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Fareed Zakaria GPS

A New Day in Britain; Greece on the Brink; Remembering Sergio Vieira de Mello

Aired May 16, 2010 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FAREED ZAKARIA, HOST: Welcome to GPS THE GLOBAL PUBLIC SQUARE. I'm Fareed Zakaria.

A big week. Hamid Karzai was received in style in Washington, finally. Europe got its act together and rescued Greece and stock markets worldwide rose in relief. And then there was the drama in Britain.

After a close election, Britain finally arrived at its first coalition government since World War II when Winston Churchill partnered with Clement Attlee. Its new prime minister, David Cameron, is the first conservative to occupy Number 10 Downing Street in 13 years, but looks he quite different from the Tory prime ministers who proceeded him.

See, during the 1980s, Conservatives Ronald Reagan and Margaret Thatcher seemed to be ideological soul mates. They were both hawkish, anti-Communist, anti-statists, tax cutting, privatizing deregulators. Anglo-American Conservatism seemed one grand movement.

And then in the 1990s, Tony Blair and Bill Clinton marched together and created a kind of happy, market-friendly centrism. But unlike America, which then made a sharp turn from Clinton to Bush, Britain continued with the Blair consensus.

So now, British Conservatism, the only kind that can win elections anyway, is softer, kinder and decidedly less confrontational, more comfortable with the state with nationalized health care, with regulations, social services, environmentalism. It is markedly different from American Conservatism these days.

I interviewed David Cameron in 2008 and he gave me his take on the difference between American and British Conservatism. Ever the astute politician, he was careful not to dismiss himself too far from his Conservative confederates in America.

(BEGIN VIDEOTAPE)

DAVID CAMERON, PRIME MINISTER, UNITED KINGDOM: Gun control or gay marriage, these aren't issues in the same way in British politics. In fact, I've come out very strongly in favor of civil partnerships between gay people because I think what matters is commitment.

I want to see more stable families and more people in stable relationships, and so we should celebrate civil partnerships.

ZAKARIA: But how could that be right for Britain but wrong for the United States? You are in effect saying that the American Conservative movement is on the wrong track.

CAMERON: No, I didn't want -- no, I just think Conservative movements, because they come from different backgrounds, because they've got different history and inheritance, they are often very different in different countries. I mean, the Republicans our are sister party. We have a very good relationships with them, very strong relationship.

If you take the issue of gun control, that's something that is very important in American politics, and I think I understand why. I'm not sure I agree with them. In Britain, gun control just isn't an issue. We have very, very tight gun control and anyone with a gun has to have a very tight sort of license.

Now that's part -- but those are the different --

ZAKARIA: And -- and no Conservative -- and no Conservative argument.

CAMERON: (INAUDIBLE) history between -- between Britain and -- and America because of -- of what the right to bear arms meant in America.

(END VIDEOTAPE)

ZAKARIA: Today, American Conservatism stands in a very different place then does David Cameron and Nick Clegg's coalition. In fact, Conservative parties everywhere, certainly in Europe, from America's Christian Democrats to Sarkozy's Gaullist, seems so very different from the Republican Party and the Tea Parties. What remains to be seen is who will influence whom across the Atlantic.

To discuss all this, two very clever and entertaining British journalists, and you'll love the accents.

Then an exclusive conversation with the prime minister of Greece. Are the Greeks out of the woods? Are we? A round table on the global economy with Larry Summers, the head of the IMF, and the finance ministers of France and Singapore.

And finally, his name, Sergio Vieira de Mello. Sergio, as he was known to all, was one of the U.N.'s great diplomats.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: Let's send this guys who's known as a cross between James Bond and Bobby Kennedy. Let's send Sergio.

WILLIAM VON ZEHLE, ARMY RESERVIST WHO FOUND DE MELLO'S BODY: As we walked along, I was looking, and at one point I found a little spot of light down below. If you looked in there, I could see two people.

(END VIDEO CLIP)

ZAKARIA: You wouldn't want to miss any of it.

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Joining me now with what are sure to be some brilliant insights on the new British government, Michael Elliot, the deputy editor of "Time Magazine" and formerly the political editor of "The Economist". And Joanna Coles, formerly of "The Guardian" and "The Times of London", now the editor in chief of "Marie Claire" magazine.

Welcome to both of you.

JOANNA COLES, EDITOR, MARIE CLAIRE MAGAZINE: Thank you.

MICHAEL ELLIOTT, TIME MAGAZINE: Thank you.

ZAKARIA: Michael, it still doesn't look like a grand Conservative victory. This is 12 years of Labor rule. You're almost set up as the opposition party to come into power, and yet David Cameron couldn't get am absolute majority.

ELLIOTT: You're absolutely right. Thirteen years of Labor rule, almost -- almost to the week. A deeply unpopular prime minister, for good reasons or bad. An administration that had got mired in scandal. Of course other parties had two because of the parliamentary expenses ram (ph). A deep economic recession.

So there were many, many factors why you might have expected the opposition power to absolutely sweep into the House of Common with an overall majority, pretty much able to do what it wanted. And David Cameron didn't honestly do that.

(INAUDIBLE) of the opposition now for nearly four years. People have had a pretty good look at him and I would say that he is admired and respected, but he is not loved by a broad swath of the British public yet.

COLES: I mean, clearly what happened was Labor lost the election. The Conservatives didn't win it, and there is a very amusing phrase about David Cameron, that's he's to posh to wash, which really goes down, I think, well with the majority of the British public who are suspicious of him.

He went to Eaton. He has a very strong sense of entitlement, which actually I don't think is necessarily true. I don't think he's actually like that.

But his public image is of someone who's extremely privileged, and whatever you think of what Tony Blair did to Britain, he shifted Britain into a thoroughly middle class country and the middle class is very suspicious of Cameron. They don't want that man to gently back running them. ZAKARIA: And -- and it feels like it's not just him, it's the -- it's the whole cohort around him. He's got a bunch of people from very posh private schools.

ELLIOTT: Absolutely. Absolutely. I mean, if you look at the pictures of -- of the cabinet this morning, you will -- you will see that it is not, in my view, a cabinet that looks like Britain.

London is now 32 percent ethnic minority. It is -- Britain has become in a -- in a sort of enjoyable and unpredictable way, a -- a nicely mixed up place, with, you know, polls and people from the subcontinent and -- and people from everywhere making it a very, very international country.

David Cameron's cabinet looks pretty much a bunch of 40-something white guys.

ZAKARIA: Why did Nick Clegg stop our (INAUDIBLE). People had thought that Nick Clegg had kind of shot up in the -- and there was a sense that this was the Liberal Democrats' moment.

COLES: And what we had for the first time ever in British elections were televised debates, completely based on the American system. And Nick Clegg emerged as a very attractive, intelligent, hugely articulate character on the stage, but that didn't necessarily mean that the media adopted him, that actually the public wanted to vote for his MPs.

And of course there is that absolutely marvelous language David Cameron is now living down, which when asked during the campaign what is your favorite joke, David Cameron, he said Nick Clegg. And of course Nick Clegg is now his deputy prime minister.

ELLIOTT: British newspapers are influential in a way that American newspapers are not. The Conservative press really had a go at him and it looked as if he was really becoming a kind of key figure in the election.

COLES: You know, this is really the -- frankly, the only shot these two men have of staying in power and there wasn't an overall -- as we've said, it wasn't an overall victory. The two of them are going to have to work very hard, but the two of them are also from the same tribe.

I mean, when we talked about David Cameron as having been Eaton and Oxford. Nick Clegg went to Westminster and Cambridge. They're exactly the same age. They speak --

ZAKARIA: (INAUDIBLE) that --

COLES: Well, those are the -- you know, it's the Princeton and the Harvard of Britain. They're both Oxbridge, as it's -- as it's referred to, which means they share essentially similar values. I mean, they may be split, you know, by nuance over Europe, but essentially they speak the same language. If we were talking about an African election, we'd say they are from the same tribe. And I think that even in the humor of the press conference they gave together where they were sort of laughing and joking and people are calling them TweedleCam and TweedleClegg, there is a sort of essential Englishness to them, which I think means they're comfortable together.

ZAKARIA: And you said Englishness, not Britishness.

COLES: Very much. They're Englishmen. They're very English men. And, you know, that gives them a sort of bond.

And of course, you know, actually Gordon Brown wasn't English. He was Scottish and sort of represented a different part of Britain, and I think people are anxious about this elitism that they see. But there's a blokishness to them, and I think that will translate probably quite well.

ELLIOTT: I think at times that kind of young blokishness will be appealing. I mean, here there are. They're both married to extremely impressive and attractive wives. They have kind of attractive families and so on.

So there's going to be an immediate visual appeal of these two guys of the -- of the top of the government and their families and their blokishness and their ability to be self-deprecating with -- self-deprecatingly witty in that charming, English way. But I think people might get tired of it.

I think people might get tired of it, and I think people are in danger of underestimating how much Britain changed, in my view, for the better, during the 13 years of -- of Labor rule. It became a much more relaxed place. It became much more messy. It became much more variegated, but it actually became more creative and more exciting.

And I -- I doubt that people will enjoy being governed by, as it were, two 43-year-old, white, male, public school and Oxbridge educated blokes. We'll see.

ZAKARIA: On that note, Michael Elliott, Joanna Coles, thank you very much.

And we will be right back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

GEORGE PAPANDREOU, PRIME MINISTER OF GREECE: So, there is a -- a wrong picture sometimes, which is saying we're handing -- handing out money to Greece. That's not so. We're paying back the loans we're getting, but they're -- the loans, however --

ZAKARIA: But Mr. Prime Minister, the loans -- the loans would not be -- they would not be available to you at the rates that they are available to you without the German backup. (END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: Nearly $1 trillion. That's the size of the Greek bailout package. It comes to almost $90,000 for each man, woman and child in Greece.

This enormous sum has settled the world's markets for now, but will it work? If it doesn't, you could probably expect another freefall.

Joining me now, the prime minister of Greece, George Papandreou. Welcome, Mr. Prime Minister.

PAPANDREOU: Thank you very much, Mr. Zakaria, for hosting me on your program.

ZAKARIA: You have committed yourself to an almost Draconian set of budget cuts and -- and increased tax collection. You're going to take your GDP, you promised, from -- the deficit from 13 percent of GDP to 3 percent of GDP.

To my knowledge, that is the most dramatic budget reduction in modern history. Can you really do it?

PAPANDREOU: We're determined to do it and we already have results just in the first quarter of this year. We're -- we've cut the budget by 40 percent compared to last year, so that's beyond -- and it's on target. I'd say beyond target, 10 percent up in revenues from VAT, and I think this determination is not just mine, it's not just my government's determination. It is the Greek people's determination to turn things around, make big structural changes.

ZAKARIA: You say that the Greek people support you, but, you know, the images we see are of protests, of people striking, of -- of even violence. This doesn't seem as though, you know -- this seems like it's going to be politically very difficult.

PAPANDREOU: I would say in the polls, the opinion polls, even though people are unhappy about the measures, we have a majority that are supporting these measures, understanding that it's for the salvation of our country and our economy.

ZAKARIA: One of the reasons Europe was reluctant was that the Germans who are, at the end of the day going to put up the bulk of the money, were I think -- and I mean the German public, was somewhat aghast to discover what kind of benefits the average Greek worker, particularly worker for the public sector had. They were paid 14 months of salary for 12 months of work. Some of them could retire at 55.

Now, the Germans looked at this and thought, they had just gone through painful cuts of their own. Their retirement age had been raised to 67. And so they were in effect being asked to use their -- use their taxpayer dollars to subsidize this rather cushy Greek life. Don't they have a point?

PAPANDREOU: Well, let me answer to that. First of all, let me make sure that this is not money which is free. This is a loan.

So there is a -- a wrong picture sometimes, which is saying we're handing -- handing out money to Greece. That's not so. We're paying back the loans we're getting. But their -- the loans, however --

ZAKARIA: But Mr. Prime Minister, the loans -- the loans would not be -- they would not be available to you at the rates that they are available to you without the German backup.

PAPANDREOU: That's right. I think some of these -- some of these comments have been unjust.

Also, there's an image of Greece. We have -- we have a great tourist season where -- where not only Germans but many people from around the world come to Greece and they have a lovely time. There's dancing, there's food, there's the sun and the -- and the sea. But that's -- that's not the average Greece that we -- we live in.

This is -- this is -- we work hard. We are hard working people. We are proud people and -- and this -- it's very easy to -- to scapegoat Greece, (INAUDIBLE) Greece -- Greek passion which would very often get entangled in -- in local and regional politics.

So what we're saying is, you know, we are ready to make the changes. Greece is a -- is a proud nation. We have made our mistakes. We are living up to this responsibility. But, at the same time, give us the chance. We'll show you.

ZAKARIA: You know, you are in some ways the -- the bellwether for the western world. You're the first western country that is going to try in a comprehensive way to pare back some of the excessive guarantees, commitments and expenditures of the welfare state.

Do you think you can do this and survive politically? I know that, you know, you made a reference to -- to beginning -- to taking a voyage like Odysseus, and a Greek columnist said, yes, but it took Odysseus -- it took Odysseus 10 years. All his -- all his comrades died, and he ended up naked and washed ashore in Ithaca.

Do you think you'll have a few more people than Odysseus did when this journey's over?

PAPANDREOU: Well, we know that these journeys are not easy and -- and they -- they are -- there are casualties and -- and -- but we also know we can -- we can reach -- reach this goal.

What we lived through in the last few months was also somewhat of a paradox because you -- and again, I don't -- I'm not trying in any way to get away from our responsibilities. We are fully aware of our responsibilities and what we must do. But there are also the financial markets. In 2008, we had actually the governments coming in to bail out the financial markets and the banks. They had to accrue a huge debt, very often, for stimulating the economies so that we don't go into not only a recession but a deep depression. Now, you have banks funding hedge funds that are actually then betting against governments that have actually helped the banks.

So this is a paradox and I think this is where we need to also regulate markets.

ZAKARIA: Do you think that Greece was a victim of the American investment banks?

PAPANDREOU: We are -- right now have a parliamentary investigation in -- in Greece which will look into the past and see how things went -- went wrong direction and what kinds of practices were -- were negative practices. There are similar investigations going on in other countries and in the United States.

This is why I think, yes, the financial sector -- I hear the words fraud and lack of transparency. So yes, there is -- there is great responsibility here.

ZAKARIA: Could you imagine going after any of these banks legally? Do you see that you have some legal recourse?

PAPANDREOU: I wouldn't rule out that this may be a recourse, also, to -- to go -- to go into this legally, but we need to -- to let the due process proceed and then make -- make our judgments once we get the -- the results from the investigations.

ZAKARIA: And you think you will make it like Odysseus in the end, personally, politically?

PAPANDREOU: I'm doing what is best for my country and -- and I think that's the best way to -- to make sure that this country does get to its -- to its destination, which is Ithaca.

What happens to me is of less importance as long as I feel that I'm doing what is best for my country and I can sleep well at night with my conscious clear, that maybe taking very -- very tough decisions and decisions that -- get very often hurt, not only me but also many of the Greek people, but, in the end, knowing that this is the best.

ZAKARIA: Mr. Prime Minister, we wish you well on what is a -- a hell of a challenge. Best wishes, and I hope we'll see you again.

PAPANDREOU: Thank you very much, Mr. Zakaria. Thank you for the opportunity you gave me to speak to you and your audience.

ZAKARIA: And we will be right back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP) GIL LOESCHER, SOLE SURVIVOR OF BLAST THAT KILLED DE MELLO: A flash is what I remember. The ceiling collapsed, the floor collapsed. We were thrust down.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Now for our "What in the World" segment.

What got my attention this week was a new HBO film about a man who's been called a cross between James Bond and Bobby Kennedy. His name -- Sergio Vieira de Mello.

(BEGIN VIDEOTAPE)

SERGIO VIEIRA DE MELLO, BRAZILIAN UNITED NATIONS DIPLOMAT: D-E M-E-L-L-O.

ZAKARIA (voice-over): Sergio, as he was known to all, was one of the U.N.'s great diplomats.

DE MELLO: Never forget that the real challenges and the real rewards of serving the United Nations are out in the field, where people are suffering, where people need you.

ZAKARIA: And in the field is where he spent most of his time, posted in far flung, failing nations everywhere from Bangladesh to the Balkans to Baghdad. He was called a master magician, mediator, manager and massager of egos.

He really came to the world's attention in Cambodia in the early 1990s. His novel solution to a very grim refugee crisis, talk to the Khmer Rouge, the mass murdering criminals who had created the crisis in the first place.

It was an idea that shocked his colleagues, but it worked. Four hundred thousand refugees soon returned to their homes.

In 2003, he was asked to go to Baghdad to be Secretary General Kofi Anan's special representative in Iraq. He accepted even though he had opposed the war, and he tackled this impossible task with his usual energy.

ZAKARIA (on camera): But then, just three months into his posting, cameras were rolling at the U.N. headquarters in Baghdad when this happened --

UNIDENTIFIED MALE: Stay down. Stay down. Stay where you are. Stay where you are.

ZAKARIA (voice-over): Abu Musab al-Zarqawi, the head of al Qaeda in Iraq, had ordered an attack on the U.N. headquarters and called for it to target Sergio himself, reportedly telling a henchman to, quote, "Kill that criminal." The truck bomb blew up right under Sergio's office. He had been meeting at the time in his office with an American professor named Gil Loescher. He describes the scene.

LOESCHER: The flash is what I remember. The ceiling collapsed. The floor collapsed. We were thrust down.

I heard someone say, oh shit, as if someone had expected it. I'm pretty sure it was Sergio.

ZAKARIA: When he was found in the rubble, Sergio's first words were don't let them pull the U.N. mission out of Iraq.

The man who found him was U.S. army reservist, Bill von Zehle. Searching for survivors, he went up to the third floor where Sergio's office had been.

VON ZEHLE: As we walked along, I was looking and at one point I found a little spot of light down below. If you looked in there, I could see two people.

ZAKARIA: There, at the bottom of a hole, were Sergio and the professor.

Army medic Andre Valentine was next on the scene.

ANDRE VALENTINE, ARMY MEDIC: I looked at the hole and I just said, holy crap.

VON ZEHLE: There would be the third floor, looking at it from the side. When it collapsed, the roof basically went.

Sergio's office would have been somewhere in here. The second floor had collapsed partially down. They were basically here.

ZAKARIA: And despite amazing efforts for hours by these two U.S. soldiers, that is where Sergio Vieira de Mello would die.

(END VIDEOTAPE)

ZAKARIA: Now, the U.N. is often derided as this vast, dysfunctional bureaucracy with a lot of talk but little action, and trust me, living in the shadow of the U.N. headquarters here in New York, I know the institution's failings as well as anyone.

But Sergio Vieira de Mello showed that far from New York, there really is another U.N. that makes sure babies are inoculated, refugees repatriated, the homeless sheltered, the hungry fed. The people who work for U.N. agencies in the field, in hellish places, for small salaries for years and years are doing truly amazing work, and Sergio reminds us of all those heroes out there.

You wouldn't want to miss this extraordinary HBO documentary. It airs on Monday night at 9:00 P.M. Eastern and Pacific. Set your VCR, set your DVR, set yourself on the couch. If you live outside the U.S., check your listings.

And we will be right back.

(BEGIN VIDEO CLIP)

ZAKARIA: Your country is growing I think faster maybe than any country in the world. Quarter on quarter, Singapore grew 30 percent. You're going to grow 10 percent this year. Why are you doing so well?

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Great conspiracy theories abound about who does and does not control the world economy. Well, today, I've assembled a bunch of folks who could argue actually do. This is not the (inaudible). This is not the Trial and Error Commission.

This is just GPS, but we have with us Christine Lagarde, who is the Finance Minister of France, Lawrence Summers, a former Secretary of the Treasury, now serves as the head of the White House Economic Council. Tharman Shanmugaratnam, is the Finance Minister of Singapore and Dominique Strauss-Kahn has been called the guardian of the global financial system. He is the managing director of the International Monetary Fund.

Tharman, your country is growing, I think faster maybe than any other country in the world. Quarter on quarter, Singapore grew 30 percent. You're going to grow 10 percent this year. Why are you doing so well?

THARMAN SHANMUGARATNAM, FINANCE MINISTER, SINGAPORE: I think first, it's about something happening in Asia. First, we have badly affected by the crisis, at least there was no domestic reasons in our financial systems. Everyone went down in the crisis. We are coming up a little faster than most parts of the world.

So there is a shift towards Asia increasingly year by year and the crisis has accelerated that shift. But we are fundamentally in a world where we have to expect that growth will be a little slower overall than we would be comfortable with it. We would desire for the next five, maybe even seven, eight years.

ZAKARIA: Why has that shift to Asia been accelerated by the crisis and why is Asia booming?

SHANMUGARATNAM: Quite frankly, for reasons of a longer term nature is the competitive rates. People work hard there. They are just easily. There's a demand for training, learning English, learning technical skills. Everyone wants to improve and every parent wants their kids to do much better than them.

ZAKARIA: Larry, let me ask you about the state of the American economy. When we look at the numbers, we seem as though we're going to grow 3 percent this year. On a post war basis, that's pretty anemic growth for a very sharp contraction. Why do you think that this recovery does not have the kind of traditionally people will say, if you shrink 3 percent, you will grow two times three, which will be six percent. Why are we not growing that fast?

LAWRENCE SUMMERS, DIRECTOR, NATIONAL ECONOMIC COUNCIL: Recessions associated with bubbles bursting, with overleveraging, historically whether you look at the real disasters like the depression or Japan in the 1990s or you look at some of the smaller events tend to have more protracted recoveries. Let's step back.

We're in a very different place than we were a year ago. A year ago, the economy was collapsing. People were talking about depression. It was pulling the rest of the world down. People thought we would be mired for years. I think we're doing better than almost anyone expected us to do a year ago.

ZAKARIA: Dominique, when you look at this recovery, are you comfortable that it's going to be robust or do you worry that a lot of it has been fueled by government stimulative measures, by government spending a lot of money? That when the money runs out, you may be in a very perilous period where these economies start moving back down.

DOMINIQUE STRAUSS-KAHN, MANAGING DIRECTOR, IMF: The big picture is that the recovery is back. Now, I'm trying to say that in many countries including the advanced economies, a large part of this recovery is still fueled by public support and private demand is still weak. That's why we shouldn't believe we're out of the woods. The world is a better place than one year ago, but the world is still a dangerous place.

ZAKARIA: Christine, when you look at this crisis and step back, a lot of people would argue one fundamental driver here was the very low interest rates that fueled a lot of bubbles. The cost of capital really collapsed between 2004 and 2007 and made people do stupid things in all kinds of areas.

So the cost of capital is now very low. I mean, interest rates are at the lowest rates in I don't know two generations. Isn't it possible that we are fuelling new bubbles and if so, shouldn't that worry us all?

CHRISTINE LAGARDE, FINANCE MINISTER, FRANCE: We had to refuel. That's really what happened about a year ago and if you look at what we did, we managed to kick start the economy. We managed to avoid protectionism, which could have taken place and we started regulating the financial system in a better way, which was an absolute must. To do all that, we had to collectively, us, member states from all around the world, we had to refuel because there was nobody else and nothing else available.

ZAKARIA: So let's talk about financial reform. Dominique Strauss-Kahn, whoever in your organization came up with the acronym for the tax you proposed deserves a gold medal because it is, of course, exquisitely name the FAT tax. Other countries have vat taxes. You are proposing a fat tax attack so financial activities transaction tax.

The idea here is presumably to achieve some kind of global commonality exactly along the lines that Larry Summers is suggesting, but France has immediately said as far as I can tell, well, wait a minute, we don't have bags that need to be taxed. Singapore isn't going to go along with it. Tokyo isn't going along with it. Canada isn't going to go along with it. So there you have four important financial centers that aren't going to go along with this.

STRAUSS-KAHN: Well, you know, we had a race because this tax is being names a fat cat tax, so the solution finally went with that. Well, I will let the different member of this panel, but you know, one of the big legacies of this crisis, is that we avoided something as big as the great depression because we had a huge level of economic policy corporation. We need to have the same level of coordination that we have during the crisis and that's what we are doing.

ZAKARIA: So will France go along with the FAT tax?

LAGARDE: Yes. Not exactly necessarily along the lines of what Dominique's proposing, but in essence, we are very supportive of the proposal and certainly, I see it as my duty to make sure we have in place a system that stops players from taking unnecessary excessive, abusive risks that put the whole system in place.

ZAKARIA: Bill Clinton in an interview said when asked about derivative regulation, he said Bob Rubin and Larry Summers gave me the wrong advice and I was wrong to take into account. Have you changed your mind?

SUMMERS: Canes was once asked, saying something different than you used to say, why is that, and he responded when conditions change, I change my views and you. And I think that's the situation we're looking at.

LAGARDE: Clinton said only stupid people don't change their minds.

SUMMERS: Very good. Credit default swaps were in their infancy in the 1990s. There was no large market in them and yet we see how much damage they did. That's a very different kind of need that has been pointed up and why we've worked so hard to strengthen derivatives, strength derivatives regulation to take just one example. We've seen what damage can be done by leverage.

In the '90s as Secretary of the Treasury, I warned about the dangers of the leverage associated with Fannie Mae and Freddie Mac. Those dangers have become more pervasive over the last 10 years. So I think that there has always been a case and one I've always tried to make for regulation.

But that case has certainly gotten stronger given what has happened. But what the international communities should resist is an attempt to place one set of standards of foreign banks and a different and lower set of standards on ones owned institutions.

ZAKARIA: And we will be back in a moment to discuss much more about the global economy and the next potential crisis.

(COMMERCIAL BREAK) CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: I'm Candy Crowley and here are stories developing this Sunday morning. In Thailand, government officials have rejected overtures from ante government protesters to negotiate an end to the crackdown.

Violence has raged across the capital since Thursday. A planned government curfew is postponed for now, meanwhile, high authorities say they will send the Red Cross and other neutral agencies in to the protest zone to evacuate women, children and the early. At least 30 civilians have been killed in the clashes since Thursday.

Officials closed airports in Manchester, Liverpool and Northern Ireland today as the volcanic ash cloud continues to snarl air travel. Officials plan to close the Dublin Airport later tonight. Much of Europe's air space was disrupted for six days in mid-April, causing stranding havoc for airlines and stranding millions of passengers. The fears were that ash from the Icelandic volcano would cause aircraft crash.

And you are looking at live pictures of the space shuttle "Atlantis," which just docked at the international space station. Shuttle "Atlantis" will spend a week at the Orbiting Complex undertaking such project as installing a new Russian compartment and fresh batteries. The mission marks "Atlantis's" 32nd and final flight.

Those are your top stories. Up next, much more Fareed Zakaria GPS, and then "Reliable Sources" at the top of the hour.

(COMMERCIAL BREAK)

ZAKARIA: We are back with our panel that rules the world. Dominique-Strauss-Kahn of the IMF, Tharman Shanmugaratnam of Singapore, Larry Summers of the United States and Christine Lagarde of France.

All right. Let's talk about the rest of the world. What would be wrong with letting Greece go under? It will be a good disciplining forcer for the rest of the world.

STRAUSS-KAHN: It's never good. It's never good. Not only for the country itself, but also for the surrounding countries and altogether, I 'm convinced it would be possible to have Greek coming back in a situation. I'm not saying it won't be painful, it will be, but that's the cost to have a safer economy.

ZAKARIA: So, Larry, is Greece's present California's future? There is a distinguished story, Neil Ferguson, who I think you hired when you were president of Harvard, who I think you hired when you were president of Harvard, who wrote an article in the FT saying that, that the sovereign of crisis in Greece, this is what American states are going to have to deal with and they'll have to make the kind of very painful adjustments that Greece is going to have to make.

SUMMERS: I think it's important to recognize that if you look at the size of Greece's debt relative to Greece's income, it's probably five to ten times the size of California's debt relative to California's income.

If you look, you're the size of government in Greece relative to the size and state government in California, you're talking about a very, very different comparison. But if you ask, do we have profound fiscal issues in the United States at the state level, or profound issues at the federal level, absolutely, we do.

ZAKARIA: So when looking at the current world economy, Brazil's Central Bank recently that said two problems that dominate the world economy right now, the first, he said, is slow growth, which I think we want to talked about.

The second, he said, is China's undervalued currency. The Indian Central Bank has made similar statements not quite as dramatic and your prime minister, Tharman, has said that China should revalue its currency.

SHANMUGARATNAM: I think basically, yes. The exchange impulse and anchor of stability at a time when there was instability all around the place. Should they now go back to where they were before the crisis, which is a path of gradual appreciation that a more flexible exchange rate allowed, I think that's sensible.

First, because inflation is going to be become an increasing concern in China. Second, because it will be part in parcel of achieving a higher standard of living. As you grow, if you want people to be able to enjoy your high standard of living by consuming more, it goes with a stronger exchange rate.

ZAKARIA: Christine, when the United States has tended to raise this issue, it has often been seen as a U.S.- China issue. What's interesting is it's now being seen as many countries who share the same concern, that China's undervalued currency is causing a distortion in global trade. Do you think it's possible for other major countries to prevail upon china to think about this in a -- to revalue its currency?

LAGARDE: I agree with Tharman. I think it will be China prevailing upon itself and realizing it's in their own self-interest to re-appreciate or appreciate the currency. It's a matter of self- confidence, understanding the situation, taking time into account, but I think it will be China prevailing upon itself very much so --

ZAKARIA: Tharman, I 'm going to give you the last world because you're in a small, highly successful country, watching these giants in the international economy and your fate depends entirely on how the elephants move around. Are you convinced that with all these big, powerful countries desperately trying to stimulate growth, keep interest rates low, spending lots of government money, flooding either markets with liquidity, that we are fine and we're not creating another crisis that could -- another big bubble that's going to pop?

SHANMUGARATNAM: If you ask me, the basic direction of travel is right. We've got group philosophical arguments for many pieces of reform that we want to make in the system. Let's focus on where the risks are and apply higher standards to where the risks are. I'm not so keen on focusing who should do what, but focus on risk. Fundamentals matter. Try not to get too complex because in finance, when you get too complex, the inmates take over the asylum.

ZAKARIA: Do you worry about the next crisis?

SHANMUGARATNAM: We will have a next crisis. We want to make sure we don't get a blowout the way we have this time. When we do, we want to make sure there's a more orderly and not a destabilizing way of resolving problems with individual institutions.

ZAKARIA: On that note, Dominique Strauss-Kahn, Tharman Shanmugaratnam, Larry Summers, Christine Lagarde, thank you all very much, and we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: Now for our question of the week. Here's what I want to know. From what you've heard, which brand of conservatism do you prefer, the British variety or the American? Let me know. Don't forget to subscribe to our podcasts on iTunes. That way you will never miss the show and you cannot beat the price. It's free.

Now, as I do every week, I want to recommend a book. It's called "The End of the Free Market: Who Wins the War between States and Corporations." It's my best guest on this program, Ian Bremmer.

In the 20th Century, he writes it was free markets versus communism, but now, in the 21st Century, it's free markets versus what he calls state capitalism. That's his term for countries like China that have control over markets and use that power for political gain. He says state capitalism will give free markets a run for its money. It's a real interesting idea.

Now, for the last look. A major battle in the Middle East has been fought and a new victor has been crowned. But it's not what you think. For years, Israel and Lebanon have been outdoing each other be bigger and bigger record-breaking portions of Hamas.

In January, the Israelis made an 8,000-pound serving, breaking all records and giving them bragging rights, but it was short lived. Lebanon has just cooked up more than 23,000 pounds of this pungent stuff, almost tripling the Israeli record.

I'm beginning to feel slightly sick and just to rub it in, the very next day, the Lebanese made the biggest ever dish of FLAFL. Maybe the Israelis need to spend less time worrying about Iran and more time in the kitchen worrying about the Lebanese.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "Reliable Sources."