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The Atlantic Council of the United States

Peering Over the Edge: Challenges and Opportunities for the Global Economy in 2012

Frank Kelly,
Managing Director and Head, Public Affairs and Communications – Americas,
Deutsche Bank

Frederick Kempe,
President and CEO,
The Atlantic Council

Robert Zoellick,
World Bank Group

Location: Washington, D.C.

Date: Friday, December 16, 2011

Transcript by
Federal News Service
Washington, D.C.

FRED KEMPE: Good morning and welcome to you all. I’m Fred Kempe, CEO and president of the Atlantic Council. I want to very quickly say hello and then begin the program. I am delighted there are so many distinguished guests with us, members of our board, members of the Atlantic Council, ambassadors – about a dozen ambassadors, and of course our guest of honor, World Bank President Bob Zoellick.

I do want to give Senator Hagel’s regrets. He very much wanted to be here to introduce his friend Robert Zoellick. He’s had some eye surgery recently and he had to go in this morning for a little bit more at the last minute. So he sends his regrets, and particularly personally to you, Bob. You’ve worked – you were kind enough to talk to his class this year, where he’s a distinguished professor at Georgetown University, and he thanks you for that as well.

So at this point I’d like to introduce Frank Kelly, a member of our board and managing director and head of communications and public affairs-Americas for Deutsche Bank. Frank’s a long-time personal friend, great friend and adviser both to me and the Atlantic Council and the Atlantic Council’s leadership. I also want to tip my hat to Judy Winchester from Deutsche Bank, who’s managing director of government affairs.

Frank’s been at Deutsche Bank since 2003, prior to that with Charles Schwab and Merrill Lynch. He’s also served in senior capacities at the Security and Exchange Commission, the Department of Justice, White House. People talk about soldier-statesman, he’s probably best described as a banker-statesman. So he has a distinguished career in both public and private sectors, and that gives him deep insight into the subjects we’ll discuss today.

I have tremendously enjoyed working with him on our Mapping the Economic and Financial Future speakers forum. This has been the flagship series for a great expansion of the work that the Atlantic Council’s been doing on global business and economics. The director of that program, Alexei Monsarrat, has done really a terrific job the last couple of years in building it up. And Frank will tell you a little bit more about the speaker series when he comes up.

I would just like to say, Frank, we’re awfully proud of this partnership and what you’ve – what we’ve done over the last few years. And it just keeps getting better. So at this point let me pass it over to you.

FRANK KELLY: Thank you, Fred. It’s a – I haven’t heard kind words about a banker in about five years – (laughter) – so thanks for breaking that (drought ?). As Fred said, I’m Frank Kelly, the managing director and head of communications and public affairs in the Americas for Deutsche Bank. Also a very proud member of the Atlantic Council Board of Directors and a proud member of the Council – been a member, I think, 25 years now.

This event is being held as part of the Mapping of the Economic and Financial Future Series that we’ve partnered with the Atlantic Council on since 2009. We’re very proud that you’ve joined us here this morning for our discussion with World Bank President Bob Zoellick. I should note that this is actually the second time we’ve had the pleasure of hosting Bob, who also gave an overview of the global economy at the depths of the financial crisis in December of 2009. Now we have you back to talk of the depths of the financial crisis of 2011. (Laughter.)

This adds to the growing list of extraordinary speakers that we’ve had – including IMF Managing Director Christine Lagarde, speaking – (inaudible) – this morning; Senator Christopher Dodd, the – he wrote the Dodd-Frank Act; several of the European commissioners and, of course, my boss Josef Ackermann, the chairman and CEO of Deutsche Bank – that we’ve gathered here to share on perspectives. And it’s been a wonderful opportunity to have dialogue on what needs to be done to keep the financial systems going after all this turmoil.

This year we’ve also been fortunate enough to host FDIC Chair Shelia Bair on futures and future regulation; European Central Bank Governing Council member and Finnish Central Bank Governor Erkki Liikanen on the sovereign debt crisis in Europe. We’ve also hosted several roundtables and conference calls, which have been very productive, with industry experts and policymakers to help understand the continually evolving future of the eurozone.

And on your way out this morning, I hope you notice the Mapping the Economic and Financial Future report on the tables outside. The report details many conversations we’ve posted as well as the expert advice given to us by our esteemed guests. You can also get a copy at the Atlantic Council – on the council website if you miss out on that.

Obviously, the ongoing crisis in Europe will play a major role in determining the speed with which the world recovers from the financial crisis. (With ?) the continued transfer of power to the global south and east as well as the political outcomes of the Arab Spring will have serious economic effects well into the future. Today’s conversation with World Bank President Zoellick offers us an excellent opportunity to discuss the many challenges that the global economy still faces as the calendar turns to 2012.

Now, introducing Bob – it’s a little hard because I think everybody knows him so well and he’s a man of great distinction. I’ll briefly run through his bio for anybody who hasn’t sort of watched world history for the last 30 years. (Laughter.) He is the elected president of the World Bank Group, which has 187 member countries. Prior to this he served as vice chairman at Goldman Sachs. And prior to that he was deputy secretary of state, where he was the chief operating officer for the department.

He’s also served many other positions – I remember him while he was trade representative (and ?) how he moved the global trade efforts further than I think just about anybody ever in terms of development – (inaudible). He has also served under secretary – former Secretary of State James Baker at U.S. Department of Treasury, where he was the deputy assistant secretary for financial institutions policy and also as a counselor to the secretary. He was at the State Department as undersecretary of state for economic and agricultural affairs, as well as counselor of the department with undersecretary rank. He also briefly served as White House deputy chief of staff.

For the folks in Europe, particularly many of my colleagues in Germany, he’s still thought of as a hero for his incredible work he did on the Two Plus Four Process for German unification. There’s not many people you can point a finger at and say he has brought a country back together. So he is also a graduate from Swarthmore College as well as having a law degree from Harvard Law School and a master’s in public policy from the Kennedy School, and has lived abroad in Hong Kong as well.

Bob, I’ll stop going through this. I’d just say that, ladies and gentlemen, the pride of Naperville, Illinois – (laughter) – Bob Zoellick. (Applause.)

MR. KEMPE: He’s (taken ?) my words. Bob, thanks very much, and I’m actually delighted that we’ll do this in a Q-and-A format, but having done this with you before I realize that I ask whatever I want to ask and you answer whatever you want to answer. (Laughter.) And so – and so we’ll try to do that. And then we’ll – and then we’ll come to the audience, so already think about what you want to do. I wouldn’t mind starting with a question that is tied to the news, but also tries to reach into your understanding of history.

Your colleague Christine Lagarde yesterday, the cover of Financial Times, warns of both economic retraction, the vice of protectionism, isolation – what happened in the 1930s, so warning of 1930’s style threats – and in a day when the French, who are essentially saying: Don’t downgrade us; downgrade the British instead.

The – so I want to ask, do you agree with that assessment of – you know, about the abyss of the 1930s sort of situation? But beyond that, we’re at the end of the year. This is the close of the year for this speaker series. Give us a feeling of what this year has been about – how might historians remembers this, what’s happened that’s most historically consequential about 2011?

ROBERT ZOELLICK: OK. Well, first, let me thank all of you for coming and supporting the Atlantic Council. And as you heard from Frank, I’ve been associated with it over many years; I think it’s a very fine institution. And I want to compliment Fred and Senator Hagel in particular because I think they really, again, give it a very strong agenda moving forward. And I also want to thank Frank and Deutsche Bank for their support of the institution. And I think the type of issues that you’ve been giving some attention to are going to be even more important, partly because of some of this – the question that you mentioned.

Fred and I enjoy history, as you know, and so one point obviously is that in some ways, since we referred to the German unification process in 1989, as you look back and see some of these potential hinge points of history, some are very clear and obvious at the time – ’89-’90 being one of them. Some, perhaps, are a little bit more obscure in terms of their implications, but I think we could be at one of those now. Another one, just to give the historical round out, would be Berlin, 1961. And if you haven’t read the book, it’s – I can’t compliment – I’ve read the book; it’s a really – it’s an extraordinarily good book.

MR. KEMPE: The check’s in the mail. (Laughter.)

MR. ZOELLICK: Christmas is near. It’s still time to get it on Christmas. (Laughter.) The –

MR. KEMPE: And you will get an Atlantic Council discount if you order it in the next one hour. (Laughter.)

MR. : One hour from now?

MR. KEMPE: Hour after the session is over.

MR. ZOELLICK: And so thinking a little bit about the context, I do think this is one of those periods where – and again Frank kind of set this up, it’s – but I think the extent of this financial crisis, along with other things that were occurring independently, have set up some very significant shifts. We can get into the details of them, but let me just put out a couple that I think have been on my mind over the course of the year.

One, (it ?) was very impressionistic at this G-20 summit that I attended at Cannes. And that was when after a prior EU summit, and if you recall, people had hoped that the European Union would be able to put together a framework for getting at the combination of issues, and then the Greeks announced their referendum and so things kind of went down from there.

I couldn’t help but be struck, watching the emerging market players at the G-20 – who of course would have never been in a G-7, you see; that’s already changed – and as they observed the Europeans, in a sense, move around in anxiety and uncertainty, there was a bit of pathos, a bit of pity for Europe in this situation. And just to connect it from a U.S. perspective, as I flew back I thought, I never want to see the United States in this condition.

Well, that’s certainly a (pretty ?) big change from even, you know, five or 10 year ago. Just to put that in a broader economic context, over the past five years, two-thirds of global growth has come from developing markets. And in the ‘90s that would have been in (the ’20s ?). So we’re seeing very significant set of structural changes in the world economy at a time when you have this crisis that’s affected Europe and the U.S. in particular.

Now, let me give you another one that, as you’ve touched on – (inaudible). Obviously there’s a lot to be focused on in the economics and finance of what – the eurozone issue. But I was – I’ve been deeply troubled over the past couple days to see some of the commentary going across the English Channel, and not only the comments from France but also some of the ones from Brussels and others.

I have to say, I’m very pleased; I saw that the SPD and the German debate actually made the point that people shouldn’t be so blithe about having a situation that leaves Germany on the outside, or leaves Britain on the outside of it. So there’s big political implications about these economic elements.

MR. KEMPE: I think – just quickly, what troubles you the most in what you’re seeing, you say you’re deeply troubled, is it the – (inaudible) – (frictions ?) among the Germans – or, excuse me – among the Europeans, or?

MR. ZOELLICK: Given that – and we can talk about this more, that I think that the economic and financial issues are far from solid – (inaudible) – continue to have social and political and economic stress – that when you start – that one of the great strategic successes over the past 70 years was the construction of Europe, which for centuries was in conflict, which was the crucible of world wars. And so I’m not remotely suggesting (let us ?) returning to that, but with a change of – passing of generations, and sometimes people may be a little bit sort of less respectful of the importance of having Europe at least work out some degree of cooperation.

And so, you know, negotiations often leave these tensions. But if the process that evolves out of Europe starts to create a deeper acrimony with Britain and kind of push it out of it, I don’t think that’s good for the – where the European Union will go. I don’t ultimately think it’s good for Britain. And even where people have differences, I don’t think they need to sharpen them in political terms.

And so I think this is now feeding into the French presidential elections. I think that it’s – obviously it will flow back into the British political process. And if people such as the leaders of the European structures that – also decide that they want to feed into these for sort of tactical negotiating purposes, I think they need to be very careful because I think you’ve got a tinderbox out there in both political and economic terms. You’ve got potential populism; you’ve got slowdowns that may run for a while.

So in a sense, it comes back to your point – (inaudible) – Christine Lagarde, one always has to be careful about historical analogies. I always liked the phrase that Mark Twain used: History doesn’t repeat itself, but sometimes it rhymes. (Laughter.) And I think what – what I think what Christine is trying to emphasis in this piece, and it’s a point that I have some sympathy for, is not only the – sort of the dangers of lack of sources of growth, but as you – if on top of that you have a frozen financial system, which you basically have in Europe today, it’s one of the things that our – (inaudible) – is trying to work on. I mean, you don’t – the inter-bank market is very frozen.

And then on top of that you get these populist political pressures that can start to lead to protectionism. That – those all add incendiaries, OK? And so, to bring this back to what I said in the European context, you know, European Union should be the last place we’d see internal protections. But now, you know, does this start to pose the dangers of some of those topics?

So, you know, I’ve been around enough negotiations; I understand positioning. But I’m also suggesting that at sort of keys points like this, where it’s sensitive, you want to encourage people to act at a higher plane of responsibility, where they’re trying to – as we did in ’89-’90, we were trying to achieve a certain goal within a larger structure. In ’89-’90 there were deep sensitivities about German unification. The U.S. was able, fortunately, to play a role in that context to help deal with French concerns, British concerns, others – Central and Eastern European concerns.

And so I think as I see the environment, I see a larger change in terms of the shifts of economic power at a time that I see the developed world in some turmoil, and if the economic turmoil weakens political influence or even political coherence, that becomes a much more dangerous environment.

Now, we’ve touched on the Arab world. That’s another, you know, huge set of changes. And I think, as an American optimist, I look at each of these and I can see how these could move in a positive direction – (inaudible). But nevertheless, that’s – the question will come down to political in terms of the leadership.

MR. KEMPE: Now, let’s start by trying to structure it in the following way and then if we want to do it a little bit differently, if other things come up along the way, that’s fine. But I think it would be nice to start with Europe, move on to China, emerging markets, U.S. and then I do think Egypt is of interest. But we’ll see how much we can get through before we go to the audience.

But let me start with Europe. In an excellent interview you did with the fall edition of International Economy – and I recommend that anyone here read that. It is a terrific – (inaudible). You said – and this is on Europe – I’m not against buying time, but how to use the time – the time for muddling through has passed. The real issue – the European Central Bank is deciding the future of the European economic system.

So why don’t you take us down – (inaudible) – Nobel Prize winner for the economy and tell me how when this, as you call this thing – (inaudible) – that, you know, first of all, is it an existential moment? And I – in (main ?) terms, I think this is the most existential moment for the eurozone since the creation of the European Coal and Steel Community.

If that’s the case, and if the problem is essentially the monetary union needs a political union and fiscal union, and politically you can’t achieve either one of those that – at this time, A, what are the – (inaudible) – unfolding? Where do you see them, potentially, and what system would you desire that would actually work knowing all of these vectors?

MR. ZOELLICK: OK. Well, let me play off a little bit your point about the Nobel economics, because it is an interesting launching point. That, of course, would be awarded for mathematical – (inaudible). And what we’re really talking about is the political economies. And that’s a very fundamental aspect of each part of answering your question.

And the second point is that I would be happy to discuss some of the elements, but because it’s a political economy pressure, the key point is the Europeans have to decide this. So the IMF or we or others can offer ideas, but this is as much a question about the future of Europe and its support of the democracies of Europe, with a very important economic, financial (stream ?) that runs through it all. You can’t separate the two.

MR. KEMPE: So perhaps if they can fix this, the leaders of Europe should get a Nobel Peace Prize for having economics –

MR. ZOELLICK: It’s a – (inaudible).

MR. KEMPE: Yeah.

MR. ZOELLICK: Now, to take apart the problem, one reason that, you know, it’s been so devilishly difficult is you really have to deal with three aspects at once. You got a sovereign debt issue, you have a bank issue and you have a competiveness issue. And up to this point, because of some of the challenges of European institutions, the response when they reach a crisis point has been providing liquidity, which buys time.

Now, what we’ve seen that I think is positive over the past three months is Germany – it’s some risk because everyone always encourages Germany to lead, and once it does then people take shots at it leading – has recognized that it needs to create this political/fiscal structure that was, in a sense going back to a prior hinge point, the unfinished work of the monetary union that came up after ’89 and ’90.

Now, I think where I see the problem coming out in the most recent summit is, first, there is going to be a lot of complications about sort of the legal arrangements – how big this is, the inter-governmental nature of the treaty. And this goes back to this politics point. You know, for example, some have said, well, France prefers the inter-governmental aspect. There may be reasons why – good reasons for that. But if that then gets used against other countries in a negative way like Britain, you’re buying trouble.

Second part of it is that, in addition to the legal aspects – while I’m sympathetic to the German interest in terms of trying to get fiscal discipline, one has to think about the timing, and how this is accomplished, and with what support mechanisms. And this runs the risks of the austerities of the ’30s. So I think what I would have liked to seen is, in addition to the discipline steps, you really haven’t seen a fiscal union – I mean, union means there’s transfers of support – and that can be done in different ways.

And this is where, again, it’s up to Europeans. It could be done through an expanded role of the – (inaudible). It could be done through some additional flexibility through the ECB in terms of buying bonds as – Marty Feldstein pointed out in the Wall Street Journal yesterday is that individual countries make their particular actions. And this will be particularly Italy and Spain.

But then the third element that I think gets particularly lost sight of in European discussions is, all this is a lot harder to do if you don’t have an environment of growth. And growth is often used in two different ways. One is, when you hear about sort of Keynesian fiscal policy, it’s the expansion of demand. And that is, under the austerity policies, that’s likely to shrink at a time that the developing countries have also been slowing down, so where does the demand come from?

But there’s another element to growth, which is what we spend a lot of time on in the – (inaudible) – world, which is the structural forms that will increase productivity. It may be infrastructure, it may be education, it may be training. It’s a lot of what Germany’s private sector was able to accomplish over the course of the past 10 years. And so the challenge will be, how do you put those elements together?

Now – so it’s not a question enough of just getting control of your spending, and dealing with your debt, and maintaining liquidity in the banking system as you do this. But for some countries in the south, it’s also a question of, if you can’t devalue, how do you achieve competitiveness? And there’s really three ways to do it. You can either have an internal devaluation, as has happened in Latvia, and it’s happening to a degree in Ireland. You leave the eurozone, which I think would be a very dramatic event, cause a whole bunch of other problems, and – (inaudible) – devalue. Or third, you get subsidized. And so I think part of this construction – my own read is that the bigger countries in Europe would be willing to support Greece if they continue to make the process.

But – what I wrap this together is, you know, unfortunately people are looking for a magic bullet. And there’s not going to be a magic bullet. And you are creating a construction. And you’re creating a construction in the midst of a storm. And so you need to be able to act on these multiple aspects, you know, the foundation, the girders, the, you know, the windows – (chuckles) – that (you’re ?) making it happen. And, you know, you don’t have to get everything right all at once. But I’m afraid where they’re a little short coming out of the most recent summit is the support mechanisms that will help with the fiscal stringency and the foundation for growth.

MR. KEMPE: But would you also – (with Greece ?), this is a political issue; if you look at the reality of the politics, the notion of a political union or a fiscal union being your answer at this point, you probably not – (inaudible).

MR. ZOELLICK: Well, I – I’m not sure I would agree with that, because I think – and again, this is for an American audience, so you have a lot of (people ?) here who (know ?) Europe quite well – understandably people say, oh, the German burgher is tired of bailing out everybody, particularly – (inaudible) – retirement age, they’ve offered the restructuring. But I think people underestimate is – and you know this (well ?) – the commitment of Germans to Europe. And it’s a core aspect of their identity, and it’s now part of (their genetic material ?).

What that means is – and this is where I think Merkel has tried to go – is to try to say, we’re not going to have constant bailouts, but this is fitting into a different political- and fiscal-union structure. But on the other hand, to talk about treaties and political and fiscal union isn’t enough. And that brings you back to the arguments.

MR. KEMPE : I quoted the (FT ?) in some of – in terms of equal opportunity, and my 25-year history with The Wall Street Journal – Wall Street Journal – (inaudible, background noise) – this morning’s – (inaudible, background noise) – mentioned a quote from Andrew Balls of Pimco: We are seeing (a ?) de-globalization and de-euroization of the eurozone; investors are going to back their own markets. Do you agree with that?

MR. ZOELLICK: I’m not sure exactly what it means, so what I would say is that – in the banking sector, as I already referred to, I think you’ve seen a frozen – (inaudible) – so in that sense, I don’t recall the context of that, but if (he’s ?) saying that, you know, U.S. money market funds and U.S. banks are not going to easily lend to European banks, or you’re going to have a dollar shortage – yes. We’ve seen that.

If he’s saying that nobody will buy sovereigns except sovereigns of that country, I’m not sure that that’s the case. I think that depends on the policy actions now that are to be particularly taken in Italy and Spain. You know, the Spanish actually had a relatively good auction yesterday. Now what could be – you know, it’s hard to read this – what could be happening there is the Spanish banks taking advantage of some of the ECBs’ facilities – could be buying the Spanish debt. And so that could provide some of the cushion that I talked about, but that will only occur if the newly elected Spanish government follows through on the fiscal measures.

So, where the – I think the Pimco quote is a – is a good warning, is that when you – when you start to lose confidence, you start to have higher degrees of uncertainty, then people are going to retreat to what they think is a safe assets, and this is what’s better for the model – (inaudible) – the dollars and their (treasury ?) assets. And there’s always the risk that people will just move to cash and sit on their cash. And so that’s where in addition to some of the pieces we’ve talked about – and this goes to the ‘30s reference – you have to be careful about the broader confidence effects.

Let me draw this – be patient with me for one other aspect of this that relates to the work of the (Dalton Company ?). I started to talk about the danger zone in August, and one reason why – and it’s coming out of the events in Europe in August, the uncertainties they were going through, the national parliament’s – (inaudible) – plus the debt-limit discussion here.

What we saw on emerging markets was very striking. Up to that point, emerging markets were part of a multi-speed recovery, and if anything – (inaudible) – was over (80 ?), so inflation. But all of a sudden we saw their equity markets take a big hit. We saw some of the currencies take a big hit. We saw some of the bond yields (decrease ?). And what I was and remain (uncertain ?) about is that if the confidence levels in those economies – the confidence of consumers – (inaudible, background noise) – comes down, then in this global economy, we’ve just made the difficult problem much harder.

Now the reality we’ve seen over the past month or so, there has been a slowdown in emerging markets. Much of this I think has been related to an appropriate tightening of policies to gather more fiscal space and to deal with monetary issues and inflation. But as we go into 2013, the question will be, you know, if there continues to be high degrees of uncertainty out of Europe, if there’s (risen ?) protectionism and conflicts in the trade area, then what does it do to business investors and their willingness to invest?

MR. KEMPE: It’s a very important – last question on Europe, as we come back to it (hopefully ?) later from the audience – ECB. The shifts in the ECB, if I read them correctly, have – Germany and France have the minority in the board, and the debtor countries are the majority on the board. Is this – is this one mark of change at the ECB? Does this ECB become over time more like the Fed? What would be your prognostication on that?

MR. ZOELLICK: Well, I have slightly different answers to the two questions. So one is, I’m not worried that the shift of – (inaudible) – membership changes the ECB’s policy complexion. I think the ECB – the members across the board see themselves as part of the central banker fraternity. And Mario Draghi is a superb economist, financier; he’s shrewd; I think he’s – would – will be very prudent in managing the policies of the ECB.

Now then, you then said, will it become the Fed over time? It has a different mandate, and it has a different mission. And so, insofar as it becomes a guardian of security of the financial markets so that they don’t lock up, I think that’s constructive. Whether it’s likely to have – to move to policies like QE2, I think that’s less so.

Let me be more specific. What Jean-Claude Trichet started, and which Mario has referred to, is something that I think markets are trying to read, but nobody has a complete sense. It’s quite clear that the ECB and, by their governing laws, they’d say they’re – they’re not there to buy the debt of countries and remove the fiscal pressure and just sort of become a – (inaudible) – or sort of an investor for Italian, Spanish or other (debts ?).

On the other hand, what the ECB had said is that to conduct monetary policy, it has to be able to have financial markets that are (operable ?). And if their financial markets freeze up, and we can’t get that monetary policy, then the ECB will intervene and buy bonds to be able to create the competence again for the exchange. And that’s exactly what they did in August, OK?

So what people in markets are reading is to say, well, how far will they go in that, OK? And that’s the uncertain question. But my own guess is, is that, you know – as a new central banker, I think Mario will be extremely careful about it, no matter what country he or others are from. At the same time, I – knowing him, and knowing his care, I’m hopeful that he won’t take stringency to a theology.

MR. KEMPE: Well said. Let’s head (up ?) to China, as the Obama administration might put it, (all ?) China. You’ve met – you’ve suggested this – I’ve heard this from Chinese officials, where you say, well, how are you going to handle the global financial crisis – (inaudible) – this isn’t a global financial crisis; this is a crisis of the West.

But there are two ways to look at this, and people are arguing between them. You know – (chuckles) – what are – some people are saying, you know, China just might have more (latitude ?). And in 2012 China’s going to play – (inaudible) – different role with the global economy, where it’s been – (inaudible). And that could shift. The other is, they could be a lifeboat for the global economy, a eurozone lifeline. You’ve talked some about the problems facing China: environment, banking system, financial system, role of the state, et cetera. Where do you come down? Hard landing, lifeboat – how do you see 2012 (in ?) China?

MR. ZOELLICK: OK. Let’s distinguish all our different elements. First off, China was overheating, and so some of the slowdown you can see with China – as you’ve seen with some other emerging markets – is understandable and appropriate. And, looking into 2012, it actually means that they may have some additional space to expand, whether fiscal or in monetary policy terms, which could be good for the international community if its role is (asserted ?).

On the other side is –

MR. KEMPE: Just – (inaudible) – like, domestic – (inaudible).

MR. ZOELLICK: Yes. And the U.S. economy’s been, you know, doing a little better than some people expected and it’s still (bumping ?) through, so it’s not a great source, but at least it’s not kind of – it’s not moving into a recession, which Europe could.

So in that sense, China is going through a slowdown. We’re going to see the implications of that, but it has more space. And this is important because, remember, when I – people still aren’t thinking in these policy frameworks. (So ?) two-thirds of the global growth is coming from emerging markets, and you’re looking at an uncertain 2012; it’s important to look at the fiscal and monetary positions of India, Brazil, China and others. And they’re – they – people tend to band them together, but they’re in different sort of policy positions. China’s probably got the most degrees of freedom.

Second observation. That’s very different than saying that China is going to bail out Europe. And so, you know, the average per capita income in China is about $4,000 a year; it’s a little less than $40,000 a year in Europe. I thought that at least the Europeans had made a mistake after one of the summits when they rushed off and thought that they could go to China with a begging bowl. A, I just thought it was bad for these bigger issues of influence – (chuckles) – and standing in the world. And second, the Chinese aren’t going to do it. They’ve got their own public (in need of ?) help.

What the Chinese would be willing to do, I suspect, (if you’re trying to decide ?), is that if Europe were able to put together some of these other elements, including the internal financial support, and it was linked to an IMF backing, I think that a number of the emerging markets would be willing to put some support into the IMF to do that.

And this, again – when you talk about hinge points and switches in the world – just remember, it was in the late 1990s that East Asians and Latins were blaming the IMF, and now they’re saying, well, I’m willing to put money in, but only if we can do it through the IMF, so we get some good (conditionality ?) on the programs in Europe. So that’s an interesting – (inaudible) – switcher –

MR. KEMPE: So under the right set of conditions, the emerging markets could rescue Europe. (Inaudible, cross talk.)

MR. ZOELLICK: I wouldn’t say rescue, because – this is where, you know, it’s kind of a journalists’ game. Europe has to rescue Europe, OK? And that – it’s very important, if there’s any message – when I’m asked, well, what can the U.S. do, or what can China do – the best thing they can do is clean up their act at home, be a source of growth at home, and then secondly, be a source of confidence to the markets. Europe’s going to have to rescue Europe with its – I think that the emerging markets, as part of responsible stakeholders, would be willing to do it through multilateral institutions. (I think it’s just ?) – (inaudible).

But the third part about China, which I’ll emphasize because it’s – (inaudible) – working with them at the Bank, and I think it’s got some longer-reach implications. The Chinese themselves have recognized that the 10 percent growth that they’ve had for 30 years has been based on an export-led and investment-led model. And they realize that’s not going to continue to work for the future. So we did some projections with them, and by 2030 I think, (you have ?) the same approach would be like adding 15 South Koreas to the world economy. It’s going to be a little hard to see how the system adapts that under an export-led, investment-led program.

So the Chinese have talked about this in their 12th five-year plan, the rebalancing, the domestic demand and others. But it’s not so easy to figure out how to do that. So the Bank has actually been working with China on the project over a year, and it will be released in – (inaudible) – with China in February. And I think the new leadership is looking to use this, as they have their transition, to say, now, what are the types of things you need to do to change the structure of the economy to achieve those goals?

And there’s huge, interesting possibilities here – not only in pricing (of ?) natural resources, changes in the financial sector, changes in the service sector (that could allow ?) competition. And, rather than getting into all the details of those, I’ll just say, I am pleased that China – for all its success over the past 30 years – is – at least has the presence of mind to say: We need to undertake structural reforms because we can’t just keep doing what we’re doing. Because one might ask whether Europe and Europeans and U.S., where it hasn’t necessarily been so good in recent years, maybe they ought to be thinking about structural reforms – (inaudible).

MR. KEMPE: Very, very interesting, again, to hear each point – (inaudible). Quickly, last question on China so we can move on – you asked deputy secretary of state – and if I’m not mistaken, you invented the term stakeholders, and the Chinese had a great deal of some trouble translating –

MR. ZOELLICK: Responsible stakeholders.

MR. KEMPE: – responsible stakeholders, responsible stakeholders. As you see them, and how they’ve moved since then, are they looking to join the current world order and integrate within that, or do you see, when they grow more powerful, that they’ll want to (probably ?) fundamentally change the global economic system and how it works?

MR. ZOELLICK: Well if you consider international trade patterns, if you consider international commodity prices, if you consider what’s going on within the world of – (inaudible) – if you consider international investment backers, if you consider East Asian security, they are part of the world order. It’s a little hard – (inaudible).

So I think the challenge will be – and this is – this is again, when we talk about hinge points – just to back up a little bit, you know, I became trade representative in 2001. Now we’re at the end of 2011. Ten years. In historical terms, that’s a relatively short space of time. But what I’ve seen happen in the context of trade, investment, commodity prices, and the role of the emerging markets, has been huge in terms of the shift.

But the challenge of integrating them – and this is exactly what you saw in Durban and you see in Doha and others – is, to what degree should they assume the same responsibilities as the developed countries – or maybe the same responsibilities in some areas but not others – when – and many of the developing countries say, look, we still have two-thirds of the people living under $2 a day. You know, so, if you go to Beijing and Shanghai you get one view of China. If you go out to (Guangzhou ?) province, you go out to other places, you get a very different condition. And, not surprisingly, you had to – (inaudible) – India. I mean, a number of the Indian states have development characteristics that are lower than African states.

And so, on the one hand, this is – (inaudible) – you’ve got this great potential. You’ve got growth, you’ve got dynamism, you’ve got new possibilities for cooperation and sharing resources through the IMF, private investment. (Our whole world ?) of development is increasingly becoming South-South sort of models as an example for whether business or development patterns. They’re contributing more to the system.

On the other hand, you’re going to have huge negotiations and debates about what’s the proper burden-sharing. So if we take this back to the context of the Atlantic Council – I remember a lot of meetings with Europe or NATO or others talking about burden-sharing. And everybody would say, well, let’s make it responsibility-sharing instead of burden-sharing. And so this is kind of – that’s the platform for these discussions we’re going to see over the coming decades, and just to connect that to where you started with Europe and my story about (cotton ?).

OK. So you know, these 50 to 60 years of American strategy being based on Europe as a partner and that the kind of the Atlantic Council, the trans-Atlantic relationship – what do you think it does to Europe’s role as a center of norms and rules and influence in the international system, when the emerging markets – (inaudible) – watching – (inaudible) – not being able to get their act together on the most basic fundamentals? Now, I don’t mean to be too harsh on that. Europe can justifiably point to its leadership role on various areas, but when you think about trends in power (and ?) influence, these are going to be significant. And so it’s all the more reason why, on the positive side, if you take that political and fiscal union and actually have a feasible map to boot there, and don’t do it in a way that breaks up Europe, you could come out better. But it’s not going to just happen on its own.

MR. KEMPE: That’s a good point to (give it ?) to the U.S. I’ll make this question quite simple. What concerns you the most looking 2012 – the U.S. we were talking about – (kinds ?) of power and influence? Some people – a lot of people – already see relative decline in the U.S., but that’s not so troubling. Do you see something more concerning than that? So that’s the – you know, what are you concerned about most? And of course, you mentioned this really interesting picture of how the emerging markets were responding to Europeans. Do they truly not respond a little bit – (inaudible) – at the U.S. not only – look at the U.S. and how it’s handling its political – (inaudible)?

MR. ZOELLICK: There’s some of that, and part of it is because the financial crisis. We’ve seen that badly in – (inaudible) – emanated out of the United States. But for now, there’s still a sense that the United States is a place of great innovation, technological prowess, creativity, ability to reinvent itself. It’s always covered – it’s confusing for others to appreciate because the turmoil that’s part of the American freedom and dynamism looks very disruptive, but it’s also the source of creating, you know, the Apples, the Microsofts, the Facebooks, the whole series of biotechnology and other types of things – but now, has to be based on some fundamentals.

(And so to go ?) – what I’m worried about is, is that the U.S. also faces some structural challenges. They start on the fiscal side, and so, you know, whether the entitlement – right, so Congress – the good news, Congress is focused on discretionary spending, but discretionary spending is not where most of the dollars are. So, so far there’s not been a unified or, at least, an approach where you have a critical mass dealing with Medicare and Social Security issues. Certainly encouraging yesterday to see the Paul Ryan proposal with Senator Wyden that’s trying to bridge some of the partisan differences in a structural way on some of the dominant issues. And also, (similar ?) on the tax reform side, I’ve worked with (banker ?) in the 1986 tax reform. I think it was very important as a source of incentives for growth, in terms of trying to flatten the base and lower the rates. There’s a mood out there to do those things.

So without getting into all the details, what I’ll just say is is that people talk about kind of the partisanship and divisions, and it’s impossible. Whether fortunately or unfortunately, I’ve been around long enough to know there was a debate like that in the 70s, and people said: Oh, we need one-year presidential terms – (inaudible) – presidential terms, six years – (inaudible) – dysfunctional. I urge (them ?) to read the Constitution. It’s not designed to make it sort of like a parliamentary system. But under the right leadership, it can work.

You just had all the appropriators, Democrats and Republicans, put together a trillion-dollar spending deal that managed to show that things can work. But from what I’ve seen is, it doesn’t work unless you get executive leadership. The Congress by itself (didn’t do it ?). And so do I expect much of that 2012 with the election? No. But after 2012, whoever is elected, that’s going to be very important because the United States still has tremendous reserves, innovation, possibilities. But if you ask about another event of 2011, I’d say the downgrade of America from AAA didn’t affect the finances today. But that may be one of those events people look back on 10 years from now, and they say: Did they get the warning? They pay attention, or did they continue to do what they were doing? So I start with the sort of what I mentioned that –


MR. ZOELLICK: – in reference topics, but I would also say there are structural issues in the United States too, in terms of competitiveness. And those – just as I talk about it in the European or the developing country context, this was partly on my mind this week because I had the chance to talk with Erskine Bowles yesterday, and I just think what he’s done is fantastic – and he and Al Simpson. I mean, they – they’re marking out pathway – (inaudible) – and they’re actually bringing (said ?) Republicans and Democrats together. But it will not coalesce without presidential leadership and – (inaudible).

MR. KEMPE: So I’ll watch for – (inaudible). Just to make clear to this audience, it really strikes me as though you’re saying, in this double crisis in West – U.S., Europe at the same time – political and economic on both sides, you have existential concerns or more existential concerns – (inaudible) – don’t want to put (too big a ?) – word there – Europe because they’re – (inaudible) – trying to create their system, while you have concerns of much lesser nature about the U.S.

MR. ZOELLICK: My concerns about the U.S. are serious. I don’t think they’re quite as time-sensitive, and I don’t think they’re quite as tenuous in terms of sort of immediate market reaction. But one reason I emphasize them is, you know, I can’t say five years, six years, seven years, but at some point, you know, it’s a country that God has smiled on, but, yeah, I wouldn’t bet on it forever if you don’t do the homework at home. But the other thing I’d just include especially in my analysis is, you have this crisis, and its effect on the political economy and financial issues and structural questions and Europe and U.S., I might add – (inaudible). But then also, it’s the upward trend of emerging markets. But this is – this also offers huge possibilities.

So you know – and if you talk to American businesspeople, they don’t – can’t begin to start their strategies without thinking about how they’re going to be positioned in these markets. Growth can be a good thing, opportunity can be a good thing. But if you’re thinking about any of these global topics from climate change and economics and trade to security, you have to change the model that one might have had in an earlier time at the Atlantic Council where the trans-Atlantic sort of access was the (critical ?) – (inaudible). And so now, looking to the future, which is why Atlantic Council plays an interesting role here, is for Europe to be that partner with the United States and for the U.S. to be that partner with Europe, both sides are going to have address some of their fundamentals at home.

MR. KEMPE: We were saying on the Atlantic Council that our organization has rarely been so strong at a time when Atlanticism has rarely been so at risk. Moving on to my last question – (inaudible) – General Jones earlier this week at the Atlantic Council – General Jim Jones, former national security adviser to Barack Obama, said: A country in decline is one that knows its problems but doesn’t address them. So let’s go to the Arab Spring. My last question: How does all this affect that? And I guess specifically, in the interest of time, let’s focus on Egypt: foreign reserves depleted; you’ve got the talk of austerity measures that’s driven down stock market; you’ve got a – you’ve got a great many economic (problems ?) potentially threatening the political transition.

MR. ZOELLICK: Well, before I say Egypt, I just want to talk a minute about Tunisia and Morocco because, from my experience with the emerging markets and watching growth and development, I think it’s important not to underestimate the role of – (inaudible). So if you look at the history of East Asian development, you know, it started with sort of Japan, Korea, Taiwan, Hong Kong, and – but now, you know, it goes to the Vietnams. And for policy leaders – and I’ll say this again, you can have the best economic textbooks, you know, go to the finest universities, but policy leaders ultimately have to make these political economy decisions, and they see what works, the – (inaudible). And so, since you believe that the sort of the Arab transformation is going to be a longer term – (inaudible) – the importance of having Tunisia, and which is a revolutionary change in Morocco, and – (inaudible) – fast (evolutionary ?) change could be very important in – (inaudible).

But to come to Egypt, I actually saw some statistics last night from Oxford – (inaudible) – that showed that some of the manufacturing and some of the banking issues, there’s some better news. But you’re right. The large – the overall macro story is one (of ?) stress. I think what one is going to see here is the process of the newly elected legislature coming to terms with the SCAF, the military. And it looks like under the decisions they made more recently – they’ll come to those decisions more quickly, which is a good thing.

And do we expect ups and downs and twists and turns? Yes. I think it’s uncertain to know what economic policies that they would follow. I think that they would probably find themselves in a stressful – (inaudible). We at the World Bank are already trying to help with things that are job-creation – (inaudible) – investment models. They’ve been worried about – with some of the new parties about the image of debt, whether from the IMF or from World Bank loans that (go to the budget ?). But there’s also opportunities here because the same social movements, the same technology, the same social accountability that created the Arab Spring can be there to improve the performance of governments in delivery of social services.

Again, without getting into the details, huge innovations about how you can without – because of technology, you can connect your community response to the delivery of services. And again, most of their models come from other developing countries. So the bottom line for Egypt is, I don’t expect this to be their – (inaudible). America sometimes want to solve problems (quick ?); this one’s not going to be solved quickly. But I also think that, if I look at the overall direction of change and the possibilities that come from these – (inaudible) – talking about Libya or Syria or others – these are enormously positive, but again, they won’t just happen on (autopilot ?).

MR. KEMPE: But the short-term is tenuous?

MR. ZOELLICK: Yes, I think – (inaudible).

MR. KEMPE: And have they shown more willingness now to work with the international financial institutions than was initially the case – (inaudible) –

MR. ZOELLICK: We’ve always worked with them. What you’ve had is – you had some of the ministers that were worried about their own political agendas. (Inaudible.) And so there was their position with the staff on the street, and so this is where we have to customize. We’ve tried to adjust the types of programs we did that could meet some of their political constraints, while continuing to be support and while continuing to be positioned to help further.

Now, this – in the case of Egypt, one, we may actually – (inaudible) – our private sector, been able to some more private-sector investments. One of the key issues will be kind of whether how quickly, as you will or preferably should, sort of clarify who you’re doing the business with. And that’s a problem because it’s hard to invest (with ?) people if you don’t know whether they’re going to be in jail the next day. So that’s – that’s something that, you know, by actually moving a political process more quickly, as they did in this most recent set of changes, was good work – (inaudible).

MR. KEMPE: Thanks very much. A fascinating (set ?) of answers. Please, and if you could identify yourself.

Q: (Off mic) – I just retired from Chevron, and just a few months ago retired from the Senate Armed Services Committee. I’d like to pivot to Afghanistan. With all the complexity the world finds itself in now – and we, the U.S., and our allies just recently disengaged militarily from Iraq. We’ll be in Afghanistan for some time to come. Your recent article on Afghan economic development, I thought was (precedence ?) – interesting. How has your thinking on that subject changed or modified at all in the last couple of months, and what does the Bank – (inaudible) – seeds of economic development of Afghanistan, which right now falls under – (inaudible)?

MR. ZOELLICK: A great question. And very much part of the trans-Atlantic community and very timely because some of you may know there was just a conference in Bonn on some of these issues, and we ended up being – the World Bank being one of the key facilitators because we work very closely with the ministry of finance and others to try to deal, at the biggest level, with the idea that if you’re going to have a security transition, you need to have an economic strategy of transition as well. And just to – there are many aspects of that, but one of the basic services we perform is to say: Well, given the expected growth, given the expected revenue you (should ?) have from the government, and given the expected buildup of the Afghan military forces, there’s a big delta between what the Afghans are going to be able to afford and, at least, what some of the plans were for paying for them. And so it’s a simple question, which is that, you know, either commit to pay for it in years to come or don’t build it.

And so this is a wonderful example where what we’ve seen in many conflict or post-conflict states is sometimes the security agenda, the economic agenda, the political agenda aren’t inter-connected. And it’s a – it’s a very useful and interesting example. I’ve actually was working with both – with the State Department, NSC, and the Treasury – the U.S. government – (inaudible) – now recognizes the issue.

Now, let’s go a step further. In terms of the development process in Afghanistan – and this was new to some of very (early ?) people from – (inaudible) – on the ground – (inaudible) – urgent, but it wasn’t my initiative – we’ve been more successful than most by learning a lesson of other conflict states that you have to try to – if somebody wants – (inaudible) – you have to sort of deal with the capacity of the country that you’re working with. And this sounds obvious, but, in so many developmental nations, people are urged by congress or other outside parties to get – (inaudible) – results. So they – they’re not all that separate.

We’ve been channeling our resources through the Afghan budget, and that means (striking ?) – (inaudible) – budget. And we designed programs that they reflect the capacities that comes up – I can give you an example. We’ve done a lot of interesting things with this national solidarity program in health and education. In health, we found an honest – (inaudible) – the importance of – (inaudible). And because the capacity of health ministry is modest, the program runs through the Afghan budget, but it’s outsourced through international and Afghan civil society groups. And they basically – they’ve done a tremendous jobs in terms of basic preventive healthcare and reducing infant mortality, maternal health. Now, we need to replicate this across other areas, and we’re trying to do that now with the government and agriculture.

Now, on the positive side – and this is for the broader stability – there’s a very good, relatively recent mayor – (inaudible) – minister of (mines ?), and we’ve been working with him on procurement that is transparent, fair and honest. And it’s interesting – you now have Chinese, Indian, and Canadian sort of successful bidders in the process.

Now, I was talking with one member of the U.S. Congress, and he said: Oh, geez. So the Chinese are now, you know, investing – as if it’s a bad thing. And I said: Well, won’t this actually increase their interest in stability and security in Afghanistan, so someday if we want to go, wouldn’t that be a good thing? So then, how do you connect this with the infrastructure regionally, which will be another set of issues. And of course, since the real question there over time is Pakistan, can we get Pakistan to understand how this is in their economic interest?

So Afghanistan, at its most basic level, you know, still remains a very poor country. There are major issues of corruption, but what I’m actually pleased about is, from the Bank’s experience on the ground and in also highlighting some of these policy issues, I think some of these questions are now an important part of the coalition and U.S. debate, and I think they’ll – they’ll lead up to the next NATO summit. And so – but the key message is: If you’re going to have a transition, you need to have an economic strategy as well as a security strategy.

MR. KEMPE: Thank you for that. We are watching – you work very closely with – (inaudible) – who’s – (inaudible) – advisory board, and we’re watching also that shock moment when the U.S. does start receding because there’s so much economic impetus going in just from our transfer – (inaudible).

MR. ZOELLICK: Well, that’s exactly – just to take one more home, and I’m just – what we’d also highlight is what we call the negative multiplier – (inaudible). So in other words, if you take a lot money out, you know, what’s the effect of taking money out? Now, that opens up – the question is, can you spend the money that you have in a way that actually supports the Afghan economy a little bit more? This is, you know, easier said than done because it depends on the provision, but a lot of the money that’s been spent from U.S.-Afghanistan hasn’t been spent on Afghanistan. So as the money comes down, we and others do this in a way that creates an offsetting multiplier.

MR. KEMPE: Please.

Q: My name is – (name inaudible). I serve as an advisor to the – (inaudible). (Inaudible) – it seems to me this would be a very delicate year when you look at the issues in Iraq, Afghanistan, the eurozone, and there’s a lot of challenging tasks, and you expect that people who have their hand on the wheel would be very steady.

At the same time, you have the domestic election coming up in the U.S. where even the executive leadership has been focused a lot on domestic issues. The debate – as an outsider, when you listen to the debate in the U.S., it doesn’t give you – the political debate – it doesn’t give you the sense that the issue is that we don’t – (inaudible) – to be concerned about, especially given what 2012 might look like, are we front and center in this debate? And so are you concerned at all that when there’s such a need for leadership, that the U.S. may be absent? And – (inaudible) – if the Republicans do win, do you think you’d be more – (inaudible) – the secretary of state or secretary of treasury? (Laughter.)

MR. ZOELLICK: I think I’ll prefer to check.

On the first question, the – as we just discussed, probably the most important thing the United States can do is get its economic house in order, and I think it’s very much part of that debate. So where I’ll (lead ?) that is the way that I mentioned to Fred, is that I think you’ve got some people – interestingly, people that – Bowles, Simpson, some of the things that Ryan and Wyden are coming up with that will – (inaudible) – up possibilities. And still, whoever is elected, I hope that they take advantage of these and focus on them, not only because they (will deal with ?) America’s economic strength and resiliency, but I think they will also (deal ?) with these somewhat more amorphous but important sense of America get its house in order and its influence and its power in the world as ultimate leader – (inaudible) – around the world depends heavily on economic strength and capability – (inaudible).

Having said that, I don’t mean to suggest by that that – (inaudible) – this come home America – one of the references that I point is – (inaudible) – is that in 1947, the per capita GDP was about one quarter of what it is today, the United States was able to engage quite – (inaudible). So if we’re four times richer, I would think we’d still be able to walk and chez gum at the same time.

So then it’s a question of the nature of the international engagement. And here – you know, I think that – (inaudible) – U.S. and there’s issues – (inaudible). Protectionism always worries – (inaudible) – administrations that it’s better – (inaudible) – offense than on defense – (inaudible) – syndrome and so that wouldn’t be a submission. I think this so-called – the pivot, East Asia, I sort of understand the idea about people recognizing the U.S. role in the Asia-Pacific, but again – (inaudible) – walk and chew gum. The United States can’t leave Central Asia either, so one has to be a little careful not – you know, for all the message that people think it sends about engagement – (inaudible) – be careful – (inaudible) – a message about disengagement in other parts of the world.

So, you know, I think that the nature of political debate about foreign policy sometimes will sharpen some elements that will make it challenging for Americans – (inaudible). My own sense is that foreign policy is not going to be the dominant issue – (inaudible). It’s going to be what happens to the U.S. economy.

And then – (inaudible) – Saudi Arabia, I’ll just say, you know, the nature of democracies – (inaudible) – these transitions, and – (chuckles) – but Saudi Arabia also – (inaudible) – nature of a transition.

MR. KEMPE: Thank you for that. And I actually thought you might say, instead of endorsing Bob Zoellick for his next job in a Republican administration, I thought you were going to say, in the interest of bipartisanship, if Obama is re-elected he should also – (inaudible). (Laughter.) (Inaudible.)

MR. ZOELLICK: (Inaudible.)

MR. KEMPE: (Inaudible.) Yes, please. Way in the back. (Chuckles.) Please. Please.

Q: Hi. Joe Basco (ph), national security – (inaudible) – consultant and retired from DOD.

Several, Mr. Zoellick, you’ve made the point that economic issues fundamentally depend on political resolution and political will. And then, in response to Mr. Kempe’s question about China as a responsible stakeholder, it wasn’t clear whether you thought it intended to be integrated in the international community or to change it. So – (inaudible) – the political question to China itself, do you see a hope for actual integration in the international community as long as China’s political system is authoritarian and out of sync with the rest of the world?

MR. ZOELLICK: Yeah. Thanks for re-raising – (inaudible). (Inaudible) – I try to listen closely to Fred, but he asks these multipart questions. And it’s kind of good, because I can pick the ones I like, but sometimes I have a hard time because I forget, but – and that was one that I should’ve – (inaudible).

Let me distinguish the economics from the political/security/military. (Inaudible) – at this point the colleagues – (inaudible) – as well. I think the good news is that over 30 years, a depth of interconnections on the economic side are rich enough and extensive enough that we should be able to manage the tensions and problems and find some mutual interest. Now, I say “should” because I worry, for example, about Internet protectionism that we’ve started to see break out. I think there’s tensions arising from this.

And I’ll just again mention, I had some mention that we’re trying to do on the structural changes in China to create lots of win-win opportunities, and I think there’s a – there’s a dialogue among Americans, Chinese, Europeans and others that we create a process for that on the economic side.

Now, I could take this further, you know – (inaudible) – with climate change and other topics. And I guess I’ll just make this reference point: What my experience has been is that China is a – had a very strong sense of national interest, as many other countries do. If you work with China – (inaudible) – often find a broader sense of national interest and include the systemic interest. And I’ve done something with them at the Bank again without getting the details – (inaudible) – worked on this, but you have to know how to do it with them in a way that’s not embarrassing, and this is the – (inaudible) – that tries to bring them along. They (should do it ?) with allies as well.

But I want to get to the political-military side. That’s the one I’m more concerned about. And I’m concerned because I don’t think that the world has the depth of ties with China on the pol-mil issues. And I’ve been switching with the adjective a little bit because I’d encouraged actually some of my Chinese counterparts, including Dy Big-wong (ph) on the – (inaudible) – to get the military-to-military dialogue going, which has happened. But I don’t think it’s enough. I think what really needs to do is develop is the pol-mil dialogue, as the United States has with Europe and others. And that may be a little structurally hard in the Chinese system, given the role of the central military committee and the fact that there’s only two civilian – (inaudible) – and Kae Jae-ping (ph).

So I think that’s a bigger issue because I think what – (inaudible) – seen over the past couple of years – (inaudible) – where there have been some overreach – shooting down satellites, some of the things in the South China Sea, some of the other actions with Japan – I perceive that they’ve often been sort of part of a PLA policy – (inaudible) – others might have wanted to regulate it, but they couldn’t really regulate it until there was the overstep. That’s not an ideal way to work in a system.

So I think, over time, in a way, the types of discussion – (inaudible) – talking about Southeast Asia with the sea lanes, and, more importantly – (inaudible) – that actually could be structurally useful to try to get the Chinese to recognize the mutuality of interest in working these out in a way that don’t increase tensions in their neighborhood. So in that sense, the U.S. policy of their working – (inaudible) – and using the East Asian summit to try to kind of point out to China the dangers of an – (inaudible) – of approach in terms of the sea bed resources. I think it’s a useful of pushing that design – (inaudible) – U.S.

And another security issue – you know, you’ve got the six-party talks in North Korea. And in that sense, China has been engaged – (inaudible) – engaged constructively, how much is the – (inaudible) – North Korea. I would like to think that over time, that China could recognize that its own security instability interests would be better served by changes in North Korean. And I’m not sure we’re there yet.

So as you – (inaudible) – this in the responsible stakeholder concept, remember the idea was basically to get China to recognize that it had (benefited ?) from the international system, and therefore, it has a stake in trying to encourage the further development and support of that system.

The benefit, from the U.S. point of view, was, the U.S. was one of the creators of the system, and – (inaudible) – the U.S. was partly the one (to judge ?) responsibility. So that’s not a bad position to be in.

Now, the Chinese recognize that as well. And so I think part of the challenge is getting them to see self-interest linked in to the system. And I see it more on the economic so far than I see on the security side, not that, you know, we’re at a – (inaudible) – point, but I think that this is going to be one the (big things ?) to watch over the next decade.

MR. KEMPE: Interesting distinction. I – we’re getting toward the end, so I’m going to pick up the last three questions. Maybe I’ll take them as a group and then around back. Please, near – (inaudible) – and then here. I saw that there were a lot of people with questions up. I’m trying to – (inaudible).

Q: (Inaudible) – Department of Commerce. You might want to save this as the last of the three. But my question is, put you put back on your development economist hat? And does the president of the World Bank respond when a Nobel – (inaudible) – economist – (inaudible) – I believe that the Financial Times – (inaudible) – and he’s very concerned with austerity in South Europe and the fact that it (invites ?) – (inaudible) – U.S. You did say that you felt that the financial and economic crisis, we’re still in the midst of it after three years – (inaudible) – two years, three years – (inaudible) – seven years in order to straighten this out. And then the real question is about your view of austerity – (inaudible) – development economics. Thank you.

MR. KEMPE: Let’s focus on the austerity part. Please – I saw a whole bunch here. Yeah.

Q: My name is Indiosk Haki (ph), and I’m a doctoral student of economic policy at the George Washington University.

Many people believe that U.S. has been hugely benefiting from – (inaudible) – the U.S. dollar is around international reserve currency, but – (inaudible) – changing. How do you realize the future of the U.S. dollar as an international – (inaudible) – currency? Can we say that – (inaudible) – not politically, but economically – (inaudible) – with many – (inaudible) – national reserve currencies? Or maybe we can go to the extent of having a neutral international supported World Bank, an international institution’s currency?

MR. KEMPE: Thank you. And last question right here. Please. And I apologize for those I didn’t (catch here ?).

Q: My name is Son Chin-choi (ph), Langem Partners (ph).

Could I follow up your commenting on EU and in China issues? And you clearly point that China will not participate eurozone bailout and their preference is going through IMF. My question is, A, our own government, (as well as ?) U.K. government – (inaudible) – on participating broader additional funding in the – through the IMF. Second question is –

MR. ZOELLICK: Did you say U.K. or U.S.?

Q: U.S. and U.K.

And second question is, there is a political – I guess political fatigue among the word (letters ?). And one of – one of symptom is (that ?), yesterday – (inaudible) – that the – how the eight rating agencies treating France. And he commented quite negative of U.K.’s issues. I would be interesting your views on Internal Commissioner Michel Barnier’s recommended suggestion, how to deal with a rating agency? And would you offer your views?

MR. KEMPE: OK, so: austerity, and particularly in respect to Southern Europe; U.S. dollar; and then this final question that you just heard.

MR. ZOELLICK: OK. Well, interesting enough, many of the – one needs to have a sensible fiscal policy. And that includes, you know, what sort of deficits you were on and your debt position. Coming out of the late ’90s, the developing countries appear to have done that better than many of the developed countries, OK? That goes a little bit to some of the issues I mentioned about fiscal space.

So as I have suggested, that if you were out of whack on that, is, you are going to have to be able to sort of cut your spending, be able to reduce your debt. But as I tried to suggest, it’s very hard to do that in an environment where everybody is doing it.

And so my – from a larger point – and I’ll use this to transition to your point about Central (and) Eastern Europe and the Balkans, I think we as a development institution can play a role and are trying to play a role by identifying where some of the weak points would be.

So in particular, as the European banks have higher capital requirements, I’ve gotten very worried that the approach is going to be that they are going to shrink their balance sheet as opposed to add capital. And in the world of trade finance, for example, we are starting to see it run off quite quickly. And this is affecting many of the European banks – the French banks, for example, played an active role in West Africa.

And the trade finance is a rather set of labor operationally intensive business; it’s not so easy to replicate. So what we did at the start of the crisis in 2008 and (200)9 is, through IFC, our private sector arm, we created some facilities to help leverage these institutions to stay in those markets. Now, part of our role will be to continue to provide such activities, but also to encourage the European governments and the European bank regulators to understand the implications of these things. And so either we or they or others can try to help offset. This is also true in the Balkans and Central (and) Easter Europe, so we talk about security issues.

A lot of those banks are owned by European and, in many cases, Austrian banks. So in 2008, I gave an interview – it became a front-page story in the Financial Times – worrying about the fact that people were not going to keep the Austrian and other banks in Eastern Europe. And it put – it kind of became the catalyst for something called the Vienna Process. Well, interestingly enough, you know, a month or so ago, the Austrian banking authorities were telling the Austrian banks to pull out as opposed to how we could work with them to stay in. We’re countering that, and in January, we’re trying to put together the EBRD, the EID (ph) and some of the other institutions.

So it – the point is – some people act as if you can avoid some of the cuts. You can’t avoid it, but you need to be aware of what you can do or what the implications of this will be for the – for other players, whether in the developed or the developing world, and try to figure out how to offset it. And as I also suggested at the macro level, it’s kind of hard for everybody to be austere at once. And also, this goes to some of the fundamentals of the structural reforms (abroad ?).

Now, in terms of the dollar as a currency, I believe the dollar will remain the principal reserve currency. This is not something that is done at international meetings; it’s done by markets. And if you would ask yourself, well, where else are you going to go, right now the euro’s got some uncertainties. The yen has never really had as broad-based a financial market. The pound has become a smaller player in the system. You might like to go to the renminbi, but it’s not open capital market system, so you can’t go there. So the reason – you know, so the dollar has actually been – (inaudible).

Now, having said that, I’ve also wrote earlier in the year (in the FT ?) is that, you know, none of these things are preordained and last forever. So it depends on the quality of U.S. policies. And I believe that over time, that goes back to both the combination of the fiscal and monetary policies.

I would – I believe, along with this multipolarity and the international economy I’ve described, it would make sense if, for example, China moves towards internationalization and an open capital account, and some of the structural changes we’re talking about I hope will make it easier to do so. And in that environment, then the international system has to think about how you would have multiple-reserve currencies. And that’s one of the things I’ve tried to outline in this piece. So while it’s not the immediate issue today for the U.S. and for others, it’s something (to be trying ?) to think about the future design as we get out of this problem

Then the question about the U.K. and the U.S. first on the IMF resources: The – you’re correct; the U.S. is in a difficult position for – and it’s slightly technical, but it’s an important reason to (recognize ?). The – one reason why you find it easier for some countries to say, we’ll pledge resources to the IMF is, they do so through their central banks, and it doesn’t have a budget effect; they basically – they make a loan and they get an asset that they put on the (Bank ?). The U.S. has a credit reporting act that dates back from the early ’90s that has to have some appropriation for any of those investments, OK? And it was the idea that Congress used to avoid giving grants, and they’d give loans, and then the loans would be forgiven so it was a backdoor way of actually figuring out kind of how to run a more disciplined budgetary policy.

So at the start of the crisis, when the U.S. joined what was an expansion of IMF resources under a special agreement to borrow, they did an – the Congress did an appropriation. They’re – under the agreement of the IMF parties, there’s going to be a quoting increase. And so one of the things I think that the administration was hoping was – is that the money that had already been appropriated for the – I forget whether it’s general agreements to borrow or new agreements to borrow, but the special borrowing they could then use for the quoting increase.

It appears there may be a need for a little bit more of appropriation just because of the way that the Congressional Budget Office rules on this, and they’ll have to get that. And that’s, I think, one of the things they’re trying to get – we’ll have to try to get in 2012. And they need to manage the politics of this so it looks like they’re not bailing out Europe. And this is not a bailout of Europe, because the IMF gets the money back. But I think there’s a political sensitivity that the U.S. is trying to manage.

In the case of the U.K., you may know better than I do. My recollection was, the U.K. position was somewhat similar to Canada and others, which is they’d be willing to put in additional resources as part of a broader package like, I think, the emerging markets would.

Then you also mentioned something about Governor Norer’s (ph) comments. You know, I’ll just say this: That’s a very unusual comment for a central bank head, OK? And in the spirit of which I said that I think that some people have to be careful about their statements, that – sort of fueling political acrimony, I will just say, it’s a highly unusual and not constructive statement.

MR. KEMPE: I think that’s a good point to end. Let me just say a couple of things about this as we close and before the audience thanks you with me.

This is a hinge point in history; I always like to look around the room and say, you know, as this happens, sitting with the World Bank president, here we are, the Four Seasons with the Atlantic Council, and we want to remember this moment. Things are shifting and it’s very hard to talk about these issues in any case when you have, as Bob talked about, a storm going on – but then, to have someone in front of you who so brilliantly articulates both the macro issues involved and the micro issues, not just economically, but also in a larger sense.

So this is just a wonderful way for us to end the year, terrific way for us to set up and know what to watch for next year. And we thank you for taking so much time, which gives us a change for a richer conversation. And we hope to see you another time, but this time, not to talk about a global financial crisis, but perhaps something a little bit happier. But thank you so much on behalf of – (inaudible).

MR. ZOELLICK: Thanks for everything.

MR. KEMPE: Thanks. (Applause.)

(Off-side conversation.)


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