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MARCH 16, 2011

Transcript by
Federal News Service
Washington, D.C.

OPERATOR: The following is a recording of the Garrett Workman teleconference with the Atlantic Council for the U.S., scheduled for Wednesday, March 16th, 2011 at 11:00 a.m. Eastern Time.

Excuse me, everyone, we now have Dr. Georges Heinrich, the director of the Treasury of Luxembourg and the senior policy advisor to Prime Minister Jean-Claude Juncker, as well as Frank Kelly, Atlantic Council board member and managing director, head of communications and public affairs, Americas of Deutsche Bank, on the line.

Please be aware that each of your lines is in a listen-only mode. At the conclusion of the remarks, we will open the floor for questions. At that time, instructions will be given as to how to proceed if you would like to ask a question.

I would now like to turn the conference over to Mr. Frank Kelly, who will be offering some introductory remarks and introduce Dr. Heinrich. Mr. Kelly, you may begin.

FRANCIS KELLY: Thank you, Operator.

Welcome to all of you for what I know will be an extremely interesting discussion on a topic that is crucial to the future of the global economic system.

Deutsche Bank is very proud to be a partner with the Atlantic Council for this call, which is part of our ongoing series with them entitled “Mapping the Economic and Financial Future.” The series gathers the best minds on the challenges of the global financial crisis as presented and serves, hopefully, the platform for an ongoing search for solutions as we work through these crises.

One of the most important developments in the aftermath of the financial crisis has been the growing threat of a sovereign debt crisis holding back the economic recovery in Europe and slowing the return to growth worldwide. Problems so far has not just been – has been limited to Europe’s periphery, but the EU and eurozone member states now recognize that they need to act convincingly to reassure the markets and protect the stability and future of the euro.

To that end, we are pleased to be joined today by Dr. Georges Heinrich, who is both the director of Treasury in Luxembourg, as well as Prime Minister Jean-Claude Juncker’s senior policy advisor relating to euro issues. As Prime Minister Juncker – as president of the euro group of 17 eurozone countries, this is both a highly influential and highly important position in these troubled times.

Quick background on Dr. Heinrich. He previously served in various leadership positions throughout the Luxembourg Ministry of Finance, most recently serving as primary counselor as well as time spent teaching economics as a professor at the University of Luxembourg.

We’re all eager to hear your comments, Doctor, and your insider’s perspective on what happened in Brussels last week and what we can expect going forward. First of all, it might be worthwhile to help explain to the American audience exactly what happened, who met, et cetera. And, as you know, it’s easy to get lost in a sea of acronyms. We drown in them here in the United States in Washington.

So, it’s been confusing for us in all that was said – the doctor and I were talking about it before the call – it’s just stunning the amount of massive developments happening around the world, whether it’s Europe, whether it’s here in the United States, or even worse, though, in Japan, the Middle East, and the implications that will all have.

So, thanks again for joining us, Doctor. I know we’re all, again, I have to say, looking very much forward to your perspective. And for the audience, following Dr. Heinrich’s remarks we will have an opportunity for all of you to chime in and ask questions. The operator will explain to everybody again how that process works after his remarks. But, without further ado, Doctor, let me turn the floor over to you.

GEORGES HEINRICH: OK. Well, thank you very much for giving me the opportunity to try to explain to you what is currently going on in Europe in terms of economic policy. I’ll do my best not to use acronyms, and also not to use too much, say, “eurospeak,” or at least when I do so, to explain to you what it means, because we have our peculiar language and I’m aware that not everybody outside our committee meetings may be aware of what these expressions actually mean.

So, I guess I will take, say, 10 minutes or so to talk you through, say, the framework of what we’re currently discussing, also explaining to you the sequence of meetings; as you said, who will be meeting whom and what will be discussed.

But I think to start off, it will be most instructive for you if I actually give you a little bit of a rundown on what we are actually trying to achieve, because information – you know, there were a lot of meetings over the last few days and there was a lot of information on what has been decided, but it’s not necessarily everybody sees on how this fits together.

And so I’ll try to put a little bit of structure on what we’re actually discussing, what we’re trying to achieve, and then I’ll also talk you through the sequence of events, and then to dig a little bit deeper on the substance. I guess that is easiest done via some questions by the people taking part in this conference call. So, if that is OK with you, I’ll start, as I said, with some elements of context.

So, the context of the discussions, meetings that are currently going on, is that we’re in the process of preparing what we’re calling a comprehensive response to the sovereign debt crisis in the euro area. And the purpose of this is to restore confidence on the one hand in public finances, but on the other hand also to restore confidence in the European banking sector. And, as the people taking part in this conference call know, but not necessarily everybody who is observing us – but, as you know, public finances and banking sector obviously are intimately linked.

The comprehensive response that we are preparing is essentially composed of three pillars. The first pillar is the strengthening of what we’re calling economic governance in the euro area. Now, what do we mean by strengthening economic governance? It means, first and foremost, strengthening budgetary discipline. And I’ll come back to what this means and to the instruments by which we’re trying to achieve this in a moment.

Reinforcing economic governance also means that we are trying to put greater focus, greater policy focus, on the issue of public debt and public debt sustainability, and we’re also placing greater focus on macroeconomic imbalances because one of the lessons we have learned from the crisis is that macroeconomic imbalances or competitiveness divergences very often, in their early warning indicator, are fiscal problems to come of debt – public debt problems to come.

And also, macroeconomic imbalances may be conducive to the formation of asset bubbles. And so, the reinforcement of economic governance is now focusing not only on, say, fiscal indicators but we’re doing a broader macroeconomic surveillance exercise in the future in order to detect, at an early stage, when things are potentially going in a wrong direction.

So that is the first pillar. Then the second pillar is the reform of the so-called – well, EFSF, the European – the European – now, I get confused with my acronyms myself – the European Financial Stability Facility. Yes, that’s it. And also, finalizing the ESM, which is the European Stability Mechanism.

Now, EFSF and ESM are the instruments that have been put in place since the middle of last year in order to deal with the sovereign debt crisis in the euro area. It is the facilities that have been put in place in order to allow the members states of the euro area to go to the market, to levy some debt, then can be borrowed to countries that are facing difficulties to find financing themselves in the markets.

So, specifically we’re talking currently about Ireland. Ireland is benefiting from an EFSF program, which is effectively the same as, say, an IMF program. So it’s a loan, together with some stringent conditionalities. And, effectively, the IMF is also participating in this program.

So it’s a joint European-IMF program to give financing to member states in trouble. And the EFSF has been given a lifeline until 2013, and in 2013 the EFSF will be transformed into ESM, the European Stability Mechanism, which is a permanent mechanism.

And now, obviously, the reason why we do not switch to a permanent structure right away but why we have until 2013 to put this in place is that the European treaty, the so-called Lisbon Treaty, which is the framework – the institutional framework for the way the European Union functions, needs to be modified to allow the ESM to – well, to have a legal basis.

And, well, treaty changes take a long time, and so we’ve given ourselves until 2013 in order to sort out all the legal work that needs to be done in the background for the ESM to enter into force. So, we have effectively – well, it’s called a bailout, even though – well, bailouts as such do not exist according to the treaty, but EFSF and ESM are effectively bailout facilities. They are facilities to provide loans to member states that have either a liquidity problem or even a solvency problem.

And so, what we’ve been discussing when I said, well, we are reforming the EFSF and we’re finalizing the design features of ESM, what we’re talking about is landing capacity of these instruments. It is the way these instruments are structured so the capital structure or the guarantee structure – it’s the instruments that these facilities can use so effectively, what kinds of activities they can do with the money they levy on the market.

And then there are pricing issues because these facilities give loans to member states, but so the pricing is the conditions with which these loans are given to member states. And then there’s the obvious point of the conditionality that is attached to providing these loans.

And, finally, what we’re also doing is provide clarification to an issue that has crossed a lot of, say – well, turbulence in the middle of standings in the markets, namely the so-called private sector involvement. So, we are specifying, clarifying what European leaders actually meant when they referred to private sector involvement because when this was mentioned first, it created a lot of trouble or turbulences in markets.

So that’s the second pillar, reforming the EFSF and setting up the ESM. And the third pillar of the comprehensive package that we’re currently discussing is restoring transparency in the banking sector and financial sector repair.

We are preparing here in Europe for a set of EU banking stress tests, which will take place in May and in June. And an important feature of these stress tests is obviously the assumptions that you use in the stress tests regarding sovereign risk.

We had a stress test in Europe last summer, and these stress tests have been widely criticized ex post because it was said by observers that the stress tests were not stringent enough, that there was no genuine stress, no genuine stress assumptions for sovereign risk. And so, this led to a lot of confidence in the credibility of these results. And so we’re trying to regain this credibility by doing a tougher, more credible stress test exercise this year.

And the political dimension relating to the stress test is obviously that governments are committed or need to enter into a credible commitment to provide what we’re calling backstop financing in case the tests show that banks do not actually pass the stress test.

So that is an important political message that needs to be conveyed on the one hand regarding the credibility of the stress tests, that governments do not interfere and that there is not the impression out there in markets that governments have meddled with the results of the tests.

And then, if the tests show that some financial institutions do not pass the stress test, governments have an obligation to show that basically they will put whatever means are necessary at the disposal to stabilize a potentially unstable situation.

So those are the three elements of a comprehensive package that is currently being prepared. Now, this package is supposed to be approved at a meeting of the European Union heads of state and government that is taking place next week on the 24th and 25th of March. And what we’re currently seeing – the activity that we’re currently seeing is all the preparatory activity that is ceding into this meeting of heads of state in government.

Now, obviously, because of the multi-pillar nature of the response that we are preparing, different formations, different groupings of people are meeting in order to prepare this. And so, this may be a little bit confusing because basically you have a meeting of either finance ministers or heads of state and government every other day now. And, as I said, this may be a little bit confusing.

So, over the last few days – you actually had last Friday the heads of state and government of the euro area. So the 17 members of the euro area were meeting in Brussels in order to prepare the summit of the 27 member states that is taking place on the 24th and 25th.

Then on Monday we had a meeting of the euro group, so the 17 finance ministers of the European Union that were, on the one hand, trying to do some, say, processing of the decisions that were taken by heads of state and government on Friday, and they were preparing the meeting on the 24th and 25th of March.

Then yesterday there was a meeting of the ministers of ECOFIN, so the 27 finance ministers from the European Union. They also prepared some elements for this comprehensive approach. And then next Monday, on the 21st of March, there will be an additional meeting of the finance ministers of all 27 member states, again, to prepare the council meeting on the 24th – the summit meeting on the 24th and 25th.

So all this is slightly confusing maybe to see all these meetings, but there is – at least in our understanding there is a clear sequence on – also a clear definition of what we are trying to achieve.

So, what has been achieved during the meetings over the last few days? As I said, our comprehensive package is based on three pillars, and I outlined the three pillars. Well, most of the progress over the last four days or last five days has actually been on pillar one, the pillar on economic and budgetary governance.

Now, in this pillar, the heads of state and government of the euro area agreed last Friday on a so-called pact for the euro. The pact for the euro is an agreement between the heads of state and government of the 17 member states on a political commitment, say, to do further structural reforms in the euro area, and these structural reforms effectively aim at, say, fostering economic convergence and avoid competitiveness divergences within the euro area.

So, basically these are policies that are effectively implemented at national level where there is no European – no, strictly speaking, European Union or euro area competence, but where the member states agreed to tighten the coordination between themselves.

So this pertains, for instance, to coordination on labor market policies to ensure that wages – say, wage developments are not the cause of competitiveness losses. Or there can be commitments to pension reforms, for instance, in this pact for the euro. There can be commitments to other structural reforms, say, for instance, liberalization of the service sector in order to contain inflationary pressures and so on.

So, the pact for the euro effectively is a package of structural reform commitments by member states where heads of state and government commit their governments to implement a certain number of measures within a framework of one year, and where there will be a monitoring by the heads of state and government.

So the idea here is to create some political momentum, let’s say, and also to create some high-level political commitment at the level of heads of state and government to send a strong signal that heads of state and government are in charge also with, say, insuring the future of the euro.

And then yesterday the 27 ministers of finance of the euro area agreed on the key elements of the reform of the Stability and Growth Pact. Now, the Stability and Growth Pact, most of you will know what this is about. The Stability and Growth Pact is effectively the fiscal framework of the European Union.

Now, you will wonder – in Europe we have been talking about the reform of the Stability and Growth Pact for almost a year now, and you will be surprised when I say that yesterday we agreed on the key features of this. Effectively, the heads of state and government agreed on the key features at the political level last December.

And what finance ministers agreed upon yesterday are actually a set of five regulations and one directive. A directive is something like a law, a draft law – a European law. And the political agreement of last December is actually translated into precise legal language via the six texts that were approved by the ministers of finance yesterday.

So, in these texts you find the precise benchmark for how much adjustment – how much, say, budgetary adjustment the member state must do in a specific year, how a country with a high debt level must bring down its public debt.

You have specific information about what sanctions apply to member states that do not comply with the rules that are set out in the pact, and so on and so forth. So, political endorsement in December and now agreement on the legal text that provides the legal framework.

Now, approval by ministers of finance is not final because at the next step, the European Parliament also needs to approve these changes to the Stability and Growth Pact, but we work on the assumption that this can’t happen until the autumn, so that by 1st of January, 2012, the new fiscal framework for the European Union will actually be effective. So this was decided yesterday.

And then, on Friday, at the level of heads of state and government, the Portuguese prime minister announced that the Portuguese authorities were taking additional measures on budget consolidation and on structural reforms in order to send a strong signal to the markets that Portugal was taking all the necessary steps that it could take in order to restore economic growth and also restore the sustainability of its public finances.

And this was further discussed at the level of finance ministers on Monday and Tuesday, the content of the reform package presented by the Portuguese authorities.

Besides the work on pillar one, which progressed very well on Friday, Monday and Tuesday, the meetings have also taken a look at the element of pillar two, so the design features of EFSF and ESM, the bailout facilities.

Now, here most progress has been made on what we call the landing capacity, so how much money these facilities will have at their disposal to pass on to countries with liquidity problems. Now, EFSF, the facility we have now until 2013, will have an effective landing capacity of 440 billion, and ESM, the facility from 2013 onward will have a landing capacity of 500 billion.

There was also a discussion and a decision on the types of activities that EFSF and ESM will be able to do. And here it has been clarified that apart from the ability to extend loans to member states, ESM and EFSF will also be given the possibility to purchase bonds on the primary market. This was an important clarification for market operators.

Then there was also some decisions on the pricing. It was confirmed that pricing should be in line with IMF practices, but there was an agreement that Greece should be given a reduction of its pricing, the pricing applied to the current Greek facility, by 100 basis points.

And there’s the understanding that the 100 basis points that were decided for Greece are actually a benchmark for the discussions on pricing for future EFSF and ESM prices, so that effectively, relative to current levels, the current pricing practice of EFSF pricing will be reduced by 100 basis points, roughly, and this will then also apply for the future ESM.

Then there was a decision on Friday to lengthen the maturities of the Greek loans that have been – the Greek loan that has been extended by member states of the euro area to the Greek authorities. The average duration of the maturity is currently three years, and it’s lengthened to seven-and-a-half years.

This is motivated by the fact that in the current repayment schedule there is kind of a hump in 2013, ’14 of refinancing these for the Greek government, and so the lengthening of the maturities provides a smoother refinancing schedule, which we think is more realistic.

Now, obviously heads of state and government provided a number of orientations on Friday. Ministers of finance could not clarify all the details – all the technical details underlying the specifications for heads of state and government on Friday, which means that some more technical work needs to be done during this week at, say, the level of – say, my level and the level of my colleagues.

And then we reconvene the ministers of finance next Monday to do the final push on the technical details so that the heads of state and government have all the information they need to take their decisions, their final decisions, on the 24th and 25th.

So, all in all, the situation in Europe, it all looks a little bit chaotic, but we actually do have a master plan. We actually have a clear set of objectives. And also, on the basis of the discussions of the last days, we’re moving maybe at the slow pace, but at least we’re moving decidedly in the direction of fulfilling the objective that we’ve defined ourselves. And so, it looks very likely that we will actually be able to deliver the comprehensive response that I have outlined until the summit of 24th and 25th of March.

So that’s what I wanted to tell you as an introduction to give you, as I said, a little bit of – maybe a little bit of a more structured insight of what we are discussing and in which sequence we are discussing these things. I hope that was at least a little bit understandable.

MR. KELLY: Well, Doctor, Frank Kelly here again. That was superb and really illuminated, I think, what the situation is, what’s going on, and gave us an idea of where things may be going.

I have to say, just as an initial comment before I turn it over to the operator for questions, you know, it’s really dawned on me that this is in some ways – of course it’s very different than the United States’ model, but considering the fiscal crises that a number of U.S. states are now facing, and the intense pressures now being put on the U.S. federal government to help bail them out, I hope they look to the model of coordination and detail that our European friends are putting into dealing with the crisis there. It’s an excellent model.

Operator, why don’t we – I’ll turn it over to you to open up for questions.

OPERATOR: Thank you, sir. At this time we will open the floor for questions. (Gives queuing instructions.)

Our first question comes from Susan Schadler with the Atlantic Council.

Q: Hi. I should also say that I was formerly the deputy director of the European Department at the IMF. I have three questions, so I’m stretching a little bit, but I’ll make them very fast.

First of all, it hasn’t been clear to me what the role of the IMF will be. You just said that when a country needs to use the EFSF or the ESM, the IMF would be involved. But there seems to be a lot of question in the press that should Portugal need to use it, even in the near term, whether the IMF would have to be involved.

The second question I have is on PSI, which you also mentioned but is noticeably absent in press reports about this. There are very few details about what PSI was involved.

And, lastly, I was – I had to smile when you said that the SGP issues have been very much on your mind in the last year. In fact, I think they’ve been very much on everyone’s mind for the last decade. And I wonder, why do people believe – what’s being done now that’s different, that makes people believe the SGP will be more – have more teeth and be more successful now than it was in the early part of this century?

DR. HEINRICH: Do I respond to questions right away or do you do a grouping of questions? Shall I reply right away?

MR. KELLY: Yeah, let’s just do it that way.

DR. HEINRICH: OK. I’ll try to be equally brief.

Well, the role of the IMF, effectively there is – well, first of all, should the IMF be involved? A number of member states insist on IMF involvement in these programs because of the credibility of the program, the additional credibility that an IMF involvement gives to the program as also credibility perceived by markets if there is IMF involvement.

The IMF has a long tradition of devising, say, structural reform programs, adjustment programs, and this is not actually something that, say, the European Union or the European Commission has a lot of experience in, and has a lot of credibility in. And so maybe this also links to your SGP question.

So, IMF involvement, a number of member states see it as very important in order to lend the needed credibility to the program. And I would tend to agree with that.

Now, how does IMF involvement translate? Well, it translates, on the one hand, obviously via an IMF financial participation. Now, we cannot pre-commit to that because that is obviously a decision for the IMF board to be taken, but we will, in all instances, seek an IMF participation of the financing part of the program.

And then obviously we will seek the IMF participation to formulate the conditionality that is attached to these loans. But, as I said, the main reason why we are seeking IMF involvement is to – well, to ask the IMF to lend its credibility to these programs.

Private sector involvement, yes, I’ve been short on that also because it is one of the technical issues that we have done, say, not so much progress on yet. This is one of the issues that will be sorted out at high velocity during the week to come.

I didn’t also mention it very explicitly because, as I said in my introductory remarks, there were a lot of misunderstandings in the markets when this was first mentioned, leading to a lot of turbulences in the market. And I didn’t necessarily want to add to the misunderstandings.

But private sector involvement effectively means – well, on the one hand, one of the instruments that has been mentioned is the famous collective action clauses, that there is a commitment to introduce collective action clauses in the bond issuance documentation. And then there are other forms of private sector involvement, which is more of a – which goes in the direction of a structured dialogue with the bond holders.

So, for instance, if a country experiences difficulties, private sector involvement means – or what we’re currently discussing is, say, a code of conduct on how a government then starts – or enters into a dialogue with the bond holders in order to provide structured forms of information on what is going on, also maybe to talk to banks, insurance companies, investment companies to maintain their exposures in countries as a sign of confidence. Or it’s more of a – as I said, a code of conduct on how to – how to talk, how to define a structured dialogue between the countries concerned and the bond holders.

And on the Stability and Growth Pact, now, obviously I would be lying if I said that I did not share some of your skepticism on the effectiveness of this, but one of the reasons that make me think that the future pact may be more effective than the past pact is that – and, well, my minister will probably fire me immediately for saying something like this, but we have actually tried to restrain the political powers of (depreciation ?).

We have tried to, say, put more automaticity into the procedure so that ministers take fewer – or where the procedure advances with ministers being involved not at every instance of the procedure, because what we saw very often in the past is that everybody agrees that fiscal discipline is important.

But then when it comes down to taking tough decisions concerning one of your neighboring countries, then you think, well, you know, maybe in a couple of years’ time I could be in a similar situation, and how would I want the others to behave if I was in that situation? And so you have a little bit of a collusion, or you had in the past a collusion of member states that were in similar situations, and that led to the ineffectiveness of the pact we observed.

So, on the one hand, we introduced greater automaticity, restraining the discretion of the council to take decisions that are more lenient. And on the other hand, you have to say that governments have now very well understood that the more fiscal laxity they allow other countries to exhibit, the more negative the political spillover effects for them can be, because the discussion on the lending facility to Greece, on the ESFS loan to Ireland have actually led to very difficult political debates in the various member states.

And so the countries realize now that, well, you know, if we’re not so tough on Greece, it’s not only a problem in the long run – it’s not only maybe a problem for Greece, but eventually if the situation gets out of control, it will also be my problem because I will be asked to step in and to help country X or country Y.

That is politically very difficult to do, and I think this is – well, this crisis was the hard way to learn a good lesson, and the good lesson is that in monetary union, the deficit of your neighbor is not only your neighbor’s problem but it’s also your problem. And so you need to exercise the necessary peer pressure to get the fiscal discipline.

So, on the one hand, restraining – a little bit more positive about the future of the stability pact, but I’ll fully believe it when I see it.

MR. KELLY: Operator, do we have other questions?

OPERATOR: We do. (Gives queuing instructions.) Our next question comes from Annette Heuser with the Bertelsmann Foundation.

Q: Yeah, good morning, everybody. Thank you very much, Dr. Heinrich, for the very helpful overview.

Actually, my first question was also going in the direction of Susan’s question regarding how to really execute the Stability and Growth Pact. You were saying, Dr. Heinrich, that you are going towards a more automatic response right now. Does that mean, in complete terms, that the European Commission will get more power when it comes to the execution of the Stability and Growth Pact, as it was, as you know, originally foreseen in the Stability and Growth Pact?

But we know what kind of trading is just going on – you just described it – between the member states when a country is under pressure. And which kind of measures can you really take, then, in order to put a country under, I would call it, constructive pressure to get its fiscal house in order?

The second question is, what is the timeline regarding the implementation of all these multiple decisions that have been taken by the euro group as well as – as a total, as a whole in the last couple of weeks?

The third question is, is there anything major left of the agenda of the eurozone countries that they need to decide on in the next couple of weeks?

And the fourth question is regarding to the current crisis in Japan. French Finance Minister Christine Lagarde has called on a G-7 meeting right now. Which kind of measures of scenario planning is going on within, first of and foremost, the euro group? Thank you.

DR. HEINRICH: On the first question regarding the stability pact, there has been one major addition to what was already being discussed at the council level on Friday.

If you read the concluding statements of heads of state and government carefully, there is one passage in those conclusions that says that the member states agree at political level that as a rule, they will follow the recommendations of the commission when it comes to excessive deficit procedures – well, implementation of the Stability and Growth Pact, that the council will always follow the recommendations of the commission. And if it doesn’t, it needs to explain in writing why it does not do so.

This was part of the initial proposal, which was then, in the course of last autumn, worked down a little bit, and now the council – well, the euro area heads of state and government agreed at the political level on this phrase, which effectively means that there is greater automaticity. Member states agree that as a rule, they will follow whatever the commission proposes on the procedural steps.

In addition to that, there is a much closer monitoring in terms of – well, the treaty – or Stability and Growth Pact provide two benchmarks, or effectively three benchmarks. So you have the 60 percent debt criteria, you have the 3 percent deficit criteria, and then you have the so-called medium-term objective, which is – well, to put things simply, it’s the need to reach a balanced budget.

Now, the previous version of the pact specified the benchmarks, and it specified very mildly if you weren’t at the benchmark, how to get to the benchmark, both in terms of speed and the adjustment that you had to do every year in terms of how many percentage points of GDP you have to cut you deficit. And also in terms of the timeline.

Now, the new version of the pact is actually much more specific in the requirements that it specifies if you have not reached that benchmark yet, on the speed that you need to apply in order to reach the benchmark. So it’s much more stringent in terms of the speed that it prescribes, and in order to give the necessary incentives to get up to that speed, there is also a whole battery of sanctions.

Previously, sanctions were only the very last instance of the procedure. Now actually at every one of these intermediate benchmarks, if you don’t reach the necessary speed there can be sanctions. But not only when you don’t meet the benchmarks, but even if you don’t have the necessary speed in order to reach the benchmark there can be tensions.

And so, the monitoring is much closer. You have much less discretion also in what the pact prescribes in terms of how to reach those benchmarks. You have proper incentives in terms of sanctions if you don’t meet that, plus you have the automaticity that heads of state and government decided upon.

Now, again, I mean, the jury is still out on whether all this will be enough. We’ll have to see how it works in practice, but at least on paper this is a much stronger framework than what we had.

The second question was regarding timetable. I said for the government’s reform of the Stability and Growth Pact, as I mentioned, we now need the approval of the European parliament. We work on the assumption that the full set of fiscal surveillance framework will be in place the first of January, 2012.

The pact for the euro that I also described, there the intention is to have political commitments by heads of state and government possibly all ready for next week but at the latest for the June European Council.

For the next meeting of heads of state and government in June, there will be a set of political commitments, two or three political commitments per member state where a country will take a firm commitment on some objectives to reach by next year, and then they will have to deliver by next year.

Then the timeline for EFSF is pretty much immediate because ESFS is up and running. So the changes that we operate through the framework of ESFS, we will implement those immediately. In some countries this will then necessitate parliamentary approval and also the design features of ESM will need parliamentary approval.

And so here the idea that most countries have, they only want to go to parliament one more time and then with the whole package. So the changes to ESF and the framework agreement on the ESM, they want to go to parliament in one package, and for then the parliament – get the approval.

And because once European Council has agreed on the ESM design features next week, we still need some legal texts to be finalized. So this will take, say, a month or so. So we work on the assumption that by May we will have all the legal texts available and then countries can start the parliamentary procedures.

And so we are hopeful that both EFSF and ESM will have the full parliamentary approval before the summer. And then, well, ESM will enter into force in 2013. In the meantime, we have EFSF working as it currently is, and ESFS still has plenty of lending capacity, so even if there was an emergency situation arising between now and the summer or even the autumn, we would be fully operational. So this time lag is not a problem.

Then there was the question if there are any – oh, sorry, and the stress test that I mentioned obviously is the stress test that’s taking place in May and June. The political commitments pertaining to backstop financing need to be in place also by May and June, so whenever the stress test results will be released.

Is there anything major left on the euro area agenda? In terms of governance, I think we covered the whole range. But obviously, say, the emergency firefighting has led us to not give due consideration to a lot of the other issues that we usually look at. And so we are very keen to get back to a situation where we don’t – where we are not in permanent crisis management, but permanent crisis management here – and the next crisis management is coming up. You mentioned it with your fourth question – the very dramatic events in Japan.

Truth be told, Monday, Tuesday we did not really have the time nor actually sufficient concrete information to discuss the situation in Japan and its economic implications, and to what extent the euro area can provide support in order to stabilize the economic repercussions, or help stabilize the economic consequences of this very dramatic situation.

But no doubt this will also be – this will also play a big role on the agenda of heads of state and government when they are meeting on the 24th and 25th, but at the moment, this is not something that we have discussed in great detail.

Q: Thank you very much.

MR. KELLY: Operator, do we have other questions? I know we’re getting very close here to the one-hour mark, and I would love to – I don’t want to – I know our guest here has been working extraordinarily hard in the last four or five days. He’s got to be exhausted at this point and we’re incredibly grateful for his time. But do we have more questions?

OPERATOR: I’m showing no further questions in the queue at this time.

MR. KELLY: Well, before we – I’m going to grab the opportunity here and ask one final question here about upcoming elections. And maybe you could give us a quick overview of the key elections you think that we should be watching here in Europe that would potentially impact policy being developed.

We certainly saw that in the United States here in the mid-term elections in November and it’s very much changed the fiscal situation. We’re in very serious tax – fiscal cuts. Do you anticipate upcoming elections will potentially have an impact, and which ones should we keep an eye on, do you think, that you think would be most impactful?

DR. HEINRICH: We had – backward looking, we had one election very recently in Ireland, and I haven’t mentioned it but you’ve probably seen it in the press. Now, the fallout of the change of government in Ireland is also one of the elements that would still keep us occupied.

You have probably seen that there’s been some – well, I think the use of the word “horse trading” is probably not exaggerated. Or, actually, there wasn’t any horse trading because no horses were traded on Friday.

There was a link that was being made between, on the one hand, the new Irish government, asking European partners to be a little bit more lenient on the pricing of the loan that was already given to Ireland, and on the other hand, some demands that, in return for a reduction in the pricing, Ireland should do something on its corporate tax rate.

Now, there was a discussion on this on Friday. It’s been widely reported in the international press, and there was no agreement on this.

Now, obviously as we have taken the decision that the pricing for Greece should be lowered – we have taken the decision that the pricing for future EFSF and ESM transactions should be lower than the current pricing, it seems slightly absurd to say that Ireland, on the other hand, should continue with the current pricing practice. Now, that is my personal opinion, but I know it’s not only my personal opinion.

Now, the link that was made with the corporate tax issue was obviously unfortunate, and it’s kind of polluting the political discussion about this a little bit. But to me it seems obvious that we still need an agreement on the Irish pricing before the next European Council at the end of next week. So these are the consequences of an election that we’ve recently had.

Then we have a general election upcoming in Finland, I think in the middle of April, I think 16th or 17th of April. And it is our understanding that this whole context of European, say, bailout packages or bailout discussions are actually a big topic in the – sorry, in the Finish general election.

There is one of the parties which has more of a – which is taking more of a populous stance on this and is turning the election debate into a debate on the, say, fiscally sound versus fiscally unsound and irresponsible countries, and with these kinds of arguments it’s easy, obviously, to influence or to play with public opinion.

And so, this puts the contenders in the general election in Finland obviously in an uncomfortable position, especially those that are in government now. And it also means that, well, for the parliamentary process – if you have a change of government, the parliamentary process will be slowed down.

But this is not something that is worrying us beyond anything that would be reasonable, I’d say, but still it is something that we have very clearly on our radar, the fact that in one of the member states, this precise part of the comprehensive response is actually an important feature in the campaign.

And then, Germany is not having a general election, but there are a number of state elections coming up in Germany, and Germany obviously has the biggest economy in the euro area, also the biggest contributor to any financial rescue packages. This is also something that is very much debated in the public in Germany.

Within government there is – say, the liberal coalition partner is having a slightly more stricter view on what it means to organize a bailout than the conservative coalition partner, and this creates, say – well, on the one hand, tensions within the ruling government, or at least not always 100 percent convergence of use within the ruling coalition. And also, as this is an issue that is debated a lot in the public, it is an issue on which the parties communicate very careful, with an eye to the upcoming elections at regional level.

And so, obviously this is influencing the stance that the government and the chancellor in particular is taking in European negotiations, requesting a lot of budget discipline, a lot of additional measures, a lot of additional commitments from countries that are benefiting from financial support from other euro area member states, or from countries that are currently experiencing market stress.

And so, I think we have four regional elections coming up this year in Germany, so this is a continuum of elections that shape, a little bit, the debates that we are having. But if the European Council next week decides on this comprehensive package, as I said, I still work on the assumptions that the governments will then assume their political responsibilities, go to their national parliaments, get approval for the package, and then by the summer, or at the latest by the autumn, we should be up and running for all the elements of the package.

MR. KELLY: Awesome. Well, Professor, I can hear the bells here in the church down the street. We’ve just hit the noon hour, and I think you’ve been incredibly generous with your time, and even more generous with the information you’ve shared with us. I think it’s a very illuminating conversation.

I think we’ll end it here, and I want – again, on behalf of the Atlantic Council and the Deutsche Bank series, I want to thank you very much for your time, energy and insights. And thank you, everybody, for joining the call, and we look forward to the next call in the near future. Thank you, everybody.

DR. HEINRICH: Bye-bye. Thank you very much. Bye-bye.