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26 January 2004

Speech by Vice Prime Minister and Minister of Finance (Netherlands), Gerrit Zalm, at the Enterprising Britain Conference Panel “Economic Reform in Europe”

Ladies and gentlemen,

I would like to thank Chancellor Brown for inviting me to this conference. In preparing this speech I was thinking about Gulliver, the well-known ancient British traveller. You'll forgive me for borrowing from British literature, but there is also a small Dutch connection: in the tale (by Jonathan Swift), Gulliver studied medicine at the University of Leiden, the Netherlands. As you know, Gulliver was shipwrecked on the shores of Liliput during one of his journeys, and found himself tied down with a myriad of tiny ropes. Although Gulliver was a young and strong sailor, he couldn’t free himself. I compare this picture to the situation of Europe, where economic performance is far less than it could be because of all kinds of barriers.

How can Europe’s economic growth be raised? How can we deliver on our famous Lisbon goal to become the most competitive region in the world?

The answer is by lifting a myriad of barriers still in place in Europe, in the same vein as Gulliver had to be unleashed from his ropes.
I will elaborate on these barriers, and focus on the financial services sector as well as the regulatory framework which currently poses a far too high administrative burden on business.

Economic situation/SGP

At the moment, economic growth in Europe is weak. Although recovery has set in, growth will be below potential in 2004, as was the case in 2003. And even more importantly, potential growth is also too low. Last year, governments were struggling to maintain their deficits below 3%. Not all governments did realise that goal. Some politicians and academics argued that it was the Stability and Growth pact that hinders Europe to grow.

I believe that is not the case. The real problems concerning the failure to live up to our commitments of the Stability and Growth Pact are that we did not realise enough consolidation in the upswing of the late nineties. Let's hope we'll not make the same mistake again in the new upswing, which is underway. The concept behind the Stability and Growth Pact still stands strong: a rule based macro-economic policy that provides for budgetary discipline, makes budgetary policy sustainable in the long term, and allows for automatic stabilisation of the business cycle. Macro-economic stability is a key element for growth. So, I remain a strong advocate of the Pact.

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Ageing

The Pact is also necessary in view of the long term. Because of the ageing of Europe, governments are confronted with a huge challenge to guarantee sustainable public finances. The costs of health-care and pensions will rise strongly. If we do not act, public finances may become unsustainable and future pensions may be put at risk. The European Commission has formulated a policy to ensure sustainable public finances and adequate pensions that can be described as a three pronged strategy. The first pillar consists of reducing government debt, the second pillar states that labour market participation should be increased and the last pillar calls for pension reform. In the Netherlands we firmly believe all three areas call for action. Government debt will be reduced, reforms of the benefit-systems are implemented and we’re also implementing pension reforms. Only the fruitful combination of effort in all three fields will lead to a long term sustainable economic situation.
Financial services

Another important challenge for Europe is to take forward the integration of the financial markets and to strengthen the European regulatory framework for these financial markets. The benefits of integrated financial markets are undisputed. But as we stand today, many obstacles to cross-border activities still exist for financial institutions:

  • Member states have different rules for consumer protection. The result is that financial institutions must design 15 different financial products to be able to reach consumers in 15 Member States. And that will soon be 25.
  • A typical large institution such as Deutsche Bank or ABN AMRO has to report to over 20 prudential supervisors in the EU. Unfortunately, in practice this also implies that the institution will have to make 20 different reports.

The Financial Services Action Plan is an important step forward in lifting the barriers to financial integration. But adoption of European legislative measures is not enough. It is the consistent and timely implementation of the Financial Services Action Plan- measures in the Member States that makes the difference. Further convergence in the practice of supervisors is also an important condition for this to work.
Administrative burden; national action plan

Let’s come back at the tied down Gulliver, that visualises the situation for Europe, where the enterprise sector is tied down by red tape. The administrative burden on businesses is one of the major economic issues in the Netherlands. For me it represents the cost of bureaucracy for economic operators as well as the inefficiencies of the government in its information demands. The burden also hinders economic growth.
Much of the administrative burden consists of demands for information from government. Information needed by the government for its taxation and the application of all kinds of laws, rules and regulations.

In the Netherlands, we developed a method of measuring the administrative burden for business in financial terms. According to our estimates, it amounts to almost 4% of GDP. It is especially tough for Small and Medium sized Enterprises to meet these information demands. It is estimated that it takes 4 times more of the earning capacity of SME’s than it takes from large enterprises.

The Dutch government decided to reduce the administrative burden with 25% before May 2007. This Spring I will present a detailed programme to Parliament. This programme will largely contain national measures, because that's what we can do unilaterally.

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European initiative on reducing the administrative burden

Effectively reducing the administrative burden in the Netherlands also requires a change in the European legislation. Over 50% of the administrative burden on businesses in the Netherlands has a direct European origin. On a European scale these costs must be enormous. European legislation tends to be very detailed in its prescriptions and in its information demands. It also tends to grow rapidly. The decision makers involved, including the politicians in the Parliament and the Council, should realize the pressure they put on the economic potential.

The administrative burden will therefore be a main topic during the Dutch presidency in the second half of 2004. We support the efforts of the European Commission to simplify European legislation. And we must see to it that businesses profit directly through less administrative costs. Together with our friends in Ireland, Luxembourg and the United Kingdom we prepare a joint initiative. This includes improving the existing mechanism of impact assessments by introducing quantitative indicators in the legislative process.

We should avoid that the current attention for administrative burden within Commission and the member states fades away when new high profile topics come up. I therefore welcome support of the business-sector in getting the message across that there’s a clear need for regulatory reform in Brussels and a lot to win by getting rid of unnecessary administrative costs.
EU-US positive economic cooperation

I just mentioned the national and European situation, but also in view of the transatlantic barriers that still exist, there is a lot of work to be done. First of all I want to briefly remind you of the results of studies organized by the UK and the Netherlands that were published in may 2003. The key finding of the first study by the Centre for Economic Policy Research, shows that full liberalisation of transatlantic trade would lead to a permanent income gain to the EU of up to 2 per cent of GDP and for the US of up to 1 per cent of GDP. This study states that the main barriers to trade are regulatory differences. The other study, done by the European University Institute, confirms this. It also recommends to identify best-practices in regulatory cooperation and to aim for a gradual increase in regulatory trust among EU and US regulators.

The Netherlands firmly supports the initiative for a new study by the OECD to further quantify the potential benefits of closer economic cooperation. In the afternoon, I am sure we will hear more about the need to stimulate EU-US economic cooperation when Mr Brown and Mr Snow will contribute to this issue themselves. For me, the most important aspects of this study are:

  • First of all to identify priority sectors where greater economic cooperation would yield the most immediate economic benefits. Financial services should be a main topic.
  • And secondly, to assess areas where EU and US regulation unnecessarily imposes costs on transatlantic commerce.

These barriers to trade should be removed as much as possible to stimulate trade and growth in the world economy.
Chairman, I come to my conclusion. If we reduce the administrative burden and implement the necessary reforms, the enterprises will get room to invest, to innovate and to create jobs. Freeing the enterprise sector, like freeing Gulliver, will release a strength of giant dimension. That’s what we should aim for in Europe.

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Advancing Enterprise: Britian in a Global Economy: Conference, 26 January 2004