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JOURNALIST: The IMF has cut its growth forecast from 4% to 3.3% because of the strains of the European crisis. What is your assessment about global growth prospects for 2012?

KEVIN RUDD: Well we look very carefully of course at what is being produced by international financial institutions. These forecasts are appropriately cautious about the year ahead and the reason for that is of course we have the rolling, not just regional but global, impact of the crisis in Europe. We also have uneven demand in major economies like China. Put all those factors together, it is therefore a year for sober analysis on the growth of the global economy.

Of course where the rubber hits the road there is the impact on people's jobs. That's why we in Australia take these matters seriously, particularly through our membership of the G20.

JOURNALIST: Just as sentiment seemed to be improving around Europe this month, S&P issued a mass downgrade for Europe. European leaders were fairly critical of the move saying it didn't take into account steps towards a fiscal compact. Are European leaders on the right path to solving the crisis?

KEVIN RUDD: Well recently in the last few days I've been both in Paris with the French government and spent some time on these subjects with Foreign Minister Juppe, but also in Brussels with President Van Rompuy, as well as Commissioner Rehn, responsible for finance. I think there is a strong emerging consensus in Europe on the way forward, and the elements of that have been made plain. The fiscal consolidation compact and the movements towards a treaty arrangement along those lines is clear. The parallel introduction of economic reforms in the domestic economies of Europe, you'll note the most recent announcements by Prime Minister Monti of Italy, these are steps in absolutely the right direction.

Of course shorter term, there is the question of the so-called firewall concerning Euro debt and European financial institutions themselves and I think from discussions with Europeans they are moving in a solid direction there as well.

It's fashionable to be pessimistic about the future. I believe that we can see the emergence of strong political will, based on the strength of the Franco-German relationship. This is a good thing and we should give our European friends a little bit more time to settle politically the framework for what I believe is emerging as a solid policy response.

How markets respond is a separate question. As for the rating agencies, my own view about Standard & Poors, and institutions like that, is that perhaps rating agencies should look at themselves.

JOURNALIST: One of the key criticisms though, from ratings agencies, was that European leaders have relied too much on austerity as the macroeconomic environment deteriorates, when they should be focused on bolstering growth. What do you make of that?

KEVIN RUDD: What I make of that is it's an entirely contradictory set of messages from the various ratings agencies.

As a matter of economics two things are at work here. One is how do you cause a stability to return to financial markets because the flow of capital to enterprises, small, medium and large is critical for economic activity, and therefore for employment. We understand that logic.

Parallel to that, however, we have it seems the ratings agencies saying apart from bringing your fiscal house in order by the way let's look at other Keynesian means of promoting growth.

Well I'd ask them just to reflect on the duality of that message.

First to discipline. Our friends in Europe have got clearly in terms of the message from various institutions and recent deliberations about the need to bring their fiscal house in order and to prosecute a program of domestic economic reform to boost productivity. That's why the Italian reforms are so important.

But on the other side, the real agenda for growth, that is the underdone half of what is occurring, not just frankly in Europe, but globally as well. And what are the means for doing that? Are we talking about tax cuts to promote the activity by small to medium enterprises? Are we talking about fiscal injections for example to fund infrastructure projects to generate activity? I think one thing the global community needs to look at afresh is the best most efficient way of generating a new increment of global growth is to conclude Doha. If you do, then you unleash a whole series of new growth opportunities around the world and a huge positive sentiment to markets when it comes to trade liberalisation.

JOURNALIST: Free trade is something President Obama is also pushing for, so you're talking about something similar to that?

KEVIN RUDD: Well not wishing to represent, or misrepresent, the US President, we in Australia have been free traders for a long time.

And for our economy, when we went through the great convulsions of opening up our economy to domestic competition policy back in the 80s and 90s and then opening ourselves also to the full brunt of international competition and the floating of our exchange rate at the time has been overwhelmingly in Australia's national economic interest.

Therefore, for the global economy, while there will be obvious disruptions which will occur once you go down the free trade path, the net impact on the global economy on individual states is overwhelmingly positive.

If you look at fiscal constraints at present on growth and you look at the lag times for example from some of the economic reforms, for example, the labour market in Italy then what's left in terms of a solid growth agenda, I say, go to the trade agenda, conclude Doha. That's a strong way forward.

JOURNALIST: Markets are closely watching events in Greece, how worried are you about a Greek default?

KEVIN RUDD: Well the question with Greece lies in the nature of the deliberations currently underway between the Government of Greece and of course the private banks.

We have seen early reporting in terms of the level of the so-called haircut to be delivered to European financial institutions who are heavily exposed to Greek sovereign debt. The debate at present I believe focuses on the further extent of that haircut and the landing point there will be quite critical. This is a very open and important debate within Europe itself.

You hear from some quarters the importance of allowing Greece to cut itself free or be cut free from the Euro zone and possibly from the European Union itself. Discussions in Europe that I have engaged in suggest that people regard such a course of action as not only injurious to the European political project but they are deeply concerned about Greece becoming a precedent for, shall I say, an avalanche of sentiment against other peripheral economies in Europe.

But on the nature of any Greek default, and the extent to which it falls within market expectations, frankly that relies now on the details of the discussions with the Euro banks and the Greek government.

JOURNALIST: You're heading to Davos this week, what message is Australia hoping to communicate?

KEVIN RUDD: We from an Australian national point of view take our responsibilities seriously as a middle power with global interests.

We are a G20 economy. We are a founding member of the United Nations. We are active in Afghanistan. And we have an active and forward leaning global diplomacy and we are active in all the councils of Asia and members of all the councils of Asia. So we take our global engagement seriously.

The first message for us is that the Australian economy has come through the crises since 2008/2009 in robust form. We are practically the only OECD economy or the only Western economy to emerge from the crisis without going into recession.

Therefore we've had growth; we've had 20 years of consecutive growth in the Australian economy without a recession, we're proud of that fact and we're also able to say very strongly and clearly that we have done so on the basis of one of the lowest levels of debt and one of the lowest levels of budget deficit anywhere in the OECD. In fact, our plan is to return the government budget to surplus in the coming financial year.

Therefore the message from us is, this economy Australia, is a 1.4 trillion dollar economy itself, the twelfth largest in the world, is itself objectively a significant market and we think we've got something to say and to sell to the rest of the world.

On the global agenda, we're looking very much at the upcoming G20 agenda for Mexico in mid-year. I'll be attending the G20 Foreign Minister's meeting in Mexico City scheduled for next month. We're working actively on the preparations for that to make sure we get the landing points right on the intersection between what's unfolding here in Europe and European firewalls, and relatedly what is occurring in terms of the work of the IMF. To ensure IMF firewalls link with European firewalls. To ensure that we've got adequate insurance and buffers to prevent a repeat of the global financial crisis we saw in 2008 and 2009.

JOURNALIST: Do you think the IMF's resources should be bolstered?

KEVIN RUDD: Well we strongly believe in Christine Lagarde's leadership. She's a highly intelligent individual, highly sensitive to what's going on in Europe and around the world. There is an importance on the part of member states to accept that at this stage we have a global responsibility at stake. The Australian Government has already indicated that it is prepared to contribute more proportionally to the IMF's facilities on this question. I believe that it is a responsibility of all credible member states. On the quantums, I won't go into speculation but I think as governments in Europe unite around the resources necessary for the European financial stability mechanism - we look with interest at the role of the European Central Bank - these should be complemented by the International Monetary Fund as well.

What's the bottom line: a clear message to markets that governments are resolved to steer us through with a firewall of sufficient strength. Mind you there's also a message for the banks themselves, which is to get their houses fundamentally in order. Many of them didn't do so after the financial crises of 2008 and 2009.

JOURNALIST: Let's delve a little further into the Australian economic position.

Of course it's been one of the more resilient economies but the drawn out nature the European crisis is taking its toll on even some of the stronger economies and the latest data out of Australia is that the job market had pretty much a zero growth in 2011, and Australia is weak in terms of trade.

The headlines this week were screaming that this is the most testing time since former Prime Minister Paul Keating triggered 'the recession that we had to have'. How big an economic challenge is Australia facing this year?

KEVIN RUDD: We have been in a rolling state of challenge since the global economic crisis unfolded in 2008 just after I was elected as Prime Minister. It's been an interesting period. An incoming reforming Labor government on the one hand with a big agenda of social reform and at the same time being faced with wave after wave of globally induced financial crises. Firstly, out of the United States with sub-prime, and recently, with the sovereign debt crisis here in Europe.

For us though, our fundamentals are very much in order. We have one of the lowest levels of debt to GDP in the OECD. As I said, we will probably be one of the first governments back to budget surplus in the OECD. We executed strong fiscal policy responses and monetary policy responses to crisis of 2008/2009 and it is significant that we are able to come through without a recession.

You mentioned employment data, since our government has been in office in the last four years we've actually added nearly three quarters of a million jobs to the Australian economy and our unemployment rate has a five in front of it; we peaked at 5.8% and we're now around about 5.2. I think most governments in Europe and in North America would probably give their right hand for that.

JOURNALIST: Indeed it is the reversal in the job picture that people are concerned about, 370,00 jobs were created in 2010, zero in 2011, that is a big change of fortune.

KEVIN RUDD: We're not immune to what happens in the world. We have undertaken a range of fiscal measures to keep the Australian economy strong, number one, and they have had an employment intensity attached to them. Secondly, our economic engagement with Asia, in general, and China in particular is fundamental and those economies by and large have remained strong including China. And China has an enormous amount of self-interest in remaining strong in terms of the need to generate 25 million new jobs each year to provide employment for the next group of nineteen and twenty year olds popping out in the workforce.

So put together our domestic policy responses to the crisis, put together with that the still robust growth in Asia, put together that the fact that the Australian government has been prosecuting a long term set of economic reforms, productivity reforms, investing in a national broadband network which is aiming to have the best broadband network for a modern economy anywhere in the world, a very large infrastructure project, and on the productivity side, investing in what we call an education revolution. Of course the yield for these things comes over time. So choppy waters, everyone is going through choppy waters but having been through the first crisis and come out OK, we've got a bit of experience under our belts to navigate the waters ahead.

JOURNALIST: How big a head wind is a strong Australian dollar?

KEVIN RUDD: It's been tough. You speak to an Australian manufacturer and when people look at the core data on the Australian economy over a period of time they say 'this is a strong economy, you've come through with positive growth, employment growth, you've got low debt and you've got low deficit,' therefore you see how currency markets have responded to that, particularly given the extraordinary strength and global competitiveness of the Australian resources and energy sectors. So the dollar has been at historic highs. The last time I saw the dollar as more valuable than the US dollar it was probably when I was in short pants, and I don't wear short pants often.

This has obviously been a challenge for Australian manufacturers who are good, creative and innovative manufacturers that are lumped with a dollar that has gone through the roof.

Of course manufacturing is responding as well as it can with new innovations and new productivity measures but it's tough and I recognise it's tough, as it is for our other export sectors and the services area, health services, the education sector, tourism and financial services, which is also strong in our overall export competitiveness.

JOURNALIST: Speaking of export markets - China is one of the biggest export markets for Australia. You're a Mandarin speaker, you've spent a lot of time on the ground in China. What's your impression of China and how it will manage growth in 2012, in what is a key year as it embarks on leadership change, a once-in-a-generation leadership change?

KEVIN RUDD: Let me correct the record partly, China is not one of our largest trading partners, it is our largest trading partner.

It's interesting if you look through the data across Asia, China is either number one, two or three trading partner of every country from the north to the south and frankly across to where you start to hit India as well. It is a big factor.

But as to the intra-regional economic activity, investment and trade within Asia, I mean its dynamic within itself. India is rising. Japan is strong and still the third largest economy. Indonesia by 2030 will be the world's sixth largest economy – people around the world need to get a hold of that fact. Korea is strong and ourselves, we are the number twelve economy in the world.

On China itself, there have been too many predictions of doom and gloom. I've been studying China for 35 years and when I did my university thesis, Deng Xiaoping was just on the road back to power and I've seen about four or five sets of predictions from various Western analysts that China was about to fall apart; the economy was not able to sustain itself; the Community party was about to fall; and they've all proven to be wrong. The Chinese leadership is intensely intelligent about how to craft its way through on the economic challenges it faces.

But here's the rub - the previous growth model which has served China well for thirty years based on labour intensive manufactures; based on manufacturing exports; based on high savings rates and high investment rates and based on a low valued Chinese yuan - all that from China's perspective has served it well for thirty years but if you look at China's most recent five year plan you see a radical re-engineering of the growth model. It's deliberately a product of intense policy work in Beijing and what's the future that they define? A growth model based on high levels of domestic consumption; on rising living standards; on lower savings levels; on greater social protections; on an exploding services sector based on China's 106 cities with a population of more than 5 million. That they see is the new growth model.

They are also mindful of the fact that they don't want to be hugely exposed in the future to the global economy and to a reliance on the consumer markets in Europe and North America. So this is now being implemented in China. I think that combined with the ability of the Chinese government to manipulate the fiscal and monetary policy levers very rapidly one way or another, and through administrative measures and credit supplying, I think their short term responses have been good so far, but the long term policy settings of the new five year plan I believe will be one of the most significant developments of the decade.

JOURNALIST: Let's close off in the situation in Iran. EU foreign ministers meet today to discuss more sanctions on Iran including an oil embargo. What is Australia's position? Is it appropriate for the international community to pressure Iran in this way over its nuclear program?

KEVIN RUDD: Yes. Our position is very clear. The Iranian nuclear program is not just a passing interest to a few analysts. This is fundamental to the security of surrounding states and to the international community more broadly. They have developed, often with assistance from the North Koreans, significant missile capabilities. As for the production of nuclear weapons material that program is rapidly expanding. Therefore, this is not an idle discussion, it's real and then when you have an Iranian political leadership who have been completely oblivious to the request by the International Atomic Energy Agency and by the United Nations Security Council and by the rest of us in the international community to adhere to their international obligations and they just push it to one side, repeatedly, then frankly the rest of us have got to apply some pressure reluctantly.

Therefore we would fully support the proposed actions by our European colleagues and of course by the United States. I spoke about it the other day with Foreign Minister Juppe and will speak about it with Foreign Secretary Hague as well and others including Foreign Minister Westerwelle in Berlin later this week.

We in Australia will reflect the policies taken in Europe so that the people in Iran and those in the leadership who think that Ahmadinejad and the clerical leadership are heading in the wrong direction will get the message that there's a price to pay here; it's called Iranian living standards.

JOURNALIST: What happens if there is an immediate spike in the price of oil, there must be some huge concerns out there given the fragility of the global economic environment?

KEVIN RUDD: The United States is very careful about these questions. The US administration is very mindful of the position when it comes to global oil supply and global oil demand. Remember we have another major supplier re-emerging in the market called Libya. Remember that over the last decade Iraq has re-emerged as a major oil supplier as well. So these things are properly calibrated and implemented in an orderly fashion with significant oil importers from Iran then it can be done in a way that it doesn't produce the basis for a real and sustained spike in the oil price.

Everyone knows there are risks and there are difficulties and there are problems with doing this but you know it's always easy for folks to sit back in arm chairs and say 'well what about the oil price' and forget about the Iranian nuclear program or let's just forget about the nuclear program and focus on the oil price. The business of government is to deal with this complexity. I think our European and American colleagues are heading in the right direction. There is a lot of anxiety elsewhere in the world about what the Iranians are up to.

JOURNALIST: Thank you.

KEVIN RUDD: Thanks for having me on your program.

ENDS

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