Robin Niblett, Director, Chatham House, United Kingdom; Global Agenda Council on Global Institutional Governance: I am Robin Niblett; I am the Director of Chatham House, the Royal Institute of International Affairs in London. It’s my very great pleasure to welcome you to this session on ‘Rethinking the Euro Zone’. Perhaps it’s appropriate to have a Brit, outside the Euro zone, help with the chairing this particular session. This is a very exciting for analysts and think tanks but difficult and dangerous for politicians of the calibre that we have here at this table, a very difficult moment for them to be able to cope with Let me just say a few more words of introduction quickly But as I said, we are in the midst of a crisis right now for an institution, a Euro zone, that was established somewhat and designed to try to avoid the creation of crises in the first place A Euro zone that was established, I think, and has lived through a period of growth is now facing a period of crisis. And this is a very different challenge for its leaders to undertake There are many who said that the Euro zone helped a number of the European countries cope with the crisis. However, it also appears to be imposing constraints: a high Euro in particular; a drive now to quickly reduce deficits as quickly as possible; certainly we have had countries who have been able to devalue outside the Euro zone but within the European Union, including Britain who perhaps have been able to benefit a little bit in this post-crisis mode. And there is the question of the future: are we through the crisis or might there be a second wave of some sort? There are many non-performing loans across the Euro zone and, as you all know here, governments carrying very, very large debt levels, accumulated debt levels as well as very high deficits In any case, the World Economic Forum has drawn together a superb line up of leaders to be able to discuss this issue with you today. We are sorry that President Kaczynski could not be with us, as he has been held up – as a number of people, I think, have been – by the snow that’s been falling since this morning. But we have three leaders, each of whom have been navigating the storm, either as national leaders or as the President of the European Central Bank And what I’m going to do is obviously engage in some questions with them and hopefully then turn it over to the audience for the last 15 minutes or so So let me get straight in and I’m going to start with Mr Zapatero, and I’m going to start with a series of questions about whether the economies of these three countries – that to a large extent have been in the eye of the storm, maybe more than others – how they’re coping today. Are we out of the eye of the storm? Spain is a country that went through a decade of very rapid economic expansion, but it’s one that is now facing some pretty high unemployment levels, a trade deficit position, and I’d very interested to know, Mr Zapatero, how is your economy coping at the moment? And then we’ll turn

around to questions of the Euro zone in our second question. First to you José Luis Rodriguez Zapatero, Prime Minister of Spain: Well, the first thing I want to say is a statement about the Euro being a success story It’s a strong currency, it has been, it is and will continue to be, and it has offered stability and fiscal harmony, and in the European Union it is a factor of unity Spain right now, as in every other Euro zone country, is going to meet the Stability Pact requirements. We are doing so and we are going to be responding to this within the monetary union, and we are going to be reducing the deficit, as agreed by 2013 by 3% of our GDP And we are a serious country; we always meet our obligations. Tomorrow, we will be agreeing on a government austerity plan, we will be working on the reform of our social security, and we have to take into account what the conditions of our country were when all this started, which were quite reasonable. We had been going through four years of fiscal surplus, and over a very long period of time we had growth and prosperity Niblett: Thank you very much. And I think certainly for countries looking to the future, something about the banking system. If I can just, Mr Zapatero, follow up quickly: Spain is a country that was able to become a multinational player, partly through the strength of some of its banks that have gone to Latin America, come to Britain as well. Are you concerned at all about the health of the banking sector in Spain at this moment? Are they through the woods? You’ve got some banks that I think are quite exposed and some that are perhaps stronger. But where does the Spanish financial system stand right now? Zapatero: Well, I think a few of

the developed countries and economies of a certain size, in which the banking system hasn’t actually needed much change because of the crisis, because of what we already had in place. There have been no bankruptcies in Spain in the banking sector and exceptions, and in fact the Banco Santander has been called to Great Britain to contribute to improve the financial sector in Britain. And I think it’s proven to be quite resilient, in fact We had significant measures in place already of supervision and regulation, but of course after all this, after the crisis, we will be needing to do some restructuring especially in small and medium-sized banking entities What we call caja de ahorro, the savings banks, from here to the summer in order, of course, to scale them down to the new situation. But I think that as I was saying, the financial system is good, resilient, and it has sometimes been shocking to hear that in the US or Great Britain or in Germany, speaking perhaps of that financial system when it’s actually proven to be one of the most resilient and controlled thanks to our central bank and to the support, credibility, the security offered also by the ECB Niblett: Thank you for those answers. Let me turn now to Mr Papandreou. You’ve had a baptism of fire since you’ve taken on the Prime Ministership of Greece, and I think the Financial Times is making a lot of money out of coverage. And it’s become a little bit – I wouldn’t say a soap, but you’re certainly finding yourself certainly the centre of attention. Greece, again, is a country that appeared to benefit hugely from its efforts to get into the Euro zone. It’s seen some very positive growth, certainly in the last five to 10 years. Now, obviously in the eye of the storm. Where do you see the prospects for Greece? How is Greece coping today with the crisis you’re in? George A. Papandreou, Prime Minister and Minister of Foreign Affairs of Greece: Thank you very much. You are right; I am in popular demand here in Davos, on panels, meetings, interviews and understandably. But it’s not the first time I’ve been in Davos and I was here another time, when again I was Foreign Minister then. I was in popular demand because Greece was a success story. This was just before the Olympic Games; we had a growth of 5% of GDP, we had great credibility. Our banking system, which is quite healthy today also, was expanding into the Balkans and we had become a stabilizing force for the economies in the region. Greek-Turkish relations were on a different pattern and things were looking very, very positive But what happened from then to today? Is it the Euro zone that’s to blame? I would put first of all the blame on us. I don’t want to make politics, but in the previous government there was a lot of mismanagement. We did have a huge clientelistic patronage, which was a lot of waste of money. Unluckily, we developed a lot of corruption at the highest of levels, and we did not take the structural measures to change our economy, to move our economy to make it more competitive, which Greece can be. We do have a great potential, more competitive within the Euro zone, more competitive as a member of the Euro zone. All of these problems, of course, have been exacerbated because of the international crisis. In fact, what I am saying now in my country, I am saying, ‘Well, the international crisis is a very difficult crisis for us, but on the other hand it has highlighted some of the real problems we have as an economy, and let’s make this crisis an opportunity’ We have put, and we are determined to get there, 2012 under the 3% Maastricht criteria This year we will be cutting 4% our deficit There is a credibility gap; I would say our

first deficit is the credibility gap and we are moving in the next few days in creating an independent statistics bureau with members from the Eurostat on it, and a Parliamentary bureau which will be following our budget We are cutting our budget from wage bill to expenditures to tax reform to pension reform in the next few months. By June, these will be laws of the land and we’ll be moving ahead We are also making huge administrative reforms, which have never been done in previous times, from five levels of governance to three levels of governance in Greece, cutting down about 6,000 legal entities. And fighting corruption from simple things like putting all our signatures on the internet to more specific ways of the way Parliament controls and the executive branch Finally, we have a growth potential; Greece has great potential. We have €16 billion from the structural funds moving into green agenda. We want to make the Aegean the model for green energy, for Europe, for wind energy and solar energy. That’s the other side of the coin of the stability and growth programme, which we are determined to implement. The Euro zone for us, whatever difficulties it may have, has been very important. As you said, the success of Greece in 2004 with the Olympics and so on was very much also supported by the fact that we were in the Euro zone And today the Euro zone also creates, I would say, a buffer for some of the problems, which will allow us to restructure and move ahead within this context. So we are determined and we think the Euro zone is an asset for our country, and of course for Europe Niblett: Thank you for those comments. Let me turn straightaway now to Mr Zatlers. Mr Zatlers, Latvia really perhaps has had one of the biggest rollercoaster rides within the European Union. One could draw the connection to being inside or outside the Euro zone But first of all, can you tell us a little bit about how Latvia has coped with this huge shift in its fortunes from being one of the highest GDP growers to obviously having taken one of the largest falls in that time? Where are we today in Latvia and are you out of the crisis moment? Valdis Zatlers, President of Latvia: We have this Davos mood in our rethinking, redesigning and rebuilding already for a year If you look back to the history, the Latvian currency was pegged to the Euro in 2005 and they expected that this peg would drive us to the Euro zone in three years. It didn’t happen. We didn’t get the Euro. We got the experience and the experience is that the government is not fulfilling the fiscal discipline very strictly. We must not think about the Euro zone Now, we have the second attempt. We had to make a very crucial decision in the third quarter of 2008, whether to abandon the peg and go the way of revaluation or to keep the peg and go through the programme of internal devaluation. And we have to say, we are on the programme for the Euro. And I have to say, the programme works. We have fulfilled all the targets and even our budget deficit is lower than we expected. But our very clear exit strategy is to join the Euro by the year 2014. That means to meet the Maastricht criteria by the year 2012. And we are not taking the free ride to the Euro; that’s not our decision We are really ready to fulfil all the criteria Because the question is what kind of Euro zone we want to join. We don’t want to have just a very, very good label, which will give us some advantages and of course a higher rating. We will take it for granted that we will fulfil all the criteria because our goal is to really rebuild the sustainability and also the balanced economy of our state. If the first year of the programme has worked, it’s a situation that Latvia is like half in because of the peg. But I can’t say we are half out because we are still out; even I would say ‘yet out’

That means we have a clear strategy and when all the problems arose in the Euro zone, when we see they are similar to the Latvian ones, and we can serve as an example and also as an experience how we managed in the first year of our programme to really stabilize the macroeconomic figures and to get started for going up in recovery Niblett: Can I ask you quickly, did Latvia suffer – as many Central and Eastern European countries did – from people borrowing in other currencies, taking out mortgages in other currencies then finding flip-arounds in the values of currencies and interest rates? Zatlers: That was one of the mistakes made by the government because instead of fighting inflation, because inflation was the only criteria we didn’t meet in 2006 and 2007, the government allowed extensive borrowing and allowed also extensive expenditure of the government itself. And there was of course the interest rates in Euros were lower; Euro loans were cheaper and people made a very simple choice. They will take which is cheaper That was a mistake and it is very difficult to go towards the subsequent of these mistakes But another question, compare the macroeconomic figures of different countries in Europe They are not too striking differences; probably, you know, very few really maintain the Maastricht criteria today. And that’s also what makes us very confident in our problem because many countries inside the Euro zone just have announced that they have to meet the Maastricht criteria again by the year 2012, 2013 or the same period That means that we are working all together, those who want to join the Euro and those who are in the Euro zone, just to get back the credibility or the stability of our region I think we have to follow the same goals, but we also have to a little bit pay attention that we need to think about how to supervise and how to really control the systems, to use these instruments or let’s say institutions to serve as early-alert systems to prevent that the Euro zone goes up with very different figures and instabilities Niblett: Thank you very much for those comments Mr Trichet, we have three government leaders here but you’re speaking, I suppose, on behalf certainly of the European Central Bank, but on behalf of all of the members therefore of the Euro zone. Let me ask you a very basic question. Is the Euro zone largely out of the woods? I won’t ask you the question you might get – you know, ‘Is it going to survive?’ – because I know the answer I’m going to get to that one. But, you know, are we still in a moment of crisis or are we stepping out of it? I know that you gave a speech in London not so long ago and you talked about your concerns still that there were exposed loans, that there may be still further sharks to come within the Euro zone economy Jean-Claude Trichet, President, European Central Bank, France: Well, first of all let me stress that we are speaking of 330 million people, 16 countries Those countries have decided to unite their destiny within the framework of the European Union, within the framework of the institutions that we have decided to have. We have decided to have the framework of a single market and the framework of a single currency within the single market, which is a single economy of the type of the United States of America And I would say we have to be fully aware of the fact that Greece is not Finland, and that Spain is not Germany, exactly as Missouri is not California and Alaska is not Florida We have diversity in this very vast economy, which is of the size of the United States, exactly as there is diversity in the United States of America in terms of inflation from country to country, in terms of growth, in terms of labour cost. So I think we are looking at an entity which is necessarily because of its size diverse, with a lot of challenges Niblett: But you wouldn’t put it that closely to the US, would you, in terms of – I mean, the US has movement of labour, common language, federal transfers. Can you draw that parallel so much between the United States and the Euro zone? Trichet: Of course there are differences, but the paradox in some respects is that in the US you have a lot of specialization on a state-to-state basis, which makes under shock differences to be from time to time quite strong. But I fully agree, of course, that we have to look at it very carefully

And my warning is only that we are looking at a very vast industrialized economy, which is again of the size of the United States And in that economy, under the stress, under the shock of the most dramatic crisis since 60 years at least, we had to react – all of us – within our framework, the Central Bank on the one hand and the various authorities, whether European or national, on the other hand If I look at what has been done, I think this Euro area within the framework of the European Union as a whole reacted in a way which obviously was not clumsy, if I may. I don’t speak of the Central Bank; one has to judge. But when I look at the fact that on both sides of the Atlantic we were able to avoid the depression with approximately the same kind of commitment, and I am speaking there of governments themselves They put on the table, because it was necessary to avoid the depression, something like 25% of taxpayer risk, which will not be transformed of course in taxpayer spending and certainly not in taxpayers’ losses. Not at all; in some cases, profits. But nevertheless, it was a political capacity to mobilize and on both sides of the Atlantic we have approximately the same figure of 25% of the GDP within the framework, which is our own institutional framework but which is not necessarily very easy because it had to be processed through the various governments that are present and all others So where do we stand now? I think we are all under stress still. We all have the lessons to be drawn from the crisis: the Euro area, Europe as a whole, the US and all other countries We are speaking of a public-finance position, deficits; let me only remind us that in the Euro area, according to the IMF this year the overall public-finance deficit will be in the order of magnitude of 6%. In the US, the same IMF says that it will be of the order of magnitude of 10%. And in other industrialized countries, it could be equally 10% for Japan, and you know better perhaps as a British citizen what it could be in the UK. So we all have very, very tough issues, both at the level of the Euro area as a whole, but in that, you know, consideration I would say the Stability and Growth Pact worked, even if we are permanently calling for full and rigorous respect of the Stability and Growth Pact in the ECB. I have to say, when I compare with other equivalent industrialized countries, it seems to me that we had a capacity to resist the pressure for destabilization of public finances. And of course, each country has its own individual problem, and I would very much echo what was said by the Prime Ministers; it is a problem that you have to solve at home because it is your own responsibility and for the sake of your own country, of course Niblett: Let me come back to Mr Zapatero I wanted to really ask him the second question: how has it been to be inside the Euro zone? Has it helped? Has it been a hindrance? I think you answered that question partly in your opening statement when you said that you felt that the Euro zone has been a strong currency, it’s been successful, and I think you indicated it had been helpful. But you hold the Presidency of the European Union right now – Spain does, you do – at a moment of complex obviously transition to a President position. But do you think the political coordination – the political coordination – between European leaders at that moment of crisis was sufficiently strong? Are you part of a club? Is the Euro group of leaders of the European zone a club that is fit for purpose at moments of crisis? Zapatero: – has and continues to be a great support to the entire area, to the 16 countries in the Euro zone. Nobody is going to be leaving the Euro. No, more countries are going to be joining the Euro area in the

future, the same as no country is intending to leave the European Union. On the contrary, more countries want to join the European Union That is the best proof of how successful the project is. The Euro area has offered us stability and has enabled us to combat the crisis with a response by the European Central Bank, a monetary response that has facilitated conditions for our financial institutions, our financial markets, and continues to be the guarantor of the Stability Pact, which they fulfil very independently together with the Commission Nobody’s going to be leaving the Euro, I would like to insist. On the contrary, there will be more countries within the Euro zone And the Euro club is a strong club with strong ties of reciprocal support. Let no one be mistaken in this. The 27 have already stated this and so have the 16. It is true that when the Euro was first conceived, some people said it wasn’t going to be possible that the Euro was going to fail. Then they said it wouldn’t last. Afterwards, they said that when the first crisis appeared around the corner it would fail, but nevertheless it has shown that during times of growth it has offered macroeconomic stability, price stability and it has facilitated economic integration And now in times of crisis, it has managed to resist. All you have to do is compare the spreads in general in the European Euro zone to those that aren’t in the Euro zone. Those in the Euro zone have been much more resilient, and now what we need to do in the coming stage, in this new stage, is to strengthen, to reinforce cooperation and coordination among those countries with the single currency, with the Central Bank that establishes the monetary policy We have to cooperate much more closely and within the European Union, we need to forge, articulate more, coordinate And the Euro group needs of course to become stronger. It’s the natural partner for the ECB. If we want the currency to have the greatest possible political and institutional support, we need to strengthen the Euro group. And every country, every country in the Euro, knows what it’s brought to us and we knew what we were gaining as Spaniards, Italians, Greeks, Finnish or Europeans. First, as Europeans, we know that we have to meet and honour our responsibilities and we are going to be doing so, despite some of those voices who analyse seriously – and it is a serious analysis – they criticize the Euro, but they have never liked the Euro. They don’t like the Euro gaining ground. They don’t like a strong Euro, and this needs to be said very clearly Niblett: I’m sure if President Kaczynski was here, he would probably – President Kaczynski might challenge your conclusion that all those inside did better than those outside, because I think Poland has done reasonably well being outside the Euro. Maybe we can come to that in the third part. I wanted to pick up your other point and turn it to Mr Papandreou, which is the issue about stability, that the Euro, Mr Zapatero said, had brought stability. You’re facing, though, at the moment some interesting swings, being inside the Euro, in terms of bond spreads. It’s a bit of a merry-go-round. I know it’s very difficult to cope with obviously as a leader. Are some of the disadvantages in the Euro actually there despite the strong comments despite the strong comments that Mr Zapatero made in favour of the Euro? Papandreou: Well, obviously the Euro zone is a big step forward to European unification but at the same time the policy coordination, as Prime Minister Zapatero has mentioned and has put as one of his priorities in his Presidency, is the other side of the coin of what we need to do in the European Union. I would say that first of all, the problem we have, I see it as home made. So we Greeks are responsible for putting our house into order. The Euro

zone will help us in creating the necessary discipline to do so and give us the motivation to do so At the same time, what I also have seen from this experience of the last few months is that there is, as Mr Zapatero said, an attack on the Euro zone by certain other interests, political or financial. And that often countries are being used as the weak link, if you like, of the Euro zone. So we are being targeted particularly with an ulterior motive or agenda, and of course there is speculation in the world markets. And again I have seen this; I saw, for example, we had a vote of confidence on Monday when we went out for a loan and we were over subscribed by five times. Even though it was somewhat expensive, it was also a vote of confidence in our economy. But the day after, there was an article in the Financial Times which said that we were seeking for China to buy up some of our bonds, which didn’t exist neither unofficially or officially The same for the Chinese investors: neither did they have any contact with us on this issue, even though everyone would like to diversify their portfolio. But we had no such contacts and we denied this, of course, and that was considered – and both the Chinese government denied it also and investors – and that was considered a vote of no confidence to the Greek economy, which changed the spreads immediately and put us in a more difficult position, which shows us that we are in a jittery time. It also shows us also that there is a lot of speculation It shows us that even rumours can create problems But for serious governments that are determined, and we are determined to make the changes and to move forward, I think this is a problem which we are facing But it also shows that it is good that we are in a common family because this does create a protection. Now, there are issues, of course, as I would say that a year ago – when I was not in government then – but when the European Union did decide to take some measures concerning the crisis and there was a fiscal stimulus by many countries, I would have wanted – and I told this to José Manuel Barroso – even though I was in opposition I would have wanted a more coordinated and a more monitored fiscal stimulus by the European Union. This has nothing to do with the ECB; it has to do with the coordination of the governments of the European Union. Then we would be sure that the impact of the fiscal stimulus would have been even better, and we would have also ensured that some countries – such as mine – would not have gone off on a tangent in their deficits. And luckily that was not the case So I do think we need more coordination, and particularly if we are talking about growth and if we are talking about labour laws and we are talking about tax reform, we are talking about green development, we need more coordination Now, there are also other ideas that are there concerning the Euro zone. And please take Greece out of this; I am sort of talking as a European now, and not as a Greek, so don’t link it with the Greek problem. The issue, for example, of European Union bonds, which would then be more similar to what you have in the United States, where states can of course get federal bonds for growth and development And this, I think, is an idea which is not mine; it’s an idea which has been tabled for many countries Niblett: Maybe I’ll bring that point up with Mr Trichet and see his comments on it. But Mr Zatlers first, I just want to get one of your comments about the Euro zone. You said you laid out the timetable that Latvia still has for wanting to join the Euro zone. Do you think the entry criteria should be changed? Do you think we should – they were created for a particular time, a particular period and maybe even for particular countries, but are they still the right criteria? Zatlers: Of course there’s a temptation to decrease the criteria because most of the countries of the Euro zone do not meet the criteria today. But as I said before, we are not going for a free ride to Europe. Because the Euro is just the framework for us to rebuild our economy. That means we are going to meet the criteria under the definite programme to a definite time. And in February the government will make a statement that this is 2014 when

we have to join, and that these are joint efforts of the government and the central bank and also of the social partners. There is broad support to this programme And why are we so confident? Because let’s say it was a very criticized decision not to devalue but to keep the peg. And now, a year later, even the critics of this programme admit that the programme works. So when we got the confidence in the first year of the programme, and the confidence is it will bring us to the goal and the goal is to rebuild a healthy, sustainable economy. And as mentioned before, the Stability and Growth Pact is of great value because the Euro club is a club of equals. And the equality is limited to these Maastricht criteria, and we should admit it. The diversity in all the other things, but the main thing is to keep the criteria We all want to join the club; this is the same reputation as it was when it was created Niblett: Mr Trichet, we’ve had a number of comments. You might want to react to a couple of the ideas that have been put forward here, but how do you manage – and how will you manage – a Euro zone with such diverse economies at this moment of crisis? They are emerging from this moment of crisis at the same time as you’ve got countries obviously on the outside wanting to come in. Is it a very different proposition to the proposition that you faced during that period of growth? Trichet: No. I would say, very fortunately on the fiscal side, we have a framework since the very beginning. At the time, this Stability and Growth Pact was challenged, including by big countries. We made the point that it was the absolute necessary counterpart to the monetary union itself, because we cannot have a monetary union if we do not have a framework for the fiscal policies, peer surveillance and peer capacity to engage in recommendation, which is the case. And it seems to me that what has been done recently is exactly what has to be done: very good work by the Commission, very difficult mediation of the governments And, Mr Prime Minister, you have a programme with the appropriate timing; you have a programme, Prime Minister Papandreou, and so forth. And of course we are there, I would say – the Commission and the ECB and the peers – to look at that programme and see to it to be fully implemented. So that exists and this is appropriate, but we have exactly the same problem in the other major industrialized countries. They have to work out programmes and be sure that they honour their programme and reach the goal. And the goal is very simple, it’s the same for all of us: it is to be back to a sustainable position in order to reinforce confidence today, confidence of the household, confidence of the entrepreneurs and confidence of the market And this confidence is a single entity, if I may, and it is necessary for the recovery to be as active as we hope. Now, we have also – and I fully subscribe to what Prime Minister Zapatero said, as President of Europe – we have to improve the surveillance, which is not I would say in a framework, in an institutional framework, but surveillance of the implementation of structural reforms, and this very important. That has been decided by the heads and it is to be implemented And we have also the permanent surveillance of the evolution of competitive indicators in the various economies in the Euro area, which is also something that the Commission has engaged to do on our own recommendation and I trust that it has to be done But this is no time for complacency; for all of us it’s a hard time, and hard work has to be done at the level of the Euro area, at the level of Europe as a whole. Very hard work, but again not of a different nature to what you are observing in the other major industrialized countries Niblett: Maybe we can come back to a few of the points that have been raised so far, but I do want to draw the audience in. We’ve got people who have battled through the snow to come and join the session today and come and participate in this session on the Euro zone I am going to take maybe two or three questions to try and group a few in and maybe direct them to different members of the panel, or you may want to direct them yourselves. Please do say who you are, who you work for, and please keep it to a short question so we can get as many in as possible. No statements, thank you Charles Grant, Director, Centre for European Reform, United Kingdom:

I am Charles Grant from the Centre for European Reform, a think tank in London. I have a question for George Papandreou. You said what you should say. You say you are trying to do all the right things, but surely the problem is that in your country it’s very hard to see how any government – however gifted and however wise – how can it be capable of reforming the underlying political and social structures which prevent economic reform, which prevent budgetary consolidation, which prevent productivity rises? How can you possibly convince us that you can restore the health of your underlying economic structures? Sean O’Grady, Economics Editor, The Independent, United Kingdom: It’s Sean O’Grady from The Independent. This is a question particularly for Mr Trichet, which is how far now do you think the private financial system – the banks, in other words – are from returning to anything like normality? And how much do they still depend on huge public funds and subsidy? Tihomir Kamenov, Bulgarian Society of International Law, Bulgaria: Question for Prime Minister Papandreou and perhaps President Jean-Claude Trichet. Tihomir Kamenov, Bulgaria. Prime Minister Papandreou, you are a devoted European and a very good lawyer by training and practice, I remember Do you believe that blocking borders is good behaviour of a member of the European Union and would it be possible for the Greek government to accept liability vis-à-vis Bulgaria? And second question, are you envious about Bulgaria entering the Euro zone next year? Thank you very much Niblett: I think the first question is really the elephant in the room. The productivity changes, the structural changes which are now absolutely – I would have thought – vital given the kind of deficit and debt burdens that most Euro zone as well as EU countries are starting to live under. Mr Zapatero, you made lots of good statements obviously about what you wanted to do and what you’d like to do, but the issue of labour deregulation, education to increase productivity – what steps is the Spanish government taking right now to convince, let’s say, people like the questioner about the commitment to structural change? Zapatero: The first answer is that we must recall that our country has 20% less than the average European public debt. It’s grown, but it’s still low. We have doubled investment We need to strengthen our educational system, but at the same time we have to recall that our economy is one of the top seven in terms of growth in investment in the world. In terms of what we’ve been hearing, it certainly seems that we’re gaining competitiveness. Over the last two quarters, we’ve been gaining market share in international trade. So that’s the situation we find ourselves in. Now, we will be making reforms, the first in the area of austerity and ensuring that there are restrictions in chapters one, two and also in terms of investment. We need to reform social security and we will do so, and to ensure that we have a system which is viable in 15-20 years’ time, and in so doing strengthen social protection We will also be changing our labour institutions, particularly in the area of collective bargaining,

in the area of job mobility and the area of the ease of hiring, particularly for young people and people who, as a consequence of the high level of unemployment in our country and who don’t have qualifications, have great difficulty actually getting into the labour market Now, we are going to have to explain all this to the Spanish people, but the Spaniards since they have become members of the European Union have recognized that they have duties towards modernizing, strengthening their economy, their social protection. And the record there is impeccable. So I think what’s essential here, and I’ll finish on this, I think that as a European and as a Spaniard, the Euro zone and the European Union is not going to give up its model of social protection, its model of social cohesion. It is not going to give up its social model. We want the most competitive economies in the world, but we also want social cohesion. We will not ever accept to gain competitiveness to the detriment of social cohesion and social protection And what does that mean? We have to be more competitive, we have to be more innovative, we have to work a great deal, but I believe in Europe we can do that. And once again, we’re showing signs in Europe that we can do that, as we have done in the past Niblett: I will pass that same question actually on to Mr Papandreou. In particular, it may be therefore that the Euro and being in the Euro zone is an external actor, a forcer of change, and may even accelerate it. This kind of structural change: will you be taking similar kind of very structural steps of the sorts that Mr Zapatero alluded to? Papandreou: Yes, it is. I would very much agree with Mr Zapatero that the Euro zone is also something which allows us for greater discipline. But I would also in that answer the two questions that were addressed to me, that what is your credibility? And I have said in my country that our biggest deficit is the credibility deficit; it’s not the financial deficit. And I – today, every Greek citizen realizes the problem and I think this is the first point I want to make. We realize, they realize we need the change and it is deeply understood that we need to make deeper changes, deep structural changes. And it will be painful, it will be painful for all, but people are determined. I get this on the streets when I talk to people; they are determined to support our stability and growth programme, which is very specific Secondly, we came on a mandate of change We were recently elected. We knew what the problems are; we didn’t know maybe the depth of the problems, such as the deficit, but we knew what the structural problems were So we’re not talking about something different; we’re just talking about compressing it in time and making it more quickly and more credibly, so that in a very short time the international markets were able to see that what we say we mean and we’ve already started the implementation And we have a strong mandate in parliament; we have a large majority Thirdly, we have been successful in the past This is not a question of DNA; this is a question of political will and the political will is there and we have been able to do it in the past when big issues, such as whether it was becoming part of the Euro zone, whether it was revamping our infrastructure, whether it was organizing the Olympic Games. When everybody said a small country like Greece can’t organize the Olympic Games, we organized the Olympic Games in the best of manners We can when we decide, and so yes we can, I would say And thirdly and finally, the competitiveness of our economy. That’s a major issue but Greece has potential: whether it’s its tourist industry, whether it’s the agriculture industry, whether it’s the services industry, whether it’s banks, we have potential and this is what we will be banking on. But of course we need to restructure Just to answer the Bulgarian question, I think that’s one more piece of evidence of the determination There are major problems in our agriculture I will be the first to say that and I am the

first to admit that, so we need to restructure Greece could become a country of high-quality, ecological, biological Mediterranean products and exporting and industry and so on, rather than at this point being in deficit and in deficit even in this area, and link it with tourism, link it with green development and so on. But what I have said to those who are protesting and who are closing off the borders even towards Bulgaria, and I very much am in solidarity with your Prime Minister, Mr Borisov, and we are in contact with each other I have said we are not going to give hand outs just like that, just to spend money just to stop the strikes and to stop the tractors on the road. We have a stability and growth programme, and we will be credible and determined to put it into action. And that means that not €1 will be spent wastefully. We will be sitting with them to make the structural changes in a programme we have to help them change. But just to throw out money, we will not do that and that is a determination. That, I think, is another point of credibility we have Niblett: I am going to turn, as we’re coming very close to the end of the panel here. Let me just take the last question, and I’ll give a chance both to Mr Zatlers and Mr Trichet to finish Chris Giles, Economics Editor, Financial Times, United Kingdom: Thank you. It’s Chris Giles from the Financial Times. It’s a question to George Papandreou Is it time, given the market difficulties you’ve been having – and you’ve had some more today with another widening of spreads between you and the German bund – for you not only to have a vote of confidence in your own credibility, to get other European Union countries maybe to give you a loan? Are you talking to the French and the Germans about borrowing money from them as a vote of confidence to show that they have confidence in your ability to meet the pledges you have made? Niblett: While you’re thinking of your answer to that question, and we are coming to an end, could I just ask for a one-minute comment perhaps from Mr Trichet on the issue of private banks, which was the previous question, and any other comment you want to make? But we do need to finish in the next two minutes Trichet: Yes, only to say that we are calling our commercial banks to be as transparent as possible. It is a general call coming from both sides of the Atlantic, everywhere in the world. Our understanding is that the main issue now is for them to restructure their balance sheet, I would say be as much as possible in a position to do their job, which is to finance the real economy. They have to do that and they have to do that by all possible means, namely putting aside their profits and not distribute large deals of dividends In order to reinforce their balance sheet and their reserves, they have to be very keen on not distributing packages and remuneration and bonuses, but to put that to the strengthening of their balance sheet. They, when it is possible, have to go to market as they did, I have to say, on this side of the Atlantic too, to reinforce their stocks and their own funds, their capital. We are encouraging them to do all what is necessary, to do their job, which is to finance the real economy, and to do that in a fashion which would permit to accompany the recovery. We see the credit outstanding being quite low, even negative, for the non-financial corporates in the Euro zone right now, which is not abnormal after the deepest recession since World War Two But we have to take care of no supply constraint as regards to credit when the demand of credit would be much more active, which should take place with the recovery which is going on Niblett: Thank you. Mr Zatlers, I am going to turn to Mr Papandreou for a final comment to answer that question. If that okay? Thank you very much. Mr Papandreou, you had a last question and then we’ll wrap up Papandreou: Well, I think the answer is very simple. We went for a borrowing two days ago and we were over subscribed five times, so we are not looking anywhere else and we haven’t asked for money from the European Union. We get structural money, but it’s not – so I think that was a vote of confidence We have been taking measures, which please look at them. We have terminated thousands and thousands of contracts of employees in the public sector. We are cutting down on the wage bill. We are creating a statistics, which is going to be a statistics bureau, which is going to be completely independent; even Eurostat will be on the board. We are moving ahead in cutting down the deficit this year by 4%. Any other country cutting down by 4% I think would be seen as a major, major success. And so keep your eyes on us, but be confident that what we say we will be doing Niblett: Let me just close up with four quick points that I would take away from this panel

The first: at least to this point the Euro appears to have and the Euro zone appears to have provided a zone on balance of stability rather than of crisis. Well, certainly in terms of the way that it’s been handled and the way that you’ve experienced it. The need for greater political coordination is probably important and I think this is maybe partly the question that was asked at the end: the sense that people aren’t alone, but they are in it together; the sense of political commitment Given the theory of the no-bailout clause, but the reality probably of political solidarity I think probably needs underscoring now and again. And then I think the issue that structural reform is now inescapable for a number of countries in Europe, and in a way that the Euro and being in the Euro zone will be part of the discipline to follow through on that structural reform. Certainly we’ll wait and see whether you as leaders are able to achieve this. Mr Trichet will be involved, watching from the sidelines. Could you please give a strong hand to our four panellists?

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