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France Deliberates Financial Reforms in Face of European Debt Crisis

July 7, 2010 at 12:00 AM EDT
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GWEN IFILL: Next: Europe is coming to terms with big questions about austerity and spending.

Last week, “NewsHour” economics correspondent Paul Solman interviewed the Greek prime minister. Tonight, he speaks with the French finance minister about how her country is coping with the large burdens of paying for its national retirement system.

It’s all part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: Paris June 24, thousands in the streets protesting France’s plan to raise the retirement age from 60 to 62 by 2018, in a country where the official work week is 35 hours, plus five weeks vacation a year, and retirees, on average, now earn more than workers.

In charge of the economy since the financial crisis, Christine Lagarde, champion French swimmer in the ’70s, high-powered Chicago lawyer in the ’80s and ’90s, and, back in France, finance minister since 2007.

We sat down with her in Paris on Monday.

Madam Minister, thanks for joining us.

CHRISTINE LAGARDE, French finance minister: Pleasure.

PAUL SOLMAN: How serious is the threat to the world economy right now? Spain, Greece, Eastern Europe, Portugal, all tremendously weak. And have you been taken off guard?

CHRISTINE LAGARDE: I’m always cautious, and I’m always very attentive to the unknown risk, because I strongly believe that the risk is going to come from somewhere unexpected.

PAUL SOLMAN: How bad is the threat now?

CHRISTINE LAGARDE: What we have done for Europe at large I think is a very massive plan, totally unexpected, totally counter-treaty, because it wasn’t scheduled in the treaty that we should do a bailout program, as we did.

PAUL SOLMAN: This is this May 9 bailout that you did. I think you said at one point this was the most expensive night in the history of the world.

CHRISTINE LAGARDE: That’s right, that’s right, because we had essentially a trillion dollars on the table to confront any market attack that would target any country, whether it’s Greece, Spain, Portugal, or anybody within the Eurozone.

PAUL SOLMAN: So, you’re not worried that there’s an imminent threat to the global economy at the moment? You wouldn’t tell me if there were, I don’t guess, but…

CHRISTINE LAGARDE: Well, no, no, let me be more specific about it.

I believe that we are — I was asked whether it’s the beginning of the crisis, the middle of the crisis, or the end of the crisis. And I said, we are in the middle of the beginning of the end. The crisis has really hit its peak.

PAUL SOLMAN: Economically, France vs. Germany seems to mirror the main sort of economic issue of our times, or of right now, which is stimulus vs. austerity, or bailouts vs. budget cuts.

Europe can’t do both, can it? It can’t do everything.

CHRISTINE LAGARDE: Yes, it can.

We always we have to strike the right balance between continue to stimulate. And most of us still have a little bit of stimulus under our foot in order to accelerate that fragile growth that has picked up in 2010.

But, at the same time, we must, very decisively, cut our deficit and reduce our debt. Now, how do we cut deficit? There are two ways. One is, we reduce public spending. And, certainly, as far as France is concerned, we can do a bit, because, at the moment, it is the biggest public spender in the European Union. So, we can cut public expense.

The other way to reduce deficit is to collect tax. And we’re going to automatically collect a bit more tax in 2010 than we did in 2009.

PAUL SOLMAN: But this is a form of austerity. And, in Greece, in Spain, and all over Europe, austerity is now being practiced. Are you not afraid that that might lead to a double-dip recession, or worse, if all European governments cut their spending and raise their taxes at the same time?

CHRISTINE LAGARDE: Well, we are all spending quite a lot of money. So, I think that the money spent by public authorities, particularly in France, which is the only country I’m a minister of economy and finance for, we have room to maneuver. There’s no question about that.

When you decide to reduce your budgets by 5 percent, you can actually do it.

PAUL SOLMAN: You know, “The Economist” says that austerity is a dirty word in France…

PAUL SOLMAN: … that, even though you’re trying to run this balance, to be austere at all is a political impossibility.

CHRISTINE LAGARDE: I have invented a new word in French, which I call rilance. Ri is the first syllable of rigueur, OK?

PAUL SOLMAN: Rigor.

CHRISTINE LAGARDE: OK. And lance is the relance, stimulate. So, I have mixed a new word.

CHRISTINE LAGARDE: The first priority is a bit of rigor in order to cut deficit, reduce deficit, reduce debt, by specifically targeted tools, but we also want to stimulate growth.

PAUL SOLMAN: You know, when Americans see French workers in the streets protesting a rise in the retirement age at which you get a pension from 60 to 62 over the course of a decade, when the Germans are going from 65 to 67 in a year, I mean, they roll their eyes.

CHRISTINE LAGARDE: It’s not as simple as that.

We are moving from 60 to 62 before 2018. And, in 2018, the whole pension scheme program will be balanced. So we reduce the deficit by pushing out the limits from 60 to 62 and by various other means, because we are going to also raise the financing of the pension scheme.

PAUL SOLMAN: You became famous and controversial here — I mean, I guess you were already famous, but controversial when you used this phrase, enough thinking already, you said to your countrymen. Time to roll up our sleeves and get working, I take it.

CHRISTINE LAGARDE: Correct. Correct.

PAUL SOLMAN: So, you kind of are the — more nearly the austerity person, no? Or at least that’s your reputation.

CHRISTINE LAGARDE: Well, I did say at the time that we had dealt, addressed, argued about each and every issue that there is to be argued upon, and that that has filled our libraries, and that we have done enough thinking so far. It’s about time to roll up our sleeves and get on with the work.

And I still very strongly believe that we have to produce more value. Our economic system has to be more productive, has to be more competitive. And I don’t see and I don’t know any other alternative but work. Yes, I haven’t changed.

PAUL SOLMAN: When we talked to Prime Minister Papandreou of Greece, he acknowledged that Greece and Europe were essentially between a rock and a hard place with regard to spending vs. saving.

Is that fair? Or do you think with your new word, rilance, rigor with stimulus, that, somehow, you can have the best of both worlds?

CHRISTINE LAGARDE: The economic policy that we are adopting with that rilance, with a bit of cutting deficit on the one hand, a bit of stimulating growth on the other hand, is a constant fine-tuning exercise, because we want as our first priority economies to develop value and to create jobs. And this is my constant obsession: How are we going to create jobs in Europe?

PAUL SOLMAN: French and German banks hold a lot of Spanish and Greek debt. You don’t worry about them?

CHRISTINE LAGARDE: As I told you, I’m minister of economy and finance.

PAUL SOLMAN: French banks?

CHRISTINE LAGARDE: I worry all the time, but I don’t worry specifically about my banks.

PAUL SOLMAN: You don’t worry about French banks. You worry just generally.

CHRISTINE LAGARDE: I worry, yes.

PAUL SOLMAN: But is that why Europe and the IMF…

CHRISTINE LAGARDE: Nobody wants to take my job at the moment, you know.

PAUL SOLMAN: Is that true?

PAUL SOLMAN: But you seem to like it.

CHRISTINE LAGARDE: You have got to keep smiling, even when it’s hard. Grit your teeth and smile. That’s what I was told when I was much younger.

PAUL SOLMAN: Madam Minister, thank you very much.