C. Peter McColough Roundtable Series on International Economics: A Conversation with Christine Lagarde

HENRY KRAVIS:  This meeting is part of the C. Peter McColough Series on International Economics which is presented by the council's corporate program and the Maurice R. Greenberg Center for Geoeconomic Studies.  Our next McColough meeting is with first deputy managing director of the IMF, John Lipsky, on Monday the 29th of October.  As a reminder please turn your cell phones off and all wireless devices.  This meeting will be on the record as Madame Minister Lagarde has decided to -- they'll make this on the record.

As you know, Minister Lagarde is the minister of the economy, finance and employment in France.  There's a difference this time and she may talk about that. I don't believe the budget is under her purview.  She grew up in France, went to Sciences-Po and University of Paris in Nanterre where she studied law.  Interestingly, one thing I found out is that she also had worked in William Cohen's office when he was a congressman in Washington.  Then joined Baker McKenzie (sic), '81 -- had a very quick path through Baker McKenzie -- became a partner in '87. 

Four years later became managing partner of the Paris office, and then in 1999 she was elected chairwoman of Baker McKenzie, which I'm sure all of you know is one of the largest law firms in the world.  She's my kind of lawyer in that she focuses on clients first, and not all lawyers do that as we know, and she saw a 30-percent rise in the firm's profits during her tenure so she's quite focused.  Became minister of trade in 2005 after she left Baker McKenzie, stayed there until 2007 and for a very short period, about one month or so, was -- became minister of agriculture, and then with the new government of President Sarkozy he asked her to come over right away to the Ministry of Finance. 

She -- I met with her recently when I was in Paris last week actually and we had a good discussion about my industry -- private equity -- and I found her to be very perceptive and receptive and certainly to the point, and I found that quite refreshing.  She's genuinely interested in the industry of private equity, of innovation, and how all of this can be helpful to the French economy and to the Sarkozy government's plans to revitalize the workforce, work rules, and to promote growth and ownership.  Her role is going to be obviously to help President Sarkozy rejuvenate the economy of France that has been on a slower track -- is now starting to show some very good signs of growth and better employment. 

I think her background on trade and on antitrust particularly will hold her in good stead as various countries continue their way through a cry for perfectionism or nationalism, and I think her background will be particularly good.  We're very fortunate that she has just come from the G-7 meeting in Washington of the finance ministers and the European Central Bank heads, and I think she'll have some things to share with us on that.  So with that, Madame Minister, I'll turn it over to you.  (Applause.)

CHRISTINE LAGARDE:  Thank you very much, Henry.  Good morning to all of you.  Little did I know when I met with Henry last week that we would see each other again in New York.  I would have been even more charming actually had I known.  (Laughter.)  Now, from client first to France first -- that's really very much the journey that I've traveled in the last two-and-a-half years, and I must say that don't know what kind of train has left the station but certainly it's that of I hope growth and employment, and we're trying to put one wagon after the other while reforming the country as fast and as much as we can while not upsetting too hard and too much the sort of social balance that has been crippling France for quite a few years.

As Henry mentioned, the election of President Sarkozy has really opened the windows of France, and what I would like to do this morning for you is to explain the few steps that we have already taken or that we will be taking in the next few months to make sure that the economy has plenty of room to expand and make sure that the people that really want work can actually get a job in France. 

You may have read in the papers in the last few weeks, months, years that France growth rate was lagging a bit behind -- that French unemployment rate was over the top and that there was not much that was being done about it, and that you also have read and read regularly about the good food and the good wine and the good this and the good that, and we certainly don't want to upset that but we want to change the first part.  And what we started doing right after President Sarkozy was elected in May was to really develop and implement the program that he had advocated prior to his election.  Now, why do I say that?  Because it really sets the scene and explains why reforms this time might actually work.

What President Sarkozy did during his campaign was really explain in details what he was planning on doing for the country, and having done so and being elected with a 54 percent majority with 84 percent of the voters turning up to the polls, there is no question that everybody knows what is expected and everybody understands what picture he has painted for France going forward. 

What no one really appreciated, and no one appreciates that ever, is the process of change and the pain that it will take which is why we have seen last week and we will continue to see here and there now and again movements, strikes, protests because that's the way generally French opinions are expressed.  My hunch is that the negotiation process that will take place will shortcut that sort of spontaneous movement that is really not helping the economy.

Now, I'd like to go through the various steps that we are contemplating, and one has already taken place.  It's about work, and I'll come to that in a second.  The second one has to do with lifting the constraints and removing the obstacles to a good working of the economy and I'll come to my antitrust -- my antitrust background will be helpful in that regard, Henry.  You were right.  The next step that we are taking as well is to encourage as much as we can innovation and creativity because we believe that together with education and training those will be the two pillars on which the French economy and the country all together will really find its place and will manage to really develop on the basis of its real merits.

And finally -- and those of you in finance, private equity and otherwise, might be interested -- I would like to explain the various steps that we are taking to restore the solidity of Paris as a financial place, and there are a few steps that are underway that will be included in the budget that we're presenting at the moment.  But back to work -- some of you may have read about it but I'd just like to remove from your views the fact that French people are lazy.  They are actually extremely productive -- one of the most productive people in the world except that's calculated on an hourly basis and with 35 hours a week of course that was a bit of a problem. 

Now, clearly by giving a strong incentive to companies to actually get people to work overtime by adding 25 percent to the compensation, by removing any social security charges payable by the employees, and by making those hours completely tax free, what we're doing is encouraging people to actually look at work in a different way -- to understand that to work more, to work longer, actually pays more.  And that was the motto of the campaign by President Sarkozy -- (speaking in French) -- work longer, work harder, you'll get paid better.  So 25 percent plus, no social security contributions, and tax free -- that's for the employee. 

For the companies to actually give them an incentive as well to employ people a bit longer than 35 hours a week, we also discounted the social security contributions for the employer by a fixed trade which encourages them to get people to work longer.  That has been in effect since October the 1st.  It required a very laborious debate in the House during which I was called the -- (speaking in French) -- because I dared say that the French had thought long and hard enough about just every issue -- that it was time to stop procrastinating and roll up our sleeves and get back to work.  So I was vilified by people such as Bernard-Henri Levy to whom I pay due respect but frankly doesn't know much about the economy.  (Laughter.)

So that's in process.  It will be reflected in the pay slips of people at the end of October and it will continue thereon, and my hope is that it will actually work.  We are injecting because that's really what it is -- it's the French state investing in the work of people to not so much inject money in the economy and therefore sustaining growth by increasing the purchasing power of people but to try to change the psyche of people so that they appreciate that work is not just a burden but it also has value and that earning a living has to do with living and not just with suffering.  So we're injecting 5.5 billion Euros in the economy through the process of removing those social security contributions and providing this tax-free regime for the overtime that people work.

The second thing that we have embarked upon which is actually a real process that we went through is to try to remove the obstacle to growth, and to that end President Sarkozy has an interesting process.  What he does is he gives his ministers a big job to do so you're sort of overwhelmed by the job.  The first time ever that there was a Ministry of Economy, Finance and Employment -- that had never occurred before.  And then you appoint a commission with some very competent people with a very talented chairman to make additional proposals so that the poor minister who's overwhelmed with the work has actually somebody on his side to say, "Hey, you forgot something.  You should do this, you should do that, you should add to the list." 

And that's a great way to actually stimulate thinking, and I'll come to the innovation and creativity in a minute.  But that's almost putting corporate methods into public life and government action by having those consultants on the side to suggest what pretty much everybody knows except it needs to be a bit more refined.  But the mission letter is quite specific.  But by having those consultants on the side to make additional suggestions.

And in relation to the obstacles to growth and the constraints and the restrictions, clearly the Jacque Attali report which -- interim report that was published about two weeks ago includes a whole list of changes, particularly those relating to the retail and distribution systems that applies in France.  That's one example of the constraints that apply.  To open a supermarket of sizable dimension anybody would have to ask something like about eight different clearance and authorizations, one leading to the other and one likely to stop the process of the application. 

Now, that is -- the recommendation of the commission is clearly to remove as much of that as possible to make it one central point and to open up the possibility for retailers to operate because by putting in place those laws that a few lawyers in the room would remember such as -- (speaking in French) -- and -- (speaking in French) -- we've actually managed to try to protect the small retails in the centers of cities but we have limited to a few very large supermarket chains such as Carrefour, such as Leclerc, and a few others which are pretty well known outside France because they've expanded internationally. But we've almost restricted access to them because we've made it so difficult for others to access the market.  Walmart, for instance, has I think given up on entering France.  They had to withdraw from Germany also but -- and by that same process we've left a few loopholes which has allowed supermarkets such as Lidl, such as Ahold, which are very discounted channels to actually access the centers of cities.  So we got that wrong and the proposal which we are going to take up will be to really significantly change that --streamline the process, make it easier and less restrictive.

In the same fashion, we're also going to -- and that's another suggestion which we had certainly identified beforehand -- we're going to also change the rules applicable to the resale price which at the moment cannot be below -- well, it's  a fairly complicated processes and so complicated that both suppliers and purchasers have managed to actually organize the discount that they were negotiating way before the resale price so that those discounts could not be taken into account for the ultimate resale price.  We're going to clear that and we're going to accept legally that all discounts be actually at the far end -- at the negotiating point between the supplier and the purchaser -- and hopefully that will bring more competition and will help push prices down.

Another example of the suggestions made by the Attali commission, which has not yet been articulated but which no doubt, and on a day like today you will appreciate that very well will make noises in France and in Paris in particular, believe it or not today in Paris we don't have more taxis than in 1931.  Now, clearly the city has grown a bit since 1931, but the number of license plates has not varied.  That's one example of things that need to be addressed and will be addressed, again with a view to pushing competition, to increasing the number of players, to making access to work actually easier.  Two small examples, and there's a whole range of things that will come and it will take the form of a bill that we will propose to Parliament in the spring.

Third direction that we are embarking upon is creativity and innovation.  We looked at what was being done in other European countries and we decided to significantly boost the tax credit that is associated to research and development.  At the moment it's a fairly complicated system that is factored by not only the amount invested in research and development but also the increase from year end compared with year end minus one, minus two, minus three, and it's a complicated averaging factor that is determined.  We are removing all that and we're saying all expenses on research and development will give -- will allow the investor to a tax credit which will be equal to 30 percent of the first 100 million euros spent on research and development.  In excess of that first 100 million the tax credit will be 5 percent.  But can you imagine spending 100 million in research and development and getting a check back of 30 million dollars?  Sorry -- euros.  We're very open -- that's another debate. 

So that's the most advantages and most favorable tax regime that is applicable in Europe at the moment as far as tax credit on research and development is concerned.  We're doing a few other things to encourage innovation and creativity.  One example is that we finally ratified the London Protocol, which allows finding of patent in any language but does not require French translation.  That was very much requested by the small and medium sized enterprises, and it's a bit of dent in this holy grail of the use of French language.

Now, things have changed in France, by the way.  You'll be interested.  I was -- on Wednesday I was presenting the budget for the general discussion, and it's a fairly elaborated process through which you have to go and everybody speaks in their turn and each group in the Parliament addresses the minister in the -- in turn.  We still have a few communists in the House, and believe it or not the leader of communist group -- there are about five or six of them now -- addressed me in English.  (Laughter.)  Not sure what he meant to say -- (laughter) -- but his comments were not recorded.  (Laughter.)  There was a blunt refusal by the chairman pro tem to actually accept or record his comments.  So changes are underway -- no question.

Another thing to push innovation and creativity, which we are doing, is to align the taxation on the proceeds of the sale of patents to the royalties on patent; same fixed rate of 15 percent.  We're also lowering the tax rate applicable to the contribution of patents by an inventor to a company.  And we're also putting in place a special status for companies set up by university students and researchers who will benefit from tax and social charges exemptions, to encourage them to set up their business as they are finishing their research development.

What we also -- as I mentioned, we believe that, in addition to innovation and creativity, education and training are key.  In terms of education, we passed a law this summer on universities, which very much give them not the level of autonomy that exists in this country but which is moving them in that direction.

And for those of you who know French universities, it's a major gigantic step away from an extremely constricted, restricted way of operating the educational business.  In the same vein, the boards will be now restricted, as opposed to what they used to be, and frankly from being inefficient to hopefully being a bit more efficient.

Professional training is a huge big project that we are working on.  And my chief of staff is now telling me that I'm taking too much time and that I should move fast.  So I will move fast to something that maybe some of you are particularly interested in, and that has to do with the competivity and attractiveness of Paris as a financial center.

Thank you, Manuel.  That was helpful.

Now, clearly one of the disadvantages of France, for those that make a bit of money, was indeed the tax system.  I believe that by pushing the tax shields to 50 percent and by including in the basis on which taxation is calculated those two funny taxes, CSG and CRDS, which are quasi-tax but pretty much social security charges assessed on any revenue, by including those in the basis and by lowering the tax shield, we're really making it almost as -- we're making Paris almost as attractive as London, especially if Gordon Brown's proposed measures are voted this year.

Effectively what we are doing and saying is the French taxation system will not take away from you more than 40 percent.  It's 50 percent with the shield, but by enlarging the base, if you factor everything in, it's really pretty much down to 40 percent.

The French taxation system will not take more than 40 percent of your income in tax, all taxes included, all direct taxes included, not including sales tax, TDA.  But all taxes included, the French state will not take away more than 40 percent.  And when I say the French state, it's federal tax, state tax, any tax that you can think of.  The burden will not be in excess of 40 percent.  That's pretty competitive.

What do you think, Henry?  It's okay.  All right.  (Laughter.)

Now, just a couple more points.  We are -- I'm convinced personally that not all top financial minds have to take the Eurostar to go and work happily in London.  And I'm determined to bring some of them back, or at least to prevent some of those that are tempted to travel the channel to actually stay in Paris.  And we're proposing already a few measures to make Paris more attractive, one of which is clearly going to be an alignment of the taxation of dividends to the taxation of bonds, to just make it as much an incentive to invest in more risky products.

I've set up -- (inaudible) -- which includes 15 top-notch bankers and regulators and governors to actually make proposals to, again, remove the obstacles, eliminate the constraints and define the strategy for Paris as a financial center.  There are lots of measures underway, including the creation of a new compartment on the Euronext regulated market, designed exclusively for professional investors and applying disclosure requirements that are strictly aligned with European standards.  In other words, the specific standards required by French law will not apply.  It will only be the European standards, and no French translation will be required.

The other thing that has now been accepted by the equivalent of the SEC, the IMF, is that when a company is listed on NYSE and asked to be admitted for trading on Euronext Paris without making a public offering of securities in France, the documents filed with the SEC and the whole application will be sufficient and will now be recognized by our regulator.

I will stop here because I understand that we have a little conversation before questions.  I will, having told you so much about overtime, though, decline any payment myself and will regret to have to leave at 55, because I'm due to attend something else.  So overtime is not for me today, but overtime pay is not for you either.

Thank you.  (Applause.)

KRAVIS:  Well, clearly, Madame Minister, you're on the right track.  I don't know if I agree yet about those taxes, but it's a start there.

How -- you know, on paper it sounds great, and President Sarkozy is clearly saying the right things.  But how committed is the government?  And more importantly, how committed to change are the French people?  What will stop it?  Get into an economic slowdown; things get tougher for them.  It's easy to start backtracking.  What do you see happening here?

LAGARDE:  Well, it's clear that when you have a very solid and steady growth, it's easier to implement the reforms.  But we are determined to make the changes.  We are determined to follow the path of reforms without slowing down or without tampering.

Clearly some of the proposals that have been voted in the summer will generate additional growth.  And my expectation is that the slowdown that might result from the subprime's effect on the U.S. real economy, if there is such a thing, which clearly Hank Paulson is suggesting at the moment, that will be compensated by these overtime measures that are expected to generate, on an annual basis, roughly 0.3 percent additional growth rate.  So that should help.

And as far as the rest is concerned, as I said, the program was well-advocated.  The voting was strong.  The majority was large by any standards with comparable elections.  And people know that things have to change.  So it's going to be a question of keeping at it and rehashing it and saying all the right things.  And, you know, some people have said, "Well, it's all about lip service."  It's not.  The lip-service process is needed.

You need to tell the story.  You need to paint the picture and you need to describe what it's going to be like afterwards.  But we are going through the process as well.  And clearly what is happening at the moment, the special pension scheme reform, which has started last week, is going to be a good test of how resilient we are and what method we're going to apply.  But the determination is absolutely certain, and it's going to be a question of just negotiating day after day without giving up.

KRAVIS:  We sit on this side of the ocean and we hear from time to time the president talking about national champions in France.  Could you help us on what that really means?  On one hand, you and the president and others are encouraging foreign investment in the country.  And I, for one, have made quite a commitment to the country, and very happily have made it and want to do more.

But what does that really mean, national champion?  It's a foreign concept for us, really, here.

LAGARDE:  I think it pleases the mind.  (Laughter.)  But if you look at facts, Wallace Becker (sp), when he hired me as a lawyer, he said, "Forget about everything.  Just get down to the facts.  The facts matter."  And when you look at all the French largest companies, publicly quoted, top 40, 43 percent of them are held by foreign direct investors.  One out of seven employees in France works for a foreign employer.  And the volume of trade between France and the United States, for instance, is enormous.

The United States is the first foreign direct investor in our country.  And apart from anecdotal -- and that's how I would characterize the discussions at the time when there were rumors that Pepsi was going to invest in Danone -- apart from those anecdotal concerns, frankly, France is open for business.  You know, thank you for your business, by the way.  I'm delighted that you are with us and that you're planning on investing more.

But clearly the country is open.  The economy is open.  And I don't think that -- if you look at the openness -- you know, I hate to criticize others, but of all European countries, I think, apart from the UK, which might be on a par with France, no other European country is as open as France is.

KRAVIS:  I think that's a fair comment.

You've just come from the G-7 finance ministers' meeting in Washington.  Maybe give us your views of how you saw it and how some of the discussion will affect France in particular.  Or do you have different views from where Secretary Paulson is, for example?

LAGARDE:  Well, as a preliminary comment, it felt quite funny, because I'm used to operating in male-dominated environment.  But, boy, that was extremely male-dominated.  (Laughter.)

What shall I say?  We had very, very good and, I think, frank exchanges of view about our respective economies, about the way the world economy is going.  There was clearly a level of uncertainty, particularly from Hank, relating to the consequences of the depression on the housing business and the actual sort of subsequent consequences of the digestion of the subprime crisis.  And there, there was a level of uncertainty in terms of measurements on the real economy.  And as a result for us, all European economies, what would be the ultimate outcome or secondary effects, if you will?

I think the same concern was expressed by some of the leaders of the emerging economies, or large emerging economies at the IMF meeting, which have not been affected at all for the moment.  But in the main, there was recognition that overall growth would be in the range of, you know, 4.5 to 5 percent, which is good; that the emerging countries would take the lead in not driving the bus but certainly pulling the world economic growth, and that it would take a bit more time to continue and finish digestion of the subprime crisis and subsequent lack of confidence caused by the liquidity crisis.

Now, clearly we all need to remain extremely vigilant and observe the market and see where things are going.  But it was a good and frank exchange of views.  The very interesting part of that meeting was all the time that we devoted to what do we need to do, what additional guidelines and codes of conduct need to be thought through -- and not only thought through, because there were recollections of the Asian crisis and the same sort of momentum, (post-Asian ?) crisis, with everybody saying, "Oh, we need to change that.  We need to fix that.  We need to improve the liquidity ratios.  We need to have alert points."

And because the crisis went away, everybody forget about, you know, those recommendations and guidelines and what have you.  So there was clearly a collective urge to, number one, stay connected rather than disconnected; continued consultation rather than being disconcerted; and trying to converge.

I think that the word convergence is going to really mean a lot -- convergence in terms of regulations, convergence in terms of objectives.  And clearly the other key word that I was particularly pleased to manage to reinsert in the communique where it had disappeared is the word transparency, because clearly to finish that G-7 meeting with the communique, that did not include transparency, to me was just not acceptable.  So I did insist that transparency be back into our communique.  I think we need a lot more of that.

KRAVIS:  Great.

Why don't we turn it over to our guests.  Now, wait, please, for a microphone to be given to you and then state your name and your affiliation.  And again, just as a reminder, we have to end the session promptly at five minutes of 9:00.

Yes, in the front.

QUESTIONER:  Thank you.  I'm Lucy Komisar.  I'm a journalist.

Over a decade ago, beginning with one of your predecessors, Dominique Strauss-Kahn, the finance ministers of both parties have refused to release customs documents requested by Judge Van Rumbech (sp) that might show that the money trail, about $1 billion in bribes and kickbacks in the Frigates of Taiwan case, that some of it may have gone to top French officials.  It was a $2.8 billion contract.

In the interest of transparency that you've just talked about, are you going to end this bipartisan cover-up by releasing the documents?

LAGARDE:  Well, I've been in the job for four months and I'm already known to have let Tracfin do its work in relation to the UIMM.  I think we've got our share of review and investigations concerning a couple of other cases and I'm sure I'll look at that one with interest.  I'm not familiar and sufficiently aware of this matter to give you a practical yes-or-no commitment.

KRAVIS:  Yes, please, in the back.  Yes, right in the middle there.

LAGARDE:  But thank you for the question.

QUESTIONER:  David Braunschvig, Bear Stearns and Council on Foreign Relations.

Madame Minister, you mentioned the importance of the commissions that help you expand your oversight.  There is a concern on this side of the ocean that the intentions of the government might be crisper than its current actions.  And I'd like you to comment on the Attali commission's recommendation that the cautionary principle, which creates tensions with EU law, and indeed puts constraints on competitiveness of U.S. companies in France, in genetically modified organisms in particular, and the fact that this recommendation is apparently not going to be accepted by the government, is something that creates concern on this side of the ocean that there might be a discrepancy between words and actions.

Thank you.

LAGARDE:  Well, it's not because the commission proposes something that it means necessarily that it was in the program of President Sarkozy or that we're going to do it.  You know, as I said, the work of the commission is to stimulate, to create additional tensions, to make more suggestions than actually a government can swallow.

Back to your point about the precautionary principle that Jacques Attali suggested was removed from the French constitution where it was put about a year ago, I think it's going to lead to quite a lot of debates as to its efficiency, necessity, contributions to progress, contributions to security of the people.

At the moment it is clearly seen as extremely helpful for the security of people, and it has not stopped a lot of pharmaceutical companies from inventing lots of drugs and vaccines and what have you.  So we'll debate it indeed.  And the fact that he's proposing it is, number one, interesting; number two, will lead to debate; number three, it does not commit the government.  It's not because it comes from a very wise commission that it's necessarily part of what we want to do.

Fourth point -- you mentioned the genetically modified -- what did you call it? -- organisms, crops -- this week, on Thursday, what has been going on for the last four months now, which is a complete overall review of anything having to do with the environment, with climate change, with the emission of CO2, will be disclosed to the public with a list of proposals.

On genetically modified organisms, there will be proposals that have, you know, led to quite a lot of negotiations and discussions, particularly with the farming sector, which is particularly concerned about it.  But you'll be surprised.

KRAVIS:  Yes, Karen, in the front.

QUESTIONER:  Karen House, retired from The Wall Street Journal.

Christine, are there other steps -- economic, financial -- that France and Europe could take in cooperation with the U.S. to put further pressure on Iran to end its nuclear program?  And was any of that discussed at the G-7?

LAGARDE:  Well, it was not only discussed, but the communique actually includes a special reference to Iran and to the pressure that, from an economic point of view, needs to be imposed, and all of that clearly in conjunction with the U.N. and the U.N. resolutions.

You're too familiar with that part of the world not to have noticed that the French policy in that regard has clearly strengthened.  And we have given notice to all French companies to not continue further investment, and we've taken steps, as far as the financial sector is concerned, to continue to put pressure and severe economic pressure on that country.  There is a very strong meeting of the minds between the United States and France in that respect.

KRAVIS:  Yes, in the middle.  Yes.

QUESTIONER:  John Beatty (sp) from UBS.  You talked extensively about reform of the French economy.  One area you didn't talk about, though, was the reform of the agriculture, and in particular the common agricultural policy.  France has consistently been one of the biggest opponents of any reform of the common agricultural policy.  Unfortunately, in the current environment, this has meant that there's -- it's essentially a logjam in completing a Doha development trade round.  Going forward, do you think that France is likely to be committed to reform and in fact abolition of the common agricultural policy?

LAGARDE:  I was only minister of Agriculture for 32 days -- (laughter) -- but, boy, did I learn in those 32 days.  (Laughter.)

The common agricultural policy is in effect until 2012.  That was the deal that was agreed amongst Europeans.  So while we are thinking about the reform, we are preparing and laying the grounds for that, it's a program that is in place until 2012.  There is a review of the financials that will take place in 2010, but the overall common agricultural policy is in place.

France happens to be the president of Europe.  We have this rotating presidency, and France will be in the position to preside as of July 1st, 2001.  And President Sarkozy is very keen that we make actual proposals for the review of the common agricultural policy post-2012 -- so with effect on -- you know, from 2013 onwards.  And clearly in his way of thinking, he would very much like the common agricultural policy to move from a program under which farmers receive grants in lieu of farming to a process and a program under which they get a good price for quality products that they grow on the land.  Now, that might not be possible for all crops for all areas of France -- and there are functions that are fulfilled by farmers that are additional to simply producing food -- but the food production aspect of their job needs, in the view of the president, to be enhanced and to be compensated by actual remuneration.

So I think you should change your mind about France being this constant obstacle to a Doha round.  I'm not sure that that is actually the case anyway.  I think that we've had specific positions concerning barriers to the agricultural products coming from, say, Brazil, Australia, New Zealand or Canada simply because we are keen to continue to have farmers and to continue to have a land that is worked by farmers.  But we've also made massive concessions.  And we've actually changed the common agricultural policy time over and over to adapt to the requests and expectations of particularly the emerging markets.

KRAVIS:  Yes, in the front?

QUESTIONER:  Bob Wilmers, M&T Bank.  I was wondering whether you could comment, please, on your dialogue with Mr. Triche, number one; and number two, how the level of the budget -- your budget deficit will fit in with the constraints of the European Union. 

LAGARDE:  I think Mr. Triche would prefer to have a dialogue with me and only me.  (Laughter.)  That's my way to address your first point.  (Laughter.)

The size of the deficit for 2008 -- the budget -- is, if my recollection is collect, 42 billion euros.  And altogether -- because to appreciate whether we fall within the restriction of the Maastricht commitments, you have to take into account the budget deficit but also the deficit of the Social Security regimes -- pensions -- and illness regimes, and also the local authorities' budgets.  So it's the aggregate of those three that are accounted to measure whether or not we fall below the 3 percent and whether we reduce our structural deficit by 0.5 percent year after year. 

We will be at 2.3 percent in 2008, which does not satisfy the requirement that we reduce the structural deficit by 0.5, given that this year we should be at 2.4 percent of GDP.  But at least the trend is in the right direction, and we felt that it was necessary to take a few measures -- including the overtime measures that I've described, including the special tax credit for interest on loans taken for residential premises -- to number one, deliver to the French population that promises made by French politicians can actually turn to be true; number two, to boost the economy a little bit; and number three, again, to put the work value and the worth ethics right at the center of the economy.

KRAVIS:  You talked earlier about the fact that you want to reduce regulation in the country, and that's terrific, but at the same time, at the G7 and before that, there's a lot of conversation about, "Well, we need to think about regulating the special investment vehicles that are out there, special financial products that are there.  we have to push the rating agencies to do a better job."  Can you comment on that, from your perspective, as you see it in France?

LAGARDE:  As I see it in France -- but I think it goes beyond that because it's also the way we all collectively see it.  One of the learnings of the crisis is clearly that the spreading was almost in a nanosecond.  I mean, August the 9th was an -- just around-the-globe contamination -- maybe that's not the right word.  "Contamination" sounds a bit ill.

KRAVIS:  It was ill.  (Laughter.)  Those of us that were in it, it was ill, believe me.  (Laughter.)

LAGARDE:  It was a bad day, right.  (Laughs.)

KRAVIS:  Yes.

LAGARDE:  Yeah, it was. 

So it's not so much the way I see it from my own perspective, but the way we collectively see it and how we should go about it.  Think in terms of process:  We all agreed -- and we talked about it at the G-7 meeting -- we all agreed that there should be massive involvement from the market players, from the professionals, and they should be the one to actually originate -- not just credit -- but originate and suggest what better principles, what better rules, what better policies should be in place of their own accord and not necessarily requiring or involving regulations. 

If what is proposed by the professionals, but the market players -- if that is not sufficient by the standards that we have to apply as government because we are accountable to citizens and we are accountable for them to have trust in the system -- then it will be time to regulate, then it will be time to, you know, modify Basel II to include the liquidity criteria in a better shape than it is at the moment. 

But I think the process should be, make -- let's make sure that the players appreciate, make recommendations.  It's in their vested interest.  And then it's for us government to determine, based on their proposals, whether it actually fits the bill and will be sufficient to restore the level of confidence that is needed for you and for which we are accountable as politicians. 

KRAVIS:  Good. 

Yes?

QUESTIONER:  Hi.  I'm Lesley Stahl with CBS News.  I want to ask you about the strike.  Strikes in the past have stymied reform movements.  Could you brief us on the strike on Thursday -- how paralyzing was it? -- why you're so confident that this time you can overcome this kind of situation where strikes might continue.  And you kept using the word "negotiation."  Does that mean you're open for compromise?

LAGARDE:  I can tell you very clearly about the strike on Thursday because I left on Thursday and I think I left at half past one.  As we expected, trains did not work, metros did not work, and buses didn't -- right.  But that was totally expected.  What was critical was whether it would last, for how long, and how strongly?  And you know, I don't have the outcome -- I don't have the count of today's train and metro and buses.  I think that it's smooth and peaceful and people can actually go to work, come back to work, and that was a critical test.

Thursday was wonderful.  Thursday it took me 20 minutes to go from (Berce ?) to Charles de Gaulle -- record time.  (Laughter.)  But that's because a lot of people had taken advantage of the RTT, which is this time off reserve that they build over time to have a day off.  So -- you wanted a practical report on what it was like, but -- that's what it was. 

But the real key test was how strong was it on Friday? -- weakening.  How strong was it on Saturday? -- weakening even more.  The fact that the -- there was the rugby final cup -- world cup on Saturday night probably helped a little bit, although it was England versus South Africa, unfortunately.  But fortunately, South Africa won.  (Laughter.)  The Brits eliminated France in the quarterfinal -- in the semifinal.

KRAVIS:  Semifinals.  That's right.

LAGARDE:  Now, you asked me about the word "negotiations."  There is a law of January 31st, 2007, that requires that any change in the labor code -- and I was quoted to have said that it was "cumbersome, too heavy, and overly protective" -- that's -- that was two years ago.  That law requires that any change of the labor code be subject to negotiations, so we have to go through the process.  Whenever we want to change provisions of the French labor code, we have to negotiate. 

And I'm pleased to say that there has been negotiations in process since the beginning of September between the manufacturer's association leaders -- Laurents Perizou (sp) and her team -- and the union leaders, and they're reviewing just about everything from the employment contract to the collective status to the termination situation to the post-termination obligations, to make it smoother, easier, more flexible for companies and more secure for employees. 

So I'm very keen to see that process through, and I hope by the end of December, which is the time that was given to them to come with proposals, they will have significant proposals.  If they don't, then we'll have to go back to the bill process and propose changes in parliament.

KRAVIS:  I think we'll do one last question. 

Yes?

QUESTIONER:  Rachel Robbins, NYSE Euronext.  Madame Minister, thank you very much for the efforts that you've been making to make France a financial center.  And you referred to the fast-path registration process.  That does not apply to the capital-raising process at the moment.  Do you see any reason why it shouldn't be extended?  And can you talk about any other longer-range initiatives that you may have to bring France more competitively into the financial landscape?

LAGARDE:  Well, I think the fast-track not applying to capital-raising activities has to do with the protection of consumers and the protection of the -- you know, the sort of single shareholder that one has in the back of his mind.  I think it's going to be a process:  Let's see how this first step works, what the outcome and the results are and then what additional changes we can bring about. 

In terms of further changes, I'm certainly considering with hope parliament amendments concerning the stop taxation -- the -- (inaudible) -- that applies to transactions.  We're not there yet, and if you can help me find 250 million euros to substitute, then you're one.  (Laughter.)  I'll get it changed.  That's one of the things that we're considering at the moment. 

But we're -- I'm very keen to continue working with John and Kathy (sp), and of course my friend Theodore (sp), to just make progress and make sure that NYSE Euronext is a European-American, American and European success, and clearly the French players are very keen to see that bear fruit.

KRAVIS:  Because the minister has another appointment immediately after this, she's going to go right out the side door. 

We thank you very much for coming and sharing your thoughts with us today.  Thank you.  (Applause.)

LAGARDE:  Thank you.

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      THIS IS A RUSH TRANSCRIPT.

HENRY KRAVIS:  This meeting is part of the C. Peter McColough Series on International Economics which is presented by the council's corporate program and the Maurice R. Greenberg Center for Geoeconomic Studies.  Our next McColough meeting is with first deputy managing director of the IMF, John Lipsky, on Monday the 29th of October.  As a reminder please turn your cell phones off and all wireless devices.  This meeting will be on the record as Madame Minister Lagarde has decided to -- they'll make this on the record.

As you know, Minister Lagarde is the minister of the economy, finance and employment in France.  There's a difference this time and she may talk about that. I don't believe the budget is under her purview.  She grew up in France, went to Sciences-Po and University of Paris in Nanterre where she studied law.  Interestingly, one thing I found out is that she also had worked in William Cohen's office when he was a congressman in Washington.  Then joined Baker McKenzie (sic), '81 -- had a very quick path through Baker McKenzie -- became a partner in '87. 

Four years later became managing partner of the Paris office, and then in 1999 she was elected chairwoman of Baker McKenzie, which I'm sure all of you know is one of the largest law firms in the world.  She's my kind of lawyer in that she focuses on clients first, and not all lawyers do that as we know, and she saw a 30-percent rise in the firm's profits during her tenure so she's quite focused.  Became minister of trade in 2005 after she left Baker McKenzie, stayed there until 2007 and for a very short period, about one month or so, was -- became minister of agriculture, and then with the new government of President Sarkozy he asked her to come over right away to the Ministry of Finance. 

She -- I met with her recently when I was in Paris last week actually and we had a good discussion about my industry -- private equity -- and I found her to be very perceptive and receptive and certainly to the point, and I found that quite refreshing.  She's genuinely interested in the industry of private equity, of innovation, and how all of this can be helpful to the French economy and to the Sarkozy government's plans to revitalize the workforce, work rules, and to promote growth and ownership.  Her role is going to be obviously to help President Sarkozy rejuvenate the economy of France that has been on a slower track -- is now starting to show some very good signs of growth and better employment. 

I think her background on trade and on antitrust particularly will hold her in good stead as various countries continue their way through a cry for perfectionism or nationalism, and I think her background will be particularly good.  We're very fortunate that she has just come from the G-7 meeting in Washington of the finance ministers and the European Central Bank heads, and I think she'll have some things to share with us on that.  So with that, Madame Minister, I'll turn it over to you.  (Applause.)

CHRISTINE LAGARDE:  Thank you very much, Henry.  Good morning to all of you.  Little did I know when I met with Henry last week that we would see each other again in New York.  I would have been even more charming actually had I known.  (Laughter.)  Now, from client first to France first -- that's really very much the journey that I've traveled in the last two-and-a-half years, and I must say that don't know what kind of train has left the station but certainly it's that of I hope growth and employment, and we're trying to put one wagon after the other while reforming the country as fast and as much as we can while not upsetting too hard and too much the sort of social balance that has been crippling France for quite a few years.

As Henry mentioned, the election of President Sarkozy has really opened the windows of France, and what I would like to do this morning for you is to explain the few steps that we have already taken or that we will be taking in the next few months to make sure that the economy has plenty of room to expand and make sure that the people that really want work can actually get a job in France. 

You may have read in the papers in the last few weeks, months, years that France growth rate was lagging a bit behind -- that French unemployment rate was over the top and that there was not much that was being done about it, and that you also have read and read regularly about the good food and the good wine and the good this and the good that, and we certainly don't want to upset that but we want to change the first part.  And what we started doing right after President Sarkozy was elected in May was to really develop and implement the program that he had advocated prior to his election.  Now, why do I say that?  Because it really sets the scene and explains why reforms this time might actually work.

What President Sarkozy did during his campaign was really explain in details what he was planning on doing for the country, and having done so and being elected with a 54 percent majority with 84 percent of the voters turning up to the polls, there is no question that everybody knows what is expected and everybody understands what picture he has painted for France going forward. 

What no one really appreciated, and no one appreciates that ever, is the process of change and the pain that it will take which is why we have seen last week and we will continue to see here and there now and again movements, strikes, protests because that's the way generally French opinions are expressed.  My hunch is that the negotiation process that will take place will shortcut that sort of spontaneous movement that is really not helping the economy.

Now, I'd like to go through the various steps that we are contemplating, and one has already taken place.  It's about work, and I'll come to that in a second.  The second one has to do with lifting the constraints and removing the obstacles to a good working of the economy and I'll come to my antitrust -- my antitrust background will be helpful in that regard, Henry.  You were right.  The next step that we are taking as well is to encourage as much as we can innovation and creativity because we believe that together with education and training those will be the two pillars on which the French economy and the country all together will really find its place and will manage to really develop on the basis of its real merits.

And finally -- and those of you in finance, private equity and otherwise, might be interested -- I would like to explain the various steps that we are taking to restore the solidity of Paris as a financial place, and there are a few steps that are underway that will be included in the budget that we're presenting at the moment.  But back to work -- some of you may have read about it but I'd just like to remove from your views the fact that French people are lazy.  They are actually extremely productive -- one of the most productive people in the world except that's calculated on an hourly basis and with 35 hours a week of course that was a bit of a problem. 

Now, clearly by giving a strong incentive to companies to actually get people to work overtime by adding 25 percent to the compensation, by removing any social security charges payable by the employees, and by making those hours completely tax free, what we're doing is encouraging people to actually look at work in a different way -- to understand that to work more, to work longer, actually pays more.  And that was the motto of the campaign by President Sarkozy -- (speaking in French) -- work longer, work harder, you'll get paid better.  So 25 percent plus, no social security contributions, and tax free -- that's for the employee. 

For the companies to actually give them an incentive as well to employ people a bit longer than 35 hours a week, we also discounted the social security contributions for the employer by a fixed trade which encourages them to get people to work longer.  That has been in effect since October the 1st.  It required a very laborious debate in the House during which I was called the -- (speaking in French) -- because I dared say that the French had thought long and hard enough about just every issue -- that it was time to stop procrastinating and roll up our sleeves and get back to work.  So I was vilified by people such as Bernard-Henri Levy to whom I pay due respect but frankly doesn't know much about the economy.  (Laughter.)

So that's in process.  It will be reflected in the pay slips of people at the end of October and it will continue thereon, and my hope is that it will actually work.  We are injecting because that's really what it is -- it's the French state investing in the work of people to not so much inject money in the economy and therefore sustaining growth by increasing the purchasing power of people but to try to change the psyche of people so that they appreciate that work is not just a burden but it also has value and that earning a living has to do with living and not just with suffering.  So we're injecting 5.5 billion Euros in the economy through the process of removing those social security contributions and providing this tax-free regime for the overtime that people work.

The second thing that we have embarked upon which is actually a real process that we went through is to try to remove the obstacle to growth, and to that end President Sarkozy has an interesting process.  What he does is he gives his ministers a big job to do so you're sort of overwhelmed by the job.  The first time ever that there was a Ministry of Economy, Finance and Employment -- that had never occurred before.  And then you appoint a commission with some very competent people with a very talented chairman to make additional proposals so that the poor minister who's overwhelmed with the work has actually somebody on his side to say, "Hey, you forgot something.  You should do this, you should do that, you should add to the list." 

And that's a great way to actually stimulate thinking, and I'll come to the innovation and creativity in a minute.  But that's almost putting corporate methods into public life and government action by having those consultants on the side to suggest what pretty much everybody knows except it needs to be a bit more refined.  But the mission letter is quite specific.  But by having those consultants on the side to make additional suggestions.

And in relation to the obstacles to growth and the constraints and the restrictions, clearly the Jacque Attali report which -- interim report that was published about two weeks ago includes a whole list of changes, particularly those relating to the retail and distribution systems that applies in France.  That's one example of the constraints that apply.  To open a supermarket of sizable dimension anybody would have to ask something like about eight different clearance and authorizations, one leading to the other and one likely to stop the process of the application. 

Now, that is -- the recommendation of the commission is clearly to remove as much of that as possible to make it one central point and to open up the possibility for retailers to operate because by putting in place those laws that a few lawyers in the room would remember such as -- (speaking in French) -- and -- (speaking in French) -- we've actually managed to try to protect the small retails in the centers of cities but we have limited to a few very large supermarket chains such as Carrefour, such as Leclerc, and a few others which are pretty well known outside France because they've expanded internationally. But we've almost restricted access to them because we've made it so difficult for others to access the market.  Walmart, for instance, has I think given up on entering France.  They had to withdraw from Germany also but -- and by that same process we've left a few loopholes which has allowed supermarkets such as Lidl, such as Ahold, which are very discounted channels to actually access the centers of cities.  So we got that wrong and the proposal which we are going to take up will be to really significantly change that --streamline the process, make it easier and less restrictive.

In the same fashion, we're also going to -- and that's another suggestion which we had certainly identified beforehand -- we're going to also change the rules applicable to the resale price which at the moment cannot be below -- well, it's  a fairly complicated processes and so complicated that both suppliers and purchasers have managed to actually organize the discount that they were negotiating way before the resale price so that those discounts could not be taken into account for the ultimate resale price.  We're going to clear that and we're going to accept legally that all discounts be actually at the far end -- at the negotiating point between the supplier and the purchaser -- and hopefully that will bring more competition and will help push prices down.

Another example of the suggestions made by the Attali commission, which has not yet been articulated but which no doubt, and on a day like today you will appreciate that very well will make noises in France and in Paris in particular, believe it or not today in Paris we don't have more taxis than in 1931.  Now, clearly the city has grown a bit since 1931, but the number of license plates has not varied.  That's one example of things that need to be addressed and will be addressed, again with a view to pushing competition, to increasing the number of players, to making access to work actually easier.  Two small examples, and there's a whole range of things that will come and it will take the form of a bill that we will propose to Parliament in the spring.

Third direction that we are embarking upon is creativity and innovation.  We looked at what was being done in other European countries and we decided to significantly boost the tax credit that is associated to research and development.  At the moment it's a fairly complicated system that is factored by not only the amount invested in research and development but also the increase from year end compared with year end minus one, minus two, minus three, and it's a complicated averaging factor that is determined.  We are removing all that and we're saying all expenses on research and development will give -- will allow the investor to a tax credit which will be equal to 30 percent of the first 100 million euros spent on research and development.  In excess of that first 100 million the tax credit will be 5 percent.  But can you imagine spending 100 million in research and development and getting a check back of 30 million dollars?  Sorry -- euros.  We're very open -- that's another debate. 

So that's the most advantages and most favorable tax regime that is applicable in Europe at the moment as far as tax credit on research and development is concerned.  We're doing a few other things to encourage innovation and creativity.  One example is that we finally ratified the London Protocol, which allows finding of patent in any language but does not require French translation.  That was very much requested by the small and medium sized enterprises, and it's a bit of dent in this holy grail of the use of French language.

Now, things have changed in France, by the way.  You'll be interested.  I was -- on Wednesday I was presenting the budget for the general discussion, and it's a fairly elaborated process through which you have to go and everybody speaks in their turn and each group in the Parliament addresses the minister in the -- in turn.  We still have a few communists in the House, and believe it or not the leader of communist group -- there are about five or six of them now -- addressed me in English.  (Laughter.)  Not sure what he meant to say -- (laughter) -- but his comments were not recorded.  (Laughter.)  There was a blunt refusal by the chairman pro tem to actually accept or record his comments.  So changes are underway -- no question.

Another thing to push innovation and creativity, which we are doing, is to align the taxation on the proceeds of the sale of patents to the royalties on patent; same fixed rate of 15 percent.  We're also lowering the tax rate applicable to the contribution of patents by an inventor to a company.  And we're also putting in place a special status for companies set up by university students and researchers who will benefit from tax and social charges exemptions, to encourage them to set up their business as they are finishing their research development.

What we also -- as I mentioned, we believe that, in addition to innovation and creativity, education and training are key.  In terms of education, we passed a law this summer on universities, which very much give them not the level of autonomy that exists in this country but which is moving them in that direction.

And for those of you who know French universities, it's a major gigantic step away from an extremely constricted, restricted way of operating the educational business.  In the same vein, the boards will be now restricted, as opposed to what they used to be, and frankly from being inefficient to hopefully being a bit more efficient.

Professional training is a huge big project that we are working on.  And my chief of staff is now telling me that I'm taking too much time and that I should move fast.  So I will move fast to something that maybe some of you are particularly interested in, and that has to do with the competivity and attractiveness of Paris as a financial center.

Thank you, Manuel.  That was helpful.

Now, clearly one of the disadvantages of France, for those that make a bit of money, was indeed the tax system.  I believe that by pushing the tax shields to 50 percent and by including in the basis on which taxation is calculated those two funny taxes, CSG and CRDS, which are quasi-tax but pretty much social security charges assessed on any revenue, by including those in the basis and by lowering the tax shield, we're really making it almost as -- we're making Paris almost as attractive as London, especially if Gordon Brown's proposed measures are voted this year.

Effectively what we are doing and saying is the French taxation system will not take away from you more than 40 percent.  It's 50 percent with the shield, but by enlarging the base, if you factor everything in, it's really pretty much down to 40 percent.

The French taxation system will not take more than 40 percent of your income in tax, all taxes included, all direct taxes included, not including sales tax, TDA.  But all taxes included, the French state will not take away more than 40 percent.  And when I say the French state, it's federal tax, state tax, any tax that you can think of.  The burden will not be in excess of 40 percent.  That's pretty competitive.

What do you think, Henry?  It's okay.  All right.  (Laughter.)

Now, just a couple more points.  We are -- I'm convinced personally that not all top financial minds have to take the Eurostar to go and work happily in London.  And I'm determined to bring some of them back, or at least to prevent some of those that are tempted to travel the channel to actually stay in Paris.  And we're proposing already a few measures to make Paris more attractive, one of which is clearly going to be an alignment of the taxation of dividends to the taxation of bonds, to just make it as much an incentive to invest in more risky products.

I've set up -- (inaudible) -- which includes 15 top-notch bankers and regulators and governors to actually make proposals to, again, remove the obstacles, eliminate the constraints and define the strategy for Paris as a financial center.  There are lots of measures underway, including the creation of a new compartment on the Euronext regulated market, designed exclusively for professional investors and applying disclosure requirements that are strictly aligned with European standards.  In other words, the specific standards required by French law will not apply.  It will only be the European standards, and no French translation will be required.

The other thing that has now been accepted by the equivalent of the SEC, the IMF, is that when a company is listed on NYSE and asked to be admitted for trading on Euronext Paris without making a public offering of securities in France, the documents filed with the SEC and the whole application will be sufficient and will now be recognized by our regulator.

I will stop here because I understand that we have a little conversation before questions.  I will, having told you so much about overtime, though, decline any payment myself and will regret to have to leave at 55, because I'm due to attend something else.  So overtime is not for me today, but overtime pay is not for you either.

Thank you.  (Applause.)

KRAVIS:  Well, clearly, Madame Minister, you're on the right track.  I don't know if I agree yet about those taxes, but it's a start there.

How -- you know, on paper it sounds great, and President Sarkozy is clearly saying the right things.  But how committed is the government?  And more importantly, how committed to change are the French people?  What will stop it?  Get into an economic slowdown; things get tougher for them.  It's easy to start backtracking.  What do you see happening here?

LAGARDE:  Well, it's clear that when you have a very solid and steady growth, it's easier to implement the reforms.  But we are determined to make the changes.  We are determined to follow the path of reforms without slowing down or without tampering.

Clearly some of the proposals that have been voted in the summer will generate additional growth.  And my expectation is that the slowdown that might result from the subprime's effect on the U.S. real economy, if there is such a thing, which clearly Hank Paulson is suggesting at the moment, that will be compensated by these overtime measures that are expected to generate, on an annual basis, roughly 0.3 percent additional growth rate.  So that should help.

And as far as the rest is concerned, as I said, the program was well-advocated.  The voting was strong.  The majority was large by any standards with comparable elections.  And people know that things have to change.  So it's going to be a question of keeping at it and rehashing it and saying all the right things.  And, you know, some people have said, "Well, it's all about lip service."  It's not.  The lip-service process is needed.

You need to tell the story.  You need to paint the picture and you need to describe what it's going to be like afterwards.  But we are going through the process as well.  And clearly what is happening at the moment, the special pension scheme reform, which has started last week, is going to be a good test of how resilient we are and what method we're going to apply.  But the determination is absolutely certain, and it's going to be a question of just negotiating day after day without giving up.

KRAVIS:  We sit on this side of the ocean and we hear from time to time the president talking about national champions in France.  Could you help us on what that really means?  On one hand, you and the president and others are encouraging foreign investment in the country.  And I, for one, have made quite a commitment to the country, and very happily have made it and want to do more.

But what does that really mean, national champion?  It's a foreign concept for us, really, here.

LAGARDE:  I think it pleases the mind.  (Laughter.)  But if you look at facts, Wallace Becker (sp), when he hired me as a lawyer, he said, "Forget about everything.  Just get down to the facts.  The facts matter."  And when you look at all the French largest companies, publicly quoted, top 40, 43 percent of them are held by foreign direct investors.  One out of seven employees in France works for a foreign employer.  And the volume of trade between France and the United States, for instance, is enormous.

The United States is the first foreign direct investor in our country.  And apart from anecdotal -- and that's how I would characterize the discussions at the time when there were rumors that Pepsi was going to invest in Danone -- apart from those anecdotal concerns, frankly, France is open for business.  You know, thank you for your business, by the way.  I'm delighted that you are with us and that you're planning on investing more.

But clearly the country is open.  The economy is open.  And I don't think that -- if you look at the openness -- you know, I hate to criticize others, but of all European countries, I think, apart from the UK, which might be on a par with France, no other European country is as open as France is.

KRAVIS:  I think that's a fair comment.

You've just come from the G-7 finance ministers' meeting in Washington.  Maybe give us your views of how you saw it and how some of the discussion will affect France in particular.  Or do you have different views from where Secretary Paulson is, for example?

LAGARDE:  Well, as a preliminary comment, it felt quite funny, because I'm used to operating in male-dominated environment.  But, boy, that was extremely male-dominated.  (Laughter.)

What shall I say?  We had very, very good and, I think, frank exchanges of view about our respective economies, about the way the world economy is going.  There was clearly a level of uncertainty, particularly from Hank, relating to the consequences of the depression on the housing business and the actual sort of subsequent consequences of the digestion of the subprime crisis.  And there, there was a level of uncertainty in terms of measurements on the real economy.  And as a result for us, all European economies, what would be the ultimate outcome or secondary effects, if you will?

I think the same concern was expressed by some of the leaders of the emerging economies, or large emerging economies at the IMF meeting, which have not been affected at all for the moment.  But in the main, there was recognition that overall growth would be in the range of, you know, 4.5 to 5 percent, which is good; that the emerging countries would take the lead in not driving the bus but certainly pulling the world economic growth, and that it would take a bit more time to continue and finish digestion of the subprime crisis and subsequent lack of confidence caused by the liquidity crisis.

Now, clearly we all need to remain extremely vigilant and observe the market and see where things are going.  But it was a good and frank exchange of views.  The very interesting part of that meeting was all the time that we devoted to what do we need to do, what additional guidelines and codes of conduct need to be thought through -- and not only thought through, because there were recollections of the Asian crisis and the same sort of momentum, (post-Asian ?) crisis, with everybody saying, "Oh, we need to change that.  We need to fix that.  We need to improve the liquidity ratios.  We need to have alert points."

And because the crisis went away, everybody forget about, you know, those recommendations and guidelines and what have you.  So there was clearly a collective urge to, number one, stay connected rather than disconnected; continued consultation rather than being disconcerted; and trying to converge.

I think that the word convergence is going to really mean a lot -- convergence in terms of regulations, convergence in terms of objectives.  And clearly the other key word that I was particularly pleased to manage to reinsert in the communique where it had disappeared is the word transparency, because clearly to finish that G-7 meeting with the communique, that did not include transparency, to me was just not acceptable.  So I did insist that transparency be back into our communique.  I think we need a lot more of that.

KRAVIS:  Great.

Why don't we turn it over to our guests.  Now, wait, please, for a microphone to be given to you and then state your name and your affiliation.  And again, just as a reminder, we have to end the session promptly at five minutes of 9:00.

Yes, in the front.

QUESTIONER:  Thank you.  I'm Lucy Komisar.  I'm a journalist.

Over a decade ago, beginning with one of your predecessors, Dominique Strauss-Kahn, the finance ministers of both parties have refused to release customs documents requested by Judge Van Rumbech (sp) that might show that the money trail, about $1 billion in bribes and kickbacks in the Frigates of Taiwan case, that some of it may have gone to top French officials.  It was a $2.8 billion contract.

In the interest of transparency that you've just talked about, are you going to end this bipartisan cover-up by releasing the documents?

LAGARDE:  Well, I've been in the job for four months and I'm already known to have let Tracfin do its work in relation to the UIMM.  I think we've got our share of review and investigations concerning a couple of other cases and I'm sure I'll look at that one with interest.  I'm not familiar and sufficiently aware of this matter to give you a practical yes-or-no commitment.

KRAVIS:  Yes, please, in the back.  Yes, right in the middle there.

LAGARDE:  But thank you for the question.

QUESTIONER:  David Braunschvig, Bear Stearns and Council on Foreign Relations.

Madame Minister, you mentioned the importance of the commissions that help you expand your oversight.  There is a concern on this side of the ocean that the intentions of the government might be crisper than its current actions.  And I'd like you to comment on the Attali commission's recommendation that the cautionary principle, which creates tensions with EU law, and indeed puts constraints on competitiveness of U.S. companies in France, in genetically modified organisms in particular, and the fact that this recommendation is apparently not going to be accepted by the government, is something that creates concern on this side of the ocean that there might be a discrepancy between words and actions.

Thank you.

LAGARDE:  Well, it's not because the commission proposes something that it means necessarily that it was in the program of President Sarkozy or that we're going to do it.  You know, as I said, the work of the commission is to stimulate, to create additional tensions, to make more suggestions than actually a government can swallow.

Back to your point about the precautionary principle that Jacques Attali suggested was removed from the French constitution where it was put about a year ago, I think it's going to lead to quite a lot of debates as to its efficiency, necessity, contributions to progress, contributions to security of the people.

At the moment it is clearly seen as extremely helpful for the security of people, and it has not stopped a lot of pharmaceutical companies from inventing lots of drugs and vaccines and what have you.  So we'll debate it indeed.  And the fact that he's proposing it is, number one, interesting; number two, will lead to debate; number three, it does not commit the government.  It's not because it comes from a very wise commission that it's necessarily part of what we want to do.

Fourth point -- you mentioned the genetically modified -- what did you call it? -- organisms, crops -- this week, on Thursday, what has been going on for the last four months now, which is a complete overall review of anything having to do with the environment, with climate change, with the emission of CO2, will be disclosed to the public with a list of proposals.

On genetically modified organisms, there will be proposals that have, you know, led to quite a lot of negotiations and discussions, particularly with the farming sector, which is particularly concerned about it.  But you'll be surprised.

KRAVIS:  Yes, Karen, in the front.

QUESTIONER:  Karen House, retired from The Wall Street Journal.

Christine, are there other steps -- economic, financial -- that France and Europe could take in cooperation with the U.S. to put further pressure on Iran to end its nuclear program?  And was any of that discussed at the G-7?

LAGARDE:  Well, it was not only discussed, but the communique actually includes a special reference to Iran and to the pressure that, from an economic point of view, needs to be imposed, and all of that clearly in conjunction with the U.N. and the U.N. resolutions.

You're too familiar with that part of the world not to have noticed that the French policy in that regard has clearly strengthened.  And we have given notice to all French companies to not continue further investment, and we've taken steps, as far as the financial sector is concerned, to continue to put pressure and severe economic pressure on that country.  There is a very strong meeting of the minds between the United States and France in that respect.

KRAVIS:  Yes, in the middle.  Yes.

QUESTIONER:  John Beatty (sp) from UBS.  You talked extensively about reform of the French economy.  One area you didn't talk about, though, was the reform of the agriculture, and in particular the common agricultural policy.  France has consistently been one of the biggest opponents of any reform of the common agricultural policy.  Unfortunately, in the current environment, this has meant that there's -- it's essentially a logjam in completing a Doha development trade round.  Going forward, do you think that France is likely to be committed to reform and in fact abolition of the common agricultural policy?

LAGARDE:  I was only minister of Agriculture for 32 days -- (laughter) -- but, boy, did I learn in those 32 days.  (Laughter.)

The common agricultural policy is in effect until 2012.  That was the deal that was agreed amongst Europeans.  So while we are thinking about the reform, we are preparing and laying the grounds for that, it's a program that is in place until 2012.  There is a review of the financials that will take place in 2010, but the overall common agricultural policy is in place.

France happens to be the president of Europe.  We have this rotating presidency, and France will be in the position to preside as of July 1st, 2001.  And President Sarkozy is very keen that we make actual proposals for the review of the common agricultural policy post-2012 -- so with effect on -- you know, from 2013 onwards.  And clearly in his way of thinking, he would very much like the common agricultural policy to move from a program under which farmers receive grants in lieu of farming to a process and a program under which they get a good price for quality products that they grow on the land.  Now, that might not be possible for all crops for all areas of France -- and there are functions that are fulfilled by farmers that are additional to simply producing food -- but the food production aspect of their job needs, in the view of the president, to be enhanced and to be compensated by actual remuneration.

So I think you should change your mind about France being this constant obstacle to a Doha round.  I'm not sure that that is actually the case anyway.  I think that we've had specific positions concerning barriers to the agricultural products coming from, say, Brazil, Australia, New Zealand or Canada simply because we are keen to continue to have farmers and to continue to have a land that is worked by farmers.  But we've also made massive concessions.  And we've actually changed the common agricultural policy time over and over to adapt to the requests and expectations of particularly the emerging markets.

KRAVIS:  Yes, in the front?

QUESTIONER:  Bob Wilmers, M&T Bank.  I was wondering whether you could comment, please, on your dialogue with Mr. Triche, number one; and number two, how the level of the budget -- your budget deficit will fit in with the constraints of the European Union. 

LAGARDE:  I think Mr. Triche would prefer to have a dialogue with me and only me.  (Laughter.)  That's my way to address your first point.  (Laughter.)

The size of the deficit for 2008 -- the budget -- is, if my recollection is collect, 42 billion euros.  And altogether -- because to appreciate whether we fall within the restriction of the Maastricht commitments, you have to take into account the budget deficit but also the deficit of the Social Security regimes -- pensions -- and illness regimes, and also the local authorities' budgets.  So it's the aggregate of those three that are accounted to measure whether or not we fall below the 3 percent and whether we reduce our structural deficit by 0.5 percent year after year. 

We will be at 2.3 percent in 2008, which does not satisfy the requirement that we reduce the structural deficit by 0.5, given that this year we should be at 2.4 percent of GDP.  But at least the trend is in the right direction, and we felt that it was necessary to take a few measures -- including the overtime measures that I've described, including the special tax credit for interest on loans taken for residential premises -- to number one, deliver to the French population that promises made by French politicians can actually turn to be true; number two, to boost the economy a little bit; and number three, again, to put the work value and the worth ethics right at the center of the economy.

KRAVIS:  You talked earlier about the fact that you want to reduce regulation in the country, and that's terrific, but at the same time, at the G7 and before that, there's a lot of conversation about, "Well, we need to think about regulating the special investment vehicles that are out there, special financial products that are there.  we have to push the rating agencies to do a better job."  Can you comment on that, from your perspective, as you see it in France?

LAGARDE:  As I see it in France -- but I think it goes beyond that because it's also the way we all collectively see it.  One of the learnings of the crisis is clearly that the spreading was almost in a nanosecond.  I mean, August the 9th was an -- just around-the-globe contamination -- maybe that's not the right word.  "Contamination" sounds a bit ill.

KRAVIS:  It was ill.  (Laughter.)  Those of us that were in it, it was ill, believe me.  (Laughter.)

LAGARDE:  It was a bad day, right.  (Laughs.)

KRAVIS:  Yes.

LAGARDE:  Yeah, it was. 

So it's not so much the way I see it from my own perspective, but the way we collectively see it and how we should go about it.  Think in terms of process:  We all agreed -- and we talked about it at the G-7 meeting -- we all agreed that there should be massive involvement from the market players, from the professionals, and they should be the one to actually originate -- not just credit -- but originate and suggest what better principles, what better rules, what better policies should be in place of their own accord and not necessarily requiring or involving regulations. 

If what is proposed by the professionals, but the market players -- if that is not sufficient by the standards that we have to apply as government because we are accountable to citizens and we are accountable for them to have trust in the system -- then it will be time to regulate, then it will be time to, you know, modify Basel II to include the liquidity criteria in a better shape than it is at the moment. 

But I think the process should be, make -- let's make sure that the players appreciate, make recommendations.  It's in their vested interest.  And then it's for us government to determine, based on their proposals, whether it actually fits the bill and will be sufficient to restore the level of confidence that is needed for you and for which we are accountable as politicians. 

KRAVIS:  Good. 

Yes?

QUESTIONER:  Hi.  I'm Lesley Stahl with CBS News.  I want to ask you about the strike.  Strikes in the past have stymied reform movements.  Could you brief us on the strike on Thursday -- how paralyzing was it? -- why you're so confident that this time you can overcome this kind of situation where strikes might continue.  And you kept using the word "negotiation."  Does that mean you're open for compromise?

LAGARDE:  I can tell you very clearly about the strike on Thursday because I left on Thursday and I think I left at half past one.  As we expected, trains did not work, metros did not work, and buses didn't -- right.  But that was totally expected.  What was critical was whether it would last, for how long, and how strongly?  And you know, I don't have the outcome -- I don't have the count of today's train and metro and buses.  I think that it's smooth and peaceful and people can actually go to work, come back to work, and that was a critical test.

Thursday was wonderful.  Thursday it took me 20 minutes to go from (Berce ?) to Charles de Gaulle -- record time.  (Laughter.)  But that's because a lot of people had taken advantage of the RTT, which is this time off reserve that they build over time to have a day off.  So -- you wanted a practical report on what it was like, but -- that's what it was. 

But the real key test was how strong was it on Friday? -- weakening.  How strong was it on Saturday? -- weakening even more.  The fact that the -- there was the rugby final cup -- world cup on Saturday night probably helped a little bit, although it was England versus South Africa, unfortunately.  But fortunately, South Africa won.  (Laughter.)  The Brits eliminated France in the quarterfinal -- in the semifinal.

KRAVIS:  Semifinals.  That's right.

LAGARDE:  Now, you asked me about the word "negotiations."  There is a law of January 31st, 2007, that requires that any change in the labor code -- and I was quoted to have said that it was "cumbersome, too heavy, and overly protective" -- that's -- that was two years ago.  That law requires that any change of the labor code be subject to negotiations, so we have to go through the process.  Whenever we want to change provisions of the French labor code, we have to negotiate. 

And I'm pleased to say that there has been negotiations in process since the beginning of September between the manufacturer's association leaders -- Laurents Perizou (sp) and her team -- and the union leaders, and they're reviewing just about everything from the employment contract to the collective status to the termination situation to the post-termination obligations, to make it smoother, easier, more flexible for companies and more secure for employees. 

So I'm very keen to see that process through, and I hope by the end of December, which is the time that was given to them to come with proposals, they will have significant proposals.  If they don't, then we'll have to go back to the bill process and propose changes in parliament.

KRAVIS:  I think we'll do one last question. 

Yes?

QUESTIONER:  Rachel Robbins, NYSE Euronext.  Madame Minister, thank you very much for the efforts that you've been making to make France a financial center.  And you referred to the fast-path registration process.  That does not apply to the capital-raising process at the moment.  Do you see any reason why it shouldn't be extended?  And can you talk about any other longer-range initiatives that you may have to bring France more competitively into the financial landscape?

LAGARDE:  Well, I think the fast-track not applying to capital-raising activities has to do with the protection of consumers and the protection of the -- you know, the sort of single shareholder that one has in the back of his mind.  I think it's going to be a process:  Let's see how this first step works, what the outcome and the results are and then what additional changes we can bring about. 

In terms of further changes, I'm certainly considering with hope parliament amendments concerning the stop taxation -- the -- (inaudible) -- that applies to transactions.  We're not there yet, and if you can help me find 250 million euros to substitute, then you're one.  (Laughter.)  I'll get it changed.  That's one of the things that we're considering at the moment. 

But we're -- I'm very keen to continue working with John and Kathy (sp), and of course my friend Theodore (sp), to just make progress and make sure that NYSE Euronext is a European-American, American and European success, and clearly the French players are very keen to see that bear fruit.

KRAVIS:  Because the minister has another appointment immediately after this, she's going to go right out the side door. 

We thank you very much for coming and sharing your thoughts with us today.  Thank you.  (Applause.)

LAGARDE:  Thank you.

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