PARIS EUROPLACE
« European Financial Markets :
Opportunities for growth and value creation»

New York, le lundi 23 octobre 2006

Mr Chairman,
Ladies and Gentlemen,
Mesdames Messieurs,
Chers amis,

I would like first to thank all of you again for your invitation today. It is both an honour and a pleasure for me to be here once again together with you in New York and to deliver this statement on the occasion of your annual conference.

I would like to take this opportunity to tell you a story. Two years ago, some people might have called it a "fairy tale". It is about a country which has been addicted to fiscal deficits and increasing debt level for 25 years and which this year will have the most "virtuous" budget bill ever in an election year! No, no I am not talking of the US here !

It is also a story about a country with solid growth, a rising employment rate, and strong markets that are more efficient than ever. And France –this country- intends to affirm its competitiveness and modernity on the so-called “old continent” of Europe.

To tell you that story, I would like to go over two main issues. The first one will stress the solidity of the economic background we have in Europe, and in France in particular, today. Then I would like to share with you my vision of our financial markets and their upcoming regulatory and industrial future.

1. When you look at Europe today, what you see is economic strength and quite reasonable sustainable growth

• a. First I would like to remind you that there is a genuine process of consolidating public finances at work in Europe.

France was the first of the major euro-zone countries to drop back to below the 3% deficit level. That was done last year. Now Germany, and tomorrow other Euro-zone countries, are well on their way and I hope they will also do it soon. We are sending a firm signal regarding our shared determination to put Europe’s economy back on a sounder basis.

The European economy brightened in the first half of the year. In the second quarter, French growth led the entire euro-zone at a very strong 4.8% ! This consolidation is not only welcome; I consider that it also constitutes a basis for a more structural rebound.

My strategy is to have Europe and France ready for tomorrow's challenges of the global economy: a post-demographic transition economy, a post-oil economy, an information and knowledge-based economy which today is the real engine of growth.

We have gone through majors reforms to that end. The Healthcare reform is completed. The pension reform is well under way. Labour market flexibility has been greatly improved. The very important tax reform we got approved last year will give working and investing in France a fantastic boost.

Last year I was surprised by the contrast in the newspapers between headlines on the French economy –especially at this very time-, which were unfairly negative, and bottom-line corporate stories that described correctly the consequences of the work we have done. I have to say that I feel more comfortable with the headlines today. First because they are more in line with reality. But most of all because they are more in line with what is really happening in France and in Europe.

I say it myself. But more important is that major outside observers are saying it also. Let us take a look at what they say :

• The United Nations upgraded France from 7th position to 4th one on the foreign investment climate quality-ranking. This now makes France becoming the first economy of all continental Europe in term of foreign investments;
  
• Eurostat endorsed our 2.89% public deficit for 2005;
  
• The IMF foresees a 2.4% growth in France for 2006 and 2.3% for 2007. France is at the top of the Euro zone ;
  
• Reuters assembled a panel of 150 economists: they said France was now considered as the best-performing country in the all Euro-zone
  
• Rating agencies, Standard & Poors in particular, give us credit for the major policy change in debt reduction. That’s not so common for these agencies as you know!

Of course we must bear in mind that major uncertainties surround the international environment more than ever. But still.

We must therefore do everything in our power to sustain the current rebound. This is directly connected with the consolidation at work in our public finances.

• b. This is the basic reason why I submitted “a rigorous and fair budget” to Parliament last week


• First of all, just a few days before, we were able to announce 5-billion € in extra fiscal income. Without any discussion or compromise, I was able to announce immediately that it would be used, in full, to pay back our debt!
  
• Second, the budget bill is built on the basis of a 1% real cut in central government spending: this comprises, in particular, 15,000 civil service job cuts next year, which is almost three times the number reached in previous years;
  
• Third, this budget bill marks a new major step in our debt reduction strategy. Wide is the backbone of my policy. I have committed myself to a further reduction in the debt ratio in 2007. This will be an additional cut of 1%, after the strong 2% cut this year.

I therefore set my new public deficit target for total public spending in 2007 at 2.5% of GDP, which is the level at which public debt ratio will stabilise itself (after 2.7% of GDP in 2006).

• c. Looking beyond the immediate results for 2006 and 2007, I believe no future Government will be able to step back.

I am convinced we have set France in motion and in the right direction: our successors, whoever they are, will be unable to roll back.

I would like to stress these efforts have been achieved in a pre-election year. Even more noticeable is the eagerness of French people to know the cost of what candidates for the Presidency propose now. This is a clear demonstration of a deep change in how people feel in France, in particular regarding the public debt. I am personally fully committed to this process, as you know. I will certainly take major new initiatives in the weeks to come, as I did last week on the 35-hour workweek issue. I wanted to trigger a nation- wide debate on what I consider could be a true danger for our economy if the Socialists win the election – though I don’t believe this will happen. I want to be sure that all the relevant economic topics are correctly and clearly addressed by the different political forces. This is how I intend to play my role. Some may not like it but this is how I will force the campaign to focus on what I consider are key issues and how I will invite the candidates to tell the truth.

2- Against this background, how can we make sure that global financial market players find their way in Europe?

A key question we are facing today is to know how and where financial markets will accommodate their clients tomorrow. And what will be the applicable regulatory framework.

• a. The first reason for this is because the ongoing process leading to a single playing field for financial markets in Europe will give new flexibility to market players.
  
  
• The very significant structural reforms we adopted in the last few years in Europe are being implemented now. In Europe, companies and banks will shortly benefit from a largely harmonised set of rules as well as from the “European passport”.

What does this whole process mean for our companies? First they can raise money easier, on a larger and more liquid market. Second they will face less red tape. This is also extremely important for foreign investors. Because I want France to remain at the top of the list of investment friendly countries. This is precisely why we did what we did on the takeover reform, where we have chosen the most competitive option…the most open one ! We have to build on the current situation where US investors are the leading foreign investors in France: with a total of $170 billion, they provide the French employment market with about half a million jobs. Let’s keep it that way!

• The end of the year will be a busy period for European capital markets, as all parties involved race to do their homework on the MIFID directive implementation.

I will make sure that the Paris financial community benefits to the maximum from this new framework. This is one of the key messages I would like you and all the Paris financial centre’s stakeholders to remember from our luncheon today.

As for legal implementation, my goals are to avoid what regulators call “gold plating”: in these complex matters, let’s keep regulation as simple as possible!

MIFID will really change concepts and practices, and allow for enhanced creativity and innovation. It will allow Multilateral trading platforms to develop. OTC operations will further develop as well, in a sound context. It is a major transformation for our European markets.

Does this mean business will turn from the current organized markets to new trading places?

I don’t think so. This structural change basically means that activity will be more intensive. New market opportunities will emerge. New actors will enter the field. And clients will be the main beneficiaries. We are entering a major innovative period.

• b. We have to be ready for this, in the financial field as well as in other economic sectors.

As you know, France launched in 2002 a wide-ranging industrial strategy, focusing on the key factors of industrial competitiveness, particularly R&D-led innovation. In particular, "competitiveness clusters" (pôles de compétitivité) are designed to align efforts and to leverage growth in industrial activities and jobs. This will also strengthen the local communities involved. These clusters link industries, private and public laboratories, and universities. The young French entrepreneurs in this room are a testimony of the dynamics we want to affirm.

We have called for projects to benefit from the new support system. Europlace has responded in the last few months with an ambitious cluster project named “financial industry”. It is today my privilege to announce here that, following my proposal, the Prime Minister has just confirmed that this project will be recognized as a major cluster. The decision will be formalized at an upcoming Cabinet meeting.

This will give impetus to Paris as a worldwide financial centre. The idea, which you support, my dear Gerard Mestrallet, together with many French and American stakeholders I welcome here today, is to build on our competitive advantages. Just let me give you a few examples: this cluster will help to develop databases for management companies, research projects in market finance, derivatives and structured products, and financial analysis in private equity. Universities, research centres, management companies, banks will work together on these projects.

It is definitely a “hands-on” and “nuts and bolts” approach.

• c. Another strategic issue is the future of Euronext. I suspect you came here with some expectations as to what my views are on this topic.

The future of Euronext, the European Federal Market is at stake now.

• This is of course the consequence of its success: many partners would like to marry Euronext … and I understand why. I have to admit that the bride is pretty attractive. Thanks to her parents probably! (Thanks to Jean-François Theodore).

But when you want to marry, you have to accept your responsibilities, and to comply also with certain domestic rules. This is always necessary if you want to be a member of the family. And Euronext’s family is a large one. S

o I have only praise for Gerard Mestrallet, Europlace’s chairman and our host today, for having found the way to organise the market participant’s views on Euronext’s future. He commissioned Henri Lachmann to do a report on the existing stock exchange consolidation projects.

I would like today to commend Henri Lachmann for having stressed the advantages and drawbacks of each solution in a balanced and yet challenging way.

• I can only repeat here the framework against which the project had to be assessed in my view :

1. the impact on Paris as a financial centre, especially its role in the cash equity market and information technology (recognising, of course, the role of the other Euronext constituency’s centres) ;
   
2. a “balanced and federal governance”, preserving the decentralised organisation of Euronext ;
   
3. the regulation of European markets solely by European regulators, as opposed to any extraterritoriality ;
   
4. the very real and keen competition at each layer of post-trade infrastructures
   
5. the capacity of the project to integrate other European stock exchanges should they want to.

Of course, at the end of the day, it will be up to the shareholders to decide. They will choose the best offer, the one with the best value.

• But I am convinced that the value of those offers will depend on multiple criteria. I’m thinking of the decisions to be made by the regulators first. But I’m also thinking of the degree of support by European market participants, which will be of paramount importance.

You are fully aware that this is a basic rule. When you manage a company you have a responsibility towards your shareholders. But you also have a responsibility towards your customers. You have a responsibility towards your people as well. And of course you have a responsibility vis-à-vis your stakeholders.

For my part, as Finance Minister in France, I am very much of the view that Gérard Mestrallet expressed: we fully support the Lachmann report conclusions.

Mr Chairman, you actually consider that none of the two existing projects is really satisfying at this time.

On one side, the Euronext- New York Stock Exchange project would create a truly transatlantic platform, at a time when the merger of the CME and the CBOT increases international competition. However, before any merger of Euronext and the New York Stock Exchange could take place, you call for an agreement on a more balanced governance between the European and the US side of this exciting project. You also expect an appropriate mechanism in order to avoid regulatory spill-over.

As regard to the Deutsche Börse project, you highlight that the two exchanges are built on very different structures, and you are probably right. On one hand, Euronext deals with trading securities and derivatives and has experienced many years of a pan-European culture of working together; on the other hand, Deutsche Börse operates only nationally. Its trading, clearing and settlement structures are very specific because they are vertically integrated.

For that reason, you, Mr Chairman, support the third scenario proposed by the Lachmann report, which suggests that Deutsche Börse would bring its cash equity activity to Euronext and become a shareholder of this multinational company. You also advocate pursuing negotiations with the New York Stock Exchange, with a view to securing a balanced agreement.

You then recognise that a transatlantic partnership would be a positive second step in this scenario. Associating new Euronext and the New York Stock Exchange obviously offers opportunities for the development of Euronext markets. We all know, my dear John Thain, that US financial markets are the most important in the world. A truly balanced transatlantic partnership would be a major market initiative. But it has to be built on the basis of a merger between equals; which –if I follow Henri Lachmann’s conclusions- is not the case in the current proposal.

• This two-step scenario does make sense.

In my opinion, there are three stages in this kind of process. The first one is dialogue : it took place over many months and led to the Lachmann report you endorse today. The last one is when the shareholders decide. It will take place within the appropriate bodies, based on the governance of the respective companies and on the quality of the offers including their acceptance by regulators.

Between the first and the third stage there is the current one : the time for thinking.

And to help in reaching the right decision, I will say only one more thing. In the complex environment in which we live, in the global economy we all share, there is a set of rules. And one of them is that you can’t build a business with a weak approval-rating from your customers and without the backing of your regulators. When you manage financial market companies, you don’t run counter to the market players. This is to be kept in mind by all decision-makers, and especially by those who can improve on their proposals. I personally very much hope that the decisions to be made will allow us to get a deal beneficial to the future of financial markets in both the US and in Europe.

To summarize, let me simply say that in the coming period, I expect Deutsche Börse and its shareholders to reconsider their position on what Henri Lachmann has proposed. And I also encourage the New York Stock Exchange and Euronext’s managements to take greater account of the issues Henri Lachmann raised in their working plan.

This is what I wanted to tell you today. My message is that we in France are fully confident in our ability to capitalize on the reforms we completed or engaged and the additional growth this lead to. I see a rising support on that in our public opinion. We are also committed to go forward in reform implementation and to further reforms in the next legislative mandate.

Thank for your attention. And I now open the floor for a few questions.

Seul le prononcé fait foi.

© Ministère de l’Économie, des finances et de l’industrie - 24/10/2006

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