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A Conversation with Vittorio Grilli

Speaker: Vittorio Grilli, Minister of Economy and Finance, Italy
Presider: Abby Joseph Cohen, Managing Director and Chair of the Investment Policy Committee, Goldman Sachs & Co.
December 14, 2012

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ABBY JOSEPH COHEN: Everyone has gotten very quiet.

Good evening, everyone. I'm Abby Joseph Cohen and delighted to welcome you to this evening's program at the Council on Foreign Relations. We have the distinct honor today to be here with the finance minister of the Republic of Italy, Professor Vittorio Grilli. And you have a copy of his biography, so I won't go through all of those details, as impressive as they are. Suffice to say that he has a very long history of being involved in public service, he has had a distinguished academic career, and he has also worked in the financial services industry. So he has very broad experience, very wide-ranging and very deep experience as well.

Because this is an official meeting, I am asked to make the following comments, and let me proceed. This meeting is part of the Council on Foreign Relations series that is referred to as the C. Peter McColough Series on International Economics. You're all asked to turn off, not just put on radio silent, but to turn off, not just vibrate, all electronic devices. And I would like to also remind members that this evening's meeting is indeed on the record. What we plan to do is to begin with a dialogue between the minister and myself, and then we will indeed open this up for Q-and-A with the members of CFR who are present here this evening.

And I'd like to begin, if I may, with some questions about the Italian economy. Clearly, 2012 has proven to be a disappointment in many economies, including Italy, GDP probably down about 2 percent this year, industrial production down even more sharply, about 6 percent down to the levels not seen since 2009. What are the reasons for this?

MINISTER VITTORIO GRILLI: Well, no, you're right, they're not very bright figures for 2012. The reason is that Italy is a country under big transformation. We are, like, into an experiment, like, my ex-academic colleagues would call creative destruction. And we have put the economy through a sharp changing pace in terms of fiscal adjustment, and we had -- we had that as a first objective to bring back credibility of our country as a reliable debtor. And so we -- you know, our focus was initially to set our fiscal trend to deliver balanced budget by next year and to stay there forever. We also changed the constitution to that effect.

So we basically put the economy under big stress, together with world economy, as you said, which is not performing as well as in the past few years. So the two combination had a, you know -- had an impact the pace of our economy. But that's something that we expected, and we know that having such a sharp readjustment of the economy would have meant price to pay in the short term. But our conviction is that that was a necessary price to pay in the short term to have a much better outlook in terms of potential output -- outlook and potential output in the next few years.

So frankly, it is not pleasant, but I think that it is unavoidable that the economy be hit like that when you just undo such a huge fiscal adjustment, and it's changed, really, the fabric of the economic relations within the country.

COHEN: And you would expect an improvement, therefore, going forward, not just in 2013 but beyond, in terms of potential growth. What are the metrics that you'll be looking at to see if, in fact, you're successful, and what's the time frame?

GRILLI: Well, of course, the objective that we had was not just fiscal austerity per se. You know, fiscal austerity we thought was but one of the necessary precondition in order to change potential output. Now, we have our own estimate. If we take the OECD estimate, they -- according to their judgment, the reform that we already put in place in this year will deliver about 4 (percent) to 5 percent GDP growth, so that, I think, is a good result. Of course, we cannot finish with that. There is much more -- much more to do.

Well, one way to look at that, and the way in which I look at that, whether or not the reform are working, is looking at what I consider the tip of the iceberg of our economy. You know, we are a large manufacturing economy, the second larger in Europe -- the second largest -- and the second largest exporter; that is basically our best part of our economy. And if we look in detail export data right now, our exports is doing well. We are gaining market shares. Even on market -- very tough market like the BRICS, we are gaining. And so that tell us that our economy is being resilient and is being restructuring and changing fast. So -- and that is where I would expect the first sign of change to come, and it seems to be coming.

And then there is the rest of the economy, which is going under much more stress. It was one of this creative destruction is reducing the size of the public sector, which, in my judgment, is too large to be compatible with a growing economy. But it's not only that, there is also the private sector, which is not the export sector, it's a domestically -- (inaudible) -- sector, and part of that sector is heavily dependent from the private -- the public sector. And there is a big size of that domestically -- (inaudible) -- sector where the major client is the public sector. And that has to change. And so we have to give it time to reorient itself to really privately led activities.

COHEN: So the trade balance improved dramatically in 2012, yet we -- there was ongoing deterioration in the labor markets unemployment rate up. What's the prospect for 2013?

GRILLI: Well, the prospect for labor market -- you know, we have our own official data -- is not going to look good for 2013 either. We -- our own forecast is 2013 is going to be a year of -- first semester of settling down, and then second part of 2013, the trend is going to, you know, change, and we'll start growing again.

We know the labor market have delays, and so the 2013 is one of further softening of the labor market. So our figure forecasting unemployment rate climbing again still around 11.5 percent for next year.

COHEN: The transformation -- the structural transformation that has begun in Italy is very pronounced in the manufacturing sector. One of the areas that has also been under discussion would be to adjust policy in the area of taxation to focus less on revenue generation from income and more on revenue generation from assets, broadly defined. What are the likelihood that that can move forward? What will the impact be? What will happen in terms of government revenue?

GRILLI: Well, I think that's what we have done, because part of our sort of shock therapy on the fiscal side was to bring a balanced budget. And in part we did major reform on the expenditure side, like the pension reform. But unfortunately, part of that, filling the gap, was raising taxes, which in general is no good to create a good business environment.

But as we did it, we thought along the lines that you just mentioned. We know that one of the weakness of our economy is not being able to have good growth in GDP, so we avoided increasing taxes on factor of production, no income tax raise -- we didn't raise income tax and we didn't raise corporate taxes. And in fact, we introduced some tax break to incentivize recapitalization of companies.

And we focused on where Italy is strong, which is our own wealth. You know, Italy's a very wealthy country, and we didn't have much of organized (accession ?) from that point of view, our sort of asset. And so what we did was to widen the tax base for real estate taxes. And, of course, that was not very popular. You know, 80 percent of our population own at least one house. So 80 percent of the people own at least their own home. And when you introduce a general taxation on housing, you can see where you are really hitting everyone.

And then we introduce a taxation on financial holdings. You know, still small, small, but one way of looking at it is that now we have a full range of tax instrument, and future government can, you know, equilibrate or re-equilibrate as a base -- (inaudible). So we have done so.

We also increase DAT. And actually we haven't increased it yet; we set it for DAT to increase by the second part of the year. Now, we -- now, I have limited the amount of increasing DAT, but that is part of the transition from taxing people to taxing things, which I believe I -- is the proper way to setting your taxes.

COHEN: Let's turn our attention for a moment from the public sector to the private sector. In the year gone by, things like business investment did not look particularly robust. And at the same time, private borrowers faced fairly high borrowing rates with a pretty significant gap between corporate capital cost in Italy versus some other nations in Europe. Tell us a little bit more about why that gap has existed; why it appears now to be narrowing and what that might mean going forward.

GRILLI: That is a very, very important point. And in the last few months, we have -- I have in the -- our own European discussion underlined that fact. My own worry was not so much into funding public debt, but was more about the funding condition for companies.

As you rightly said, our own companies, even the very good one, the one export-oriented, found themself -- that they had to borrow a -- quite more sort of pricy condition than competitor on the other side of the border. And that also meant an uneven playing field. But I find it completely wrong in a monetary union like ours.

And by the way, even Professor Draghi, when announcing sort of the OMT programs, gave as one major reason this segmentation of credit markets, which were incompatible with well-functioning monetary union that were impeding the proper monetary transmission.

So I think it's worked very well, identify problem. As you said, condition are (slowing ?) becoming better, but they are not there yet. To me, one of the major solution or part of a solution is a banking union. Adding a single supervisory system is a way also to prevent what, in my opinion, has happened, like national supervisor to be overprotective and overprudent of their own systems within Europe, and so really preventing to some extent the free flow of liquidity across the system. So now if we go -- and we hope we will be going at a high speed toward a single supervisory system -- I hope that the kind of segmentation which are induced by, you know, uneven supervision will go away.

COHEN: You've raised some important issues in your last response, and I'd like to pursue it just a little bit more. Clearly, there's been so much focus on the actions taken within the eurozone per se. Tell us a little bit more about how that affects the conditions of stability in the broader eurozone and the impact on Italy itself, and also tell us a little bit more about the public comments you've made about how important it is to return to a sense of normality so that economic players can make decisions in the usual way and not always be so concerned about the crisis just around the corner.

GRILLI: Yeah, I think that the next -- the last, say, six months, maybe a little bit more, I think, Europe and single member state have shown that it was a clear strategy of how to move forward, good solution as far as crisis management from European point of -- point of view, the ESM agreement, the OMT announcement, the revision of programs of several countries that are in needing of support. And the national agenda on that, including my country, have been very forceful and with not just announcement but (facts ?). And I think all of it, I think, has been convincing up to now to market that we have somehow been able to bring our act together collectively and individually as a country. Of course, I think that we are under scrutiny. We understand that, and I think that the market, the way in which I interpret it, is supporting. They -- saying, you are doing the right thing, but don't stop. (Chuckles.) And that's what we have to do for sure, and that's our own commitment.

Now, as far as -- sorry, the second bit that you asked me was on --

COHEN: On creating a more normal set of conditions so that policymakers and others can make --

GRILLI: Yeah, normal conditions, right. That's part of creating a normal condition because I think investment decision -- investor are used to analyze and take care of risk, but not total uncertainty. I mean, when you have this catastrophic risks and event, that's something that you cannot hedge against. And so I think part of normality is convincing the market that we have crisis management that is there, is needed, and so to cut down this (tail ?) risk of a catastrophic event. And that is part of bringing normality, which doesn't mean eliminate risks. We know that we will be operating under risky condition for a while, but something that's the investor community knows how to handle and not something that is beyond their capacity. And I think that that is, again, a part of the strategy that we have been employing.

COHEN: Clearly, the policies that have been in place thus far have been successful in terms of working down the budget balance -- imbalance as a percentage of GDP, this year likely to be under 3 percent. So much of the pain has already been felt. Tell us a little bit about the glide path going forward. So for example, over the next year or two, what would you expect to see, number one, in terms of future progress with regard to budget deficits? And number two, at what point can the economy begin to build on its internal dynamism and can we expect to see plus signs in front of industrial production and GDP and also, of course, creation of new jobs?

GRILLI: Well, as far as our fiscal data and fiscal balance, the balanced budget is in the numbers already.

Now I think that Italy was part of changing a little bit the approach to achieving balanced budget. You know, up to a year ago, the idea of achieving balanced budget was nominal term, OK? And that brought somehow to us a wrong attitude of adjusting, having a fiscal adjustment, economy slowing down, the original fiscal target now being able to be achieved and go through another fiscal adjustment and -- which triggers, like, these recessionary spirals that as an economist I don't find very wise.

So what we did last December 2011, we set numbers to achieve nominal and cyclically adjusted balanced budget. Then the economic condition deteriorated, and so we made a stand and said we'll stick to cyclically adjusted fiscal balance, which is the appropriate way of looking at it, and we are now going to go through further adjustment to also bring down the nominal deficit, which we forecast next year is going to be about 1 1/2 percent. And I think that has been both in -- within Europe and the IMF the accepted now proper strategy.

So -- but in the numbers right now is, as the cycle will normalize, also the balanced budget will be there, not only cyclically adjusted but also in nominal terms.

So I think that future governments will need just to stick to a number. Of course they can have different composition, if they want. But as I said before, now balanced budget is part of the constitutional requirement, so they cannot go away from that.

I have to add that of course that means that we have to run pretty big primary surpluses to achieve that, but something which is not new to Italian economy. If you look back to 1995, we had a debt-to-GDP ratio which is a similar size as we had now, 125 percent. And back then we also had a financial crisis. It was just Italian one, so it was not so -- sort of -- didn't get so much sort of attention globally.

But starting from 1995, actually the year after, we started deleveraging the economy in a major way, running important primary surpluses, and also had the effect of slowing down our growth, you know. And you can see there is a big sort of structural shift between growth before the kind of beginning of deleveraging and after. Why? And that's -- why? Because I think that of course deleveraging, and especially if it's done fast, doesn't help the economy. So you have to pair it with important structural reform. They were not pursued back then.

So now the different strategy is that, disappointingly, we have to start all over again to deleverage the economy in a major way, but now we have -- and we have done, and we continue to do -- pair it up with major structural reform, so that they cannot set the sort of negative impact that reducing your fiscal stance had and so trying to make the economy much more flexible and reactive, so that the consequences are going to be far less. And we expect, as I said, in the second semester of 2013 to see in the quarterly numbers, you know, positive signs.

Next year for us globally is going to have still a minus sign in front, a small -- I think it's going to be between minus 0.2 -- you know, within our official forecasts right now it's minus 0.2 percent. But from 2013, also globally, on a yearly basis, we'll see plus signs.

COHEN: One final question from me on the macro picture before we turn to the people in the room, and the question has to do with unemployment. This is something that perhaps is seen not just in a country-specific way but in many developed countries. Over the last few years, with economies growing dramatically below potential, in some cases actually shrinking, we've seen rising unemployment rates and we've seen that the duration of unemployment has increased. What does this suggest about the ultimate recovery? When industrial production and GDP pick up, will workers be prepared?

And the Italian economy specifically, in which sectors do you think there might be a pickup in terms of where these jobs could be created?

GRILLI: Yeah, I mean, I -- as I said before, this creative destruction means there are going to be, you know, clearly some sectoral shifts going on.

We have been very concerned about not letting unemployment grow too much. I mean, our economy is very much dependent on the quality of our human capital in companies, so we have a system of absorption of unemployment, which is similar to a German one, where workers are not -- at least not all -- dismissed, but we do reduce the number of hours without dismissing the people so that we keep them in the system so we don't get human capital being destroyed. In the market -- in the labor market reform, we strengthen all the training and retraining programs so that -- make sure that even the people that have to sort of relocate themself, they have proper support.

Now, one sector that, frankly, I believe will need to change and become much more efficient and stronger is a service sector. Is a big sector, but I think Italy has a weakness in this sector. And it's also the sector where, frankly, most of the young people will be naturally attracted. And one of our weak spot is unemployment within young people. And so -- (inaudible) -- it's necessary that the service sector will become much more competitive, much more efficient.

And that's part of also reducing the size of the public sector, because the public sector occupies space in the service sector. You know, one thing that you may not know is that we have a lot of locally owned companies, public companies -- publicly owned. We have about 7,000 of them, huge numbers. And a good part of those companies are what -- according to the European jargon, they are called in-house companies. What is an in-house company? Is a company which is 100-percent owned by the public entity and has as a client only the public entity that owns it. So is basically a company set up just to provide services to the public administration.

And why we're such -- so many of those? Because according to European rules, if you have an in-house, then you can give contracts to this in-house without going through proper public tender procedures. And that -- what meant is that you have occupied with publicly owned company the space of privately owned service company. Not only that, but you also prevented a public administration to go through public tender procedure and (before ?) also decrease the market for private company that will try to run for those contracts.

And we have introduced -- I have been thinking about that for a long time, but now as a minister, I was able to pass a new law where -- actually at the beginning, my proposal was to forbid this in-house, and they said that it was basically unconstitutional to do something, that that even against European laws. So we did something different, that we said, well, you may call yourself an in-house companies, but if the public administration needs services, they have to tender for them. So the in-house will have to compete. And it's a really good in-house, they will win. If not, eventually will have to be shut down.

So I think that is the sector that I think we need to target, and not only in Italy. I think Europe in general, service sector is not up to speed. The single market has been very effective on manufacturing, but not as effective in the service sector. And we had bad experience with trying to liberalize -- (inaudible) -- the private service sector in Europe.

COHEN: Thank you. Well, ladies and gentlemen, it's your turn. (Off mic.)

QUESTIONER: Hello. Thank you for your answers to these questions. My name is Ron Tiersky. I'm from Amherst College. I'd like to pick up on the question of unemployment and ask you to talk a little bit more about young people, not just in Italy but in France, and perhaps above all, in Spain.

We have extremely high unemployment rates of young people, and it's one generation or two generations or maybe three generations. This is connected to the fragility of young people's lives and to the birth rate, all sorts of things that one might talk about. Could you please discuss what the government is, you know, thinking about what to do about this situation of young people, how this affects Italian society as a whole?

GRILLI: Thank you. I mean, that's a very important question because in Italy, we have one out of three young workers which are unemployed, so that is a clear problem, especially if you want to have a credible story of how you're going to grow because those are the one that are supposed to make your economy grow in the future.

So what we have done in Italy -- and Spain have done similar things -- one problem in Italy, and that was basically one of the core objective of the labor reform that we introduced, we had an uneven playing field. We had, like, insider and outsider worker -- or maybe two kind of the insider: You had typically adults male workers that had a lifetime contracts, basically, almost unfirable, and then you had young people contracts that were short-term contracts -- a lot of discrimination about them, and especially the fundamental one, that any kind of adjustment in your labor force will be done with the young workers because they were the one that were easy to get rid of.

We basically set up sort of a LIFO system in the labor market, which is -- was last in, first out kind of system, which were basically the young people, and the new labor market reform took that away. Just -- we have just one single kind of contracts. Everyone is on the same level playing field because the LIFO kind of mechanism meant that the company themselves had huge disincentive to invest in the young people because they know that they were the one that had to be let go. So first thing, we changed that rule so everyone is on the same kind of contract.

Second, we look at other country in Europe, at least the very successful in introducing fast in an effective way young people into a labor force. And Germany has been very, very good in that, and they have an integrated system between especially professional schools and job market. And we have been introducing in the -- our labor market reform mechanism that are similar to that, you know, like, four years programs for young people, moving from schooling to work, the apprentice kind of contract, which are being reinforced. So that has been the second part of it. And hopefully, that will address in part our problem.

That is not just a question of, you know, you know, low framework. We have seen -- you know, our conviction was that, of course, there are problem that are generating the labor market by the law -- the law -- you know, regulate the labor market, but there are things that also derives from contractual arrangement between unions and employers. And we truly believe that was a big part of labor market dysfunctionality, especially in productivity creation that came from contractual arrangement. So we challenged the union and employers to go back to their, you know, negotiating table and to find agreement to improve their labor contracts and better identify the flexibility that you can introduce in the labor force management and to link much better wage dynamics with productivity gains.

And in this budget, which is now under approval in the next few days, will be finally approved in parliament, we set a big chunk of money and have said, well, here is some money we'll be delivering as tax breaks to the part of wages which are clearly linked to productivity gains. And union (and works ?),now after weeks of negotiation came back with an agreement. We found that this agreement is sort a good one. And so now from next year we'll have -- we will have new tax legislation that will target exactly wage taxation and introduce tax break for that part. So that is also part of incentivize a much more flexible labor market because after all, that's the only way in which you can get the outsider inside, and those are our young people.

COHEN: Yes, sir.

QUESTIONER: (Off mic) -- Citigroup. The markets have been relatively kind lately in general to the European periphery.

I was wondering, in case it changes, maybe linked to the Italian election, maybe linked to something in Spain, whatever the trigger may be, is there any plan? Or how would you react if markets were to turn hostile again?

GRILLI: Well, I think one way which we address that issue is to do the right things and then to explain what we have been doing. And frankly, I understand election are times of uncertainties, but I don't see any substantial fact that can derive from the electoral campaign that would change the fundamentals of the Italian economy.

So part of me going around -- (chuckles) -- and a future explanation is to explain or reassure that our fundamental is there and remind everyone that electoral campaigns are times which are necessary for democracies and actually not only necessary but good times for democracy to have that -- a deep exchange of views and also, I think part of -- a necessary component to make our reform agenda to be continued in the future and deepened because at this point you need a strong electoral mandate to keep going on.

So frankly, you cannot ever say. Maybe some major event will happen around the world. Maybe it will need to revalue. But right now I don't see things -- we've seen how our own Italian development coming out of electoral campaigning that it could change the fundamentals of our action, our economy. So if necessary, we'll explain even more that things have not changed and try to be convincing and reassuring.

COHEN: Yes, sir, all the way in the back.

QUESTIONER: Alan Dasfrank (ph). To maximize the recovery of the Italian economy, if you could tell Mr. Monti and Mr. Berlusconi what they ought to do for the next year, what would you tell them?

GRILLI: (Chuckles.) I speak often to Mr. Monti. You know, he's my prime minister, so I don't have to tell them what to do through anything here. But I think that what I'm fully convinced and everyone is fully convinced is we have to pursue our reform agenda. And I think that we have to keep in mind that one thing is the cycle, and the other thing is potential growth.

And we know that as we go through this reform agenda and as we went through the readjustment of our budget numbers, in the short term that would have had not a positive impact on the cyclical behavior of our economy. But that is the price you have to pay to have a much better long- and medium-term prospect. So again, that's the way we have to pursue. I mean, there is not a question of changing the cyclical sort of stance from the point of view our fiscal policy, but not to let go about deepening our reform agenda. So I think that that would be our fruits, and I -- as I can -- as I told you, I think that those fruits will start being there.

And the second part, 2013 -- so my suggestion would be keep doing what we have been doing and actually going deeper. And I wouldn't -- and also, my economic training -- I don't believe in sort of cyclical adjusting of the economy, if nothing else because, frankly, in Italy, we have no fiscal space to do so, and is also now incompatible with our constitution that require, you know, balanced budget.

What, however, I would underline as part of making our economy more productive -- we have to decrease the tax burden, and to decrease the tax burden, we have, again, to pursue what we have been starting with this government.

And I see two necessary components to decrease the tax burden on an economy. As a macroeconomist, when you look at the macro identity, you never see the T of taxation, or you also see the -- you always see the G, for government spending, and now especially if you are in a country and in Europe where a balanced budget is the requirement, you have a very impressive identity, which is T equal to G. And so in order to decrease T -- that's taxes -- you have to decrease G.

And that's what we started doing with major spending reviews. But that's something what have to be pursued and is a very difficult -- very difficult, and I think every country that is going through -- is going through a government spending reduction know that is a very difficult exercise. But that is point number one.

And point number two is in order to decrease tax rates, you need to widen the tax base. And in Italy, we know that we have still quite a big problem in tax evasion. We are -- you know, things are getting much better. And that again is something we have to pursue.

From the start of this government, we gave much more potent tools to our IRS. Now they have full knowledge of financial -- linked financial transactions, something they didn't have before. So -- and this is -- again, bearings its fruits. But again, in order to be able to decrease tax rate, we have to make sure that everyone's paid taxes.

And those are the two very important, say, macro fiscal dimension in which I would remind everyone that we have to pursue in order to make the business climate more friendly in terms of tax burden.

COHEN: David. David.

QUESTIONER: Hi, David Malpass with Encima Global. Regarding banking union, Germany used to be -- did not want to put money into bad banks that had already lost money. Has there been a breakthrough? What was the change that allowed the banking union to come together? Did Germany change its view of the historical weak banks?

GRILLI: Well, I think that this is a discussion that will be pursued. I mean -- but banking union is a multistage process. There is the single supervision mechanism. Then there is a resolution mechanism of which -- what you are referring to, whether the ESM can directly recapitalize or not banks in trouble within monetary union, and then the recent deposit insurance theme.

Now, the agreement that we have had is on the first step, single supervision, that we all agree is a prerequisite in order to go further and talk, because all the other measures about mutualization in some form of our budgets. So I think that as we've done with fiscal compact from, you know, fiscal rule in general here was necessary to have transparent and unique rules for supervision first.

So I think that now, this first building block, which is a huge building block, is we agree that now we will have within the monetary union a single supervisory system, which is going to be having huge role by the ECB. And then once we have that running, we can unlock all the others. So that is going to be a discussion that will continue.

COHEN: Yes, sir.

QUESTIONER: (Off mic) -- University. You are obviously in the eurozone, which is probably economically a suboptimal currency area for you. How do you offset that economic reality?

GRILLI: That's a huge, huge, huge question. I'd say that is suboptimal as a static analysis. I think the intellectual thinking back then, and I think part of the intellectual thinking now, is that in order to make less suboptimal currency area, we need convergence. And convergence is clearly economic convergence, but economic convergence also require really a common framework, a common framework which is basically rules, a major part of the economy. And the major rules that we started a long time ago are single-market rules, especially for commodities and not service yet. But now we have monetary common rules, but we still have to work hard, and that's what we're doing, with fiscal rules that have to be the same.

And -- now, fiscal rules is much more than just fiscal discipline and balanced budget, you know? And -- but now I think that's quite a cornerstone of all. And then we have to keep going, keep going is the banking union for example, start thinking on federal budgets. And thinking on federal budgets also would bring the discussion about level of entitlement around the union, because a very deep fiscal union will bring that up, say, well, can we run in a homogenous way a monetary union if we have 17 different pension schemes or we have 17 different health care schemes or we have 17 different -- well, not -- (inaudible) -- but I think as well very important, university and research systems?

You know, all that will have to somehow -- and it is not just a private economic convergence. This is also really the design of public economic policy. And this is a slow debate, I agree with you, but we'll be much better to be already -- (chuckles) -- in a different position.

But the exercise of the monetary union in Europe is different from what we have seen in the past. I would say -- and I like to put it like, in the past usually monetary union has been built out of the greenfield, you know. Here we are in a process of -- we have the brownfield, frankly. And when you do transformation in that brownfield, there are much more complicated but nonetheless can -- you know, can be done.

And that's what we're doing. And I think the last year I think, to me -- and the market seems to appreciate that Europe is speeding up the decision process. And I think it's fair to say that many of you would have not believed just a couple of years ago that in six months' time we could agree on the ESM, the OMT, the banking union project. This are, you know, quite high speed for, I would say, any country, but especially if you have 17 countries that have to agree.

COHEN: (Off mic.)

QUESTIONER: (Name inaudible) -- professor at Columbia University. Following the question on the banking union and the banking supervisor, how extensive will be the powers of the banking supervisor? For example, will he or she be entitled to make sure that the banks -- Italy and elsewhere are keeping enough capital as backing to assets or that the depositors' deposits are guaranteed? I mean, how does the role of the banking supervisor fit in with the role of the national supervisors who are already there in each country, right?

MIN. GRILLO: Yeah, and in Italy, I have to say we have been doing a good job in supervising our banking system. But the issue is now we move from a system of, say, 17 national supervisor, albeit already somehow coordinated but still quite autonomous, to a single framework, where you will have -- and that was, you know, a big discussion. We want to have a single framework about rules, a single rulebook, single procedures of how you inspect, you monitor, and in case you impose changing -- changes.

And that system is going to be run by the ECB, and as a system. So you have a division labor. Once you have -- and we agree that the rules and procedure are the same everywhere, then the decision is there are, for large banks, which are considered not just systemic but operating in more than just one country, the ECB will take care of, directly from Frankfurt, the daily monitoring. Then, in Europe, we have 6,000 banks, you know, not just two or three, you know. And then also to be a credible system, then the other ones, which are smaller and operating mostly on a single country, will be monitor on -- and supervised on a daily basis by the national supervisor, but according to the same rules and procedure, with the ability of the ECB, if it sees it proper or necessary to call to Frankfurt in anytime the monitoring of any single institution.

So that is sort of a single system but with division of labor, which I think is typical also. A system like the U.S. is not the -- all the banks are, you know, monitored by, you know, Washington, actually, probably none. And so there is a division of labor, which I think once you guarantee the rules and procedure are the same -- and part of the ECB be clearly monitor that the procedure and the rules are the same -- then the division of labor is on a country basis.

COHEN: Yes, please.

QUESTIONER: (Name inaudible) -- from Citigroup.

When you look at your borrowing costs now, do you think they're appropriate, or do you think they still reflect fragmentation?

GRILLI: Well, I think that, well, we have to distinguish between the private sector and sovereign. I know that private sector of course cannot avoid to have this overhanging sort of influence from the sovereign. But my own way of thinking is there is still some way to decrease the spread if you talk about sovereign, I think, and we are, you know, sure that we can reduce the difference between our rates and German rates much further. But of course that is going to have to be earned by continuing our reform agenda and showing results, and so -- but I think there is a lot of room for improvement.

What I think that is more disappointing is, as I said, private -- private credit market. And I think, to me, there is no reason why some companies that are perfectly well-functioning; that are located, you know, like 10 miles from another, they have very different credit condition. You know, once they -- you know, they had -- in especially international market, the revenue base is the world. It's very hard to understand why that's the case, but I understand why that's the case because our supervisory system and all credit, you know, risk ratios depends on ratings, and the ratings, you know, are still wired in a -- in a -- to me, in a not perfectly reasonable way.

So my answer is, I don't know if it is proper right now, 300 or not. I know that Italy, if we are pursuing what we're doing, deserved lower, much lower than that. But it is the market to decide, and our job is to pursue that agenda.

On private credit market, I hope that this banking union and the action by ECBS that are necessary to take to make monetary transmission work will accelerate that equalization, if you will, of credit conditions in the private sector.

COHEN: We have time for just two more questions. Yes, please.

QUESTIONER: Thank you. Julie Bowden (sp) from Wellington Management. Professor Grilli, you and I have talked in the past about the fact that the reforms that have come through are very wide, but the implementation is actually a lot slower for the economy. So where would you see -- what percentage of the reforms that have actually been passed have actually now been implemented through the economy? And how much further needs to be done in terms of seeing those being implemented, so that we can talk about the fruits, as you were, in the second half of next year?

GRILLI: Yeah, well, I mean, to start with, clearly our reform agenda is not over. And I think that our government agenda was -- I don't think we left sector of the economy in need of reform untouched. We basically had also strategically an approach -- (inaudible) -- wide-range strategy to reform.

The truth is that, especially in some area, we need to go deeper, and we need to go deeper and probably in some sector we needed to go down a mile and we only are down a few hundred yards. So we need to do more. Future government will need to do more.

Now as implementation is concerned, I think that the results, frankly, are better than they seems, because we put a lot of thinking about, when we were writing a law, that a lot of it would be self-implementing. What do I mean? We just reduced the maximum -- the amount of administrative acts that had to follow the major legislation. For example, when we talk about pension reforms, when we talk about taxation reforms, when we talk about, you know, profession liberalization, the moment we passed the law, they were immediately self-implementing. So no further acts are needed to make them -- that we are already running on a different regime.

So -- and that, I think, is quite a difference from the past, because we were aware that we had only one year in front of us, or a year and few months, and we knew the difficulties to go through administrative acts.

And so we wanted to front load everything in the -- in the (legislative ?) now. So I am quite optimistic about that -- not optimistic --- is the fact.

Now, of course, that doesn't mean that, we -- you know, future government, as I said, don't need to deepen, and I think they have to deepen, especially, as I said, in the area of spending review -- and that is a very, very difficult area -- and in the area of liberalization in general, which, again, is part of (almost ?) the spending review, because to me, liberalizing means also to change the attitude and the economic space that the public sector is occupying because a lot of liberalization in Italy is not just making the market more competitive between privates companies, but it's to take out of the game public sector. And so that's part, again, of the spending review, in a sense.

COHEN: And our final questioner. Sir.

QUESTIONER: Jeff Shafer, J.R. Shafer, Insight. It's very good to have you here tonight talking to us. My sense of modern Italian economic history, from a distance, is that it's a country with -- long had very deep structural problems. A number of times it's come up to a crisis, and you have been able to mobilize action to decisively push it back, but you haven't gotten a hold of a constituency for sustained reform that's kept it on track. Are there any signs, are there things that you can do to find the public support to really continue to drive this forward this time?

GRILLI: Well, that is a very important question, and that requires political management, skillful political management to -- because frankly, nowhere in the world people like reforms, you know. (Laughter.) Reform means that -- I mean, in theory, the -- you know, the name reform is good, but then in practice, it means that you have to change, and change is not part of human, you know, nature in a sense. Only very few people like change. People tend to like, you know, what they have.

And so I think, however, that level of awareness in Italy right now, the need for change is there, you know. And I think that that is a basic fact. And proof is that I'll bet if you ask an Italian citizens, are you happy right now, the answer probably is going to be no, I'm not happy. But still, as being very orderly management, people are accepting what's happening as an unfortunate price to pay.

It's true that in the past, we may have had similar circumstances, but really, the game was very different. The game were -- the economy were much less global, and we were not part of a monetary union. So somehow in the past, as I said, in '95 we started a similar process, but the pressure to change coming from being part of a new system and monetary union were not there, so that reform back then were not pursued.

Now it's quite different. And being part of a monetary union right now, people know that there is not the emergency exit of a devaluation. And I think that is changing the game and, I think, for that reason puts a lot of responsibility on politics to really be able to steer because it's a one-way street, as far as I can see it. There is no sort of taking sort of a turn away from that path.

And -- but you're right, history has been different, but also now Italy is in a different system, and the big world crisis has shown that there is no alternative ways. Everyone that want to be successful has to pursue certain changes. And then it's up to politics to make them possible.

COHEN: Well, Mr. Minister, I think that we probably have many happy members here, and on their behalf I'd like to thank you for what I think --

GRILLI: Thank you.

COHEN: -- was a very articulate -- (inaudible). (Applause.)

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