 Hello and welcome. You're watching a France-Vain-Caître and today we're bringing you a special debate in cooperation with the World Economic Forum. We're in Istanbul, where the forum is organising a regional conference for Eurasia, the Middle East and North Africa. The topic that we're debating today goes straight to the heart of one of the most important issues in global economics and business today – the Eurozone survival. More specifically, we're asking whether or not austerity is the right way to achieve a healthy economic recovery and to restore growth in the Eurozone. This, of course, at a time when some people are saying that austerity risks killing the patient that it was meant to heal growth and the Eurozone as a whole. With me here on stage, I have a distinguished panel from academia, from politics and from business. Sir Michael Rake, he is the chairman of the British telecoms company BT. Brendan Howlin, he's the minister of public expenditure and reform of Ireland. John Evans, he's the general secretary of the trade union advisory committee to the OECD. Xavier Salah and Martin, he's a professor of economics at Columbia University in the United States. And last, but certainly not least, we have Mehmet Şimşek, he's the finance minister of Turkey. Gentlemen, thanks first of all for joining us here today at the World Economic Forum. Let me start with you, Sir Michael. The UK applied a series of austerity measures back in 2010 when the new coalition government came into power. Two years down the line, where are we now? Has austerity helped or hindered the economic recovery in the UK? I think the answer in the moment is probably neither. The real answer starts with the fact that there was no choice. I think the level of debt that the UK had incurred, its deficit, its fiscal deficit, is one of the highest in the world. And I think the new coalition government quite quickly realized, unless it got on top of this very, very quickly, it was likely to spiral out of control. And I think the government had to demonstrate both political will to deal with it and rely on the fact that we still have our own currency and therefore to dramatically control and reduce the cost of borrowing. So I think that was key. I think that the major concern now in the UK, however, is after this two years of austerity, and by the way, a lot of the cuts haven't even started to come into place yet in the UK and public expenditure, is the other headwinds, the Eurozone crisis going on longer than originally anticipated. Do we have an adequate strategy for growth? You know, can we just rely on cost cutting in the public sector? And that's the big question at the moment in the UK. What do we do to get growth? What do we do to get money to the SMEs, to hire people, to reduce youth unemployment, which is really becoming a significant issue? It is a significant issue in the Eurozone as well as in the UK as you were just mentioning there. John Evans, let me turn to you. You represent around about 61 million workers within the 34 member countries of the OECD. Is government spending making a real difference with the respect to employment? As we're seeing austerity measures, for instance, by 10, are we seeing unemployment coming up as a direct effect of that? Well, I think the coordinated measures which were taken in 2008, 2009, beginning of 2010 actually had the effect of keeping people in jobs. If you look at the ILO figures and estimates in 2009, they're expecting an extra of 52 million people to be unemployed globally. In fact, unemployment jumped by about 28 million, still too much. But the measures that were taken then prevented a complete free fall of the global economy. In our view, the switch rapidly over one or two months to just pulling away that safety net, that oxygen of the global economy was too rapid and it didn't allow the private sector growth to pick up sufficiently to take over the recovery. So now the issue is how do we get growth back into the system? How do we put creating jobs at the centre economic policy? Because unless we can put people back to work, get them paying taxes, get the economy moving again and putting confidence back into consumers as well as investors, then I think the risk of debt traps and spiraling deflation is very real. Professor Salah and Martin, regaining confidence will of course require boosting competitiveness in Europe. When you look at the European scene, it's often seen as if there is a north-western frugal competitive part and then in the south-west you have the more wasteful, if you will, economies, people would probably think of Greece first and foremost. But where is though the Eurozone when it comes to competitiveness as a whole, how competitive is the Eurozone vis-à-vis other regions of the world? I think regaining confidence requires diagnosing the problem correctly. And I think that posing the question on whether there should be more or less austerity, more or less government spending is a big mistake because there are three big problems, three big areas that require three big kinds of solutions. One problem is debt, public debt, private debt, bank debt, that problem should be addressed if we want to save European problems. Second is deficits. Third is economic growth. These are three different problems. Of course they are related. If you decrease the deficit, you affect economic growth. If you try to cut the deficit to reduce that, you might affect. So everything is interrelated. But thinking that you can solve all the problems with just one measure, at least you need three measures, one for each problem. And therefore the debate should not be more austerity, less austerity. The competitiveness question that you ask is going to be relevant for the third question. We need the Southern European countries, the periphery, to become more competitive. And for these, there's a whole array of things they need to do. But don't believe for a minute that if you start growing, you're going to solve the financial problem, you're going to solve the debt problem. Those require separate solutions. I just want to go back to a point that you and Michael brought up before that Britain back in 2010 didn't really have a choice when it comes to austerity measures. I suppose one could argue that the Eurozone is in much the same seat as Britain was two years ago. Minister Howland from Ireland, what do you say about that? I'm just wondering whether my country falls into your north-western frugal countries or your southern... You're the exception of the Prusa rule, perhaps. Well, I hope we've been either. I think we were the poster boy for economic growth through the Celtic Tiger Times. At fora like this, Ireland was the country pointed to. The core of our problem was a banking issue and the nationalizing of a banking debt. And that recapitalizing of the banks in Ireland cost 40% of GDP or 64 billion euros. And that's a mistake that we have to reflect upon now into the future. We have to balance our budget. So the issue of fiscal consolidation is one that has to be faced. But I don't think the issue of fiscal consolidation and growth and job creation and stimulus are mutually exclusive. We have to have twin track strategies. We have in Ireland, I suppose, the perfect example. We have a dynamic industrial base. We have growing exports. But we have a very flat domestic economy because of the quantum of money that we have sucked out in real-time probably more than any other country since 2008. So we need stimulus back to get people confidence again to spend. And Europe needs to have that strategy. From our own perspective, I welcome the new focus on growth. Certainly since the election of François Land. I think it has gained enormous traction in Europe. And we need to have that put into concrete measures now. Specifically issues like having more paid in capital to the European investment bank. Countries such as my own where it is very difficult for the sovereign to borrow because of our impaired status needs to be assured that we can have actually drivers for economic stimulus that will create jobs in the medium term. We need to look at the issue of recapitalizing of the banks. And hopefully the European stability mechanism itself should be doing that. So it's not impairing the sovereign as we repair the banking system. And of course President Barroso has talked about the reassignment for example of structural funds. There is a variety of real measures that are urgently needed now. I think we've talked about it long enough and the response seems to be incremental always in the European Union and indeed in the international community. We need to have a clear strategy now that can overcome the challenges faced by a number of countries whose essential economics like my own are very robust. You speak there about real measures. And I suppose Turkey is a country that has come up with those real measures because last year was so economic growth of some eight and a half percent in Turkey. Finance Minister Shimsek what are you doing right and what can the eurozone learn from you. Well circumstances may certainly be a bit different but we've gone through quite a bit of adjustment in early 2000 from 2000 to 2001 onwards. Our adjustment was actually very large. We had annual primary surpluses in two six and a half percent of GDP for quite a few years. So I think through that fiscal adjustment there was a boost to confidence. Private sector investments private spending has increased. There was a crowding in effect. But that was because we were fully penalized for irresponsible fiscal policies of 1990s. The problem with eurozone is that because some of the relatively I mean those countries that had poor fiscal positions were not penalized. They had access to capital at very low rates. At the peak we had real interest rates in this country prior to fiscal adjustment at almost 20 25 percent real interest rates. So we were fully penalized. So what happened was as soon as we start austerity there was a boost to confidence. So a virtual circle started essentially private you know as a crowding in effect private sector investments private spending increased. So public sector retrenchment did not mean weaker banking sector did not mean high jobless rates. In the case of Europe of course you have a combination of problems. You've got banks that are already troubled because of toxic assets real estate bubbles and of course the value of government papers that they hold has collapsed. So the banks are weak and governments are relatively obviously fiscally some governments are in difficult positions. So you really need some outside help. In the case of Turkey if you go back to 2000 2001 we secured help from the IMF but also we did very painful adjustment. So pain at that time was sold to people saying pain today growth tomorrow in a rewards tomorrow. But in the case of Europe it looks like pain today and pain tomorrow literally because there is the leveraging by private sector banking sector is weak because of other reasons that I explained. And of course governments are pushing for austerity. So that means lower economic activity external backdrop is not as strong as is used to be. So you've got a combination of weak domestic demand on the back of the leveraging by private sector fiscal austerity by governments and of course weaker banking sector which means higher jobless rates falling economic activity. And actually you're not gaining anything fiscal austerity is not fixing problem. Europe needs growth. But for growth to start you need a significant boost and external boost. That's why the argument for a bank bailout by a European fund for government. I mean I know there is moral hazard and also kind of issues but essentially there is need there is clear need for support from outside whether that is Germany where there is a combination of other funds clearly something has to be done. I saw several nods there as you were speaking Minister Schimsheck John Evans. I think there's a difference between an individual economy which is faced by a fiscal crisis where you can take measures which regain confidence bring down interest rates and get the economy growing again particularly you've got a flexible currency. I think you can't do that at a continental level which is such a large component of global GDP. So one size doesn't fit all on globally you have to get some growth back in the system and you have to get demand rising again as well. The IMF just came out with some study which suggested that looking at the last 30 years set over 100 examples of fiscal austerity. They do in the short town actually reduce growth. The problem is when that's happening in the continent at the same time nobody is growing and I think that's a dilemma at the moment. I also say I think that it's wrong to see public debt as being the cause of the crisis. With one or two countries that was certainly the case in Europe but generally public debt in Spain was lower than that of Germany. It was sometimes debts in the private sector the Irish banking system the real estate in Spain and what we've seen is the growth in debt has been the result of the crisis not the cause of it. Now it's difficult to untangle it but somehow we have to re-inject growth into the system. I don't want to set up any rivalries here but you saw Michael Rick if you were to choose between investing in the Eurozone and investing in the Turkish economy for instance. Where would you invest that money? In the short term it's clearly Turkey but I did want to reflect on a couple of the comments that were made about the banking sector. I think this is critically important. I mean it's dangerous to oversimplify things on the other hand unless you see these things clearly you can't understand that the reality is the most Western economies had overborrowed during the boom both privately and publicly to varying degrees. The reality is when the music stopped because of the banking crisis and the complete breakdown and confidence in the financial system actually kind of run out of the ability to borrow money to solve the problem to buy our way out of problem. Therefore I think there was absolutely no choice but for this austerity program to come in. I think there's a real issue now around how you operate with the banks you know because there is a huge amount of deleveraging going on and because the regulators kind of failed to make sure the banks have the right level of capital and liquidity prior to the crisis we risk now a huge overreaction and a rapid deleveraging of the banking sector which is compounding the problem of growth so it's not just the banks have had a problem they're being actually forced by the regulators to reduce their size dramatically and the real problem here and we really have to understand this is big companies like BT could go to the commercial paper markets and get very cheap finance directly sort of you know from from the market SMEs where the employment is going to come from can only get it from the banks and certainly the experience in the UK is very clear the SMEs who have the assets actually don't have the confidence partially because of the Eurozone crisis to invest those who have intellectual property but no assets aren't able to borrow and aren't able to expand so are being caught in a real vice-like difficulty and I think there's a huge need here for really strong leadership at the Eurozone level you know it is that Eurozone to cause the problem to unlock some of this to give business the confidence to move forward and invest where they have cash and to sort of create an environment where it's easier for SMEs tomorrow and in the moment the uncertainties around will Greece leave you know what's the position of the banks who have huge exposures to Greece will that roll on to Spain what are the position of unfunded you know banks who look all right today will they be all right if Spain gets into really serious issues is causing an enormous confidence in crisis you know crisis in confidence and I think we really really need to understand that too in order to work through this it's it isn't just about finding specific measures to create employment I mean creating employment through public sector which the UK did to some degree you know you you see the problem you've created false jobs we are we're a question and downsizing enormously the public sector we're going to cut the public sector pay bill by a factor of 20 percent by between 2009 and 2015 the issue in relation to you know bad political decisions and bad banking decisions in terms of people lending money it was also obviously bad decisions on those who lent the money and those who accounted for them of course as well so there's a shared moral hazard if we're looking at the spectrum of moral hazard and we need to address it on that basis but so Michael is absolutely right in relation to the issue of access to money in an economy such as as the one I am living in is extremely important and while lots of SMEs actually do want to invest now and the banking system is telling us that there is money available when you drill down it's very hard the conditionality of accessing that money is such that in reality for many SMEs it's not possible and we need to have a strategy that allows businesses to have access in the medium time to survive or the medium term to thrive professor Salai Martin yes I think we should not forget that every single economic theory in the history of the world says that if you increase taxes in the middle of a recession and I'm talking about Keynesians I'm talking about classics I'm talking about lunatics everybody agrees that if you increase taxes in the middle of a session the recession worsens if you reduce spending in the middle of a session the recession worsens okay so nobody believes that magically you're gonna you're gonna the opposite will happen now whether this might be very necessary to be to start austerity programs in the middle of a session but everybody remember that these will at least in the short run worsen the problem now all these textbooks at the same time also tell you that there are other kinds of policies that you can engage in when the fiscal policy is not available we're talking about monetary policy we're talking with exchange rate policy and we're talking about supply side policies that's why I was saying earlier that we shouldn't just engage in the debate more or less austerity maybe austerity is necessary but this is not excuse for not doing anything else why aren't we playing with monetary policy why aren't we playing with exchange rate policy why are we taking so long to engage in supplied or competitiveness policies and point number two I want to take issue on the problem of the fiscal problem Spain Spain had a fiscal problem even though it was not in the data Spain had a real estate bubble and therefore the tax revenue was transit early high and when the tax revenue was very very high for a short period of time the government increased spending permanently then of course the bubble burst tax revenue goes down you stay with a huge spending and the deficit and the deficit arrives and also Spain had a real big public I mean a private debt bank problem government made a big mistake of you know the same mistake as our island of saying we will save all the banks when you say that immediately all the debt of all the banks becomes public debt and therefore the real government that is really really big because it's coming coming in the next few weeks we will see how big the government that work actually was all right we're going to take a short break now thank you very much gentlemen do stand by for us because we will come back straight to this debate as I say we're going to take a short break now and we'll be back right after news do you stay with us here on France thank you magic of television we shall now resume this debate in a moment I shall just walk up to this mark right here on the floor just waiting for the go ahead in my ear to present it does nothing and except for unless someone speaks into their welcome back you're watching a France van Kiat and we're bringing you a special debate today brought to you in cooperation with the World Economic Forum we are discussing austerity and we're discussing growth in just a moment we'll pick up our discussion with our distinguished panel once again but first though we're going to bring you a special message from a man who's centrally placed in your own politics today unfortunately he could not be here in person but he recorded this message from Rome