Before the interview began, we asked the minister about a photograph of her shaking hands with Chinese President Hu Jintao that hangs on her office wall alongside images of her with Obama and other world leaders and a collection of satirical cartoons – most of which feature a caricature of the minister herself, taken from the French press.
The photograph was from her last visit to China and she said that she was "very proud' because as she lined up to shake his hand, when he got to her "he told me something in Chinese, the interpreter said ‘he knows you are a very old friend of China' – to be considered as an 'old friend of China' I felt, woah – I've been around for a long time, that's what it says. That I've visited China many, many times and he knows."

EO: I want to start by asking about your recent meeting with your German counterpart; you’ve just announced some important agreements regarding closer coordination between the German and French economies. What do these new policies mean? – some newspapers say that it indicates the move towards a unified fiscal union.
ML: No, there were two major announcements yesterday. One that was already sort of brewing, so people did not really comment much on it, but it was a lot of work actually – and it was the joint position paper that we sent to Herman Von Rompuy to improve and strengthen the economic governance of Europe – where we  included various preventive measures as well as potential sanctions to restore and strengthen the discipline among the European member states and to have a special framework for the Euro members – that was one.
The second common objective that was also identified yesterday, is this project launched by the president yesterday – to aim at converging our fiscal systems, and when I say fiscal – it’s really the tax system, as opposed to fiscal discipline – and that will take two steps - one is ask out state auditors, for us it will be the cour des comptes  – which is the major auditor of public finance and authorities in France – and a particular tax expert college – that is the German counterpart.
To ask these two to review our respective tax systems and analyze the two systems so that we have a clear picture of what’s in there and what’s in here - in terms of corporate tax, income tax, indirect taxation and wealth tax, estate tax, transfer of property tax, inheritance tax – all, the whole range – to see whether we move closer together because…
I’ll give you a for instance. The corporate tax in France is 33%, whereas it’s 29% in Germany – but if you compare the base of each tax, the base is broader in Germany and narrower in France – so eventually, at the end of the day, we’re likely to have, pretty much the same amount of taxation – but it’s framed differently.
So that’s a project that we will be working on – analyze the system, compare them, see whether we can get closer together.

EO: What are the benefits of this convergence?
ML: It’s two fold – one is, if there are things that they do better, that we can learn from and vice-versa if there are things that we do better that they can learn from – then the better for both. The second, if it brings a level of consistency between the two, and then you know, it brings us closer together.
But, still, there is no long-range planning of merging the countries or putting together a special “duo pole” within the European Union, nothing like this.

EO: When did you begin to plan this convergence?
ML: You know in many ways the crisis bought all of us closer together – the world was smaller – when banks across the world started fidgeting and some of them could not get refinancing – it brought all of us closer – now clearly, within the Europe Union, this was the case and even more so within the Eurozone, and within the Eurozone, the two giants – our combined GDP represents more than 50% of Eurozone GDP – we had to work much more closely over the past few months than probably ever before.
So that crisis brought all of us closer, particularly, as I said, within Europe, within the Eurozone and between Germany and France.

EO: So this is something that has been adopted because of the crisis?
ML: It seems such a natural project to take up now – to give you an example, Germany abolished the wealth tax a few years ago, we still have it – should we keep it? Should we look at what they’ve done?

EO: People are still saying that this crisis will push Europe from a monetary to a fiscal union, you don’t think that this in the direction in which things are headed?
ML: I think it would be premature to say that, each and every member state has a long history, tradition, culture and a collective ambition to be together and to use the same currency, but I don’t think that yet – we’re going to converge to the point of merger.

EO: What was it like when you took part in the German cabinet meeting?
ML: It was very different and Wolfgang yesterday said to me, “oh gosh, it’s very different” – but the difference has to do with the structure.
Number one, Germany is a federal organization.
Number two; it is a coalition of political parties that are together under a joint and negotiated contract.
So there is a significant element of discussions, argument, counter-argument, trying to reach a consensus and pre-meetings taking place before the cabinet meeting , according to what Chancellor Merkel told me,  and there’s a lot of back and forth and exchange.
It’s not the same as a very centrally driven political regime s organized under the constitution of 1958 – which is the fifth republic.
Where the president and the PM work together, organize things – which does not include a lot of preparation and a lot of consensus because we have a majority – the government is totally supported by a majority and there is no arbitrage, no compromises and concessions.
It’s one policy, driven by one government, supported by one majority.

EO: So the cabinet meeting in France is much quieter than the German?
ML: There is less debate, to give you an example, Chancellor Merkel, when one matter was discussed during the cabinet meeting in Germany, had to give the floor to three different ministers, who belonged to different parts of the coalition because that’s the way it was put together – for us there was no coalition. So a matter that relates to unemployment or employment – will be dealt with by me. I don’t have sort of another partner who I should pay attention to and be sensitive to …

EO: So it helped you understand better the decision making process in Germany?
ML: Oh yeah,  absolutely, particularly I understand a lot better why some issues take more time than it would in France. In France, if the president and the PM say go – it happens just like that.
I think it’s a lot more of an iterative process. Where is has to be tested and vetted – and then it forms a consensus, so it takes more time.

EO: So you understand why at the start of the crisis, especially in relation to the bail out of Greece, why it took much longer for Germany to reach a decision.
ML: Yep


EO: Do you agree that the recent moves to push ahead with the enforcement of political and financial sanctions against countries that do not stick to fiscal discipline is, in a sense, following the German lead?
ML: The political sanction is something that was very much discussed between Chancellor Merkel and President Sarkozy, the re-enforcement of financial sanctions is something that Germany has long called for, and the idea of the interest- bearing deposit is something that we worked on together, so I think it’s a mixture of both
But it’s a fact that German has always been very strong on the deficit-cutting, sanctions, discipline and control.
It wasn’t the case in 2004 and 2005, when both Germany and France, sort of got away …

EO: Despite all these example of enhanced cooperation, in what areas do you think major disagreements remain, especially in relation to European institutions?
ML: I think on the role of the European Central Bank (ECB), Germany is very, very keen that it be a totally independent bank with a single purpose - price stability. France is also very keen that the bank be independent – there is no question about that – but it’s also important to us that the matter of growth and jobs – be also included in the process, which does not mean we’re not attached to medium term price stability – which is conducive to jobs and creation of value, but on that front, there is a stronger German sensitivity than French.


EO: Is there a distinction between the two countries in terms of the level of integration that either of you are looking for in terms of European institutions?
ML: No, I don’t … you know it’s a rather new endeavor in a way and I think there is sort of an interest, but also a little bit of curiosity about it.
Some of the German players probably think, well “are the French really serious about it?” Are they going to be really disciplined and solid in terms of cutting deficit and having a sustainable debt and will they be prepared to, you know, do what it takes.
And equally on our part, we think, well, do we really want to be in the straight-jacket that Germany has imposed on its economy up until now.
So I think there is apprehension and anxiety as well as a kind of “hmm this might be interesting.”

EO:  What do you think President Sarkozy meant when he said that “France should learn from Germany”?
ML: I’ll give you two for instances.
We’ve been trying for years and years to strengthen our medium sized companies. You know we have a lot of small companies and we have quite a lot of medium-sized companies but the sort of big-middle sized companies that we call intermediate – the enterprise de taille intermediaire - the sort of slightly bigger than medium. Which in Germany is the Mittelstand
We’ve been trying hard, but we don’t have a thick layer of middle-sized companies.
Germany has it and they’ve had it for decades, and they’re very, very strong at trading and exporting and being the backbone of German industry.
So from that angle we have to learn from Germany.
We have big champions – Alstom, Areva, Danone and Carrefour, the likes of them, but we don’t have this thick layer of intermediate companies, that’s point number one.
Point number two, Germany has been very good at maintaining a very solid industrial basis and we are very keen to have that as well.
Sufficiently high in the supply chain so that we don’t compete with today China and tomorrow India and the day after Indonesia – where labor cost is just going to beat us, because that’s the way competition is organized.
But those are two examples – middlestand and  industrial policy.

EO: Will there continue to be difference between your two countries?
ML: Well you’ve got two different spaces – you’ve got the larger space, which is the EU – 27 member states joining forces and, you know, pulling in the same direction and having this open market and determined cooperation in many fields.
And within that larger circle, you have the smaller circle of the Eurozone, where in addition to what I just mentioned; you have the single currency, which is our common good.
So that involves and requires a special mechanism, the Eurozone meeting, the presence of the President of the Eurozone,  the ability under article 136 of the treaty to actually have special arrangements – all of that.

EO: There’s a need to improve the Stability and Growth Pact – do you think the liquidity issue has hijacked solvency to become the focus of the tension?
ML: It shouldn’t be the focus, it should be included in the attention that we pay to the solidity of our systems, but this is more a Basel Committee issue, because when you look at banks, what is going to be decided on a broader base that will be applied by all banks, so that there is effectively a level-playing field between them all and how do we translate that into European regulation.
Are you talking about banks, or are you talking about something else here – I might have misunderstood your question.

EO: More to institutions
ML: OK, well, I think that’s very much a Basel Committee issue. But in relation to banks – yes, we should pay attention to the liquidity factor, because we paid a lot of attention to the solvency matter and we did not pay sufficient attention to liquidity.
That was the case, if you remember Northern Rock in the UK, the solvency factor was well taken into account, that was fine – the bank had enough capital, but it was very short on liquidity.

EO: It’s already in place …
ML: It’s the entire reform of the European supervision system that has been approved by the council, that has been put to the parliament and or which there will be a final vote in September – so by September we’ll have the backbone of the European supervision system in place.
So we’ll have a lead regulatory body or watchdog – and below that you have three subsets – one for banks, one for insurance companies and one for markets – that will bring together the national supervisors and those authorities will have overriding authority on the national supervisor in specific cases when there is discrepancy in interpreting, when there is a need to arbitrate between two and in case of emergency.
So, effectively we’ll have in place a European structure of supervision.


EO: What about the process of integrating that into a global level of supervision and regulation?
ML: Well let’s wait until the Americans complete their process, because President Obama although he signed the bill yesterday, they now have 2 years to complete and deliver on it – the SEC is going to get on with the work I suppose, but they’re not going to be ready to operate until 2012 from what I understand.

EO: So, first sort out Europe and then see how others are going …
ML: Yeah. I was just on the phone with a couple of American agencies – just to make sure that we operate as closely as possible so there is no big discrepancy between what we do.

EO: Do you think there should be international coordination?
ML: It is happening actually, there is international coordination taking place between us.
 The G20 is one – you have the G20 at the political level, you have the Basel Committee at the financial level, you have the Financial Stability Board, the FSB  … so you have lots of circles that are coordinating and the best way to coordinate is this (tapping telephone in front of her)

EO: There is a huge amount disbelief between the government and the market – what do you think are the causes of this disbelief?
ML: I wouldn’t say disbelief … I think there has been skepticism, suspicion and lack of understanding – but we don’t pursue the same objective - at all.
Markets are there to make money. A market is a market – a market settles supply and demand but at the end of the day, the operators on the market are there to optimize their positions – where do I make the most money? Where is the biggest pocket of profit? Where is the risk? Where is the opportunity?
That’s what they pursue – you have masses of individual interests – sometimes they are aligned, sometimes they are not.
Now, what do I pursue as a member of my government? – I pursue the general interest.
I don’t care if there is one position which is either open or closed or up or down, my concern is how the overall system stands and is it going to be stable for the long-term.
So, I think we’re not exactly on the same page.

EO: What’s the French position on the debt crisis? You had 82.5% debt to GDP ratio and 8% deficit to GDP?
You have to save 100 billion over three years – to reach the 3% requirement – how will you do it?
Are you optimistic that you can reach that goal?
ML: We’re not just optimistic; we’re determined to reach those numbers.
To reach 3% in 2013, 6% next year and 4.6% the year after.
And it will be a combination of cutting expenses,  … you have two pots – the stimulus measures that we put in place last year – that will be gone in 2011, you have, at least, better growth than what we had last year, so we can expect slightly better revenue from both corporate and household.
Then you have the general cut on public expenses that was decided by the PM – minus 10% within 3 years, front loaded with a minus 5% next year.
And then you have all the tax loopholes that we either slash or reduce and we come to a total of 40 billion next year and a total package of 100.

EO:So there is this new word that you’ve coined “Rilance” – (a combination of French word riguer + reliance – similar to English Growth + Austerity)
ML: Ok, so in English it's “Grosterity” -
It’s a game, to make up a new word is quite funny – and although we’re not in a funny game, we should keep a bit of sense of humor now and again.
There was once stagflation, a combination of stagnant growth and inflation -
Grosterity is a combination of having a very tight budget approach, being rigorous about cutting expenses, slashing and reducing tax loopholes and being very cautious about how we spend money.
That’s on the one hand – the “sterity” of my luggage word.
And growth is – we want to create value, we want to deliver jobs, and to do that you need to encourage people to invest, encourage people to innovate and that’s why we put together the long term investment plan- endowed with 35 billion Euro from the state coupled with private money being put into the pot as well.
It was my way to say, watch out – it’s a combination of both, it’s not exclusively austerity, thank you very much. We need that, but we also need to support growth.

EO: Your PM also said it’s only limited to the budget … why do care so much about this word austerity?
ML: You’re too young for that, my dear – it’s a historically loaded term … it’s not actually the word “austerity” but the word “riguer” – which is the translation.
It was used back in ’76 – well that at least is my recollection – and it was used by a PM of the time and it was coined negatively at the time – a kind of “oh my gosh, oh it’s horrible” –
Then it was picked up later by a second PM (the first one was Raymond Barre – the second one was Pierre Mauroy and then it was a sort of a turn in the policy of the time – and again it was very negatively coined – so I think that’s why there is some reluctance about using the word.

EO: How do you balance cutting spending but increasing investment, especially on the SME sector?
ML: Have you done any sailing in your life?
 Ok, well that’s exactly the same exercise, you’ve got to balance – it’s a balancing act, if growth picks up as we forecast, than the volume of “austerity” will probably not be as voluminous and painful as that being considered at the moment.  Vice-versa, if there is less growth than expected, then we will have to be tougher on the austerity measures.
So, you have two sails, and depending from where the wind is going to blow, you’ll have to use one or the other.
It’s a balancing act.

EO: It will be a very tough job
ML: Yes. Well, it would be much easier to say “austerity – nothing else,” (slamming fist on table dramatically), well – I think the world is a bit different.

EO: What do you think will be the future of the European economy over the coming five to ten years?
ML: I don’t think it’s going to be sluggish. I think it’s going to vary depending on countries, because we are at different stages of development.
The most developed ones and the faster-aging ones will probably develop more slowly than others.
Do you think that Japan has declined as a result of reduced growth over the last ten years?

EO:  Compared to the past, it has a low-growth rate
ML: But yeah – it’s always two things.
You have a base and then you have a percentage.
If you start from a very high base and you’ve got a relatively small percentage, but it’s applied at the right section, then you can be ok and that could very well be what might happen – I don’t know.
It’s fair enough that a country like the Philippines or say Indonesia would grow at 6,7,8 or 9% because they start at such … well I wouldn’t say low base - but if you look at the …
I will tell you something.  I was minister of trade in the past, there was only one number that I was interested in to see what kind of goods we could deliver to that country and it was not GDP and it was not growth.
It was per capita GDP – and that’s a very telling number.
For instance, if the per capita GDP, like in Luxembourg, is in the range of 40,000 US dollars – than you know you’re going to sell luxury goods – it’s a particular segment of the market.
If you look at another country where the per capita GDP will be 8,000 or 9,000 US dollars per inhabitant, you know for sure that they’re going to be developing infrastructure and agribusiness and things like that.
So, it’s that number to me which was key.
But there is a rebalancing in the world which I think is extremely beneficial for our collective well being.
You have emerging markets and developing countries that are moving up the ladder of development and the very developed countries which are sort of plateau-ing at the moment.


EO: How will the developed countries deal with the competition from the developing countries?
ML: Well, there is going to be a balance internally too, if you look at China for example – it’s an economy that has been growing extremely fast, to the risk of overheating at times,  but which relied on an export-driven economic model – it’s now going to rebalance and domestic demand will take the baton from this export led growth.

EO: So demand from the emerging economies will provide jobs …
ML: I should think so

EO: What has the crisis has changed? Are we talking about incremental changes to the European system or has something fundamental changed?
ML: No, it’s not incremental – it’s a transformational event that took place in late April and beginning of May.
The fact that we decided to close ranks and put money where our mouth was and decide to stand for each other – I think that was transformational. 


EO: Sure – but what’s actually changed? Putting up this money is a step, but the economic models are still the same, the European institutions are still the same – it doesn’t seem like there has been a qualitative change.
ML: But that’s because Europe is not one country. It’s very different from say Australia.
You’re talking about 27 countries with over 2,000 years of history and battles and war, where the common goal was suddenly to stop quarreling, stop fighting, stop dying, for the sake of borders or industrial supremacy and let’s number one – talk to each other, see where our common interest is and try to develop, in common, the best we have.
It was a very unbelievable, you know, that they launched and it’s progressing crisis after crisis after crisis.
Schuman, who was one of the founding fathers, actually said, “Europe will progress through crisis” and he was damned right, we saw that earlier this year.
You know, you might think that there is a lot of wasted energy, a lot of wasted duplication and layers of this and that over the other – but it’s the way we find those synergies and the way we find common ground.
It’s a tedious process, especially looking at it from the outside, gosh – you know, they’ve got one president of the council, and then there is the 6-month presidency, then there is the commission, then there is the council, then there is the Economics and Finance Council and then there is the Eurogroup and … oh my gosh …what’s the phone number, thank you very much.
Well, everybody is playing his part – it’s like a clock, you have lots of things that all move in one direction.
But, I’m very optimistic, very optimistic.

EO: What does this crisis in Europe mean to China?
ML: I think there was a big question mark suddenly – why is there such a debt crisis and what’s the relationship between Greece and Germany and France and where is the actual guarantor of all that – how’s it built?
I think it was, not just in China but to many other people.
I also believe, having discussed it with a few of them, that the fact that we decided to strengthen the relationship within Eurozone members, and to have to have the European Financial Stability Facility and to operate more cohesively with strong support from the ECB, that went for quantitative easing in the process, I think that that was a signal that the Euro was not about to go and that In addition to the dollar, that the Euro was definitely a currency that was “worth it” and to be included in whatever basket of reserve currencies going forward.
It must be strange from a Chinese perspective to observe the European construction and the way it works, I’m sure of it.

EO:  I think even some officials don’t fully understand
ML: Don’t feel bad about it - a lot of us don’t either.

EO: What can China to help EU recover?
ML: It should consume lots and lots and lots of Louis Vuitton bags, lots and lots of Christian Dior Perfume, drink lots and lots of champagne and fly Airbus all the time.
That’s a bit of a joke because I was a trade minister, but you know what I mean about the growth in domestic markets is serious.
The more emerging markets begin to focus on developing their domestic markets and servicing their market, I think the rebalancing will take place.

Tony Liu and Zhang Feifei translated selections of this interview into Chinese.

The Chinese-language translation of the transcript can be found here.

The above transcript is of an interview with France’s Minister for Economy, Industry and Employment Christine Lagarde which was conducted at 5pm, Thursday July 22, 2010 at the minister’s office at the French Ministry of Finance, 139 Rue de la Bercy, Bercy, Paris. The interview is just one of a series of interviews that Paul and Zhang Feifei conducted with various officials, scholars and journalists throughout Europe on the topic of the future of the European economy in the wake of the sovereign-debt crisis. You can find a collection of the interviews in English here and in Chinese here.