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Banking sector – Austerity measures

Published on December 2, 2010
Interview given by Christine Lagarde, Minister for the Economy, Finance and Industry, to the “Liberation” newspaper (excerpts)

Paris, December 2, 2010



Q. – People may get the impression that the banks, after being saved by States, are now speculating against them…

THE MINISTER – Investors are financing the debt every day – around 1.2 trillion for France alone. It’s natural for the risk they take to be valued. When a country poses more risks, like Greece, there’s a premium: it’s the reward for the risk. One has to distinguish that practice from speculation as such. We haven’t been able to provide evidence for it, to date, but there have been very strong movements on the markets for derivatives like CDSs. Regulating this type of market and making it transparent is an absolute necessity. It doesn’t mean banning it but allowing the regulator to step in when he notices disproportionate volumes of trade. That’s why the government totally supports the European Commission’s proposals in this area.


Q. – How do you answer those French people who might be tempted to follow the appeal by Eric Cantona to withdraw their money from banks in order to bring down the financial system and show their anger against the bankers?

THE MINISTER – Let me remind people that, in exchange for supporting the banking sector, the State – that is, the French people – has received €2.4 billion in interest. This image of the banker “soaking up the public finances” is false. We have a solid banking system in France, much more regulated than before the crisis. Under those conditions, there’s no reason to be defiant.


Q. – By adopting ever tougher austerity plans, isn’t Europe killing off any return to growth?

THE MINISTER – That’s a debate we had with our European counterparts on the subject of Ireland. Certain participants were hoping for an ever quicker restoration of the public finances. I was among those who argued for spreading that effort over a longer period, which is why the aim of returning to the 3% public deficit limit for Ireland was extended until 2015. To do it earlier was unreasonable and we ran the risk of a downward spiral.

Q. – If growth isn’t sufficient in 2011 to reduce the deficit, will the austerity have to be stepped up?

THE MINISTER – Let’s not be too pessimistic. The pace of growth in France has been 2% over the last four quarters and there’s no reason to call into question that 2% prediction for 2011. Apart from that, we’ll have to reach a 6% public deficit by the end of 2011, as compared to today’s 7.7%. We’ll get there.

Q. – Does national sovereignty depend on an austerity policy that looks set to last many years?

THE MINISTER – There are two dimensions to your question. Should we or shouldn’t we move initially onto a path of restoring balance to the public finances? Or can we allow a debt to persist which currently represents €23,000 for every new French person? The former option is obviously the right one. And I can tell you, having seen my Greek and Irish counterparts at the height of the crisis, that I don’t want my country to find itself in that situation, which consists of having things imposed from outside. We mustn’t let people think failing to restore balance to the public finances allows for growth. If you take the example of the stimulus package, we devoted a very large part of the 35 billion to supporting the most disadvantaged households and their consumer spending. It was socially more just, but above all the best way of boosting the economy. We put money where it would be spent and not saved. (…)./.

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