French Finance Minister Christine Lagarde 'We Europeans Are All Being Put to the Test'

In a SPIEGEL interview, French Finance Minister Christine Lagarde, 55, discusses Germany's plans for reforming the euro zone, whether the euro rescue fund should be allowed to buy bonds and what a new global monetary order involving China could look like.

SPIEGEL: Madame Lagarde, at the recent EU summit, there was a heated debate over a "pact for competitiveness," which is intended to harmonize the economic policies of different European countries. The strategy was developed at the Chancellery in Berlin. Are the plans the beginning of a "German" Europe?

Christine Lagarde: Fortunately, the days of dictates and hegemonies in Europe are over. I'm pleased that German Chancellor Angela Merkel and French President Nicolas Sarkozy have jointly reached the conclusion that in order to keep the euro, we will have to go a step further than tightening the Stability and Growth Pact. We must coordinate our economic policies more effectively. We have no other choice.

SPIEGEL: France has repeatedly raised the issue of a European economic government, intended as a political counterweight to the European Central Bank (ECB). Will a French idea now be implemented with German content?

Lagarde: Let's put it this way: Angela Merkel is lending new clout to Nicolas Sarkozy's idea. The point is to close the gap between competitive member states like Germany and those that are less competitive, such as Greece. It's not about everyone becoming like Germany or France. What we expect is that everyone should seriously ask themselves what they can learn from the best in Europe. For example, German industry is certainly the most competitive in the euro zone at the moment. We should use it as a yardstick for our own efforts.

SPIEGEL: What can Germany learn from the others in return?

Lagarde: From France, it can learn a few things about how to better integrate women into professional life, and how to combine family and career more effectively. Your family minister, Kristina Schröder, has already discussed the issue with me. That's the way the competitiveness pact is supposed to work.

SPIEGEL: Nevertheless, we have the impression that the core of the intended pact is very German: balanced budget acts modeled after Germany's "debt brake," a retirement age of 67, wage restraint. It all sounds like austerity measures imposed by Berlin.

Lagarde: The pact combines German virtues with a proper dose of realism. The issue of the retirement age is a good example. No one is aiming for a situation where every European would in the future only be able to retire at the age of 67. Chancellor Merkel also knows that the retirement age in each country has to be brought into line with demographic developments in that country. But one basic rule applies to all countries, namely that if people are living longer, the pension system has to be adjusted. We have to work longer because we are living longer. It's simple mathematics.

SPIEGEL: Under the pact, wages would also no longer rise automatically with inflation, as is customary in Spain and Belgium, for example. These countries sense an attack on their social systems.

Lagarde: Of course we have to be careful that we don't antagonize people too much. But if tying wages to inflation results in certain countries being less competitive, they should ask themselves: Is this wage policy really the best approach? The French government, like the German government, believes that wages should not rise in lockstep with inflation.

SPIEGEL: The pact is supposed to be implemented within a year. That's quite ambitious, given the snail's pace at which the EU usually makes decisions.

Lagarde: We want to pick up the pace a bit.

SPIEGEL: The head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker, has warned against massive social cutbacks within the euro zone. The Irish are up in arms about the notion of a uniform rate of corporate tax. How do you intend to bring all the opponents into line?

Lagarde: It's a question of the basic principle of give and take. The right to receive assistance from the community in a time of need is justified. But so is the right to expect the recipients of this assistance to improve their situation. Solidarity is not a one-way street. This has nothing to do with social cutbacks.

SPIEGEL: The goal of the competitiveness pact is to curb economic imbalances in the euro zone. This also applies to the German trade surplus, which many see as one of the key causes of the euro crisis. You yourself sharply criticized the German trade surplus a year ago, but then you changed your mind.

Lagarde: And I can tell you why. What has really changed fundamentally in the last few months is the source of German growth. Unlike the way it was a few months ago, growth in your country is no longer being driven solely by exports, but also by domestic demand. This is a development that I, like all Europeans, very much welcome. Germany retains its competitiveness and is still a major exporter. But it has also found another source of growth: consumption and investment.

SPIEGEL: Nevertheless, your old opinion has found a new advocate. Marco Buti, the director-general for economic and financial affairs at the European Commission, wants to see a cap on trade surpluses included in a competitiveness pact.

Lagarde: It isn't possible to simply tell a competitive country to stop being competitive. Nevertheless, it is a good thing for the countries with surpluses to be putting their economic models to the test. If the domestic economy in Germany heats up, it's good for Germany and for all of Europe.

SPIEGEL: A reform of the European euro rescue fund, the European Financial Stability Facility (EFSF), is also in the works. Until now, only about half of the available €440 billion ($595 billion) could be distributed, because the fund can only keep its top rating if it maintains large cash reserves.

Lagarde: That is a problem indeed. We want to organize the bailout fund in such a way that it can actually distribute the €440 billion in aid. Therefore we need to say what is necessary to achieve this.

SPIEGEL: But additional guarantees are needed for that purpose. Is this just a job for the six euro-zone countries with the highest credit ratings, including Germany and France?

Lagarde: No, not at all. The stability of the euro affects all 17 euro-zone member states, which means that everyone has to contribute to it and provide additional funds.

SPIEGEL: You have to admit that you want to distribute the burden onto as many shoulders as possible, because you're afraid that your country will soon no longer belong to the exclusive club with the highest credit ratings. How much longer will France keep its AAA rating?

Lagarde: You're completely on the wrong track there. As long as I occupy this office, France will not give up this status. We are also doing a lot to keep it that way. We are sorting out our finances and reducing our new debt. We are pursuing tough reform policies that will increase our growth.

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