THE ASPEN INSTITUTE ASPEN IDEAS FESTIVAL WELCOME AND CONVERSATIONS 2016 IN CONVERSATION WITH CHRISTINE LAGARDE Aspen, Colorado Sunday, June 26, 2016 1 LIST OF PARTICIPANTS CHRISTINE LAGARDE Managing Director, International Monetary Fund JANE HARMAN Director, President, and CEO, Woodrow Wilson International Center for Scholars Trustee, The Aspen Institute * * * * * 2 IN CONVERSATION WITH CHRISTINE LAGARDE MS. BOONE: Ladies and gentlemen. (Applause) MS. BOONE: Welcome, everybody, to the 2016 Aspen Ideas Festival. This is our 12th Ideas Festival and I have to say we're so excited, it's ridiculous. (Laughter) MS. BOONE: I could use some language that some people used this morning in the final closing about how ridiculous it is, but I won't use that. I'm going to be back in a bit, but we've been planning this event for a year and we want to get going. So it is my great pleasure to introduce to you a friend, a trustee of the Aspen Institute, the president and CEO of the Woodrow Wilson Center for Scholars, Jane Harman, and our very, very honored guest, Christine Lagarde, managing director of the International Monetary Fund. Would you join us on the stage? (Applause) MS. HARMAN: Well, good afternoon, everyone. Can we please give a shout out for Kitty Boone? (Applause) MS. HARMAN: No way -- with all affection for Walter and the team, no way this could happen without her magic. So I'm delighted to be back and delighted to be part of the first act. The reason this is happened: you may know something happened last week. (Laughter) MS. HARMAN: A big vote. It wasn't in the United States. But Christine was actually coming last year and at the last minute there was a family event and she had to cancel. So we decided she would come this 3 year, a year's lead time. Nothing would interfere with Christine and Xavier coming to Aspen, now way. Middle of last week I get a text: "Sheri (phonetic), there's this vote, and if it passes, I may have to delay or cancel my trip to Aspen. But it probably won't pass." (Laughter) MS. HARMAN: And remember the day of most people thought it had tipped and it wouldn't pass. So at 4:00 a.m. on Friday, junkie that I am, I turn on my television. Oh, my god, 5:00 a.m. text from Christine: "Sheri, I have to" -- "emergency meetings. I have to delay and may have to cancel my visit to Aspen." So I thought, "She did predict this" -- "how sad." So canceled a bunch of things, but headed to Aspen anyway, landed in Aspen to find that she managed to come. (Applause) MS. HARMAN: And has to leave early. So Walter had this brilliant idea that we would hold this event early. And the 800 of you who are in the first session get the whole advantage of this and so do I. So Christine Lagarde is a dearest friend. I'm totally objective when I say she's one of the most admired women on the planet. Do we agree? (Applause) MS. HARMAN: She was just elected unanimously -- get that -- to her second five-year term as the director of the IMF, the International Monetary Fund; the first woman to hold that position. She also was -- (Applause) MS. HARMAN: -- the first woman to be finance minister of a G7 country. She also was the first woman to chair a major international law firm. Not bad. (Applause) 4 MS. HARMAN: So the markets are opening in Asia -- I believe I'm correct -- and there are "wreckperts" everywhere -- good new word; I read it, I didn't make it up -- who are saying, "Catastrophe" -- "the U.K. will fall, the EU will fall. The U.K. has opportunities. The EU has opportunities. These countries will leave," so on and so forth. The markets obviously were down on Friday. My first question to you my friend is: is Brexit a catastrophe or an opportunity or both? MS. LAGARDE: Thank you very much, Jane, for this easy one. (Laughter) MS. LAGARDE: And thank you very much. On behalf of my husband and myself, I like to really thank the Aspen community. We've been here for less than 48 hours and we've only met lovely, nice, warmhearted, welcoming, hospitable people, not to mention of course Jane and Bob, my friends. But really thank you so much. It feels so good to be here. (Applause) MS. LAGARDE: Jane, what I thought I would do is just start with a few numbers and a few -- put things in perspective a little bit because there is a lot of either short memories or a rush to a few conclusions, which I think is not necessarily the wisest thing to do at the moment. So looking at numbers a little bit. I think we have to keep in mind that the European Union which started being constructed over 50 years ago represents roughly 500 million people and is the largest free market economic zone in the world. That's what the U.K. is considering at the moment. The U.K. itself is a country with over 60 million people; GDP per capita at around $45,000; a pretty good track record of economic policy in the last few years 5 with unemployment down at about 5 percent; growth ranging from 2.2 percent to 1.9 percent and up; and, you know, public finances that have been largely established and a good direction in terms of debt-to-GDP. So that's the economic situation of that country at the moment. And I'm saying that with particular purpose, which will be, as you will understand, the questions that I have at the end of my quick look around. Second set of facts, which I think are important, is that on Friday as we all sort of woke up to this news, which was heartbreaking for those of us who are truly Europeans and certainly it was very much my sentiment as a European. But when we woke up we realized that first of all the markets had vastly underestimated the outcome. And contrary to what I hear all the time from my teams, which is essentially markets usually get it pretty right and anticipate reasonably well, on this particular occasion whether it was a bookmaker or the markets that was not anticipated very much -- which will explain something that I will say in a minute. That's point number one. Point number two; it might just be the case that the experts much criticized, including by Justice Minister Gove. They just might be right and it's not necessarily going to be the best news in the world. Third; on that Friday in the course of the day there was no panic, right? And despite the fact that markets had not anticipated that vote, and therefore, had priced in asset values and other currency values the fact that the U.K. would probably remain, which led to a nice increase on the markets in the days preceding the referendum. Well, despite that, there was no panic. There was a violent, brutal immediate massive move. You know, the pound went down by 10 percent, caught up a little bit later on in the day. The valuations, you know, went down in many corners and some people lost a lot of money, other people made a lot of 6 money, as is often the case when there is massive volatility. But there was no panic. And the central bankers did the job that they were prepared to do just in case, which was to put a lot of liquidity on the markets so that there would not be shortage of liquidity and no sort of fading away of those liquidities as we saw it on previous occasions, particularly in 2008. So that's the first take. You know, central bankers did their job. All groupings, organizations, eminent policymakers came out publicly along the same lines of trying to reassure that the situation was under control and it was very much under control. We didn't see those sort of panic move. Now, having said that, clearly what we are facing in terms of -- and I'm coming to your question. Risk opportunities or threat opportunities I think needs to be distinguished in terms of short-term, long-term. And we have done a lot of forecast, analysis as have many other institutions. And our conclusions, which I have shared with British public opinions -- not too much success -- was that the outcome would not be a very happy story for the British people both in terms of trade declining, in terms of productivity probably declining, in terms of income, in terms of inflation and so on and so forth. But very much of that outcome, which is not terribly precisely predictable, is going to depend on the level of certainty or uncertainty, predictably or lack of predictability: people going in a risk-off mode or considering that the situation is going to settle back or not. So I think that at this point in time policymakers both in the U.K. and in Europe are holding that level of uncertainty in their hands and how they come out in the next few days is going to really drive the direction in which risk will go. Now, we are hearing at the moment -- and I'm not inventing it -- different statements going a little bit in many directions. There's uncertainty in the political party situation in the U.K. both in the Labour and in the Conservative Party. There is a timetable that has been 7 announced under which this referendum, which was legally off an advisory value, is leading to the resignation of the prime minister, which will only be effective at the time when he is actually replaced by his successor, who will be appointed by the Conservative meeting which will take place probably after the holiday, which will be in the course of September. So early October we will know who is the next leader of the Conservative Party. And in the meantime, Prime Minister Cameron has indicated that he was not going to trigger this famous Article 50 of the European treaty, which provides for the terms under which a withdrawal can be actually notified and organized. But there has been no withdrawal from the European Union except some 30 years ago by Greenland, which left from Denmark literally. There is no precedent. There is no real history of how these things happen. So certainly from our perspective as the IMF, we have very strongly encouraged and will continue to encourage the parties involved to actually proceed with this transition in the most efficient, predictable way in order to reduce the level of uncertainty, which will itself determine the level of risk that we are facing. Having said that, in the long-term if the decision was maintained and if the leave is effectively followed through by a withdrawal from the United Kingdom, there's no doubt that it will have an economic impact on that economy and it will have also an economic impact on growth in the European Union. So policymakers are going to be in high demand to come in the most cohesive, concerted and hopefully positive way in response to the situation. MS. HARMAN: Yeah. MS. LAGARDE: Final point -- and I think this is something that does not apply on to the U.K. and the European Union and the Euro area -- is why -- and I think those are the questions that will come to the fore not just in the U.K. But why is it that the populist voices sometimes based on so-called truth that they now have to 8 retract? Why is it that those voices carried a lot more and a lot further than the voices of "experts" who were largely unanimous about the outcome and consequences of the decision? That's a big question to ask. Is it an issue of the economic outcome? Is it an issue of the democratic process? Is it an issue of the communication channels? But all those questions I think are on the table and warrant everybody's attention. MS. HARMAN: Well, there's another dimension to that. For those of you -- and you're all junkies, so you all know this -- who have studied how the vote went: millennials by a large amount voted to remain. And here's just a summary of a post that many of you probably have seen, which is gone viral, by somebody named Nicholas. He said the Brexit vote is three tragedies. First, the working classes who voted to leave will be hurt the most. Second, the younger generation will have never known the full extent of lost opportunities. And he says literally: "freedom of movement was taken away by our parents, uncles and grandparents in a blow to a generation already drowning in the debts of our predecessors. And this third point, which is searing, is that we now live in a post-factual democracy. That's exactly what you said, Christine. And he asks: "when was the last time a prevailing culture of anti-intellectualism led to anything other than bigotry?" So after you have absorbed that -- (Applause) MS. HARMAN: There's a lot of buyer's remorse out there. Three-and-a-half million people have signed a petition to hold another referendum. Given the fact that the formal exit isn't triggered, do you think there's any chance that can't you take a joke will be -- (Laughter) 9 MS. HARMAN: -- operative? MS. LAGARDE: You know, it's really hard to speculate. But, you know, the sleepy lawyer wakes up inside myself and -- MS. HARMAN: I'm still asleep. MS. LAGARDE: But, you know, I don't think that it's there. Although you could argue that with an advisory capacity and the sort of general uncertainty about the timeline, about the triggering point, about the two years timeframe within which negotiations must be conducted, there is room for revision. But I just don't see it personally and, you know, I certainly don't want to be quoted on that because it's very much up in the air. And it's -- by the way, it's for the U.K. to actually decide for itself at the end of the day. And they are -- that country is the only country that can actually trigger the mechanism. MS. HARMAN: Right. MS. LAGARDE: No matter how much the EU leaders insist on it being conducted very diligently, it is the U.K. that can trigger the Article 50. MS. HARMAN: Let me ask you about leadership in the context of Brexit. You've mentioned the need for a steady hand. But The WorldPost, which is part of The Huffington Post, something that I think is very good piece of journalism, wrote yesterday that there are only two compelling leaders in the world, the Pope and Yo-Yo Ma. (Laughter) MS. HARMAN: And I'm actually very partial to Yo-Yo Ma since he was once the Harman-Eisner artist in residence at the Aspen Institute and a dear friend. But who could lead Europe through this? What steady hand is in Europe? Angela Merkel comes to mind; so do you. (Laughter) 10