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The Atlantic Council of the United States

The Way Forward in Europe

Alexei Monsarrat,
Director of Global Business and Economics Program,
Atlantic Council

Clay Lowery,
Vice President,
Rock Creek Global Advisors

Finance Minister of Luxembourg Luc Frieden

Location: Washington, D.C.

Date: Monday, February 13, 2012 

Transcript by
Federal News Service
Washington, D.C.

ALEXEI MONSARRAT: Hi, everyone. Welcome. Thanks for joining us today. I’m Alexei Monsarrat. I’m the director of the Global Business and Economics Program here at the Atlantic Council.

I’d like to thank our guest today, Luxembourg finance minister Luc Frieden, for coming to speak with us. As the European Union continues to battle the ongoing crisis, which remains a threat to the common currency’s future, we’re glad to have the opportunity to hear his perspectives and insights. We’re certainly grateful that he’s taken time out of his pressing schedule, which has now gone even more pressing, to come and be with us today. And so thank you, Minister, very much.

Today is part of our Mapping the Economic and Financial Future series, which we host in partnership with Deutsche Bank. And we’re proud to be partnering with them on this. Our past speakers have included Christine Lagarde, Senator Chris Dodd, ECB governor Erkki Liikanen, former FDIC chairwoman Sheila Bair, and Bob Zoellick.

And as you all know, the Atlantic Council is committed to reinvigorating the Atlantic community to effectively react and respond to global challenges. At the same time, the Council faces more and more challenges to our mission every day. And so we’re glad to able to convene this forum. And our guest today is in the thick of managing that crisis. And so we look forward to hearing from you.

I’ll introduce the minister in a moment. He’ll make a few remarks, and then we’ll have a moderated discussion. Our moderator today is Clay Lowery, who is vice president at Rock Creek Global Advisors and the former assistant secretary of the treasury for international affairs. And during that career, as many of you know, that the role of assistant secretary of treasury is a heavy one, managing a lot of the different international negotiations on just these issues that we’re dealing with today.

And to our speaker, as you know, he is Luxembourg’s finance minister currently and a prominent member of the European Union’s Eurogroup and Economic and Financial Affairs Council, where he’s been since 2009. Prior to that, he was also minister of justice, minister for the treasury – minister for the treasury and budget, minister of relations with Parliament, and minister of defense. So I think you must be close to the end of the round of government.

He was responsible for coordinating the government of Luxembourg’s preparations to introduce the euro. He has also been in Luxembourg’s Parliament, so covers both branches of government, from ‘94 to ‘98 and was the chairman of the Finance and Budget Committee, as well as serving as chairman of the Institutions and Constitutional Revision Committee. He comes to us with degrees from a number of illustrious institutions, all of them in law, including the Sorbonne, Harvard, and Cambridge. So without any further ado, Minister, if you’d like to make your remarks. (Applause.)

MINISTER LUC FRIEDEN: Thank you. And good afternoon to all of you. It’s great to be at the Atlantic Council. And I think there is probably no better place to talk about the things that are going on on both sides of the Atlantic. And I had two visits or meetings this afternoon that reminded me very forcefully of what we are living – going through these days and what brings us all together.

First, I went this afternoon on official visit to Arlington military cemetery. And I reminded myself and seeing these numerous tombs of soldiers, many of whom fought in Europe, why we created Europe 60 years ago and what brings us together with United States, where so many soldiers fought to provide us and to guarantee our freedom and our common values. And I indeed meet a number of veterans who fought in the Battle of the Bulge at the end of the Second World War – quite impressive, I must tell, for somebody who is born – who was born 20 years after World War II.

And thereafter, I went to the Treasury, meeting with the undersecretary of international affairs. And the question she put to me were all about Europe, Greece, the future of Europe. And so I thought to myself, by coming here, that probably a number of years ago, if you entered the U.S. Treasury, people would not have asked you only questions about Europe. And therefore, bringing together the images of Arlington Cemetery and what we owe to Americans and what has laid the ground for creating Europe, a unified Europe, and at same time seeing today that what happens in Europe is of great importance to what’s going on in the United States, and what happened in 2008 in United States led to a huge problem in Europe, shows that we have become much more interdependent than we ever were before.

Europe is today at a turning point. And I think that probably never before we had to make so tough choices about the future of our continent. Yes, indeed, it was probably extremely difficult to build Europe out of the ruins of World War II. Europe is and remains first and foremost a project of peace. And the United States always encouraged that process very much. But at the same time, we used economic tools to integrate our continent further. And so bringing coal and steel together, creating the single market where people, capital, goods could flow freely; and thereafter, deepening Europe by creating the euro, a single currency out of a number of countries, all providing with new common borders – i.e. establishing the Schengen Area, where people can circulate freely – is certainly something that, seen from today, was historic and is something that you cannot take away from one day to another. I also still consider, despite all the difficulties, that it’s a great success.

But indeed, it’s true – we did a number of things, but at the same time, we encountered a number of problems. On the euro end, what we have seen over the past few years is one of those problems that we encountered. When I was in charge of introducing the euro in my country, I often reminded – I often had to tell people what would be the advantages of this common currency, that we would no longer see the risk of devaluation – of competitive devaluations, that the fluctuations of exchange risks would disappear, that there would be no transaction costs anymore that would make business more difficult and more expensive, that we would have price stability in the eurozone. All these things are still true today. To that extent, the euro is indeed a success.

But at the same time – and that was probably something that from the outset was known but not sufficiently taken into account thereafter – we established a currency in a number of different countries – today 17 – without having one common fiscal policy, without having one government, without having one political union. And this problem remains until today. And the question, therefore, is where should we go for the future? Can we still do it with a number of different countries? Or does the common currency require automatically, to be a success, one government, one political entity?

The theoretical answer probably would be that, indeed, you need an integrated – a fully integrated economic and fiscal policy for that currency to be in the long-term assured to be in stable waters. I don’t think that that is, in the short term, realistic. So the other way to achieve this is to make sure that you have rules that everybody complies with. We had these rules in the treaty that established the European Economic and Monetary Union, but those rules were not in all circumstances complied with. And that’s why we have most recently decided to strengthen these – the rules that have to be observed to make sure that if something – if somebody, if one country deviates from the path of fiscal discipline, if it deviates from a number of fundamental criteria that have an impact on the currency, that then the others can (sort of assert ?) automatic way of sanctions, make sure that the stability of the anti-eurozone is not put into crash.

So I think if you don’t have a political union, you can have other means to achieve this stability. And this stability, of course, is a key element. When it comes to a currency, you have – must have trust in a currency. And the currency – and the trust is created by making sure that there is a stability that goes with the currency.

The interesting thing when you observe Europe these days is that although we realize that we have to be more – that we are much more interdependent than we ever were, at the same time, we also notice in a number of countries that there are some nationalistic protectionist tendencies that express themselves. And we see those especially in some elections that took place in a number of countries. So on the one hand, people see that we have to make sure that we are in this all together and therefore have to stick to common roots, some believe that they can get out of this in a purely national manner; I don’t think that that is the case; that we need to find common solutions to the challenges that we are facing because we are so interdependent in Europe and, I would even say, in the world.

In the short term, we are faced with a number of very difficult issues in the eurozone. Greece is one of the topics that, of course, is – which is at the forefront of our agenda. I will be flying back to Europe tomorrow to attend yet another meeting of the finance ministers of the eurozone, discussing about the way forward on Greece. I think we are doing this of course to help Greece, but also to help all of us, because by helping one country such as Greece, we ensure the stability of the eurozone as a whole. It is, at the end of the day, our banks who would be in danger if a number of countries would not be able to repay their debt. So it’s not something only that you do out of solidarity, but also do it in your own interest.

I think that the Greek problem is difficult to be solved. It can be solved if Greece fulfills the conditions that those who will give money to Greece, that is all the other 16 countries directly through European mechanisms, are complied with. What we need is full implementation of the measures that at the end of the day will substantially reduce the debt of Greece. Those commitments must not only be political commitments. They must be put into laws, and they must be implemented. So we need actually three things – a number of laws, we need a strong political commitment by all the political – or the main political leaders of Greece. Why is that so important? Because Greece will have elections in two months from now, so we must make sure that also after those elections, these commitments will be complied with. And third, we must make sure that these measures are also fully implemented.

Greece has had a long history of problems in implementing a number of decisions. The administration has some deficiencies. And therefore, we believe that in order to create trust also into the Greek authorities, it is worthwhile establishing, in partnership with Greece, a monitoring system, making sure that in each relevant ministry of Greece, civil servants from other countries can monitor the implementation of this – of this common projects of putting Greece again on its feet so that it can develop for the future. I also believe it is extremely important that we develop for Greece, in the same way then for some other countries in Europe, policies of growth – so restructure of funds out of the European budget. We must make sure that also these countries have a future in which economic development can occur. So structural reforms and short-term financing is necessary.

Whatever happens with Greece now is less relevant than it was six months ago, because in the meantime we have set up a number of quite credible firewalls in Europe and together with CIMF that will make sure that if something would go wrong in Greece or in other country, the contagion effect would be less damaging as that could have been the case a number of months ago. And therefore, I think we should do our best to find together with Greece and according to what we have agreed upon in the last few meetings; we should implement this. Greece must implement this. The key is in the hands of Greece. And at the same time, we must make sure that this solidarity is applied so that at the end of the day there is stability in the eurozone.

That goes, by the way, also for the other countries – those in program or those that are not in a program. Sound public finances combined with policies of growth are the key for Europe to have again a growth which is stronger than the one that we are currently witnessing. This is not easy to be implemented, because in the short term probably some of these austerity measures will have a negative effect on growth. In the long term, I think some of the structural reforms that we are doing and some of the reductions in the deficits of the – the fiscal deficits of the countries will help making these economies more competitive, stronger. And therefore, the painful short term will be positive in the long term. And therefore, in the long term, sound public finances is the key to a stable monetary union. And therefore, this criteria, which we have since the beginning of the monetary union, have to be complied with.

I do know that Europe has a smaller deficit than the United – smaller public debt than the United States. But having such complicated institutional structure such as the European Union, the eurozone makes it more necessary for us in economies which are not all organized in the same manner, where there are a number of macroeconomic differences, is extremely important to bring all this together.

That also requires probably Europe to change its institutional model once again. I think Europe, which is a continent, which is a main – an important trading partner for the U.S., which is a continent that produces so many sophisticated goods and products and services, must appear on the world stage with a much stronger governance. And therefore, I also believe that it’s not sufficient to put in place names or institutions, but we also need to give additional power to those institutions. That is true for foreign policy. That is true for economic policies. I think that if we have a common monetary – if we want to have a common defense and foreign policy in the European Union, then we have to entrust some institutions or some people with more power.

We have seen the appointment of a high representative for foreign affairs in the European Union, but that person rarely can speak on behalf of all the 27 member states because too much power is left with the national governments when it comes to these issues. In the monetary field, it is the same. And therefore, the appointment of a European minister of finance doesn’t make sense unless – and I would welcome that – we would transfer some more powers to the European Union to make sure that all the rules on the fiscal discipline and on some economic issues are exercised at a European level. I think we are on the right path, but still some work has to be done.

I’m also convinced that despite the fact that the eurozone is going through difficult times, that there is a clear political commitment in Europe to keep the euro as a currency of the European Union. This is a project that led to success. It is a normal consequence of setting up the single market. And therefore, I think the euro as such, from a political point of view, is not put into question. There might be differences. I’m not excluding that some countries will exclude themselves by not complying in the medium and long term with rules. But the currency as such – as a tool, as a political tool of integrating Europe – will remain.

At the end of the day, I would strongly welcome that Europe will be a much more integrated federal structure where a number of decisions are being taken at the European level and others at the national level. The way to come then is a long forward. And therefore I think the most realistic way to go forward is probably having a Europe with different circles, which we already have now, but those who are within a certain circle, such as having the common currency, having the same rules on free movement of persons, i.e. the Schengen visa area – those will bring Europe forward. But one thing is extremely important for me: That is, we always have to have the same common objectives. And these are the objectives of peace, of stability, of prosperity, of a certain social – of certain social principles, where Europe has built up something that cannot be taken away from one day to another. If we are in agreement on these fundamental objectives, then the speed with which we achieve these objectives can be done with various degrees of intensity. And that is something that I think is realistic for the way forward in Europe.

Can Europe do all this alone? Should Europe do all this alone? I don’t think so. I think that Europe is a continent that is strong in itself, but Europe certainly has no vocation to be superior to others. But we are, as I said at the beginning, extremely interdependent. We are interdependent on so many issues – economic issues, migration issues, energy issues, climate issues. And therefore I think we are much stronger if we do this together with other partners in the world, in times of crisis and outside times of crisis.

I think the dialogue with the United States and Europe is extremely important, and I welcome the discussion that we have done, for instance, on financial regulation, also when it comes to the sovereign debt crisis. I would welcome a stronger implication of the United States in some of these mechanisms, not that one party imposes something on the other, but that in partnership we discuss these issues – derivatives, capital adequacy of banks, resolution mechanisms, but also when it comes to the sovereign debt crisis, the strengthening of the IMF.

Why? Because I do think that what we are seeing in Europe is not only a European crisis. This crisis is, to some extent, a consequence of the financial crisis that originated in the United States in 2008. This led to a crisis in the real economy. All our governments put in place rescue mechanisms for the banks, stimulus packages to support the economy, and all this increased the public debt in a number of European countries.

What happens in Europe has a consequence for America, and what will happen in America always has a consequence on Europe. And therefore, I think, in the international organizations where we are together, we should strongly cooperate together. I think that Europe and the United States not only share common values – and I mentioned with gratitude the Second World War, but also thereafter – if we are together, we are much stronger.

We have common values. We have common interests. We have a common purpose. And I think we should do more work together and probably give to this – what I would call a new Atlanticism – a much more structural meaning. I think that the United States should discuss these issues with the European Union as a whole, and not what they sometimes are doing and what Europe is sometimes doing, only with some countries in the European Union.

A negative example of that occurred only very recently, where five European countries concluded a political agreement with the United States on FATCA, the Foreign Account Tax Compliance – terrible abbreviation, but you know what I mean. So I think it would be much more useful, more helpful, more efficient if these negotiations were taking place between the United States and Europe as a European, as a political entity.

I think that this new Atlanticism, if we would give it some permanent structure, some kind of secretariat, would allow us to better structure this dialogue. And this dialogue must be (let ?) and must be continued and must be intensified on many issues. There is, of course, an intensive dialogue, but it can be improved – it should be improved – because we are an economic and political partner of the United States, and we are a security partner of the United States.

I think, to some extent, that we could develop a (human/humane ?) model for many parts of the world – not in a sense of superiority, because I don’t think that neither Europe nor the United States are better than other parts of the world. But we share a lot in common, and so I think that we should work hard together on issues of economic – on economic issues, on security issues, on environmental issues and others – to create a kind of – yes, I would say, a concept of how our societies can evolve in the future, keeping in mind the principles of individual freedom that our societies and our governments have to protect.

Is it not that, this freedom of the individual person, that has been written down in the fundamental treaties – in the fundamental documents that were at the origin of the United States – the Declaration of Independence – and of the fundamental documents that ensured the freedom of man in the European Union – for instance, the declaration of human rights of 1789 in France, the Declaration of Independence a little bit earlier in the United States?

So all this goes together, and therefore, I think, we can develop together – but only if we do it together, without, as I said, superiority – a model of universalism without uniformity that will bring this world closer together.

In the short term, we have to solve a number of problems. These problems can be solved. The solution will not be easy. It will not be easy in eurozone; it will not be easy in Europe. In the long term, I think, we should set up in Europe a much more integrated European Union which can be a friend and partner of the United States, as it always has been in the past. And while I started my remarks with my visit to Arlington this afternoon, I reread recently the great speech of General Marshall at my U.S. university, Harvard University, in 1947, where he said things which, actually, one could say again exactly in the same way today.

He said then – and it could be almost like a speech which a U.S. president or a European president could give these days – he said, I quote, “the remedy lies in restoring the confidence of the European people in the economic future of their own country and of Europe as a whole. The U.S. should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and assured peace.”

The first sentence alone is already a whole political program. The second even makes it a much stronger Atlantic alliance, and therefore I think that in the future, indeed, our task, our enormous task, is to strengthen Europe, to bring back the trust of the people in the economy, to create again jobs, to explain to the people why we need to do this, and why we need to do this together because we are interdependent.

So this is a global task. This is a global challenge. And I’m glad to be able to discuss this at the Atlantic Council with you here in Washington. Thank you very much. (Applause.)

CLAY LOWERY: Thank you, Minister. My name is Clay Lowery, just so everyone remembers. I really appreciate it. And you covered a lot of areas. You covered macroeconomic issues, governance issues and institutional issues. You did something which actually I was going to ask you a question about, so I’m actually already glad you did it, which is, where can the United States be helpful? Which is a very important question, I think, especially to this audience.

And then finally, I just want to thank you again for being here in a very, very busy time and explaining what’s going on in Europe to the people in the United States, which I think is very important at that time – and that’s what the Atlantic Council tries to do all the time. So thanks to the Atlantic Council as well.

I want to ask everybody to just start getting your questions ready. You’ve probably already got them ready, but I’m going to ask a couple of questions and then – to get us started – and then, hopefully, we’ll get to the audience. And if you don’t ask questions, I’ve got a lot of them.

So let me first start with something you did talk about a little bit, which is the structure of a fiscal union, in some respects. You had talked about how there was a Stability and Growth Pact, and it was – the compliance level was not at an all-time high. So there’s now an idea of having a new fiscal union with stronger enforcement mechanisms and stronger compliance mechanisms.

But part of that, of course, is potentially a penalty towards those that do not achieve what they’re supposed to achieve on the fiscal side. Now, it’s one thing to penalize those that you have major disagreements with. So if the United States has problems with Iran, we try to put sanctions, and Iran does something we don’t like, it’s not that hard for us to put down more sanctions. It’s a different thing to penalize your friends.

And you’re in a union together, and you’re basically going to be saying to a country which is already suffering and having problems on their fiscal side, we’re going to penalize you. And you’re going to have to pay us more than otherwise would have been the case. How are you going to be able to do that? And how would – if you’re in the financial markets, how are you going to be able to believe that that enforcement mechanism is going to work, whereas the old ones didn’t?

MIN. FRIEDEN: Well, first of all, I think that the difference to your example is that everybody accepts these penalties. So they are decided by everybody and not imposed by one on the other without asking the other one. Secondly, I do think that the most important aspect is the sanction that we foresee in the so-called preventive arm of the Stability and Growth Pact.

I do agree with you that once it is too late, sanctions do not make any big sense anymore. But when you see that a country deviates from the path of fiscal discipline, at that moment, I think, these sanctions can be very efficient. Putting, now, sanctions on Greece would not be very helpful. But in other countries, where the problems are less big than they are in Greece, for instance, I think there this could be an instrument that would discipline the country.

Because the country then realizes that if it doesn’t do so, it has to spend extra money to put that aside with various degrees of penalties. So I think that exercises some pressure on the public opinion of a country, on the parliament of the country, to come back on the path of sound public finances.

I would have preferred by far that we would never have come to such a situation. But I think where we are now, this probably, in the short term, is necessary to show that we mean what we say and that this – what we put on paper – is really meant to be applied, and therefore penalties – it’s like if you drive too fast. If you know that you may have to pay, then you may already take into account that you should not drive too fast. So it’s more from – from an aspect of, yeah, prevention than anything else.

MR. LOWERY: OK. Let me ask one more and then I’ll go to the audience. I’m going to switch to financial regulation, because you did talk about it a little bit. And you also mentioned the idea of – this is more than just a European issue. And by the way, that goes for macroeconomic and the debt crisis as well, which I agree with.

On financial regulation, there have been letters written, discussions about how the United States is doing financial regulation implementation, reform. The European Union’s doing it as well. And we’re starting to see some concerns rising about extraterritoriality, about U.S. regulations that are going to affect European institutions or European countries.

The one that comes springing to mind, mainly because it’s topical now, is the Volcker rule. And I think Paul Volcker will disagree with what I just said. But it is becoming – we saw that Commissioner Barnier wrote a letter last week worried about this. The Canadians have written a letter, the Japanese. The Chancellor of the Exchequer in the U.K. has written a letter – all these concerns that U.S. regulations are starting to bleed beyond its borders and are harming European, or Canadian, or Japanese institutions.

And the same could be said about some of the issues going on in, maybe, the derivatives market in the European Union. Is there a way for better international coordination? How do we stop the extraterritorial aspects of very necessary regulatory reforms?

MIN. FRIEDEN: I want a United States that is open to international trade, that is supportive of international trade, that is not imposing anything on any other country with the purpose of sealing off its national market. That’s the United States that I like, which I knew in the past.

And I have the impression that a number of laws in the recent past have been taken that, at least from the outside, give the impression that their purpose is to protect the United States and which, in the long term, will however be contrary to the interest of the United States because America will not participate in the development of the global economy.

The law that you mentioned has aspects which are clearly discriminatory, for instance, for the European fund industry. European retail funds are clearly treated differently, according, at least, to the text which I have seen so far, from similar investment, mutual funds products in the United States. And the same is true for this FATCA legislation which I touched upon during my speech.

These are long-arm statutes by the United States that will make it very difficult for European companies, for European financial institutions, to continue to work with the United States. And I think this cannot be in the long-term interest of the United States. It’s certainly not in the interest of Europe. And I think in a strong partnership, we have to discuss these things on a bilateral or multilateral level before such laws are being implemented.

Afterwards it’s always, to some extent, too late. It creates unnecessary problems between our two continents, our two countries – if I may call Europe, for one moment, as a country – and I would by far prefer a much more constructive dialogue on these issues. There is a lot of work that can be – that needs to be done. Fortunately, we are partners and friends, so these issues can be discussed, but I think there is room for improvement.

And I think in the recent past, a number of decisions were taken unilaterally by the United States which, from a European perspective, create a certain number of problems. That’s one of the reasons why I came on this visit – to discuss these issues with the Treasury, with the State Department. I can tell you that I had very constructive meetings in both departments, but still, these are issues that cannot be easily changed because the basic laws have already been approved by the U.S. Congress.

And the implementation still has to be done, but I could imagine that between partners – especially if in my model of a new Atlanticism, we would have a more permanent structure to discuss these things – I think that could be easier and could avoid unnecessary frictions between our two continents.

MR. LOWERY: I’m going to start way in the back. There’s microphones, and if you could please introduce who you are and your affiliations.

Q: (Name inaudible) – Wall Street Journal, Dow Jones. Can you give us some indication about the financing gap with Greece? German officials have said there is still a large financing gap. You said that it’s all left to the Greeks to implement fully, but it seems to me there’s a funding, still a funding gap. And German officials have also mentioned a debt-to-GDP ratio of 136 percent by 2020, which is far short of the IMF’s targeted goals. Can you elaborate on the details of that?

And secondly, you started off with your visit to Arlington and said the U.S. needed to do more. Is there a role – a greater role, in your mind, for the White House or State – given the risk to a number of NATO members; potential of a failed state in Greece, a neighbor to Turkey; et cetera? What specifically would you call for in terms of U.S. leadership? Are you asking U.S. to cough up more cash for the IMF?

MR. FRIEDEN: Well, there are a lot of aspects in your two questions. So I think on the funding issue, we still need to get all the figures to what these new measures by Greece will lead to. In the European summit of December last year, we put forward two main targets to which these fiscal programs in Greece should lead to. One target is 120 percent of GDP debt in 2020, and the other target is that we try not to have to give to Greece in the second program more than 130 billion euros.

I cannot tell you exactly to what these measures which Greece have decided last week will lead to. And that’s one of the reasons – one of the main reasons why we postponed our decision at the last Eurogroup meeting – because these measures, which I included in a memorandum of understanding of the main political leaders of Greece, had not yet been examined in detail in terms of figures by the troika made up of IMF, ECB and commission. I have the impression that not all the details – at least when I left Europe – were yet on the table. And I hope to get more clarity on those issues tomorrow, on Wednesday, at the Eurogroup finance ministers’ meeting.

I don’t think that European – the other partners in Europe can bring up much more money than what has been agreed upon in December. And Greece knows this. So Greece has to come up with a program that leads to those targets, at least in general lines. And I’m hopeful that that will be achieved. There was still an issue outstanding with some pension mechanisms in Greece, where Greece itself said that they had to come up with further measures. And I hope that we will get those measures on Wednesday.

And the conclusion, therefore, on the first aspect, is that then those financing gaps will not exist anymore, because I don’t think that they can be filled with new, additional money from the other European countries.

On what the United States can do, I think that really this is a European issue, but it’s not only a European issue. If Europe has a major problem, America feels the consequences of that. If America has a major problem – and America indeed in the past have had major problems, i.e. the 2008 crisis – we feel the consequences of that. That’s why we have global financial institutions such as the IMF.

And therefore I hope that the IMF, and the United States as the biggest individual shareholder of the IMF, plays a key role in bringing the IMF as an additional firewall to the firewalls that we have set up in Europe. We have the EFSF as a temporary firewall. We have the ESM stability mechanism as a permanent firewall which will start in July or August this year.

And then in addition, to give more credibility to all this – and to show that it is a global issue, I think the United States should not lean backwards. What General Marshall said in 1947 at Harvard is exactly, I think, what Europe and America have to do also together now. I really call on our American friends to remind themselves of the important role they play not only in world politics – in the world of security issues where they play a role for which we are extremely grateful, and have always been a strong supporter of that role also within NATO – but we also need their role in world economic affairs. This is not only an issue for Europe.

Does that mean they have to bring more money on the table? I think, within the framework of the IMF, these are issues that have to be discussed there. But I think just looking to the United States is not enough. This is also an issue about global responsibility. We all have a responsibility for others.

MR. LOWERY: Sir, in the back.

Q: Yes. My name’s Terry Murphy; I’m a member of the Atlantic Council, but I’m also an international lawyer, and I’ve had over 30 years of active debate on extraterritorial legal issues between the United States and Europe. And I think – Minister, I wouldn’t dream of going into the financial issues, which I know nothing about.

But I know for a sure that the German Bundeskartellamt has engaged very extraterritorially, to the negative impact on American business. And I know for sure that Mario Monti, when he was Commissioner for Competition in Europe, blocked and declined to approve – rejected – General Electric’s proposed acquisition of Honeywell, which was approved by the United States authorities and rejected by the European authorities.

So there is much more to this extraterritorial issue than has been suggested. I think if you’re going to make that argument, sir, you really have to be aware that in the – in the legal issues, the legal areas – maybe not financial, but in the legal areas, there’s a huge amount of extraterritoriality going both ways.

MR. LOWERY: We can get one more question – because, let me just say, there is stuff on the financial side as well. Sir, right here.

Q: (Inaudible) – the Capital Trust Group. Mr. Minister, there is a cloud hanging over Greece, Portugal, Spain and Italy. Let’s assume on Wednesday the Greeks come through, and there is an agreement. But suppose we have an oil crisis because of Iran, and the price of oil goes up to 120 (dollars) or $150. Greek’s going to suffer, Portugal’s going to suffer, Italy’s going to suffer. What will the – what can the world do to help these countries?

And secondly, on the IMF firewall – don’t you think that the Chinese, the Gulf Arab states, the Brazilians and the Indians and the Russians should contribute more to the IMF, so we’ll have a solid firewall to handle other crises?


MR. FRIEDEN: First on the issue mentioned on extraterritoriality of European decisions: I do not disagree on this, except that in your example, those were decisions not of – not – these were not effects of laws, but of decisions by administrative authorities, either the European Union or of member states of the European Union – whereas in my remarks, I spoke about laws adopted by United States parliament – Congress.

So I think there is a slight difference there, but I am never suggesting that Europe is without mistake here. I think these issues of effects on other continents by decisions that you take in – on one place should be taken into account, especially when it is with regard to friends with whom you are dealing on a daily basis. And therefore I think this also should be part of this trans-Atlantic dialogue. That’s why I – we need this dialogue also on the issues of competition law indeed.

Your questions, I take the second one first because that’s easier. (Laughter.) I think indeed that, when I talk about the IMF, it’s unfair only to speak about the United States. I’m speaking about the United States because I am Washington, D.C. (Laughter.) But were I in Beijing, I would say – and I was there a few months ago – I mentioned exactly the same thing.

And the – China also has a huge interest in having a stable euro – a stable eurozone, because quite an important amount of their currency reserves are in euros. World trade is such that China, U.S., Europe, all this of course is closely linked nowadays. And therefore also they have an interest, and they should play a role in – despite the fact that they call themselves still an emerging economy – in the international financial institutions such as the IMF.

The first part of your question is of course one which – for which probably there is no answer, because you are speaking of a cloud. As long it is a cloud hanging somewhere, it’s OK. If that cloud comes down with like a hurricane, and all this comes together – irresponsible behavior in Iran combined with fiscal problems in Italy, Spain and what other countries you mentioned – I think it’s probably impossible in that case to solve these all together. The – you can never have a firewall that is strong enough to take off the market, for a long period of time, quite a number of economies.

So therefore all these issue – how strong should this firewall be? I think at the end of the day, there is no clear answer to this. That’s why I think that what Italy and Spain are now doing are steps into the right direction; that we must make sure that – on the geopolitical front, i.e. Iran and so on – we must do whatever is necessary – in close partnership with all responsible governments – that nothing dramatic can happen there, because otherwise, if the problems become so big, you cannot just finance all those problems. So we must do what we have promised to do in Europe.

I think the government of Prime Minister Monti is doing the right thing with broad political support in Italy. I think the Spanish government is doing the right things, but of course the government only started, so we have to see what this will lead to. And the geopolitical stability is a key element when it comes to making sure that the economy is also still not affected too much by a dramatic increase in oil prices. You can only do a certain number of things. I hope that the scenario that you are describing will not occur.

MR. LOWERY: Ma’am. The microphone’s right there.

Q: (Off mic) – department at the IMF. Oh, sorry – the IMF. National Public Radio has been doing a really good job of covering the situation in Europe over the last year or two years. And the other day they started a segment saying: Default, for all its complications, is simple compared to what Greece is trying to do. And it struck me, as I was sitting there listening to this, that that really sort of hit the nail on the head in a critical respect for Greece.

As a – as a negotiator frequently in these kinds of situations in Asia, Russia, Turkey, I know that there are times when you hope things can happen. And you do things – you agree to things because you think, if we’re lucky, this is actually going to work. But now it’s been two years, and it hasn’t worked. And I wonder – the big question I have is, is it fair to ask – to permit, to encourage – Greece to try to do what they’re doing without the use of the exchange rate?

MR. LOWERY: And why don’t we get one more question, so you can think about that one – because that was not the easiest question I’ve ever heard in my life. (Laughter.) The gentleman right there – the – (inaudible) — whose hand is still up, and then I’ll get back to you. How about that? All right?

Q: Marten van Heuven, board member, Atlantic Council. Mr. Minister, you laid out a vision of more integration in Europe. Could you give us your assessment of how the European publics feel about this issue?

Q: Brian Beary, journalist for Europolitics. And my question really just follows up on that one. When – the question was, is it fair? And I would suggest – in your comment you said that whatever happens in Greece now is less relevant than it was six months ago, because you’ve created a firewall. So basically are you saying that, you know, you had to put Greece through this to save the euro, but you’re really sacrificing Greece – because it hasn’t helped Greece; it’s driven the Greek economy into the ground – but ultimately it’s better because the euro is going to be saved because of that?

MR. FRIEDEN: The first and the third question are to some extent related. I think we never experienced – we have no example where a default in a currency union occurred. And I think therefore the examples that we have been looking into, or the rescue packages that were established in Latin America or elsewhere, cannot be translated one-to-one to the European situation.

So therefore I was extremely reluctant, months ago, when the theoretical possibility of a default was being contemplated. It might have been – might have had some advantages for Greece’s national economy, but it might have had huge negative consequences on the other countries of the European – of the eurozone. To that extent, I think that today this – from a theoretical point of view – is not anymore the case, because, first, the markets anticipate a number of things, or have anticipated a number of things. And secondly, as I said, we have set up EFSF, ESM, all the things which we didn’t have when this crisis unfolded.

I still think that we should do our best to keep the eurozone with all of its members. But again, the key lies with Greece today. And therefore, if the Greek people or the Greek political elite does not apply all these conditions – and I do know that that is very difficult also for the Greek people, so I am not underestimating the problems that that creates in Greece – if they don’t do this, I think they exclude themselves from the eurozone, and the impact on the other countries now would be less important than maybe a year ago.

That might be something which would allow Greece also to – at least to some extent, to get a new start – provided we would nevertheless also in that situation help Greece to create an economy that can create jobs. This, however, is not the scenario that I, as a minister of finance of the eurozone, prefer. I prefer by far full compliance of Greece with the conditions that the troika has put forward and that the finance ministers of the eurozone have endorsed. But I also say that the eurozone and Greece is something that will take many years before this can be again a very stable partnership. So we have embarked on this for many, many years. And I think the same goes, by the way, for the IMF, because we are doing this together with the IMF.

So there is no definite answer to the questions you put forward today. We have been asking ourselves many times those questions. Our preferred scenario is Greece complying, eurozone giving additional funds, clear monitoring – and I cannot insist enough on this aspect – clear monitoring of the implementation of what Greece has promised to do. If they don’t do all this, I think then we must go on with 16 countries.

And by the way, the same would be true for other countries in the eurozone. Our interdependence is such that somebody who is in this club must comply with the rules, because the effect on others is huge. But again, don’t get me wrong on this; let’s first try the other thing, and then I think Greece will have a long path of recovery over the decades that will follow.

The other question is not easier. That is the political question, what public opinions in Europe think. As I said, there is a clear contradiction in what people are expressing in Europe. The obvious, in my mind, is that most of the challenges we are faced in Europe cannot be dealt with on the purely national level. In all the areas I have been dealing with in my 10 years or so in government – be it internal security, be it defense, be it monetary issues, be it energy issues – all these issues cannot be dealt with purely on the national level.

I think the nation-states – certainly in the small nations of Europe – cannot find adequate answers to all of these issues. And I would even say many of these issues need global answers.

And therefore, I think that we should better explain to the – our public opinions, that more integration is not giving up of sovereign rights, but exercising sovereign rights in common – for the common good. And therefore, we have to strive to a model where we realize that although we are emotionally attached to our countries, that the countries cannot bring about all the solutions.

And therefore the more integrated model of Europe, the more integrated model of trans-Atlantic relationship – of the world, actually – is an answer to the challenges we are facing – I could have added the fight against extremism. The fight for human – fundamental human values, which are more or less the same in all civilizations, requires us to be more integrated. And that starts for us at the European level.

Public opinion in many countries is not there, but that is partly due to a number of political leaders who do not explain how we relate all together. And it’s our task as political leaders to explain this aspect of interdependence. And that’s why I also mention that we need a new model for our countries and for the citizens of our countries to meet a number of challenges. It’s a huge task. And we did not come from one day to another, but a more inward-looking solution is short term and destructive in the long term.

MR. LOWERY: This gentlemen right here and then yourself. So two questions, you know.

Q: Bobby Stein with Chartwell Captial. Thank you for all your public service. The key question I have is, we’re talking about all these sovereign countries. The one thing that Europe does have a problem with is the banks and the leverage of the banks are substantially higher than we have in this country. What is the plan to reduce the leverage in the European Union?

MR. LOWERY: Gentleman right back there –

Q: Thank you. Garth Trinkl, Department of Commerce. Thank you for your comments, sir. I have a strategic question. And this is following in the – in the footsteps of the Zbigniew Brzezinski’s new book on strategy and his comments on PBS “NewsHour” in the past week, that he believes that there’s going to be a transition in the Russian Federation in the shorter term rather than the longer term.

Could you – I – could you talk a little bit about your vision for these concentric circles? Do you see concentric circles smaller than 16 states of the European Union? And what’s your vision for Turkey and the Russian Federation going forward? Is – do you have any comments on those? But more importantly, are – do you have a vision for smaller concentric circles than the eurozone as it is now – relationship between the Eurogroup – eurozone and the European Central Bank. Thank you.

MR. LOWERY: All right. Those are two very different questions, so good luck. (Laughter.)

MIN. FRIEDEN: I think on the first one, I think we have to continue to discuss these issues not only in Europe but together with the main economic actors in the world, certainly the United States. And I think what we have been doing with Basel III and all this new rules on capital adequacy are probably the right answers, at least in the medium term, to deal with those issues. But again, it is absolutely necessary that all the major economies apply those rules in the same manner, otherwise we just risk new imbalances which would be harmful to the world economy.

On these circles, I would like to recall what I said early on: The objective must be the same. And the objective is more integration, more bringing together the people of the European continent, because we have common interests and because we all belong, to some extent, together, which is not that everybody has to harmonize everything – it’s not uniformity in all degrees – but it’s certainly bringing people closer together.

If this cannot be achieved one – from one day to another, this political integration which the previous person asked about, I think that in this process, these circles can be the way forward. We have them already to some extent. We have the Schengen visa area. We have the euro. We have, unfortunately I must say, a number of new treaties in the European Union that have not been adhered to be all the countries.

Take the most recent treaty on fiscal discipline, what we call the fiscal compact. Twenty-five countries have declared that they would adhere to that treaty. So it’s not 27, it’s 25. This is not, for me, the ideal world, but it’s probably a realistic way forward. This is within the European Union. Then I do think that Europe has a clear interest in having also circles of – and a close relationship with countries that are in its direct neighborhood.

Turkey is one of those countries. We are, like the United States, partners of Turkey in NATO. We are neighbors of Turkey. Turkey has made an application to the European Union, but Turkey will certainly not be tomorrow a member of the European Union. So in the meantime I think we need to develop much more than just neighbor good relations with those countries.

The bilateral relations we have between the European Union and Switzerland can be a model for many of those partnerships with countries such as Turkey, to some extent also with Russia – although with Russia we have no direct – or no big border except in the north. So the relationship and the size of those – of that country is a little bit different. But we certainly also have a clear interest in having good relations with Russia, which is a country, of course, that is undergoing a quite substantial transformation, as you said yourself.

Again, in this, I think, Europe should not always do this only on its own, but we should also do this in close cooperation with the United States, because together we should have good relations with the countries you mentioned. I do not see them in the classical sense of the circles I described early on. But in a broader circle around the European Union, it’s absolutely necessary because the borders of the European Union cannot be the borders of – they are not the borders of the world. There is something outside these borders and we have to deal with this in a more structured way, as we have done in the past.

MR. LOWERY: This lady right here.

Q: My name is Sunjin Choi at Langham Partners. Minister, thank you so much for lucid and succinct remarks. My question is in regard to sovereignty issues and credit rating agency. In January, S&P downgraded many of eurozone countries. And France and Austria’s downgrade – AAA to AA – and four other countries, Spain, Italy and Portugal and Cyprus, was downgraded two notches down. And Slovenia and Slovakia and – was downgraded one notch.

My question is, why not in Belgium? You are a member of Eurogroup. You are a – (inaudible). You often talk to Belgian ministers. Belgian government is faced with large issuances, as well as – they have not dealt with the – (inaudible) – Belgian – (inaudible) – unlike your government, you have been very successfully able to offload 90 percent of – (inaudible) – Qatari government. Can Belgium learn lesson from you? Thank you.

MR. LOWERY: Well – (chuckles).

MIN. FRIEDEN: I am not working for a rating agency – (laughter) – so I do not always completely understand why certain decisions are being taken by the rating agencies. They are sometimes difficult to understand why some countries are targeted and others not. They were, I think, for all of us a warning that things had to change in a number of countries. But I’m not speculating why Belgium, according to your description, was treated differently.

I think – and by the way, we were for a long time in monetary union with Belgium. So we know the situation of Belgium quite well. I think that the Belgium government – the new Belgium government which came into office after two long periods of political (vacuum ?) has – embarked on a number of reforms that I think also are going to the right direction.

But again, I do not apply the same criteria than the – than the rating agencies in judging this, but I’m judging what the minister of finance tells us in the Eurogroup. And I think they are fully aware of their responsibility also in restoring some public financing and reducing their public debt, which is quite high – more or less the level of the public debt of the United States, so you know how high it is.

MR. LOWERY: One last question because we’re basically running out of time. So the woman in the back.

Q: Yes, my name’s Roz Engel, and I’m from the National Defense University. My question really relates to a connection between defense and security and the economic crisis. And I think everyone in the room appreciates the connection between European economic integration as sort of a strategy for creating regional security – so a path towards security in terms of integrating. And my question really is trying to connect this sort of soft path toward security with sort of the hard power capabilities that the United States, perhaps, has sort of more invested in over the years.

So in the past, say, decade, European investments in defense have been falling – at least relative to the rest of the world. And in the last couple years, of course, it’s accelerated. So my question is along the lines of: Do you think that European spending has reached too low a level in terms of defense? And do you believe that some of the fiscal coordination, cooperation at the union that is being contemplated for Europe holds any promise for consolidating fiscal defense spending in Europe in the future?

MIN. FRIEDEN: Obviously defense expenditures are part of national budgets and therefore measures that are being contemplated right now in all of our countries will also affect defense expenditures. I would like to say that what you said about the reduction in the budgets for defense does not – did not apply in the last few years to all the countries. My country, despite the fact that there is a small defense budget, increased its expenses as part – as member of the NATO over the past few years. I know that others did the same, but it’s true that the United States have invested much more in defense than Europe did in the past.

I think we have to see this as a common project. As I said beforehand, I believe that NATO is a key instrument when it comes to ensuring peace and stability in the world. So we are very grateful for what the United States are doing. I’m also – I read with great interest the recent speech by the secretary of defense of the United States at the Munich security conference, where he confirmed the commitment of the United States towards Europe but also towards the defense budget, knowing that also in United States this is an issue – how you deal in times of economic difficulties with defense expenditures.

I think we must develop NATO as a common instrument for world security and therefore also think better where we should invest in order to make it an efficient – in order to have efficient capabilities to intervene in the areas where our military forces have to intervene. This is debate that it not only started the crisis already. When I was defense minister six years ago, we already tried to reorganize our capabilities a little bit to make it more efficient, faster, and therefore also to shift the investments from one part to another.

I think that Europe has a role to play as well, and that we cannot leave the burden just on the shoulders of the United States. In the short term, though, I cannot imagine that European governments will increase their budget for defense. I think, though, that intelligent spending means those in the U.S., in Europe and with other partners that are members of NATO, that we have to concentrate our expenditure on those military capabilities that are most necessary to fight the new forms of instability, be it terrorism or the areas in which we are currently active in – Afghanistan, still the Balkans, maybe North Africa.

And we see, in the most recent conflicts, that we need today other rapid intervention forces than those we had – that we needed in the Second World War and thereafter. And so maybe we can spend the money more in – in a more intelligent manner, spend less but spend it better. And that requires our armies, our defense forces in all of our countries to go through a – to an intensive transformation which will not be easily achieved. But if you have less money, you have to spend it – not only in defense issues but also in other issues – in a more intelligent manner.

I think Secretary Panetta spoke of smart defense. We are saying in Europe that we need to make smart cuts in our budget, that is to say that we should target those expenses that are not harmful to growth, and the same is true when it comes to defense. We cannot do everything we would like to do in the years to come, but Europe has a clear responsibility also in that area. We cannot just – the Americans let do the work. We benefit of that. We are together in this. World security is a common issue and let’s spend money intelligently together.

MR. LOWERY: So, Mr. Frieden, thank you very much for covering such a wide breadth – (applause). I was just going to say, I worked for many finance ministers and none of them could have answered a question on defense. And you just did it very well. (Laughter.) So thanks once again.