French Finance Minister Christine Lagarde on the EU’s New Debt Support Facilities: “An Historical Turning-Point”

The finance blog Naked Capitalism today linked to a current article of high interest which happens to be available only in a foreign language, in this case French. I’m referring to the interview with French Finance Minister Christine Lagarde in the business newspaper Les Echos – newsworthy at any time, but of crucial interest appearing just now.

This is not the first time this has happened on Naked Capitalism, but my intent here is certainly not to scold. In many of those previous instances I have been happy to step in and provide a translation of the article in question on this site, and I do the same below after the jump with the Lagarde interview. The piece’s lede is “‘There’s a determination to construct a new edifice, to reinvent the European model,’ declared the Minister of the Economy in an interview with Les Echos.” (Interviewer’s questions are in bold.)

Has Europe passed close to catastrophe?
All responsible public figures, including me, had the fear of a disaster in their heads if we did not rapidly find a new accord. All the stock market indices were plunging, there was a massive rise in bond yields for numerous countries, the interbank market was was straining . . . All the symptoms that preceded the crisis of the autumn of 2008, just before the bankruptcy of Lehman Brothers, were resurging, it’s undeniable.

Is the plan announced during the night of Sunday-Monday simply a short-term oxygen-bag for the public finances of member-states, or is it really an historical turning-point for the Eurozone?
It’s an historical turning-point, this is extremely clear. It is not just a contrivance concocted for urgent needs. We wanted to construct a system for the long term. Basically, there’s a realization that we are all in the same boat and that we are facing the same storm. There’s a determination to construct a new edifice, to reinvent the European model. We have got to find the rules that will keep us from future crises like these. When you put 500 billion euros on the table, you’ve got to believe in it all the way! That also means that there will be budgetary adjustment measures for everyone.

Are you working to correct the original defect of the euro?
Yes, I deeply hope that, but you can’t do that in one day. The efforts that will begin soon [according to latest reports, the date will probably occur on 21 May] led by the president of the EU Council, Herman van Rompuy, will be truly definitive. Without a doubt we will have to do more to converge our economic models and reduce divergences in competitiveness. The Eurozone has functioned for too long as a club: one had to respect a certain number of criteria to enter, but then the rules were insufficient. It will be necessary to accelerate the mechanisms of regulation, reinforce the Stability & Growth Pact, improve the functioning of the Eurogroup, etc. In each country one can imagine that the Stability & Growth program would be submitted to a vote of Parliament before being transmitted to the European Commission. Reciprocally, we have to ask ourselves what influence our European partners should have on national budgets.

Is Germany ready for the Eurozone to change its nature by being more integrated politically and economically?
I think that it is ready under certain conditions. Germany has accepted being made to evolve its traditional position – that is, of privileging bilateral loans as we saw in the case of Greece – to that of advocating along with us the creation of a European stabilization fund, of a collective dimension. That is a key element.

It’s a touch of federalism . . .
It’s more than a touch of federalism, since the European fund will issue securities to buy bonds or propose loans. However, the Commission, which will manage the Stabilization Fund, will not be the sole master since it will operate under the authority of the member-states. There will not be any complete delegation.

How will the Fund intervene concretely?
The technical and legal modalities will soon be proposed to the Council by the Commission. The Fund will intervene at the request of a State, and after the issuing of an opinion by the economic and financial committee of the European Council and by the European Central Bank. The conditions (price, term, audit schedule) will be similar to those of IMF programs. The point, however, will be never to have to make use of it!

Why was an appeal made to the IMF? Can’t Europe get out of this by herself?
It is extremely useful to have the IMF on our side. First of all for the conception of the support and adjustment programs. The analyses they’ve shared have been invaluable in the case of Latvia, Hungary, and of course Greece. Then because the IMF is best-equipped to supervise programs following on from plans for a return to equilibrium, since that is not the Commission’s business. Finally, European states have financing quotas for funding the IMF, why not use them?

The markets welcomed this plan yesterday very well, but don’t they risk “testing” a fragile country once again in the near future?
The 60 billion euros that the European Commission has already authorized for lending is ready now and already available. And I believe that the collective determination collectively displayed by all the actors – Europe, central bankers, G7, G20, everything within one weekend – is enough to dissuade them.

The problem of state budget deficits remains . . .
All member-states have to restore equilibrium to their public finances even as they pursue reforms and invest in strategies for the future, so that they can regain consistent structural growth rates. France will hold to her engagement of bringing the budget deficit back to 6% of GDP in 2011 and to 3% in 2013.

Greece has gained assistance, but at the price of very tough budgetary adjustment measures. Won’t she be feeling wronged today?
In equivalent circumstances there would have to be similar requirements for any country. The conditionality of the assistance will be very strict. Greece is nonetheless a case really apart, since it is the only one to have misreported its accounts.

What will France’s contribution be?
Each country will engage on the basis of its assigned quota [around 20% for France] for the capital of the European Central Bank, in other words around 90 billion euros for France. Once the Council has approved the modalities of the Stabilization Fund, the principle and the specific level of this guarantee will have to be submitted for the approval of Parliament as a financial measure.

What will be the impact on France’s public finances?
There will be no direct impact, not on the level of deficit nor on the debt in the Maastricht sense, since these are guarantees which will only be invoked in case of a default.

What are you going to do against the speculators?
We initiated work on this subject eighteen months ago. But the process takes time, whether it’s a matter of regulating the ratings agencies or the derivatives markets. In my personal opinion, for example, I think that it’s necessary to take a long hard look at high-frequency trading [transactions initiated by computers, NDLR]: that’s what I was asking Commissioner Barnier about last month. Ultra-sophisticated non-standard derivative products must be controlled, registered, we’ve got to know how they work, the risks they are susceptible to generating . . . That has to go forward. Michel Barnier, the new European Commissioner for the Internal Market and Financial Services wants to act along this line. With regard to the speculation that went haywire at the end of last week, I called Jean-Pierre Jouyet, president of the Authorité des marchés financiers (AMF) [French Financial Market Authority] to inquire about all that commotion in the market. I am pleased to be able to say that the European regulatory authorities have decided to launch coordinated inquiries, in concert with their American counterparts.

Did you ever fear during any moment of the negotiations on Sunday evening that the plan would capsize?
Yes, we were struggling with the issue of Europe issuing loans and of the States supplying those with guarantees . . . I asked for a short break in the session for everyone to calm down!

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