Following is the transcript of a CNBC interview with Lorenzo Bini Smaghi, Chairman, Société Générale S.A at the China Development Forum in Beijing. The interview was broadcast on CNBC's Street Signs on 26 March 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Martin Soong.
Martin Soong (MS): Alright Mr Bini Smaghi, we have to start with what's going on here in China with the U.S., the tariffs et cetera, worries about a trade war. How concerned are you that this situation could too easily escalate?
Lorenzo Bini Smaghi: Well it can easily escalate. Trade wars we know how they start, we never know how they end. I think the issue is can we get to a state where people are willing to sit down and discuss, or is it going to be our best actions and retaliations. And I think that that requires some leadership across the world to you know take the initiative and you know ask people to come and sit down and discuss at a certain point.
MS: It's difficult though is it not when you have two leaders like President Trump and also Xi Jinping – and China's probably left wondering Mr. Trump and the Trump administration what is what is it exactly that you want. Do you have any sense what President Trump's end goal might be? What does he want out of all this?
Lorenzo Bini Smaghi: It seems to me that maybe it's just to keep the cohesion of his electoral bases. There is a midterm election. Things don't look that good given what we saw in Pennsylvania. So this will be the risk if things don't go well politically that he may want to tighten its bases with measures that you know to some extent correspond to what he promised, that may not be targeted to you know a win-win situation, maybe it will be lose-lose.
MS: It seems positive, at least to some people watching, that China's response or retaliation so far to the 232 tariffs, not the 301 tariffs, has been actually quite modest, quite mild. Does that give you some hope?
Lorenzo Bini Smaghi: Well I mean so far I think it's skirmishes. Let's see, hopefully we remain at this stage and it's just you know the two sides have been able to prove something, and the European Union the same. But we have to see you know , the ball now is back in the U.S. case. Do they really want to escalate or not.
MS: So let's talk about the EU, since you brought it up, nearly at the last second exempted from these 232 the steel and aluminum tariffs, so Europe managed to breathe a sigh of relief. But these exemptions though are temporary, only until I think May 1. And now you've got European leaders screaming that these exemptions should be made permanent, should they?
Lorenzo Bini Smaghi: Well I mean what purpose is there for them to be temporary? I mean unless there are some discussions going on from now to May to try to address the real problems, if there are real problems. Otherwise why not make them permanent. So it's again it's not clear what the purpose is.
MS: Let's get to your specialty, monetary policy and the ECB of course. I'm wondering whether, you've already raised concerns that now the asset program is probably at its limits at least technically, what happens with growth picking up? What happens after that with monetary policy? Is the ECB technically equipped to handle the financial tensions a slowdown, maybe even a recession and now we have this tariff problem. Does this make the ECB's job of normalization even harder now?
Lorenzo Bini Smaghi: Well the problem is hitting the inflation target. If inflation projections in the second half of this year get closer to two percent, yes it's easier for the ECB to get out. If on the contrary, inflationary pressures continue to remain very subdued, if the dollar weakens, that may prove to be a difficult position because they plan to exit but they're far away from the target. So there is a dilemma there, which may come.
MS: Do you believe the tariffs potentially are inflationary and in an odd way could that actually help the ECB?
Lorenzo Bini Smaghi: Well not really because as we've seen in the end they lead up to a weakening of the dollar, a strengthening of the euro. So they don't look like they're inflationary for Europe, they may be inflationary for the U.S., which may you know lead the U.S. to have to raise interest rates even faster. So they may get two bad things, first higher tariffs and higher inflation and higher interest rates, that's not necessarily good for the U.S. economy.
MS: Indeed. This may be easy to talk about now that you're out of the ECB, the euro or the strength of the euro you've been worried about that. You think that in this cycle it could pick up strength even faster? The tariffs and the risk of trade war, does that make the situation even more dire, simply because the euro seems to be a very favored place for people who put their money in terms of when things are risky, it's a safety trade, a safety currency?
Lorenzo Bini Smaghi: I mean at the current level I would not be concerned. I think it would it would become a problem if the exchange rate really changes abruptly. I would say at current levels it's not really problematic. Clearly if there are capital inflows towards Europe, the exchange rate will go up, interest rates will go down, so will make it more difficult for the ECB to exit their policies. It will nevertheless help the, you know, the European economy because of low interest rates helped the deleveraging process. And some countries still need to deleverage. So all in all you know it will be a rebalancing of growth towards more domestic demand growth rather than exports, which for a big area like the Eurozone is not necessarily bad.
MS: And the Eurozone's recovery has astounded I think a lot of people. With the prospect of Mario Draghi on the way out and potentially somebody like Jens Weidmann in, as a German by almost definition he would be a hawk, but with these terrorist risks looming what happens then?
Lorenzo Bini Smaghi: First I mean he has one and a half years to go Draghi so still a long time. And then we'll see, I think that you know the wisdom of the heads of states and governments will decide who will be the next chair. And in any case you know it's a council, it's a collective decision-making body. I think the new head of the ECB one and a half year from now will have to lead; it will have to take into account the situation which is prevailing. So I think I think like in the U.S. the transition from Janet Yellen to Jay Powell has happened relatively smoothly. Central banks are institutions, you know, that are expected to live for a long time, so it's normal to give attention to who chairs, but in the end the policies are going to be in line with continuity I would say.
MS: Let's focus if we could very quickly on what's happening in Italy. France last year dodged the populism bullet. Italy apparently hasn't managed to do that now with the elections and the whole political mess going on there. With this risk of a trade war looming, what happens now with Italy? It needs growth it doesn't have it – it's projected to grow I think at the slowest rate of all 19 members. What happens now?
Lorenzo Bini Smaghi: I think the difficulty to form a government a stable government, I think the public finances which are inherited by the previous governments are, at least for one year, on a relative safe sound unless they're changed. But what Italy needs more is reforms. And if you don't have a stable government then it is more difficult to have reforms that will increase the potential for growth of the economy. So there's the big question mark: Stability of the government and ability to continue the reforms.
MS: Soc Gen, black and red now, coming off not a very good year although the fourth quarter we had a surprise profit so that was good. What is the outlook for this year for 2018?
Lorenzo Bini Smaghi: I think we adopted the new plan up to 2020 to transform and grow. I think that's the big challenge to leverage on the different businesses that we have in the international investment banking, retail, to really transform and all the investments that we have implemented for digitalization in particular to make a new model that allows for growth to be competitive in the banking sector, which is a big challenge given all the environment that we have: Interest rates, but also Fintech regulation, we have a more stable now picture concerning regulation. I think these are all elements that we need to lever to have a new model of growth.
MS: And I have asked this question, you've cut a little bit more than 2000 jobs in the last round, likely more to come this year?
Lorenzo Bini Smaghi: I would say that what we've done is in line with the plan. We don't expect, unless major changes in the environment, we don't expect. We now need to implement the plan. You know investing in IT, in digitalization requires human capital, a different you know a different type of human capital. We need to invest in the quality of people. So that's one of the main objectives we have this year.
MS: And very quickly cryptocurrencies. You've described them as a scam and you know it's only going to be when people finally discover some terrorist backing behind the money or financing that people will wake up and realize it is a scam and you've obviously called for regulation, more regulation on it. Specifically what kind of regulation do cryptocurrencies need?
Lorenzo Bini Smaghi: Well you know if you look at the financial sector regulation, we talk about know your customer, anti-money laundering, tax evasion. Banks have become the long hand of governments to make our financial system safe. It's a bit surprising that you know you have these initiatives completely out of these regulations and gives the impression that those who use these mechanisms try to avoid and evade these regulation. So if they want to be you know the limits of our systems and may create systemic problems then I think regulation needs to look at it, international regulation of course and international cooperation. I think very soon this will be one of the main topics at the G20 or G7.
You know I don't think that the Chinese authorities, the U.S. authorities, European authorities want these channels of financial investments are used for purposes that are against the stability of their own systems.
MS: Here in China, where we've been for a month now with the NPC etc., with this brewing trade war, there's been also a lot of talk that maybe a high level of the future, the fight for the future between the U.S. and China for digital supremacy, who controls technology, controls the future, the power and also the world. There has been a lot of I think disquiet over China's attempts to acquire a lot of very sensitive technology in the U.S. but also in the EU Germany et cetera.
At this stage of the game with the Trump administration slapping tariffs all over the place, what is what is the mood in Europe. A, to tariffs and B, to opening or leaving itself open to investment, even from China?
Lorenzo Bini Smaghi: I think we can't solve problems by tariffs, but we need a fair taxation system and we need reciprocity that is mutual access. So we cannot open our markets to people who have instead closed their markets. So I think we need, and this requires trust of course. And requires acceptance that you know our company has come for instance in China and invest and have the possibility to develop and control and have control of their destiny and vice versa. You cannot ask for the opening of European markets while not allowing foreign firms to come in. And it's true that China maybe has a lesser development stage, but now it's a very big market. It has world competitors, so you know you can't talk about China as a poor country, it's a leading country and it should not be afraid of opening up.
MS: Is it a threat to Europe though?
Lorenzo Bini Smaghi: Oh I think it's not it's not a threat to the extent that we talk and we implement the reciprocity that we open and they open. And so we work together.
END
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