Improved transparency is Europe's quickest route to debt resolution and China's best defense against external economic shocks, former U.S. Treasury Secretary Hank Paulson says.

Paulson's definition of transparency is both broad and direct -- if regulation or legislation gets in the way of clarity and confidence for financial markets, it has to go.

Complexity is the enemy and complexity is what leads to opacity, the opposite of transparency. Paulson said in an interview during a visit to China with his eponymous Paulson Institute.

When there isn't transparency it's not always because people are trying to hide the ball, it's just hard to cut through all the underbrush and see it and work toward a solution.

European Union leaders are holding their latest summit meeting to try to bring an end to the near two-year-old debt crisis, but appear to have again been unable to strike a straightforward deal capable of calming volatile global financial markets.

As I look at Europe - and I hope I'm wrong - I think you've got to assume that the political issues will grind on for a long period of time. So the key that we learned in the U.S. is that you've got to stabilize the banks while that happens, Paulson said.

The way you do that is with something that is big and powerful and easy to understand and the longer you wait the more expensive it is, he added.

When regulators are trying to put out fires, there is a huge premium on market stability and market confidence. I think whatever maximizes that is what people will move toward because that is what protects society.

The urge for action and reform clearly understood by markets is clear to Paulson, who in 2008 steered the U.S. economy through its worst crisis since the Great Depression.

I'm not somebody who sits on the sidelines and criticizes because what we had in one country was difficult. To have multiple countries have to work it through and come together with different political dynamics and economic dynamics is even more difficult, he said.

And it's one reason why Paulson believes a practical approach and the improved transparency it brings would maximise the economic benefits of the U.S.-China relationship.

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FASTER REFORM, BETTER STABILITY

Improving economic transparency in China through more rapid reforms would accelerate wealth creation and underpin stability in the face of external economic shocks, such as that currently caused by sinking import demand from its biggest trading partner -- a desperately debt-ridden Europe.

When China makes decisions, from what I see, it looks through a lens and the lens is stability, Paulson said.

I think the argument someone needs to make is what's the path to greater stability? I believe it is getting to the point where there is greater likelihood of sustainable economic prosperity and stability by going faster rather than slower (with reform) he said.

They need to accelerate the process and give themselves more tools to defend their own economy from shocks from outside. That's why I would accelerate.

Reform of China's closed capital account is a long-stated desire in Washington, which believes the closely controlled currency gives Beijing an unfair advantage in global trade.

Paulson said a free-floating yuan was in China's interests and would help deliver the rebalancing of the economy that Beijing's leadership says it wants, but that avoiding points of international tension was why his institute focused on business projects and local government relationships instead.

There will be ups and downs in the U.S.-China relationship, based upon what the issues of the day are and what's happening in Washington and what's happening in Beijing. But a lot gets done outside of that environment, he said.

That approach would become more important still in the face of soaring environmental challenges to economic expansion that both countries face and an area where the Paulson Institute was focusing its activities.

The Western model, particularly the U.S. model (of economic growth), is flawed as it relates to China. There are not enough resources in the world for 1.3 billion Chinese to live the way we've lived in the United States. So there's no doubt that we need alternative sources of clean energy, he said.

I say there is probably more mutuality of interest to come together here because this problem impacts both of us. A ton of carbon is equally harmful whether it comes from the U.S. or China and we both benefit from energy efficiency.

(Editing by Kim Coghill)

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