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  • Frederick Kempe, President and CEO, Atlantic Council
  • Caio Koch-Weser, Vice Chairman, Deutsche Bank Group
  • Christine Lagarde, French Minister of Finance

FREDERICK KEMPE:  Hello, I’m Fred Kempe, president and CEO of the Atlantic Council and I’d like to welcome you all here for tonight’s event with French Finance Minister Christine Lagarde.  I am going to leave it to my friend, Caio Koch-Weser, vice chairman of Deutsche Bank and co-chairman of the Atlantic Council’s Business and Economic Advisory Group to introduce you, Madame Minister.  But Caio will – forgive me if I make a small, personal remark.

Madame Minister, it is a great personal pleasure for me to welcome you to the Atlantic Council.  In the days when I was running the Wall Street Journal Europe, we decided it was time to shine a light on the top European business leaders and particularly the top European women in business. 

And so we did a ranking of the top 25 European women in business and if I’m not mistaken, Madame Minister, you were among the top five.  And we got to know each other through conferences we held around this with the top women in business and I got to know your intellectual capability, your grasp of issues, small and large.  But I never guessed you were going to become a member of the French cabinet at that time. 

And I think at the Wall Street Journal, if anything, we underestimated your skills and capabilities.  Since then, we’ve enjoyed a great many conversations.  I’ve learned from all of them.  And at a time of great stress, we’re fortunate to have you in such an important leadership position. 

The Atlantic Council is pleased to host the Mapping the Economic and Financial Future Series in partnership with Deutsche Bank.  Over the last year, we’ve gathered some of the trans-Atlantic community’s best minds to share their perspectives on global turmoil we all have endured and to join in this search for solutions. 

Our guests have included the CEO of Deutsche Bank, two EU commissioners, the Egyptian finance minister, the president of the World Bank, the head of the Commodity Futures Trading Commission and alter this year, we will host Bundesbank chief, Axel Weber – I always don’t know whether to use my German pronunciation or the English pronunciation.  Axel Weber will be here later this year and European Central Bank chief, Jean-Claude Trichet. 

So let me now pass to Caio, one of the premier global economic thinkers by any measure.  I’ve been stealing his ideas for years as well.  After many years in public service, including serving as the deputy finance minister, Caio Koch-Weser moved on to Deutsche Bank where he’s vice chair.  He was recently appointed to a very important body, the U.N. Advisory Group on Climate Change and this is an issue on which Caio has been at the forefront of global thinking.  It’s a great pleasure to welcome you tonight.  Caio?  (Applause.)

CAIO KOCH-WESER:  Thank you, Fred and I would like to join Fred in welcoming all of you to the Atlantic Council.  We are very honored indeed this evening to host Christine Lagarde, French minister of economic affairs, industry and employment.  I’m greatly looking forward to know what no doubt will be a most interesting insightful and rich discussion. 

Let me say behalf of Deutsche Bank that we are very pleased indeed to partner closely with the Atlantic Council in this series.  The remarkable speakers that have come through this room have demonstrated the kind of thought leadership that we at Deutsche Bank strongly support.  We are most pleased tonight that Minister Lagarde joins that list of eminent speakers. 

She joins us at a time when the global economy remains fragile.  While there is now reason to hope for a better-than-expected return to growth, sustained recovery is not yet assured.  Governments on both sides of the Atlantic are engaged, literally as we speak here tonight, in the difficult but crucial process of crafting new rules that will govern the international financial system and help restore the trust that is so critical to economic revitalization.

Cooperation between the United States and Europe is essential for this to happen.  We are the two largest financial blocs in the world, with the largest bilateral investment relationship.  But in this changing world with new economic powers to our east and south, the trans-Atlantic dialogue is not taking place in isolation. 

In fact, the United States and Europe are firmly committed to the G-20 as a policy forum in a changing forum that requires new and adapted patterns of global governance.  There are some real disagreements about the best way to achieve a safe, responsible and smoothly functioning financial architecture – disagreements within the G-20 between the U.S. and Europe and within our own political systems at home.

With her leading role at the center of these momentous discussions, we are looking forward to hearing Minister Lagarde’s views on the political dynamics driving financial rulemaking and the best ways that the U.S. and Europe can balance competing domestic demands.

As one of today’s most respected financial policymakers, Christine is adept at addressing a wide range of crucial issues.  Her long experience in the private sector and government provide her with a unique perspective that cuts across the economic and political spheres.  As a French finance minister, she has done an impeccable job confronting the daunting challenges brought on by the global financial and economic crisis.  Let me note, also, that Christine if the first woman ever to become the minister of finance of a G-8 economy. 

Prior to her appointment in 2007, Christine served as minister of Agriculture and Fishing and Minister of trade.  She has also chaired the law firm Baker & McKenzie’s Global Policy and Global Executive committees.  We are proud to host her this evening.  Please join me in welcoming Minister Christine Lagarde.  (Applause.)

CHRISTINE LAGARDE:  Well, thank you very much for both of you and for those kind words of introduction.  It’s quite interesting because I was encouraged to attend this event with two warnings – number one, you’re missing the part of it because you can’t attend dinner and dinner is planned at a time when – there is a G-7 dinner tonight which I cannot be excused for. 

And the second warning was you don’t need to prepare any notes.  You don’t need to have any speech ready because in any event, it will be a question-and-answer session.  Thank you, Fred, that was great.  (Laughter.)  So I don’t have any notes and I don’t have any script at this point in time. 

The good news, if I may say, is that a bank is still hosting me as a speaker tonight.  (Laughter.)  So there is hope.  I will just say a few words and then I will turn it over to you and then you can – you can sort of start with your questions and then offer the floor to those that might have questions.  I’ll just start with four letters, actually, because it’s my way of – you know, sort of reminding myself what my job is all about at the moment and has been for the last two years.

And those two words all begin with an R.  It’s my quadruple R as opposed to a triple something.  And my first R, really, has to do with resuming growth and resuming the kind of growth that goes with jobs and which could be of a different nature from the growth that we were accustomed too.  So it’s resume sustainable growth, going forward.

My second R has to do with restoring public finance and whereas I think that 2009 was a year of brutality, was a year where we had to inject massive funding, where we had to fuel and refuel the economy because there was nobody else to do so. 

I think that 2010 and onwards might be years of subtlety where we have to both combine this continuation of the stimulus packages that we have underway in many places around the world while at the same time, removing some of these public supports programs so that we can restore public finance and bring our deficits back as well as reduce our debt to GDP numbers, certainly as required and the stability and growth pipe that we have within Europe.

My third R has to do with reforms.  And certainly as far as my country is concerned, France, we want to continue the reform program which was very much the central point of President Sarkozy’s platform when he was first elected.  We have begun reforming the country.  We have continued to reform the country and we need to complete the job.

And there are a few things that we have underway at the moment, one of which is the overall reform of the pension in France which has just started about two weeks ago and which will just continue in the weeks to come but is certainly one additional significant reform that we need to implement to make sure that we restore our competitiveness, which has certainly been hampered as a result of the – of the crisis.

And my final R, which will come as no surprise to those of you who are familiar with the major issues at stake at the moment has to do with regulation.  It has to do with reforming our supervisory system and our regulatory system so that the financial landscape is different and we can avoid the recurrence of what we have experienced about two years ago.

So Fred, I thought I would just stop here with my quadruple R’s and welcome you to the stage so that we can move to what you have scheduled, which is questions from you and then from the floor.  Is that right?

MR. KEMPE:  That’s absolutely perfect.


MR. KEMPE:  And –

MS. LAGARDE:  Oh, thank you.

MR. KEMPE:  We’ve had both examples here at the Atlantic Council.  We’ve had people who have not wanted to make any public remark at all and it’s just been this comfortable Q&A and there have also been those who have engaged in total filibuster.  (Laughter.)  And so I think the audience actually welcomes this approach rather than the other approach.

We have a lot of experts in the audience and a lot of – I consider myself a recovering journalist – a lot of press in the audience as well.  And I think, you know, we don’t want this to be a press conference.  We really want to go deeper into the issues.  But I do think a couple of things are sort of unavoidable and perhaps you can put this into a deeper context than one may read in the everyday – in everyday reports.

And one of the topics that I think is absolutely unavoidable is Greece.  And the Bundesbank president’s assessment that the size of the emergency aid package is, quote, “nothing more than just a drop in the bucket” – pretty big drop.  But if that’s true, what does that mean if he’s proven correct?  What happens after that runs out?

And then also, there is the issue of other countries in Europe as well and you know, some have talked about the Lehman curse of bailing out some and not bailing out others and what happens in this respect.  So I just wonder if you could address the whole issue of where we go now – a little bit of what the lessons from this were.

MS. LAGARDE:  Well, that’s a pretty broad question.  Let me begin with the first – the first topic that you raised, which you said is pretty unavoidable tonight.  And that is Greece.  Incidentally, I call Axel, Axel Weber but maybe I’m wrong.  I have no idea.

MR.    :  Weber.

MS. LAGARDE:  Is that okay?

MR.    :  Weber.

MR.    :  Weber.

MS. LAGARDE:  Weber, yeah, Axel Weber.  What we decided to do, which certainly has taken a little bit of time because we had to move from European Council to the other – to the ECOFIN ministerial group and then the Eurogroup.  And you know, for those of you who are not familiar with the way in which Europe works, it’s not surprising that it takes that process because the European institutions and the European process is organized in that way.  It’s not as if it was the government of the United States deciding for California.  It’s a little bit more cumbersome than that and you’re familiar with that, Fred.

But it took us those two European councils, followed by additional technical work and refinement to make sure that we had in place a package for Greece that would not a drop in the bucket because I wouldn’t call the 30-billion euros commitment by members of the Eurogroup as a drop in the bucket, number one.

Number two, it’s one majority share of the overall package because as you know, the IMF is going to participate in the overall program.  And if you compare that with the cash needs as well as the financing of Greece debt and deficit, it is far more than what is expected for the first year of the program.

And clearly, what we have built with Greece is a three-year program for which during the first year, the Eurogroup member states’ commitment is 30 billion euros.  We’ve put in place a process by which Greece, if it needs to activate the program, will have access to Euro/IMF funding in order to, as I said, finance its debt and finance its deficit.

Now, this is not without consideration and clearly, the consideration that have been negotiated with Greece are part of a stability program that has been drafted earlier in November, if I recall and significantly updated as a result of negotiations with the commission, which includes very, very hard and harsh measures on Greece which include anything like cutting civil service compensation by a range of about 20 percent, reducing pension scheme, effectively collecting taxes, raising taxes on the wealthiest and so on and so forth. 

And it has two components – reducing expenses on the one hand, increasing collections on the others.  And there were doubts at one point in time that Greece was really serious about it.  But clearly, the Greek government decided to confront its public opinion, took the bills to parliament, had them voted and the country is underway to deliver on a very solid program that was negotiated with the European Commission which we have all approved and which is going to certainly help restore the solidity and better balance of Greek public finances.

So that’s where we are and clearly, it’s a situation where financial markets have been testing constantly for the last few months.  I believe that the resolve evidenced by the Eurogroup collective commitment to support Greece together with the IMF is an indication that you know, we’re all accountable to each other and we’re not going to let down any member.  And we have confidence that Greece is actually going to deliver.

But it’s a process which includes gives and takes, where on the one hand, the country has to demonstrate its determination to restore public finance and to get back to reality in terms of data and statistical – data and analysis.  And on the other hand, members of the Eurogroup are providing their commitment and their support and indicating very clearly the amount, the interest rate, the maturity and the review process together with the IMF.

MR. KEMPE:  Thank you for that fascinating answer.  The one line shows that we have decided that we’re all accountable to each other.  Does it?  In other words, what do we learn through – about Europe through this process?  Would Europe and would European publics and voters support another such situation – every situation will be a little bit different, but if similar to this one?

MS. LAGARDE:  What we’ve learned through the process is that we had to adjust constantly.  And we had to transgress – if I may use that sort of analogy because the treaty – the revised treaty, you know, the Lisbon Treaty did not provide for – did not provide for such mechanism.

There was, effectively, a no-bailout clause.  And we had to work around the treaty to make sure that we could put in place a system whereby we would, you know, build the package in association with the IMF.  So what it’s telling me is that the initial treaty certainly did not contemplate this.

We found ways and means, in accordance with the treaty, to circumvent the no-bailout clause in such a way that we could support Greece and that ability to adjust is exactly the, you know, a clear – how would I put it – it’s not the brand of Europe, but essentially, Europe has been built exactly on that over time.  If you look at the European construction in the last 50 years, it’s very much the result of circumstances, of the determination of people and the willingness to adjust constantly.

MR. KEMPE:  Thank you.  I’m going to ask one more question and then I’ll go to the audience.  You’re talking about regulation.

MS. LAGARDE:  You asked me to draw conclusions and lessons from the financial crisis and that’s a very, very broad topic that you’re opening.

MR. KEMPE:  Yes, please.  I know. 

MS. LAGARDE:  Well, number one, nobody wants this to happen again.  Number two, we need to collectively address the issue of risk and try to minimize risk or make risk less attractive than it was before.  And to do that, clearly, the G-20 has been a good – a good instrument, a good body, again, a result of transgression because the G-20 was never a group of heads of states and government. 

It was a group of finance ministers, which was, you know, sort of elevated to the head of states and government level with a few to offering, as broad a solution as possible, particularly in the realm of financial regulation and supervision, which appointed, respectively, the IMF and the Financial Stability Board to offer remedies both in terms of alert system and support packages – that’s the IMF. 

And number two, a group that could actually offer new sets of rules, principles, guidelines in relation to multiple factors to include capital requirements, liquidity ratios, rating agencies, compensation for traders and executives, hedge funds regulation, transparency and clarity of what happens in the derivative business, clearing of such instruments in a more visible and secured ways and so on and so forth.

I mean, there’s a whole list of things that have taken place, are taking place and will continue to take place.  Very often, the perception is that there was a lot of speeches – there was a lot of good intentions, there was a lot of lip service paid through the principle of better clarity, better security and ring-fencing risks and nothing is happening.

And yet, if you really scratch under the surface and see what is the IMF doing, what is the FSB – the Financial Stability Board – what has the Basel Committee done, what has the European Council and the European Commission done?  A lot is underway and a lot is being delivered on time.

I think we all need to remember that the G-20 initially, and more recently in Pittsburgh, set deadlines and you know, one, for instance, is Basel II.  When is Basel II?  Basel II includes the set of rules that applies to banks, essentially, in terms of capital requirement and liquidity ratios and capital targets and various other things.

Well, Basel II is to be enforced throughout the systems in all member states – member states of the G-20, not of the European Union by the end of 2011.  That’s one example.  In relation to derivatives and clearing platforms and other mechanism, the deadline is 2012.  So the sense we have of impatience in the face of still unemployment, still fragile growth, should be tempered by the agenda that we have, the speed at which we need to include people and the difficulty of the job.

But it’s – there is work being done and so far, we are on schedule.

MR. KEMPE:  I’ll ask just one more question and then go to the audience.  But it has two parts and I’m afraid each of these could take an entire seminar.  But during the crisis, there are two issues that came up as crucial.  One of them was rebalancing the global economy.  Another one that came up was financial regulatory convergence. 

And I’m not sure either one of them is happening, but perhaps on the rebalancing, you could talk about your ideas on rebalancing the eurozone economy, which have been criticized, particularly in Germany.  And how can Europe have this conversation?  How does this get done?  And on regulatory convergence, divergence, is it your impression that we’re not converging across the Atlantic but rather there’s a danger of divergence?

MS. LAGARDE:  On the first issue, as you know, I raised the subject when, you know, I referred to our need within Europe and more particularly, within the eurozone to have a better convergence of our economic models, and certainly the need for us to not only look at the budgetary constraints and the budgetary criteria, meaning deficits and debt-to-GDP, but also competitiveness, because there is – when you look at a map of unit labor cost within the eurozone, you see that Germany is way up there because it has significantly improved its competitiveness. 

Whereas other member states, such as Greece, such as Ireland, for instance, are at the other end and the spectrum is getting bigger.  Clearly, within the same monetary zone, we need to narrow that gap and we need to bring economies back together better.  So it’s one exercise that we need to conduct and clearly, while I mentioned at the time and I still believe that to be the case, it will require a much bigger effort and a priority effort on the part of those that are in deficit of competitiveness, that are in deficit altogether in terms of budget. 

But that will require everybody to make an effort, for instance, Germany and other member states that are at the other end of the spectrum to do their part as well.  I’m very focused, for instance, at the domestic consumption and I think that everybody has to contribute to this objective of resuming growth and resuming sustainable and probably different kinds of growth going forward.  To that end, it seems to me that it’s not just a matter of straight, strict and exclusive exports but it has to be exports and consumption and investment, which are the two drivers of growth.

So I think we – it’s a matter that it’s not new, it’s not negative against anybody and it’s a significant issue that needs to be addressed.  Mr. Von Rompuy has been tasked by the heads of states and government of the European Union to actually work on that and he’s setting up a taskforce to focus on those issues, to make sure that we establish solid growth on a consistent and collaborative basis within the European Union and more particularly within the eurozone. 

The second point was – I’m trying to make it short.  The second point had to do with convergence versus divergence.  When we had this goal of converging, initially, but two years ago when the crisis hit, were we realistic?  Were we naïve?  Aren’t we moving away from convergence?

It depends on the area.  If you look at regulation on derivatives, for instance, we are clearly addressing them much on both sides of the Atlantic and we talk to each other and clearly the regulation that will be on the floor of the Senate on Monday will be observed very carefully – our end – because Commissioner Barnier is going to propose draft legislation at the European level in June so we will need to parallel the effort so that we establish something which does not give rise to arbitrage or to the race-to-the-bottom-type of approach.

MR. KEMPE:  Do you see anything that’s going forward in the Senate that concerns you?

MS. LAGARDE:  I’m not familiar enough with the 1400-page bill – (laughter) – to give you the right answer, Fred, as much as I would like.  One other area where I wish we would converge better, where clearly there are significant areas of disagreement is on the accounting standards and I see that as a key issue because you begin with measuring; you begin with the integrity of data; you begin with comparing comparable assets and liabilities and if you don’t measure them by the same yardstick, you begin with a problem. 

Clearly, between the U.S. government, the IFRS – not that I’m familiar with all of them in details, but certainly as far as financial instruments are concerned, we are not converging as much as we should and clearly there is disagreement between various players and constituencies, particularly regarding the use of market value and fair value.

MR. KEMPE:  Thank you. I think Caio, you had a question.  And if you wait for the microphone and also identify yourself for the record too, please.  Thank you.

MR. KOCH-WESER:  I’d like to go back to the subject of Greece.  One should never waste a good crisis and do you see a chance that the right lessons are learned but also politically more feasible then, if desirable, to implement?  You touched on some of them already. 

There are two specific questions:  Isn’t it true that in a sense, the institutions we have in Europe, between the Eurogroup, the EFC of deputies, the Commission, we don’t have the culture of surveillance, of tough review, of enforcement in the end that, say, the Bretton Woods culture is.  Myself, having moved from the Bretton Woods to these positions, government, at least that always struck me and I think the crisis shows that with a single currency, you need the instruments, you need the culture, the discipline, the strength of institutions. 

Greece’s problem statistics, even when I was chairman of the EFC, were not new.  We all know that.  Eurostat did not pursue it as strongly as it should.  That’s just one example.  So isn’t, on the how we go about managing our single currency area, much more to be done to strengthen discipline capabilities of the common institutions and the interplay?

The second one is on the what.  I think you already answered it partly.  There has always been a healthy dialogue between France and Germany on things like gouvernement économique going further.  Doesn’t the crisis also tell us that there is more than fiscal when we coordinate policy in the Eurogroup?  In other words, you mention divergence in competitiveness, inflation, indexation of aid settlements in Spain, current accounts deficits – the whole bunch.  Isn’t there, perhaps, scope now politically to move a step forward so that we don’t stop halfway, and learn the right lessons from the crisis?

MS. LAGARDE:  Yes and yes.  (Laughter.)

MR. KOCH-WESER:  French position:  yeah, but.  The feasibility with others – that’s my real question – to get it done.

MS. LAGARDE:  Well, as you say, we can learn an awful lot from the crisis and I personally don’t see a need to actually try to change the treaty, for instance.  I know this is a matter which is much in debate.  I think it’s really a question of using the provisions of the treaty as it exists and as it has been ratified around Europe. 

But having the political drive and determination to comply with the rules, to respect the pact, to improve on it, maybe, clearly – whether there was too much focus on fiscal policies, as you said, and convergence of fiscal policies and not enough attention paid to competitiveness, to inflation, to a lot of the sort of labor-driven markets principles in various countries – I think it’s a necessity.  I think we absolutely need to do that and I would hope that in the future we can actually not forget what has happened in the last few weeks but really build from there and consolidate and the same goes with the economic government.

MR. KEMPE:  Thank you.  Here and then we’ll go back there.  Thank you.  Harlan.

Q:  I’m Harlan Ullman, Madame Minister.  I have two related questions dealing with reform and regulation.  As you know, the Senate is just finishing up a bill which we don’t expect you to read, but from a French and European perspective, what might you like to see of important issues included and what might you not like to see included?  Second, what ticking time bombs do you see still persisting in the financial system and what can be done to defuse them?

MS. LAGARDE:  Sorry, I missed the second part.

Q:  What ticking time bombs do you see still hidden in the financial system and what can be done to defuse them?

MR. KEMPE:  Or inflating bubbles.

MS. LAGARDE:  Well, as I said, I’m not familiar with the 1400 pages.  First of all, I’m pleased that it is coming to the floor and it’s going to be up for discussion shortly and I’m – a few months ago there was doubt as to whether it would be under review this year or whether there would be this process which parliaments in any country can actually use to slow down the review.  So I think the timing is right.

Second, I would hope that there are enough far-reaching, ambitious proposals so that we have an effective, better regulation than what was in place in the past.  I’ll give you a for-instance which is popular at the moment because the IMF report on taxation has just been leaked and commented. 

There is a debate going on between central bankers working to apply a capital charge – a special capital charge on those activities that are most risky, whereas some of us – and I’m of that group – believe that we would be better off – rather than have a special capital charge on highly risky activity, we would be better off having a taxation – a levy that would encompass not only banks, which would be the case with the capital charge, but any financial institution known today or to be developed tomorrow that would embark on such high-risk activity. 

So that we could actually include that culture of “watch out, there is a tax; there is a tax because there is a risk; there is such a tax because the risk is likely to be systemic.”  By doing so, we would certainly include banks, hedge funds, insurance companies – any financial institution likely to engage in such activity. 

That’s a for-instance.  I don’t know whether that is embedded in the 1400 pages or whether it will come at a later stage.  But I would hope that this kind of approach be developed, so that we can only – we can not only plan for the past and the present but also look forward to what will develop going forward with, indeed, the ability to continue to adjust because there will always be creativity and this ability to invent, circumvent, go around, find shortcuts and try to avoid regulation and supervision because it’s in the nature of the game.  In terms of ticking bomb, I hope there is no such a thing. 

MR. KEMPE:  An inflating bubble which is, I think, another metaphor for it?

MS. LAGARDE:  You know, clearly what some analysts are saying now is, okay, forget about growth, with securing growth somehow – it will have its own life.  But be very careful with sovereign debt because that’s where the new ticking bomb is. 

Let me say this in terms of ticking bomb:  One of the results of the crisis we’ve been through and one of the results of the G-20 resolve is the increased role of the IMF – increased role of the IMF because not a single country can actually identify bubbles and it takes an institution which has a further-ranging view and a level of independence because it correlates all the interests to actually identify bubbles.  I would certainly hope that if there was such a ticking bomb or such a potential bubble developing at the moment, the IMF would have the view, the scope, the authority to identify it and warn us about what is going on.

MR. KEMPE:  But sovereign debt being in a 60-year high is something to watch and will be talked about, I would guess, in the next few days here.

MS. LAGARDE:  Yeah, it will.  It will.  If you look at the report by Blanchard, the chief economist of the IMF, he’s identifying sovereign debt as one potential risk going forward.  Yeah.  Which is why I said, as part of my quadruple R’s, restore public finances is clearly one.

MR. KEMPE:  Lots of questions.  First, here and then in front of you.  Thank you.

Q:  Thank you.  Yes.  Thank you, Madame Minister.  My name is Paolo von Schirach of the Schirach Report.  About your four R’s:  R number one, resuming growth – there seems to be a little bit of skepticism on this side of the Atlantic as to the disparate rates of growth.  Here in the U.S., of course we’re not doing great, but there are encouraging signs, not so much of growth but also increased productivity. 

There seems to be equally strong doubts as to the buoyancy of Europe.  I’m just quoting very briefly from a recent analysis by David Wessel in The Wall Street Journal of April 15, and he says, “In a survey last week, The Wall Street Journal asked forecasters which major region is likely to be the biggest drag on global growth this year – 46 chose Europe, seven Japan.  No one picked another region.  ‘Europe is driving along the edge of the Grand Canyon,’ one said.  ‘It is all downside risk.’” 

It’s not very encouraging.  Of course, you know, this is not scientific; it’s just a poll among various economists.  I don’t know who was polled.  Likewise, the same article –

MR. KEMPE:  Can you just pose your question?

Q:  Yes.

MR. KEMPE:  Thank you.

Q:  The same article poses questions about the stability of the banking system in Europe.  So I’m asking you the question, are these misgivings well placed?  Is this a fantasy of The Wall Street Journal?  Related to that, if you could comment on the problem, as been identified by many, represented by the lack of fertility in Europe.  In other words, all European countries, France excepted, are –

MS. LAGARDE:  Thank you.  (Laughter.)

Q: – have significantly negative fertility rates.  Does that have any long-term consequences for the viability of European economies if you are looking down the line of collections of old people, essentially?  Thank you.

MR. KEMPE:  So doubts about the buoyancy of Europe and the fertility of Europe.  (Laughter.)  And I would actually add to that the question of, how did Europe come out of this crisis compared to other parts of the world?

MS. LAGARDE:  Okay.  You’re right in that the recovery is different in different parts of the world.  If you look at China, if you look at India, if you look at Singapore – to take a different range of countries with different size, different models – they’re coming out of the crisis a lot better than the U.S., a lot better than Europe.

The U.S. is going to, probably, come out of the crisis this year at 3 percent growth – that’s the forecast – which is – what?  Half of what it was in normal time.  On my forecast for France this year is 1.4 (percent).  The IMF just revised upwards to 1.5; I think I’ll stay with my 1.4.  It’s more than half what we had the year before the crisis – we were slightly over 2. 

Whether that’s a trend of old Europe versus new United States or whether it’s a reflection of different levels of productivity or whether it’s the result of immigration policies coupled with fertility rate, as you mentioned, or whether it’s the result of a different economic model which includes what we call the economic stabilizers, which actually helped us through the crisis, I don’t know.  I think economists will give you as many answers as there are economists anyway. 

But what I look at, at the moment, is an economy where the banking system is solid.  I find it quite ironical that some publications refer to the “weak banks of Europe.”  Well, okay, I’m just looking backwards two years ago and wonder where the “weak banks” were?  We seem to have forgotten about recent history. 

But I can tell you that as far as my territory is concerned, I have a landscape with very solid banks which have actually benefited from the crisis in many ways because if you look at BNP, for instance, it has certainly acquired a good chunk of Fortis and it has strengthened its position.  We have a banking system that is solid because it has strong supervision, because it had a business model that was very well balanced between retail banking and investment banking, with probably more conservative principles and heavier regulation. 

We have an economy where growth is picking up.  We closed the fourth quarter of 2009 at a growth of 0.6 which, you know, puts us in a reasonably good position for 2010, and with a destruction of jobs that is significantly reducing and which has stabilized.  We have not yet bounced back and we have not yet started net creation of jobs, as apparently the United States has in the last quarter.  But it’s clearly settling and directionally going upwards.

So I would very much prefer to have a 3 percent forecast in 2010.  But I’m happy to have had only minus 2.2 in 2009, which was – I don’t know how you say it in English, actually.  It’s not twice as good but it’s half as bad – thank you very much – as average eurozone and my forecast for 2010 is reasonably good and certainly one of the highest in the eurozone.

So we need to keep up with the reforms.  We need to continue to invest in research and development to make sure that we stay at the edge and at the forefront in terms of technology, in terms of refinement in the kind of products that we offer and the kind of services that the economy supplies.  But I’m not depressed by those forecasts. 

It’s not a major surprise or the result of the crisis that Europe and particularly the eurozone average growth is less than that of the United States.  It has been historically the case for the last 10 years or so and whether that’s a result of the United States’ taking quite a lot more of immigration than we do in Europe, whether it’s a matter of massive investment because of the amount of liquidity that is made available as a result of the imbalances that you were talking about and because the United States has invested heavily in technology, for instance.  There are all those reasons coming along. 

But clearly we need to look at rebalancing better and this rebalancing has to do with the U.S. consumer consuming maybe a little less, saving a little more; it has to do with China and the United States sort of reaching a better equilibrium – all of that has to converge into a direction that is in the best interest of all and not just in the best interest of one or two major areas and one being the buffer and taking the heat from what’s happening on the monetary scene, for instance.

MR. KEMPE:  I see lots of questions.  I’ll do my best to get around to you.  Bruce, please.

Q:  Bruce Stokes of the National Journal.  Madame Minister, one of the reasons that you and your colleagues are working so hard to help Greece weather the storm is to avoid a forced debt restructuring for Greece.  Some, though, advocate that as the alternative, that that would be what Greece will have to do and we should get on with it.  Could you walk us through why a debt restructuring would not be the best solution for the rest of Europe if that were the route that Greece had to go?

MS. LAGARDE:  This is just not the topic, okay, and what we are working on at the moment is, as I said, a program which has gives and takes, where Greece commits, number one, to disclose and has disclosed and continues to disclose – as you know, there were new numbers released today as a result of Eurostat doing a thorough investigation of each and every number and each and every way in which various systems, including pensions, were accounted for and recorded.

So coming up with the appropriate numbers, disclosing all the data, putting in place the austerity package that was required and heavily negotiated with the commission and members of the Eurogroup and on the other hand, it is a joined commitment of all members of the Eurogroup together with the IMF to actually be available to support the financing of Greece, should it be needed, relying clearly on the expertise of the European Central Bank, the commission and more importantly, the expertise of the IMF, which is familiar with conditionalities and forcing a program, monitoring a program and helping the delivery against the commitment that I referred to earlier on.

MR. KEMPE:  Thank you.  Please.  Here.

Q:  Dov Zak; I used to be CFO of the Defense Department and I want to ask you a defense question even though you’re finance minister.

MR. KEMPE:  Which has a somewhat large budget.

MS. LAGARDE:  I might be totally out of my depth, in which case I’ll say so.

Q:  No, you won’t be because in my experience, finance ministries always don’t think they’re out of their depth when they deal with defense budgets.  (Laughter.)  Mr. Gates, our secretary of defense, recently said that only five out of 28 NATO members were meeting their defense commitments of 2 percent of GDP.  From your vantage point as a finance minister, how do you see the current economic crisis affecting even that?  Do you think that Europe can meet even those modest goals – the ones that have already fallen short of what Mr. Gates is concerned about?

MS. LAGARDE:  Well, in this matter as in any other matters, I think that crisis should not be used as a feeble excuse.  In other words, the crisis can be a perfectly legitimate reason why certain commitments are not made and second, why certain principles are not respected.  I’ll give you a for instance. 

We in Europe have a Stability and Growth Pact under which we commit to each other that our deficit will not be in excess of 3 percent – our budgetary deficit – our public deficit, rather.  And second, that our debt-to-GDP will not exceed 60 percent.  If you look at the 27 member states, about 23 of them are currently in breach of those two rules.  And that is clearly as a result of the crisis because there was no option than to actually massively inject public funds into our economies. 

Equally – and as I said, I’m not a defense minister, so I’m not particularly in tune with the details of who is in default and who has delivered those five out of so many – but I could understand that the year 2009 was not exactly the year during which commitments were delivered to perfection.  But as I said, it shouldn’t be an excuse in the long run and in the long term.  When you join a club, you operate by the rules.

MR. KEMPE:  A question here and then – oh, just a minute.  I’m sorry, you have the microphone back there.  Let’s take a question back there.  I didn’t know you were already back there.  Then I’ll come back here.  Thank you.  Please.

Q:  I’m Brian Beary, Washington correspondent for Europolitics.  In the hedge funds regulation which is being negotiated in the EU at the moment, France has had a disagreement with the United Kingdom regarding licensing or approving hedge fund managers to operate in Europe. 

Can you just talk us through what your position is on that and I know that the U.S. has chimed in saying it’s concerned with the proposal that France has put forward because it will prevent – you know, make life difficult for U.S.-based hedge fund managers.  Can you just talk us through that?

MS. LAGARDE:  I’m not going to go into all of the very technical details of the passport because that’s exactly what you’re talking about.  And it’s going to bore everybody to death.  But I take from two very basic – I start from two basic principles:  One is there should be no discrimination, and the EU is an open market.  That’s my first principle. 

My second principle is that we cannot as a result of this new hedge fund regulation authorize the active marketing of products without supervision, without regulation, that would originate from, for instance, non-cooperative jurisdictions without proper control.  So my argument – and it’s not only France. 

There are many, many players within Europe that take the same view, which is that as a result of that regulation, I certainly don’t want to allow things that were not permitted prior to the regulation.  It would be unacceptable to public opinion, unexplainable by any decent government.  That’s my view.

MR. KEMPE:  Thank you.  Please.

Q:  Christoph von Marschall from the German daily Der Tagesspiegel.  I want to come back to the question of growth.  And I was a little surprised how calmly you talk about growth rates about 1.5 percent and of course, this has been always a rule after crisis, after downturns that the American economy is growing twice as fast European, but I am concerned.  And it sounds a little bit, when I listen to you, that you are not so much concerned.  How do we get back with growth rates from 1.1 or 1.5 percent if the U.S. is going twice as fast and China is going four or five times that fast, India as well? 

So we were down 4 percent.  I congratulate France that you haven’t been hit that hard.  But in the eurozone or in Europe in general, we are down 4 percent.  So it takes us very long.  And we know that below a growth rate between 2.5 or 3 percent, we are creating no additional jobs.  So how can we solve our problems – growth problems, restoring public finance problems, job market with growth rates of 1.1 or 1.5 and it isn’t here something wrong with European model?

MR. KEMPE:  And what would be the source of that growth as well – exports, consumption?

MS. LAGARDE:  Well, let me just get back to the numbers because I want to be clear on numbers.  What I mentioned earlier was for France last year, minus 2.2.  As you said, average euro minus four.  And for this year, my forecast for France is 1.4.  The IMF has it at 1.5.  I’m not satisfied with it as I said. 

But equally, I do not believe that Europe or France, for that matter, will cruise at a rate that will be enjoyed by India, China and other developing and emerging markets because we are simply cruising at a different pace because we are at a different stage of our respective development.  And I believe also that the crisis has accelerated a process by which there is massive readjustment.  It’s like tectonic plates actually moving along. 

And clearly, some of the Asian economies and some of the Latin America economies are growing much faster.  And it’s a good thing because they actually need to fuel their development and I would be very pleased to see that there are development as well taking place in Africa, particularly in sub-Saharan Africa. 

Having said that, you know, I’m not happy that our growth rates are where they are or that our forecast is what it is.  And that’s the reason why I think that we should continue the reform programs that we have underway and from my vantage point, I certainly think that we need to put more work into the economy.  So we need to work better.  We need to work longer.  That goes to the pension reform systems.  That goes to the working hours.  That goes to the productivity that we actually put into those hours of work, putting it very bluntly. 

It goes to the competitiveness that we need to improve.  And we are very strongly financing and supporting research and development programs in France.  To give you an example, we have research and development programs where we finance 30 percent of any investment by a company or a private actor in the economy as long as it is dedicated to research and development.  And third, we need to improve the capital and the access to capital markets for small and medium-sized enterprises. 

And you know, if you take the three chapters that I just mention – improve the work put in the economy, significantly support finance and improve the competitiveness by research and development programs and by focusing on those growth areas of the future – which is what I meant by sustainable growth – and finally, improving access to capital markets and significantly improve the capital pool that is available for SMEs throughout Europe – I think we have three areas of collective efforts that we need to undertake together if we want to improve the position. 

Now, having said that, there are elements about Europe which are not unpleasant either.  And I always have in the back of mind – because France is generally the most heavily criticized of all European players and clearly numbers are going my way at the moment – but I have this front page of The Economist back from May 2009 where you had President Sarkozy sort of standing on his podium and Chancellor Merkel with her feet on the ground and Prime Minister Gordon Brown with his head coming out of the gutter.  And it said, you know, the European new pecking order:  What is the right model?  So things change over time.  (Laughter.)

MR. KEMPE:  Please. 

Q:  Madame Minister, San-jin Choi (sp), Langham Posners (ph).  Could I borrow your pecking order Economist – and there is great division between France and German government in regards to the Greek rescue package.  A, there is difference between what should be done; B, how it should be done.  But looking at the pecking order, in March, Chancellor Merkel appeared to be completely in charge of ignoring President Sarkozy’s views or her European Central – her own Bundesbank Axel Weber, as well as European Central Bank Jean-Claude Trichet’s – views on role of IMF. 

My question to you is, looking at April 11th agreement, in principle there is agreement on Greek rescue package.  However, some finance ministers indicated they must refer to their decisions to their head capital of their cities as well as parliamentarians.  So question is, A, what is German government position in dealing with rescue package and, B, like countries like Spain and Portugal and Italy, they themselves – in Portugal’s case – in the case of Spain, suffered from 18 percent unemployment rate.  How can politicians can persuade public to subsidize Greek government while they’re suffering during the crisis?  Thank you.

MS. LAGARDE:  Well, I’ve got my share of the problems.  I’m not going to address my colleague’s job.  And what I can tell you is that around the conference call that we had for two-and-a-half hours on that April 11th that you seem to be so familiar with, there was not a single disagreement amongst ourselves.  There was not a single moment of disagreement as to how, what and when. 

Now, once you’ve said that, you’ve not completed the picture.  And clearly, each and every member state has its parliament, its congress, its two chambers or one chamber and has to follow the rules of any democracy.  And you know, if we were not to do that, there would be something utterly wrong. 

So we are all taking our steps back at home and there are different principles.  If you’ve followed the latest developments and I’m sure have, clearly, given the technicality and detail of your questions, but the Dutch government, for instance, has taken up the matter, has had the dialogue with parliament. 

I have myself presented at the cabinet meeting on Wednesday the draft bill that I will be presenting before the house and the senate when I get back.  And a country like Italy, for instance, does not have to go to parliament ex ante but ex post.  And those are just three examples of a multiple variety of different legal and democratic ways of implement a decision that was collectively reached.

MR. KEMPE:  We have time for one or two more questions.  Let me take one in the back and then, in fact, let me take these last two – one in the back and then one in the front.  Please.

Q:  Hi.  My name is Dinesh Lahani (sp) and I’m a student at –

MS. LAGARDE:  Can you stand up because I can’t see you?

MR. KEMPE:  Please stand up.  Yeah.

MS. LAGARDE:  Oh, that’s better.

Q:  Hi.  My name is Dinesh Lahani and I’m a student at George Washington University.  And I have a question regarding like speculation and what you guys would do about it.  What I mean is that the ambiguity that initially surrounded the Greece crisis led to market participants continually devaluing the euro.  And in the recent months’ economic data, like, this would be a boon for Germany because their inflation rose from .5 to 1.2 percent, which is an increase of .7 and it’s still well below the 2 percent that is allowed. 

But is this – are certain financial and economic issues aiding to the ambiguity that’s existing and does Europe realize that, like, the speculation that is occurring right now could actually be negative and cause another financial crisis in the future by means that it’s becoming politicized to that extent?  Do the finance ministers of these countries try to have an argument with the other parties that are involved?  Or how is it actually addressed?

MR. KEMPE:  Let me pick up one other question in the front first.


MR. KEMPE:  Please.

Q:  I’m Susan Schadler, former deputy director of the IMF’s European department.  My question is pretty unrelated, so I don’t think you can answer them together.  It has to do with the future of multilateralism in the area of international monetary cooperation versus a movement toward more regionalism, such as what we see, for example, in trade.  So there are two things that stand out in the post – in the crisis period.

One is that you’ve stated the IMF’s stature has improved and it’s become a more central player.  But when you look at what is actually happening on the ground with the IMF, there’s still a huge amount of distrust of the IMF in Asia and Latin America.  It was fortunate that no countries there really needed to use the IMF in an emergency.  And so it’s untested whether they would have come to the IMF, but there are questions about whether any of those countries would come back to the IMF or whether they would like to form their own regional monetary funds that would really take over most of the regional problems. 

At the same time, there’s Greece, where Europe had to swallow very hard before it invited the IMF in – but it does – may be an example moving forward of regional cooperation between the IMF and a region.  An experiment that has never been tried with quite the depth that it looks like that’s going to be tried in Greece.  So my question is, how do you see – looking forward five, 10 years – this tension or dichotomy between regionalism versus multilateralism developing and do you have feelings that one way would be better than another way?

MR. KEMPE:  This is a great question.  In other words, was this a one-off or is this IMF arrangement something that is a model for the future?  Or would a European monetary fund be part of the answer going forward?

MS. LAGARDE:  First of all, it’s not a one-off because this is the third time that we are joining European forces together with the IMF.  We’ve done it with Hungary, we’ve done it with Latvia and it’s now being done with Greece.  So it’s the third time in a row.

Q:  (Inaudible) – Romania as well.

MR. KEMPE:  Yeah.

MS. LAGARDE:  Yeah.  So you’ve proven my point.  It’s not the first time.

Q:  No, but it is different.  This is qualitatively different with Greece.

MS. LAGARDE:  Well, the only difference between those programs and this one is that Greece is part of a monetary zone that is the euro and it goes sort of against a provision of the treaty that planned for no bailout at the time when the euro was built when there was convergence criteria coupled with the growth and stability pact – sorry, Stability and Growth Pact – which everybody hoped would take that problem away and there would be no bailout. 

But you know, I’m not sure that I have the answer to your question.  And you know, you’re clearly considering all the issues and a lot of very informed people such as those in the room are probably having the same worries and questions and queries.  My sense is that we need both.  We need a combination of regional programs’ support, monitoring, on-the-ground presence and an international institution that takes sort of a broader view which relies on long-term experience of similar situations.  And it seems to me that having both is probably a sensible balance. 

I’m not sure that we need a European monetary fund, so to speak.  What we are experiencing at the moment might serve as a template going forward once we improve it, we tinker around the edges and make it a more stable sensible program – not just for that region but maybe for other regions. 

Now, I’m not sure that the accumulation of capital on a regional basis is of great help and that goes to your point about Asia resenting or associating the IMF with harsh and tough programs that are not particularly valued by the population.  But accumulating in various regions is not a solution either. 

But you know, what I find fascinating is as a minister of finance at the moment in a country that is engaged and that will be engaged in 2011 as a chairman of the G-20 and chairman of the G-7 at the same time for the entire year is how are we going to better design our institutions?  How are we going to have an architecture that will actually address those issues that we are facing at the moment? 

Are we going to have a G-20, an enlarged G-20, a reconciliation between the CIMF – CMFI, sorry – and the G-20 that will be able to address financial issues, trade issues, environmental issues, health issues on a much more coordinated basis – because those problems are cross-borders, ignore frontiers and are very contagious when things go wrong.  And we’ve clearly realized – whether it was as a result of the H1N1 virus or the financial crisis – that we were equipped but not equipped to the point where we could actually address the risk of contagion to stop it, ring-fence it and redress our respective situation. 

Now, I’m not ignoring your point earlier on.  I don’t think that we can actually address markets politically.  I think we need rules.  We need what I call gendarme – you know, proper, solid authority that can be used, that have the sticks as well as the carrots to make sure that there is no – how would I put it? – there is no excess and there is no abuse.  That’s what we have to, by all means, avoid.  And I think, you know, playing with a very narrow, very shallow market of the CDS on sovereign debts, when there are only four players in the game, I have my doubt.

MR. KEMPE:  Thank you, Madame Minister.  As I thank you on behalf of the audience, let me just say a couple of things.  So much of what you said points to the mission of the Atlantic Council.  Our mission is renewing the Atlantic community for global challenges.  And our notion is we are the largest economic space on Earth.  We are the largest cross – foreign direct investment space on Earth. 

And we still usually lead in writing the rules and better designing institutions as much as there is a rise of other countries, we can’t solve the world’s problems, but very often our consensus is a precondition for their solution.  So this platform was established with that in mind, that across the Atlantic we just needed to talk more deeply about these issues. 

So I want to tip my hat to Deutsche Bank as our partner and to Caio Koch-Weser who has chaired our Business and Economic Advisers Group.  Tip my hat to Alexei Monsarrat and James O’Connor who run our Global Business and Economics Program and doing all the hard work here.  And I just get to sit up here and have pleasant conversations like this one.  (Laughter.)  And I particularly want to tip our hat to you – a true Atlanticist and this was a fascinating conversation.  Thank you very much.  (Applause.)

MS. LAGARDE:  Thank you to you.

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