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A Conversation with Dr.Wolfgang Schaeuble

Speaker: Wolfgang Schaeuble, Minister of Finance, Federal Republic of Germany
Presider: Carla A. Hills, Co-Chairman; Chairman and CEO, Hills & Company, International Consultants
April 19, 2013
Council on Foreign Relations

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CARLA HILLS: Well, ladies and gentlemen, I'm Carla Hills. I'm co-chair of the Council on Foreign Relations.

And we are privileged indeed to have with us the Honorable Wolfgang Schaeuble, a highly experienced German government official, who is currently serving as minister of finance.

You have his resume, and we're running late, so to maximize our time for conversation, I will be undiplomatically brief. But let me simply say the minister has held four Cabinet positions. Under Chancellor Kohl, he served as a federal minister for special tasks and head of the Federal Chancellery, and he served as minister of the interior. Under Chancellor Merkel, 2005 to '9, he again served as minister of the interior. And he is a long-standing leader of the Christian Democratic Union, serving as its chair in 1991. He's been a member of the Bundestag since 1972, serving as parliamentary whip between 1981 and '84. And in 1990 he led the negotiations for the reunification of East Germany.

He is proficient in economics and law, holds a doctorate of law, and he's written a number of books, most recently "The Future of Modernization: What We Can Learn from the Crisis."

Mr. Minister, we are delighted you could be with us. We look forward to your remarks, and then we will pepper you with questions.

MINISTER WOLFGANG SCHAEUBLE: Thank you very much. Sorry for being late.

I think today we are all -- our hearts and our minds -- with the people in Boston. And I hope this nightmare will be over very soon.

And nevertheless, I have to make some remarks on financial markets, and then things are going well in Europe, as you all know. (Laughter.) I may be very brief, too brief, all the time for discussions. Therefore, I just would -- wanted to say we all remember the crisis -- by the way, started in the United States, so-called Lehman Brother, 2008. And in 2008 we all agreed it will never happen again. We have to draw lessons. We have to learn our lessons. From the Washington summit to London and Pittsburgh and Toronto and -- (inaudible) -- up to G-20 meeting today in Washington, we have made a lot of progress in drawing lessons since then.

We agreed all that the reason -- there are three reasons: too much public indebtedness, too much liquidity in market, financial markets, and too less regulation. Those are three main issues we are working on again and again.

And I think in regulation markets, we made a lot of progress since last couple of years. I will not mention in detail all what we achieved, but let's say we have been achieved a lot. But it's not enough.

In reduction indebtedness and liquidity in financial markets, we have a little bit different opinions all over the world, to be very frank, that this was the reason we -- I am a little bit late. And -- (laughter) -- we have to continue this discussion as well.

What learned in Europe, and with all the world, what the rest of the world learned, that Europe is very complex and complicated. And one of the consequences of the banking and financial crisis in 2008 has been that financial markets became aware that the euro, the European currency union, is a very complicated structure. And if I'd -- and if sometimes I try to explain someone abroad how it works, but after two minutes I always give up because everyone said, please, shut up. (Laughter.) It will never work.

My only remaining question, then, has been have you ever tried to build a common market, a political union, a fiscal union, by 27 sovereign nation-states? Have you tried to build a common currency by 17 sovereign member states? And would you really think it would be easy to get it? It's not easy.

I am quite convinced, if I -- if I (suffering ?) all the meetings on a global level -- G-20 and IMF and so on and G -- oh, don't know what else -- what we need in the 21st century is some form of -- some kind of new global governance. I bet we are not -- we are not at the end; we are at the very beginning to find better global governance. And in this dimension maybe a very difficult way of -- and complex way of European integration into last 60 years has been a major success, and maybe, in some way, an example how to go on in building more international, global, whatever governance (so on ?).

Since markets detected that the European currency union is very complex, we suffered major problems, and all the problems we didn't have really solved in the European currency were -- became on the table, (and they have ?) been solved.

Therefore we fight the euro crisis in the last couple of -- three -- in the last three years, in my understanding, very successfully. But we have to fight it in three ways. We have to fight the three reasons we had in the global crisis as well. Too high indebtedness and a common currency without a common fiscal policy -- it's a major problem. Therefore we are working again and again. The last occasion was yesterday in federal parliament in Germany, when we approved with -- by broad -- by broad majority, about 500 -- close to 500 votes, from 600 members of Bundestag, the program for the assistance for Cyprus and the (prolonging ?) programs for Ireland and Portugal to support both countries in regaining access to financial markets.

But in any -- in any program, decisive force that the member states fight themselves the real causes of the problems. That means we're using deficit and regaining increasing competitiveness, because a lot of member state underestimated in the first years of the common currency that the pressure on competitiveness in a common currency without the possibility of devaluation is huge. And if you don't improve your competitiveness, you will -- you will get major problems. It has happened in Germany. You will not feel it in the first years, but it will happen, and it did.

Therefore we always have to force member states, oblige member states to stick to European rules, to reduce deficits in a, of course, balanced way, to enhance their competitiveness by structural reforms, and then we can -- we have -- we have built European mechanisms to give systems to buy time until they get reaccess -- I could say they'll regain access to financial markets. These programs work very well in Ireland, in Portugal, and work rather well in the last year in Greece, by the way. I think it will work in Cyprus as well.

And if you look (at -- through your ?) figures, we have halfen (ph) the average deficit -- the average national deficit in the eurozone in the last three years, exact -- delivering the -- (inaudible) -- commitments, by the way, half the deficit. We have halfen (ph) the difference in the labor costs in between different member states of the eurozone. It's halfened (ph) in the that couple of years. The countries under reform program made significant progress. Ireland, Portugal are doing very well. They will regain access to financial markets at the coming years, as has been agreed.

Increase -- unemployment is going down, slowly, but going down, not increasing. Greece has risen its exports in third countries in the last quarter of last year. Greece has made a lot of progress in reducing deficit as well. Therefore we are regaining confidence. If you look at markets, markets are very -- have regained a lot of confidence, and bonds for all member states, including Italy, Spain, all the (continental ?) countries, are below they used to be before the crisis. Therefore markets have regained.

What we are doing now is the next step, building a banking union -- (audio break) -- that is, we have already agreed on a single supervisory mechanisms because we need a strong and a European supervision of banks because our bankings work not only in the framework of one member state but -- (inaudible) -- we need a European mechanism and a European supervision. We have implemented -- we will -- and we will implement single supervisory mechanisms in the coming -- in the coming weeks. It has been already decided.

In Europe, we will build -- we have a European regulation on deposit insurance. We have a European regulation on -- (inaudible) -- it is not yet decided, but it's drafted, and it is on the way, on regulation and restructuring mechanisms as well. And therefore we are working step by step in the direction of a European banking union as well, to split, to separate the risk of sovereign debts and the banking system as well. And then we have improved all the regulations for the financial sector in Europe as well, and therefore I think we are on a -- we are generally on a good way.

We have what is -- remains the remaining problem -- and we discussed it yesterday evening and this morning, again and again -- growth in Europe is actually not very convincing. But if you suffer such a crisis, we did five years -- but you need some time to overcome the crisis. It's unavoidable. If you promise to deliver immediately growth, you will only create the next bubble. That's what we are decided not to do. Therefore, we need time. The forecast of the European Commission is that we will -- we will -- we will get the turnaround in 2014. I'm quite sure we will. Everything -- every economic figures are saying that we will get this turnaround in regaining growth for the eurozone as a whole in 2014.

But I would like to add what I have said this morning and in our G-20 meeting. No one should expect that Europe will deliver high growth rates in the coming years. If you look at the real situation, if you look at demography, if you look at the standard of living at social -- these social systems, the costs of social insurance in Europe are about double compared to other industrialized countries. If you want to -- want it to change, you will be killed, because you have to -- you have to make your policy on behalf of the experience of every society, and Europe is quite diverse.

If you look at what we're just as -- discussing between U.S. and Europe, it's a new energy fracking and so on -- if you look -- the reaction in Europe, it's totally different to United States.

Of course I will not compare United States -- we can't -- between -- to Europe. Therefore, if we are honest on behalf of our demography, our population is not increasing, and it's becoming older. We are aging. Sometimes we are saying Europe is aging, old, rich and risk-averse. (Laughter.)

On this basis, we will -- if we will achieve a moderate sustainable growth -- (audio break) -- in Germany, for example, what I have said years ago publicly, I don't expect more than on -- the long-term sustainable growth be beyond 1.5 percent.

Of course in some member state -- in the Mediterranean member states, in the Eastern member states of Europe, there's much more necessity for higher growth rates. But in the very developed members that we have to there -- and we have to tell this to the emerging countries as well -- if you need global growth, if you hope for global growth, don't expect that the most developed countries will deliver the highest growth rates.

By the way, if we want to overcome global diversions, it will be better if the emerging countries have higher growth rates than the advanced economy. And therefore I think we to make us honest; we have to tell our friends -- not only in the BRICS states, all over the world -- that global sustainable growth may not rely on high growth rates in the advanced economies. My -- (rely on ?) -- at modest growth rates in Europe, higher growth rates, of course, in U.S., where it is much more dynamic. It's a totally different situation. I'll give no advice to United States, of course; I acknowledge the situation is different.

In Europe we are working for sustainable growth, for stability. We have the most -- what we have been criticized in the last couple of year was that the euro creates so much nervosity in markets. This problem is nearly to be solved, and that is the main achievement we got. And on this way we will go on and we will -- I'm quite convinced that the support in European population for this way of European integration will sustain.

You know, there's a lot of uncertainty in some member states. We have a lot of political problems and it's always the same, but even in (U.S. ?) it's sometimes not easy to get decisions. In Germany it's not easy because we have another majority in the second term, but it's in Federal Parliament. In Italy they prefer to have no government. They are much more successful -- (laughter) -- without government. Belgium, by the way, has been very successful for years without a real government. (Laughter.) And sometimes you need some government; they will get it.

I will tell you, in Germany -- to end with one poll, what's quite interesting. You may know -- you may have known that of course there's a lot of concern in public opinion -- (oh, to Bilderber ?) -- was it not a wrong decision to go for European monetary -- to give up the D-Mark and all these things?

If you look at polls, actually we have the highest polls we ever had in answering the question, should we stay in the euro or not. Seventy percent, which is really high in polls, of German public have said yes, we have to stay; we have to solve some problems, but we will stay.

And that's a good -- (inaudible).

Thank you very much. (Applause.)

HILLS: Thank you very much.

Let me just start the questions by asking you -- we have seen major initiatives in both the United States and Europe to regulate banks. Is more coordination needed between the two of us? And if so, how would you recommend that we could achieve that?

SCHAEUBLE: I think it's always more coordination needed, but having said this, we try to find solutions in Europe for Europe. We know that U.S. has in some way gone ahead in some way, but we will work -- we discuss the global area. It's not the most problematic issue, to be very frank, actually, to have a common understanding in regulation, financial sector. Nevertheless, in financial regulation you can suffer what is normal in the history of -- as soon as you have some progress or some more -- the last crisis is far away, so less ambitious is to ongoing -- to stick in reforms. We have to.

Look, what I tell to my European colleagues again and again is, if we will suffer another crisis like the crisis we suffered in 2008, my concern is in Europe. I don't know what is the situation in U.S., but in Europe my concern is another crisis in such dimension would not only take market economy in stake, but the democracies, the way of democracy and the rule of law we just said.

And therefore, it's very important that we even oblige financial markets to understand that they must be regulated. We had a philosophy in the '90s and the early years of this century, the less regulation, the better for financial markets. And we had no regulation, and markets destroyed themselves. Therefore, without regulation, it doesn't work. We need regulation. And we have again and it's only possible on a global way.

Look at the other issue we just raised, the issue on the erosion on tax bases and some profit shifting. It's not a minor problem. If we -- we have asked for an OECD report, and the outcome was (completed ?). Companies which are -- which work on a global level have a tax burden which is half compared to companies which are not on a global level, because simply possibilities. The options to avoid taxation are -- in this interconnected world of the 21st century is endless. And at the end, you need someone who pays for the public budget and for the social system. Otherwise, you will create major problems in Europe and on the legitimacy of our political order.

And having said this, the real discussion in the -- in the framework of G-20 is whether market economy is more successful combined with political freedom and democracy and rule of law or whether market economy combined with a political system which is not so complicated like our Western democracy is more efficient. I am convinced more sustainable -- it's a political order on the basis of freedom, with the rule of law, democracy. And it may be a little bit more complicated, like Europe, but more sustainable as well. But we have -- we have to prove this again and again.

HILLS: Let me ask you a -- quite a different question. And that is the U.S. and the European Union have announced that they're going to negotiate a Trans-Atlantic Investment and Trade pact -- Partnership. And several have suggested that the United States and Europe include Canada, which has in the final stages of negotiating a free trade agreement with Europe, and include Mexico, which already has a free trade agreement with Europe, so that we don't have different rules of origin and border red tape and all the mess that comes from three separate trade agreements. What are your views? Would Europe be accommodative to including Mexico and Canada?

SCHAEUBLE: (Sighs.) (Laughter.) Look, I am -- I am -- as I just have tried to say, I am very in favor of thinking in global dimensions because I think we, especially United States, but even Europe as a minor partner of United States -- we have a common responsibility to make the world stable. And this will not happen if we fail in -- find better solutions to fight against global (shifts ?) and divisions.

If that is right, of course a trans-Atlantic free trade agreement is very helpful. It may increase economic development in both sides of the -- of the Atlantic Ocean. If we will negotiate (in concrete ?), I bet we all will see, in Europe as well as in United States, huge and -- a lot -- (laughter) -- I don't know whether you ever suffered any lobbying by agriculture, by farmers. (Laughter.) We do in Europe. If you're -- if we -- if we negotiate a European partnership -- (chuckles) -- (laughter) -- first we all say, oh, we have to spend much more money for modern technology and innovation and so on and so on.

But then -- but of course, you never might touch the (burden ?) -- (laughter) -- yes, it's -- that is the reality. And lobbying is very strong. If you look what's going -- if you, as a finance minister, have to work on financial regulation in the daily work, it's really interesting. And at the end, you cannot really make a division between expertise and lobbying. It is totally linked in our complex world. Therefore I am -- I am quite happy that these negotiations do not be to the -- in Germany, not to the -- to the responsibility of the finance minister but the minister of economy. And I am very happy -- (laughter) -- to see what (is ?) will happen.

Having said this, I would -- I think it would be better in our common interest not to exclude Mexico and Canada from this. That would be the wrong signal because we are saying that a trans-Atlantic free trade agreement is not a no to the WTO, but it's only a first step in the -- in the direction. If we would say, but we don't want to have Mexico included, that would be not very (responsible ?).

HILLS: Thank you. Professor Robini (sp).

QUESTIONER: (Off mic.)

HILLS: Microphone.

QUESTIONER: I have a two-part question for you. One is how much would you be worried about what's going on in Italy? Nine out of 10 Italian voted against the Monti policies. There is not yet a president. There is not yet a new government. There may be new elections. We don't know the results of them. Populist forces might win. What happens if Italy drifts in the wrong direction? Do you accommodate Italy, or do you confront Italy?

Second question, there has been ongoing debate in the eurozone on how much you rely on -- (quote ?), on bailouts as opposed to bail-ins of private credits or either the sovereign and all of the banks. And I understand that you've said that there is not a mechanical template but probably is needed, when necessary, bail-ins might be part of the solution. So what are the rules of the game in which cases bail-ins (are be there ?) creditors of banks insolvents are going to be necessary as part of a resolution of a crisis of another eurozone economy?

SCHAEUBLE: Italy. Italy is much more flexible than Germany. Therefore, I am -- I trust Italy will always find a solution. The Germans would really be, oh, hopeless in that situation; Italy no.

By the way, I don't share your interpretation of the outcome of last election, to say they voted against -- 90 percent against this policy of Monti. I think it was a vote against the political class. And if you look what's going on in Italy, you can imagine, you can understand (therefore ?) all over Europe, political class is a little bit doubted. It's one of -- one of the major concerns. Therefore, it's not -- I don't think it was a decision against the policy of Mario Monti.

Mario Monti is a -- he's a -- he was a very successful prime minister. He was a very good member of European Commission. And -- (inaudible) -- I like him very much. But as a -- to be a political leader, it's a little bit different. When we discussed, will he -- will -- Mario, will you run for new elections? He said no. I am ready to stay as prime minister, but I will not run for election. (Laughter.) OK, it's fine. But -- (chuckles) -- that's democracy, difficult. (Inaudible) -- late he decided to run. Maybe it was the next mistake, do it or do it not.

But so having said this, you will see they will -- they will elect the president. I don't know whether they have already as the -- aber -- but I'm quite optimistic they will do it in the coming hours to -- and new elect a president. And then they will find -- (inaudible).

Italy is, in real economy, not my major concern in Europe. I will not tell what's my major concern in Europe. (Laughter.) But Italy not. They have huge private savings. They have -- in (real protection ?), Italy's number two in Europe, far ahead of France -- behind Germany, of course, but number two. So real -- so economy -- and they have a huge -- small or medium-sized economy -- situation in -- especially in the north with -- Italy has -- suffers the problem of north and south, but it's about 150 years since they suffer, and they have always survived so far -- (inaudible). Italy's totally pro-European. Italy's really -- and Italian population is really pro-European. Of course -- (chuckles) -- like George Soros, Berlusconi has recommended Germany should leave the eurozone. It's a quite good idea, yeah? (Laughter.) We will not do it. But you should ask why has Berlusconi been so successful for more than 10 years? It's an interesting question. Now, it will change, so.

The story of the bail-ins, if you look what have been -- what has been agreed, even in Washington summit, "too big to fail" will never happen. We have to find solution.

If you translate the principle of "too big to fail," in reality, it means the moral hazard that as long as it -- as things are well, the banking make a lot of profits and the bankers as well, and as soon as they have a problem, taxpayers pay. That is too huge -- "too big to fail," and we have decided it will never happen, and therefore it will not happen.

And therefore we need a hierarchy of liability that will be even part of the European restructuring mechanisms -- first owners, then of course bondholders, later on secured depositors, and then the member state -- the taxpayers of the member state and then -- and, if needed, the community of European taxpayers. That is the hierarchy of liability we created. That is OK.

But it's always the same in politics. In principle, everyone agrees. As soon as you make a principle concrete -- and in Cyprus that was a total different situation, for example, compared to Greece. In Greece we had a huge sovereign indebtedness by parliament, therefore said we need an haircut for Greece. What was also very disputed in all of the world -- actually, it's not -- it's not even disputed; it has been worked well -- it was without an haircut for Greece, it was -- Greece would never have been -- have the chance to regain access to markets (and sustainability ?).

In Cyprus the situation was totally different. The Cyprus business model relied on banks which attracted deposits with high interest and low transparency -- high interest, low transparency, low (taxation ?). And the Cyprus banks bought an huge amount of Cyprus bonds. In the U.S. you've got a lot of interest for Cyprus -- for Greek bonds, but the speculations went -- (audio break) -- it -- and then what -- should the European taxpayers pay the bill for this? It was totally clear, but in the very beginning, when it became concrete, there were only two who were in favor of (unbailing ?), to make it concrete. In general, everyone is agreed. In concrete it was the IMF and it was the German government. And then we had to wake -- to go a long way to try compromises and on all -- all this nonsense, and at the end we got it. And now it's fine. And it will work.

And it gives a real chance for Cyprus to regain a competitive trust for business model. I am quite optimistic. Of course, they will suffer some years. That is unavoidable. But it will work.

HILLS: I'll remind you to state your name and affiliation, and you're limited to one question.

Jacob.

QUESTIONER: Jacob Frenkel, JPMorgan. Thank you, Mr. Minister, for a very sobering and refreshing analysis, which is in a stark contrast to some of the cheerleading statements that were made in some other meetings. So thank you for that.

You started by saying that Europe will grow subpar, it will be for the long term, it's aging and the like. And so what bothered me is there is so much pressure on the ECB to expand further. And we all know that this will not help competitiveness of any country, where the focus on competitiveness has to do with structural measures, and with poor and weak politics, we know it's going to be very tough. And I agree that Italy is very flexible, maybe flexible in ideas but not flexible in the economy.

So, well --

SCHAEUBLE: (Inaudible) -- economy --

QUESTIONER: -- I think -- OK.

SCHAEUBLE: -- the new economy is (very large ?).

QUESTIONER: I have a concrete question, which is the following. The Achilles' heel in the past crisis was the weakness of the financial system and the weakness of banks. The solution is to strengthen the banks, and the best way to strengthen the banks is by having them hold much more capital. And I think that's well-received.

SCHAEUBLE: Mmm hmm. (Acknowledgement.)

QUESTIONER: You have a problem with the suboptimal growth of Europe. If you increase capital requirement ratio now, as is required for long-term strength of banks, you reduce the ability of banks to lend and support growth. How do you square that circle?

SCHAEUBLE: Until now, we have no problems to fulfill credit demand all over Europe. There's no -- there's no crunch in credit; therefore -- of course, central banks are watching very carefully.

Second, European banks has already risen a lot of capital. I have to add, European banking -- Europe has been a little bit over-banked. Therefore, one of the advantages of the crisis is that we have some reducing of the banking sector in Germany. For example, what we used to have with the so-called Landesbank, you may remember it's hard to do. It's --oh, it created a lot of problems. But I will not discuss only German problems. Compared to others, we are relatively comfortable. The same has to happen in Cyprus, It does happen, actually. And it has to go on all over Europe. Therefore -- and can we do it in a reasonable way, in a balanced way?

By the way, I agree, but we will not rely in Europe on monetary policy. Some would like to do it, but some others will not. And up till now we have never -- we haven't any case -- you can examine it. In all member states, we have achieved a lot of structural reforms. What Spain has decided, it would have never expected that it would happen in -- (inaudible). What Italy did, under Monti government is very (impressing ?). What Greece did -- it's totally adverse what has happened over decades. And of course I can tell you the story of Portugal and of Ireland.

Even France has made a lot of reforms. France has made a social contract with major trade unions and entrepreneurs, what is totally new for France, because they learned, like some people in Anglo-Saxonian markets after the financial crisis, a so-called Bernanean (ph) model of market economy from Germany; has proved not so badly in overcoming the crisis because -- and reduction of a limitation of the confrontation between the different parts of the society. It's better to getting reforms.

That is a new challenge for France because the French likes the revolution. If you have a French what is the biggest event in French history, what is the highest achievement, it is, of course, the revolution. But for a reform process, it's difficult to get. (Laughter.) Therefore, we move but we (give pressure ?) by our -- that is why I tried to tell you how we fight the euro crisis. There's no way beyond fighting the causes, the real causes, in the member states. And that's always not only deficit, financial policies, it's always economic policy, and therefore we need structural reforms.

And we -- of course, maybe compared to U.S., our labor market remains very regulated. Yes, of course. Europe will remain different to United States. But together we will -- we know we need a strong United States. We need a strong United States because you are the undispensable for the global growth. yes, of course you have a huge responsibility, not only for United States but for the whole world. And you need partners, and we do whatever we can to be in some way a reliable partner but -- yes, but (not more ?).

HILLS: Right at this front table here. Right there.

QUESTIONER: Thank you. Thank you, Mr. Minister, for a very illuminating discussion. Let me ask you to --

HILLS: Your name and --

QUESTIONER: My name is Gerry Livingston from the Germany Historical Institute here in Washington. Let me ask you to discuss a German problem, and that German problem is the role of the federal constitutional court, the Bundesverfassungsgericht. In recent decisions, it has warned against -- strongly against -- the transfer of sovereign German powers, particularly fiscal powers, to the European Union. And this is a very admired institution, I guess most admired institution in Germany. Will this not be an obstacle to the transfer of fiscal powers to the European Union?

SCHAEUBLE: You are right. You know the Germans believe in courts. And they believe especially in the constitutional court. And since political class is not very well estimated, constitutional courts is, even more than the German Bundesbank. And -- (chuckles) -- such a high expectation. And all this is always a temptation, even for judges.

And of course, it's sometimes not really -- not really -- but it's a -- it's a long-term -- the constitutional court is very -- you -- we all can trust that he will rely on what is the constitution of Germany. And the constitution of Germany gives the constitutional court a special role but only on behalf of the constitution.

And their -- and the constitutional court and the judges know, in German constitution, since the very beginning of -- 1949 is -- Germany want to be a member of a united Europe. It was in the very beginning of the Grundgesetz in '49 already. And therefore we have a clear basis in our constitution to transfer sovereignty towards European institution. That's not disputed by a constitutional court.

So yeah, they will say they look very carefully vis-a-vis respect in all decisions of our constitution, the rule of our parliament, because constitutional court is saying as long as we have no fiscal policy in Europe, common fiscal policy, the final decision on budget has to be through the German parliament, and that must not be -- (inaudible). Therefore, German parliament has to be involved in European decisions. Without, it's not possible. Therefore a program for Cyprus needs approval before decide -- being decided formally the approval by German parliament, but we get it.

And I think this decision is right. Otherwise, we should maybe have to change our constitution. Somebody we will do if needed. Up to now our constitution is fine to this way of European politics we are -- we are doing. Therefore, now our constitutional court is only a challenge for politics to -- and politicians to understand.

We -- it's not a good way if public only trust judges. It's good that it trust judges, but it would be better if they even have a minimum of confidence to political leaders as well. (Laughter.) We are working on it.

QUESTIONER: Thank you. (Inaudible) --

HILLS: Please.

QUESTIONER: Doug Rediker at the Peterson Institute for International Economics.

If we go back to banking union as the next, most important step towards, ultimately, potentially fiscal or political union, and if you look at the necessary components for this single supervisory mechanism, which you reference as an imminent step, but then the resolution mechanism and the deposit guarantee schemes that could be part of that broader banking union, it all really relies on the integrity of the bank balance sheets that are going to be subsumed within this union.

So my question to you is, right now, whether it is considered the legacy asset issue or otherwise, there is a disconnect between the interest of national supervisors to dig into and disclose fully the asset quality issues that may be within their banks and the broader banking union, which might share that burden that would otherwise be borne by the national governments if they disclose the poor quality of those balance sheets before it becomes harmonized. How do you, as the strongest balance sheet in the European Union, end up reconciling that? Because the EBA doesn't have the access to the actual balance sheets. The ECB doesn't. It's still at the national level. To get real banking union, you need -- you need the bank balance sheets to be transparent and believable, and we're not there yet.

SCHAEUBLE: We, in the single supervisory mechanism -- we have decided that a defined figure of banks in all European member states will be supervised not any longer by national supervision but by the single supervisory mechanism. And they will have this look on the balance sheet, which EBA does not have on behalf of the given situation of the -- and the legal basis and the -- extralegal basis of the European Banking Authority, but the single supervisory mechanism is -- will have.

And it's a very complicated issue of legacy. We have -- we discussed it broadly in Dublin one week ago in our informal meeting in Dublin, and I can tell you -- not to mention all the details now, but I can tell you we are on the way, and we will find it and -- (inaudible).

By the way, I will like to repeat, don't expect that as long as the situation in European treaties is as it is -- it's a given situation -- that the banking -- European banking union is the same like as the Federal Reserve in U.S. We -- Europe remains a very strange and very specific construction of combination between European authority, with a lot of competences, and member states which remain partly sovereign, not on -- not hundred percent. European member states -- no European state is really sovereign. It -- if you would explain in some -- American political leader, they would never -- they would never understand it, how it -- if this would -- could work. But Europe is of course totally different, and in Europe we need this new form of governments, and we all agree on this, in the principle. In details, we fight a little bit. But it works, and therefore the European banking union will rely on them. We will have -- and in European law, Basel III implemented. By the way, we would implement this this year, I hope U.S. as well.

Then we will have the single supervisory mechanism and European restructuring mechanisms as well, and European (lets its license ?) for deposit insurance, and at the end we also have of course national responsibility. We'll say to the hierarchy -- they'll remind the hierarchy of liabilities, because otherwise we create the wrong incentives. These incentives -- if you tell a member state, don't care; Europe will take the bill -- by the Germany, will take the bill -- it's the wrong incentive. You have to tell them, no, no, no, the -- be careful. You take part of the risk.

And if that is not enough, at the end, in the hierarchy, European -- we have the European Stability Mechanism, as ever we will have it -- and we have the ECB.

By the way, we -- someone who follows the discussion in Germany may have news that there was a huge discussion on the so-called TARGET2s. They have (happened ?) in the last couple of years. What is it -- what is the proof? That the imbalances in competitiveness are going down. We have a lot real progress in the real figures.

QUESTIONER: Ambassador --

SCHAEUBLE: He was ambassador when I was member of Kohl government.

QUESTIONER: Yeah. You --

HILLS: But now you leave without him asking you a question.

QUESTIONER: -- you helped me solve a lot of problem.

SCHAEUBLE: (Chuckles.) Yeah, we did, eh?

QUESTIONER: We did.

SCHAEUBLE: In times you can -- you mentioned today -- Cold War.

QUESTIONER: Right.

SCHAEUBLE: Exchange of --

QUESTIONER: We'll have a second session after this one to talk about that. (Laughter.)

HILLS: You only get one, Richard.

QUESTIONER: Yeah. Richard Burt, McLarty Associates.

SCHAEUBLE: Yeah.

QUESTIONER: Mr. Minister, I think I speak for a lot of people in this room, actually, that recognize the role that you and the chancellor have played in exercising leadership on the -- on the whole eurozone/euro crisis issue.

But this is not solely a German responsibility. And so my question is really about two partners of Germany. One, France -- one has the impression from Washington that the French don't necessarily have the political or the economic strength to continue to be a close partner of Germany in the construction of the -- of Europe.

And secondly, there's the question of Britain. Now, they're not a member of the eurozone, of course, but in talking about the evolution and the future of Europe, the British obviously have a role to play. But are the Europeans and are the Germans prepared to make the concessions necessary to keep Britain in the EU?

SCHAEUBLE: Look -- (chuckles) -- that's Europe. The answer is that's Europe. As a German -- member of German government, I am condemned -- (laughter) -- to cooperate closely with France. I will tell you -- (laughter) -- you can't -- no, I -- that's not a joke. Not a joke. It's European history. It's the core of European integration.

You can't -- (inaudible) -- once I had a discussion with a good friend as -- actually, he's prime minister in Finland, Jyrki Katainen. He told me, oh, Wolfgang, shouldn't we divide the eurozone? I said, oh, Jyrki, how? Well, how do you divide? Oh, in a northern part and a southern part. It's quite interesting, but please answer one question: In which part is France? (Laughter.) He thought about it a minute, and then he said, you are right, we can't. (Laughter.) If you look at a map of Europe, it's -- the answer is clear.

Cooperation between France and Germany is a key for European integration. It was the very beginning after World War II, and it remains. Therefore when Pierre Moscovici, my French colleague, came to Berlin the day after he was appointed, we told, oh, what a silly decision of French voters to vote for a Socialist government. And he said, yes, and it's the opposite in Germany -- (inaudible) -- he would never vote for my party. I said, yes, but we will have to work together. We are condemned to work together. We do it. Therefore that's what the French and the German know.

So I just have mentioned that France has -- you have to understand. You have to understand Germany, which is maybe the most difficult thing. You have to understand France. And in France, it's difficult to make social reforms. It's -- to -- it's really difficult. It's easy to give the advice. You have to do, ba-ba-ba-ba-ba-ba. (Laughter.) You can make a lot of jokes, but it's France. France is a wonderful country, but by the way -- well, yes -- don't -- it's -- it make -- look, if you look at foreign policy, security policy, you can see it. Europe is as it is. Germany is as it is, and then much more, some ask us for what we never can do, because we have our history, France its own. So it's therefore we have to work on this basis.

Italy is crucial for European integration as well. But without France, it will never happen. So we (will do it ?).

So of course I would prefer to have a stronger position of France, actually. But by the way, I am optimistic that they will -- they have -- they got it. They are doing a lot of making reforms. They implemented some legislations. They make a lot of decisions. They would not have campaigning for Hollande when they campaigned, but now they have to implement, to cut expenditures. They will reduce their deficit by cutting expenditures, and the relation is two-third cutting and one-third raising taxes. Maybe you can send from -- someone from the negotiation teams on the Hill to Paris to help them to find current solutions and to overcome the (difficult ?) position.

So U.K. -- of course it would have been better from the very beginning if U.K. have -- would have defined itself as part of the European continent. But U.K. didn't. (Chuckles.) Churchill gave the founding speech -- delivered the founding speech in Zurich. You know this. But of course, he mentioned continental Europe, not U.K.

If you look at the real situation in -- it's fine to criticize David Cameron, but if you look at the real situation in the majority party -- and he has to be careful. I think it's -- and my answer's always quite easy. The more we succeed, for example, in our common European currency, the sooner Europe -- U.K. will join. The more we have difficulties, there will be a little bit -- they have a major -- (they suffer ?) a major discussion in British society. You can follow it again and again because it's -- even history has changed. And France and U.K. had to learn in a much more different way the change of history after World War II.

The Germans had nothing to learn. We were by then -- because it's totally different. I pay respect to France and U.K., and so this is why Europe is complex, but nevertheless, we (can own it ?). If you look at the role of Poland, for example, the role of the new member states in Europe, it's a real success story. Don't underestimate. Of course, you can see, even in member states, some heritage from former times, in Hungary as well as in Czech Republic or in Slovakia and so on.

But having said this, if you look what has been achieved in separating Czechoslovakia in a peaceful way, no one would have expected that it would be doable. They did it, and now Czech Republic and Slovakia are very close friends, close friends. And even the former Yugoslavia, after all this terrible war in the '90s, we -- is on the way to achieve -- (inaudible). Europe is a success story, but it remains very complex, complicated, but attractive.

HILLS: Minister, we could keep you here all afternoon. We're enthralled. All I can say is we're going to invite you back and hope you will come.

Thank you so much. Join me in thanking the minister. (Applause.)

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