Whither Europe? Ask Felix Rohatyn

The ambassador to France talks about convergence and reform

In a Europe that is undergoing wrenching change, few Americans have been as well-equipped to represent the U.S. as Felix G. Rohatyn, the former head of Lazard Freres & Co. in New York. In December, Rohatyn will be ending a three-year stint as the U.S. Ambassador to France. With his stellar contacts and Continental background--the Vienna-born banker spent several years in France before reaching the U.S. in 1942--Rohatyn has helped defuse the oftentimes anti-American rhetoric of the French Establishment. He took some time out to reflect on France, the European Union, and transatlantic relations with European Regional Editor John Rossant.

Q: With the euro, France and Europe are entering into uncharted territory. How much is France really opening up?

A: It's hard to generalize, but the political leadership and a vast part of the public still have profound questions about capitalism and markets. This is somewhat in contradiction to the needs of a globalized economy. [Yet] companies that I never thought would be privatized, like Air France, France Telecom, and Aerospatiale, are now all private.

Work needs to be done on basic issues like creating pension funds. The pay-as-you-go system here, especially with the demographics, will lead to a catastrophe. And one of the results is that American pension funds own a greater and greater portion of French equities, which politically will be a problem over time. In this, and on the need to lower taxes, the Germans are conceptually ahead of the French.

Q: How much of the euro's continued slide is based on capital flows?

A: The large capital flows toward the U.S. are results of the success the euro has had in creating very big capital markets. This has spurred growth. European companies are now making big investments in the U.S., creating a net outflow of long-term capital without a counterbalancing reverse flow.

The picture of tomorrow's Europe is becoming more hazy--and markets require as much certainty as possible. We --including myself--were overoptimistic in thinking that with the arrival of the euro, Europe would "happen." We were wrong. Convergence of things like labor legislation and economic policy is only slowly beginning to take place.

Q: The U.S. is a political role model for the Europeans. Will the electoral impasse between Gore and Bush change European perceptions of American democracy?

A: That will depend on how this turns out. So far, one effect has been to confirm the view of a lot of Europeans who question our social and political structures. I've been trying to explain that what happened showed a system that actually works quite well in an anomalous situation.

Two things that were shocking [to Europeans] were the networks making wrong calls on the election not once but twice. Also outrageous is the amount of money that went into these elections. Television and politics are becoming Siamese twins, and that is shocking to Europeans. Unfortunately, it leads people here to criticize the whole system and question the legitimacy of our leadership.

Q: What factors will affect transatlantic relations under a new Administration?

A: There is an integration taking place in business and investment, both within Europe and between Europe and the U.S., that will far outpace the political integration in Europe--and will drive it. And those investment flows to the U.S. will mean hundreds of thousands of new Americans working for European companies, in addition to the 3.5 million to 4 million who already do so. Look at the mergers taking place in Europe. These are forces that will be driving European and transatlantic structures. Business needs, for example, common [structures] for drug and food approvals. Probably we need a joint U.S.-European antitrust authority.

Q: What do you plan to do when you get back to New York?

A: I have a lot of friends on both sides of the Atlantic, and a number have proposed we do some things together. I will probably work on a book about the things I've done and seen. Coming here as ambassador has brought me, in a way, a full circle: In 1940 and 1941, we were able to flee occupied France. Then, 60 years later, I return as U.S. ambassador. A pretty good first and last chapter. In between, of course, I've seen the evolution of the U.S. financial system.

Before it's here, it's on the Bloomberg Terminal.