G20-Interview given by Christine Lagarde
Q. – In the space of a few days Germany, then Britain have presented very ambitious austerity plans. What’s your analysis of them?
THE MINISTER – I wasn’t at all surprised by the German plan – my colleague Wolfgang Schäuble had announced it. Germany is applying to the letter, rigorously and in a disciplined way the commitments she made vis-à-vis her partners. As for the British plan, the spending cuts and tax increases (taxes on consumption, capital gains and high incomes) seem massive. It schedules an ultra-fast return to balanced public finances in 2016. George Osborne himself recognizes that its brutality will obviously impact growth.
Q. – Is this British budget going too far?
THE MINISTER – Given the circumstances, we all have this imperative of restoring our public finances.
Q. – Precisely, France stands out: she hasn’t opted for this style of communication, rejecting even the word “austerity”!
THE MINISTER – As you and I know, the word has terrible overtones in France. That’s how it is… If you want, I can say that we’ve got to have a responsible, rigorous policy. Is that different? No! Basically, our economic policy pursues three objectives, the “three Rs”: safeguard the Recovery, Restore our public finances and pursue the Reforms. As regards the deficits, we could have raised taxes in general or drastically cut public spending. We prefer to take targeted action: on spending, by freezing funding to local authorities and announcing cuts in operational costs and public spending. On taxes, by reducing the niches fiscales [tax breaks or shelters] or taking targeted action (stock market gains, high incomes, employers’ overheads with the reduction in employers’ contributions calculated on an annual [and not, as now, monthly] basis, etc.).
Don’t forget already the pension reform which will have a substantial effect on public finances: -0.5% on the deficit as soon as 2013 and +0.3% a year on growth. All this is perhaps not sensational, but we are moving forward stage by stage, in successive phases.
Q. – On spending, nevertheless, so far few concrete measures have been announced, except for the pension reform…
At the moment the government is working on the decisions which will soon be taken and announced. What’s going to be the scale of the budget cuts, which projects are going to be halted or suspended?
THE MINISTER – But we aren’t, on the pretext that our neighbours are making announcements, arbitrarily going to follow suit. Our timetable is clear: pension reform last week; then the policy discussion on public finances; consolidation of our State spending plan in July; tax measures at the end of the summer.
Q. – François Fillon has talked about €45 billion of spending cuts over three years. How much has there got to be in the 2011 budget?
THE MINISTER – Overall and absolutely certainly, we’re going to have to do more than all the ministers think! I can confirm that to you.
Q. – The IMF is doubtful about your growth forecasts. What do you think about them?
THE MINISTER – You’re forgetting to mention that the IMF’s report on France contains above all lots of compliments on our policy! Our forecast of 2.5% growth in 2011 is ambitious, but not unrealistic. Why? In 2009 France resisted better than the other countries, and so, logically, by analogy with France’s very strong recovery as early as the following year after the 1993 crisis [it’s not unrealistic]. I shall take the appropriate steps after seeing the results of the second quarter of 2010 which will be known mid-August.
Q. – What do you think about the successive speeches of Barack Obama and Tim Geithner calling on the Europeans to support their economy, when a fortnight ago they were calling on them to impose austerity to defend the euro ?
THE MINISTER – The volatility of some statements almost matches that of the markets. I don’t think those in charge of economic policy should change their approach every fortnight. What is certain is that the European public deficits are taking attention away from those, just as large, of other States in the world.
Q. – What do you expect from the European initiative on establishing a bank levy?
THE MINISTER – The idea is to show our partners, including the recalcitrants which include Canada, Australia and Japan, and even some emerging countries, that a group of mutually-supportive States, including the United States, is determined to prevent the systemic risk presented by certain banks. Through this initiative, France, Britain, Germany and, more broadly, the European Union, are demonstrating their conviction that levies based on bank balance sheets have virtues comparable with statutory recapitalization demands. The other message is aimed at the general public. We are putting in place, fast, measures to prevent a crisis similar to the one we experienced nearly two years ago now. I have high hopes that the G20 will set out the framework and general principle of such a levy.
Q. – Nevertheless the issue of the allocation of the yield of the levies – to the general budget or a dedicated fund – doesn’t seem to have been settled even inside the EU?
THE MINISTER – History shows that when things go wrong, it’s the State which comes to the rescue as a last resort. So it isn’t inconceivable for the product of the bank levy to be paid into the State budget. However we are open to debate. Germany is more in favour of allocating this product to a specific fund which would act like an insurance fund. The concept of a fund seems incompatible to me with that of moral hazard. If such a fund is created, won’t the banks feel more encouraged to take risks in knowing that they will have this insurance fund?
Q. – How much would the bank levy raise for France?
THE MINISTER – Very probably between €300 million – equivalent to the amount raised by the bonus tax this year – and €1 billion. I’d very much like it to be a billion. The banks have the resources to cope with this tax. 2009 was an excellent year for them in terms of bonuses and dividends paid out.
Q. – You referred to Canada, who is ruling out such a levy. Nor is she in favour of the levy on financial transactions…
THE MINISTER – Political leaders have to give themselves the means to honour their commitments, when they declare that they are supporting development assistance, are mindful of the destitution of a number of countries suffering from natural disasters, recognize the disappointment of the Copenhagen Summit and promise to make significant progress in Cancún on financing the battle against climate change… Logically, given the enormous needs for financing, we need to find new resources in the light of our budget difficulties. The financial transactions levy is good because its feasibility has been widely demonstrated. Moreover, our battle for transaction transparency on the derivatives markets will make it possible to identify new bases for the tax. Let’s take advantage of them.
Q. – Do you think the banks are exaggerating when they explain that the various measures designed to strengthen their capital basis or tax them could limit their ability to finance the economy?
THE MINISTER – They are defending their business and that’s legitimate, just as the supervisors defend theirs. They are perhaps doing it a bit too much. However, they are right to say that the new recapitalization requirements must not be too brutal and threaten the funding of the economy. That isn’t the aim. We mustn’t break the banks’ economic model, especially when it has withstood the crisis pretty well, as is the case for the French banks. We must also ensure that the measures taken don’t create unfair competition to the detriment of the European banks./.