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Rt. Hon. Lord Mandelson, First Secretary of State, Secretary of State for Business, Innovation & Skills, Lord President of the Council
Berlin, 11 June 2009
My argument today is relatively simple to sum up. I believe that the European Union faces perhaps the most important half-decade in its recent history. The EU has been tested in crisis and it will be tested in recovery. It failed some of the tests of crisis and passed others. It now faces the longer-term challenge of returning to sustainable economic growth.
Many say that this crisis has weakened the EU. I do not agree. Eurosceptic gains in the European Parliament elections last weekend suggest a rising mood of national insularity, at least for some. But I believe our reaction to this crisis, if we get it right, can make Europe stronger for the future. No matter how badly a downturn might tempt us to think and act in national silos, the next five years will in fact demand an even greater Europeanism from us.
The credit crunch has challenged us to think carefully about the role of the state in managing a capitalist economy and in building and preserving economic strength. The conclusions we draw will have far-reaching implications for the European economy.
State capitalism elsewhere will always drive the suspicion that we are naïve in Europe to back away from state management of industry or protectionism. But we are right to do so, and I don’t think the events of the last two years should change that. We have to have confidence in a basic model that has developed over decades of collective European experience.
But that does not mean there is no role for our states in building Europe’s economic strength. If we don’t develop a body of good shared European ideas on this, there is a risk the bad ideas will capture the political market. That is my theme for today.
Certainly, we have experienced the first major financial crisis of the global age. But in reality Europe is living through not one economic crisis, but four, all of which are related.
First, there is the credit crunch, which, for a while at least, has crippled much of the European banking sector. Second, there is the sharp contraction of a housing bubble, especially in the UK, Spain and Ireland. Third, there are the capital and debt problems in the new member states caused by the rapid withdrawal of foreign bank lending and exchange rate volatility for people who have borrowed in foreign currencies. Finally, there is the collapse of global demand which is hurting us all, but Germany, of course, as Europe’s biggest exporter, most of all.
The stress testing of the major European economies has presented us with some difficult truths. It has revealed weaknesses as well as strengths in the economies of all the major European economies.
The recovery will test us too, because it will put a premium on economies and labour markets that are sufficiently dynamic and flexible quickly to recreate employment and help Europeans retrain and find work. Our policies for dealing with unemployment are about to face their biggest test for decades, and this has implications for our social and labour market policies.
Britain and Germany have long regarded their respective strengths in financial services and manufactured exports as assets to be proud of, and they are. But they are also vulnerabilities for each of us if they are not embedded in diverse economies with strong and sustainable domestic demand.
The crisis also stress tested our institutions and our instincts of political cooperation. Again, there are lessons to learn. We went into an international banking crisis with no international arrangements for handling defaults in cross border banks. We agreed rules on deposit guarantees with difficulty.
There were tensions on fiscal stimuli and when we put together a fiscal boost we gave only some acknowledgement to the fact that Europe’s economies are so interlinked that the most effective stimulus is a coordinated stimulus that targets aggregate European demand. Thanks in large part to the leadership of the French Presidency, we held together. But of course we could have done better.
And there is still a real risk that in trying to rescue parts of our banking systems and industrial base we effectively start to renationalise parts of the single market, which would be a huge mistake for innovation, enterprise and growth in Europe.
Politically it must be national governments that lead in developing these solutions, because it is their taxpayers’ money. But measures that push the state back into running parts of the economy or put the openness of the single market into reverse are a mistake.
If we care about Europe’s long term economic future, we should be deeply suspicious of the credit crunch Colbertists. The credit crunch has not undermined the argument for open markets, competition and free trade. It hasn’t weakened the case against subsidising companies or industries simply as a means of maintaining short term employment or building national champions. This crisis should not become a pretext for resurrecting the protectionist and state interventionist arguments that decades of experience has discredited in Europe.
So I would argue that the next European Commission should take a tough approach to scrutinising national rescue packages, for banks, cars or anything else.
The Commission was right to create short term flexibilities in state aid rules to enable governments to take extraordinary action to fight off the crisis. This was necessary to bridge the gap caused by the failures of financial markets. But the new Commission must be hardnosed about withdrawing the privilege after 2010.
The British Prime Minister Gordon Brown has also been arguing that the EIB should lend more, lend faster and take on more risk to assist European businesses. I think that such an expanded role for the EIB in increasing credit makes sense because it is bound to take decisions on a commercial and European basis, although the EIB as an institution does need to develop the capacity to respond more quickly in crisis situations.
Europe also needs to ensure that national bank rescue packages come with a coherent plan for managing the dramatic withdrawal of foreign bank lending from the Baltic states and some of the Central European economies. This is perhaps the most important test of European solidarity the EU will face in the years ahead.
There are also other issues that Europe as a whole needs to address. There is a clear need for a European response to addressing the weaknesses in financial markets. When finance capitalism becomes a liability to the real economy instead of its backbone and facilitator then we have a real problem. But the only credible way to address problems like excessive risk-taking, regulatory arbitrage and tax havens is to act at the European and global level.
Europe needs higher and more comprehensive regulatory standards. It is important to stress that the UK is completely committed to transformation of European and global financial architecture. We will engage fully in the debate and work to get the best possible solution for the member states EU and global economy.
We will need a strong common position if we want to project a European voice and values and responsibility into the G20 agenda for global prudential standards and economic reform. Unwinding the growing imbalances in the global economy that created a decade of excessively cheap credit will need European engagement, especially with China and the US.
Pushing forward a Doha World Trade deal this year and next will also obviously require a common European front. Managing the transition of the European economy to low carbon and pushing forward a global climate change package for Copenhagen is clearly a problem that demands European coordination and cooperation.
I offered a warning before about credit crunch Colbertism;; about using the recession or the credit crunch as a pretext for turning back the clock on the single market or greater state intervention in the European economy.
But I also agree with Chancellor Merkel and President Sarkozy that Europeans rightly expect the EU to defend their interests in a globalised economy. And for that reason I do think that we need to have a debate in Europe about the role of governments in the European economy. This is what we used to call industrial policy, but it is wider than that. It is about the reformed European social model.
The real imperative for this comes not from the credit crunch or the recession but from globalization. It comes from the reality of a model of global production in which European companies and workers will compete for slots in global value chains. From the need to ensure that they are equipped to be first movers in the shift to green technologies and compete with the emerging economies
Europe pays high wages, and in order to do this it must ensure that the goods and services it sells have a high degree of added value. This means that our challenge is not to make particular things in Europe, but to make or do the part of anything that creates the greatest value.
That can be a component, it can be the software that runs it, it can be the design or marketing, or financing that conceptualises and commercialises it. This is a model of production that challenges us to see the world in a new way, but it is the way the global economy works and it plays to Europe’s strengths as much as anyone’s.
To compete in this fast-moving world our companies must be built by workers with the right skills, they must be able to rely on world class digital and material infrastructure, and benefit from a regulatory environment that is designed to facilitate the creation and development of strong and flexible businesses.
This is where the role of government becomes critical, because training, ground-breaking science, innovation, finance, infrastructure – these are not things that markets will necessarily provide to the right degree on their own.
The basic presumption in Europe for the last decade has been that the core challenge is freeing up the supply side by making markets work better. That remains true. But we also have to enable and equip as well, and government has a role in both respects.
There are dozens of ways we can do this without reverting to protectionism or economic nationalism in Europe. The way we regulate business and the things that shape the business environment. Our science and R&D policies. Our education and skills policies. Europe’s digital infrastructure. Our low carbon policies. They are the levers on which an industrial activism should pull.
But it is a lot harder than just taking out the national chequebook. It requires a strategic approach from government, an ability to think long term and to see the way that different policies and priorities can interact over time. I believe that this is something that Germany has done well: in technical education, in developing and nurturing manufacturing excellence, in encouraging the shift to low carbon, in building middle sized companies. I have always argued that the UK can and must learn from Germany in these areas. I think Europe as a whole can too.
So there is clearly a difference between protectionism and protection. But politically, we need to be clearer about what needs protecting. Manufacturing and other industries in Europe continue to succeed even in the face of the toughest global competition. They don’t need protection.
Opportunity needs protecting. That’s why we need actively to encourage entrepreneurialism, and make it easy to start companies, create jobs and bring new products to market in Europe.
Our basic strengths need protecting: a culture of science, world class universities, innovation and research, a global brand for design, style and quality, world class infrastructure.
Most importantly of all, people need protection. The world is moving quickly and we need to ensure that people can thrive in this environment. That’s why we need strong social safety nets that actively encourage employment, lifelong learning, strong standards for the workplace.
Competitiveness policy must extend to the support we give to people as they move between jobs and to the training they can access in doing so. It extends to our policies on labour mobility that enable people to seek out work where there is demand and design working lives that suit them. It may be difficult issue in the current climate, but labour mobility in the EU will be an important part of responding to the need to get Europeans back into employment. In the long run, these things make us more competitive, not less.
It is about embedding security, flexibility and productivity in our social models, in the context of a globalizing economy which is constantly exerting pressure to change. This should be the benchmark for the modern European social model.
What this implies is a vision of the reformed European social model and European competitiveness policy that looks at individual people, rather than individual jobs, the business environment rather than individual businesses and high levels of productivity rather than individual products.
That turns the traditional logic of industrial policy on its head, but people are key to our future competitiveness and rising productivity is as fundamental to our economy as electricity.
Now clearly most of these policy tools belong with national governments. But I do think that there is a important European dimension to this work. As a former Commissioner I believe very strongly that the next Commission and its President and the next European Parliament must provide intellectual and political leadership on this over the next five years. Today the government in London has published a paper that aims to shape the Commission’s work in the area of globalization and Europe’s capabilities.
Central to all its recommendations is a call for the new Commission and Parliament to defend the integrity of the Single Market and be far-sighted in how to develop it further. It is easy for distracted governments in the grip of a downturn to forget what we have painstakingly built up, but the single market is the best ‘industrial policy’ ever devised by European governments. In the global economy, scale counts and it is European integration that gives us our weight and critical mass. None of Europe’s economies will recover until investment and demand in the Single Market returns.
The most obvious place to start is to enforce the existing rules more firmly. In addition, rather than setting the usual vague target of ‘completing the single market’, the next Commission should propose a targeted agenda of single market liberalization for the goods and services that will be key to Europe’s comparative advantages in the years ahead: low carbon goods and services, high-value services, network services like broadband and digital communications.
This should include the implementation of plans to help SMEs get more out of the Single Market by reducing the burden of unnecessary regulation and opening eyes to the opportunities of European trade.
But the next Commission should also lead a European debate on the future of industrial policy in Europe. Not only should it benchmark the best ways of investing in productivity at the national level, but it should propose new ways of doing this at the European level.
When the EU budget is reviewed, the next Commission should be radical. It should champion a greater prioritization of resources invested in EU research strengths, especially in low carbon and other areas where we have comparative advantages.
The EU has done a good job of setting some of the strictest carbon targets in the world. We also need to think about equipping ourselves to compete for the huge markets these targets and a rising carbon price will create. Too little of what we spend at the EU level is targeted at innovation and building a genuine European capability in research and fundamental science.
The Commission also needs to champion an action plan for the EU digital economy, removing barriers to ensuring that every European business and individual has access to broadband networks within just a few years.
The next Commission should be asked to recommend ways to simplify European venture capital rules for small businesses, and should set itself the target of delivering an EU patent, with a fast-track procedure for bringing green products to market. Again, the thread of green recovery needs to run through the work of the Commission and Parliament in a very practical way.
Finally, the next European Commission should undertake a full audit of the EU’s future skills needs and offer concrete proposals for developing human capacity in areas of growing business demand. The Commission should also simplify European Social Fund regulations to ensure funds can be spent more quickly and in a more targeted way, especially on the skills needed for a low carbon economy. The British Prime Minister has urged the President of the Commission to consider ambitious EU targets for apprenticeships, supported by the European Social Fund.
So, let me sum up. I’m not naïve: I am not suggesting that we can or should pretend that there are no national economic interests in Europe. But on the wider questions of the openness of the Single Market, the openness of the European economy to the world and the role of governments in the European economy, in the long run our national and European interests are the same. My argument today has been that we need to step up our defence of all these things.
Britain has always had a complicated relationship with the EU, and the idea of pursuing its interests through greater Europeanism. The results in last week’s European elections suggest voters in Britain still have mixed feelings.
But Britain must, and gradually is, recognizing that its interests lie in a stronger Europe. Lie in working more closely with Germany. We see this in climate policy. We see it on financial services and de Larosiere. But it is a wider question of Britain’s sense of its place in the world.
We have too often acted as if we have nothing to learn from the rest of Europe, or gain from closer European cooperation. After the crunch, that attitude is simply no longer credible. It is clearer than ever that Britain and Germany need the EU to project their interests and values in the world.
Over the next five years the European economy needs to be capable of creating millions of new jobs, shifting to low carbon and equipping companies and workers to compete successfully in a globalised economy. This will require governments with the confidence and credibility to set the right frameworks for markets and the private sector and a commitment to investing in the foundations of European productivity, even through the downturn.
One of the mistakes that almost all European governments have made in the past is cutting investment in economic capabilities in a downturn. We must not make that mistake this time.
Recovery will only be possible so long as we do not allow the single market or the EU to be weakened. A crucial check against this are strong European institutions. The eurosceptics who love the single market but hate the idea of European institutions have always missed this basic point.
For the last five years the Commission led by Jose Manuel Barroso has pushed us to see the reality our collective European economic future. He is the man to ensure that the next Commission remains our European economic conscience, and he needs to surround himself with the best talent from around Europe. Like any conscience we won’t always like what it tells us. But it will probably be right. And governments that bash or undermine the institutions for short term advantage, especially now, are playing a dangerous game.
Crisis will always be the test of European Union. The great risk of the next five years is that the tensions of this crisis and the insularity bred by recession will make us think less as Europeans, not more. It is hard to see Europe recovering or prospering in the future if we do not resist that temptation.
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