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The Atlantic Council of the U.S.
Conference Call with Austrian State Secretary in the
Federal Ministry of Finance, Andreas Schieder
May 4, 2011
10:30AM ET

Operator: This is a recording of the Atlantic Council conference call, May 4, 2011 at 9:30AM Central Time. Excuse me, everyone. We now have Andreas Schieder in the conference call, State Secretary of the Austrian Federal Ministry of Finance, as well as Julie Chon, Senior Fellow for global business and economics of the Atlantic Council on the line. Please be aware that each of your lines is in a "listen only" mode. At the conclusion of their remarks, we will open the floor for questions. At that time, instructions will be given as to how to proceed if you’d like to ask a question. I would now like to turn the conference over to Ms. Julie Chon, who will be offering some introductory remarks and introducing State Secretary Schieder. Ms. Chon, you may begin.

Julie Chon: Thank you very much. Thank you for joining our conference call, everyone. We know that there are several callers calling from abroad and we certainly appreciate the interest that’s been expressed. We would also like to welcome State Secretary Schieder to the Atlantic Council. I was just mentioning that his visit takes place during the 50th Anniversary celebrations of the Atlantic Council’s existence and last night we had many luminaries, such as vice-President Biden and General Colin Powell expressing and emphasizing the importance of the trans-atlantic partnership and tackling the future problems that arise in the world, whether they are economic problems or national security challenges. And so we thank the State Secretary for joining us today and this is actually a global conference call; one in a series entitled: "Mapping the Economic and Financial Future." Originally this call series was developed in response to the financial crisis in order to stimulate a debate between leaders on both sides of the Atlantic and better understand the causes of the financial crisis as well as identifying substantive solutions. Now, we’ve expanded the scope of the dialogue to include policies to stimulate economic growth and we’d like to thank Deutsche Bank for serving as a partner with the Atlantic Council in this series. Again, the State Secretary comes to Washington at a crucial time in Europe efforts to stabilize the financial sector and undergo major reforms and financial regulation and I’d like to hand the forum over to him, so that he can provide us some insights as to what’s happening in Europe and what he may have heard in his meetings in Washington.

Andreas Schieder: Thank you. Good morning, good afternoon. Thank you for the invitation to give some input. As I came to the U.S., the main topic was only the financial crisis and the stage of economic recovery at which we are now – what has to be done and what was already done. With the political development of the last days, especially the capture of Osama bin Laden, all the major topics have been discussed; it shows how interlinked anyway all this kind of issues are. But to come back on the core issue, I think we have a common understanding in Europe, and hopefully all over the world, that our economic systems cannot continue the same way as before the crisis and it’s to say the changes that have been made so far are obviously not enough. The financial market seems to be back on the same attitude as before the crisis; attitudes which led us into the crisis. So, still the question is how to react on the crisis, what has to bee done to avoid a new crisis and the question what will be a new understanding of economy is on the agenda . But maybe, to keep it short, to come back on the time when the crisis hit Europe. In 2008, let’s say, quite soon it became clear that the crisis which had been in the U.S. will very quickly become bigger, become wider, become global and, effect all the big global economies. This globalization in combination with deregulation and liberalization of financial market was the main cause of disruptive behavior all over the world. The economic effect on GDP as the main figure in Europe was a minus of 4.2 percent, so the GDP in Europe dropped by 4.2 percent since 2009. Seven million people lost their jobs in reaction of the crisis and also now with the different speed of the recovery within, say, highlighting of the imbalances between the Europe member States; while some countries have low unemployment rate, even below 4 percent, below 5 percent, we have other countries in the European Union with unacceptably high unemployment rates, like 20 percent. So we see, still the imbalances can get wider and a special part of the unemployment problem, of course, is the youth unemployment, which is sure one of the biggest problems in Europe nowadays because it is linked with the European idea and the future of the affected young people. Finally let me tell you about the important cornerstone of a successful reaction on the crisis. Two things have to be said: as the crisis changed quite quickly, it was also necessary to have a quick reaction, saving the banking systems, providing liquidity to the financial market, allowing counter crisis investments, stimulus packages, labor market packages, and things like this. Bbut also, and I think this is one of the major differences between the U.S. and Europe, the social security- and welfare system in Europe provided Europe with some kind of economic automatic stabilizers, which allows that the consumption rate did not drop and, therefore, the recovery also was able to begin earlier and it prevented the financial crisis from becoming also a social one. For example, the consumer spending in the Eurozone just dropped by 1.1 percent, much less than the GDP dropped. And also there was a very common understanding on the necessity on financial market reforms, regulation. There is a certain risk nowadays while economically recovery takes place, the momentum for reform is vanishing because of the recovery of the financial market. We should not forget that, even if the markets are recovering, that we need also to work on regulation, on the rules, and also on global surveillance and things like that. This is important. Also I believe that the financial markets must be more included in financing the cost of the crisis; therefore, speculative taxes on speculative incomes is important and here the financial transaction tax is a very important tool, which we as the Austrian government and also a huge group of countries and people in Europe, would like to see go through all over the globe.

Julie Chon: Very interesting. As you know, the United States actually did not include a bank tax in our overhaul of the financial regulatory system, which is known as Dodd-Frank, and yet this debate continues in Europe about pursuing a bank tax. How likely do you think it will be for Europe to actually institute a bank tax without the cooperation or existence of a bank tax in the United States, considering the competitive forces of the financial services industry?

Andreas Schieder: I think the banking business can be divided into two different businesses; the one is investment banking, which has a very global attitude, and then you have the classical, the one we know from the studies in universities: captures the function of a bank is the transferring risk, transferring savings into investments, giving loans to the economy, to support the real economy. And this kind of business is, I think, wide on a continental level. So, what we see is that the tax amount of the banks more or less in real money was the same over the last decade, while the balances and the income and the economic reprise of the bank, of course, moved up very highly to the share of taxes – their revenues became lower, so, therefore, a lot of European states introduced banking taxes, different basis, different systems. There is a certain debate that there should be a European-wide regulatory guideline upon on what it should be, but we saw that the countries failed to give money to the budget again, were using the banking taxes in a lot of countries, and I don’t see any negative impact on competitiveness of the banks.

Julie Chon: And also, a question about the bank stress test results that are expected next month. Some criticize the last round of bank stress tests for an inadequate level of standardization in terms of methodology, assumptions, and the actual implementation by national level supervisors. How much standardization do you think there should be regarding financial regulation as well as financial crisis responses going forward versus national level responses being left to individual countries?

Andreas Schieder: I think always it is evident that it is a global issue mainly. The wider the regulatory framework that is taken; let’s say Europe-wide, even more of the attitudes of macroeconomic surveillance, and things like this, stability board, global leverage is quite good, but I think there is still some space to have more European standardized regulation. With the stress tests; I think we have to be careful. Stress tests are a good instrument to know how stable banks are in terms of certain ideas of negative impact, but stress tests cannot be replaced by regulation, cannot be replaced by surveillance, so we need both in addition, because also we know that there’s a good stress tests after some certain things happening can also result in a negative sort of future on the bank; we had this in the past. So, I think the stress test as an instrument is a good one, but it is not the overall answer on every problem.

Julie Chon: Well, those are just some initial questions that we’ll start with here and we’ll turn it over to the Operator to indicate questions from callers.

Operator: Thank you. At this time, we will open the floor for questions. If you’d like to ask a question, please press the "star" key followed by the "one" key on your Touchtone phones now. Questions will be taken in the order they are received. Please be sure to introduce yourself when asking a question. If at any time you would like to remove yourself from the questioning queue, press "star two."

Julie Chon: And while the callers queue up their questions, we’ll ask one more here. State Secretary Schieder, you’re the chairman of the economic and financial network for the Socialists, the European Socialists, and a couple of months ago, in the lead up to the EU summit in March, the party recommended a set of principles to be included in the establishment of the ESM, the permanent stabilization mechanism. And one of those recommendations stated that the ESM should assume the responsibility of direct market intervention to purchase debt of troubled countries, as opposed to the European Central Bank. Do you believe that there should be restrictions on the ECB’s future interventions in the market?

Andreas Schieder: Although I’m thinking part of the answer lies in the past. We saw that first the ECB refused any intervention and then finally there were some kind of ECB interventions. But I would say even also and my function as the coordinator for the European Social Democrats, that the ESM, the stability mechanism included a set of really important instruments. The inclusion of the private market, so that all the private sector has to take its responsibility. Although it’s construction is more intelligent because itself can – based on the market – organize the capital and it has a AAA rating. It does not affect the national deficit of the member states. So, I think this construction, also its size, which creates 500 billion lending capacities is one which is the proper answer on the problems of some states in financing their state duties, so I think this is a proper and stable and big enough answer on all these issues.

Julie Chon: But do you believe that the ECB should be restricted in its ability to intervene directly in the market? In the U.S., the Federal Reserve, has also confronted similar concerns about the appropriateness of quantitative easing, and so is it your view or the Social Democrats’ view that future reforms should include some type of restriction on the ECB’s ability to do that?

Andreas Schieder: I think we are in the middle of the debate and we should take some time also to take the pros and cons on this issue, because financial markets are quite, they’re quite listening what’s going on; we should also debate and not to have any quick, too quick decisions on these issues. There is a lot of debate in Europe going on, what should be the future of the ECB on those details. How should the future of the European Union be constructed? There is a debate on Europe bonds and issues like this. What I think is necessary is to have a strong European coordinated economic policy in order to bridge all of the imbalances, which would be between the member states of the European Union. There is a so-called EU-2020 strategy, with major guidelines: green growth, employment, future technology, education. But, unlike the past, now we have clear goals, that have to be reached. Also all the EU funds have to follow this 2020 strategy and I think this is a good example, a way we should continue.

Julie Chon: Operator, do we have any questions lined up?

Operator: Thank you. Again, if you’d like to ask a question, you can do so by pressing the "star" key followed by the "one" key on your Touchtone phones now. And our first question comes from Sandrine Rastello with Bloomberg.

Sandrine Rastello (Bloomberg): Yes. Hi there. Thank you for organizing this call. I was just curious because obviously Greece is a big topic at the moment of what your view was of the Greek debt load and whether it was sustainable? And in particular, I was also interested in whether you think the EFSF should be buying Greek bonds in 2012 and beyond, if the country can go back to the market?

Andreas Schieder: Not answering directly your question; I think the plan of all of this saving attitude of the EFSF is to bridge short-term problems of the Greek states on going onto markets. In the future, they will be able to go on the markets by themselves, so I think this is the main course. Also it helps to give them some time while the markets are quite negative towards them in order to start to bring the budget in order, to start reforms in the state and so on, so that in the future, hopefully, sooner than later they can be active on the markets again. And we see also that this is working, because the signals of the markets are quite comfortable and different, but also they are becoming more and more positive signals; it might be that in the future, we cannot say that it will be 2012 or when exactly, that all those countries, which are now in, let’s say, some stability programs, can be active on the markets again.

Sandrine Rastello (Bloomberg): And what about the debt load, and we’ve been hearing from Germany from some German officials that Greece may not be able to go on without cutting some of its debt.

Andreas Schieder: I know that there is a lot of leaked information of officials, of newspapers, and so on. I think as a responsible finance politician of the European Union, you should not jump into these messy topics. I think we put clear that the problem of Greece not completely 100 percent true information to the Eurostat[Inaudible 00:20:42], we gave an answer on this with the European semester on more transparency and more control of all of budgets of the European Union members states. Secondly, of course, they have imbalances in the budget; they have to make their own reforms, which are hard reforms. We see even the Greek states is very hard reforms also, and thirdly, also there is part of the problem is there is also the speculative sector; that is, we have clear signals that state by state, the speculative forces try to speculate against one of the states, so there must be the answer, even stronger regulation of the markets, stronger transparency rules of the market, and things like this. And for bridging the actual short term problem, we created the Greek aid facility, which we at the end, developed for them into the European stability mechanism, making this a permanent instrument.

Operator: Thank you. There are no more questions at this time.

Julie Chon: Okay.

Andreas Schieder: Perfect.

Julie Chon: Well, thank you very much for your time this morning and for joining the call and we will continue this series in the near future again with another topic. Thank you.

Andreas Schieder: Thank you. Thanks, everyone.

Operator: Thank you all for your participation on today’s call. You may now disconnect your lines.

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