An unprecedented crisis of confidence is rocking the global economy. Major financial institutions are threatened, millions of small savers in the world who have invested their savings on the stock market are seeing them melt away, day after day, millions of pensioners who contributed to pension funds fear for their retirement, millions of modest households are being put in a difficult position by the rise in prices.
Basically, a certain idea of globalization is biting the dust with the end of a financial capitalism which had imposed its rationale on the whole economy and contributed to corrupting it.
The idea of the all-powerful market which wasn't to be impeded by any rules or political intervention was a mad one. The idea that the markets are always right was mad.
For several decades we created conditions in which industry operated with the aim of achieving short-term profitability.
The growing risks people were forced to take to obtain increasingly exorbitant profits were concealed.
Remuneration systems were put in place which drove dealers to take more and more absolutely reckless risks.
Banks were allowed to speculate on the markets instead of doing their job which is mobilize savings for economic development and analyzing the credit risk.
The speculator rather than the entrepreneur was financed.
The rating agencies and speculative funds were left totally unsupervised.
Firms, banks, insurance companies were forced to write down the value of their assets in the accounts at market prices which go up and go down at the whim of speculators.
Banks were subjected to accounting rules which provide no guarantee on the proper management of the risks but which, in the event of a crisis, contribute to exacerbating the situation instead of cushioning the shock. It was a madness for which we're paying the price today!
This system, where someone responsible for a disaster can leave with a golden parachute, where a trader can lose his bank €5 billion without anyone noticing, where people demand from businesses returns three or four times higher than the growth of the real economy - this system has created inequalities, has demoralized the middle classes and fuelled speculation on the property, commodities and agricultural markets.
Need for regulation
But this system - this has to be said because it's the truth - isn't the market economy, it isn't capitalism.
The market economy is a regulated market, a market serving as a tool for development, serving society. It isn't the law of the jungle, it doesn't procure exorbitant profits for some and make everyone else make sacrifices. The market economy means competition, reducing prices, eliminating the huge dividends gained without effort, and benefiting consumers.
Capitalism isn't a system for the short term; it's for the long term, the accumulation of capital and long-term growth.
Capitalism isn't a system giving primacy to speculators. It gives primacy to entrepreneurs; capitalism rewards labor, effort and initiative.
Capitalism isn't a system for diluting ownership and for widespread irresponsibility. Capitalism means private ownership, individual responsibility, personal commitment, a code of ethics, morality and institutions.
Moreover capitalism is what has allowed the extraordinary growth of Western civilization over the past seven centuries.
The financial crisis we are experiencing today isn't the crisis of capitalism. It's the crisis of a system which has distanced itself from capitalism's most fundamental values, which has betrayed the spirit of capitalism.
The current crisis must prompt us to build capitalism on a new sounder foundation, base it on an effort and work ethic; it must prompt us to restore a balance between the necessary freedom and regulation, between collective and individual responsibility. We must find a new balance between the State and the market when public authorities the world over are being compelled to intervene to save the banking system from collapse. A new relationship must be established between the economy and politics through the development of new regulations.
Self-regulation as a way of resolving all problems is finished. Laissez-faire is finished.
The all-powerful market which is always right is finished.
We must learn the lessons from the crisis so that it doesn't reoccur. We have just been a fingertip away from disaster and we can't take the risk of it happening again.
If we want to rebuild a viable financial system, raising the moral standards of financial capitalism is a priority.
I have no hesitation in saying that from now on there must be a limit on the remuneration of executives and dealers. There have been too many excesses;
there have been too many scandals. So either the financial industry agrees on acceptable practices or the government of the Republic will settle the problem through legislation before the year is out.
The remuneration of executives must be indexed to the business's actual economic performance. They must not be able to claim a golden parachute when they have committed errors or caused their businesses huge problems. And if the executives have a stake in the company's performance, which is a good thing, its other employees, particularly the lowest-paid, must too. If the executives have stock options, the other employees must also have them or, failing that, benefit from a profit-sharing system.
We have to find out where the blame lies and those responsible for this collapse must at least pay some financial penalty.
Secondly, we must regulate the banks to regulate the system.
The crisis we are going through should lead to a large-scale restructuring of the whole global banking sector. Given what has just happened and the importance of the stakes for the future of our economy, it goes without saying that in France the State will play an active role. We are going to have to supervise the rating agencies which - and I stress this - have been failing in their job.
Heads of states should meet
But we wouldn't completely sort out the financial system if at the same time we didn't seek to end the currency disorder. It is necessary for heads of State and government of the main countries concerned to meet before the end of the year to learn the lessons of the financial crisis and coordinate their efforts to restore confidence.
There has to be a root and branch revision of the whole global financial and monetary system, as was done at Bretton Woods after the Second World War. This will allow us to create the tools for global regulation, now made essential by the globalization of trade. We can't go on managing the economy of the twenty-first century with the instruments of the twentieth, no more than we can design tomorrow's world with yesterday's ideas.
In these exceptional circumstances when everyone absolutely has to act, I call on Europe to ponder its ability to cope with the emergency, to rethink its rules, its principles, learning the lessons of what is happening in the world. Europe must give itself the means to act when the situation demands and not condemn itself to inaction.
If Europe wants to safeguard its interests, if it wants to have a say in reorganizing the global economy, its leaders must start thinking together about its competition doctrine - to my mind, competition is only a means and not an end in itself -about its ability to mobilize resources and prepare for the future, about the economic policy instruments and objectives assigned to monetary policy.
I know it's difficult because there are 27 countries in the EU, but when the world changes, Europe has to change too. Europe has to be capable of drastically changing its own dogmas. As EU president, I shall propose initiatives along these lines at the next European Council on 15 October.
Modernize the economy
All these challenges are immense.
I'm determined to go on modernizing our economy and society whatever the difficulties because we no longer have any choice but to do so, because, in my heart of hearts, I'm convinced that there's no other workable path for France.
At a time when old ideas and old structures are being swept away, our strategy is to be imaginative, to be bold.
We have the choice: to sit on our hands or take the lead. My choice is made.
In the midst of these difficulties we must be ahead of the pack, not following behind, and in this way France will be true to herself. She will be true to her history and to her values.
Mr. Sarkozy is president of the France. These are excerpts from his speech on 25 September 2008.