Deputy Prime Minister’s speech to MEDEF
Deputy Prime Minister's speech at le Mouvement des Entreprises de France (MEDEF) in Paris to an audience of business people and diplomats.
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Today I want to talk about Europe’s economy.
All eyes are on Athens as it works to restore stability to the Greek economy, and on the Eurozone as it continues to weather the sovereign debt crisis.
But I don’t want to focus simply on the Eurozone. I want to talk about the whole of Europe. Because the causes of the current troubles are not exclusive to Eurozone states, and nor are the consequences.
Mistakes have been made by countries outside the Eurozone as well as those inside it and, as members of the EU, all of our economic fortunes are tied.
The UK, for example, exports more to our Eurozone partners than we do to the US, and vice versa.
We are clear: a successful Eurozone is essential for a prosperous UK.
So there is no room for schadenfreude here; no place for wagging fingers.
Countries like the UK should not see ourselves as spectators, watching from the wings, triumphalist, complacent, as if Europe’s economic woes are a Eurozone problem, rather than a problem for all of us. As if it is enough to put your own house in order, but then stand by and let the neighbourhood crumble.
We all have an interest in a strong European economy.
First we need to understand the mistakes that have been made, and I will describe what has been a widespread failure among states to recognise the need for fundamental economic reform.
Then I want to talk about how we move forward together, taking domestic and collective action to deliver fiscal stability, a stable financial sector, and the structural reform necessary for sustainable growth.
First: the mistakes.
There are three key areas where states across Europe - and the world - have allowed serious imbalances to build up.
In fiscal management: where governments racked up debts they couldn’t afford.
In the financial sector: where economies became dependent on under-capitalised, overleveraged banks, as well as over-indebted and overstretched households.
And in the housing sector: where ever higher house prices were built on ever cheaper credit.
Did these imbalances appear only in the Eurozone? No, they did not.
Unsustainable deficits were found in Greece as well as places like Hungary.
Iceland’s banks took reckless risks, just as the UK’s did too.
Spain, Ireland, and, again, the UK, suffered over-heated housing markets.
And, are we, outside of the Eurozone, now recovering more strongly than all of you in it?
No, that is not case either.
The UK’s recovery - though choppy - is giving us cause for optimism. But France is similarly demonstrating success - your economy showing steady, stable growth. And take the German example: a Eurozone country now motoring ahead.
So this is not a question of us and you.
Mistakes were made across the continent. In many ways, the same mistake: Government after government believed that you can build a strong and sustainable economy on asset bubbles and easy money, ignoring the need for deeper, structural reform.
Monetary union should have actually resulted in the reverse.
When you can’t devalue your way out of trouble you have no choice but to make serious reforms. But that didn’t happen.
Because countries’ economies were awash with cheap and easy credit, many felt they could get away with entering into currency union without implementing the structural reforms needed to make it sustainable.
So, yes, there was growth, but it wasn’t based on sound economic policies, and the result was burst bubbles and bailouts.
The fact is, if you don’t get the fundamentals right, no matter where your trouble starts - whether in irresponsible fiscal policy, or an unsustainable financial sector, or a fragile housing market - it always ends up in the same place:
A burden on your taxpayers’ shoulders.
So what now?
Many people are asking: what next for the Eurozone? That is an important question.
On the one hand, some people, including senior members of the previous UK government, are predicting collapse and doing so with short-sighted relish, given it would do lasting damage to the UK economy.
On the other hand, some people are now arguing that only complete fiscal union can work.
It’s not my role, or the role of the British Government, to predict the future of a currency union we’re not a part of, although I expect - as is usually the case - things will end up somewhere in between these extremes.
But regardless of what happens in that debate the inescapable duty of all European governments is to now reform our own economies so that they are strong and stable, and to work together, at the European level, to deliver prosperity that really lasts.
That means action on three fronts, to deliver sound fiscal policy, a resilient financial sector, and, at long last, meaningful structural reform.
One, fiscal policy.
European governments must each take the difficult decisions needed to restore stability to their nation’s finances.
In the UK we are doing so, eliminating our structural current deficit over the next four years, a plan that has been backed by the EU and the IMF.
I know that the French Government has also taken significant steps, and I know it is not a task any of us enjoy.
We do it because we have to do it, not because we want to, because sound public finances are the essential platform for growth, and because ducking these choices could have taken us down the same path as Greece and Portugal.
It’s important to remember that last May, while coalition talks were taking place to form a new government in the UK, we were a nation on the brink.
Protesters were lining the streets of Athens. ECOFIN was holding emergency talks. The UK’s Coalition Government knew from day one that inaction on the deficit was simply not an option.
Domestic fiscal consolidation efforts must of course translate into restraint in the size of the European budget - a point the UK and France are both clear on.
At the European level, action is also being taken to improve economic governance structures, which will in turn improve the national policies of member states.
The Stability and Growth Pact rules are being strengthened - and this time we need to ensure they are properly adhered to.
And stronger surveillance will allow us to spot and correct imbalances building up.
Two, banking.
Again, our starting point is domestic action.
Many countries have taken action to prevent collapse in their banks.
In the UK that involved taking a number of large banks into public ownership. But averting crisis was not enough.
We have also had to look very carefully at the functioning and structure of our banks to ensure they can never again take our economy to the edge of a precipice.
So we are now working out how to significantly reform the industry, including how to insulate retail banking from higher risk investment activity.
But we also need to do more together.
All of Europe’s banks must be properly capitalised and able to withstand future shocks. That is our part in making sure history cannot repeat itself.
Crucially, we need to implement the Basel standards fully in EU law, just as we have agreed.
And we need to ensure that we have the right financial regulation for Europe. Regulation that allows our firms to remain competitive in the global financial sector.
Three, structural reform. Because the easy money has gone, and we can’t ignore this anymore.
The character of structural reform will vary from state to state.
As I said, in the UK we recognise that deficit reduction is only a means to an end.
It creates stability; it does not drive growth in and of itself.
So our deficit reduction programme goes hand in hand with our pro-growth agenda, which, in simple terms, is about rebalancing our economy away from an overreliance on one industry - financial services - and one area - London and the South East.
That rebalancing cannot happen overnight. Diversifying our economy, decentralising it: that takes time. It takes infrastructure. It takes new businesses and entrepreneurs. It relies on a workforce that is highly skilled, and flexible.
So there is no quick fix. But we are taking the action that will lay the foundations for the new economy, turning a page on the debt-fuelled, consumption-driven practices of the past.
We’re prioritising the right types of infrastructure - high speed rail, broadband, energy infrastructure and low carbon technology - and we’re especially keen to learn from France on this.
We’re protecting investment in our schools, and reforming higher education funding, a decision that has sparked considerable controversy, but that is necessary in order to keep our universities world class.
Our higher education sector benefits from some of the best quality teaching and research in the world, a comparative advantage we must build on.
We’re also simplifying the tax system for small and medium sized companies, as well as easing the burden of regulation, not - as is sometimes the caricature - because of a kneejerk, Anglo-Saxon rejection of all red tape.
On the contrary, the UK government is very clear that there are areas where regulation is absolutely necessary, not least to uphold environmental standards and help reduce carbon emissions.
We just need to be smart about it. It’s not how much we regulate, but how we regulate, that counts.
So there is no magic wand solution. But we have restored stability to the public finances, we are moving ahead with our plan for growth, and we are seeing positive results.
Business investment is up. UK exports are up. Private debt is down. And key parts of our economy - like our manufacturing sector - are leading the recovery.
The World Bank has already said we’re one of the easiest places in the world to do business.
The Coalition is determined to build on that, attracting more investment to the UK, helping our companies and creating jobs.
I know that, here in France, your President and Prime Minister are driving through bold reforms, including to the pension system last year.
Growth prospects are looking good, with 2% growth forecast this year, and I’m looking forward to discussions with Prime Minister Fillon this afternoon to see how France and the UK can learn from each others’ efforts.
As we reform our domestic economies, we need to do the same at the European level too, and with renewed urgency.
Last year the rest of the world returned to pre-crisis growth levels. Europe is still not growing even half as quickly as we were before.
Nowhere is progress more important than on the Single Market, a market of 500 million consumers. Unprecedented. Unparalleled. An unmatched example of nations coming together for our shared prosperity.
In the UK we are proud that Lord Cockfield, a British Commissioner, was its chief architect. And we now want to see this project completed.
That’s why we are pushing for implementation of the Services Directive.
And it’s why we want to see a fully functioning digital single market.
A true single market could add 800bn Euros to EU GDP.
The UK is also very ambitious for Europe’s role as the global leader in innovation.
I was in Brazil last month, a country with extremely impressive economic prospects. Where business is booming. Where there is huge trade potential still to be tapped. Where their commodity supplies make them the envy of the world.
Yet even these powerhouses still look across to Europe for our knowledge, our expertise. For our help in maturing their economies, moving them up the value chain.
That is our edge in the new, global economy. We must never lose sight of that, and we must take the steps needed to stay ahead.
Like ensuring the provision of venture capital right across EU. Like creating a clear, cost-effective, pan-European patent regime. Like ensuring the funds we spend on innovation from national and EU budgets deliver maximum value for money.
And let’s make the best of our trading power to open up new markets for our businesses.
Europe is the world’s largest trading bloc.
We will reap the benefits of lower trade barriers.
So the UK Government is clear that we need to actively press for progress on the stalled Doha round, as well as bilateral agreements with key trading partners, including India, Japan, Mercosur and ASEAN countries too.
So, to conclude, there are problems in the Eurozone and they are important, not just to members of the single currency, but to all Europeans.
We may have different coins in our pockets, but our fates are intertwined.
But events both inside and outside of the Eurozone have demonstrated the irrefutable need for all European states to pursue deep-seated economic reform, individually, and together, because without it there will be no lasting success. No matter what happens to monetary union.
If Europeans now take the right action in fiscal policy, financial policy, structural reform, we can correct the mistakes of the past. We can lead a new era of prosperity for our continent.
Thank you.