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French Finance Minister Reflects on Economic Crisis

November 21, 2008 at 6:20 PM EDT
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Despite the deepening global financial crisis, France experienced a slight uptick in economic growth during the third quarter. French Finance Minister Christine Lagarde describes her country's situation in an interview with Margaret Warner.
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JUDY WOODRUFF: Next, the crisis spreads to Europe. Margaret Warner interviewed the French finance minister, Christine Lagarde, in Paris this morning.

MARGARET WARNER: So, Madam Minister, thank you for joining us.

CHRISTINE LAGARDE, French Finance Minister: My pleasure.

MARGARET WARNER: So, to begin, how bleak do you think the world financial picture is right now? Do you think we are on the brink, really, of worldwide deep recession?

CHRISTINE LAGARDE: Well, I think we are currently in a very serious situation. Will I call it a recession? I suspect, yes, on a global basis, it’s certainly going in that direction.

France, interestingly, is presenting an interesting face. It has amongst — not an ocean, but at least a large group of countries suffering negative growth. We have positive growth. In the third quarter was a bit of a surprise because we came out with .1 percent.

But it was a plus, as opposed to Germany, which was minus, U.K., which was minus, Italy, minus, Spain, minus.

MARGARET WARNER: And the U.S. minus.

CHRISTINE LAGARDE: And the U.S. minus, as well, yes.

MARGARET WARNER: Now, a couple of months ago — and I’m not trying to hang you up on this comment — but you said you thought the risk of systemic failure was passed. Do you still have confidence that the world isn’t running that risk?

CHRISTINE LAGARDE: I remember having said that after the big major rescue plan of Freddie and Fannie, as we call them over here. What I believe precipitated a much major disruption was the failure of Lehman Brothers, which clearly disrupted the whole system in a much more intrusive and much deeper way than probably was expected or feared by anybody.

And we came to realize that afterwards. And I suspect nobody thought it would be as bad as it turned out to be, because the trust that most operators put in the system was then broken, and everybody suspected that there might be others.

And when the financial actors don’t trust each other and stop lending to each other, then it’s the whole economy that is put to a halt. And that’s what we’re seeing at the moment.

France's economy relatively stable

MARGARET WARNER: Now, as you said, France did at least have a slight uptick in growth in the third quarter. Do you think that's just an anomaly? Or do you think it is because your system, in your system, your government has more involvement with companies and you've had all kinds of targeted rescue plans, even, for instance, buying up unfinished houses that builders can't sell just so they can finish and get their money out?

CHRISTINE LAGARDE: I can think of two reasons -- well, three, actually. One is, I think our financial system is rather solid, and it's not because of the virtue of our bankers. It's simply because the business model was built differently.

Banks in France are predominantly commercial banks. They're retail banks. Seventy percent of the business and profits is generated by this retail activity, which gives them a big shock absorber.

MARGARET WARNER: A lot of deposits?

CHRISTINE LAGARDE: Yes, that's point number one. Number two, still in that sort of financial system category, French consumers are not borrowing as much as American consumers. They're not in debt as much as American consumers, simply because regulation has been such that they cannot exceed certain limits.

They have to bring equity when they borrow, and so on and so forth. And they cannot revolve credit in the same way and at the same speed as in the U.S.

Second, I believe that some of the reforms that we have conducted in the last 18 months are producing results. The fact that we're asking people to work harder, to work longer, that we are asking the operators to be more aggressive, be more competitive, the fact that we're supporting investment in research and development, I think that all of that is gradually bearing some fruit.

And, finally -- and that's exactly to your point -- the state is heavily involved in the economy. A big chunk of our GDP is actually public finance-driven, and that is a little bit more solid, a little bit more sustainable.

Sometimes we regret it; we wish the state was not as involved. And I'm certainly one that would like to see public spending reduced significantly and public involvement and extensive regulations to be reduced.

But in a crisis such as this one, major public spending on an ongoing basis provides a bit of a shock absorber.

MARGARET WARNER: And the U.S. and European countries have already done interest rate cuts, coordinated those. You've done fiscal stimulus plans or at least announced them and injected capital into the major banks. And yet things seem to get worse by the day.

CHRISTINE LAGARDE: You mentioned the recapitalization of financial institutions. It has been the case in some countries, but not in all.

A lot of announcements have been made. If you look at Europe, for instance, nearly 300 billion euros were announced for recapitalization. Only about 70 of that has actually been put in the system.

So there is always a gap between what you announce, the way the media reacts and the markets react, and then execution. We are currently in execution process.

Sarkozy advocates more regulation

MARGARET WARNER: Now, your president, President Sarkozy, has talked a lot about the need, really, to use this crisis to set up a new system, some kind of international regulation of these big global financial institutions. How would that have prevented, for example, the collapse of Lehman Brothers?

CHRISTINE LAGARDE: I believe that if hedge funds had been included in the supervision that we had, we might have realized earlier on how extensive, how large, how sizable the share of the markets and their role were.

And let's not forget that Lehman was very much a host to hedge funds, particularly in the London office. I think that has played a role very much in precipitating the crisis.

MARGARET WARNER: And how leveraged they were.

CHRISTINE LAGARDE: And how leveraged they were, absolutely, absolutely.

MARGARET WARNER: But those, of course, aren't even regulated in the United States.

CHRISTINE LAGARDE: Which, you know, some of us regret. And I was pleased to hear that my colleague, Hank Paulson, was actually advocating that hedge funds be included in supervision and regulations.

MARGARET WARNER: Now, let me go back to this idea of international regulation. There's been a lot written that President Sarkozy certainly sees this whole crisis as an opportunity to rein in the excesses of American-style sort of laissez-faire capitalism. Is that a fair reading of his attitude, your attitude?

CHRISTINE LAGARDE: Shall I say it's excessive? Tempting, isn't it? We all tend to think -- when I say "we," it's an analysis that is broadly shared in France, in my country, but I hope it is also understood outside, that it is a crisis of excess, but excess in general terms, not excess of the free market or excess of the American capitalism.

That is nonsense; French capitalism is just as effected and as concerned and as in need of changes.

Crisis of excess of what nature? Excess of credit. We've had too much of it. Excess of volatility, affecting currencies, affecting stock markets.

Excess of sophistication. I don't know if you've been offered financial products in the last 12 months. Impossible to understand, unless you're a nuclear scientist or a top, top, top expert. And I'm not even sure that they understood what they were doing. So excess of sophistication.

And, frankly, excess of remuneration sometimes, that we are driven to encourage people to take risks that they were not capable of measuring.

So we don't -- certainly we don't want to destroy the system. There is no alternative anyway. But we need to bring a little bit of measure, a little bit of reason and more balance. My motto is balance.

Crisis may bring balance

MARGARET WARNER: Do you have reason to believe or expect that a President Obama will be more open to this global supervision, more than President Bush?

CHRISTINE LAGARDE: It remains to be seen what he exactly wants to do, but I suspect that he will be sensitive to the notion of balance. That seems to have been advocated during his campaign.

And he's concerned about, you know, everybody being part of this American rejuvenated dream that we all, you know, greet and welcome with huge expectation and enthusiasm. And if you want to make sure that a dream comes true, you have to share it with as many people as possible.

MARGARET WARNER: Do you think that, finally, that when this crisis finally passes, that the -- it will end up that the United States has a less dominant role in the world financial system and maybe a less dominant role in setting the rules?

CHRISTINE LAGARDE: It could well be the case. And it could well be that as part of this better balanced or rebalanced world, we see new players emerging, such as China, such as India, such as Brazil, such as countries that are becoming extremely powerful because they hold reserves or because they hold monetary and financial power.

If you look at the flow of funds across the planet, it's clear that the Chinese authorities and the Chinese monetary authorities are playing an important role.

And the Chinese population, by saving and enabling the Chinese government to actually buy in massive amounts Treasury bonds, are holding a significant position on the global financial planet.

So there will be rebalancing in that respect, as well. And if that causes China to be a bit more powerful, Brazil to have a bit more to say, the oil-producing countries to be properly represented, and financial institutions to represent all of that in a more cohesive way, if that is in consideration for a slighter, reduced role of the United States -- or of Europe, for that matter -- then so be it. I think a balanced world is required.

MARGARET WARNER: Madam Minister, thank you for being with us.

CHRISTINE LAGARDE: My pleasure.