Nicolas Sarkozy, the president of France, was in Abu Dhabi to sign ground-breaking agreements with the UAE on culture, diplomacy and security. But commercial ties also were on the agenda. Travelling with Mr Sarkozy, along with a number of French corporate representatives, was Christine Lagarde, the minister of economy, industry and employment. Wayne Arnold, The National's senior economics correspondent, caught up with Mrs Lagarde over coffee during the Louvre Museum's ribbon-cutting yesterday at the Emirates Palace Hotel. Here are some highlights:
Q: We've seen several big investments by the UAE's sovereign wealth funds in the UK and Germany, but not in France. Do you hope to change that with this visit? A: There is a co-operation agreement that will be signed today [Tuesday] between the FSI, the strategic investment fund of France, and Mubadala ? a co-operation agreement to partner in relation to investments in France. I think for a period of time the investment fund that was set up by president [Sarkozy] was regarded as vaguely hostile and intended to secure investments within France for France with French partners, as if we were hostile to investments from abroad. And that's not the case at all.
Q: Would France welcome investments by Abu Dhabi sovereign wealth funds? A: Of course, we welcome those investments. France is very much open to foreign direct investment. It is the second [most popular] destination for FDI in the world after the United States. So it comes before the UK, before Germany. It's open. Foreign direct investments by sovereign funds are welcome. We're not afraid. We don't regard them as a threat. We have always had a dialogue with sovereign funds to understand what their strategy is, what kind of stakeholding, shareholdings they are interested in. And frankly, the strategy and management of those funds of the various entities in Abu Dhabi are perfectly reassuring as far as the targets are concerned.
Q: The IMF mentioned recently that one of the biggest risks to the Middle East is a prolonged European recession. What is the outlook for Europe from your perspective? A: I don't expect a V-shaped recovery. But I see stabilisation factors at the moment. We learnt from the crisis that all economies, including those that thought they were protected, are interdependent. What happens in eastern and central Europe has an effect in western Europe. What happens in the US has effects in Europe. What happens in Europe has an effect in the Middle East and on and on and on.
Q: France has gained attention because of the stresses on its economy, the kidnapping of bosses and similar protests. But France's social safety nets are also gaining admiration. Are they proving a boon or bane in the crisis? A: They've operated as a great shock absorber. The welfare system, the unemployment benefits ? guarantee a level of consumption that hasn't fallen so far. Consumption in France has increased in the last few quarters, which has sustained a bit of activity, whereas at the same time investment, particularly private investment, has declined dramatically. The key question is: Will it hamper the recovery or is it going to sustain the recovery? We are removing a lot of constraints, a lot of barriers, a lot of licence, a lot of rules and principles that were constraining entrepreneurship, constraining the creation of value.
Q: Why has France's financial system withstood the crisis better than others? A: Our banks are very much based on retail banking. [For] most of them it's about 60 to 70 per cent of their activity, and 30 to 40 per cent is investment banking. So they've managed to balance their business model. Whatever losses they were carrying on the one hand, they can balance out on the other. Less leverage. And a lot of retail activity, which is a big cushion.
Second, we had a supervision system which has always been extremely strict, rigorous. The assets, for instance, [that must] be held by banks were very, very strictly enforced. Having said that, I'm still very, very strongly supporting a solid financial regulation system. And I'm delighted to see that my counterpart in the US is also of the same view. And I dearly hope that by the New York G20 meeting [in September], we would have managed to move along in our respective corners - Europe, the US, Japan and other Asian countries, and the Middle East - so that we can have better regulations, enforceable regulations on ratings agencies, better control and supervision of hedge funds, better principles and policies of compensation for traders in particular, and a closely co-ordinated supervisory system. And the tax havens, which have to be brought into line so we can know what's going on behind closed doors.
Q: Who do you blame for the financial crisis? A: Everyone. I think ex-post we will find out - just as we did in the Enron crisis - that a lot of people had been complacent. Nobody was paying attention to the whole picture. The decision to let Lehman Brothers go down precipitated and acted as a catalyst. Q: Was that a mistake? A: Yes, absolutely. I said so then. I did what I could. Q: You've called for a co-ordinated supervisory system, but would global regulation work?
A: I don't think a global committee would work. There are two bodies that need to be used extensively, the IMF and the FSB, the Financial Stability Board. If these two can co-operate and work together, which seems to be the case because they've identified their respective territories, then locally we on the ground in the regions can adopt [rules] and make sure the rules are respected and enforced.
Q: Has there been a breakdown in values? How can we establish and enforce them again? A: I think the losses that have been suffered are going to be a long-standing wake-up call over values. But I also think a combination of the right compensation system and enough fear generated by a strong supervisory system will have to be in place to constantly remind people of values. Fear and greed. We need sufficient fear, and enforcement of appropriate regulations is one way to maintain fear.
Q: Is capitalism finished? A: No. it needs to be better regulated and sustained on the basis of good solid values, not for the benefit of just a few. warnold@thenational.ae
