is enforcement when banks do things that are against the law.

JD: Absolutely.

DL: When one looks at the populism in the United States there's a lot of anger on this subject.

JD: Very much the same in our countries.

JC: Agreed. Guys thank you so much, brilliant. Ken Rogoff Professor of Economics at Harvard. The President of the Eurogroup Jeroen Dijsselbloem and David Lipton the Deputy Managing Director of the IMF. Thank you.