WPC 2026 - Workshop 1 - Economy and Finance

So dear colleagues, dear friends, I think we have the qu and we can uh start our meditation. A number of us are used to this kind of discussion. A number of participants and not only of speakers have the memory of the previous discussion. So uh I think it's very not necessary for me to restate that we are looking at the economy and finance from various angle of vision. We have the privilege to gather uh personalities that are coming from again different origin public and private that are coming from different continent that have the experience of dealing with IFIs or not and all taken into account. I have asked them perhaps to concentrate their introductory remarks with a few major message in order for all of us to have I would say the most interesting discussion after because tradition is that we have short introductory remarks by the member of the panel and then we engage in a very vivid discussion with the participants asking questions making remarks so it's it must be as frank direct and open as possible in order for all of us to get the best out of this encounter. Uh my intention if it is agreed upon is to ask John Lipki to speak first not in the alphabetic order but because he would elaborate a little bit taking into account his own position experience on the what the diagnostic of the IFIs. uh we know the most recent diagnosis of the IMF since only a few half days and we know also of course that the overall situation is marked by a very high degree of uncertainty. Uncertainty seems to me to be very much the rule of the game to the extent that for each member. So, normally I would give the floor to John, then to Yan if he wants to to speak, then to Daniel, then to Jeff, if you agree, Jeff, then to Ainori, you are nodding. Okay. Then to Jean May and then to Nicolola. You're you're not served by your name but you're you're used to it. I I will promise next time that you pick first. So now uh for me to be in line with what I just said, let me only say a few words on precisely what are my main message at the present moment. Uh I would say that even before the conflict in the Gulf, the global economy and finance situation was extremely fragile and I think we should not forget that again we have a number of indicators that are not re not we're not reassuring at all in particular the overall debt outstanding public debt outstanding in particular in practically all countries in the world which did not improve since the last dramatic great financial crisis and that that is certainly one of the indicator which is alarming. We have also had a continuing dramatic change in the structure of global finance with the non-banks and nonregulated entity being more and more important and playing a decisive part. We are now at the level of 51% if I'm not misled in terms of in comparison with the overall credit bank and non-bank uh combined. So this is something which is very important, considered very important of course by the financial stability board and by the international community as a whole with a lot of attention given to this particular issue and of course this is part of what the reason why we should be very alert. Again I have also the sentiment but but we will discuss that that at the level of the global finance also we have a level of implicit bubbles that are not negligible. I was a little bit struck by the the figure which was pronounced by Dominic Sen on the global capitalization where we have the US representing if I'm not misled around 70% of global capitalization which seems a little bit too much if I may but I say that with great prudence of course but but >> the true number is around 50% 50% >> the true number I I I think it's more >> 70% is the allocation of global portfolios but it's not a thing >> I I mean again we we will not engage in a battle of figure but but it it is clear that it's higher than was the case in the past so that that for one I mean second second element message from me uncertainty in the present period is really the rule of the game We were not expecting the war in the Middle East, but it is there. The impact, global impact of this war looked until now to be very very important, if not if not decisively dramatic at the global level. But but this is of course a materialization of an uncertainty which is underlying the power politics which is marking the present geostrategic picture is of course an an additional element of of uncertainty and I would say that in this universe one of possible message would be resilience in this environment is the absolutely key for all entities in the world. Of course the private sector, of course the public sector and certainly all those who have to take decisions in the present I would say circumstances. So resilience being the rule augmented quite considerably because of the fundamental uncertainty that we are living in. And uh last point to be a little bit more positive and I wasn't till now I would mention that despite all the divisions that we are observing at the global level between countries between continent between the north and the south and and and I am struck by the fact that the so-called BIS system, the financial stability board continue to work. there is no I would say absence of appropriate dialogue and discussions at that level of professionals uh and uh the report is made by this so-called system to the G20 and despite also all the what is said on the G20 about to disappear or about to be replaced by other groupings Nevertheless, at least in the last years, even including the change in the administration of the United States of America, even take taking into account again the extreme tensions between a large number of member of the G20 as well as the grouping which is more or less thinking that he might substitute or is complimenting clearly the G20. But all that being said, we had the report given to the G20 and we had approval by the G20 of the essential element in that report. So a an element of positive vision. Let's try to maintain the the flame as long as possible in the present circumstances. But again it had to be noted and uh having been myself at the heart of this so-called system B system and and the the like I think that it is all taken into account a little bit reassuring. Now I will give the floor immediately to John. John you have the floor. >> Thank you very much. and uh you've made it easy for me since you've already highlighted the principal uh the principal issues but uh uh coming from the the uh spring meetings of the IMF and World Bank uh there were some clear themes that uh that stood out and uh I will highlight here and I suspect none of them will come as great surprises to any any of you. Uh certainly one of the surprises uh that was discussed but left un I think unanswered was the source of the resilience of global growth in 2025. Certainly better outcomes than had been anticipated especially in light of the uh liberation day shock to the trading system. And it was at first anticipated it would have substantial effects on uh uh economic performance and on on corporate valuations. Remember the initial huge hit to US stock values. So surprise one was what was why was it so resilient and I don't think that there is a clear consensus explanation for that. Um certainly US corporate profits held up much better than had been anticipated and um much speculation has been about that. Uh one that uh uh perhaps of interest to report is from the view of uh the National Economic Council, the head of the National Economic Council, Kevin Hassid. His explanation, at least in part, is that actually we're seeing the productivity impacts of AI more much more quickly than had been anticipated and that as that it is being mismeasured and it's showing up in corporate profits and productivity, but in fact, as he would put it, when we get the benchmark revisions to GDP, we're going to find out that US GDP was quite a bit higher than than the current measures suggest. one possible explanation of course favorable to the to the uh Trump administration but nonetheless uh it is it is uh quite almost taken for granted uh that uh that US corporate profits held up much better than than expected and in looking forward I suspect that that is uh leads to another mystery which is why have stock prices been so resilient in the face of the war and the uh laundry list if you will of risks that is perceived to the to the global economic outlook. Uh but sticking to first the 2025 mystery of course China the Chinese economy performed better than had been anticipated as well as a result of a surge in exports that on the one hand had not been anticipated but also led to the renewed concern over global imbalances in which The Chinese surplus has now spread to other countries even as the bilateral uh uh imbalance between the ch China and the US uh has lessened. So today the I would say the focus is as JeanClaude mentioned is on the risks to the outlook created by the war and the uncertainty about the uh duration and dimension and scope of the impacts. Um as Cristina Geva explained that in fact the uh new world economic outlook that they had planned uh to announce uh before the before the war in uh in the Middle East was going to up upgrade the global growth forecast and um with uh uh without an increase in the perceived risk of inflation and now that has changed as is obvious to everyone. Both the outlook to growth has been marked down with the outstanding risk that could be more damaged. The outlook to inflation has deteriorated and that expected to be to be higher. Uh the uh perceived risk is especially uh reflected in concerns about uh uh energy importing uh emerging markets. that the risk is they will find both their terms of trade damaged, external demand for their exports damaged and uh a need a need to find finance in a situation in which private finance uh may not be uh available. This of course all in the context of of risks. At the same time as Jean Claude uh also mentioned already concern is growing about the level of public debt and deficits that predated the uh the war and only can be exacerbated uh by this. That's particularly true of course in a case like the United States where by all intents and purposes the you can make an an easy argument that the economy is at full employment and despite that we have a public sector a public federal deficit that's going to be around 6% of GDP. Uh why that is good policy in this in this context is is uh not clear. Another risk of course is represented by the uh disappointment at the uh latest ministerial meeting of the World Trade Organization and the risk of renewed trade frictions uh in the uh in the coming year. as part of the risk if uh obviously if energy prices remain uh strongly uh uh deviated from expectations. Similarly for other commodity prices uh the the uh potential for new trade frictions is uh is self-evident against that has been uh opportunities and that the principal uh source of opportunities is artificial intelligence of course and the prospect we've all talked about and thought about of uh how soon and how much how much it's going to cost, how soon it's going to pay off or if it's going to pay off. And um a a quick observation, many have uh suggested this could be another.com boom, but as I like to put it, it's has almost nothing to do with the.com boom in the sense that.com involved, as I put it, a bunch of very smart young people sitting around offices in Mountain View, California, wearing polo shirts and khaki pants who were convinced that their their ideas were so wonderful that in just a couple of years they were going to be billionaires. And uh as I used to say when the dotcom bubble burst, I wouldn't want to be the Ferrari dealer in PaloAlto, but I didn't think it was going to have a general impact because there was no capital involved. The what's happened this time is there's huge amounts of capital involved as we all can see. We we don't know how big but we know it's going to be already uh estimates are it may have added as much as 1% of US GDP in uh in 2025. Um so real in real money is being raised. It's being invested in real assets and those the producers of the tools of AI as we all know are are finding uh fabulous results and huge profitability making sales to customers who have no profits and almost no income. This is all on the promise of uh of payoffs. It's likely to be um an important impact in financial markets going forward but the uh uncertainty is going to continue. This is also linked as JeanClaude mentioned uncertainty about developments in financial markets. one the uh rapid continued rapid growth of non-bank financial intermediaries and perhaps most notable in the US the growth in private credit and worries that this could produce um uh potential problems and instability financial sector instability going forward. The consensus in Washington was that it's not big enough to represent a systemic threat. But of course, uh we've heard that before in uh with subprimes. the the claim is that the uh the underlying complexity is much less than was the case in um in the U financial crisis in which the problem was on the one hand you had um uh sophisticated products purchased by purchasers who didn't understand what they were or what was in what was involved. and at the same time purchasing uh portfolio insurance uh credit default swap against credit default swaps from an insurance company that had no capital that resulted ultimately in a freezing of the uh the interbank market that was the real center of the problem that doesn't seem to be a threat at this time but there's still a substantial concern. Um final uh a final uh remark uh listening to AJ Banga the president of the World Bank. uh the focus of the bank is on a limited number of uh sectors and a focus on job creation and that seemed to highlight I think a generalized concern around in the global economy that employment growth has been very slow in the advanced economies and uh in the US in particular uh there's a surprise of the low higher low fire economy in which either it's interpret it can be interpreted as representing fragility or something more uh more to be expected in a context of an economy that's essentially at full employment and growing essentially at uh at uh full capacity. So lots of uncertainty uh some real promise and uh continuing surprise I say today in the strength of equity markets especially in the US in the face of what are obvious uh risks. I'll stop there. Thanks. >> Thank you very very much indeed John. Maybe you you will think I'm too demanding on you, John, but one of us must report to Would you be the reporter >> from now on? >> That's very very kind. >> What can I say? >> Ready. >> So, thank you again very very much. My dear Yan, you have the floor. >> Thank you very much, Mr. Chairman. It's always very sobering to speak after John. Um first of all I want to clear something. Uh what you see written on the board is not correct. I'm not the chair obviously of this uh session clearly lo but I take the promotion. Um all right let me go through some slides. Oops. Here we are. Yeah. So I'll start with a a picture that uh a lot of people uh alluded to earlier which shows basically the size of the uh US economy again versus the EU and specifically here uh it's trying to represent the capitalization of companies that have that are less than 50 old and that have more than 10 billion dollars in market cap. Right? And obviously you recognize immediately the the magnificent seven blue or green you know Tesla could be added uh and obviously the EU uh looks weak in comparison. So what I'd like to do is a sort of deep dive on innovation and in particular on R&D intensity and try to compare US, Europe and China uh in this race. Um and obviously you know it's a big takeaway and to me that's really the first takeaway of the draggy report uh the huge lag between the US and the uh European Union. That's the first slide sort of top level uh differential of total R&D expenditure and it's well you know the US is 3.5% of GDP that's much higher than the EU uh and China is in the middle as much as we can say and you know what measure you use PPP or or absolute level is another question but so here's a Um, unfortunately it gets worse than that. This is taken straight away from the what's called the scoreboard of the European Commission that is published each year. So I think that was from uh end of last year for data all the way to 2024. Um I suspect as of now the gap is bigger but if you just look at the first two lines which is really tech in terms of software and hardware you see the little blue of the EU versus the huge red portions of the US. uh it's quite staggering right so let's and and China is kind of in between now let's try to decompose a bit further I'm taking essentially six uh industrial sectors u that have innovation and defense significance since defense is so such a hot topic right now and if you look at enterprise R&D so private sector R&D D uh what is really staggering is look at the total figure at the the bottom line uh there's a ratio between the US and Europe of more than five right that's the R&D in high-tech for to simplify things right and China as much as we can say is kind of in between um the for for for the EU and the US here I'm using the official uh scoreboard for China I'm using the uh NBS which is the the local statistical agency uh and we'll go back to to that uh but you know staggering figure and and this is really at the core of the draggy report right now if you look at government funded R&D uh it's not too bad. You know, for these sectors, the EU is uh below the US, but but the ratio is smaller. Uh and then again, China is in the middle. I skip all that. You can refer to it later. Uh now, so China, as I said, is a bit tricky. If you look at uh the reason I used NBS as opposed to the the official European scoreboard is that um the European Commission seems to probably underestimate uh some of the Chinese numbers. Now the question is what do you call a private enterprise in China? Right? You can debate that uh most likely the capital is uh government uh funded but um you know there's enough freedom for these companies to compete on the national market and international market. So you can still call it a a private sector. Now so this is R&D. Now I just want to look a bit more at the quality of research out of China. And this is another very staggering figure that's coming from the ASPI technology tracker. ASBI is a big Australian uh think tank that produces this annual report and um again we're going to introduce all kind of cover but it is rather staggering that uh China seems to be leading you know uh across all major technologies um and Europe is nowhere to be found here. that sort of breakdown for for different sectors. Um I won't go too much into uh the details and then I wanted to compare against the uh YPO which is sort of UN official patent uh database. Uh so there are differences uh but overall uh there's a lot of similarities between these two uh types of uh of rankings. Now on the quality of the research and the patents, there's been an interesting study that was done by Philip Pagon and his quarters recently that shows that when the first Trump administration uh decentivized researchers to co-publish with uh Chinese uh academics. um suddenly the quality of the um Chinese papers went down. So less citations sitations in other uh academic publications. So you can see here the the difference the you know the dark green versus the light green uh China without US corridors uh you know there are far less impact of of the research. So the the the key date was 2018 and you can see uh a big drop of the the quality of the papers once that policy was enacted by the Trump administration. >> Can can we go back? >> Sure. >> I I have a difficulty to to see exactly what is happening. Could you could you repeat what at at which moment do you know consider that in the first if I understand in the in the first term of of the president of the US we had this inflection point >> right so so it's easier to see it here actually so around that inflection point was around 2018 right u so before that Chinese academics were collaborating with their European or US cultures and and you see an increase in the academic production in terms of stations until 2018 and from that point especially spectacular in the US obviously uh that production went down right >> yeah much more spectacular in the US than in China >> than in Europe >> in Europe I'm sorry >> Europe no of course okay thank you >> so I mean you know all that sort of puts things in perspective and say, you know, we can doubt some of the uh official stats about the quality of patents and the quality of academic production from China, but overall uh there is a lot of investment and you know Europe is already below that, right? uh so so the competition for Europe is really from the US and uh from uh China. So finally the the last point a slide I already showed yesterday but what what it means really for Europe if we want to uh go back to the kind of level of R&D we see R&D we see in US but also in Switzerland and Denmark is to really uh make restructuring cost of of companies much much cheaper as you can see in Italy or Spain where it is very difficult to uh restructure your ventures. Uh there's almost zero investment in in tech, right? So we have to do something about that. And I will stop here. >> Okay. Thank you very much indeed, Yan. I think it was extremely stimulating. I see a lot of us would like to have the slides. >> Yes. >> If if could be printed. >> And I don't Yeah. All of us could see the slidesh. Yeah, there was no particular problem to to see the slides because Yeah. So, thank you very much, Yan. Indeed. Uh and uh we have to meditate more on that. You were more or less confirming you you were confirming the present consensus. Uh >> yeah, Jeff Jeff is signaling that it's difficult to see. Yeah. Yeah. >> Yeah. Okay. But in any case, >> we we will ask the organization to print the paper. That would be very >> and it seems to me that I can say that you are even I would say more impressive in pinpointing the I would say terrible I would say late position of of Europe even much more than Enrioa and Mario if I may. So very very telling. So thank thank you again very much. >> Yeah. I will ask you now uh Danielle if he wants. I'm I'm going to say um to speak out what I I believe is the the global picture. I'm not going to use numbers but um I'll try to say it may sound like platitudes but this is how I I believe so I think what's happening in the world economy fragmentation continues uh platitudes institutions are questioned or dismissed by some major players um and the transatlantic relationship is much in a multi-polar war the European and tries to save multilateralism. This is very clear. G7 and G20 still relevant but weakened but still relevant. Large global imbalances are a threat. Financial instruments are increasingly used as weapons, tariffs, sanctions, currency wars, crypto assets is a sort of geopolitical financial warfare. uh security considerations take precedence. Um it's it's a battle between resilience and efficiency. Defensive expenditure up and quite rapidly. We should think about deficits and public debts in this regard is the old u dilemma guns versus bread. Artificial intelligence. I'm more cautious about artificial intelligence. You may say, Daniel, it's your nature. You're very pessimistic, but I think it poses huge risks apart from an existential threat. >> Could you speak closer to the light? >> Yeah. Is it better now? >> Okay. But very secondly, global macro the mac global macroeconomic scene is worrisome. I I put it here. Stipulation is looming. I I may be pessimistic, but I think the IMF spring outlook is already outdated. Uh budget deficits will rise again at a time when fiscal space is very limited. Um it's already clear that we'll have a new inflationary bout. Supply chains are again strained but I think central bank should be cautious in raising policy rates swiftly as this is a supply shock side shock. What I'm very worried about is a new wave of financial deregulation and it seems to me the lessons of the great recession crisis seem to have receded. Uh Jamie Diamond talks about the new credit cycle, but he's very gentle and put it credit conditions have loosened for years now. And banks are asking for lossing of capital and liquidity requirements. European banks, they always talk about American banks. It's it's the debate 20 years ago. We cannot compete with American banks and and and there should be less regulation as John has already mentioned and you your chairman non-bank financial institution share and funding has risen greatly and the regulation of private credit is inadequate in my view. I believe that all types of finance need to be regulated because contagion contagion can erupt from any corner of the financial system. The ECB sees private credit as a risk to financial stability. I'm quite I mean the deindos has is one of the has one of the latest remarks. I think that central bank's independence is threatened and it's not about um the current American administration. I believe that in the background is um the rise of authoritarian temptations in many many many countries many economies and there is fiscal dominance and we know that in history sometimes some central banks have been forced to be more um give up on their major major uh u mission Uh however, I believe central banks may have to raise policy rates because of the inflationary bout. Uh and also I believe that the effects of the Middle East war will persist. Um it's interesting to see how reforms will be implemented once the new chairman of the Fed uh is going to take um his job. Um now crypto assets why I view crypto assets as a threat. Uh the the origin of crypto assets uh I shouldn't get too much into detail but it's the wish to decentralize finance which in itself is a threat to central banks. Most of them are highly speculative. Stable coins in particular endanger monetary policy transmission. and monetary sovereignty. Stable coins and I I think BIS is very much right. Stable coins are non-m money and can harm the financial system as a whole. Um and they can trigger a crisis. The proliferation of stable currencies like we are getting back into a world of free banking which is very dangerous. European banks should seem to be more relaxed about stable coins because they fear American competition. Um uh but competition is not necessarily good unless you have regulation a proper regulatory framework. I think that tokenization is the proper way to use new technologies. It's the BIS view and I think BIS the BIS view is fully justified. CFDC's are inevitable and will trigger a new type of currency competition. This is also an inexurable trend about artificial intelligence and coming to the end. Artificial intelligence can bring great benefits but entails huge risks. Um a huge productivity shock. This is what Kevin Worish said recently. I think it's an open issue. We'll see because it's not only productivity. It's also about the social impact and political disarray. I mean, what one should also look at externalities. It's not only an economic shock in itself. Um, it can harm banks by rebuilding vulnerabilities. The economist I think the latest issue of the economist talked about the mitts moment and it can enhance contagion and invite a new financial crisis and I believe artificial intelligence need to be regulated. I'm not in the I'm not uh in eye to eye with those who say low but you're going to stifle innovation. Um but it's hard for central banks uh the BIS financial stability board national regulators to coordinate closely. I mean this is a big question and and last for the euro >> yes please go >> for the euro to be a stronger reserve currency the euro area needs addis a safe asset and more overall integration. Thank you very much indeed. I note that we uh we have not only Kevin Vos but John Nipki saying a moment ago that artificial intelligence might very well produce productivity progress of of magnitude that we were perhaps underassessing until now. Anyway, thank you very much. I I guess that most of the points you were mentioning will be discussed uh during the course of of our workshop. I will now give the floor to Jeff if he wishes. >> Absolutely. Thank you very much. I feel very sorry for Nicola um who comes last because I had a whole series of notes and I've been going through them as people spoke and checking off the points that were made and there are no unchecked points on my list. So, I thought I would talk about something different that I hadn't planned to talk about, but that I think is in many ways um the lurking behind, beneath, above, around much of our conversations about the international economic order and about finance as well, which is geoeconomics. Uh which is that is the use of economic uh tools, economic policies for geopolitical purposes. The core of geoeconomic policy is elasticities of substitution. Geoeconomic policies focus on those activities for which the supply is inelastic. Right? That the term that was used in some of the panels is indispensability. But when we think about this in a more rigorous economic sense and that we now have some very rigorous studies of geoeconomics, this is all really about the inelasticity of substitution. whether of goods or of other activities. The problem with using geoeconomic policies on goods in trade for which demand supply is inelastic is that when supply is inelastic, the rents available to producers are enormous. So controlling the supply of goods for which supply is inelastic means forfeiting massive profits. And we've seen that with the lobbying by some of the firms that had their supplies or that that were threatened with an interruption of supply which immediately say if you keep us from selling to China for example, we go bankrupt. So policy makers perhaps unexpectedly and and predictably have turned away in many instances from using the most inelastically supplied goods uh for geoeconomic purposes. And that leaves as much of most much much of the technical academic literature on this has suggested financial tools for the use in geoeconomic policy. Um that has led senders and targets potential senders potential target when we use the term sender to mean a country that is imposing financial restrictions for geoeconomic purposes. Targets as the countries they're imposing them on. um that has led for a search for financial vulnerabilities on the part of both senders and targets. In other words, countries that want to use financial instruments for geoeconomic purposes look for the vulnerabilities of their targets and the targets look for their own vulnerabilities to try to block the possibility of using finance for this purpose. Um the the obvious implication of this is very substantial more or less continually increasing intervention in international capital flows. Um this is understandable. It is understandable that countries do not want to be subject to financial restrictions as they enter into greater and greater conflict uh with with countries with other countries around the world. It's understandable that countries that have economic that have geopolitical goals would rather use economic policies to achieve them rather than kinetic that is military means. But what is often ignored in discussions of this is despite the benefits these policies are costly. They're costly economically in particular. So the the focus on the benefits of geoeconomic policies I think obscures many of the costs. There is an obvious cost to efficiency because it it changes interferes with the allocation of capital both within countries and across countries. There is a cost because it leads to a lower level or lower lesser degree of specialization in finance as both targets and and uh senders try to find general ways of uh adapting to financial intervention. It leads to a proliferation of innovation and not the good kind of innovation at least in my view innovation in ways of protecting c of countries and governments protecting themselves from financial geoeconomic policies and evading those financial um geoeconomic policies. Um it also in the case of both senders and targets leads to uh decay of financial and more broadly economic reputation. uh because if you believe that the financial instruments in question are going to be subject to political intervention, you are less likely to give them uh the the benefit of the doubt as to the credibility of the instruments themselves. And I've mentioned a couple of times on on pre I think on a previous panel and and conversation um there is very substantial evidence at this point from uh very detailed academic studies that Treasury securities have suffered over the past year a loss of confidence. um among investors and monetary authorities around the world. Um more broadly, I think the the general point that I would make is geoeconomics is here to stay. Uh geoeconomics has very important implications for international financial flows, for international finance, the international financial system more broadly and for the international economy. And I would remind um remind us that you know as a political economist politics trumps economics, geopolitics trumps politics and that the uh where governments as in the present world um have more and more recourse to use the use of economic policies for geopolitical purposes. It is I think an open question as to how far this will go. In the past it has gone very far and the distance it has gone has been disastrous for the world economy and for that matter for international politics. But I do think it's important for those of us who are interested in international financial matters and international economic matters to think not only about the purely financial issues that have been discussed here and that my are all of which are checked off on my list but to also think about the fact that we now live in a world in which geoeconomic policies are playing an increasingly important role in the development of international economics and of of the international economic order and of the international financial system. >> Thank you. Thank you very much indeed. I I am struck by the fact that the vocabulary has changed dramatically because what you said maybe I'm I'm making a dramatic misinterpretation but we would call that in the past sanctions financial sanctions US financial sanctions and yeah I see you're nodding so it's close to the concept that you were mentioning. >> Absolutely. Financial sanctions are one of many geoeconomic policies. I mean tariffs, export controls, you know, financial capital controls more broadly. Any the term is generally used to mean any economic policy that's pursued for geopolitical purposes. >> Okay? >> And that's a pretty broad range, right? You can go back and it's not new either because people keep forgetting that during the Cold War, we had massive controls on economic activity with the Soviet Union and we know what that implied, >> of course. Yeah. Yeah, John, >> if I could ask a question, the uh having like Sean Claude had some experience during the the financial crisis. Uh I think the idea at that time wasn't that countries forgot their individual interests, but clearly the dominant sense was if we don't hang together, we will surely hang separately. Is your perception that this growth of use of geoeconomic tools a reflection of great power conflict the increase in great power conflict or the other way around? Uh it is a reflection of increasing great power conflict. I think that that if I were going to be optimistic on the list that I discarded, I tried to end with something optimistic and the optim that's actually close to what JeanClaude said, which is why I didn't do it saying that in extremists um I mean the financial we just uh had Andrew Bailey at Colombia and and and so I I've known him for many years and we talked about the FSB and there is still dramatic levels of cooperation within the BIS and the FSB as there was in the aftermath of the global financial crisis. So that's holding together, but that is a very technical, very limited range. And I have to ask myself how well that might continue to hold together if geopolitical or political or foreign policy conflict among the major powers, including the European powers and the United States, I mean, as on opposite sides of many issues, proliferates. At this point, um I worry that the absolutely correct notion that if we don't stand together, we'll all hang together, we'll all hang separately, that that may be gradually going by the board as governments focus more and more on competition among themselves than on the potential for cooperation. >> Thank you very much indeed. Very very stimulating. I would say that this is one of the modalities of power politics which is the overall I would say characteristics of our time. Akinoi you have the floor. >> Thank you. Um two wars near Europe and AI have been already discussed but uh let me uh frame the two things in a macroeconomic perspective. Um first uh the wars you know let's imagine what standard economics textbook will tell us about the situation on the supply side the wars impose significant constraints on the production and delivery of energy materials not only um oil and natural gas but also nafla ammonia fertilizer and therefore food heightened risks to such Such supplies have also raised the cost of risk management. Uh I you know I said this uh shifting uh practices practices from just in time to just in case uh several years back but uh through a higher inventory and diversification of supply sources uh that's costly. On the demand side, the wars are bringing with them higher defense outlays both directly and indirectly because national defense is no longer a notional issue. It's a real one. Therefore, it requires not only a stepped up spending on armaments and uh and weapons, but also heightened preparedness in terms of human resources uh and also medical treatment and other supporting facilities. So in the budget uh of many countries, some attempts may be made to cut other items in the budget uh welfare spending for example. But rampant populism will most likely check such attempts and therefore fiscal larger will uh likely expand. In short, the wars are generating massive increases in aggregate demand while constraining aggregate supply. Okay. Now, let's go to AI. The AI revolution is accelerating. Uh AI is entering every aspect of business and daily life of ours. All of us expected this happen this to happen a year ago, but it it has unfolded even faster than many anticipated. On the supply side, it's raising productivity so rapidly that some people are becoming anxious about massive job dislocations going forward. Some pundits argue that the resulting supply expansion will be so large that it could cause deflation in in the global economy. once again in the future. At present, however, the AI revolution is accompanied by a tremendous expansion is business investment in data centers, related facilities, which is driving up demand for semiconductors, uh capaci capacitors, networking nodes and of course electric power. As a result, prices of these uh uh items are rising. So are the stock prices of the companies that produce them. Um all in all, aggregate demand is growing faster than supply at least for now. Putting upward pressures on on prices. Now what will happen from here? Let us consider uh you know of of course the future of course depends crucially on how the wars develop. Uh so let us consider relatively optimistic optimistic scenario in which tensions around both Ukraine and the Middle East somehow abate. This is similar to the most recent IMF wheels standard reference scenario. They they changed the name baseline to reference anyway. So quite naturally elevated demand and constraining constrained supply will result in slower economic growth with higher inflation and in this circumstance uh savings will shift from glut to shortage. Uh for example uh most recent MFVO expects that the budget deficits of advanced countries to grow by half a percentage point of GDP in 2026. Current accounts deficits of energy importing countries will increase. Of course, even in oil exporting countries, some sovereign wealth funds will draw down their financial investments to support reconstruction and replenish defense capabilities as we heard from uh uh uh speaker from uh UAE yesterday. So against this background, market interest rates will remain high or rise further which could trigger a repricing of financial assets across the board. So we discussed already but uh some economists e expect such repricing to be particularly salient in private private credit markets and equity markets discussed already possibly leading up to a financial crisis. Well, despite these concerns, however, the market appears less cautious or I should say more sanguin about uh you know the world economy judging from stock and bond prices as well as risk indicators such as CDS premier for example S&P 500 fell only 8% uh from its previous peak during the Iran Iran war before it it it it it more than fully rebounded. This episode contrasts with a 25% drop immediately after Mr. Trump announced his liberation day. So um that's quite a different uh market indication. There is a gap between the majority view of economists and the and what the markets indicate. The market is obviously more optimistic than economists uh like uh Danny Rouset uh moment ago. WTI futures I checked show a steep backwardation with July delivery in the high $80 per barrel and December delivery in the mid70s7 $70. So uh the market expects the condition will return to normal before too long or at least at the end by the end of the year. Economists at the IMF and elsewhere on the other hand appear to take supply disruptions more seriously. You know I have always thought the market is riskneutral while most economists tend to be cautious. Of course, e economics is often termed as, you know, dismal science and e economists are paid to worry about many things. That's quite a nature. But but the contrast now is more striking than usual. Uh this is what we are seeing. The market's present optimism stems largely from its expectation that the AI revolution will outweigh the negative effects of the war. In economics term, the aggregate demand elevated by the wars and AI will be met by enhanced productivity gains and supply increases. I hope this will eventually prove true, but the market seems to discount this element over a much shorter horizon than economists do. So, which will prove correct? The average economist or the market? Over the past several years, myself tended to be optimist remember uh about the global economy, particularly the US economy. While many economists became pessimistic after Mr. Trump was elected US president, my optimism has been based on two elements. One is AI which we discussed already. The other is the fact that there is little overleed economies. uh there may be hidden uh leverage but uh hard to detect yet. On the flip side, the public sector is heavily indebted as uh Junko Trucher mentioned. Of course, this is a problem. But if economic growth continues uninterrupted, coupled with productivity gains from AI like the market expects, we may be able to correct budget deficits through taxation or you know tax increases or automatic tax increases. At the moment the presence of large excesses in the private sector um particularly uh in the core parts of of our financial systems in short banks is an encouraging fact uh that support optimism about continued economic growth with somewhat elevated inflation. So I have lots of things to say about stable coins but let me stop here for the moment. >> Excellent. Thank you very much indeed. We will have a full-fledged discussion on the stable coin and and the like but thank you very much. I see that you are more on the optimistic side >> on the market side. Yes. >> And you were not always on this side. Now Jeanlo, could you elaborate a little bit on your own view? I will be more on the pessimistic side. We are the United States are in Kulusak and the world is in deep trouble as we don't know when the street or form is going to reopen soon or not soon and we all know that the world depends uh on its issue from an economic and financial viewpoint. It is very presumptuous to make any forecast now because we are in in in the in the dark night. Therefore, just a few comments. First one, there has been last year two pivots. one in favor of European and Japanese stocks versus Wall Street, particularly because European PR were eight 18 versus an expensive 28 for the S&P 500 and another pivot in favor of the euro versus the dollar minus 9%. But this year we can expect two reverse pivots. one in favor of Wall Street versus Euro stock as American companies are expecting earnings growth by 18% much higher than in Europe by 10%. Europe is hit by energy prices whereas the US are as we all know net exporters growth in Europe will be this year around 09% compared to a US growth anticipated at 2.7% and an increase rates in Europe versus no cut by the Fed should deteriorate further the European stock market besides another reverse pivot. The dollar has already gone up and shouldn't continue to do so except if there is a cut from the Fed this year. Indeed, as US stocks uh Amazon for instance has gained 3.5% yesterday and US treasuries will continue to attract hot money and as increased energy prices will need more dollars. For every 10% increase in energy prices, the euro slides by 08% because of higher higher demand of dollars. Second point, the crisis will affect more Europe than the US and will lead to different monetary policies. Although both will have to face a dilemma between a rise of inflation and a growth risk le to stackflation in a vicious circle with a hokey shift towards rates increase instead of cuts. In Europe, first we expect limited growth below 1% and an inflation of 3 to 4%. As a consequence, we might have two or three rates increase this year. in the US with interest of 3.5 to 3.75% with an employment of 4.3% a sticky inflation of 3% although not that much contaminated by the tariff tax increase and with a growth of around 3% the Fed could be on a wait and see position even after the departure of J Powell midmay and avoid the cuts advocated by President Trump. And on the contrary, an increase of the rates because of inflation once this year is not impossible if inflation deteriorates. The last Federal Open Market Committee of the Fed was already split between seven members in favor of no cut and seven members of just one cut of 25 basis point. But a monetary policy in order to fight against a shortage of supply, which is now the case, is not a good medicine. While it is efficient to fight again against an an excess of demand, and it will increase the cost of refinancing heavy debts becoming worrying because of investments in defense and damaging emerging countries. Third point, there has been still now a splendid paradox. We are confronted by huge risks still in front of us. But the stock markets may be stupidly enough not declined much not more by by 10% since early March except in some particular sectors such as the luxury and they moreover since the beginning of April S&P and the euro stocks have gained have regained thanks to good expectations on first quarter earnings and uh AI stocks are booming in a bubble maybe and tech stocks as well plus 15% this month but we are not sure that this paradox will last for long. Fourth point, indeed today we can dream of a ceasefire, but a ceasefire will be maintained during a certain period of time between Israel and Lebanon. that the straight of arms will reopen soon and that negotiations between the Iran and the US would succeed to a certain extent so that US army does not stay longer in this region and in order to prepare midterm elections but even if this dream becomes true financial markets will be volatile because of the risk of stagflation the price of sh energy should continue to remain high this year because of a destruction of some key energy infrastructures in Qatar. 17% are destroyed and in Kuwait a lot in Kuwait reducing energy output which could keep the barrel around $100 for months and damage some key economic sectors such as chemicals of course but also fertilizers because of sulfur the food industry therefore aluminium semiconductors automotive industry while fueling inflation raising ing interest rates, reducing consumption and growth and affecting the stock markets. On top of all, we're confronted for a certain period of time with a huge uncertainty as Jon has mentioned in particularly in the Gulf whereas it has been such a sunny paradise for years as it will take anyway time to complete to a complete reopening. It will remain unfortunately risky and unstable and undermine confidence. To conclude, we are probably going to live in a very dangerous way and uncertainty in the coming years and we should remain extremely cautious. Even if peace happens shortly in this region, stagation at least will will will appear and as a paraphrase from President Hoover, the crisis is at the corner of the street with a hope that I am completely wrong if a strong peace hopefully arrives very quickly. >> Thank you very much indeed, Jeanl. We all hope that you are totally wrong. We do. without saying >> you too. I understand. Can I turn to Nicola? >> Nicola has two hemisphere in his brain. One is a US hemisphere, the other front is a European hemisphere. The senior fellow of both best think tanks on both sides of the Atlantic. We are you know suspended to your lips here. uh JeanCloud of course is alluding to the fact that I work both for Bugal which is in Brussels and for the Peterson Institute for International Economics which is in Washington DC and I have to mention that the honorary chairman of Google is Jon. So thank you chairman. Um I did some of you uh may have attended the panel in which I spoke yesterday. So I I did give a little bit of EU versus US during that uh panel. I'm not going to repeat exactly what I said yesterday. Uh rather I will look at the global financial system a bit holistically. Um and I will since uh the the the mood so far has been a kind of balancing of optimism and pessimism. Uh I will start optimistic and end with a little bit more of a downbeat tone. So I will start with resilience and uh continue with uh with risk and and end with a question mark. Let me talk first about resilience and um I think we all want to have a a conversation now. So so I'll be a little bit too uh succinct I guess uh very cartoonish and then uh I hope we can come back to some of those points in the in the collective discussion. The market of course has been incredibly resilient given given the magnitude of the the shocks of the last uh 18 months. Uh particularly u I would say you the you know the doubts about US institutions some of us were having that conversation at lunch. Um I would make the argument that the political regime in the US has changed. So we have experienced regime change in the US last year. And my point here is just that the core of the US political regime is the US constitution and the US constitution is not being enforced. So uh we have uh the Supreme Court you know blowing hot and cold but uh letting the executive branch do a lot of things that are clearly contrary to the constitution. And perhaps more importantly we have Congress not playing its role of being uh the main check on the executive branch uh under the US constitution. And in that context uh it is uh remarkable how um serene how um even uh upbeat uh the financial markets have been. Uh actually I did check the evolution of German stocks between early 1933 and uh five years later in 38 uh they went up 50%. So maybe we should not have anticipated a negative reaction of the stock market uh to this political regime change. Now I'm not saying that the US now is Germany in the 30s. Not at all. Uh that's not my point. Uh and uh and I have no uh intuition and certainly even less conviction on where the US will go politically. I suspect it may not come back to where it was 18 months ago, but that doesn't mean the most horrible scenarios will materialize. So, so I think this is just a point about market resilience as opposed to US politics. The second thing that has been remarkably resilient in that context uh and this is much more structural than market fluctuations is the international uh central rule of the dollar. uh there were some wobbles in April uh for a brief period April last year a year ago uh but at this point basically and I'll speak under just control here the central role of the uh dollar in uh the global financial center system has not changed uh of course we don't know the exact numbers of you know reserve currencies and so on in real time but basically uh from a kind of basic smell test there's probably some diversification of going on in you know central bank reserves global investment portfolios but nothing dramatic and nothing of a completely different nature from the kind of fluctuations we've seen in uh recent years and decades the kind of things that barak and green among others has documented in terms of diversification anyway no sea change even more structural and here I will let you repeat actually what you said uh chlude in your introductory remarks Um we have seen the you know unraveling of some global institutions, the US exiting a number of UN agencies. Um the WTO of course being stuck in a stalemate and we had a lot of discussion of that already at this conference. The IFI IMF World Bank in a slightly better place but still very you know um defensive let's put it that way. Uh the World Bank no longer talks about climate change, that kind of thing. Uh and um which is a big change. Um the IMF is enthusiastic about Argentina. I mean that kind of thing. Um we haven't seen that in the Basel cluster as you said. Part of that is because the US is actually not the dominant stakeholder in the BIS, but part of that is probably the nature the very nature of the BIS which is an organization of central banks not an organization of governments. uh and uh the Fed of course I could have mentioned it in the resilience so far has been relatively unaffected by the turmoil even though of course it may be changing soon but I think it's remarkable that even if you look at you know the way these things work on a daily basis the implementation of Basel 3 let me remind our European participants here that on the basis of the proposals issued last month by the Fed and other agencies The US will be more compliant with Basel 3 than the European Union probably when all the dust settles. We'll have an assessment by uh under the Basel committee's regulatory consistency assessment program which is a very good program uh in 2029. So we'll have to wait a little bit to have confirmation. But my expectation at this point is that based on previous episodes, uh the EU will be found non-compliant or materially non-compliant and the US will be found probably largely compliant as it was in the previous round. Uh so um it is not the fact the case that the US is exiting Basel while the EU is staying in Basel. It's a much more nuanced picture in which compliance with the Basel framework in the US remains quite good even though they have deregulated and they have basically eliminated a lot of gold plating that they had above Basil uh in uh under under the Trump administration already. So lots of resilience now also lots of risk. Uh I completely agree with Daniel. The kind of swing of the pendulum in terms of uh you know um regulation and supervision is absolutely striking. Those of us who have been through the previous cycle and who remember the time before the great financial crisis are horrified because we see the same vibes as we had in the mid 2000s. We know where that led and we feel that it will lead to the same place again. Uh and that applies to the US. I mentioned yesterday the US uh cycle of deregulation, dsupervision and institutional erosion. I'm not going to repeat but it also uh is visible elsewhere. for example, the UK with the idea that you know the Bank of England has a growth or uh competitiveness mandate whatever is sending a very um alarming signal even though the Bank of England says nothing has changed uh and they have also lowered capital requirements not in a very big way but with again sending exactly the wrong signal and in the EU itself so far policy has held the ground but the lobbying of the banking uh sector is uh relentless uh and very determined and frankly they're getting political traction. The the the banks of course have extraordinary access to the political leaders and at this point the um technocrats, central bankers, financial stability people, techn uh you know bureaucrats in the European Commission are playing a very defensive game against the pressure of the banking sector to decrease capital requirements. We will probably have an indication later this year on how that's likely to play out ultimately, but it doesn't look very promising. So, if you believe in that theory of the swing of the pendulum, uh we are going into a cycle of deregulation that's going to result in a major financial crisis somewhere down that road. Uh and that's completely depressing. Now, my final note, which I have said is a bit downbeat. >> That was optimistic. >> Yes. Um there's a there's a short story of Isak Azimoth called Nightfall. Maybe some of you uh remember it. Uh Azimov, which of course was a genius of science fiction and many other things. Uh viewed it as his best piece ever. Uh so much so that he uh later made it into a novel. I think the short story is better than the novel. It's much more crisp. Anyway, Nightfall tells a story of a planet system somewhere out there in the space where people basically keep repeating um the same uh catastrophes uh over and over again because of the way the planets interact with each other. It's very funny. Uh essentially every couple of thousand years they destroy civilizations and they rebuild it and then they destroy it again. Um and um it's uh it's super crisp. Read it. It's very short. Um, so I I've always been thinking about that short story when thinking about the swing of the pendulum because it's kind kind of the same thing, right? I mean, you you rebuild and then you forget and you know, some uh alignment of the planets make you destroying everything and then you rebuild again. Now, Nightfall was written the short the original short story in early 1941. And the downbeat tone is whether actually this kind of thing is to be thought about in terms of financial stability or more basic, you know, security stability. and uh and and and it's hard not to think at this point that it might be the latter and that actually you know the financial crisis is the least of our concerns because the security crisis that may be coming could be larger. Um maybe uh that's not the right way to think about it and I actually hope it's not. Thank you. >> Thank you very much indeed. I was reflecting on what you said and the pendulum uh without having a full-fledged pendulum as we have observed in the past and you said that very uh clearly uh I I'm struck always struck by the difference of perception between the both sides of the Atlantic not to speak of other continent uh we have the US always telling us and from their standpoint very rightly so. Don't overregulate in advance. It's stupid. Let the market make his own explorations. You will see we maybe we will have marvels. If on top of the marvels we have risks that are materializing. Okay, we will make it. We will we will invent what is necessary to combat the the risks that are materializing. And you European, you're much too much to concentrate on regulation and preventing in advance a lot of bad consequences that perhaps could come but perhaps could not come and therefore you are hampering the discovery of the new technologies proesses and again with AI we still we we have clearly these two vision on both sides of the Atlantic that that it's clear that we need both. If I we could not we should not be too European in preventing in advance a lot of discoveries in the technical side in particular that are or in the financial side or whatever in the economic side that are of extreme importance and the US of course should know in advance that they are taking a lot of risks and when there is a catastrophe the catastrophe is not only for the US but for the rest of the world too as we could observe unfortunately at the moment of the last great financial crisis. Anyway, the I think the the to the tab was very stimulating and we should concentrate maybe on some important point. I would list perhaps the two first ones if we accept to speak very very concisely because we will have to to close the session. uh at uh a quarter to seven or something like that. So or maybe maybe at seven seven would we could make it at seven. So the the first one would be perhaps how you would uh discuss the AI productivity progress themselves. How do you feel that this economically and theoretically should be assessed? I think we we are still in a very uncertain world. I'm not myself convinced at the stage. My my optimistic reaction is it will produce fantastic results because all all such innovation that we're of that magnitude are likely to be benefiting the overall economies and and of course our fellow citizens. But again this has to be perhaps explored a little bit and I think it would be good. uh as was mentioned previously, we have the issue of the stable bonds and of all the tokens and all what goes with it which is also uh underlying and maybe we could also have an exchange if again we are sufficiently concise on this element also and maybe we could conclude JeanClode with the likelihood of a big big big difficulty. in the financial sector which is also of course something which we we cannot avoid to discuss a little bit. Now I open for full-fledged discussion. No, no long exposition but remarks tough remarks speaking our minds, speaking our guts in in some domain and I start with AI. I see Yan you're ready please. Yeah, know I was going to react to what Akina said earlier when I looked myself at the beginning of the year which was almost a century ago when you measure in AI terms but I look at specific models one coming from Warton University one from Gman Sax one from EY and then sort of more casual discussion with people like AON and and sort of more back up the envelope models if you The maximum I could see in terms of productions over the last the next 10 years would be something like 0.3% per year. So 3% over 10 years max, right? And maybe a was a bit more generous and again may maybe it was sort of more back of the envelope but I didn't see any large impact predicted yet. Right? I think people are very cautious and and I think nobody knows frankly uh how far it can go. >> Well, this is a good start. >> Just just one comment. It it's already obvious that many computer programmers are being laid off. They they are no longer used. I mean AI uh program everything, you know. And so uh that's already done and the consulting companies are getting into trouble because those companies uh used to design uh you know systems for financial institution others now banks use AI and uh produce programs inhouse easily. That's that's obvious >> but I think you see progress in maybe 10% of the economy and then you have massive sides of uh other sectors that that are not impacted by AI. So net net you see this relatively modest uh expectations. Well, I I said >> I'm sorry. I'm sorry. No, no, I'm sorry, >> John. You you mentioned that there was a surprise in the productivity progress and you were very close to attributing this productivity progress to AI. Did you did you >> I I ascribed it to uh Kevin Hasset is the the administration's claim, but uh I guess a couple quick comments. the um my my line is uh in the industrial age machines made weak people strong and in the information age technology makes stupid people smart and first of all I don't know why that is bad for inequal that creates inequality it it seems that it holds out the prospect what's that >> because rich people are No, that uh uh that it it ought to uh create productivity gains not just in computer software but in in other areas but it makes in general makes workers more productive and as we've also seen that uh as as a student of Paul David who was the original uh theorist of technology diffusion or perhaps the most prominent uh that it takes it takes time but that productivity gains never move uh deriving from from technology never move in a straight line or a smooth line but in waves and the uh second reference I like to make is listening to Jensen Hong uh of Nvidia who told us at Stanford uh last year in 10 years computers will be a million times more powerful than today. Computers will be very expensive but computing power will be ex nearly free. So he said think of a future in which you can have access to all the computer power you can imagine virtually for free. what will that mean? And the answer is none of us have a very clear idea at all. >> And therefore to try to to surmise what's going to happen is difficult. >> Yeah, >> it's better not to get crazed but still it's uh also uh probably an error to be too cautious. >> Good. Before giving the floor to Jeff, one one remark because what we are discussing looks very much like the solo paradox with the new computer the mainframe solo said I'm very surprised because I see a lot of spendings in the fantastic mainframe and I don't see any consequence in the productivity progress that we measure and it last a long time when at a time then you could see that there is no more paradox because there were productivity progress which were very impressive. So are we more or less in the same sequence in your in your mind? But I'm sorry don't respond immediately the question. >> No no I think that's that's a great entree. I mean Solo said we see computers everywhere except in the productivity statistics and we see AI everywhere except in the productivity statistics. Um I think I was going to make one minor point and then a more a broader one. The minor point is the people that I some people people I respect say that most of the influence that we see of AI on growth now is in traditional industries building data centers. So cement actually is booming because you need a lot of cement to build a data center. So it's not AI itself that's leading to this growth. It's the production of the that leads me to a broader point really from economic history because you know we can't predict the future. I mean at least I can't predict the future but we can use some of the experiences of the past to try to think of what patterns there may be. AI is a general purpose technology and the general experience with general purpose technologies is that the productivity increases are not in the technology itself but in its use. So when steam power, the railroad, electricity, the internet came on stream, the first indication, the first uh the first tendency was to say people are going to make a fortune in railroads or electricity or the internet. But everybody piles in. It's highly competitive and eventually all the rents get competed away and everybody in that starts a railroad goes bankrupt. And no one wants to be an internet service provider today. And it's very easy to produce electricity. Now, it's hard to see all of these the AI companies going bankrupt or losing the rents that they're currently earning. But there's a lot of competition in that space. So, I think that what we what we are likely to see is a process of discovery of what industries can best use AI to improve their productivity. And there already are studies trying to figure that out, but they're speculative. And so I would say don't expect AI itself to be the productivity the engine of productivity but its use to be the engine of productivity. And so that means the money probably in the longer run will not be made in AI itself but in industries that figure out how to use it. That's a lesson from now maybe the future will not be like the past but that is the lesson of economic history with general purpose technologies. >> Okay John and then Nikolai if you wishes. The only comment I was going to make is uh Paul David's seinal computer and dynamo uh article was essentially written in response to Solo's remarks. The suggested being that our at that time our understanding of the process of technology diffusion and its effect on productivity was very poorly understood >> much better now. >> Thank you. Niga, you ask for the floor. >> Yes, absolutely. Um John reminded me of this famous um uh prediction by the chairman of the US Atomic Energy Commission in 1954 and it's so good that it uh it deserves to be read again. Um it is not too much to expect that our children this is was when well you know commercial nuclear power was starting to be a thing. It's it's not too much to expect that our children will enjoy in their homes electrical energy too cheap to meter. Well, no. Of great periodic regional famines in the world only as matters of history will travel effortlessly over the seas and under them and through the air with a minimum of danger and at great speed. Okay, that kind of materialized and um and and and we'll experience a lifetime spend far longer and hours as disease yields and the man comes to understand what causes him to age. I mean some of this has happened. It's not bad but electricity too cheap to meter. No. hasn't happened. So, uh I think AI to me is kind of the same thing. We we we can extrapolate some of the wonderful things that you know are being uh projected but maybe not all of them. >> Thank you. Thank you again. I have to repeat of course that all of us can intervene, make comments, ask questions. We are a full-fledged now working party where we are all equal. So who wants to say a last word perhaps or a new a new idea launch a new idea please? >> You're obliged to you're obliged to to speak in English. >> Yes. Uh yeah I I wanted to start by sitting what uh somebody talk about is solo pred prediction or saying that you have uh productivity everywhere but not in the statistics from the computers. Uh the same for the AI. In fact, u I think we have to distinguish between the the sectors that produce AI and the sectors that just control AI products. Uh so this is one thing I don't know the study you mentioned from Harvard University did this distin distinction. Secondly, uh when you invest in infrastructure, uh there was a study from OECD telling that if you invest $1, you have to invest $9 in human capital in reorganization. So I think we need all this uh deepness if you want to estimate the impact on of AI on on the economic tank. >> Thank you. Yeah. >> Yeah. Yeah, just to to clarify, yeah, these studies were the full impact on GDP. So across all sectors now, uh how accurate precise the assumptions were I don't know what was striking though is everybody was making uh the same kind of predictions, same order of magnitude. So maybe everybody was making the same mistake. I don't know. Uh but but yeah, it was really a global impact, not just in AI. If I understand well to not to miss your point Yan, you said that after due meditation with Nobel Prize and so forth, you arrive >> at at more 3% growth more >> over 10 years >> over 10 years in the US. >> Is it in the US? >> Actually, you know what? I I forgot where it was. >> Okay. You know what? you know well you know well it's good to take in any case >> let's assume the US because again it was Goldman Sachs ey and wartton university but >> okay >> thank you so yeah please >> yeah in general in microeconomic terms 3% is not three percentage but 3% of what exist already so we have to make also this distinction 3% % of maybe the 2% we have today. So it will be two 2.06 06 >> it's not >> no what you mean just 0.3% of growth annual growth right that you add to your usual projection so as we said 2.7 or what it is for the US this year right >> okay okay so Daniel and then yeah >> it's about um um the impact the overall impact Um it's um many people accept as a working hypothesis that is going to uh increase concentration market concentration and this is not good. Clearly it's not good. Secondly, it's going to increase inequalities >> in the realm of finance. It may uh it may enhance herd effects and increase contagion. So a big a big issue is for the regulator. What are we going to do against the background of the regulation? What's going to happen? I think um one and and then last but not externalities. If you have if you have a lot of replacement and displacement, you end up with a big social problem. >> Yeah. Thank you. you're you're on the negative side. Of course, they are negative associated with any new I would say innovation, major innovation. Even in the last ancient time, the Greek philosophers were analyzing very clearly all the drawbacks of poetry. poetry was not that good necessarily because you know it permitted to certainly to memorize a lot of sentences and the writings also were not that good. I mean each fantastic invention and I take it as a fantastic discovery of of your I would say our own civilization has a lot of drawbacks clearly and we have to care for the drawbacks but perhaps just in between the US and Europe not not I would say being too cautious and not permitting the uh I would say benefits to to flourish. You have the floor, sir. >> Thank you very much. I I just wanted to rebound on two points that were mentioned by the panel. The first one was uh that European countries have too much debt and and very limited fiscal space. The second point that was very impressive is this huge difference in terms of tech size between Europe and the US and the fact that Europe is really lagging behind the US in a huge order of magnitude and that my belief is that AI will accelerate this uh this gap because you the US are going much faster in AI than Europe. So how do we address this situation where basically in Europe we don't have any financial flexibility and and and this decoupling of of the economies between Europe and and the US are creating a a very strong factor of instability. So I was sensitive for example to the the point of Yan about saying that we can improve labor flexibility and that we will increase tech investment in Europe. Okay. My feeling is that the only way to to change the situation would would significantly change the capital supply in Europe on tech and my question for the panel is how do we do that? I mean how do we if we have no debt flexibility? Um how do we invest in a major way in tech in Europe to to try to merge this gap? >> Before letting Yan respond to you, two remarks. One is the US has no more fiscal space than us to be frank much less obviously in many respect and on the other hand the European have a savings surplus which is very solid if I may they don't make the best use of it but but they have this surplus which is not the case if I'm not misled in the US so we we should not underestimate ate our own potential. If I we we make a very poor use of this potential at the present moment. And my my own uh my own understanding of the lag between the both sides of the Atlantic is that frankly speaking we do not have yet a single market. We discussed that today. We have no single working single market. Why? Perhaps because we have a glass ceiling which is the fact that we are not a full-fledged federation. Political federation. The US is a political federation and you know there is no division by states in the US when it is absolutely obvious in our case and of course and are telling us what to do to create the real single single market. I'm a little bit afraid. We were going this direction as rapidly as possible, but I'm a little bit afraid that the glass ceiling would would continue to be there. But that's another story. Yan. >> Yeah. Know I mean a single market would certainly help. But uh you know in this world of open capital and large capital flows when you talk to so funds for instance they'll tell you that you know they are overly invested in the US and they would love to diversify. for obvious reasons, right? So, France in in the Middle East, large even European companies end up investing a lot in the US when you could argue I mean they could easily invest at home and you know you just need to make sure that the the returns of your venture is high enough and and that's the you know the key thing right I mean you know um the private sector is much more profitable in the US than it is in Europe as simple as that. So that that in itself uh sorry John >> I'm sorry Jeff and then >> I was just going to make the point in response to the the comment that was made that we we've talked a lot it's been mentioned the global fin macroeconomic imbalances have been mentioned one of the big imbalances is surpluses from Europe that is the surplus savings that have largely been invested in the US now and so it seems to me just following this is just to agree with Yan that the the there is no shortage of savings in Europe. There's a shortage of investment opportunities that are more attractive than those in the US. And I think the the goal for Europe should be to try to turn that around. >> Sure. >> But but isn't part of the difference the the ability of innovators to obtain financing in the US? In other words, isn't a lot of the a lot of the flows from Europe >> to the US into funds, not necessarily some of course into into specific investments, but I think a lot of it is is into funds that then turn into investment in innovative uh firms. >> I totally share your view. It's absolutely clear that the fact that we do not have a real single capital market is playing a very important role. But there are other elements and I know Yan how keen you are to mention precisely the cost of fa failure in Europe which is much higher than in the US. You you you had a chart on that. >> Yeah. And I just want to clarify you know it's not like Europe is lacking investment. It's just that uh firms invest in what we call marginal innovation right where you don't take that much risk and they leave uh disruptive innovation to the US right because again they they cannot stomach this kind of risk but the risk is proportional to to the return right so >> yeah but if if we are speaking of innovator in Europe that are absolutely remarkable and would succeed in the US environment. The difference in Europe is that they don't get the capital. They you you have now the pool of capital despite the fact that we are much more savings than the US. you you do not have the capital the risk capital that it stands ready of course to have confidence and even if again the innovation is fantastic and should normally be extraordinarily profitable I would say that the lack of profitability of large firms influences the lack of profitability of small firms just because it's cascading and who is buying smaller firms it's larger companies and those will take when they merge, they'll take into account the cost of restructuring the two businesses, the big one, the small one, and they'll uh they'll pay the small firm at a discount to take into account that cost. >> Yeah. >> So, so it's sort of cascading down. >> Okay. >> Thank you. I'm sorry, madame. You have the privilege of being the first lady to speak. It's very very >> which is an an important privilege in this. >> Yeah. Yeah. please in >> this day with so many panels with a feminine presence. Okay. No, it was just to go maybe a question for Grey Fre because I think we we should focus a little bit more about what is this real shift of paradigm to geoeconomics and maybe we should focus more also to understand better the Chinese economic policy and not only Chinese economic policy but of many countries and especially to give an example it seems to me and this is my question that uh geoeconomics it's much more deeper than only the weaponization uh of economy and it is an in my opinion a sort of error to focus only on weaponization because this is also another view another vision especially of resources of scarcity of resources And let's say a mercantalist spirit which is spreading in many countries and mercantalism it means something which is much more deeper than protectionism and it impacts public policies. It impacts also preferences of agent. Meaning that the idea that resources are now a a zero someum game is impacting uh investment. The way to invest, the way to to arbitrate for public policies in many countries. And it seems to me that geoeconomics is not studied deeply enough to understand what it means really. And it's not only weaponization. It's a new way to arbitrate arbitrate to make arbitrary in in economic policy. And we have a US economic policy which is based on mercantalism. Okay, thank you very much indeed. You have to respond. >> Sure. I guess I have to. Well, uh first of all, I think um you yourself correctly have said this is not a new policy. This is mercantalism or neo mercantalism. Um the the most famous expression of mercantalism back in the 17th century was Thomas Hobbes who said wealth is power and power is wealth. And that's pretty much where we are today with with this. I would not by the way say that this is necessarily simply an American turn although the United States is is most prominent in its use of these economic tools. I said before that the west was united in during the cold war in using very very extensive and much and much more extreme geoeconomic tools than are being used today. nearly total prohibition on trade with the Soviet Union with and one of the reasons that that was possible because there was general consensus that there was a goal that that the US and its allies had a goal in mind with respect to the Soviet Union. I think that but so let me say a few things about why I think this is happening. Part of it is economic competition. uh the sense that the Chinese have and other countries but the China in particular has used purpose of government policy for both geopolitical and economic purposes and that if other countries simply abide by liberal economic principles they'll be left behind. So there that's there's an economic competition component. There is a uh uh supply chain component driven both by the experience of the pandemic in which countries found that they suddenly didn't have access to face masks or personal protective equipment because they were all made in China. um and a broader sense that global that that global value chains that long and complex supply chains um were making it difficult to figure out how countries could move forward in value added terms without relying on countries that maybe they didn't feel were particularly reliable and third most broadly the sense of vulnerability that the pandemic uh the Russian invasion of full scale scale invasion invasion of Ukraine um trade wars currency wars that all of these have given rise to. So I think this is a an understandable set of defensive measures by governments who after all are charged with protecting their citizens from adverse effects. So so I'm I'm I'm not happy about this turn. Um and but I think that we have to as you say take it very seriously and think about what the implications are for the development of international economic and financial affairs and also it seems to me if I may sorry if I may just and also to integrate it into uh into our economic tools and the way we are thinking about the open economy uh now I mean also since we were speaking about solo and so on it is now to be thought in a new paradigma. >> Uh, and in the United States at least, I am invited to at least two geoeconomics conferences every week. The the National Bureau for Economic Research now has a program on geoeconomics which meets spring, fall and and and summer. So, uh, the work is being done. It's being done by academics which may be a risk, but uh, but that's the that's the that's that is certainly being taken. But in any case, you are in full agreement on one point. If I understood well your remark, this geioeconomics to take your word is both offensive and defensive. And what we experienced all of us as you said with the pandemic we had we realized to which extent it was very dangerous to have too long and stretched value add a chain in at the global level and that would necessarily ask us to hedge against the possible risk associated with the interruption of those chains. So I I think uh we we have to look at it from all possible angles. >> Yes. And and it changes also the behavior of agents. I mean the only word which is common between macroeconomic text and geopolitics research for example if you take Gilpin's uh research this is the preferences of agent. preferences of agents are not the same today in a new paradigma also it's not only economic policy level okay thank you very much do we have any other question yeah please >> yeah thank you very much for this uh absolutely fantastic discussion I wanted to ask the panelist about um on a more structural approach uh uh how they um I would like to have their opinion about one of the main differences between uh the way Europe and the US fund their corporates. Uh in the US I may be wrong probably around 70% of the funding of corporations comes from stock markets and in equity I mean and it's the re and the rest for credit and it's reverse for in Europe. uh in your opinion does it have significant consequences on the issue of innovation that you highlighted and uh if yes uh in in your view can this structure especially in Europe change and would for instance the unification of European markets uh have an influence on that very strong very structural future of the European financial markets >> please yeah know I'm often asked this question. I'll go back to the si very simple distinction I made earlier which is that we've had European champions forever. In fact, we invented capitalism right and uh and you know and we still have those champions by the way which were financed as you said more by banks than by markets right. Uh so they have a different uh capital structure um and and yet their performance was very good. So meaning they they could reward their shareholders the same way. Um so to me the big difference is the risk level and speed of the tech industry that makes that older model uh just not viable in Europe right as as simple as that. So now of course there are differences. Doesn't help that we don't have large pensions funds in Europe. doesn't help. We don't have a full single market. Uh but I wouldn't say that's the first issue. >> Can I please >> I ask you on a question because this is a puzzle to me too. So you talk about the risk profile, but there are plenty of Europeans willing to re lend in a kind of venture capital form to American firms. Why aren't they willing to lend to European firms? >> Okay. Well, let me give you a specific example. when Meta decided that they changed their name for nothing that the metaverse was not going anywhere that was at the end of 2022 at the same time uh Chad GPT appeared on the market what did they do they decided to make a complete tutor and go full speed to AI in the process they ended up you know uh firing 20,000 people 25% of their staff right uh over a period of a few months and at a cost equivalent to a few months of salary. Right? Today SAP um you know big German tech or auto companies uh announce plans over several years right so you cannot get the same kind of velocity uh as simple as that. So, so that that's risk and agility if you will that that is in question. We cannot have a Google or Meta in Europe right now. Meta announced just two days ago they were going to lay off 10 about 10,000 people. I mean, you may argue, you know, it's maybe excessive. They could have retrained their people, but they have the ability to act very quickly, very decisively. We just can't do that in Europe. >> Yeah. But, but Yan, I'm sorry to interrupt, but you don't respond to the question which was asked. >> Sorry. Why why do we maintain such different structure for the overall financing of the economy on both sides of the Atlantic? I am a little bit surprised myself because I thought we would have some kind of convergence. On the one hand, clearly the market domination was terrible in terms of propagating the the crisis, the last big financial crisis. So and there was a lot of criticism of what had been done with the subprime and the rest of it. Uh in Europe we could see that we were very poor in terms of growing a market with of a sufficient dimension. So the the very naive idea that we we will converge we will draw all the consequences of the crisis and realize that there is something in between which could be better better for the European better for the US. It's not at all what we have observed clearly. >> Very short answer. Back in 95, 30 years ago, productivity was roughly the same on both sides of the Atlantic. Yet the financing model was the same, right? >> No. >> What the 30 70%. Yeah. Yeah. Yeah. Right. Right. >> So now why is it so structural? I don't know. I would rather ask Jean Lord as former central banker. >> My sentiment is very clear. Uh we are not at an optimum in Europe. That that's my understanding. Whether or not the US goes too far in the other direction is something we should reflect upon. I I don't think that on both sides of the Atlantic we are in any respect at an optimum personally. But >> yeah, >> Nicola and then Jeff. >> Well, a couple of things. Um, the reason why the European financial system is bank- based uh is because of European history and the roles that the banks have played in financing European governments particularly in episodes of crisis and warfare. and the US has a completely different history of government funding that has always uh been uh more market-based uh for various reasons. Uh and so you you you really have completely different historical paths. So so I think we we we can you know spend a lot of time about financial history but basically the reason for the current difference between a bank-based Europe and u and market-based uh United States is uh is essentially past dependency. Now the question is is that optimal? I think there is a policy consensus in Europe to say it's not. That's why we have spent the last few decades talking about capital markets union, savings and investment union and so on which are basically this idea to uh rebalance the system and make it more market-based. uh so I don't think there is and and I don't want to you know spend time on why this is a good idea but I think there is really a very broad consensus in European policy uh you know uh communities that this is the right thing to do now why is it so difficult to implement for two reasons mainly first the banks are not happy with it because it's a system it's it's a concept of market development and of course there's a lot of nuance because actually some banks are happy and other banks are happy for some segments etc. But there is resistance particularly the most obvious resistance is in Germany from the savings bank sector which is very politically powerful and really doesn't like this idea of capital markets union but there are other bits and pieces um and the other one is that governments don't like EU wise integration because they lose sovereignty and that the discussion particularly about capital market supervision which is the core of the current discussion about uh capital markets union. Yeah, let let me say that on this I mean I am cautiously optimistic. I think we will get there. We will get to a single supervisor for market the same as has happened with banking and anti-moneyaundering and other things. Uh and you know uh 50 years from now I'm uh I'm I'm I'm actually quite confident that we will have progressed in the direction of a market-based system. But these things are very very history dependent. They don't move quickly. And I think we should be realistic about what can be achieved by policy reform. >> Before giving the floor to Gabrielle, one remark, could your hemisphere which is dealing with the United States of America tell us whether the system is optimal in the US in your in your mind? >> I think the system is actually quite good in the US. I think the US doesn't need to become more bank-based. I suspect they will become more bank-based because they're undermining trust in the US capital markets right now. I mean, the dismantling on of market supervisory capacities, the rise of special deals, special treatments, insider trading by friends and family of the rulers, that kind of thing. No, I'm not I'm not making a joke. This is happening. It's it's documented in the media. Okay? And and and so I think they're undermining their market system, but to no advantage, neither to themselves nor to the world. >> Thank you very much indeed. uh uh for the European that do not necessarily know that they are in the United States of America two institutions one is called Freddy May the other is called no Fanny May I'm sorry and the other Freddy >> back and these are more or less French type semi-public institutions that are taking a lot of risks to avoid the banks to take the risk of the mortgages and so forth. So they are elements that we must have in mind when we compare the structure for for Jem Michelle. So Gabrielle you have the floor and >> yeah thank you very much. I just wanted to add to to what Nicolola said uh an aspect that I think is important uh in Germany certainly in parts of northern Italy France too Switzerland very much Austria Austria too we have a lot of familyowned businesses and familyowned businesses don't want to see their property be diluted on uh stock markets and so and and they even today uh we see that they finance a lot of their investments based on their own cash flow they don't even go through a banks. Yeah. And uh so what and that means that the we have a cultural divide. No, there's a whole equilibrium to be looked at. It's not just we have too many banks if you like, but it is the demand for certain financial services. No, it's very different given the familyowned capital bases in in our in many of our companies. >> Okay. Thank you very much, Gabriel. And of course, this is true for Austria and very very largely true for Europe as a whole. I have now several call for the floor. Junko then yourself sir and then you chlo first. Well, thank you. Just one word. We have not talked a lot about the bubble of IA and this bubble vav also huge debts and aren't we going to face a cris another crisis not geopolitical this time but an economic and financial crisis like the one we had with the internet in 2000. >> Yeah. >> Just a question. Well, all those enormous construction we were speaking of cement are financed by the market certainly not by the corporate involved and of course you're absolutely right at the time we might have an explosion there that that's not totally possible especially if the rates increase. Yeah. Yeah. Yeah. Please, >> I'm sorry. I'm maybe going to raise something that was >> Do do you have the mic? >> Can you hear me? >> Yes. Much better. >> I'm sorry. Maybe I'm raising something that was discussed. I was late for the beginning of So, if it's the case, just tell me to shut up and I will stop. I I wanted to talk about the non-banking market. A lot particular and this is for the US market. As you know, historically, I mean, traditionally the economy has been financed mostly by capital markets and to a lesser extent by banks in North America and the reverse in Europe. And I think that has changed but not to a great extent. There's still a majority of lending in Europe that's done by banks and in the US by capital markets. Now recently what we've seen in the US is development of the non-banking market and that happens essentially the shift was at the time of the great financial crisis of 2007 and 209 and my one of my concern now is that effectively a lot of lending I after being in banking for many years particularly with American bank. >> Could you speak closely? I say I've been in banking for many years and work for city and I was involved in a lot of transaction but after I left city I moved to the private equity market and I deal in what I'm doing now working for independent broker dealer we do a lot of lending organizing lending by private equity firms and as you know there's also a very large sector of particularly for middle market but not just middle market to lend and to the economy in general and certain sector are no longer financed by the banking industry. My question is really looking at some of the development and recently there's been some significant credit failure in the non-banking market. The question becomes some of these institution are in my opinion representing a systemic risk and there is as you know in the United States an organization that's or a committee that's called the financial stability oversight council which supervised the potentially of having systemic institution and this is chaired by the secretary of the treasury with participation from the Fed and from the SEC. The question that I have now is that if one of these institution non-banking gets into trouble is that something that's going to be viewed by being systematically systemically important and therefore would the regulator step up and I'm thinking particularly in the context of the new chair of the Kevin Walsh who's now as you know in the process of being confirmed as the replacement of chip power and the question is what do you think and what's going to be the likelihood of having bail out? >> Thank you very much. Very good question of course and I would say the crisis possibly coming from this kind of totally direct credit given by uh out of of the banks is is really a problem. But we have two US citizens around this table. So maybe I could we could ask both. You're you're by you're bational. >> You prefer you prefer Nicola. >> So that's >> I'm I'm not a US citizen. >> No. No. But but Nicola if you think that you can enlighten us. >> I I think we we have number of different divides and some of the conversation so far has kind of confused them to a certain extent. We have a divide between equity and debt. In debt we have a in credit we have a divide between banking credit and market credit. Uh and then in equity and increasingly also in credit we have a divide between public so-called public assets in the sense of being tradable on the market. So typically between uh tradable stock and private equity uh and increasingly also between bonds and private credit. uh these are not the same uh you know dualities. Uh so I think we we have to be somewhat rigorous in the way we we talk about the different divides and and each of them has kind of a difference between Europe and the US. Uh so for example in Europe you have fewer publicly listed companies. You have also less bond financing. Uh you have the housing market with funny and Freddy which is a whole story within the story. And you also have less developed p private credit market which is a much more recent story really of the last few years in the US. Now to the question uh of whether we should worry about private credit uh if that was the question. Yes, we should worry about private credit. I'm not sure how much we should worry about it. And here I would echo what John said about the tone of the spring meetings. Um, it seems to me, but I will be a fool for having said that, uh, that both, uh, crypto, stable coins and private credit at this point have been identified as potential systemic risk before they have grown to truly systemic size. Um, now that doesn't mean this won't happen. Uh but we also know that typically systemic financial crisis happen from something that hadn't been uh identified as systemic risk. So so uh actually what we're not talking about stable coin here we might uh stable coin volume has flatlined over the last six months which is kind of funny because this is exactly the moment when they became you know the topic of every financial stability conference under the earth. Um I don't know if private credit is flatlining but I think it's also a very uh you know diverse uh segment in which you have a lot of good stuff actually like private equity. I think a lot of it is useful um but uh but you also have supervisory arbitrage especially with with life insurance companies and I think that's where the more fishy stuff happens. So, so basically I'm calling for a lot of nuance and and on private credit specifically I would insist on the fact that we know so little because the sector is so opaque. >> Uh I'm not sure that it is that opaque because I have I don't want to pronounce any figure but I could I have the memory of the start of this and it goes much much uh higher than the cryptocurrencies. I mean in in my memory No, >> no, I'm sorry, John. You know better. >> Well, it what I what I wanted to say here is the the source of systemic risk is hidden leverage. >> People have taken taken have credits that they don't understand that they that they've taken. That was the that was the heart of the subprime crisis was not the size of subprime loans themselves that they were embedded they were embedded in securities that were purch by the way about half of the toxic subprime uh assets uh were purchased by European institutions >> of course of course >> and so the these institutions were the enablers >> of the of the crisis so the question with private credit is not some could go broke. Of course, some could be broke. The question is are the people who hold the credit able to able to withstand the the losses? And the risk is that institutions have have lent money to uh intermediaries that have the have the credit. and so that the failure cascades backwards into some leveraged institution. So far the judgment is not that's not a risk on a scale that you would call systemic even though for sure there will be losses. Similarly in AI somebody's going to lose money. No question about it. But is it leveraged in a way that would cause systemic problems? And and I would add to that some sorry something that Dominic Senaki bought up yesterday which is of balance sheet vehicles that that could have some hidden assets as well and poorly financed and refinanced and and yeah uh please um when Fidelity Investments came and tried to sell me private credits, I decided that that we have now reached the European an institution stage of the cycle. Um, one observation while I have the floor. Uh, it really I was really struck by our discussion of AI and productivity that we never mentioned China. Um, China is pursuing a policy of uh really trying to promote diffusion and China is leading the world in embedded AI in machines and robotics. Um and China uh and the and China has one big advantage over the United States which is that um >> um they've invested heavily in renewables. So you have a a electricity supply that is not likely to be as severe a constraint as in the US. Now in the US, if you want to build a data center, you basically have to build your own power source as well because local uh local uh electricity payers don't want to get socked with gigantic increases in rates to fund somebody's uh >> Yeah. Can can can I make the point that China was mentioned >> quite often here slides? >> Yeah, >> but not in the actual discussion. Well, it was a very euroscentric. >> No, no, really. >> Certainly not euro. Certainly UScentric. >> Yeah. Yeah. US European >> transatlantic. Transatlantic. But but but the importance of China is in all minds. There is no doubt. And uh again the problem of the European is that they see two giants on both sides of their continent. And this is not very reassuring. I I remain a little bit struck by the fact that you are considering that private credit is not a real problem namely certainly not a systemic problem. >> Not systemic not systemic >> because of the size >> and and and yeah >> yeah please I can >> not just that because major investors are insurance companies and private credit markets. So insurance companies are not leveraged you know and what uh they incur losses investment losses what will happen policy holders do they leave or you know that's a sort of question um if uh bankr run sort of uh crisis >> is it likely to happen and IMF and FSB they checked and uh they thought it's not like a bankr run type uh incident u the Insurance companies don't mark don't have to mark to market >> right >> so they they can take they can be very calm about these things >> they will stop the losses easily is that that >> I wouldn't personally go as far as saying there is no systemic risk in private credit I think we don't know and again the secretary is very opaque uh but I agree with Jun's characterization of what is the current uh you know uh view in the in the community. Um I I emphasize the opacity of the sector even so there I don't think anybody has a full view of that market. So so so we're still in the discovery process. >> Okay. >> So >> we didn't answer one question. >> Yeah. Please. >> The the council the financial stability council in the US does it does it function? Does it any role. >> Um, so there is a lot of coordination between the Fed and the Treasury. Um, in German it might be called Glung that I'm projecting my own obsessions here. Um but um especially on supervisory policy there is a lot of evidence of uh you know uh political appointees being inserted in the fed system in a way in an intermediate layer between vice chair Bowman and the staff um and a lot of meetings happening at the treasury between the Fed and the Treasury to discuss financial stability and supervision. Is that good for financial stability? Um, time will tell. It's there's a there's a a possible other view which is that actually it's bad because it undermines the uh supervisory independence of the Fed. Let me mention here that the independence of financial supervisors is a much less established concept than the independence of central bankers. And I think we're seeing a genuine divergence between the policy frameworks of the US and the EU because in the US the Fed in its capacity of as supervisor and regulator is becoming increasingly aligned with the executive branch and that's actually recognized by the Supreme Court if I get the story correctly. >> Yeah. Um, conversely in the EU, the supervision of banks, microcredential supervision of banks has been placed under the ECB without any change in the uh treaty foundation of the ECB and therefore supervision is as independent under the FSM as monetary policy is within the ECB. So, the EU has reached an extraordinarily high level of supervisor independence in international comparison. uh there's a backlash against this right now. there is a lot of uh there's a campaign frankly against the supervisor independence within the ECB uh which is orchestrated I think by the banking sector legitimately as don't know defense of special interests um and um and I don't know how it will play out but I will note that to chance that you need to change the so-called SSM regulation of 2013 which is uh adopted by unanimity >> and and therefore Uh I think it will be very interesting to observe how this debate about supervisor independence evolves in the next few years. Note that this is not about regulation because the ECB is not a regulator. It doesn't set rules. It's only about the enforcement of the applicable rules in uh with the element of discretion that is inherent in banking supervision. Thank you. >> Thank you very much indeed. what you say is absolutely right and uh of course it was possible because in the master treaty it was already foreseen that if there was unanimity in particular on on giving the central bank this responsibility it was possible so we didn't have to negotiate any new treaty uh for a change which was really extraordinary and came after the crisis only because it was clear that the system had not functioned very well and uh take taking into account the fact that two different traditions were were colliding. There was a tradition of full independence out of the central bank of the surveillance authority. another tradition that it was in the central bank. And by the way, by the way, the IMF made a lot of global campaign at the time for the FSA type of the the financial stability authority type like the the UK and after the crisis the the trend was not reversed. We had a new pendulum if I may a caricature of pendulum. So thank you very much Nicola. So I we do not respond as well as you would have hoped to your question. I would say that there is undoubtedly a problem with a very rapid growth of of this private credit and there has been some problems here and there. Now the qualification of the phenomenon as being systemic we will see and perhaps it's not yet time to say that. >> Okay. >> Can I have a follow-up comment? >> Please please of course. >> No. Uh one of the gentlemen said that part of the private market is insurance companies. I mean uh in the case of the financial stability oversight council that I made reference to a few years ago they considered that bet life which is an insurance company life insurance company in the US was a systemic risk. So I mean this is not something that's reserved for banking industry quasi banking industry but I mean at the moment the landing in the Nicolola is right in a sense that there is some ethicity there's no statistic because this is nonregulated sector and this is my point this is the the reason why I'm asking the question we're talking of a nonregulated sector as such you know insurance companies are regulated in the US by a special supervisor for insurance companies. Yes, >> there is no joint supervision which is another problem in we separate the supervision of insurance company which is done at the state level >> and as you know the systemically important bank are over seen by the OC or by the fed yeah the federal level so this is really one difference that makes that's why the question of if there is a problem that becomes systemic will the regulator bail out the institution. In my sense, it's going to be very difficult. >> Yeah, of course, it would be very difficult. >> Bail out the non-banking institution. Yeah. >> But but we had during the financial crisis of 2008, AIG was bailed out effectively. >> So we have precip. >> Yeah. But AIG was an insurance company which was supposed to be controlled and surveyed. But you know they were trading in CDS. >> Yeah. Yeah. I remember >> in London in London. >> I remember >> and there's an issue as John was saying of consolidation you know that was not necessarily viewed as being and that was supervised by an insurance supervisor. >> Yeah sure. But supervision was very poor and we we we had the crisis only because we we we made a lot of mistake obviously in all countries uh including in the US of course. So that being said it is 620. I had said that perhaps we could exchange views on the cryptocurrencies the stable coins and so forth. again there the action is in the US in many respect. So if I turn to our US friends can I can I ask you how do you see things? You know that in Europe the stable coin which I understand are stabilizing but which had an episode of extremely rapid outstanding growth were considered as a very astute mean to finance the US treasury indirectly through the so-called I would say bids and bonds that would back of course the stable currency. So how you see that? Was the fear of the European exaggerated? Where do we stand? >> We we'll we'll see. We'll see the uh the the problem. Uh I think I described uh in the panel yesterday. Uh when you you have really four four options, principal options on the one hand crypto which has no backing and trades on an open ledger. You have stable coins that have backing and trade on an open ledger. You have tokens, tokenized deposits that have backing and trade on closed ledgers. And you have central bank digital currencies that are form of money. the uh if we go to crypto the uh limitations are are obvious and if you ask what's the use case essentially it's for elicit transactions or someone if you want to hide hide assets uh clearly uh seemingly within limits and uh subject to extreme volatility idea of the stable coin was to provide uh as I uh promoted by folks who on the one hand if you can say what is the use case for stable coins uh in the US for why would a US citizen hold a dollar stable coin when you could hold a dollar uh it's it's for crossborder transactions and has it my understanding is has the actual stable coins uh have been uh used substantially as on and off ramps to crypto. And the idea uh was the to provide some kind of a regulatory the the Genius Act >> was designed to provide some regulatory uh credibility to these in to these uh uh instruments. And the attraction to the government of why they would wanted to promote that was as you say the notion that they would be useful internationally as a store of value and as a trans as a means of transactions backed by US Treasury securities. So it was viewed as a as a way to do that. Uh my own view is that there's the weakness of the stable coin is it's what I call story money. If you said, "Here's a stable coin. It's worth a dollar." You'd want to know, "Wait a minute. Who's issued it? What are the reserves? How is it governed? What are the terms?" You'd want to hear the story. Tokenized bank deposits strike me as another another digital asset that could be very attractive in as much as if if the bank is credible. It's on their balance sheet. It can be traded 24/7 real time settlement. It can be converted into your local currencies. That strikes me as an as an asset that could have real attraction internationally. And I think that worries a lot of a lot of uh national authorities that that could end up diminishing their monetary sovereignty. >> Would it in the end have an impact on the holding of Treasury securities? I think that's that's more ambiguous >> potentially, but I think the >> not necessarily because I understand that the deposit itself would be the guarantee. >> Yes. Yes. Exa Exactly right. And John, just to be clear, so you would compete basically with tr say master card networks. You would compete with the wire transfers and make all these things sort of commission free in effect. Right. >> Exactly. >> Yeah. Yeah. >> And it can serve as a store of value. >> Well, that's I think that's that's part of the issue. I think there's a debate, as I understand it, as to whether stable coins are simply another form of fast payment system. >> They're very widely used by by immigrants in the US for remittances because it's a very convenient way to not pay 20% commissions to send money back to Guatemala, right? Uh but that's a fast payment system. That's not a store of value. And and I think the the underlying question is whether they will they could serve as a store of value. Um, and I think that has to do with what happens with stable coins. I mean, at this point, there's a question about paying interests when it's not clear what the underlying asset is that's paying the interest and whether it's actually backed by interestbearing assets and whether people would trust them, right? You you know the the issuer can say we're paying 4% because we own 100% 4% treasuries when they might not, you know. Uh so so whether it can serve whether they can serve as a store of value I think is still an open question. >> Okay. And what do you think of the central bank digital currency? >> For me I I have a hard time understanding the use case if it's if it's a retail it's offered at retail. It just uh would disintermediate the banking system. If it's offered at wholesale he said what's what's the point? I don't I don't quite get it. No, I I guess that the idea is to take advantage of the technology and which is not necessarily the case if I understand well with the traditional way of organizing the wholesale. No. >> Yes. >> Yes. But >> yes, but uh the Fed has a Fed now. >> Yeah. >> Nobody uses it. >> Uhhuh. It's uh it it's not clear that there's huge >> there is no advantage. Okay. As regards the retail, I fully share your view of course and on top of that we have also all the problems of the control of financing of terrorism, criminal activities and and and that's an enormous problem. So central banks issue >> it's also linked with true politics. I mean the Chinese again I mean they are all over the world. >> Yeah it's true. It's true that the central banks apart from the United States central bank which is perhaps told don't engage in that direction but many other central banks have and including of course the ECB are envisaging to have this kind of whether or not it would prove very useful we will see in any case it's a way for them to demonstrate that they can also manipulate the new technology which well is part of the benefit >> but I'm I'm sorry Gabrielle had us on the floor. No, >> I'm sorry. So please >> just wanted to say of course the the CBOC uh already has a digital yuan that's very little used. >> Yeah. >> Uh and I I suspect there may be privacy issues at the heart of that. >> So >> you may not want >> Yeah. Please. Yeah. I know if I can ask this really a question about financial stability. So in your list of four candidates really only stable ground is a good one right if I understand you correctly potentially >> out of the four that you listed only stable coins are sort of >> no I think bank I think tokenized bank would be the winner bank deposit yeah sure sure >> yeah please >> but but just to >> I'm sorry no the question was >> the question is >> no just one comment about E1. Um if I understand correctly um E1 didn't fly much uh because two things one is maybe u privacy issue matters but more important is Alip payes we pay already there every Chinese use comfortably and all the systems so uh it was very >> difficult for u you know central bank to introduce new exactly what you said yeah payment system. This is one thing. >> Secondly, uh several months ago month ago, PBOC decided to u uh let commercial banks take care of EU. So, uh EU is now the product of uh you know deposit instruments of commercial banks in China rather than central banks money. So, the status has changed. But let me ask you, >> why are large European large banks pushing for issuing stable back stable coins? >> No, they don't. >> No, I don't know. >> They don't at all. >> They they resist it. They're the ones that don't want it. >> They don't issue them. They don't want them. >> Competition. >> No. >> Yen, please. >> Yeah. No, I never asked my question about liquidity. John, do you think any of this form of new form of payments could have helped during the liquidity crisis of 2008 some you know it was hard sometimes to um >> well the the heart of the the crisis was the freezing of the interbank market. >> Right. Right. Right. >> That was the key. I don't I don't see that this >> because you buy you bypass the interbank system in a way. Oh, you mean if it had if it had >> if it had been in place >> that potentially. Yes. >> Interesting, right? >> Yeah. >> Yeah. Yeah. But >> but it's that it would have this. In other words, if we had a a different system, it wouldn't have had the same problems. >> Yeah. Exactly. But the main problem >> I was hoping the problem would have been reduced. It's the main problem was that we do did not have absolute confidence in the signature of the other partners and we experienced that in an exemplary way in Europe on the 9th of August 2007 where we were bound to take an extraordinary decision to say to tell all banks after two hours and a half of meditation at the level of the ECB of the executive board. We said we we will give you all the money that you would like to get and we thought that it would be around 30 billion 45 billion. They asked us 95 billion euros. So it was absolutely gigantic and of course we we appeased them but the market was not functioning at all. It was total interruption of the functioning of the market. But I may be wrong but Lorenzo Binismi he wrote a piece some quite a while ago and he said we in Europe we should go for stable coins Eurob based stable coins and other European banks I mean large banks I mean if we don't do it I mean it's I mean Europe American banks will do it I mean it's real >> so if I can interject here because so Lorenzo of course is is the chairman of societ general and solicitor general has still is 14 days I think >> I think the handover is in one or two weeks. Uh so um the so general has launched a euro denominated stable coin product which has not been uh very successful commercially so far as far as I know it's an outlier among European banks. It's a bit experimental. uh there aren't I'm not aware of other large European banks that have done that already. There are a number of projects going on. Uh I think what the banks have clearly opposed is not euro denominated stable coins is the digital euro the central bank digital currency. The banks dislike the digital euro because it will uh potentially disintermediate a number of uh you know rents uh from which the banks are making a lot of money. But that's not about stable coin. It's about the CBDC project. >> Yeah, absolutely clear. >> Absolutely clear. Okay, so we don't have any new comments or questions or remarks. >> We've solved all of those problems >> on on the cryptocurrencies or crypto tokens or whatever. No. Can I consider that we had very good exchange of views and we learned a lot. Thank you very very much indeed. seven. >> No. received email ladies.