C. Peter McColough Roundtable Series on International Economics: A Conversation with Tommaso Padoa-Schioppa

JACOB A. FRENKEL: Ladies and gentlemen, good morning.

I am Jacob Frenkel, vice chairman of AIG and chairman of the Group of Thirty. And we have the great privilege of having with us Minister Tommaso Padoa-Schioppa. This meeting is part of the Peter McColough Series on International Economics, which is sponsored by the council’s corporate program in the Maurice R. Greenberg Center for Geopolitical Studies.

My notes say that this is the stage where I ask you to please turn off your cell phones, your BlackBerrys. This meeting is on the record. And as always, we will divide it into two parts. The first is a warming-up exercise where I have a brief conversation with the minister setting the stage for the real stuff, your questions and answers.

The handout that was circulated contains the bio of our distinguished guest, so there is no need to repeat it, except to note that in the international financial arena, he is viewed as “Mr. Euro,” “Mr. Europe,” “Mr. Brussels,” “Mr. Governor,” “Mr. Banca d’Italia.” There are so many “misters” there that you end up with a question of, “What not?” So I would ask you at the end about what not.

Our guest spent a significant part of his career at the Banca d’Italia, arriving to the top now after several tours of duties with the European Central Bank, with the commission, after being with the securities system. There was a short period between his so-called retirement, which puts a question mark what retirement means, between his retirement from the ECB and his joining the Banca d’Italia, where he could test how desirable he is by the market. He realized there are too many jobs that he was asked to do, at which point he said, “I might as well go back to public service.” So he’s now our guest.

And let me divide my leading questions into two parts—three parts: one, Europe; second, the world; third, Italy. Of course, it’s a long story. I have my watch on, and let me start with Europe.

You have been at the cradle of the European Central Bank. You have been at the cradle of the euro. You have been at the cradle of the euro system. In the book that came out shortly after your retirement—the title is, “The Euro System, the Euro and Beyond”—many people did not know what “beyond” means, what further ambitions does the euro have. Can you tell us a little bit about what is the “beyond”?

MINISTER TOMMASO PADOA-SCHIOPPA: Well, I think that the construction of an economic and monetary union was virtually completed with the Maastricht Treaty that set the single currency. From a constitutional point of view, I don’t think there is any need for major changes in the economic part of the European constitution, if we want to call constitution, the treaty. And an indirect demonstration of that is that the constitution, that was discussed and drafted a couple of years ago, basically didn’t change any of the fundamental economic provisions.

In this respect, the “beyond” is implementing this constitution in full for the economic part, which is still to be done. Many of the fields where a single market should be built are still protected, for example. Many of the fields for which a common policy decided in Brussels is provided for by the treaty do not have a common policy—energy, for instance. But the rest is—beyond economics, is political, you know, broadly speaking, which, of course, if implemented in the fields of foreign policy, of security policy, would have enormous implications for the economy, but it’s not economic primarily.

FRENKEL: Thank you.

For American audience, for many American audience—not necessarily this one—the names Maastricht, Brussels, Lisbon are just three cities in—they recognize that they are cities. For a more informed audience on this side of the Atlantic, very frequently they recognize that those cities mean some agreements and treaties, but they are very cynical about what does it mean, really. Lisbon, the agenda for structural reform seem to be lagging behind. Maastricht, the criteria for the stability pact, the growth and stability pact, seems to be put aside. And Brussels, for the uninitiated, looks like a group of bureaucrats who tell nation-states what to do.

Can you give us a little bit—but given the time constraint, leave the passion aside now and make it relatively—

PADOA-SCHIOPPA: There are less bureaucrats for Europe in Brussels than in Milan or for Lombardy, which is the reason—(laughter)—so it’s not—that’s the Lisbon issue. It’s not as huge as people make it.

Well, for each of these locations, one could say something. Let me say something about Brussels, because Brussels is the location of two very different types of meetings and policies. It is the place where competition should be open, and it is the place where the cartel to impede competition meets. And one is the commission; the other is the council, if you want to put it in very simple terms. The council, for those of you who are not familiar, is the Council of Ministers or of national officials—meeting in Brussels.

So Brussels lives in this permanent tension between—and ambivalence—between wanting and not wanting to do what is its own agenda. And very often one Brussels is blamed when the responsibility lies with the other.

FRENKEL: Thank you. Let me turn a little bit—still within Europe—and the last question on Europe has to do with the European Central Bank. The success of the European Central Bank in taming inflation is undisputed. In fact, the numbers that just came out show that year over year, inflation in the euro zone is the lowest that it has been this century or this millennium, whatever way you want to look at it.

And yet there is a lot of hawkish talk coming from or interpreted here about—coming from the ECB about a further rate hike.

I know that as governor you are not going to speak about monetary policy, what will it be. It’s obvious. But help us to think about it. How come there is such a success on the disinflation process and yet one even thinks about raising interest rates?

PADOA-SCHIOPPA: Well, maybe this constant reminding of the risk of inflation is one of the reasons of the success of the policy of the ECB. So in many respects, you have to keep people aware of the danger.

The—when inflation is high, people realize how bad it is, become favorable to an independent and strong central bank, because they see the disease running. When you have a long period without inflation, there is a risk of people forgetting about the risk, and there is a need for an additional pedagogy on the risk of inflation. This, I think, is part of the communication of the ECB. Certainly, the ECB has inherited this kind of mode of communication from the Bundesbank. But I think it’s effective. It helps.

FRENKEL: Yes. Let me take you to the world. Last month—or a bit more—there was the IMF-World Bank meeting in Singapore, and you were one of the G-7 ministers that came out with a relatively positive view about the world economy, pointing out about the dangers of protectionism, pointing out about global imbalances, but by and large, a positive view.

I want to focus for a minute about global imbalances. We have been told, time and again, also in this room, that those global imbalances are not sustainable, and this was three years ago, two years ago, one year ago. Now, do we cry “wolf”?

Let me elaborate a little bit more. We were talking about large current accounts that should bring to a weakening of the currency, and it has not; large budget deficits that should bring about higher interest rates, and it has not; large—a higher price of oil, which should bring about inflation or a recession, which it has not. Which (bank ?) paradigm are we? What do you think about these global imbalances?

PADOA-SCHIOPPA: Well, I have been convinced for some years—at least two or three—that not only the global imbalances were not sustainable, but that the moment in which an adjustment process would start was relatively near.

The nature of these imbalances is rather different, and in some respects, I’ll defer to the U.S. sector on that imbalance in particular, which is, in my view, in some respects more puzzling than the external surplus of the Asian economies, which is, in a way, a natural by-product of the historical process which is under way in East Asia.

But it’s true that the external imbalance of the United States has a size and a duration which has very few comparisons in the past. In this sense, everyone thinks it is unsustainable.

Probably we agree that today that new elements in the economy, in the markets that may make it sustainable for longer than in past circumstances—for longer, but not forever.

But I admit that my expectation that the process of adjustment would start was not confirmed by the facts. Now, should we think that since it didn’t happen, it will not happen? This is not my view. I think the adjustment is needed. It will come. It’s hard to imagine that it is not including a slowdown in the growth rates of the U.S. economy. The question whether the process can be entirely market-driven or to what extent it needs policies is open. I tend to think that it needs policies.

For instance, the system failed to increase the savings by public budgets. But all that can happen in an orderly way, and the big question is not whether it will happen or not, but how orderly the process will be.

FRENKEL: Let me take you to the mechanisms. In 1995, when the dollar was viewed as being very high, a few ministers got together in Plaza and the system was taken care of. Less than two years thereafter, the G-7 met in ( Louisville ?)—or G-6—and issues were taken care of.

Why can’t they do it now? Or let me help you a little bit—let me ask you a little bit further looking into the future. You mentioned China and Asia. If you had to look 20 years down the road, who would sit around this G-7 table?

PADOA-SCHIOPPA: Europe with a single voice or representative, the United States, certainly China, Japan—maybe we have part of these 20 years to see who else—India, hopefully a Latin American country, hopefully an African country.

FRENKEL: Well, it’s a very different world indeed.

And let me just conclude this part on the world by saying, a lot of it depends on the world remaining open, and everyone speaks about the relative—let’s call it failure of the Doha Round. Do you think we can save the trading system from the Doha Round?

PADOA-SCHIOPPA: Well, the Doha Round has not failed yet. I had a long conversation with Pascal Lamy about a week ago. I think there are still very good possibilities that wisdom will prevail. But clearly one of the risks associated with (disorderly/orderly ?) correction of imbalances is protectionism. And it’s clear that the effect of the emergence of China and India is so immense that the big question is really whether this emergence, which is an extremely positive phenomenon for the world economy, will happen in a way that does not disrupt but reinforces the system of multilateral cooperation. It should, but it’s not easy to accommodate a new giant or two new giants into system. When the United States emerged in the same way a hundred years ago, it was a similar process and not an easy one.

FRENKEL: Well, the role of financial markets are, of course, critical. In the book which you published very recently regulating finance, balancing freedom and risk, you analyze in great detail the notion of how should we regulate financial markets in the growing globalization—large banks, small banks and the like. Can you say something about it?

PADOA-SCHIOPPA: Well, in general, the problem of globalization is, I think, the problem of electing the policy or, globally speaking, public interest dimension of economic life proceed not too slowly with respect to the advancing of integration for markets. Market system functions if it operates under a rule of law, and if the market is global, some global rule of law is indispensable, otherwise it’s anarchy.

There are important progresses. In the field of finance, there has been important progresses. Financial Stability Forum is an example of increased cooperation that was created less than 10 years ago. It’s hard to say whether we have enough cooperation or not. Fortunately, we have had no big tensions in the last—since ‘98-2000.

Is the system robust enough to withstand a new wave of financial tensions or not? I don’t know. Certainly, the policy side of the system is relatively weak compared to the market side. So we have to be aware that there may be an inconsistency that could be—could need a correction very quickly in case of a tension.

FRENKEL: Let’s look closer to your home, Italy. I just want to remind everyone that you have been on the job just a few months, and yet the question is: Do markets understand you? Standard & Poor’s and Fitch have just downgraded you. The smile on the minister’s face is because he saw Mr. Standard & Poor’s here, it’s not that he’s happy about that outcome. (Laughter.) You understand that Standard is the first name and Poor is the last name. (Laughter.)

In some of the issues that came up and also in several articles and analyses in the Financial Times yesterday and the last week, really raise significant questions about the Italian budget, about how does one deal with a budget deficit. Isn’t there too much reliance on tax revenue rather than spending, how is the reform progress working out, or the accounting practices—a lot of things that people, when they read just the headlines get an impression. And they will be very appreciative if you could shed some more light on what keeps you up at night.

PADOA-SCHIOPPA: Yeah, well, I’ll give you my view, of course, which may not be exactly the same as the one of the Financial Times, but it’s what I can do.

There is now before the Italian Parliament a budget which completes a correction which started with a mini budget in July, and this correction will bring the Italian deficit-to-GDP ratio back to where the European rules require it to be, it will put the debt-to-GDP ratio back on a downward slope, and it raises in total resources for about 3 percentage points of GDP, which make it the largest adjustment package of the last 25 years, except for one which was done in 1992.

This huge adjustment occurs—does not occur in a crisis situation, not under a currency crisis, as in ‘92; not under the threat of being excluded from the euro, when Italy made another big adjustment in the mid-‘90s. My expectation is that this budget will be adopted by Parliament as it is, with some changes in composition, but not in the (ballot ?). If this happens, it will contradict all the predictions of the last month that expected a composite coalition, such as the one which is in government now, to be completely incapable to agree on such an adjustment. In fact, initially there were requests that Italy should, as Germany did after the new government was put in office, to offer a postponement in the date of the adjustment, which we didn’t.

I think it may take time for all that to be recognized as the essential aspect of what we are doing. But since human nature is fragile, criticisms by the press, by Standard & Poor’s, et cetera, are a very positive incentive, and I think we still need incentives of this kind. So I’m not particularly unhappy about this; it’s much better these kinds of incentives than a crisis on the market.

FRENKEL: Well, it’s nice to have a minister that takes comments and criticisms in such a way.

Speaking of incentives, as I open the floor, I’m going to give you the opportunity to ask questions. Let me must remind you of a story about incentives. There was this guy who was condemned to die in the electric chair. So as they brought him there, they realized he was so heavy he did not fit in the chair. And the executor told him, “Go home. Go on a diet and come back in a month.” He came back after a month and he was much, much bigger. And he said, “Didn’t I tell you to lose some weight?” He said, “Yes, but I did not have the incentive.” (Laughter.)

Well, Italy is not on the electric chair, it has the incentive.

Let me open now the floor for questions. Please raise your hand, wait for the microphone, identify your name—I’m smiling because these are the instructions I have received.

Ambassador Richard Gardner. Microphone, please.

QUESTIONER: Silvio Berlusconi had an unprecedentedly favorable political situation. He had five years with a very substantial parliamentary majority. Yet, in his five years, if my figures are correct, Italy’s primary budget surplus, before interest expenses, deteriorated from 3.3 percent to 0.4 percent, and the overall fiscal deficit dropped from minus-2.6 to minus-3.7—or grew from minus-2.6 to minus-3.7.

You have only a one or two vote margin in the Senate, so you’re dealing with a very substantial heritage from those five years. You must have asked yourself what happened in those five years to leave you in such a difficult situation. Where did he go wrong?

PADOA-SCHIOPPA: Well, you raise two issues. One is the slim majority and the other is the previous five years’ legislature.

In the mid-90s, there were two countries which were—which had a huge debt in Europe and which were at the risk of being excluded from the single currency, Belgium and Italy. Belgium was in an even worse situation than Italy, had a higher debt relative to GDP. Both reached a primary surplus of 5, 6 percentage points at the eve or in the moment the euro started.

Belgium is still there, and their debt-to-GDP ratio is now to 90 percent—down, because it was 150 percent also.

Italy has lost the opportunity and has practically brought back to zero the surplus. And so our debt-to-GDP ratio is still above hundred percent.

It’s true it was a lost opportunity. And in fact the Belgian economy is growing fast, possibly because there is more room for private economy growing than there is in Italy today.

I then—I have no explanation of why such a surplus was wasted in a period of few years. But I don’t think that a slim majority is an impediment for restoring it.

The first six months, five months of this government have passed a number of important legislation through the Senate, in spite of this slim majority. And I think this can continue.

The largest—you know that very well the largest adjustment in the Italian economy after World War II, in 1947—you remember Rinaldi and de Gasperi—was done by a government which had no majority. People don’t remember.

I think good policies carry support, and big support without good policies fades away.

FRENKEL: Thank you.

Please.

QUESTIONER: John Mbiti from UBS. Many European countries, including Italy, have been experiencing declining birth rates and at the same time have—the percentage of the working population that’s retiring or has retired has been increasing. This means obviously that pension claims on the national government is going to continue to increase over the foreseeable future. Since this problem has arisen because of the composition of the national population, is it time to adopt a more flexible approach to immigration?

PADOA-SCHIOPPA: The situation you describe is particularly true for Italy, which has the lowest birthrate in the world, I think, now. And you are right that this affects the pension system, in spite of the fact that the pension deficit in Italy is in a better shape than in most European countries. Italy has already reformed its pension system to the point of having a more balanced system than, say, Germany or France. As you know, the pension debt is not recorded as such, is not part of the public debt, but in economic terms, it’s there. Yet, Italy still needs some adjustment in the pension system, because the transition to equilibrium is very long, and there is a period in which a small number of young persons supporting a large number of retired people would create problems.

Immigration can help. It does help already. Italy has less of it than most other European countries, but—and for Italy, it’s an entirely new phenomenon to be a country of immigrants. It didn’t happen for the last thousand years. Italy has been an emigration country, as you know very well, for at least a century.

But another element for solving the problem is to accept the fact that working life can be longer than the present pension system foresees. In fact, we—I think we will adopt, in early 2007, some measures to be negotiated with the unions to rebalance the pension system in favor of the youngest generation by making the economy benefit from longer working life.

FRENKEL: Yes, please.

QUESTIONER: Hi. I’m—

FRENKEL: Microphone, please.

QUESTIONER:—Gertrude Chavez from Reuters. I was wondering if the rate hikes in the Eurozone could put a break on growth in Europe.

PADOA-SCHIOPPA: I don’t think so. I don’t think that the rate hike will be an impediment. I don’t know what the movements in rates the ECB will decide in the coming months.

But I must confess that since I’ve been minister—in spite of being the economic and financial minister of the country which has the largest public debt in Europe, I don’t perceive the decisions of the ECB on the rates as one of the major factors that can create a problem to me. There are many other sources of imbalance which come first. So I think the ECB can do its job, and I try to do mine.

FRENKEL: Thank you.

Yes, please.

QUESTIONER: Yeah, David Braunschvig, Council on Foreign Relations and Bear Stearns. Mr. Minister, you—in your plan, you identify tax evasion, fighting against tax evasion as an important objective. At the same time, you are raising taxes for the upper brackets. Is there a tension between those two objectives, given the fact that one can be an incentive for the other? And how does raising taxes for certain categories contribute to the competitive advantage of Italy and job creation? Or is it sort of a concession in advance to your negotiations with the unions for concessions from them later in 2007?

PADOA-SCHIOPPA: Well, you combine different aspects. For those who are not fully informed, one of the measures in the budget is to redesign the profile of rates—tax rates in personal income tax rates and to raise slightly the marginal rate the highest—for the highest incomes and to lower the rates for the lower part of the income. In total, about 90 percent of the taxpayers will have a small reduction or not so small reduction, and the other part will have a slight increase in their taxes. But it will not go back to where it was three or four years ago. So it’s a very small correction.

The point is that tax evasion is not so much in the personal income tax or not exclusively in the personal income tax, it’s probably even more in the value-added tax. And most of the measures that are taken in the budget to reduce tax evasion to decent proportions, which is not what we have now, affect the VAT, not the personal income tax. So I don’t think the two things are incompatible.

You referred to negotiations. Certainly, one big difference I am experiencing in my job today compared to the previous one is that fiscal policy needs a degree of negotiation. It’s just not conceivable not to have it. Negotiation includes support by the Cabinet, going through parliamentary approval, negotiating with local governments, for instance, in the health care system, which in Italy is a combination of central and regional government.

I understand that in abstract terms, for an economist to have to negotiate something that hopefully should be designed in rational terms and just decided, may be a complication in the reasoning. And it’s true that monetary policy doesn’t have to negotiate its decisions. So this is a big difference. But I don’t think one should consider seeking support as an unwelcome complication. It’s the essence of a good policy. The problem is not whether it was negotiated or not, but whether the substance is good or not.

FRENKEL: It’s tough to—(inaudible)—democracy.

Please.

QUESTIONER: Robert Hecht from the International AIDS Vaccine Initiative. I wanted to ask you a question on a very different subject, which is international development finance. Italy has been a tremendous champion for reforms in international development assistance, first supporting the International Finance Facility for Immunisation and now the advanced market commitment concept or pilot.

I wanted to ask you two things. One, what is your vision or your view on the future of reforms in international development finance, international development assistance? And secondly, what does Italy hope to do—I know along that you have friends in London and in Ottawa supporting this advanced market commitment pilot idea, but thoughts on what can be done to persuade the Bush administration to support this initiative, since they’ve been sitting on the fence concerning this important proposal from you.

Thank you.

PADOA-SCHIOPPA: Well, I take your second question; I don’t have perhaps a complete vision to suggest for your broader first question. But we are very focused on the advanced market commitment, and I’m glad you asked the question.

For those who are not informed, this is an initiative that has been discussed for quite a while now in the G-7, which consists in providing financial support with government money to make it profitable for pharmaceutical laboratories and industries to invest in research in diseases which are typical of the poorest part of the world and not of the richest part of the world, so that they have no market or not sufficient market where the market is rich, so that research is not even undertaken because of lack of these incentives. The idea, I think, was developed by an economist in a scholarly article some years ago, and it was rediscovered by one of our officials in the Italian Treasury. Vittorio Grilli, the head of the Treasury, who is here with me, was directing this initiative.

It is now at the point of having been blessed by the G-7, but not as a G-7 initiative, but as an initiative that some of the G-7 countries will take. And Italy is one of them. Canada has already committed some money; the U.K., I discussed that with Gordon Brown in London last week; and I discussed it with Hank Paulson yesterday in Washington.

I’m hopeful the U.S. Treasury will participate. Hopeful. It is the perfect type of initiative for a government that believes in markets and is sensitive to problems of development aid.

And if this initial experiment were to succeed, I think it would open the way to very important developments—which means, referring to your broader question, that the combination of a market mechanism with a public policy involvement, I think, is the essential challenge in providing aid for development. And it is necessary to find the right ways. It’s not by accident that this idea comes initially from pure academic research concerned exactly with the need to optimize this combination.

FRENKEL: Thank you.

I know that you are hopeful. And speaking of hope, the English poet Francis Bacon once said that hope is a beautiful breakfast and a terrible supper, so we need some results before sunset. (Laughter.)

Please.

PADOA-SCHIOPPA: I am more hopeful than that.

QUESTIONER: It’s Amity Shlaes from the council. I was listening to what you said about the common future of Europe, but I was also wondering if you would comment on the—a little bit different—the common future of Europeans. And what I was thinking about was a while back there was a monetary economist who wrote an important essay about an economy in which jobs for certain people were assured because of politics and strong labor law, but other people were certainly shut out, even as there was an environment of monetary order and low inflation, stunning lack of inflation. And the name of that economist was Ben Bernanke. And what he was writing about was the Great Depression.

And if it’s hyperbole to compare Europe to the Great Depression of the United States in the ‘30s, nonetheless there is one thing I’d like you to address, which is whether there’s so much concern about the monetary that the jobs story is neglected, and with it the freedom and future of the European people.

PADOA-SCHIOPPA: Well, I didn’t under the question, the last question. Can you repeat it, please?

QUESTIONER: Sometimes observing Europe you get the feeling there’s so much emphasis on the monetary that there’s too little emphasis on job creation. And you don’t have to be Keynesian to address that question.

PADOA-SCHIOPPA: Well, the emphasis on the need to keep inflation down, for somebody of my background, who spent a lifetime in central banking in a country where inflation was two-digits for 15 years or more, I’m not the right person to question the wisdom of warning against the risks of inflation.

I’m not sure that there is insufficient talk about job creation. The problem is that there is insufficient action, not insufficient talk. And I repeat, the insufficient action is, in my view, the fact that the European Union is not implementing in full its own program. In part, it’s not implementing it in full because it has not given itself the decision-making mechanics that were required for that, which is in simple terms, avoid vetoes, avoid unanimity, accept majority rules. If the ECB Council could decide only when it was unanimous, we wouldn’t have a single monetary policy. Whenever you have unanimity, you have the risk of paralysis in decision-making. And it is very likely that the veto comes from the one who would marginally suffer from a decision that is conducive to a better general situation. There are always some losers, but the losers should not always be the same, and are not always the same.

If there was this more effective way of deciding, I think Europe would be a much more dynamic economy and would create more jobs.

The other part is fields in which the optimal policymaker is no longer the nation state but Europe itself—infrastructure. I have lived in Frankfurt for seven years. The infrastructure of ground communication between France and Germany is still consistent with the event of a war between the two countries. There are no direct railways, no good highways. All runs vertical; very little runs East-West. Only Europe can undertake the initiative of public works that overcome this lack of infrastructure, because what is lacking is European infrastructure.

So there are positive parts, in addition to simply freeing the market, which would also be needed. But again, it’s a matter of decision-making.

FRENKEL: We are getting to a soft landing, so we need to be brief questions and maybe brief answers.

Please?

QUESTIONER: Minister, Mario Platero, Sole 24 Ore. You just spoke about the problems that Europe may have with unanimity and vetoes within the decision-making process. Well that describes, it appears, exactly what happens also in the Italian government and in the Italian coalitions. There are parties that expresses vetoes, and so, of course, they make your job much more difficult. How frustrated you are with the current political situation in Italy?

And I guess this audience probably would be interested in knowing if you think that there may be a need for a reform of the current political institution organization of Italy?

Thank you.

PADOA-SCHIOPPA: I’m not frustrated at all. The reality is what you have to face when you want to change reality. So I don’t see anything abnormal in the difficulty. To act is not as free an activity as to think. (Laughter.) So it’s entirely normal. It would be—I would be concerned if there were no inertia nor resistance to overcome. For the rest, that’s too new to take any judgment on the political system.

FRENKEL: Thank you. If the next questioner too will be very brief, we can give them a chance. Please.

QUESTIONER: Thank you. Brief question—maybe not so brief answer. But I’m Tom Bombelles with Merck. And going back to the issue of competitiveness in the Italian economy, does your focus—justifiable focus on budget deficits impede implementing the Lisbon agenda and improving Italy’s national—international competitiveness?

PADOA-SCHIOPPA: Well, while I’m doing the budget, I focus on the budget. And there is no doubt that this has been my main preoccupation and will remain so until the successful adoption of the budget that I expect to come—end of December.

I’m fully convinced that this was an overriding priority, to correct the budget, to clear the way for the rest of the legislature from any risk of emergency in the fiscal field. But I’m equally convinced that the real problem of the Italian economy is lack of growth. And to have a sound budget is a precondition, but it’s not sufficient.

So much has to be done through influence other than tax revenues and spending—regulation, lightening the burden of the public administration, increasing the productivity in the public sector, making the whole interaction between business and government easier and more friendly.

Part of that is to be achieved through a leaner budget. But much of that is to be achieved otherwise, by improving the legislation, creating competition in fields where there isn’t enough. And the agenda is there. Some steps have been taken.

I’m convinced that this will continue to be on the agenda of the government and will be implemented, but it was not the budget—the instrument that could achieve in total this kind of agenda.

FRENKEL: We have one last question. I cannot promise an answer. Please.

QUESTIONER: Oppenheimer Fund, Alessio de Longis. We have spoken about lack of growth, weak productivity, pensions, the pension problem, demographics.

Now, one of the requirements of an optimal currency area is labor mobility. And we know that Italy—a large part of the Italian human capital, highly qualified young workers, work abroad. With—the problem with respect to before is that they tend to stay abroad much longer, and sometimes they don’t bring back anymore the skills that they earned abroad, because they don’t find opportunities home.

So in a way, Italy’s still a country of immigration. How can an optimal currency area, with this—where Italy fits in with this issue, how can Italy solve its pension problem when a large and hopefully highly productive part of its human capital is not contributing to the income of the relatives?

PADOA-SCHIOPPA: Well, you put several ingredients in a single question.

I am extremely sensitive to the issue of highly qualified Italians being—particularly in this country, but by now also in Germany and in France—and finding their working conditions there more favorable than those they would have in Italy—being nostalgic of Italy, keen to be useful in Italy, and to go back, liking the Italian way of life, including its lively (disorder ?), and yet not having equivalent opportunities.

I think this is a very serious problem for Italy. I know countries, such as Greece or Spain, which repatriated their talents much more effectively than Italy did.

I’m not sure—and this is the second ingredient in your question—that if this was done, the numbers would be large enough to re-balance our pension system, quite frankly. The effect would be on quality, on incentives for a more—a higher degree of recognition of merit. But the macro figures of the pension system would probably stay more or less the same.

And finally, all this is true even without mentioning the optimum currency area issue, which is, in my view, a different issue. It was true even before the euro. I don’t think, by the way, that for the optimum currency argument to hold, Europe will ever achieve the degree of geographical mobility of labor that you see in the United States. The United States is still an empty country, where there is room for everybody in another place. Europe is crowded; it’s difficult. You could not have 1 million persons moving from the northwest of Italy to the northeast. There is no room.

There are other ways to develop in order to give markets more flexibility and we have examples in Europe. So I think the euro will bring about as a consequence some of the optimum currency area features, and we are seeing that already. But Europe will remain a different place compared to this country.

FRENKEL: Thank you. Thank you very much. It is refreshing to have a—such a thoughtful, professional, transparent, hopeful, optimistic minister coming and spending the breakfast with us. You know, the—speaking about an optimist, the optimist and the pessimist stories, both of them end their life in the same way, but they run their life differently.

PADOA-SCHIOPPA: (Laughs.)

FRENKEL: So the optimistic way—(laughter)—the optimistic way beats the alternative; for in this regard it’s a lesson which we will take with us.

Thank you for spending the time with us. (Applause.)

PADOA-SCHIOPPA: Thank you.

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THIS IS A RUSH TRANSCRIPT.

JACOB A. FRENKEL: Ladies and gentlemen, good morning.

I am Jacob Frenkel, vice chairman of AIG and chairman of the Group of Thirty. And we have the great privilege of having with us Minister Tommaso Padoa-Schioppa. This meeting is part of the Peter McColough Series on International Economics, which is sponsored by the council’s corporate program in the Maurice R. Greenberg Center for Geopolitical Studies.

My notes say that this is the stage where I ask you to please turn off your cell phones, your BlackBerrys. This meeting is on the record. And as always, we will divide it into two parts. The first is a warming-up exercise where I have a brief conversation with the minister setting the stage for the real stuff, your questions and answers.

The handout that was circulated contains the bio of our distinguished guest, so there is no need to repeat it, except to note that in the international financial arena, he is viewed as “Mr. Euro,” “Mr. Europe,” “Mr. Brussels,” “Mr. Governor,” “Mr. Banca d’Italia.” There are so many “misters” there that you end up with a question of, “What not?” So I would ask you at the end about what not.

Our guest spent a significant part of his career at the Banca d’Italia, arriving to the top now after several tours of duties with the European Central Bank, with the commission, after being with the securities system. There was a short period between his so-called retirement, which puts a question mark what retirement means, between his retirement from the ECB and his joining the Banca d’Italia, where he could test how desirable he is by the market. He realized there are too many jobs that he was asked to do, at which point he said, “I might as well go back to public service.” So he’s now our guest.

And let me divide my leading questions into two parts—three parts: one, Europe; second, the world; third, Italy. Of course, it’s a long story. I have my watch on, and let me start with Europe.

You have been at the cradle of the European Central Bank. You have been at the cradle of the euro. You have been at the cradle of the euro system. In the book that came out shortly after your retirement—the title is, “The Euro System, the Euro and Beyond”—many people did not know what “beyond” means, what further ambitions does the euro have. Can you tell us a little bit about what is the “beyond”?

MINISTER TOMMASO PADOA-SCHIOPPA: Well, I think that the construction of an economic and monetary union was virtually completed with the Maastricht Treaty that set the single currency. From a constitutional point of view, I don’t think there is any need for major changes in the economic part of the European constitution, if we want to call constitution, the treaty. And an indirect demonstration of that is that the constitution, that was discussed and drafted a couple of years ago, basically didn’t change any of the fundamental economic provisions.

In this respect, the “beyond” is implementing this constitution in full for the economic part, which is still to be done. Many of the fields where a single market should be built are still protected, for example. Many of the fields for which a common policy decided in Brussels is provided for by the treaty do not have a common policy—energy, for instance. But the rest is—beyond economics, is political, you know, broadly speaking, which, of course, if implemented in the fields of foreign policy, of security policy, would have enormous implications for the economy, but it’s not economic primarily.

FRENKEL: Thank you.

For American audience, for many American audience—not necessarily this one—the names Maastricht, Brussels, Lisbon are just three cities in—they recognize that they are cities. For a more informed audience on this side of the Atlantic, very frequently they recognize that those cities mean some agreements and treaties, but they are very cynical about what does it mean, really. Lisbon, the agenda for structural reform seem to be lagging behind. Maastricht, the criteria for the stability pact, the growth and stability pact, seems to be put aside. And Brussels, for the uninitiated, looks like a group of bureaucrats who tell nation-states what to do.

Can you give us a little bit—but given the time constraint, leave the passion aside now and make it relatively—

PADOA-SCHIOPPA: There are less bureaucrats for Europe in Brussels than in Milan or for Lombardy, which is the reason—(laughter)—so it’s not—that’s the Lisbon issue. It’s not as huge as people make it.

Well, for each of these locations, one could say something. Let me say something about Brussels, because Brussels is the location of two very different types of meetings and policies. It is the place where competition should be open, and it is the place where the cartel to impede competition meets. And one is the commission; the other is the council, if you want to put it in very simple terms. The council, for those of you who are not familiar, is the Council of Ministers or of national officials—meeting in Brussels.

So Brussels lives in this permanent tension between—and ambivalence—between wanting and not wanting to do what is its own agenda. And very often one Brussels is blamed when the responsibility lies with the other.

FRENKEL: Thank you. Let me turn a little bit—still within Europe—and the last question on Europe has to do with the European Central Bank. The success of the European Central Bank in taming inflation is undisputed. In fact, the numbers that just came out show that year over year, inflation in the euro zone is the lowest that it has been this century or this millennium, whatever way you want to look at it.

And yet there is a lot of hawkish talk coming from or interpreted here about—coming from the ECB about a further rate hike.

I know that as governor you are not going to speak about monetary policy, what will it be. It’s obvious. But help us to think about it. How come there is such a success on the disinflation process and yet one even thinks about raising interest rates?

PADOA-SCHIOPPA: Well, maybe this constant reminding of the risk of inflation is one of the reasons of the success of the policy of the ECB. So in many respects, you have to keep people aware of the danger.

The—when inflation is high, people realize how bad it is, become favorable to an independent and strong central bank, because they see the disease running. When you have a long period without inflation, there is a risk of people forgetting about the risk, and there is a need for an additional pedagogy on the risk of inflation. This, I think, is part of the communication of the ECB. Certainly, the ECB has inherited this kind of mode of communication from the Bundesbank. But I think it’s effective. It helps.

FRENKEL: Yes. Let me take you to the world. Last month—or a bit more—there was the IMF-World Bank meeting in Singapore, and you were one of the G-7 ministers that came out with a relatively positive view about the world economy, pointing out about the dangers of protectionism, pointing out about global imbalances, but by and large, a positive view.

I want to focus for a minute about global imbalances. We have been told, time and again, also in this room, that those global imbalances are not sustainable, and this was three years ago, two years ago, one year ago. Now, do we cry “wolf”?

Let me elaborate a little bit more. We were talking about large current accounts that should bring to a weakening of the currency, and it has not; large budget deficits that should bring about higher interest rates, and it has not; large—a higher price of oil, which should bring about inflation or a recession, which it has not. Which (bank ?) paradigm are we? What do you think about these global imbalances?

PADOA-SCHIOPPA: Well, I have been convinced for some years—at least two or three—that not only the global imbalances were not sustainable, but that the moment in which an adjustment process would start was relatively near.

The nature of these imbalances is rather different, and in some respects, I’ll defer to the U.S. sector on that imbalance in particular, which is, in my view, in some respects more puzzling than the external surplus of the Asian economies, which is, in a way, a natural by-product of the historical process which is under way in East Asia.

But it’s true that the external imbalance of the United States has a size and a duration which has very few comparisons in the past. In this sense, everyone thinks it is unsustainable.

Probably we agree that today that new elements in the economy, in the markets that may make it sustainable for longer than in past circumstances—for longer, but not forever.

But I admit that my expectation that the process of adjustment would start was not confirmed by the facts. Now, should we think that since it didn’t happen, it will not happen? This is not my view. I think the adjustment is needed. It will come. It’s hard to imagine that it is not including a slowdown in the growth rates of the U.S. economy. The question whether the process can be entirely market-driven or to what extent it needs policies is open. I tend to think that it needs policies.

For instance, the system failed to increase the savings by public budgets. But all that can happen in an orderly way, and the big question is not whether it will happen or not, but how orderly the process will be.

FRENKEL: Let me take you to the mechanisms. In 1995, when the dollar was viewed as being very high, a few ministers got together in Plaza and the system was taken care of. Less than two years thereafter, the G-7 met in ( Louisville ?)—or G-6—and issues were taken care of.

Why can’t they do it now? Or let me help you a little bit—let me ask you a little bit further looking into the future. You mentioned China and Asia. If you had to look 20 years down the road, who would sit around this G-7 table?

PADOA-SCHIOPPA: Europe with a single voice or representative, the United States, certainly China, Japan—maybe we have part of these 20 years to see who else—India, hopefully a Latin American country, hopefully an African country.

FRENKEL: Well, it’s a very different world indeed.

And let me just conclude this part on the world by saying, a lot of it depends on the world remaining open, and everyone speaks about the relative—let’s call it failure of the Doha Round. Do you think we can save the trading system from the Doha Round?

PADOA-SCHIOPPA: Well, the Doha Round has not failed yet. I had a long conversation with Pascal Lamy about a week ago. I think there are still very good possibilities that wisdom will prevail. But clearly one of the risks associated with (disorderly/orderly ?) correction of imbalances is protectionism. And it’s clear that the effect of the emergence of China and India is so immense that the big question is really whether this emergence, which is an extremely positive phenomenon for the world economy, will happen in a way that does not disrupt but reinforces the system of multilateral cooperation. It should, but it’s not easy to accommodate a new giant or two new giants into system. When the United States emerged in the same way a hundred years ago, it was a similar process and not an easy one.

FRENKEL: Well, the role of financial markets are, of course, critical. In the book which you published very recently regulating finance, balancing freedom and risk, you analyze in great detail the notion of how should we regulate financial markets in the growing globalization—large banks, small banks and the like. Can you say something about it?

PADOA-SCHIOPPA: Well, in general, the problem of globalization is, I think, the problem of electing the policy or, globally speaking, public interest dimension of economic life proceed not too slowly with respect to the advancing of integration for markets. Market system functions if it operates under a rule of law, and if the market is global, some global rule of law is indispensable, otherwise it’s anarchy.

There are important progresses. In the field of finance, there has been important progresses. Financial Stability Forum is an example of increased cooperation that was created less than 10 years ago. It’s hard to say whether we have enough cooperation or not. Fortunately, we have had no big tensions in the last—since ‘98-2000.

Is the system robust enough to withstand a new wave of financial tensions or not? I don’t know. Certainly, the policy side of the system is relatively weak compared to the market side. So we have to be aware that there may be an inconsistency that could be—could need a correction very quickly in case of a tension.

FRENKEL: Let’s look closer to your home, Italy. I just want to remind everyone that you have been on the job just a few months, and yet the question is: Do markets understand you? Standard & Poor’s and Fitch have just downgraded you. The smile on the minister’s face is because he saw Mr. Standard & Poor’s here, it’s not that he’s happy about that outcome. (Laughter.) You understand that Standard is the first name and Poor is the last name. (Laughter.)

In some of the issues that came up and also in several articles and analyses in the Financial Times yesterday and the last week, really raise significant questions about the Italian budget, about how does one deal with a budget deficit. Isn’t there too much reliance on tax revenue rather than spending, how is the reform progress working out, or the accounting practices—a lot of things that people, when they read just the headlines get an impression. And they will be very appreciative if you could shed some more light on what keeps you up at night.

PADOA-SCHIOPPA: Yeah, well, I’ll give you my view, of course, which may not be exactly the same as the one of the Financial Times, but it’s what I can do.

There is now before the Italian Parliament a budget which completes a correction which started with a mini budget in July, and this correction will bring the Italian deficit-to-GDP ratio back to where the European rules require it to be, it will put the debt-to-GDP ratio back on a downward slope, and it raises in total resources for about 3 percentage points of GDP, which make it the largest adjustment package of the last 25 years, except for one which was done in 1992.

This huge adjustment occurs—does not occur in a crisis situation, not under a currency crisis, as in ‘92; not under the threat of being excluded from the euro, when Italy made another big adjustment in the mid-‘90s. My expectation is that this budget will be adopted by Parliament as it is, with some changes in composition, but not in the (ballot ?). If this happens, it will contradict all the predictions of the last month that expected a composite coalition, such as the one which is in government now, to be completely incapable to agree on such an adjustment. In fact, initially there were requests that Italy should, as Germany did after the new government was put in office, to offer a postponement in the date of the adjustment, which we didn’t.

I think it may take time for all that to be recognized as the essential aspect of what we are doing. But since human nature is fragile, criticisms by the press, by Standard & Poor’s, et cetera, are a very positive incentive, and I think we still need incentives of this kind. So I’m not particularly unhappy about this; it’s much better these kinds of incentives than a crisis on the market.

FRENKEL: Well, it’s nice to have a minister that takes comments and criticisms in such a way.

Speaking of incentives, as I open the floor, I’m going to give you the opportunity to ask questions. Let me must remind you of a story about incentives. There was this guy who was condemned to die in the electric chair. So as they brought him there, they realized he was so heavy he did not fit in the chair. And the executor told him, “Go home. Go on a diet and come back in a month.” He came back after a month and he was much, much bigger. And he said, “Didn’t I tell you to lose some weight?” He said, “Yes, but I did not have the incentive.” (Laughter.)

Well, Italy is not on the electric chair, it has the incentive.

Let me open now the floor for questions. Please raise your hand, wait for the microphone, identify your name—I’m smiling because these are the instructions I have received.

Ambassador Richard Gardner. Microphone, please.

QUESTIONER: Silvio Berlusconi had an unprecedentedly favorable political situation. He had five years with a very substantial parliamentary majority. Yet, in his five years, if my figures are correct, Italy’s primary budget surplus, before interest expenses, deteriorated from 3.3 percent to 0.4 percent, and the overall fiscal deficit dropped from minus-2.6 to minus-3.7—or grew from minus-2.6 to minus-3.7.

You have only a one or two vote margin in the Senate, so you’re dealing with a very substantial heritage from those five years. You must have asked yourself what happened in those five years to leave you in such a difficult situation. Where did he go wrong?

PADOA-SCHIOPPA: Well, you raise two issues. One is the slim majority and the other is the previous five years’ legislature.

In the mid-90s, there were two countries which were—which had a huge debt in Europe and which were at the risk of being excluded from the single currency, Belgium and Italy. Belgium was in an even worse situation than Italy, had a higher debt relative to GDP. Both reached a primary surplus of 5, 6 percentage points at the eve or in the moment the euro started.

Belgium is still there, and their debt-to-GDP ratio is now to 90 percent—down, because it was 150 percent also.

Italy has lost the opportunity and has practically brought back to zero the surplus. And so our debt-to-GDP ratio is still above hundred percent.

It’s true it was a lost opportunity. And in fact the Belgian economy is growing fast, possibly because there is more room for private economy growing than there is in Italy today.

I then—I have no explanation of why such a surplus was wasted in a period of few years. But I don’t think that a slim majority is an impediment for restoring it.

The first six months, five months of this government have passed a number of important legislation through the Senate, in spite of this slim majority. And I think this can continue.

The largest—you know that very well the largest adjustment in the Italian economy after World War II, in 1947—you remember Rinaldi and de Gasperi—was done by a government which had no majority. People don’t remember.

I think good policies carry support, and big support without good policies fades away.

FRENKEL: Thank you.

Please.

QUESTIONER: John Mbiti from UBS. Many European countries, including Italy, have been experiencing declining birth rates and at the same time have—the percentage of the working population that’s retiring or has retired has been increasing. This means obviously that pension claims on the national government is going to continue to increase over the foreseeable future. Since this problem has arisen because of the composition of the national population, is it time to adopt a more flexible approach to immigration?

PADOA-SCHIOPPA: The situation you describe is particularly true for Italy, which has the lowest birthrate in the world, I think, now. And you are right that this affects the pension system, in spite of the fact that the pension deficit in Italy is in a better shape than in most European countries. Italy has already reformed its pension system to the point of having a more balanced system than, say, Germany or France. As you know, the pension debt is not recorded as such, is not part of the public debt, but in economic terms, it’s there. Yet, Italy still needs some adjustment in the pension system, because the transition to equilibrium is very long, and there is a period in which a small number of young persons supporting a large number of retired people would create problems.

Immigration can help. It does help already. Italy has less of it than most other European countries, but—and for Italy, it’s an entirely new phenomenon to be a country of immigrants. It didn’t happen for the last thousand years. Italy has been an emigration country, as you know very well, for at least a century.

But another element for solving the problem is to accept the fact that working life can be longer than the present pension system foresees. In fact, we—I think we will adopt, in early 2007, some measures to be negotiated with the unions to rebalance the pension system in favor of the youngest generation by making the economy benefit from longer working life.

FRENKEL: Yes, please.

QUESTIONER: Hi. I’m—

FRENKEL: Microphone, please.

QUESTIONER:—Gertrude Chavez from Reuters. I was wondering if the rate hikes in the Eurozone could put a break on growth in Europe.

PADOA-SCHIOPPA: I don’t think so. I don’t think that the rate hike will be an impediment. I don’t know what the movements in rates the ECB will decide in the coming months.

But I must confess that since I’ve been minister—in spite of being the economic and financial minister of the country which has the largest public debt in Europe, I don’t perceive the decisions of the ECB on the rates as one of the major factors that can create a problem to me. There are many other sources of imbalance which come first. So I think the ECB can do its job, and I try to do mine.

FRENKEL: Thank you.

Yes, please.

QUESTIONER: Yeah, David Braunschvig, Council on Foreign Relations and Bear Stearns. Mr. Minister, you—in your plan, you identify tax evasion, fighting against tax evasion as an important objective. At the same time, you are raising taxes for the upper brackets. Is there a tension between those two objectives, given the fact that one can be an incentive for the other? And how does raising taxes for certain categories contribute to the competitive advantage of Italy and job creation? Or is it sort of a concession in advance to your negotiations with the unions for concessions from them later in 2007?

PADOA-SCHIOPPA: Well, you combine different aspects. For those who are not fully informed, one of the measures in the budget is to redesign the profile of rates—tax rates in personal income tax rates and to raise slightly the marginal rate the highest—for the highest incomes and to lower the rates for the lower part of the income. In total, about 90 percent of the taxpayers will have a small reduction or not so small reduction, and the other part will have a slight increase in their taxes. But it will not go back to where it was three or four years ago. So it’s a very small correction.

The point is that tax evasion is not so much in the personal income tax or not exclusively in the personal income tax, it’s probably even more in the value-added tax. And most of the measures that are taken in the budget to reduce tax evasion to decent proportions, which is not what we have now, affect the VAT, not the personal income tax. So I don’t think the two things are incompatible.

You referred to negotiations. Certainly, one big difference I am experiencing in my job today compared to the previous one is that fiscal policy needs a degree of negotiation. It’s just not conceivable not to have it. Negotiation includes support by the Cabinet, going through parliamentary approval, negotiating with local governments, for instance, in the health care system, which in Italy is a combination of central and regional government.

I understand that in abstract terms, for an economist to have to negotiate something that hopefully should be designed in rational terms and just decided, may be a complication in the reasoning. And it’s true that monetary policy doesn’t have to negotiate its decisions. So this is a big difference. But I don’t think one should consider seeking support as an unwelcome complication. It’s the essence of a good policy. The problem is not whether it was negotiated or not, but whether the substance is good or not.

FRENKEL: It’s tough to—(inaudible)—democracy.

Please.

QUESTIONER: Robert Hecht from the International AIDS Vaccine Initiative. I wanted to ask you a question on a very different subject, which is international development finance. Italy has been a tremendous champion for reforms in international development assistance, first supporting the International Finance Facility for Immunisation and now the advanced market commitment concept or pilot.

I wanted to ask you two things. One, what is your vision or your view on the future of reforms in international development finance, international development assistance? And secondly, what does Italy hope to do—I know along that you have friends in London and in Ottawa supporting this advanced market commitment pilot idea, but thoughts on what can be done to persuade the Bush administration to support this initiative, since they’ve been sitting on the fence concerning this important proposal from you.

Thank you.

PADOA-SCHIOPPA: Well, I take your second question; I don’t have perhaps a complete vision to suggest for your broader first question. But we are very focused on the advanced market commitment, and I’m glad you asked the question.

For those who are not informed, this is an initiative that has been discussed for quite a while now in the G-7, which consists in providing financial support with government money to make it profitable for pharmaceutical laboratories and industries to invest in research in diseases which are typical of the poorest part of the world and not of the richest part of the world, so that they have no market or not sufficient market where the market is rich, so that research is not even undertaken because of lack of these incentives. The idea, I think, was developed by an economist in a scholarly article some years ago, and it was rediscovered by one of our officials in the Italian Treasury. Vittorio Grilli, the head of the Treasury, who is here with me, was directing this initiative.

It is now at the point of having been blessed by the G-7, but not as a G-7 initiative, but as an initiative that some of the G-7 countries will take. And Italy is one of them. Canada has already committed some money; the U.K., I discussed that with Gordon Brown in London last week; and I discussed it with Hank Paulson yesterday in Washington.

I’m hopeful the U.S. Treasury will participate. Hopeful. It is the perfect type of initiative for a government that believes in markets and is sensitive to problems of development aid.

And if this initial experiment were to succeed, I think it would open the way to very important developments—which means, referring to your broader question, that the combination of a market mechanism with a public policy involvement, I think, is the essential challenge in providing aid for development. And it is necessary to find the right ways. It’s not by accident that this idea comes initially from pure academic research concerned exactly with the need to optimize this combination.

FRENKEL: Thank you.

I know that you are hopeful. And speaking of hope, the English poet Francis Bacon once said that hope is a beautiful breakfast and a terrible supper, so we need some results before sunset. (Laughter.)

Please.

PADOA-SCHIOPPA: I am more hopeful than that.

QUESTIONER: It’s Amity Shlaes from the council. I was listening to what you said about the common future of Europe, but I was also wondering if you would comment on the—a little bit different—the common future of Europeans. And what I was thinking about was a while back there was a monetary economist who wrote an important essay about an economy in which jobs for certain people were assured because of politics and strong labor law, but other people were certainly shut out, even as there was an environment of monetary order and low inflation, stunning lack of inflation. And the name of that economist was Ben Bernanke. And what he was writing about was the Great Depression.

And if it’s hyperbole to compare Europe to the Great Depression of the United States in the ‘30s, nonetheless there is one thing I’d like you to address, which is whether there’s so much concern about the monetary that the jobs story is neglected, and with it the freedom and future of the European people.

PADOA-SCHIOPPA: Well, I didn’t under the question, the last question. Can you repeat it, please?

QUESTIONER: Sometimes observing Europe you get the feeling there’s so much emphasis on the monetary that there’s too little emphasis on job creation. And you don’t have to be Keynesian to address that question.

PADOA-SCHIOPPA: Well, the emphasis on the need to keep inflation down, for somebody of my background, who spent a lifetime in central banking in a country where inflation was two-digits for 15 years or more, I’m not the right person to question the wisdom of warning against the risks of inflation.

I’m not sure that there is insufficient talk about job creation. The problem is that there is insufficient action, not insufficient talk. And I repeat, the insufficient action is, in my view, the fact that the European Union is not implementing in full its own program. In part, it’s not implementing it in full because it has not given itself the decision-making mechanics that were required for that, which is in simple terms, avoid vetoes, avoid unanimity, accept majority rules. If the ECB Council could decide only when it was unanimous, we wouldn’t have a single monetary policy. Whenever you have unanimity, you have the risk of paralysis in decision-making. And it is very likely that the veto comes from the one who would marginally suffer from a decision that is conducive to a better general situation. There are always some losers, but the losers should not always be the same, and are not always the same.

If there was this more effective way of deciding, I think Europe would be a much more dynamic economy and would create more jobs.

The other part is fields in which the optimal policymaker is no longer the nation state but Europe itself—infrastructure. I have lived in Frankfurt for seven years. The infrastructure of ground communication between France and Germany is still consistent with the event of a war between the two countries. There are no direct railways, no good highways. All runs vertical; very little runs East-West. Only Europe can undertake the initiative of public works that overcome this lack of infrastructure, because what is lacking is European infrastructure.

So there are positive parts, in addition to simply freeing the market, which would also be needed. But again, it’s a matter of decision-making.

FRENKEL: We are getting to a soft landing, so we need to be brief questions and maybe brief answers.

Please?

QUESTIONER: Minister, Mario Platero, Sole 24 Ore. You just spoke about the problems that Europe may have with unanimity and vetoes within the decision-making process. Well that describes, it appears, exactly what happens also in the Italian government and in the Italian coalitions. There are parties that expresses vetoes, and so, of course, they make your job much more difficult. How frustrated you are with the current political situation in Italy?

And I guess this audience probably would be interested in knowing if you think that there may be a need for a reform of the current political institution organization of Italy?

Thank you.

PADOA-SCHIOPPA: I’m not frustrated at all. The reality is what you have to face when you want to change reality. So I don’t see anything abnormal in the difficulty. To act is not as free an activity as to think. (Laughter.) So it’s entirely normal. It would be—I would be concerned if there were no inertia nor resistance to overcome. For the rest, that’s too new to take any judgment on the political system.

FRENKEL: Thank you. If the next questioner too will be very brief, we can give them a chance. Please.

QUESTIONER: Thank you. Brief question—maybe not so brief answer. But I’m Tom Bombelles with Merck. And going back to the issue of competitiveness in the Italian economy, does your focus—justifiable focus on budget deficits impede implementing the Lisbon agenda and improving Italy’s national—international competitiveness?

PADOA-SCHIOPPA: Well, while I’m doing the budget, I focus on the budget. And there is no doubt that this has been my main preoccupation and will remain so until the successful adoption of the budget that I expect to come—end of December.

I’m fully convinced that this was an overriding priority, to correct the budget, to clear the way for the rest of the legislature from any risk of emergency in the fiscal field. But I’m equally convinced that the real problem of the Italian economy is lack of growth. And to have a sound budget is a precondition, but it’s not sufficient.

So much has to be done through influence other than tax revenues and spending—regulation, lightening the burden of the public administration, increasing the productivity in the public sector, making the whole interaction between business and government easier and more friendly.

Part of that is to be achieved through a leaner budget. But much of that is to be achieved otherwise, by improving the legislation, creating competition in fields where there isn’t enough. And the agenda is there. Some steps have been taken.

I’m convinced that this will continue to be on the agenda of the government and will be implemented, but it was not the budget—the instrument that could achieve in total this kind of agenda.

FRENKEL: We have one last question. I cannot promise an answer. Please.

QUESTIONER: Oppenheimer Fund, Alessio de Longis. We have spoken about lack of growth, weak productivity, pensions, the pension problem, demographics.

Now, one of the requirements of an optimal currency area is labor mobility. And we know that Italy—a large part of the Italian human capital, highly qualified young workers, work abroad. With—the problem with respect to before is that they tend to stay abroad much longer, and sometimes they don’t bring back anymore the skills that they earned abroad, because they don’t find opportunities home.

So in a way, Italy’s still a country of immigration. How can an optimal currency area, with this—where Italy fits in with this issue, how can Italy solve its pension problem when a large and hopefully highly productive part of its human capital is not contributing to the income of the relatives?

PADOA-SCHIOPPA: Well, you put several ingredients in a single question.

I am extremely sensitive to the issue of highly qualified Italians being—particularly in this country, but by now also in Germany and in France—and finding their working conditions there more favorable than those they would have in Italy—being nostalgic of Italy, keen to be useful in Italy, and to go back, liking the Italian way of life, including its lively (disorder ?), and yet not having equivalent opportunities.

I think this is a very serious problem for Italy. I know countries, such as Greece or Spain, which repatriated their talents much more effectively than Italy did.

I’m not sure—and this is the second ingredient in your question—that if this was done, the numbers would be large enough to re-balance our pension system, quite frankly. The effect would be on quality, on incentives for a more—a higher degree of recognition of merit. But the macro figures of the pension system would probably stay more or less the same.

And finally, all this is true even without mentioning the optimum currency area issue, which is, in my view, a different issue. It was true even before the euro. I don’t think, by the way, that for the optimum currency argument to hold, Europe will ever achieve the degree of geographical mobility of labor that you see in the United States. The United States is still an empty country, where there is room for everybody in another place. Europe is crowded; it’s difficult. You could not have 1 million persons moving from the northwest of Italy to the northeast. There is no room.

There are other ways to develop in order to give markets more flexibility and we have examples in Europe. So I think the euro will bring about as a consequence some of the optimum currency area features, and we are seeing that already. But Europe will remain a different place compared to this country.

FRENKEL: Thank you. Thank you very much. It is refreshing to have a—such a thoughtful, professional, transparent, hopeful, optimistic minister coming and spending the breakfast with us. You know, the—speaking about an optimist, the optimist and the pessimist stories, both of them end their life in the same way, but they run their life differently.

PADOA-SCHIOPPA: (Laughs.)

FRENKEL: So the optimistic way—(laughter)—the optimistic way beats the alternative; for in this regard it’s a lesson which we will take with us.

Thank you for spending the time with us. (Applause.)

PADOA-SCHIOPPA: Thank you.

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