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Is Europe on the brink of economic implosion? With the Eurozone ‘pigs’ – Portugal, Ireland, Greece and Spain – grappling with economic instability, Dateline’s George Negus talks with France’s Finance Minister, Christine Lagarde, about the precarious state of Europe’s economy.

Lagarde, ranked by Forbes magazine as one of the most powerful women on earth, and voted Europe’s Finance Minister of the Year by the Financial Times, takes a hard line.

She tells Negus that excess is to blame for the Global Financial Crisis, and that it could happen again. She warns that banks will never do business in the same way again, and that she has hope that countries traditionally opposed to banking regulation will see the light.

She is tough on Greece, a country she says has lied and deceived the European community over its financial problems. Yet she gives the strongest indication so far that the ‘Eurozone’ stands ready to bail Greece out, once it shows commitment to change. And she proposes that the way forward is backwards – no more hubris, no more making money for the sake of making money – but that sensible and balanced policies is the way to go.

CHRISTINE LAGARDE (French Economics and Finance Minister) – 23rd February 2010

Almost out of the blue, the great worry here in Europe at the moment is that not only countries like Greece and Spain, but maybe even Ireland and Portugal could economically go down and need to be bailed out, by the EU or somehow, and the question being asked is, could this in turn infect the rest of Europe, maybe even the rest of the world and provoke, possibly, even global financial crisis, round two? Madame Christine Lagarde, the French Economics and Finance Minister, is highly regarded internationally on the whole question of both the causes and the effects of the GFC. So who better to talk to right now? Dateline met with her at her office on the banks of the Seine.

GEORGE NEGUS: Minister, thanks very much for time because I realise you’re pretty busy solving a lot things, not in the least of which is the global financial crisis and its impact here. This overall global problem is still with us but now you’ve been beset here in Europe with this sovereign debt problem with Greece in big trouble, Spain in big trouble. The so-called PIGS.


GEORGE NEGUS: I know. It’s a horrible acronym. So we’ve got Portugal, Ireland, Spain and Greece, Greece and Spain.

CHRISTINE LAGARDE: Greece and Spain.

GEORGE NEGUS: Is it possible that could infect other European countries and maybe even flow on so that this might end up being, if you like, stage two of the financial crisis. How worried are you about what’s happening here in Europe because that’s something we never anticipated?

CHRISTINE LAGARDE: Well nor did we anticipate that the states would have to get involved the way we had to get involved in 2009. Because we had to literally flood the markets, or central banks rather, had to flood the markets with liquidities to reactivate the inter-banking system first. That was totally unexpected. So we had to get involved and we’re facing a totally different situation now where clearly the markets are wondering whether sovereign debt is actually solid and can be trusted in the future. Now on this PIGS issue which is not very kind. As much as I like the animals . . to call somebody a pig . . .

GEORGE NEGUS: As acronyms go, it’s pretty ordinary.

CHRISTINE LAGARDE: It’s pretty unkind. Greece has a particular issue and when you look at the combination of the macroeconomic data concerning Greece. When you look at the public finance management and the lack of solid statistics on Greece and its performance, you have a recipe for major questioning by the markets as to the solidity of the country.

GEORGE NEGUS: Was it fact an accident waiting to happen economically?

CHRISTINE LAGARDE: Well it was, it was brewing so to speak. And we knew it because since January 2009 the country has been under notice within the Euro group where we share the same currency, the Euro, to put its house in order.

GEORGE NEGUS: Are we looking at bailouts here? Are we looking at the EU having to bail out countries and could that have a domino effect then. That countries all over Europe could be falling into the same plate.

CHRISTINE LAGARDE: Don’t forget the Euro was built ten years ago on the premise there would be no bail-out because everybody had to play by the same rules and had to respect the same discipline. In the case of Greece, there’s clearly been a failure to observe the discipline. And therefore we have this lack of credibility which is something the Prime Minister of Greece himself admitted. He said the major deficit that Greece has, is not a deficit of public finance, it’s a deficit of credibility. And he’s right.

GEORGE NEGUS: So they’re going to have to fight their own way out of it?

CHRISTINE LAGARDE: It’s not as simple as that and it’s not a one-way street. It’s a two-way street, the euro club. It’s do what you are supposed to do, a man’s got to do what a man’s got to do and Greece is going to have to do that. Demonstrate that you can actually do it. Because Greece has told us in the past ‘I’ll do this, I’ll cut that, I’ll squeeze here and I’ll collect more’. But they haven’t been able to do it. So they have to demonstrate they can do it and in consideration, clearly members of the eurozone clearly will be prepared to help Greece if that was necessary.

GEORGE NEGUS: Is it possible that psychologically, leave the economics and the politics out of it, is it possible psychologically we still don’t want to believe that this is happening. Do you think we’re deluding ourselves that we’re even vaguely on top of it?

CHRISTINE LAGARDE: Well my own psyche is not fooling me in that direction. I look at numbers, I look at practical options and I look at statistics.

GEORGE NEGUS: But out there?

LAGARDE: And the big concern we had with Greece is that was missing.

GEORGE NEGUS: Can I ask you this? If you had to rate the causes of the whole global financial crisis, not just the European aspect that you’re so close to but generally is it bad governance, is it poor corporate values, is it bad banks, is it greed, stupidity, human nature or all of the above?

CHRISTINE LAGARDE: I’d use one word – excess. It was in the main and in each and every category that you’ve just mentioned excess. And the sentiment that we with our sophisticated models, with our ability to run transactions, with our faith in the market, we could overcome the basic rules of balance, equilibrium and reason. It was excess in all categories.

GEORGE NEGUS: People have tried to describe what had happened. Some have even gone so far as to say it’s the failure of capitalism. That the market, the marketeers and the capitalists themselves, the people who were almost religiously committed to the system, tried to make the system do what it wasn’t meant to do which was just make money?

CHRISTINE LAGARDE: There was a bit of that. But don’t forget that capitalism evolves and evolves very regularly on the back of those crisis – I think what was peculiar about this crisis was its abruptness it’s depth and its spectrum. It just went in a nanosecond across the world and it infected finance throughout and from finance it went, quote unquote, to the real economy. And I think a lot of people are now questioning the value of finance for the sake of finance and money-making money on the back of money on the back of money.

GEORGE NEGUS: Do you agree with the likes of George Soros? A hedge fund, a very successful hedge fun player but also political philanthropist. He says, and he actually said it to me when this happened, that the market can’t be trusted to look after this on its own. They can’t be trusted to get us out of this. That regulation, by law is the way to go. Do you agree with that?

CHRISTINE LAGARDE: He’s right. Yes, he’s right, he’s right. It’s a bit like those people who say capitalism has to become moral. Capitalism is not moral in and of itself. It’s not one of its attributes at all.

GEORGE NEGUS: A contradiction in terms.

CHRISTINE LAGARDE:Absolutely. And yes I believe that we need to fix good and better rules. More importantly, because I’m a very practical minded person, once the rules are there we need to make sure they’re respected.

GEORGE NEGUS: Who is going to make the decision? Who is going to make the decision on this framework, this new framework so we don’t get ourselves into this same state again?

CHRISTINE LAGARDE: Well people are working on it at the moment because the G20 has instructed the financial security board and the international monetary fund to work on those two fronts. One is to set the rules and to make sure that the rules on the capital of banks, the rules concerning compensation, the rules concerning the nature of derivatives, the rules concerning clearing platforms. All those rules have to be worked out and the FSB, the Financial Stability Board has certainly been tasked with a lot of that. The IMF, on the other hand, has been tasked with setting up this sort of control system and alert system when they can actually spot when a bubble is forming, or when something is going wrong somewhere.

GEORGE NEGUS: Gordon Brown was a ‘let the market rip’ man which seems to be strange coming from a man of his ideology. The Americans by nature, hate the whole idea of regulation and intervention by governments. You sometimes think if they had their way there would be no government, Barack Obama at least.

CHRISTINE LAGARDE: It’s an old story isn’t it , for them?

GEORGE NEGUS: So if you can’t get the Brits and the Americans to talk regulation, to talk intervention, to talk a new system, how can it work without them, let alone China who probably also think ?….

CHRISTINE LAGARDE: Well I think there is hope. There’s always hope. When I listen to Gordon Brown asking for a taxation on financial transactions there is hope. When I see my colleague Alistair Darling come to terms with all of us to say ‘yes we need European supervision’, there is hope … Now if you look at what President Obama has suggested, he’s steps ahead, you know. He’s suggesting there should be a ten-years taxation on banks so that banks actually refund the US taxpayer. So that is clear involvement.

GEORGE NEGUS: So you’re saying he’s suggesting that. Will he succeed? In a country like that where the whole idea of government leaning on a bank is anathema.

CHRISTINE LAGARDE: Yeah but when you look at the number of people unemployed in the US, nearly 10 per cent. . . public opinion is strong and they don’t want that to happen again.

GEORGE NEGUS: The banks and the way they behaved and the finance companies, the financial industry generally, have become a symbol of all of this. And the obscene bonuses that they were paying themselves, and in some cases still are, in the UK and the US etc. How’s your system working?

CHRISTINE LAGARDE: Well we’ve got three things in place. One is, we’ve now included in our system of regulation, the rules set by the G20. That is, if there is a bonus, there must be a malice. A portion of the payment must be deferred over a period of time. So that its not just a catch the money and run and forget the rest and leave the losses behind. Second, we’ve decided any bonus paid in relation to 2009 where we had to step in to secure the system, will be taxed at 50 per cent. So any bonus paid to any trader for their part in this big market where there is competition – 50 per cent back to the state. And third, we have this good bad cop, this gendarme, who is a very senior gentleman, former head of the IMF, in his 70s, highly respected, who is checking all the compensation plans and saying ‘ok there, fine, it’s in line with the rules, there excessive, please redraft’.

GEORGE NEGUS: He’s the guy that the banks would love to hate.


GEORGE NEGUS: Yeah right. It’s a whole new ballgame we’re talking about isn’t it? It’s not business as usual and it never will be – again.

CHRISTINE LAGARDE: No. It’s going to be different. To take the example of the banks, they know for sure that they are not going to make the same amount of money, they’re not going to generate the same amount of profits because they’re going to have to put in more capital.

GEORGE NEGUS: We live in strange times don’t we, where the taxpayer has bailed out private enterprise? I spoke to Joseph Stiglitz about this. I said can we use the term nationalisation? He said, ‘Oh we don’t like that word. We call it pre-privatisation. That the taxpayer will give the money and when they’ve fixed themselves up then they can buy back their own bank’. We would never have anticipated this sort of almost political, not economic turnaround.

CHRISTINE LAGARDE: As far as we’re concerned, no taxpayers money has been engaged because all of it has been refunded and we’ve collected over 2 billion euros interest on the loans that we made to the banks. So it’s been quite a bargain for France and for the state.

GEORGE NEGUS: Is it the danger though that countries are going to get into debt all over again just to enable them to have their stimulus packages etc?

CHRISTINE LAGARDE: We have engaged nearly 2 per cent of GDP in the stimulus package in 2009 and that was the only way to stimulate the economy and to keep people off the street and with a job so I have no regret for having done that. Now clearly as we gradually withdraw the stimulus package, we need to make sure that private enterprises are back to business and are going to invest and are going to create value and keep employment going. It’s like driving a car, you change gear but you have to be very careful that you don’t stop the engine.

GEORGE NEGUS: Nice meeting you and thanks very much for your time.


GEORGE NEGUS: Madame Christine Lagarde, and you’d have be impressed. Unlike so many others in the world right now having their say about the global financial crisis, she actually makes sense – and without all the usual political jargon and economic gobbledegook. Hear, hear, Madame!