Transcript of Podcast: Federation of Small Businesses’ John Wright

Lord Mandelson spoke about Europe’s role in the world; how we need to get our economic, political and institutional act together, whilst outlining some new ideas on how the work of the European Commission could be reorganised, particularly in the wake of the economic crisis.

Hear the speech:

Lord Mandelson said:

“We are approaching a decisive break with the economic past – a totally reordered global economy. The idea that this doesn’t require serious new thinking in Europe is just not credible – it must be based based on new strengths and capabilities to enable us to compete in a much tougher global economy.

“We will either step into a meaningful role in a multipolar world, or make do with a walk-on role. Will we drive the agenda, or become a subsidiary of a process driven and shaped elsewhere, above all by the G2, meaning the US and China. We need policies and structures for this changed world.  So it is time that Europe got real.”

Lord Mandelson offered a wide range of suggestions for refocusing EU policy around innovation and investment in growth, including:

• Refocusing the EU’s structural and research funds to support innovation.
• Potentially amending EU State Aid rules to boost growth in high-tech industries including low-carbon.
• Driving forward the benefits of a single market, especially by making open trade in services a reality.
• Rethinking some of the organisation of the European  Commission to reflect the importance of innovation, the digital economy and climate change.

• Full text of Lord Mandelson’s speech
• Press release: A different Europe for a new economic era
• View images of Lord Mandelson’s speech in our Flickr set

Speech by: Lord Davies
Venue: Drapers’ Hall, London

This speech lasts 15 minutes.

Transcript of speech

Lord Mervyn Davies, Draper’s Hall, London

Chairman, my Lords, Aldermen, Ladies and Gentlemen, pray silence for the Minister of Trade, Investment and Business, the Right Honourable Lord Davies of Abersoch.

Lord Davies

Well first of all, I should say thank you for the round of applause but it won’t stop me from starting by telling a couple of stories about bankers. But first of all can I just say thank you, Stuart. He’s one of the most exceptional people I’ve ever met. You can tell who wrote this speech!

I’ve been in Government ten months so jokes about expenses have worn a bit thin. A man needs a heart transplant, and it’s his lucky day as his doctor finds no less than three matches for his blood and tissue type. The first is from a priest, the second from a nurse and the third from a banker. The doctor asks the man which heart he would prefer and, to his surprise, the man chooses the banker. Why did he choose the banker’s heart? He replied, “Because I’m pretty sure it’s never been used.” [Laughter]

About a year ago there was a joke that went, “What do you call a banker who irons five shirts on a Sunday evening?” And if we were here twelve months ago the answer would have been an optimist, but the real problem twelve months on I have with that joke is whoever heard of a banker who irons his own shirts. [Laughter]

Now, just out of interest, because I have a huge now, huge Civil Service army working for me, I Googled, or the team did, ‘banker jokes’. I got over half a million hits. Pretty bad I thought until I checked, Anthony, how many lawyer jokes there are out there. I got over 750,000 hits. So bankers, we’ve still got some way to go.

Then just for fun I tried MP jokes – one and a half million hits. And people wonder why I agreed to be a politician.

Let us look back at the crises of the last 100 years. 1929/39 Great Depression, Latin America, the Asia crisis, the ’73 oil crisis, the ruble crisis in ’97, the dot com bust in ’99, the Enron crisis of 2000, and now 2008. So where does the October crisis rank amongst them? I suppose you have to reflect on the Chinese leader, and lots of people argue about which one it was, but maybe it was Deng Xiaoping who said when asked what he thought of the French Revolution it was too early to tell. Similarly – that was meant to get a laugh. [Laughter]

Similarly, with this crisis it is too early to tell what the full implications are. We are in the middle of an open debate about the future of the banking industry. Not the financial services industry because so many parts of the industry, and we’ve got Peter Levine here, Lord Levene, and you look at Lloyds of London, you look at many aspects of the industry, they’ve done a great job of being unaffected.

But what is clear is that the banking industry will never quite be the same, and nor should it be. Will there be huge changes such as Glass-Steagall? Should the bonus culture be killed? What are the right levels of liquidity and capital and leverage? How do we get banks to get back to what they should be doing, which is supporting small business? What is the future of trade credit insurance in Britain but also across Europe? How do we reduce the fees payable on M&A and other investment banking products which seem to be high by other benchmark industry standards? Is the model in part of investment banking of paying somewhere between 40% and 45% of revenues to all staff, is it sustainable and why is it sustainable?

There are literally hundreds of questions. My personal view is that there are three or four different types of banks. Firstly there are those true investment banks who do very little other than that type of business. Then there are the global banks who operate in over 70 countries, are very multicultural and they’re very different in their nature. Some of them don’t have a home market, some of them do. But thirdly, there are the regional banks who probably operate in between 20 and 70 counties, and finally there are the local banks who are largely dominant in one market and maybe have one or two international offshoots.

Surely a global solution to looking at these banks is the answer. The danger in the UK is that we look for a UK solution and the danger in Europe is that we look introspectively and not for a European solution. [Some applause]. No, it’s fine. As a politician I’ve been ten months, I’m not used to a round of applause, it’ll unnerve me. [Laughter].

What troubles me at the moment is that some people are out there, without mentioning names, unsettling the market with ill-thought through statements and what we have to acknowledge is that London is in competition, the UK is in competition with other financial centres.

London is a capital market of huge significance but it is part of a global marketplace. We need the US/China/India contingent to engage in the industry structure discussion, but we also need a greater voice from the institutional owners of the companies on these issues, and in particular on bonuses. The last twenty years has seen huge scientific progress in life sciences in general and genetics in particular. IT and computing has advanced at an extraordinary pace. But we’ve also seen growth in current account imbalances from the early 2000s compared to the previous decade.

The volume of trade has tripled, powered by imports of cheap Asian goods by credit-fuelled economies in the west. Now this has led to unsustainable savings in the east dependent on excessive debt in the west. Between 2002 and 2008 China saved US$1.4 trillion but the US borrowed US$3.9 trillion. But what also happened is that the world economy became interdependent. Two-thirds of Asia’s exports and commodities find final demand in the west. Most of China’s official reserves are held in US securities. And, as the late James Goldsmith observed, if you owe the bank $100 that’s your problem, but if you owe the bank $1 million that’s the bank’s problem.

But we now at this moment in history, this moment in time, when fundamentally the role of a bank is to support commerce, consumers and businesses, and assist in their economic development by facilitating business and trade. But in the interconnected world we must make sure that we don’t come up with a UK solution. Greed, lack of broad expertise, misunderstanding of risk were all contributing factors and banks have got in many cases out of touch – not all – out of touch with society.

But we should not jump to the conclusion that regulation is the answer or that London is dead. London has maintained its position as the number one financial centre in the world. It is a truly – as Giles said at our table – a truly great city. London and other financial centres in the UK, such as Liverpool, Manchester, Leeds, Glasgow, Edinburgh, etc, have a wonderful future. So much of the industry, as I said earlier, such as insurance, professional business and legal services, have been unaffected. And, as Stuart says, we must make sure that London stays competitive by investing in the infrastructure.

We must debate and sort out the future of banking, but the danger at the moment is that it is leading to pessimism. This is not a time for pessimism, it’s a time for playing to our strengths. There is a real danger of fiddling around whilst Rome is burning. India, China, Brazil, to name three, are on the move. And what I thought I’d do is give you very quickly two examples of why I say that.

Last week I met the Chief Executive of China Mobile, which has just celebrated 500 million mobile users. But I also me the CEO of ICBC, China’s largest bank, but also now the largest bank in the world by market capitalisation. Almost 40% of Indians are younger than 15. India sells more than 10 million handsets every month. Less than 40% of Indian households have a bank account, and only 2% of India’s population has any kind of insurance cover. India will produce somewhere between 800-900,000 engineers this year. Bangalore alone will produce – I was there in India for a week about three weeks ago – Bangalore alone will produce more engineers as a city than the whole of the US in its totality. So there are huge opportunities in these markets, but there are huge threats.

Now, the one observation I have – and I make no apology for saying this everywhere I go – in ten months as a Minister I’ve had the privilege of touring the world going to over 20 countries, but also going around the UK and the regions. We have a wonderful diversity in our economy. It is not all doom and gloom. Over £½ billion of loans have been made to 5,700 firms under the Enterprise Finance Guarantee Scheme. We’re the sixth largest manufacturer, we’re ahead of France. We’re the seventh largest economy. Manufacturing accounts for 50% of exports and we still have six of the top ten Formula 1 teams in the UK.

The UK claims 13% of world turnover in aerospace. The environment industry, which is very much the industry of the future, the turnover is £25 billion, it employs 400,000 people and is projected to be worth £46 billion in 2015. The UK has overtaken Denmark in having the world’s largest installed capacity of offshore wind power. The UK is a world leader in research and development. 9% of scientific papers are produced in the UK. 12% of citation is shared, basically we’re second only to the US. We rank sixth in the world by the World Bank for ease of doing business. The Economist ranks the UK top in having the strongest business environment of all European economies after 2012. There’s been an 11% increase in new foreign direct investment projects in the UK. The UK still is the number one destination in Europe for FDI, and by some distance.

One of Britain’s real success stories over the last few years has been one industry, and that’s the life sciences sector. Life science exports rose 19% last year. Biotechnology, healthcare, pharmaceutical industries in the UK together generate more than £23 billion a year in revenue, and also employ 400,000 people. All of the world’s leading pharmaceutical companies have R&D and/or manufacturing facilities in the UK. I was with the CEO of GE about two or three weeks ago; the UK is regarded by them as their natural centre outside of the States. Five of the world’s top 20 medicines were discovered in the UK, fifteen of the world’s top 75 top selling medicines were discovered and developed in the UK. Although the UK is just 3% of the global pharmaceutical market it attracts 10% of all R&D.

On Friday I was in Oxford. I visited the University but I also visited two fascinating companies: Oxitec, which is a company, a small company which is carrying out work to eradicate dengue fever, a disease that costs over £5 billion to tackle. It affects 500 million people every year. It’s a company that is literally at the cutting edge of its space. I also visited Glide Pharmaceuticals who have developed a technology which can deliver vaccinations without needles.

But let’s move on very quickly to the automotive sector. Despite what you might read in the press – and the press are here, they’re obviously always very optimistic about British industry – the automotive industry still plays a vital role in the UK economy. This diverse, vibrant and world class sector incorporates 5,000 companies and employs 800,000 people. Automotive manufacturing contributes £9.8 billion to the UK economy and accounts for about 11% of the UK’s total exports. But it also attracts significant FDI. There are more than 50 automotive design engineering companies based in the UK who collectively handle an estimated 20% of the global demand for independent vehicle design engineering services. Over 75% of the cars and commercial vehicles produced in the UK are exported, valued at around £24½ billion of product.

So in closing, let’s make sure that the debate about the banking industry does not colour the fact that Britain has excellence in advanced engineering, in mobile telephony, in life sciences, pharmaceuticals, in education, in business and financial services, in the Stock Exchange, in the maritime and creative industries. This is a country that has 4.8 million SMEs, and over 120 companies register with Companies House every hour. Manufacturing attracts more FDI to the UK than to any other country in Europe, and globally the UK is second only to the US.

And finally, let me highlight one fact for you. Life expectancy for men is 77 years and for women it’s 82. The average age of the UK is 39.6 years so I’d like to say ladies, you have obviously a huge number of years ahead of you. Gents – let’s move. [Laughter]

My message to you is basically the debate on financial services is a great one to have. It’s absolutely fundamental. But let’s make sure that that debate and discussion does not lead to talking Britain down and talking about Britain as if we have no economy, no future and that we have no industry, because factually that’s incorrect. Thank you. [Applause].

Venue: Tokyo, Japan

As always, I am glad to be back in Japan. I’ve always been an Asia-minded person but I am especially glad to have served as the UK Chair of the UK-Japan twenty first century group and to have championed Japanese commercial links with Europe as Trade Commissioner.

I am also pleased to say I still treasure the pen used to sign the post-war treaty between Britain and Japan: my grandfather was Britain’s signatory as Foreign Secretary at the time!

If we look beyond the current downturn, it’s certain that this edge of the Pacific will be the most important driver of change in the global economy and global politics. Not least because, like Europe and the US, you are having to define and manage relationships with a transforming China and a growing India.

But while change in this region is exciting, it needs to be seen in the context of Japan’s continuing relationship with its strongest economic partners, and Europe is chief amongst these.

It’s too easy and too common, in my view, for Europeans and Americans to misunderstand just how subtle and complex these regional relationships are and what they will mean for Asia’s future. We, too, need to adjust to the new influences on Japan’s future.

Today, I want to talk about two specific aspects of that future and what they mean for Japan and Britain: trade and the international economy and climate change.

It’s been an interesting few months for Japan-watchers like me in Britain and Europe. I want to congratulate Prime Minister Hatoyama on a campaign and a victory that is seen by many to mark a sea change in Japanese politics. I am officially flattered to hear that many of the reformers in Japan’s new government are looking to the UK system and Civil Service as a model for change in Japan. This is not the traditional kind of UK export – but it’s one we are pleased to supply, and will do all we can.

So, my first question is how we might capture some of that sense of change to reshape commercial ties between Britain, Europe and Japan.

In both the short and medium term, Japan and Britain face similar domestic challenges. We need to strengthen our banking sectors and invest in economic recovery. We need to convert carbon intensive industrial economies to low carbon in the space of a generation. As mature industrial democracies we all have ageing populations whose expectations of healthcare and support in old age will test our post-second war social settlements.

These are huge – even daunting – challenges. They are shared risks and somehow we have to resolve all of them as internationalists, capable of seeing both our national and collective global interests.

Copenhagen and climate change in December will be the first big test of this new political reality: a test which over the last few weeks we have sometimes seemed dangerously close to failing.

I have to say that in this area I think the new Government has made an impressive start. Its pledge to cut CO2 emissions by 25% from 1990 levels has already played an important part in bidding up ambition ahead of an eventual agreement at the Copenhagen summit. That is badly needed. It is holding firm even in the face of domestic opposition. I welcome this.

But beyond that: governing global finance and making the G20 a credible force; correcting over time the trade imbalances that have defined the global economy for the last decade; adapting to China’s new status and strength; managing the threat too often posed by North Korea. The list is not a short one.

The messages that Japan is sending – its high profile rejection of economic nationalism, its commitment to openness – could not be more important against the backdrop of global recession.

Preserving openness through the downturn

With the downturn, the question of global economic interdependence has become a question of national economic survival. Especially for a huge net exporter like Japan whose manufacturing sector has been hit extremely hard by the collapse in demand, just as many British exporters have.

So the internationalist stance of the Hatoyama government is welcome and timely and right. The joint commitment to a global recovery driven by a sustained and sustainable return to global growth and demand is something on which the UK and Japan agree closely.

Our challenge now is to continue to translate that agreement into joint advocacy for a Doha world trade deal, a G20 settlement on global financial governance and a global economy that comes out of this crisis as open as the one that went into it.

Britain rebounds

We also have to make sure that commercial ties between Japan and Britain emerge from the downturn without any permanent damage. I know that over the last year the Japanese media – often taking their cue from their British colleagues – have painted a negative picture of the prospects of the UK economy.

This is easily explained by the natural gloom of British journalists but, as a globalised economy, Britain has felt the effects of the downturn as much as most. Our large financial services sector was directly exposed to the banking crisis. But Britain’s open economy and flexible labour markets have proven strikingly resilient through this crisis, with high rates of re-employment for those unlucky enough to have lost their jobs. There are strong signs that the economy will have returned to growth by the first quarter of next year.

There have been a few important corporate testimonials to this over the last few months. Nissan and Toyota have renewed their commitment to the UK as a venue for low carbon automotive development. They and other major Japanese companies are responding not just to the very positive environment for doing business in the UK, but to the strength of our science base, our record in bioscience and manufacturing innovation, our skilled workforce, our central position in the massive European single market.

It’s a common caricature about the UK that our economy is based largely on the sharp suits in the City of London. But even the super-powered financial services sector of the last decade never eclipsed British manufacturing as a share of UK GDP.

If anything, the banking crisis has deepened the resolve of the British government to ensure that the UK remains one of the best – if not the best – place in Europe to do advanced manufacturing, especially in low carbon.

The low carbon sector in the UK will employ a million people by the middle of the next decade. It’s already worth more than a hundred billion pounds a year and has maintained positive growth rates even through the recession. The British government is investing strong support in low carbon technological innovation such as wave and wind power and the kinds of strategic skills these industries and their supply chains need.

Which country, for example, is already a pioneer in wave and tidal energy with government support? Britain. Which country is committed to having one of the world’s few heavy forging capacities for the nuclear supply chain outside of Japan? Britain. Where is the world’s biggest demonstrator programme for low carbon vehicles? Well, it’s in Britain, and its part-funded by the British government.

This has to be an area where there is scope for closer ties between the UK and Japan both in research and production. To be sure, it’s an agenda where business is often as concerned about competitiveness and costs as it is ready to focus on commercial opportunities. But that needs to change, and change quickly. Governments both here and in Britain need to insist on that. The scope for collaboration is immense. Britain and Japan are both industrial innovators who need to be confident of their capacity to benefit from even radical change. The low carbon economy isn’t a threat to recovery. It’s the key to sustainable recovery, where the earliest movers will be the biggest beneficiaries.

Open investment

There is no question that getting the best out of a low carbon partnership, or any kind of deep commercial ties, means an open investment relationship between Britain and Japan.

I made a bit of a stir here last year by strongly defending the value of foreign inward investment into Japan- even where it means foreign ownership. Yes, we should always ask tough questions of inward investment – as I said in the Wall Street Journal two weeks ago. But that’s not the same as questioning its potential value.

Japanese investment in the UK proves this. Nissan has been part of the industrial landscape of the North of England for 25 years. Honda and Toyota and hundreds of other Japanese firms like Komatsu, Panasonic, Sharp and Eisai are now an integral part of corporate Britain. These companies bring more than capital – over the last two decades they have raised standards for UK manufacturing and business as a whole. They are part of the reason why the UK remains the world’s sixth largest manufacturer.

My point is that what ultimately matters is not the colour of these companies’ passports, but their commitment to their local workforce. Their respect for the industrial heritage and local productive base.

There isn’t yet a British equivalent of Nissan or Toyota in Japan – as I was at pains to point out last year. British presence here is hardly weak – but it’s not what you’d expect in the world’s second largest economy. But the more Japan opens up, the more certain I am that a British aerospace leader; or ICT firm, or bank, or retailer, or pharmaceutical or healthcare investor could step into that role. I believe that we will both benefit when finally they do.

So, as I say, I welcome very strongly the Hatoyama government’s willingness to challenge some of the older negative assumptions about what is good for Japanese business and industry with respect to foreign influences.

And I welcome the recognition of the benefits of regulatory reform in Japan. Creating a wider and fairer field for government procurement is an example. This is the way to create public sector savings as well as a spur to innovation.

This change can have a very real effect in EU-Japan relations. If we’re serious about a credible Economic Integration Agreement between the EU and Japan then we’re going to have to tackle these tough issues.

For too long, the growth of our trade has been hampered by regulatory restrictions. We really need to lift our eyes and look beyond the obstacles remaining in the way, and commit to a new EU-Japan vision.

The fact is, it’s easy to cut a tariff. (Actually, as a former WTO negotiator with four years of Doha Round negotiations under my belt I can’t believe I just said that!). Let’s just say in principle it’s easy to cut a tariff.

It’s much tougher to identify and tackle the prejudices, the legal obstacles, the non-tariff barriers and the inter-Ministerial politics that can stand in the way of real regulatory reform. But this is what Japan needs to do. Addressing these will require real leadership and tough decisions to be made. To be totally frank, during my tenure as EU Trade Commissioner, I often felt the EU and Japan would find it too difficult to resolve these questions. I do worry that in the year and a half since I was last here we have not made a lot of material progress in improving conditions for foreign investors here. That’s the candid truth. So both sides have to try a whole lot harder and make it more of a priority. I was encouraged that Prime Minister Hatoyama recognised this when I saw him yesterday.

Conclusion: necessary internationalism

So I want to repeat the challenge I made when I visited Japan last year as EU Trade Commissioner. How can we not just maintain but strengthen an open trade and investment relationship? Then I was concerned about ensuring that the benefits of global economic integration were extended. Now I am concerned about preventing them going into reverse.

And that means tackling those areas where we have yet to see real change on the Japanese side. Recognising that just as Japan’s prosperity depends upon its trade with other countries, its competitiveness in a rapidly changing world depends on opening its markets even more to the benefits of foreign trade and investment. The new Government has made an impressive start in setting a new, internationally-minded, tone to the political debate. It has identified the values, interests and goals that Japan shares with its allies. Let’s work harder to give them real expression. We need to do this if the relationship is to grow and prosper.

The worst thing that we could do would be to take each other for granted. That’s no way to preserve a good marriage. I have confidence that the new Japanese Government will not allow that to happen.

The Government will invest £150m alongside private sector investment on an equal basis. This could leverage enough private investment to build a fund of up to £1 billion over the next 10 years.

Read the full press notice here

Listen to Lord Mandelson and Lord Drayson’s speeches in the podcast below:

He delivered the speech at the “Value of Higher Education” event at the Royal Society of Arts (RSA) on 24 June 2009.

View: speech transcript

View: social media news release about the speech

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Here Lord Drayson describes how the life sciences industry represents the single most important growth area that we have in this country and why boosting innovation and investment is a key element in the Government’s strategy of industrial activism.

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“So what can Government do to increase the number and the hit rate of sensible, prescient decisions that it makes – so that, in future, Schneider Cup-type successes far exceed TSR2-like disappointments?

This is all about the task of backing research with genuine potential, and “keeping faith”, as it evolves, for what can be ten – fifteen – years or more.”

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