I sat down for coffee and a chat this morning with France's Minister of Economy, Industry and Employment, Christine Lagarde, at the Emirates Palace Hotel. Ms Lagarde is without doubt one of the most articulate government officials I've had the pleasure of hearing speak, so sitting down for a tete-a-tete was, needless to say, a special treat. Ms Lagarde is outspoken on the need for a coordinated global system of financial regulation to prevent crises like this one and to restore a common sense of equitable capitalism. In the course of our conversation, though, she also dropped two very interesting bits of news. First, that Mubadala was due on Tuesday to sign an investment cooperation agreement with France's Strategic Investment Fund, a 20 billion Euro fund established late last year in what many saw as a way to use government funds to prop up French industry. Second, that the UAE's own Minister of Trade, Sheikha Lubna Al Qasimi, was due to receive the Legion d'Honneur, France's highest honour, early next month.

Highlights of our discussion after the jump:

Q: What do you hope to accomplish here in the UAE?

A: Why am I here? Because the president asked me to be here. And what the president wants is... You have a lovely expression in English: Your wish is my command.

I was hoping to see my friend Sheikha Lubna, but she's in the States and she's only returning tomorrow. So it's a missed opportunity. But she's coming over on the 8^th of June, she's coming to Paris. We'll decorate her with the Legion D'Honneur, which she has been awarded.

Q: We've seen several big investments by the UAE's sovereign wealth funds in the UK and Germany, but not in France. Do you hope to change that with this visit?

A: There is a cooperation agreement that will be signed today between the FSI, the strategic investment fund of France, and Mubadala -- a cooperation agreement to sort of joint venture and partner in relation to investments in France.

I think for a period of time the investment fund that was set up by the President [Nicolas Sarkozy] was regarded as vaguely hostile and intended to secure investments within France for France with French partners -- as if we were hostile to investments from abroad. And that's not the case at all.

Q: Would France welcome investments by Abu Dhabi sovereign wealth funds?

A: Of course we welcome those investments. France is very much open to foreign direct investment. It is the second destination for FDI in the world after the United States. So it comes before the UK before Germany. It's open.

Foreign direct investments by sovereign funds are welcome. We're not afraid. We don't regard them as a threat. We have always had a dialogue with sovereign funds to understand what their strategy was, what kind of stake holding, shareholdings they were interested in. And frankly the strategy and management of those funds by the various entities in Abu Dhabi is perfectly reassuring as far as the targets are concerned.

Q: The IMF mentioned recently that one of the biggest risks to the Middle East is a prolonged European recession. What is the outlook for Europe from your perspective?

A: I don't expect a V-shaped recovery. But I see stabilization factors at the moment.

We learned from the crisis that all economies, including those that thought they were protected, are interdependent. What happens in eastern and central Europe has an effect in Western Europe. What happens in the US has effects in Europe. What happens in Europe has an effect in the Middle East and on and on and on.

Q: France has gained attention because of the stresses on its economy, the kidnapping of bosses and similar protests. But France's social safety nets are also gaining admiration. Are they proving a boon or bane in the crisis?

A: They've operated as a great shock absorber. The welfare system, the unemployment benefits in general that are made available to people who lose their job guarantee a level of consumption that hasn't fallen so far. Consumption in France has increased in the last few quarters which ha s sustained a bit of activity whereas at the same time investment, particularly private investment has declined dramatically.

The key question is, Will it hamper the recovery or is it going to sustain the recovery? Shall we have reformed the French economy sufficiently so that we actually benefit form the shock absorber and get a kick form the reforms that we have implemented and are continuing to implement? We are removing a lot of constraints a lot of barriers, a lot of license, a lot of rules and principles that were constraining entrepreneurship, constraining the creation of value.

Q: Why has France's financial system withstood the crisis better than others?

A: Our banks are very much based on retail banking.  Most of them it's about 60-70 per cent of their activity and 30-40 per cent is investment banking. So they've managed to balance their business model. Whatever losses they were carrying on the one hand they can balance out on the other. Less leverage. And a lot of retail activity, which is a big cushion.

Second, we had a supervision system which has always been extremely strict, rigorous, which has required discipline for which the assets for instance due to be held by banks were very, very strictly enforced.

Having said that, I'm still very, very strongly supporting a solid financial regulation system. And I'm delighted to see that my counterpart in the US is also of the same view. And I dearly hope that by the New York September G20 meeting we've managed to move along in our respective corners, Europe, the US, Japan, and other Asian countries, and the Middle East for that matter, so that we can have better regulation and enforceable regulation on ratings agencies, better control and supervision of hedge funds, better principles and policies of compensation for traders in particular, and a closely coordinated supervisory system.

And the tax havens, which have to be one after the other brought into line so we can now what's going on behind closed doors.

Q: Who do you blame for the financial crisis?

A: Everyone. I think ex-post we will find out -- just as we did in the Enron crisis --  that a lot of people had been complacent. Nobody was paying attention to the whole picture. The decision to let Lehman Brothers down precipitated and acted as a catalyst.

Q: Was that a mistake?

A: Yes, absolutely. I said so then. I did what I could.

Q: You've called for a coordinated supervisory system, but would global regulation work?

A: I don't think a global committee would work. There are two bodies that need to be used extensively, the IMF [International Monetary Fund] and the FSB, the Financial Stability Board.

If these two can cooperate and work together -- which seems to be the case because they've identified their respective territories -- then locally we on the ground in the regions can adopt and make sure the rules are respected and enforced.

Q: Has there been a breakdown in values? How can we establish and enforce them again?

A: I think the losses that have been suffered are going to be a longstanding wake-up call to values. But I also think a combination of the right compensation systems, enough fear generated by strong supervisory systems, will have to be in place to constantly remind people of values. Fear and greed. We need sufficient fear and enforcement of appropriate regulation is one way to maintain fear.

Q: Is capitalism finished?

A: No. it needs to be better regulated and sustained on the basis of good solid values, not the benefit of just a few.