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French Finance Minister joins Lateline -

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French Finance Minister joins Lateline

Broadcast: 21/04/2009

Reporter: Tony Jones

The French Finance Minister, Christine Lagarde, joins Lateline from Paris to discuss the latest IMF


TONY JONES, PRESENTER: Earlier today, before the release of that latest IMF report, I spoke to the
Finance Minister who likes to say that women are like teabags - you never know how good they are
until they're in hot water.

Christine Lagarde is the outspoken Finance Minister of France and she joined us from Paris.

Christine Lagarde, thanks for joining us.


TONY JONES: Now the IMF says we have to prepare for an unusually severe and long-lasting recession.
Doesn't' that contradict President Obama's recent rhetoric about "glimmers of hope"?

CHRISTINE LAGARDE: Not necessarily. There might very well be glimmers of hope, and yet a
long-standing downturn in the economic movements. So, I've no idea whether in Australia your
audience is more concerned about the forecast than whether forecasters are right or wrong, or
whether they are more concerned about actual efforts to kick start the economy and to certainly
alleviate the consequences of the current economic crisis on the population. That's what I'm
personally concerned about as far as the French economy is concerned.

TONY JONES: Well as part of those efforts, world finance ministers are meeting again in Washington
this week, and it's reported that the IMF will be putting them under pressure to, "... keep the
stimulus taps open through to 2010." Is that what you're expecting? Is that what should happen?

CHRISTINE LAGARDE: I might be a very short term person, but I'm more concerned about what is
happening next week, next month and throughout 2009, because that's the year for which we have
already quite a lot of measures underway which I want to see through on the ground for companies
and for people. What will happen in 2010 will be another story, and I think that we need to see the
outcome and the effects of what we're doing in 2009 before we start planning ahead of time what
will take place in 2010. We should stand ready; there is no question about it. But what really
matters to me and where the focus of our energy, and certainly my drive, is at the moment is 2009.
Tomorrow rather than next week and next week rather than in a month's time. I think there is
urgency, and it's not a question of how many zeroes we put on the board or in how many Euros we
forecast yet more stimulus, but what happens now, and does it actually trickle down all the way
throughout the economy - that's what matters to me.

TONY JONES: Well in this country there's been a fundamental debate about cash stimulus payments
versus long term infrastructure spending. Now, do you believe that both things are necessary? Or
that cash payments to promote retail sales are wasteful?

CHRISTINE LAGARDE: I'm far more convinced of the efficiency of investment, and particularly public
investment. I'll tell you why: at the time when there is a bit of a credit crunch - and certainly
there was a credit squeeze a few months ago - it was difficult for companies and for private
investors to invest in the economy. And the only valid signature that could attract funding were
state or any company associated with state sovereignty. So it's for those companies to actually -
and those companies with state sovereignties about them, or for the state to actually invest, throw
money in the economy by way of building the infrastructure, fixing the infrastructure when it needs
fixing, investing in research and development, public research and development if necessary, so
that we actually start the process which, if accompanied by a relaxation of the credit access, will
actually engage private companies into the same movement. But that's what I fundamentally believe
in: public-funded investment to kick start a general movement of investment which in my view is the
best multiplier for growth and which also helps to actually concentrate growth where is will
matter, which is, in my view, training, research and development, innovation and public
infrastructure, to facilitate the life of companies.

TONY JONES: But how do you ensure with so many governments spending hundreds of billions of dollars
in these stimulus packages that they don't all end up permanently indebted, and as a result,
terminally weakened?

CHRISTINE LAGARDE: That's a risk - it is clearly a risk. If too many states borrow too much for too
long, and therefore dig themselves into deficits that is only funded by indebtedness, we run the
risk. But we have to compare that risk with the risk of a major credit squeeze, a complete deficit
of investment, a shrinking consumption and a situation that would be deflation. And clearly we
cannot afford that at the moment. So we need to manage, in the short term, this medium term risk
that needs to be channelled, that needs to be tempered, as soon as growth and sustainable growth
kicks in. It's a very, very subtle management of economic policy. And it's a very fine line to
hold, but I think we have to do that.

TONY JONES: Yet you've talked openly about officials in Europe and the United States grabbing at
ideas and then discarding them and then picking them up again and in doing so transgressing most of
the rules of economic management. Now this suggests that in the global panic to save capitalism
from itself, that you may all have made some fundamental mistakes that we just don't know about

CHRISTINE LAGARDE: I like the way you use the word transgress because transgression has been very
much the rule of the game recently. Why is that? Because we're facing a crisis, the scope of which,
the depth of which and the fast-spreading of which was totally unprecedented, and for which
economic models and traditional reasoning has not proven efficient, neither to measure, analyse, or
remedy the situation. And that's the exactly the reason why we have to think outside the box,
propose measures that would've been unthought-of only a few months ago, simply because foreign -
unprecedented crisis. Under exceptional circumstances, we need to apply exceptional measures. And
therefore, we need to take the risk - we try to measure it as much as we can - but we need to take
the risk of making mistakes. There's a possibility that we do that, but we simply cannot afford not
to do anything and we cannot apply the old recipes to a new dish, which is the economy as it
unfolds at the moment.

TONY JONES: But when they finally learn the consequences of living with unprecedented and massive
levels of government debt, will the world's great social democracies find they simply can't afford
their own most expensive social programs.

CHRISTINE LAGARDE: There is a vast diversity of social programs around. And, you know, if we look
at Europe, for instance, although we are in the same economic zone, 16 of the 27 member states
share the same currency - the Euro - and yet we have very different social programs. Some programs
are far more state-financed than others, pensions schemes are different, and yet, the whole system
works. It's really a question of culture, of social balance within each individual country. But,
you're right, some of the expenses that have been funded up until now on a collective basis might
have to come into question. It's, you know, a time when most certainties need to be questioned,
need to be weighted, so that we can keep the highest benefit and keep the cost at a minimum at a
time when, clearly, states have to go into further indebtedness to finance the stimulus packages
that we need to throw in.

TONY JONES: What do you make of the argument from conservatives in the United States and here in
Australia that tax cuts are the most efficient way of stimulating the economy?

CHRISTINE LAGARDE: As you said earlier, new recipes, new tools, new techniques must be adopted,
adjusted if necessary, and tax cuts might be a way to engineer a kick start of the economy. It
remains to be proven. At this point in time, as far we're concerned in France, we've decided to
keep taxes at the same level. We don't want to increase taxes, we don't want to increase
contributions. But equally we recognise that now is not the time when deficits are growing and when
indebtedness is getting bigger, that's not the time to reduce taxes in our country.

TONY JONES: Do you agree with the Australian Prime Minister Kevin Rudd when he says that the entire
crisis was triggered by what he calls extreme capitalism, and that the answer is for government to
take a far greater role in their economies? And does that create a risk of a move away from free
enterprise and towards big government?

CHRISTINE LAGARDE: I have huge respect for your Prime Minister. He's a very, very wise gentlemen
and certainly one that I have admired in action at the G20 meeting.

TONY JONES: Well he'll be tremendously pleased to hear that.

CHRISTINE LAGARDE: No, but I'm telling you the truth! I find myself in major agreement with him. My
personal belief is that this crisis stems from excess, abuses of the system. I don't suggest,
though, that it would be the end of free enterprise. I think that a liberal economy can also have
its social dimension and that liberal economy, as liberalism is understood in economic terms, can
only survive if it is properly regulated. And I think it would be a complete deterioration if you
will, or abuse of liberalism itself, if it wasn't regulated. So, when he says that government is
back and policies are back, I totally agree with him if he means regulation, ownership of the
development of a free market economy by politicians, by those who have been elected by the people
to represent the general interest and to make sure that proper functioning of the economy is
actually respected. And to that end, we need a combination of sensible and strong regulations, but
also sensible and strong bodies that will make sure that regulations are actually applied. And if
there are violations, that such violations are sanctioned appropriately.

TONY JONES: Well on that issue you've been one of the main voices calling for new rules, for a new
architecture of the financial system. But what if any significant changes have been made since the
London Summit, at which you and your French colleagues were so vocal in calling for change?

CHRISTINE LAGARDE: Well, point number one: the need for better regulation was articulated as one of
the key objectives of the Summit, which was not the case only a few days before we started the
meeting itself. And if you want specific examples, let me give you a few. One, rating agencies,
which have had a lot to do with the way in which instruments were wrongly rated. They will have to
be registered, they will have to comply with codes of conduct, they will have to avoid conflict of
interest and they will have to dissociate and classify financial instruments differently depending
on whether it's a state obligation or whether it's a financial instrument that is based on
sophisticated techniques. That's one example. Second example: hedge funds, which accumulates and
move around masses of money in huge quantities. They will have to be equally registered, regulated
and whenever they become of systemic importance, where they could actually endanger the system then
they will have to be under the watch of supervisors. Another example which comes close to anybody's
mind is the compensation paid to traders, for instance, where we realised very quickly that some of
the compensations included what they call pro-cyclical effects, which is a way to say that the
compensation paid to traders accelerated the crisis and stimulated and incentivised short term
objectives, short term behaviour as opposed to sustainable and more longer term instruments and

TONY JONES: OK, but let me ask you this because the United States pretty much ignored these kind of
calls for a reform for a long period of time. Is the Obama administration really serious about
reforming the global financial system with all that entails?

CHRISTINE LAGARDE: You know, I would certainly hope so. And it seems clear to me, having listened
to him, having watched him in action, including at the G20 meeting in London, that President Obama
is exactly on that page, and that he will make sure, I hope, that transparency, accountability,
responsibility of players is actually transformed into the appropriate, sensible, solid level of

TONY JONES: A final question: have we seen a philosophical shift, a permanent shift away from
unfettered free enterprise?

CHRISTINE LAGARDE: You know, given the depth of the crisis and the consequences that it is on
people who are losing their job, who are being kicked out of their house, who do not have access to
credit, I would hope that this brings back the understanding that we cannot live with excess, with
abuses, with greed, and that there should be balance, there should be equilibrium, there should be
less distortion throughout the system.

TONY JONES: Christine Lagarde, we'll have to leave you there. We thank you very much for taking the
time to talk to us tonight on Lateline.

CHRISTINE LAGARDE: It's lovely talking to you.