C. Peter McColough Series on International Economics: Debt, Governance and Growth: A Eurozone Perspective

STEVEN RATTNER: We're going to start on time, as always at the council.

We're all here, as you know, to hear from Olli Rehn, the European Union commissioner for economic and monetary affairs. He's going to speak about Debt, Governance and Growth: A Eurozone Perspective. I suspect among debt, governance and growth, I think I know which one of those three most of our questions are going to be focused on. But before we get to that, he's going to make some introductory remarks.

Let me make a couple of announcements. First, this is part of the C. Peter McColough Series on International Economics. Of course, everyone has already turned off their BlackBerrys and their other wireless devices. And I would remind you this meeting is on the record.

Our next meeting in this series, this McColough series, will be Thursday, June 9th, with Sheila Bair, the chairman of the Federal Deposit Insurance Corporation.

I'm not going to read Mr. Rehn's very distinguished biography, which is in the packages you all got, because it would occupy almost the entire time of the meeting. It is very long. It is very distinguished. He is clearly well -- highly qualified for the very intense role that he's now in as the EU participant in these multiparty discussions and efforts that are under way to resolve the current euro zone issues that we're all very familiar with.

So I'm going to invite him to the podium to speak for about 10 minutes, and then he and I will engage in a dialogue for another 10 or 15 minutes, and then we'll open the floor to questions and, of course, adjourn properly -- promptly, rather -- and properly -- at 9:00.

OLLI REHN: Ladies and gentlemen, good morning. And many thanks to Stephen for his very kind words of introduction. And I'd like to thank you for your kind invitation to give a talk at the council on Foreign Relations, which I highly appreciate. It's a great pleasure to be here and share with you some views on the European economy and its governance.

Before turning to the challenges of the euro area, let me begin with a more positive note. The economic recovery in Europe is maintaining its momentum and becoming increasingly self-sustaining, despite some financial turmoil and external turbulence. Of course, we know that these developments remain uneven and tensions continue in the sovereign debt markets. But at the same time, it's important to also keep in mind the big picture, that the European recovery is indeed moving forward and maintaining its momentum despite these challenges.

It has been clear already for a long time that the current stage of the crisis is a severely intertwined combination of a sovereign debt crisis and banking sector fragilities. And it is equally clear that we cannot solve one without solving the other. We need to resolve both and in parallel.

So what have we done to this end, to achieve this goal? When working on our crisis response, I have greatly appreciated the pertinent advice given by the legendary Bill Rhodes in his recent memoirs on international financial affairs. Let me quote him. "When facing an economic crisis, the clock is always running against policymakers, so they must act rapidly to implement the necessary reforms and programs to avoid further deterioration. Experience has taught that the time is the enemy." Unquote.

While we may have not been all the time ahead of the curve, we have nevertheless been able to put together a comprehensive crisis response, which has been partly implemented and is partly still being worked out.

The first essential element of the comprehensive response now is to complete the financial repair in Europe. This is why we are currently conducting a new round of bank stress tests, which is carried out across the EU and managed by the recently established European Banking Authority.

The tests will identify pockets of vulnerability in the banking system, and once identified, vulnerable banks need to be either restructured and/or recapitalized.

EU member states have committed themselves to put remedial plans in place to that effect prior to the publication of the results, so that we have the plans -- very concrete plans ready on either restructuring or recapitalization once the results come out in a few weeks.

The other dimension of the crisis is the still-accumulating sovereign debt, as we well know. Even if public debt as a share of GDP is on average lower in Europe than in the United States, we are convinced that putting the debt-to-GDP ratios on a downward path is a pressing priority for all EU member states.

For some member states, like Greece, there has simply been no alternative to fiscal consolidation. If you are shut out from the private debt market, you need to put your fiscal house in order to regain access to market financing. For other member states, it is obvious, and in fact confirmed by economic modeling exercises, that fiscal prudence is positive for growth and employment in the medium to long run.

The impact of debt on growth has also been looked from another angle. Carmen Reinhart and Kenneth Rogoff, in their wonderful book, "This Time is Different," have coined the 90-percent rule, or should I say rule of thumb, that countries with public debt exceeding 90 percent of annual economic output grow -- tend to grow more slowly. High debt levels can crowd out economic activity and entrepreneurial dynamism, and thus simply hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90-percent threshold -- it's currently, on average, around 85 percent -- and when the U.S. has already passed this threshold.

Ladies and gentlemen, in Europe our comprehensive policy response has combined both, say, short-term firefighting measures and longer-term work on new economic policy architecture.

To prevent Greece from defaulting, a loan package with strong conventionality was put in place a year ago, as we know. In parallel, soon afterwards, we created effective financial backstops to manage further problems and these mechanisms were put into action for Ireland and Portugal in the recent months.

We have also decided on the principles of a permanent stability mechanism, which will replace the temporary ones in 2013. By containing the sovereign debt crisis into the most vulnerable countries, these backstops have helped to prevent the crisis from spreading to a Europe-wide financial turmoil, and thus protected the ongoing recovery and slowly improving employment.

But clearly, the firefighters' job is not over yet. We cannot give the ground completely to the architects. Despite significant achievements in reducing the fiscal deficit since spring last year, Greece is not likely to be able to gain access to market financing by early next year, as foreseen in the EU-IMF program, in the current program. This calls for difficult decisions still in June.

And we are in fact currently carrying out our fourth quarterly review of the Greek program in Athens with a troika, EU-IMF troika. Good progress has been made, especially on the most pressing issues, and I'm confident that the review can be concluded in the coming days. Once the review is concluded positively, the EU with the IMF will move on to prepare next steps in order to safeguard financial stability and to continue economic reform in Greece.

I have been often asked what has been the main lesson we have learned from the crisis. And my answer is that -- it may be a simple but still fundamental lesson: Prevention is always better than correction -- not to speak of being forced to crisis management. The financial crisis revealed certain systemic weaknesses in the EU's economic and monetary union. Many countries in the euro area did not use the opportunity of good times in the first decade of the euro to put their fiscal houses in order. When the crisis hit, it exposed those countries where macroeconomic imbalances were large and/or public finances were in a bad shape.

In response, we are undertaking a fundamental reform of EU economic governance. The commission presented a legislative package last fall to the council and the parliament, and I expect that they will conclude the work in the coming weeks, still in the course of June. This package is composed of three main building blocks.

First, to strengthen the prior and preventive -- (inaudible) -- surveillance to prevent a crisis like Greece. Second, to identify and correct macroeconomic imbalances and divergences in competitiveness to avoid situations like Ireland or, to an extent, Spain. And third, to create a more effective enforcement mechanism, with earlier and more automatic sanctions in the case of violation of the rules.

Some people think that EMU stands for European monetary union. In fact it stands for the Economic and Monetary Union. And now we are to strengthen its economic pillar and thus finally bringing a real and serious dose of E into the EMU. That's the task as regards the reinforcement of economic governance in the union.

Ladies and gentlemen, to conclude my opening remarks I would like to say that with our comprehensive crisis response we have managed to, so far, to prevent a financial meltdown and contained the sovereign debt crisis into three countries now covered by the EU-IMF programs. But of course we can not declare any victory yet. The work must go on.

And June is indeed a critical month in overcoming the crisis. This calls for bold decisions, though difficult decisions, on completing the financial repair, reinforcing economic governance, and keeping Greece on the reform track. So we may not be fully in the endgame yet, but we can make the coming weeks the beginning of the end of the crisis.

Thank you for your attention.

(Applause.)

RATTNER: Well, thank you, Commissioner, for that very clear and lucid overview of the situation in Europe. I want to apologize in advance, I was a journalist in my early life and I can't resist the journalist's temptation to ask pointed questions, so let me try to -- I know everybody here would like to hear a few more specifics about how this all will play out. I know, as you said in your remarks, you're in the middle of discussion in Athens and so there are things you may not be able to comment on.

But I think the fundamental question that's on people's minds is is there a way, and let's use Greece being the one that's in the firing line at the moment as the example, is there really a way forward for Greece to deal with this debt load -- which is far and above the 90 percent number that you mentioned; it's going to be at 160 percent if it's not there already. Is there a way to deal with it without what we would call default, a reduction in the amount of debt that the Greeks own? Is there any way that they can manage that debt load, no matter what else happens around it?

REHN: Thanks for asking this very pertinent and aggressive -- (laughter) -- no small talk this morning, seemingly. So let me explain how we see the situation in Greece and -- well, other coming actions. First of all, we have a -- in a way, we work in two stages now. First, we have to see that Greece will be able to meet the conditions of this year fiscal targets 2011, and also launch seriously its privatization program. This will happen in the coming days.

Once we see this, then we move to the second stage, which is to see how we can, together with Greece, ensure that Greece will be financed in the medium term, and especially what Greece itself has to do in order to ensure the trust of its partners -- its European and international partners.

There are a number of things that are needed, at least three or four. First, Greece will have to achieve a primary structural surplus in the next two years or so. And that is the sine qua non. That is the necessary condition of starting to reduce the debt burden. It's simple, but it needs to be underlined. Currently, the deficit is at the level of -- well, last year, 10 percent. This year, target is 7 percent.

Second, Greece is embarking on a very ambitious privatization program of 50 billion euros up to 2015, which represents over 20 percent of Greek GDP. And EU member states want to see some kind of guarantees that this privatization program indeed will be implemented. That is another cornerstone of this package.

And then, third, we need reinforced delivery mechanisms or improved delivery mechanisms from Greece, which will imply reinforced technical assistance on certain critical areas such as tax collection and privatization activities.

And then, fourth, we are working on, currently, to introduce a Vienna-style initiative where banks would maintain their exposure to Greece. And in that context, we are examining the feasibility of a voluntary rescheduling of loans, on the condition that it will not create a credit event.

All this work is now going on both in Athens and, in fact, in Vienna because the economic and financial committee of the European Union is meeting today and tomorrow in Vienna. And of course, in Brussels and Washington, things are -- things are being worked out as well. So it's a moving target, but this is the broad sketch of the plan, which will be completed by the 20th of June.

RATTNER: But it's true, isn't it, that so far, the Greeks have basically missed every target that have been set for them, whether it's the budget deficit, whether it's the privatization schedule. They did have positive GDP growth for the first quarter, but I think everybody was quite surprised and doesn't think it's the beginning of a trend. They're in the middle of a deep recession.

And so, I guess, what's the confidence level they can actually get back on track? And even if they get on track, the Reinhart and Rogoff book that you referred to would basically say that a country with 160 percent GDP can't possibly grow it's way out of a debt burden like that, that there has to be a reduction in the amount of debt, not simply all the very important steps that you just mentioned.

REHN: First, Greece has not failed all the targets. Greece has, in fact, in the first twelve months of the program, from spring last year until, say, early spring this year, been able to achieve a reduction of its fiscal deficit by 7 percent, net terms, which shows 5 percent reduction in gross terms. So that is actually no mean achievement. And that increased the credibility of the Greek efforts in the early phase of the program.

However, since February, when we already warned of risks of slippage, we have seen that especially the tax revenues have not increased as expected. And because of the burden of the past is quite heavy, there is a need to fill a gap of around 3 percentage points still this year, in fiscal terms.

But Greece is working on that. And I don't think it is, in any case, right to say that everything has failed. The glass is maybe not completely full, but it is more half full than half empty in terms of providing results. Another privatization program is being launched in these days and these weeks.

Concerning the debt burden, I'm of course fully aware that Greece has a, say, formidable debt burden. But really, the critical thing is to, first of all, achieve a primary structural surplus so that Greece will stop living beyond its means, which is not yet happening. So that's the sine qua non of everything. And therefore, that's now the objective.

And if you look at some relevant examples from Europe, we have -- in the 1990s, Belgium was able to achieve a 5 percent primary surplus for six years. And we have, altogether, six member states that have been able to achieve 4 percent primary surplus for at least four years. So it is economically and financially doable, feasible. The question is whether there is the required political will and the sufficient social sustainability in the Greek society.

RATTNER: And to that point, of course, the -- I don't mean to be entirely negative; I'm just trying to, obviously, draw you out. The Greek government lost the support of the opposition party, which wants lower taxes. And then, with respect to Belgium, yes, Belgium did not have quite the same level of debt, I believe, as Greece has. And it also -- the economy wasn't nearly so deep into recession. Of course, the euro didn't exist at that point in time, so they had currency flexibility. So I don't -- there are certainly some parallels. Whether they are perfect parallels, I'm not as sure.

REHN: That was during the runup to the euro, and it was a currency board then, so it was equivalent to a euro membership of the time, in a way. And of course, the debt burden was somewhat lower but was still well beyond 100 percent in the case of Belgium.

RATTNER: So when you mention the Vienna-style debt restructuring or reprofiling, -- whatever Europeans like to call it today, because it changes -- seems to change every few days -- (laughter) -- you said no credit default. So does that mean all these people who -- most of whom, I suspect are on -- in the Wall Street world in one way or another -- should feel comfortable going out and buying debt, Greek debt at 60 cents on the dollar today? Is that a good investment? (Laughter.)

REHN: I try, usually, to avoid giving investment advice to anybody. (Laughter.) It's beyond my responsibilities.

But yes, the answer is that the limit is that it should not create a credit event. And our deputies, the deputy finance ministers and my deputy, are in fact literally, at these hours, exploring the possibility of these options. And the work will be intensified in the coming weeks. But the frame is indeed to move towards a Vienna-style initiative on a voluntary basis and, in that context, explore the feasibility of voluntary rescheduling or reprofiling without that creating a credit event. That's the frame.

RATTNER: Let me ask one last question on this subject, then I promise I'll move on to something more interesting -- to you anyway.

The idea obviously -- the alternative that people float is letting Greece default, and I think the Rogoff-Reinhart book says that Greece was actually in bankruptcy something like half of its existence as an independent country. Why not -- in other words, I -- what really is the risk to Europe of letting a member state -- especially one that I think is something like 2 percent of the GDP, a very peripheral member state -- simply do what many other countries and certainly many companies around the world have done successfully and moved on to live another day, but with a more manageable debt burden?

REHN: We see that there are quite relevant and serious risks linked to that scenario of debt restructuring. If you talk about, say, that kind of -- either a default or hard-debt restructuring, and we see that, first of all, it will have a very negative impact on the capital base of the Greek banking system, and that would create a very difficult situation in Greece, also for the real economy, of course.

And moreover, concerning the European financial system and the European banking sector -- as this is an intertwined combination of the sovereign crisis and banking-sector facilities -- it would have -- it would likely have a very negative impact through a chain reaction in the European financial system and also still a contagion effect to some other sovereigns. That's why -- I mean, in all openness -- we have come to the very firm conclusion that debt restructuring is not on the cards. The other alternative is by far much better, and that's why we are now working on this other alternative.

RATTNER: Let me use my last few minutes to move to, (as I said ?), a broader and more longer range question. You talked about the ESM and the components of trying to assure that this doesn't happen again, the greater economic integration and so on. But it would seem to me, anyway, fundamentally Europe has the problem of some countries, particularly Germany, to some degree France, that are not just growing fast but achieving very high levels of productivity, very high levels of efficiency and competitiveness in their economies, that are literally fused at the hip with some countries that, with or without a debt crisis, are not achieving the same levels of efficiency, and therefore -- and the steps that Europe has put in place to achieve greater economic harmonization -- I personally am not sure will necessarily turn a country like Greece into Germany in terms of its level of productivity and efficiency.

So even if you get through this current crisis, how does the ESM and the other steps that are being taken ensure that this doesn't happen in the future, where one country simply lags so much in productivity that -- as you know, as an economist -- the only choice is to reduce the real wage in order to remain at all a viable country?

REHN: That is the critical question indeed, and in fact I think we also have to realize the limits of the reform of economic governance, because still, in the end, we are talking about 27 member states in the European Union or 17 member states in the euro area, and each and every member state, in the first place, has its own responsibility on its own economy and its own economic and fiscal policy.

That is the basis of the economic and monetary union when it was created and, even with the reform of economic governance, it still will be the base. This means that each member state has the responsibility over ensuring that it can restore their public finances to resilience and health, and each member states -- each member state has the responsibility of taking such kind of economic and structural policies that will facilitate the competitiveness of its industries.

And we have one, to some extent, illustrative example of this, both in bad and good -- without making this a too-long story -- but if you take Ireland. Ireland, from the late 1980s up until around 2005, had a greatly successful economic development strategy, before it started to accumulate its credit boom and real estate bubble in the course of, say, early 2000s. Ireland did many things right from the mid-1980s, early '90s, and it became the third wealthiest member state of the European Union -- a major success story, the "Celtic Tiger," and so on -- with right policies in many ways.

Then something went wrong, and now Ireland is recovering from that, restoring confidence into its economy. And in fact if you look at the Irish figures now recently, exports are growing, industry production is increasing, and the current account is on the black.

I know it's still very difficult in Ireland -- say, socially and politically -- but at the same time, Ireland is turning the corner, clearly, and I'm confident that Ireland will be able to overcome this crisis and return to the path of sustainable economic development.

RATTNER: Thank you.

Let me open the floor to questions and, as usual, if you could say your name and your affiliation when you ask the question.

Yes, this lady right there.

QUESTIONER: Hi. I'm Michele Wucker with the World Policy Institute. One policy option I didn't hear you discuss is the possibility of providing funds to buy back the debt on the market at a deep discount, the kind of thing that Allan Meltzer has discussed in the past. Could you speak a little bit to that possibility if it might be an option to include in the policy mix for Greece?

REHN: I'm fully aware that this has been one part of the broader discussion on how to handle the debt burden of Greece. It would have been a more relevant possibility if the European Financial Stability Facility were given powers to intervene in the secondary market. However, the agreement among the EU member states is that it can, under certain conditions, intervene in the primary market -- primary sovereign debt market -- but not in the secondary bond market; which does not make it impossible, but it makes it more difficult. And therefore, it is not the primary option now, but I would not completely rule out this possibility.

RATTNER: Right. The gentleman in the middle in the back, please?

QUESTIONER: Thank you. Mazir Aminovi (ph), Goldman.

It wouldn't be a surprise to you to hear that virtually everyone in the market expects a great restructuring, probably in two stages with a reprofiling now soon and a much more severe default later. Leaving the second part aside, because I'm sure you wouldn't want to comment on that -- on the reprofiling or Vienna-style extension -- and from an economic point of view, it's very little difference on the terminology, as long as the net present value is reduced -- virtually all of us who have been investing in these markets for the last 20, 30 years see the same data, draw the same conclusion.

At the ECB, I mean, they clearly have first-rate economists who look at the same information. But they seem to be just ideologically opposed to any sort of discussion of this topic. In your interactions with them, can you just shed some light on why are they so adamant of taking even that sort of option off the table?

REHN: You said I would not comment on the second part. I still comment. Restructuring is not part of our plan.

Concerning your question as regards, say, the policy views of the European Central Bank, even though it is a legitimate question, I don't dispute that, but unfortunately I cannot give the answer because I fully respect the independence of the European Central Bank to speak for itself. And as this is a very much on-the-record meeting, I will not want to speculate on the ECB views on this.

I responded earlier on, already, to the question, why I don't see that restructuring would be beneficial for Greece, and I stand behind that same answer still.

RATTNER: Byron?

QUESTIONER: Byron Wien, Blackstone. You've said that Ireland is engaged in some remedial steps that give you encouragement. Greece, Ireland and Portugal are less than 10 percent of the European Union. Spain is a much bigger part. And it's imperative that Spain makes a turnaround for this plan to work. I wonder if you could comment on that.

And then, as an ancillary point, France has 25 -- the French banking system has 25 percent of French GDP outstanding in loans to the weaker countries. The Netherlands have 17 percent. Germany has 15 percent. If there is a default, or even a serious restructuring, the banking system of the stronger countries is in peril. I wonder if you could comment on that as well.

REHN: Thank you. First, as regards Spain, even though it's always somewhat dangerous to comment on market developments or market evolution, nevertheless I have to do it because Spain has been, so far, at least, in the last couple of months been able to decouple itself clearly from the three countries in the program of the three crisis countries.

Even when Portugal requested financial assistance from the U.N., the IMF, the bond spreads of Spain, they're only very much in -- (inaudible) --impacted. And even when there was quite vivid and even wild discussion on debt restructuring at some point in April, some weeks in April, in Europe, that it did not cause any major widening of spreads of Spain. To my mind, this shows that -- and you know it better because there are many so-called market forces in this room.

But my reading is that Spain has been able to convince, so far, of course -- it has to win the confidence every day -- but it has been able to convince so far the market participants and the general public that it will be able to overcome its challenges through the decisions, very bold decisions Spain has taken already last year on fiscal consolidation, on significant structural reforms including both a very ambitious reform of the pension system and a, say, right step forward in reforming the labor market.

And third, Spain has a credible plan which it is executing now in order to restructure its troublesome savings bank sector, the CajaSur. So with these actions, Spain has been able to convince the public and the markets so far of its resilience.

And in fact, I think one quite important illustration is that I recall a certain period, say, one or two months ago, when I discussed with some sovereign wealth funds -- three sovereign wealth funds, not the smallest of them -- over China, over Norway and Russia, returned Spain to the list of countries where these funds are again investing.

So in that sense, Spain is on the right track. But yes, definitely, Spain needs to keep up the momentum of the reforms. And the next challenge will be especially the regional and local government and their finances. They just had elections, and now, following this, it's important that the regional governments in Spain will ensure sustainability of their public finances.

On the second part, in fact, I responded in my opening remarks when I quite openly admitted that this is a crisis which is intertwining sovereign and banking elements. And in fact, that's one reason why it's very important that the stress tests are now conducted with all credibility, and in parallel, we have the national backstops in place in those countries where there are going to be pockets of vulnerability.

RATTNER: Steve?

QUESTIONER: Steve Tananbaum, GoldenTree. I'm trying to understand the glass-half-full, I guess, argument for Greece. And it's a primary (surface ?). But then you also have the interest expense. So if you could take me through, just for the next couple years: Is the glass-half-full argument that you have time until you restructure, or is that you have something that's sustainable? And I guess maybe specifically it seems like you have to have the largest primary surpluses that Greece has ever had for a prolonged period of time to be able to make a dent in the -- in the -- in the -- in the debt.

REHN: The primary structural surplus -- I mean that it includes the interest rate payment also. And I mean, of course we all have the same statistics. I mean, I'm fully aware of that.

But at the same time, restructuring just like that would not solve the fundamental problems of Greece. And therefore, as I said, I explained, we do not prefer that -- that's not in the cards.

And concerning the path forward, of course the key is for Greece to put both sides of the equation in order. I mean, Greece needs economic growth, and even though I agree with Steven that the results of the first quarter should not be, say, overplayed -- I mean, they had slightly less than 1 -- 0.8 percent growth for the first quarter, instead of 0.1 (percent), which we had predicted, so about 1 point -- 1 point higher growth than expected and forecasted by the commission or any other forecaster -- we should not make too much out of that. But we are assuming in the program and the program is based on the assumption that Greece can achieve positive economic growth in the second half of this year, in the course of the second half of this year, so that growth will pick up late this year, 2012, and Greece will be able to thus start better -- also servicing its debt and its formidable debt burden.

The other side is tax collection, which has continuously disappointed both the EU, the IMF and the Greek government. And therefore that is going to be one if not THE priority area when we are putting together a package of reinforced technical assistance for Greece, which the commission will organize, but we have the real expertise in the member states, so we will use the member state expertise, as we have done in the past in some other countries.

RATTNER: You know, of course if Greece gets -- even if Greece gets through all this, they're going to have a much higher cost of capital for the indefinite future than the other member states. And so to the second point of how they become competitive and grow at a reasonable level, they're going to have that burden as well, of a higher cost of capital for -- probably forever, or at least for a very long time.

REHN: That will be seen in the next one or two years, I believe, because now the -- we are aware that Greece is not likely to be able to return to the markets early next year. I mean, the target was March 2012. I mean, with the interest rate of 16 percent for 10-year bonds and 26 percent for two-year bonds, it's not -- it's not possible. I mean, for -- so that calls for quite difficult decisions now, in the short term.

And to be fully honest, sometimes in life it's quite useful to follow the logic of John Maynard Keynes that in the long run we are all retired. So -- (laughter) -- let's say --

RATTNER: I think he said "dead" -- (laughter) -- if I'm correct. (Chuckles.)

REHN: Let's handle -- let's handle the short run -- short run first and then see how we overcome the medium- to long-term challenges, without underestimating them, of course.

But we have a very intensive three weeks ahead of us to, say, put the Greek program back on the reform track.

RATTNER: Fair enough.

This gentleman here.

QUESTIONER: Thank you. I'm Tim DeSieno from Bingham McCutchen. And I'm very pleased that you have drawn such a clear connection between the sovereign aspects of the problem and the banking aspects of the problem.

And I just want to want continue in that vein. You mentioned -- you made some comments about your optimism with respect to Ireland turning the corner and some positives in the economic sphere.

So let's draw the connection. I'm sure, you know, we're all watching very carefully what's happening in Ireland with respect to the banks and what the market perceives as incredibly coercive action with respect to the banks' subordinated debt and frankly the inversion of the priority as usual of debt over equity.

What concerns might that create in your mind as you think about Ireland's turnaround and the market's perhaps growing reluctance to finance the Irish banks as a result?

REHN: Can you specify -- you referred to the -- I mean, what is the main concern in this regard, from your point of view? The --

QUESTIONER: Well, our -- my concern would be the markets are watching what's happening in Ireland: the total eradication of the rule of law, and a fear about investing in Irish banks, frankly maybe European banks, in that aspect of the capital structure, certainly in the medium term, for fear that it might be repeated, their money might be taken from them again. Which would seem to me -- I'm just a lawyer, but it would seem to me to present threats to recovery or at least private sector-financed recovery in the real economy that you talked about, given the connections that you've acknowledged.

REHN: Yeah. OK, I see your -- I see your logic.

And in fact when the discussion of the Irish program was conducted in November, December last year, then the line was drawn clearly to the senior bondholders' debt, so that the Republic of Ireland took certain decisions concerning subordinated debt in some banks. But in agreement with its European and international partners, it did not touch any senior debt, and that is going to be the line also in the future.

Moreover, as you know, Ireland conducted a quite credible bank stress test exercise, finally. I mean, it was the fifth round. I mean, we thought that the fourth round in September would have -- would have brought all the -- all the, say, (baring ?) of the past to the limelight, but that was not the case. Only this fifth round now, in March -- this was conducted together with the ECB, IMF and the commission -- to my mind, is a convincing and credible one.

And in that context, Ireland committed, altogether, 24 billion euros for recapitalization of its banking sector; which actually was foreseen, because in the program we had 35 (billion euros) upper limit, and the central scenario was 25 (billion euros), by accident, and the results always tested. So it revealed weaknesses after 24 billion euros, which now Ireland is recapitalizing.

And so far, the banking reform in Ireland now in the past months has been on track, and I have no reason to suspect why it would not stay on track. So in that sense, in fact, we have a -- even though I hate to be called optimist, because life is not usually giving too much reasons for being an optimist; I'm rather a realist. But if you look at the real economy in Ireland, it is recovering, and if you look at the banking sector, it is being repaired. So that should logically help Ireland to overcome the challenges and restore economic growth and return to the path of more sustainable economic development.

RATTNER: Yes, sir, in the back.

QUESTIONER: Nick Bratt, with Lazard.

I wonder if you could put a -- put perspective on the political dimension in the current situation. A few weeks -- a few months ago, we had the Icelandic people in a referendum vote against debt rearrangement. We have in Finland the emergence of a party that is opposed to bailing out some of the weaker countries. We have demonstrations in Spain and Greece against your austerity measures. So to what extent is popular discontent going to act as a constraint on decision-making?

REHN: That's indeed a very, very pertinent question. And we have a -- there was some time, say a few years ago, politicians were complaining that: Our people are not interested in European affairs. (Laughter.) So now, they are complaining that they are too interested in European affairs -- (laughter) -- with the examples as you have posed.

In fact, I am very concerned of a -- certain directions of the national debates in Europe. So that, very (broadly ?) speaking, in, say, Central and Northern European countries, especially AAA countries, the so-called AAA countries, there is a clear support fatigue; which was one of the factors, not only -- not the only factor, for instance, of the electoral success of the True Finns Party in the country I know best -- I mean, or I used to know best. I'm not able to comment that because I'm a -- I'm a false Finn, I'm not a true Finn. (Laughter.) I belong to those 81 percent who did not vote for the True Finns. (Laughter.)

So there is a clear, clear support fatigue. And that means that many of the decisions which I described will be a very hard sell in many of the national parliaments in the European Union member states. But I still believe it feasible and doable.

On the other hand, in Southern Europe we have the -- we have the reform fatigue, in different guises. And sometimes these debates are diametrically opposed. I think the funniest moment -- well, that's the wrong word, but one of the most paradoxical moments was when I was in the Greek Parliament some months ago, and I was facing the -- facing the critical opposition of the -- of the center right, which opposed the EU-IMF program, which was the previous government, while the Socialist government is pursuing the course of the EU-IMF program; while in the country I know best, it's the center right which has been supporting the EU-IMF program, while the social democratic opposition has been hammering the current government, and got a quite good electoral result in the elections.

So we have quite some paradoxes and quite some tensions in the European politics. And in this context, we need bridge building and we need such kind of political leadership from EU leaders that will help us to build these bridges, convert these national debates. Because in the end of the day, we are in the same boat, and if we cannot resolve the problems relative to Greece, Ireland and Portugal, it will be to the detriment of whole Europe. And therefore, still, the electorates and the parliaments have been supportive of the rescue measures we have undertaken.

RATTNER: We'll direct it to the two gentlemen in the front here. Why don't we start with you, sir?

QUESTIONER: Chris Faulkner MacDonagh, with Ziff Brothers Investments.

So, you know, I just wanted to pick up on an earlier question on the (net present value ?) of that; in that, I mean, it looks -- it seems like one of the -- one of the big negotiating levers that you have is the fact that if the countries defaulted right now, they're running primary deficits, so that would require a very large fiscal contraction immediately if they defaulted, right?

However, let's say your rosy scenario plays out actually, and they buy enough time so that you get a primary surplus. Yet that would still leave them with very large, potentially unsustainable levels of debt. And at that point, they are no longer subject to this fiscal arithmetic, and they could potentially default with very little economic consequence, or much less severe consequence domestically.

So being sort of a rational, forward-thinking (agent ?), as you're thinking about this (repeated gain ?) dynamic, how would you -- how -- what do you see that gives you confidence that you can lock in that guarantee they're not going to default in a future state because -- once they achieve that primary surplus goal?

REHN: I think I could otherwise follow your reasoning very well and, I mean, follow you also in the sense that I can, say, subscribe to the logic.

But on the other hand, if you achieve the primary surplus, and if things work out as they have been planned in the EU-IMF program -- which by the way, may for some look a rosy scenario, but for the Greek people it doesn't seem to be such a rosy scenario; it's a very tough program. And it, of course, will require quite some effort from the -- from the political leaders, as well as from the ordinary citizens of the -- of the country.

But if you achieve a primary surplus -- and the program is designed on the basis of achieving a 5-percent primary surplus by 2014 and maintaining that for an extended period of time -- so in fact then logically you should reduce the need -- or the danger of a default. If you reach the primary surplus, then you should be in a position of relatively solid economic growth, and you should also be able to improve your tax collection and fiscal balance, of course. So then the program is on track, and there is less need for contemplating any worse solutions or being excessively feared of a default.

RATTNER: Well, we're all going to find out. (Laughter.)

Yes, ma'am.

QUESTIONER: Yes, thanks. Well, thank you very much for your comments. Joyce Chang from JP Morgan.

I was wondering if you could talk a little bit more about the privatization program in Greece, since that seems to be the cornerstone for the next program. You mentioned the importance of guaranteeing that it's implemented. Can you talk about what steps would be taken to guarantee that it's implemented, and which assets seem the most viable to privatize, and the time frame?

REHN: I wish I were able to talk about this, but this is now under preparation and the talks are going on both in Athens and in some European capitals. So it's a moving target, and it's a bit difficult to, in a public arena, discuss it in all detail, but if I give you the frame.

So already in February, in the latest quarterly review, the Greek government commit itself to a privatization program of 15 billion euros by 2013, in the next two years. And altogether, this included 50 billion euros by 2015. Now, the IMF has assessed -- has calculated -- estimated that there is, altogether, perhaps 280 billion euros worth of assets that could be privatized in Greece.

Of course, that is by far the upper limit -- or by far a rather theoretical magnitude, and that includes plenty of illiquid assets. And therefore, it is much more meaningful to have a more realistic target. And therefore, this 50 billion target has been set. It has been based on a -- on a certain calculus of what kind of assets could be included in this, starting with three state companies and other state-owned enterprises, and then moving to more -- say, to much more illiquid assets over real estate and land. So in a way if you have a certain spectrum of liquid/illiquid, you would use -- you would not use the whole spectrum; you would use the, say, most privatizationable assets.

And now there's a reflection going on that there -- or rather, how this could be collateralized, in a sense, that it would provide guarantees for the EU member states, and that this privatization program indeed will be -- will be done. And there are several options, but one of these options is based on the model of the German Treuhandanstalt which was responsible for privatizing the assets of the former German Democratic Republic of East Germany.

That's one option. Not the only option, but one option. So this is a work in progress, and we will -- we should have the principles agreed in the context of the -- (inaudible) of the second stage, which means still in the course of June, in the coming weeks.

RATTNER: Well, this may not be accurate, but you were quoted about a week ago by Reuters at a conference as saying that you didn't think they could achieve their 50 billion euros of privatization. (Laughter.)

REHN: Yes, that's precisely not correct. And that's good you raised this. It's a good example of, say --

RATTNER: What's wrong with journalists. (Laughter.)

REHN: No, no, no. It's -- maybe it's because of my lousy pronunciation. Because what I said was that Greece can meaningfully privatize 50 billion euros worth of assets -- can meaningfully. I think being less -- I was thinking: Why did this mistake happen? Because it was the only journalist -- he was the only -- she and he were the only journalists who make the mistake.

It's been corrected, one minute after we saw it on the screen, because all the others heard not the word "not." So maybe in the English language you often use the expression you cannot meaningfully do something, and then in the mind of the journalist that was the frame, and it became "not"; while I said precisely the opposite, diametrically opposed, that Greece can meaningfully privatize 50. Because I had in mind, which has been said, that the IMF had focused 280 billion euros.

RATTNER: Well, thank you for clarifying that. I think we're out of time.

I just want to exercise the priority of a moderator to ask for a show of hands on a question that I think is really around what we've been talking -- how many people here believe that it will be possible for Greece to get through this without what in Europe they call a hard restructuring, or we might call a default -- in other words, a substantial reduction in the principal of their debt?

One, two -- well, we wish you luck -- (laughter) -- because we would -- we would all -- no seriously, we would all like you to succeed. I think it's in everybody's interest for this to work out in a positive way.

And thank you so much for coming here today. Copies of the commissioner's speech are available on the back table. And we appreciate everybody being here today.

REHN: Thank you, very much. (Applause.)

STEVEN RATTNER: We're going to start on time, as always at the council.

We're all here, as you know, to hear from Olli Rehn, the European Union commissioner for economic and monetary affairs. He's going to speak about Debt, Governance and Growth: A Eurozone Perspective. I suspect among debt, governance and growth, I think I know which one of those three most of our questions are going to be focused on. But before we get to that, he's going to make some introductory remarks.

Let me make a couple of announcements. First, this is part of the C. Peter McColough Series on International Economics. Of course, everyone has already turned off their BlackBerrys and their other wireless devices. And I would remind you this meeting is on the record.

Our next meeting in this series, this McColough series, will be Thursday, June 9th, with Sheila Bair, the chairman of the Federal Deposit Insurance Corporation.

I'm not going to read Mr. Rehn's very distinguished biography, which is in the packages you all got, because it would occupy almost the entire time of the meeting. It is very long. It is very distinguished. He is clearly well -- highly qualified for the very intense role that he's now in as the EU participant in these multiparty discussions and efforts that are under way to resolve the current euro zone issues that we're all very familiar with.

So I'm going to invite him to the podium to speak for about 10 minutes, and then he and I will engage in a dialogue for another 10 or 15 minutes, and then we'll open the floor to questions and, of course, adjourn properly -- promptly, rather -- and properly -- at 9:00.

OLLI REHN: Ladies and gentlemen, good morning. And many thanks to Stephen for his very kind words of introduction. And I'd like to thank you for your kind invitation to give a talk at the council on Foreign Relations, which I highly appreciate. It's a great pleasure to be here and share with you some views on the European economy and its governance.

Before turning to the challenges of the euro area, let me begin with a more positive note. The economic recovery in Europe is maintaining its momentum and becoming increasingly self-sustaining, despite some financial turmoil and external turbulence. Of course, we know that these developments remain uneven and tensions continue in the sovereign debt markets. But at the same time, it's important to also keep in mind the big picture, that the European recovery is indeed moving forward and maintaining its momentum despite these challenges.

It has been clear already for a long time that the current stage of the crisis is a severely intertwined combination of a sovereign debt crisis and banking sector fragilities. And it is equally clear that we cannot solve one without solving the other. We need to resolve both and in parallel.

So what have we done to this end, to achieve this goal? When working on our crisis response, I have greatly appreciated the pertinent advice given by the legendary Bill Rhodes in his recent memoirs on international financial affairs. Let me quote him. "When facing an economic crisis, the clock is always running against policymakers, so they must act rapidly to implement the necessary reforms and programs to avoid further deterioration. Experience has taught that the time is the enemy." Unquote.

While we may have not been all the time ahead of the curve, we have nevertheless been able to put together a comprehensive crisis response, which has been partly implemented and is partly still being worked out.

The first essential element of the comprehensive response now is to complete the financial repair in Europe. This is why we are currently conducting a new round of bank stress tests, which is carried out across the EU and managed by the recently established European Banking Authority.

The tests will identify pockets of vulnerability in the banking system, and once identified, vulnerable banks need to be either restructured and/or recapitalized.

EU member states have committed themselves to put remedial plans in place to that effect prior to the publication of the results, so that we have the plans -- very concrete plans ready on either restructuring or recapitalization once the results come out in a few weeks.

The other dimension of the crisis is the still-accumulating sovereign debt, as we well know. Even if public debt as a share of GDP is on average lower in Europe than in the United States, we are convinced that putting the debt-to-GDP ratios on a downward path is a pressing priority for all EU member states.

For some member states, like Greece, there has simply been no alternative to fiscal consolidation. If you are shut out from the private debt market, you need to put your fiscal house in order to regain access to market financing. For other member states, it is obvious, and in fact confirmed by economic modeling exercises, that fiscal prudence is positive for growth and employment in the medium to long run.

The impact of debt on growth has also been looked from another angle. Carmen Reinhart and Kenneth Rogoff, in their wonderful book, "This Time is Different," have coined the 90-percent rule, or should I say rule of thumb, that countries with public debt exceeding 90 percent of annual economic output grow -- tend to grow more slowly. High debt levels can crowd out economic activity and entrepreneurial dynamism, and thus simply hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90-percent threshold -- it's currently, on average, around 85 percent -- and when the U.S. has already passed this threshold.

Ladies and gentlemen, in Europe our comprehensive policy response has combined both, say, short-term firefighting measures and longer-term work on new economic policy architecture.

To prevent Greece from defaulting, a loan package with strong conventionality was put in place a year ago, as we know. In parallel, soon afterwards, we created effective financial backstops to manage further problems and these mechanisms were put into action for Ireland and Portugal in the recent months.

We have also decided on the principles of a permanent stability mechanism, which will replace the temporary ones in 2013. By containing the sovereign debt crisis into the most vulnerable countries, these backstops have helped to prevent the crisis from spreading to a Europe-wide financial turmoil, and thus protected the ongoing recovery and slowly improving employment.

But clearly, the firefighters' job is not over yet. We cannot give the ground completely to the architects. Despite significant achievements in reducing the fiscal deficit since spring last year, Greece is not likely to be able to gain access to market financing by early next year, as foreseen in the EU-IMF program, in the current program. This calls for difficult decisions still in June.

And we are in fact currently carrying out our fourth quarterly review of the Greek program in Athens with a troika, EU-IMF troika. Good progress has been made, especially on the most pressing issues, and I'm confident that the review can be concluded in the coming days. Once the review is concluded positively, the EU with the IMF will move on to prepare next steps in order to safeguard financial stability and to continue economic reform in Greece.

I have been often asked what has been the main lesson we have learned from the crisis. And my answer is that -- it may be a simple but still fundamental lesson: Prevention is always better than correction -- not to speak of being forced to crisis management. The financial crisis revealed certain systemic weaknesses in the EU's economic and monetary union. Many countries in the euro area did not use the opportunity of good times in the first decade of the euro to put their fiscal houses in order. When the crisis hit, it exposed those countries where macroeconomic imbalances were large and/or public finances were in a bad shape.

In response, we are undertaking a fundamental reform of EU economic governance. The commission presented a legislative package last fall to the council and the parliament, and I expect that they will conclude the work in the coming weeks, still in the course of June. This package is composed of three main building blocks.

First, to strengthen the prior and preventive -- (inaudible) -- surveillance to prevent a crisis like Greece. Second, to identify and correct macroeconomic imbalances and divergences in competitiveness to avoid situations like Ireland or, to an extent, Spain. And third, to create a more effective enforcement mechanism, with earlier and more automatic sanctions in the case of violation of the rules.

Some people think that EMU stands for European monetary union. In fact it stands for the Economic and Monetary Union. And now we are to strengthen its economic pillar and thus finally bringing a real and serious dose of E into the EMU. That's the task as regards the reinforcement of economic governance in the union.

Ladies and gentlemen, to conclude my opening remarks I would like to say that with our comprehensive crisis response we have managed to, so far, to prevent a financial meltdown and contained the sovereign debt crisis into three countries now covered by the EU-IMF programs. But of course we can not declare any victory yet. The work must go on.

And June is indeed a critical month in overcoming the crisis. This calls for bold decisions, though difficult decisions, on completing the financial repair, reinforcing economic governance, and keeping Greece on the reform track. So we may not be fully in the endgame yet, but we can make the coming weeks the beginning of the end of the crisis.

Thank you for your attention.

(Applause.)

RATTNER: Well, thank you, Commissioner, for that very clear and lucid overview of the situation in Europe. I want to apologize in advance, I was a journalist in my early life and I can't resist the journalist's temptation to ask pointed questions, so let me try to -- I know everybody here would like to hear a few more specifics about how this all will play out. I know, as you said in your remarks, you're in the middle of discussion in Athens and so there are things you may not be able to comment on.

But I think the fundamental question that's on people's minds is is there a way, and let's use Greece being the one that's in the firing line at the moment as the example, is there really a way forward for Greece to deal with this debt load -- which is far and above the 90 percent number that you mentioned; it's going to be at 160 percent if it's not there already. Is there a way to deal with it without what we would call default, a reduction in the amount of debt that the Greeks own? Is there any way that they can manage that debt load, no matter what else happens around it?

REHN: Thanks for asking this very pertinent and aggressive -- (laughter) -- no small talk this morning, seemingly. So let me explain how we see the situation in Greece and -- well, other coming actions. First of all, we have a -- in a way, we work in two stages now. First, we have to see that Greece will be able to meet the conditions of this year fiscal targets 2011, and also launch seriously its privatization program. This will happen in the coming days.

Once we see this, then we move to the second stage, which is to see how we can, together with Greece, ensure that Greece will be financed in the medium term, and especially what Greece itself has to do in order to ensure the trust of its partners -- its European and international partners.

There are a number of things that are needed, at least three or four. First, Greece will have to achieve a primary structural surplus in the next two years or so. And that is the sine qua non. That is the necessary condition of starting to reduce the debt burden. It's simple, but it needs to be underlined. Currently, the deficit is at the level of -- well, last year, 10 percent. This year, target is 7 percent.

Second, Greece is embarking on a very ambitious privatization program of 50 billion euros up to 2015, which represents over 20 percent of Greek GDP. And EU member states want to see some kind of guarantees that this privatization program indeed will be implemented. That is another cornerstone of this package.

And then, third, we need reinforced delivery mechanisms or improved delivery mechanisms from Greece, which will imply reinforced technical assistance on certain critical areas such as tax collection and privatization activities.

And then, fourth, we are working on, currently, to introduce a Vienna-style initiative where banks would maintain their exposure to Greece. And in that context, we are examining the feasibility of a voluntary rescheduling of loans, on the condition that it will not create a credit event.

All this work is now going on both in Athens and, in fact, in Vienna because the economic and financial committee of the European Union is meeting today and tomorrow in Vienna. And of course, in Brussels and Washington, things are -- things are being worked out as well. So it's a moving target, but this is the broad sketch of the plan, which will be completed by the 20th of June.

RATTNER: But it's true, isn't it, that so far, the Greeks have basically missed every target that have been set for them, whether it's the budget deficit, whether it's the privatization schedule. They did have positive GDP growth for the first quarter, but I think everybody was quite surprised and doesn't think it's the beginning of a trend. They're in the middle of a deep recession.

And so, I guess, what's the confidence level they can actually get back on track? And even if they get on track, the Reinhart and Rogoff book that you referred to would basically say that a country with 160 percent GDP can't possibly grow it's way out of a debt burden like that, that there has to be a reduction in the amount of debt, not simply all the very important steps that you just mentioned.

REHN: First, Greece has not failed all the targets. Greece has, in fact, in the first twelve months of the program, from spring last year until, say, early spring this year, been able to achieve a reduction of its fiscal deficit by 7 percent, net terms, which shows 5 percent reduction in gross terms. So that is actually no mean achievement. And that increased the credibility of the Greek efforts in the early phase of the program.

However, since February, when we already warned of risks of slippage, we have seen that especially the tax revenues have not increased as expected. And because of the burden of the past is quite heavy, there is a need to fill a gap of around 3 percentage points still this year, in fiscal terms.

But Greece is working on that. And I don't think it is, in any case, right to say that everything has failed. The glass is maybe not completely full, but it is more half full than half empty in terms of providing results. Another privatization program is being launched in these days and these weeks.

Concerning the debt burden, I'm of course fully aware that Greece has a, say, formidable debt burden. But really, the critical thing is to, first of all, achieve a primary structural surplus so that Greece will stop living beyond its means, which is not yet happening. So that's the sine qua non of everything. And therefore, that's now the objective.

And if you look at some relevant examples from Europe, we have -- in the 1990s, Belgium was able to achieve a 5 percent primary surplus for six years. And we have, altogether, six member states that have been able to achieve 4 percent primary surplus for at least four years. So it is economically and financially doable, feasible. The question is whether there is the required political will and the sufficient social sustainability in the Greek society.

RATTNER: And to that point, of course, the -- I don't mean to be entirely negative; I'm just trying to, obviously, draw you out. The Greek government lost the support of the opposition party, which wants lower taxes. And then, with respect to Belgium, yes, Belgium did not have quite the same level of debt, I believe, as Greece has. And it also -- the economy wasn't nearly so deep into recession. Of course, the euro didn't exist at that point in time, so they had currency flexibility. So I don't -- there are certainly some parallels. Whether they are perfect parallels, I'm not as sure.

REHN: That was during the runup to the euro, and it was a currency board then, so it was equivalent to a euro membership of the time, in a way. And of course, the debt burden was somewhat lower but was still well beyond 100 percent in the case of Belgium.

RATTNER: So when you mention the Vienna-style debt restructuring or reprofiling, -- whatever Europeans like to call it today, because it changes -- seems to change every few days -- (laughter) -- you said no credit default. So does that mean all these people who -- most of whom, I suspect are on -- in the Wall Street world in one way or another -- should feel comfortable going out and buying debt, Greek debt at 60 cents on the dollar today? Is that a good investment? (Laughter.)

REHN: I try, usually, to avoid giving investment advice to anybody. (Laughter.) It's beyond my responsibilities.

But yes, the answer is that the limit is that it should not create a credit event. And our deputies, the deputy finance ministers and my deputy, are in fact literally, at these hours, exploring the possibility of these options. And the work will be intensified in the coming weeks. But the frame is indeed to move towards a Vienna-style initiative on a voluntary basis and, in that context, explore the feasibility of voluntary rescheduling or reprofiling without that creating a credit event. That's the frame.

RATTNER: Let me ask one last question on this subject, then I promise I'll move on to something more interesting -- to you anyway.

The idea obviously -- the alternative that people float is letting Greece default, and I think the Rogoff-Reinhart book says that Greece was actually in bankruptcy something like half of its existence as an independent country. Why not -- in other words, I -- what really is the risk to Europe of letting a member state -- especially one that I think is something like 2 percent of the GDP, a very peripheral member state -- simply do what many other countries and certainly many companies around the world have done successfully and moved on to live another day, but with a more manageable debt burden?

REHN: We see that there are quite relevant and serious risks linked to that scenario of debt restructuring. If you talk about, say, that kind of -- either a default or hard-debt restructuring, and we see that, first of all, it will have a very negative impact on the capital base of the Greek banking system, and that would create a very difficult situation in Greece, also for the real economy, of course.

And moreover, concerning the European financial system and the European banking sector -- as this is an intertwined combination of the sovereign crisis and banking-sector facilities -- it would have -- it would likely have a very negative impact through a chain reaction in the European financial system and also still a contagion effect to some other sovereigns. That's why -- I mean, in all openness -- we have come to the very firm conclusion that debt restructuring is not on the cards. The other alternative is by far much better, and that's why we are now working on this other alternative.

RATTNER: Let me use my last few minutes to move to, (as I said ?), a broader and more longer range question. You talked about the ESM and the components of trying to assure that this doesn't happen again, the greater economic integration and so on. But it would seem to me, anyway, fundamentally Europe has the problem of some countries, particularly Germany, to some degree France, that are not just growing fast but achieving very high levels of productivity, very high levels of efficiency and competitiveness in their economies, that are literally fused at the hip with some countries that, with or without a debt crisis, are not achieving the same levels of efficiency, and therefore -- and the steps that Europe has put in place to achieve greater economic harmonization -- I personally am not sure will necessarily turn a country like Greece into Germany in terms of its level of productivity and efficiency.

So even if you get through this current crisis, how does the ESM and the other steps that are being taken ensure that this doesn't happen in the future, where one country simply lags so much in productivity that -- as you know, as an economist -- the only choice is to reduce the real wage in order to remain at all a viable country?

REHN: That is the critical question indeed, and in fact I think we also have to realize the limits of the reform of economic governance, because still, in the end, we are talking about 27 member states in the European Union or 17 member states in the euro area, and each and every member state, in the first place, has its own responsibility on its own economy and its own economic and fiscal policy.

That is the basis of the economic and monetary union when it was created and, even with the reform of economic governance, it still will be the base. This means that each member state has the responsibility over ensuring that it can restore their public finances to resilience and health, and each member states -- each member state has the responsibility of taking such kind of economic and structural policies that will facilitate the competitiveness of its industries.

And we have one, to some extent, illustrative example of this, both in bad and good -- without making this a too-long story -- but if you take Ireland. Ireland, from the late 1980s up until around 2005, had a greatly successful economic development strategy, before it started to accumulate its credit boom and real estate bubble in the course of, say, early 2000s. Ireland did many things right from the mid-1980s, early '90s, and it became the third wealthiest member state of the European Union -- a major success story, the "Celtic Tiger," and so on -- with right policies in many ways.

Then something went wrong, and now Ireland is recovering from that, restoring confidence into its economy. And in fact if you look at the Irish figures now recently, exports are growing, industry production is increasing, and the current account is on the black.

I know it's still very difficult in Ireland -- say, socially and politically -- but at the same time, Ireland is turning the corner, clearly, and I'm confident that Ireland will be able to overcome this crisis and return to the path of sustainable economic development.

RATTNER: Thank you.

Let me open the floor to questions and, as usual, if you could say your name and your affiliation when you ask the question.

Yes, this lady right there.

QUESTIONER: Hi. I'm Michele Wucker with the World Policy Institute. One policy option I didn't hear you discuss is the possibility of providing funds to buy back the debt on the market at a deep discount, the kind of thing that Allan Meltzer has discussed in the past. Could you speak a little bit to that possibility if it might be an option to include in the policy mix for Greece?

REHN: I'm fully aware that this has been one part of the broader discussion on how to handle the debt burden of Greece. It would have been a more relevant possibility if the European Financial Stability Facility were given powers to intervene in the secondary market. However, the agreement among the EU member states is that it can, under certain conditions, intervene in the primary market -- primary sovereign debt market -- but not in the secondary bond market; which does not make it impossible, but it makes it more difficult. And therefore, it is not the primary option now, but I would not completely rule out this possibility.

RATTNER: Right. The gentleman in the middle in the back, please?

QUESTIONER: Thank you. Mazir Aminovi (ph), Goldman.

It wouldn't be a surprise to you to hear that virtually everyone in the market expects a great restructuring, probably in two stages with a reprofiling now soon and a much more severe default later. Leaving the second part aside, because I'm sure you wouldn't want to comment on that -- on the reprofiling or Vienna-style extension -- and from an economic point of view, it's very little difference on the terminology, as long as the net present value is reduced -- virtually all of us who have been investing in these markets for the last 20, 30 years see the same data, draw the same conclusion.

At the ECB, I mean, they clearly have first-rate economists who look at the same information. But they seem to be just ideologically opposed to any sort of discussion of this topic. In your interactions with them, can you just shed some light on why are they so adamant of taking even that sort of option off the table?

REHN: You said I would not comment on the second part. I still comment. Restructuring is not part of our plan.

Concerning your question as regards, say, the policy views of the European Central Bank, even though it is a legitimate question, I don't dispute that, but unfortunately I cannot give the answer because I fully respect the independence of the European Central Bank to speak for itself. And as this is a very much on-the-record meeting, I will not want to speculate on the ECB views on this.

I responded earlier on, already, to the question, why I don't see that restructuring would be beneficial for Greece, and I stand behind that same answer still.

RATTNER: Byron?

QUESTIONER: Byron Wien, Blackstone. You've said that Ireland is engaged in some remedial steps that give you encouragement. Greece, Ireland and Portugal are less than 10 percent of the European Union. Spain is a much bigger part. And it's imperative that Spain makes a turnaround for this plan to work. I wonder if you could comment on that.

And then, as an ancillary point, France has 25 -- the French banking system has 25 percent of French GDP outstanding in loans to the weaker countries. The Netherlands have 17 percent. Germany has 15 percent. If there is a default, or even a serious restructuring, the banking system of the stronger countries is in peril. I wonder if you could comment on that as well.

REHN: Thank you. First, as regards Spain, even though it's always somewhat dangerous to comment on market developments or market evolution, nevertheless I have to do it because Spain has been, so far, at least, in the last couple of months been able to decouple itself clearly from the three countries in the program of the three crisis countries.

Even when Portugal requested financial assistance from the U.N., the IMF, the bond spreads of Spain, they're only very much in -- (inaudible) --impacted. And even when there was quite vivid and even wild discussion on debt restructuring at some point in April, some weeks in April, in Europe, that it did not cause any major widening of spreads of Spain. To my mind, this shows that -- and you know it better because there are many so-called market forces in this room.

But my reading is that Spain has been able to convince, so far, of course -- it has to win the confidence every day -- but it has been able to convince so far the market participants and the general public that it will be able to overcome its challenges through the decisions, very bold decisions Spain has taken already last year on fiscal consolidation, on significant structural reforms including both a very ambitious reform of the pension system and a, say, right step forward in reforming the labor market.

And third, Spain has a credible plan which it is executing now in order to restructure its troublesome savings bank sector, the CajaSur. So with these actions, Spain has been able to convince the public and the markets so far of its resilience.

And in fact, I think one quite important illustration is that I recall a certain period, say, one or two months ago, when I discussed with some sovereign wealth funds -- three sovereign wealth funds, not the smallest of them -- over China, over Norway and Russia, returned Spain to the list of countries where these funds are again investing.

So in that sense, Spain is on the right track. But yes, definitely, Spain needs to keep up the momentum of the reforms. And the next challenge will be especially the regional and local government and their finances. They just had elections, and now, following this, it's important that the regional governments in Spain will ensure sustainability of their public finances.

On the second part, in fact, I responded in my opening remarks when I quite openly admitted that this is a crisis which is intertwining sovereign and banking elements. And in fact, that's one reason why it's very important that the stress tests are now conducted with all credibility, and in parallel, we have the national backstops in place in those countries where there are going to be pockets of vulnerability.

RATTNER: Steve?

QUESTIONER: Steve Tananbaum, GoldenTree. I'm trying to understand the glass-half-full, I guess, argument for Greece. And it's a primary (surface ?). But then you also have the interest expense. So if you could take me through, just for the next couple years: Is the glass-half-full argument that you have time until you restructure, or is that you have something that's sustainable? And I guess maybe specifically it seems like you have to have the largest primary surpluses that Greece has ever had for a prolonged period of time to be able to make a dent in the -- in the -- in the -- in the debt.

REHN: The primary structural surplus -- I mean that it includes the interest rate payment also. And I mean, of course we all have the same statistics. I mean, I'm fully aware of that.

But at the same time, restructuring just like that would not solve the fundamental problems of Greece. And therefore, as I said, I explained, we do not prefer that -- that's not in the cards.

And concerning the path forward, of course the key is for Greece to put both sides of the equation in order. I mean, Greece needs economic growth, and even though I agree with Steven that the results of the first quarter should not be, say, overplayed -- I mean, they had slightly less than 1 -- 0.8 percent growth for the first quarter, instead of 0.1 (percent), which we had predicted, so about 1 point -- 1 point higher growth than expected and forecasted by the commission or any other forecaster -- we should not make too much out of that. But we are assuming in the program and the program is based on the assumption that Greece can achieve positive economic growth in the second half of this year, in the course of the second half of this year, so that growth will pick up late this year, 2012, and Greece will be able to thus start better -- also servicing its debt and its formidable debt burden.

The other side is tax collection, which has continuously disappointed both the EU, the IMF and the Greek government. And therefore that is going to be one if not THE priority area when we are putting together a package of reinforced technical assistance for Greece, which the commission will organize, but we have the real expertise in the member states, so we will use the member state expertise, as we have done in the past in some other countries.

RATTNER: You know, of course if Greece gets -- even if Greece gets through all this, they're going to have a much higher cost of capital for the indefinite future than the other member states. And so to the second point of how they become competitive and grow at a reasonable level, they're going to have that burden as well, of a higher cost of capital for -- probably forever, or at least for a very long time.

REHN: That will be seen in the next one or two years, I believe, because now the -- we are aware that Greece is not likely to be able to return to the markets early next year. I mean, the target was March 2012. I mean, with the interest rate of 16 percent for 10-year bonds and 26 percent for two-year bonds, it's not -- it's not possible. I mean, for -- so that calls for quite difficult decisions now, in the short term.

And to be fully honest, sometimes in life it's quite useful to follow the logic of John Maynard Keynes that in the long run we are all retired. So -- (laughter) -- let's say --

RATTNER: I think he said "dead" -- (laughter) -- if I'm correct. (Chuckles.)

REHN: Let's handle -- let's handle the short run -- short run first and then see how we overcome the medium- to long-term challenges, without underestimating them, of course.

But we have a very intensive three weeks ahead of us to, say, put the Greek program back on the reform track.

RATTNER: Fair enough.

This gentleman here.

QUESTIONER: Thank you. I'm Tim DeSieno from Bingham McCutchen. And I'm very pleased that you have drawn such a clear connection between the sovereign aspects of the problem and the banking aspects of the problem.

And I just want to want continue in that vein. You mentioned -- you made some comments about your optimism with respect to Ireland turning the corner and some positives in the economic sphere.

So let's draw the connection. I'm sure, you know, we're all watching very carefully what's happening in Ireland with respect to the banks and what the market perceives as incredibly coercive action with respect to the banks' subordinated debt and frankly the inversion of the priority as usual of debt over equity.

What concerns might that create in your mind as you think about Ireland's turnaround and the market's perhaps growing reluctance to finance the Irish banks as a result?

REHN: Can you specify -- you referred to the -- I mean, what is the main concern in this regard, from your point of view? The --

QUESTIONER: Well, our -- my concern would be the markets are watching what's happening in Ireland: the total eradication of the rule of law, and a fear about investing in Irish banks, frankly maybe European banks, in that aspect of the capital structure, certainly in the medium term, for fear that it might be repeated, their money might be taken from them again. Which would seem to me -- I'm just a lawyer, but it would seem to me to present threats to recovery or at least private sector-financed recovery in the real economy that you talked about, given the connections that you've acknowledged.

REHN: Yeah. OK, I see your -- I see your logic.

And in fact when the discussion of the Irish program was conducted in November, December last year, then the line was drawn clearly to the senior bondholders' debt, so that the Republic of Ireland took certain decisions concerning subordinated debt in some banks. But in agreement with its European and international partners, it did not touch any senior debt, and that is going to be the line also in the future.

Moreover, as you know, Ireland conducted a quite credible bank stress test exercise, finally. I mean, it was the fifth round. I mean, we thought that the fourth round in September would have -- would have brought all the -- all the, say, (baring ?) of the past to the limelight, but that was not the case. Only this fifth round now, in March -- this was conducted together with the ECB, IMF and the commission -- to my mind, is a convincing and credible one.

And in that context, Ireland committed, altogether, 24 billion euros for recapitalization of its banking sector; which actually was foreseen, because in the program we had 35 (billion euros) upper limit, and the central scenario was 25 (billion euros), by accident, and the results always tested. So it revealed weaknesses after 24 billion euros, which now Ireland is recapitalizing.

And so far, the banking reform in Ireland now in the past months has been on track, and I have no reason to suspect why it would not stay on track. So in that sense, in fact, we have a -- even though I hate to be called optimist, because life is not usually giving too much reasons for being an optimist; I'm rather a realist. But if you look at the real economy in Ireland, it is recovering, and if you look at the banking sector, it is being repaired. So that should logically help Ireland to overcome the challenges and restore economic growth and return to the path of more sustainable economic development.

RATTNER: Yes, sir, in the back.

QUESTIONER: Nick Bratt, with Lazard.

I wonder if you could put a -- put perspective on the political dimension in the current situation. A few weeks -- a few months ago, we had the Icelandic people in a referendum vote against debt rearrangement. We have in Finland the emergence of a party that is opposed to bailing out some of the weaker countries. We have demonstrations in Spain and Greece against your austerity measures. So to what extent is popular discontent going to act as a constraint on decision-making?

REHN: That's indeed a very, very pertinent question. And we have a -- there was some time, say a few years ago, politicians were complaining that: Our people are not interested in European affairs. (Laughter.) So now, they are complaining that they are too interested in European affairs -- (laughter) -- with the examples as you have posed.

In fact, I am very concerned of a -- certain directions of the national debates in Europe. So that, very (broadly ?) speaking, in, say, Central and Northern European countries, especially AAA countries, the so-called AAA countries, there is a clear support fatigue; which was one of the factors, not only -- not the only factor, for instance, of the electoral success of the True Finns Party in the country I know best -- I mean, or I used to know best. I'm not able to comment that because I'm a -- I'm a false Finn, I'm not a true Finn. (Laughter.) I belong to those 81 percent who did not vote for the True Finns. (Laughter.)

So there is a clear, clear support fatigue. And that means that many of the decisions which I described will be a very hard sell in many of the national parliaments in the European Union member states. But I still believe it feasible and doable.

On the other hand, in Southern Europe we have the -- we have the reform fatigue, in different guises. And sometimes these debates are diametrically opposed. I think the funniest moment -- well, that's the wrong word, but one of the most paradoxical moments was when I was in the Greek Parliament some months ago, and I was facing the -- facing the critical opposition of the -- of the center right, which opposed the EU-IMF program, which was the previous government, while the Socialist government is pursuing the course of the EU-IMF program; while in the country I know best, it's the center right which has been supporting the EU-IMF program, while the social democratic opposition has been hammering the current government, and got a quite good electoral result in the elections.

So we have quite some paradoxes and quite some tensions in the European politics. And in this context, we need bridge building and we need such kind of political leadership from EU leaders that will help us to build these bridges, convert these national debates. Because in the end of the day, we are in the same boat, and if we cannot resolve the problems relative to Greece, Ireland and Portugal, it will be to the detriment of whole Europe. And therefore, still, the electorates and the parliaments have been supportive of the rescue measures we have undertaken.

RATTNER: We'll direct it to the two gentlemen in the front here. Why don't we start with you, sir?

QUESTIONER: Chris Faulkner MacDonagh, with Ziff Brothers Investments.

So, you know, I just wanted to pick up on an earlier question on the (net present value ?) of that; in that, I mean, it looks -- it seems like one of the -- one of the big negotiating levers that you have is the fact that if the countries defaulted right now, they're running primary deficits, so that would require a very large fiscal contraction immediately if they defaulted, right?

However, let's say your rosy scenario plays out actually, and they buy enough time so that you get a primary surplus. Yet that would still leave them with very large, potentially unsustainable levels of debt. And at that point, they are no longer subject to this fiscal arithmetic, and they could potentially default with very little economic consequence, or much less severe consequence domestically.

So being sort of a rational, forward-thinking (agent ?), as you're thinking about this (repeated gain ?) dynamic, how would you -- how -- what do you see that gives you confidence that you can lock in that guarantee they're not going to default in a future state because -- once they achieve that primary surplus goal?

REHN: I think I could otherwise follow your reasoning very well and, I mean, follow you also in the sense that I can, say, subscribe to the logic.

But on the other hand, if you achieve the primary surplus, and if things work out as they have been planned in the EU-IMF program -- which by the way, may for some look a rosy scenario, but for the Greek people it doesn't seem to be such a rosy scenario; it's a very tough program. And it, of course, will require quite some effort from the -- from the political leaders, as well as from the ordinary citizens of the -- of the country.

But if you achieve a primary surplus -- and the program is designed on the basis of achieving a 5-percent primary surplus by 2014 and maintaining that for an extended period of time -- so in fact then logically you should reduce the need -- or the danger of a default. If you reach the primary surplus, then you should be in a position of relatively solid economic growth, and you should also be able to improve your tax collection and fiscal balance, of course. So then the program is on track, and there is less need for contemplating any worse solutions or being excessively feared of a default.

RATTNER: Well, we're all going to find out. (Laughter.)

Yes, ma'am.

QUESTIONER: Yes, thanks. Well, thank you very much for your comments. Joyce Chang from JP Morgan.

I was wondering if you could talk a little bit more about the privatization program in Greece, since that seems to be the cornerstone for the next program. You mentioned the importance of guaranteeing that it's implemented. Can you talk about what steps would be taken to guarantee that it's implemented, and which assets seem the most viable to privatize, and the time frame?

REHN: I wish I were able to talk about this, but this is now under preparation and the talks are going on both in Athens and in some European capitals. So it's a moving target, and it's a bit difficult to, in a public arena, discuss it in all detail, but if I give you the frame.

So already in February, in the latest quarterly review, the Greek government commit itself to a privatization program of 15 billion euros by 2013, in the next two years. And altogether, this included 50 billion euros by 2015. Now, the IMF has assessed -- has calculated -- estimated that there is, altogether, perhaps 280 billion euros worth of assets that could be privatized in Greece.

Of course, that is by far the upper limit -- or by far a rather theoretical magnitude, and that includes plenty of illiquid assets. And therefore, it is much more meaningful to have a more realistic target. And therefore, this 50 billion target has been set. It has been based on a -- on a certain calculus of what kind of assets could be included in this, starting with three state companies and other state-owned enterprises, and then moving to more -- say, to much more illiquid assets over real estate and land. So in a way if you have a certain spectrum of liquid/illiquid, you would use -- you would not use the whole spectrum; you would use the, say, most privatizationable assets.

And now there's a reflection going on that there -- or rather, how this could be collateralized, in a sense, that it would provide guarantees for the EU member states, and that this privatization program indeed will be -- will be done. And there are several options, but one of these options is based on the model of the German Treuhandanstalt which was responsible for privatizing the assets of the former German Democratic Republic of East Germany.

That's one option. Not the only option, but one option. So this is a work in progress, and we will -- we should have the principles agreed in the context of the -- (inaudible) of the second stage, which means still in the course of June, in the coming weeks.

RATTNER: Well, this may not be accurate, but you were quoted about a week ago by Reuters at a conference as saying that you didn't think they could achieve their 50 billion euros of privatization. (Laughter.)

REHN: Yes, that's precisely not correct. And that's good you raised this. It's a good example of, say --

RATTNER: What's wrong with journalists. (Laughter.)

REHN: No, no, no. It's -- maybe it's because of my lousy pronunciation. Because what I said was that Greece can meaningfully privatize 50 billion euros worth of assets -- can meaningfully. I think being less -- I was thinking: Why did this mistake happen? Because it was the only journalist -- he was the only -- she and he were the only journalists who make the mistake.

It's been corrected, one minute after we saw it on the screen, because all the others heard not the word "not." So maybe in the English language you often use the expression you cannot meaningfully do something, and then in the mind of the journalist that was the frame, and it became "not"; while I said precisely the opposite, diametrically opposed, that Greece can meaningfully privatize 50. Because I had in mind, which has been said, that the IMF had focused 280 billion euros.

RATTNER: Well, thank you for clarifying that. I think we're out of time.

I just want to exercise the priority of a moderator to ask for a show of hands on a question that I think is really around what we've been talking -- how many people here believe that it will be possible for Greece to get through this without what in Europe they call a hard restructuring, or we might call a default -- in other words, a substantial reduction in the principal of their debt?

One, two -- well, we wish you luck -- (laughter) -- because we would -- we would all -- no seriously, we would all like you to succeed. I think it's in everybody's interest for this to work out in a positive way.

And thank you so much for coming here today. Copies of the commissioner's speech are available on the back table. And we appreciate everybody being here today.

REHN: Thank you, very much. (Applause.)