Christine Lagarde Defends European Austerity

The French Finance Minister defended Europe’s austerity measures and its attempt to enact stricter financial regulation on ABC’s This Week.

French Finance Minister Christine Lagarde rejected any dichotomy between austerity and growth on Sunday. “We need to address both issues,” she said, adding that that is the European policy. Her comments came mere days after American treasury secretary Timothy Geithner urged Europe not to cut stimulus spending.

Lagarde spoke with ABC’s This Week after a meeting with her American counterpart to explain that both Europe and the United States need to start reducing their deficits lest they imperil the fragile economic recovery worldwide. “People worry about public deficit,” she said. “If they worry about it, they begin to save. If they save too much, they don’t consume. If they don’t consume, unemployment goes up and production goes down.”

Across Europe, countries are balancing their budgets. Germany and the United Kingdom have announced ambitious budget revisions while the European Commission wants to sanction eurozone members that plunge too deep into the red.

The American narrative has been the very reverse. At home President Barack Obama has pushed for major stimulus measures and is running a deficit of almost $1.3 trillion. This summer, he called upon Europe to also continue stimulus spending, alleging that renewed austerity would undermine the recovery. The rest of the G20 countries disagreed however and agreed to cut deficits in half by 2013.

Economists in the United States, including Paul Krugman and Simon Johnson, have been critical of the European approach, complaining that “arrogant” and “incompetent” EU policymakers failed to anticipate that economic disparities between eurozone member states would lead to the sort of crisis that happened in Greece in May. Asked why she hasn’t taken advice from such American experts, Lagarde said that she would rather base policy on numbers — “which is better than, you know, theories and speculations.”

France did stimulate the economy “massively” between 2008 and 2009, according to Lagarde. “Unemployment is going down,” she added. “Why would I inject more public money into the system when private investment is picking up?”

President Nicolas Sarkozy’s government is still struggling to meet European budget rules. He has pledged to bring down the country’s deficit from 8 to 3 percent in the next three years, implying almost a hundred billion euros in spending cuts. The government is planning to eliminate some ten billion euros in tax breaks but has vowed to avoid unpopular increases in income, corporate and value-added tax rates. The retirement age is also set to rise over mass union protest.

Asked whether the government could withstand popular pressure against pension reform, Lagarde said that it has to “in the interests of the next generations.” The only way to make the system financially sustainable “is to increase the retirement age by two years,” she said, from 60 to 62. “It’s only two years,” while the average Frenchman has gained some fifteen years in life expectancy since the system was devised half a century ago.

France will chair the G20 next year. President Sarkozy has teamed up with German chancellor Angela Merkel — considered the leading voice in the austerity camp — to implement stricter financial regulation, including a ban on certain speculative trading activity. Germany has already banned the naked short selling of eurozone government debt and financial stock, as well as naked credit default swaps involving eurozone debt.

Lagarde wouldn’t say whether the mechanisms are now in place to prevent another near collapse of financial markets. “We’ve been working really hard in the last two months to put in place what our leaders decided was needed,” she did say, including “an alert control system, a supervisory system [and] discipline in the markets.”