12 May 2004

SPEECH BY THE CHANCELLOR OF THE EXCHEQUER AT THE CBI CONFERENCE ON COMPETITIVENESS IN EUROPE – POST ENLARGEMENT

It is a pleasure to welcome to London in the month of a great historic event – the enlargement to 25 of the European Union - Foreign Ministers, Finance Ministers and businessmen and women from all our new European Union partners in Eastern Europe;
To congratulate you on the difficult decisions and choices you have made which has made it possible to join the European Union this month;
And to look forward with you to the challenges ahead and to discuss Europe and economic reform in its full context - the global changes taking place in all our economies.

Today east and west are united in one Europe, thus ending centuries of division. It is an historic occasion and one we are celebrating. A European Union that started with a desire for a Europe at peace is, with enlargement, entrenching that commitment to peace and seeking to generate prosperity in all parts of the continent.

And I want to demonstrate today that to be fully equipped for the global economy all of us must ensure that the new enlarged Europe must become more open, more outward looking, and more flexible, competitive and reforming -- in product and capital markets, employment policy, our attitude to taxation, and in monetary and fiscal policy, and trade.

Let me first congratulate every new entrant on the challenges they have met and overcome to secure membership of the European Union. It is only because of ten years of reform that in the new Member States growth has been on average more than 3 per cent a year.

Indeed double digit export growth since the mid 1990s has been the major factor behind the acceleration of growth.

And the rise of exports has been helped by the 17 billion dollars of foreign direct investment entrant countries have attracted per year, on average, over the same period.

And we now have a single market enhanced by 74 million more people ---- with even greater opportunities for trade across Europe which in the long term will be good for growth and good for jobs in current and new members of the European Union alike. And let me say that Britain will be foremost in supporting a strong regional and structural policy and a large allocation of resources to new Member States to ensure that through regional policy and structural reform we assist the rise in prosperity of the new Member State economies and meet our objectives of helping every economy tackle poverty and unemployment and ensure high levels of sustainable prosperity and growth.

So enlargement has provided and is providing a stimulus for economic reform across the continent.

But from now on, more even than the process of enlargement, it will be - for all of us, existing Member States and new entrants alike - the impact of globalisation – global companies, global brands, global flows of capital and global sourcing of products – that is putting all of Europe under intense and sustained competitive pressure, forcing Europe to change – and change quickly.

Globalisation means that over the last ten years world trade has been rising nearly twice as fast as output.

And the significance of globalisation is that where previously industries and sectors could be sheltered from global competition there is today hardly a product or increasingly a service produced by European companies that is not subject to global competition.

And today we are not just witnessing the growth of global trade and flows of capital from Europe but most significantly the rise of other emerging market economies including

not just the rise of developing countries taken together – who in twenty years time could account for 50 per cent of all manufacturing exports;
but the rise of Asia – to which up to 5 million US and European jobs could soon be outsourced;
and the rise of China – its growth today contributing more output to the world economy than all G7 countries put together, consuming for example half the worlds cement, with more Volkswagens sold in China than Germany.

And while investment in our own economies has been rising, the stock of FDI investment from the EU to the rest of the world has in only ten years also risen from $500 billion dollars to $1400 billion dollars and the stock of portfolio investment from the EU to the rest of the world has risen from one trillion to 5 trillion dollars. The value of exports from the EU to the rest of the world have risen from $63 billion dollars thirty years ago to $864 billion dollars now. And the transatlantic economic relationship alone now accounts for up to $2.5 trillions of commercial transactions each year, including $500 billions of foreign trade, and provides employment to over 12 million people.

And Ministers across Europe are coming to recognise that in this new global economy there is no escape from uncompetitiveness by resorting to loss making subsidies, artificial barriers or protectionist shelters. Indeed, in every part of the world rigidities, inflexibilities and lack of competitiveness - that could once be sheltered in the era of trade blocs - are now fully exposed in the era of global competition.

Let me sketch out the significance of the changes we face in the period ahead

The Europe that progressed from coal and steel community to customs union to common market to single market and then to European Union was, in effect, the world’s first modern trade bloc -- its advanced internal rules and preferential agreements separating Europe off from the rest of the world.

Understandably the discussion then was how this new trade bloc of Europe could manage its own internal affairs, what institutional arrangements were required, whether a social dimension was needed. And an assumption became rooted in the very rhetoric of European integration that the single market and single currency would lead to tax harmonisation, a federal fiscal policy and the completion of a federal state.

But because of the intense pressures that arise from globalisation, Europe is now entering the second stage of its history as a union and is finding that the agenda relevant to its first phase - the era of a trade bloc - is quite different for its second stage – the Europe facing global competition.

And this forces the European Union to shift from an old often inward-looking trade bloc to a flexible, reforming, open and globally-oriented Europe - able to master the economic challenge from Asia, America and beyond.

And the agenda that flows from this demands a programme of liberalisation, tax reform, new employment policies, the opening up of trade and commerce and a modern monetary and fiscal regime.

So the debate about Europe’s future and its role in the wider world has to be understood in this context: that the economic reality is no longer – as it was in the 80s - how this or that trade bloc develops on its own but how each continent is part of – and benefits from - globalisation as a whole; and interestingly also the political reality remains people’s attachment, for example on issues of what is taxed and by whom, to their national values, their national identities and thus to their nation state.

And with Europe’s Intergovernmental Conference now entering its final stages, and the European budget discussions for the years ahead about to begin, it is important that Europe responds to these new challenges with clarity.

So what are the ways in which the new enlarged Europe must change to meet the competitive challenge of globalisation?

First, I want to suggest how in an enlarged Europe the economic reform programme can develop.

All of us – all 25 in Europe - will only maximise the benefits of globalisation – and solve its problems of low growth and high unemployment – by becoming more efficient and increasing its productivity ---- pushing ahead with the necessary structural economic reforms to promote sustainable growth and increase the flexibility of our labour, capital and product markets.

Indeed, Global Europe must be more aggressive in making sure that in its operation the single market does not shelter inefficient industries but does what it should do: forces them to be more competitive; fosters investment in key areas like R&D and infrastructure; and by encouraging new enterprise – and rewarding it properly – generate the growth, productivity and employment we need. And the experience of new Member States – such as Estonia which has been growing at 5 per cent a year in recent years – shows that reforms can provide a strong stimulus to growth and jobs.

So having created a single market in theory, we should make it work in reality so we achieve lower prices for the consumer.

Between 1992 and 2001, the single market produced a gain equivalent to £4000 pounds for every household in Europe. Goods now move freely across Europe, whereas before 1992, internal customs borders meant that around 90 million forms were filled in each year, a massive burden on businesses and individuals. And markets have been opened to the benefit of consumers. In telecommunications, for example, the average price of calls has dropped since 1996 by around 30 per cent for businesses and 16 per cent for households.

But while the single market encompasses 450 million people today, we have still a long way to go to secure for business and consumers the full benefits in commercial opportunities and consumer prices. While in 1988 Cecchini estimated that single market liberalisation would add 4.5 per cent to Europe’s GDP, cut prices by 6 per cent and increase employment by 1.75 million, many of the gains have yet to materialise. And the single market is often more honoured in rhetoric than in reality.

So we favour:

faster progress towards the integration of capital markets;
full liberalisation of energy markets by 2007;
full market opening of postal services by 2009;
in aviation, rapid progress towards a fully liberalised EUUS open aviation area and the use of market mechanisms for allocating slots at airports;
and making the single market a reality for services as well as goods where we must agree the principles of an approach in the next year.

Too often we have depended upon political fixes to make progress in our journey towards a single market. Too often, the aims of liberalisation and opening markets have resulted instead in increased regulation. So we need a new model for opening European markets and for removing barriers to competition.

In the UK, we decided that the way forward was that competition authorities, rather than politicians, should make the crucial decisions necessary for opening up markets.

In Europe, we should make the same move. Rather than political initiatives based on harmonisation, Europe needs a more proactive EU competition regime which makes a reality of the single market --- with investigations into particular European markets and sectors to drive up competition

A similar proactive approach must be taken to state aid reform. We should abolish wasteful state aids but also make sure the rules do not prevent measures which help make markets work better. And we will support the European Financial Services Action Plan as it improves mutual recognition of financial services providers in insurance, banking and capital markets.

In an increasingly competitive world where innovation is vital for growth, Europe must raise R&D investment to move closer to our aspiration of 3 per cent of EU GDP. And we will promote both a European wide venture-capital industry and Private Finance Initiatives across the continent.

I know many of the business men and women here today feel strongly about tackling wasteful and unnecessary regulation and because around half of all new regulations now emanate from Brussels not only will Britain resist inflexible barriers being added into European directives like the Working Time Directive, the Agency Workers Directive, the Investment Services Directive and the Transparency Directive but we have agreed with Ireland, the Netherlands and Luxembourg to put regulatory reform at the heart of our four EU Presidencies through to 2005, ensuring that any proposed regulation and every costly and wasteful existing regulation is put to a competitiveness test.

Second, the same globalisation that demands open, flexible liberalised markets demands more open, flexible and competitive tax systems.

When I first attended European Finance Ministers meetings in 1997 I found that it was simply assumed that tax harmonisation within Europe would happen.

For years for example it had been assumed that to eliminate tax avoidance by for example German citizens failing to pay tax on their savings income in Luxembourg, there should be a harmonisation of taxes on non-domestic savings throughout the European Union. This was a proposition that from the moment we came into power we fought for two reasons: harmonisation of tax would reduce competitiveness and would be unacceptable to the peoples of Europe because decisions on what to tax, and how, reflect national choices and cultures.

In the years after 1997 a detailed proposal was drawn up under which similar tax rates would be levied on savings in Europe under the auspices of the commission. But when such a plan was finally explored in detail, European leaders found that in an open global economy, where savings could move worldwide, Europe’s savers would respond to a harmonised tax not by bringing their savings back to their country of residence but sending their savings out of Europe altogether to lower taxed countries. So instead of, for example, Germany receiving tax on its citizens savings in Luxembourg both Germany and Luxembourg would lose these investments to Switzerland and Liechtenstein or non European tax areas like the United States.

It is now obvious that - national cultural factors notwithstanding - it is the very openness of global capital markets that undermines the European Union’s proposals for tax harmonisation and would, if harmonisation was implemented, reduce European competitiveness.

So it is right while dealing with unfair tax competition to resist schemes for the harmonisation of corporation tax or further harmonisation of VAT, just as it has been right to support exchange of information as the means to tackle avoidance of savings taxation.

Third, Europe’s founders recognised that markets are social structures and work best when there is an explicit social dimension. And for its time and era the European social model which argued that enterprise had to be matched by fairness was an advance on responses to industrialisation in many other parts of the world.

And from the United Kingdom we will support a generous allocation of regional structural and social cohesion funds to new Member States to enable men and women who are unemployed to be brought back to work and to enable areas and communities – too often in the past left behind outside the mainstream of European economic development - to become more prosperous

And with competitive pressures now global and not just European – and with 18 million people across the EU out of work including more than 18 per cent of young people - the social dimension of a Global Europe must change also. It cannot be a labour market policy that is passive, simply paying benefits to people who are out of work and protecting people against change. Instead, Europe must move from passive labour market policies to active labour market policies – policies which equip people to cope with change, policies which do not simply pay people to stay out of work but which encourage people to move from welfare to work and give them the skills they need.

Take long term unemployment

In some countries between 40 and 60 per cent of the unemployed have been unemployed for more than a year, but in America the figure is just 12 per cent. So it is right that following the Wim Kok recommendations, Europe examines how, in the search for higher employment levels, we reform employment services, seek greater local flexibility, ensure social security benefits can encourage the return to employment, and sharpen tax incentives for work. And it is right both to create flexible markets and to equip people to meet and master change - through investment in skills and training, through the best transitional help for people moving between jobs, and through the operation of incentives to work like a minimum wage and a tax credit system, tailored in each member state to national circumstances. Many of the new member states have already learnt these lessons and recent tax and benefit reforms in Slovakia and Poland will go some way to help make work pay and reduce long term unemployment

In the UK, employment figures out today show a further rise in employment, a further fall in unemployment and with the highest levels of employment and the lowest levels of unemployment our history, Britain is working - with full employment now closer than ever before.

But we will not relax, be complacent or rest on our laurels. Our determination is to advance further and faster to full employment and so the Employment Secretary, Andrew Smith, and I are launching a series of radical new measures to help parents find and retain jobs:

we are piloting an extra in-work payment of £40 a week to make sure it pays for lone parents to get a job and this will be extended to a further 12 areas in October and across the whole of London from next April;
and - introduced in three areas of the country - our Extended Schools initiative which makes better use of school facilities to provide affordable childcare will be rolled out to a further four areas in the autumn.

And it will be a priority for our third term to strengthen the New Deal further: new opportunities matched by tough new compulsory measures for the unemployed as well. No one able to work should be sitting at home on unemployment benefit doing nothing.

Backing up the changes that we have been developing – work trials, motivational assistance, specialist support for the hardest to help, training in CV writing, and more help with initial training expenses and essential costs of work like new clothes - we are introducing:

compulsory attendance for work preparation with a personal adviser every three months;
in 12 areas of the county, mandatory participation in basic skills training;
in another 10 pilot areas, an even more intense intervention at 6 months including a work-focused training course.

And there will be tough new measures in our manifesto to strengthen the New Deal further. I believe it would be completely irresponsible and the wrong course for Britain to scrap the New Deal and to put at risk the platform of stability on which we are closer to full employment than ever before.

The fourth area in which the new enlarged Europe must change to meet the competitive challenge of globalisation is trade.

In the old trade bloc economy Europe could worry most about internal trade and least about trade with the rest of the world. But it is now trade with the rest of the world that is growing fastest of all.

Take investment flows. For fifty years from the 1940 America invested heavily in Europe. In the 1990s it is Europe that is investing heavily in the USA. Indeed for nearly ten years funds invested from Europe in America have exceeded funds invested in Europe by America

And so it is obvious that while in the trade bloc era Europe could be protectionist and shelter its goods and services, globalisation forces Europe, like Britain, to be open and outward looking. And in a new global environment where all the arguments for the benefits of free and open trade are now more pressing than ever before, but where political resistance is strong, Europe needs to confirm its rejection of the protectionism and parochialism of the past

The breakdown of talks in Cancun - where the EU, US, Japan and many developing countries were unwilling to accept the necessary cuts in tariffs and trade-distorting support to reach agreement - is a bitter disappointment and a serious setback to the multilateral process.

Cancun showed that there are now real risks that the response to globalisation is not to embrace change by opening up trade but as a world to set our face against change by creating greater barriers, pursuing bilateral deals, and building inward looking regional blocs.

To present an inward looking “Fortress Europe” as the sequel to the nation state and the alternative to the embrace of globalisation would be to miss the major opportunities for prosperity - the real gains that can come from open trade

Europe must lead in the World Trade Organisation. Along with America, not lag behind. We should not wait for the Doha development agenda to conclude but should start liberalising now and deliver the benefits that such reforms – properly sequenced - would have on growth, consumer prices and developing countries economies. In particular Europe and America must, sooner or later, come together to tackle, at root, agricultural protectionism which is failing consumers, taxpayers, farmers and the environment, as well as seriously damaging the world’s poorest countries.

But at the same time as pursuing a multi-lateral agenda, Europe should also recognise that a strong transatlantic economic partnership is critical to long term prosperity. In the best and most forward looking responses to globalisation, Europe and America should see ourselves as partners not rivals -- not Fortress Europe versus Fortress NAFTA, but working together to be beneficiaries of global change and ensure that all continents benefit.

It is estimated that if we broke down the tariff barriers and the barriers to trade in services between Europe and America Europe could increase employment by 1 million, raise growth by up to 2 per cent in Europe and up to 1 per cent in America. This would be a welcome development not only for countries that stand to benefit directly from trade with the us but also for those, such as the bulk of the new member states, that currently trade predominately with the existing member states of the EU.

So it is not just in Britain’s but in Europe’s interest that the EU and USA seek common approaches to competition, liberalise services and capital markets, remove remaining tariffs, reinvigorate the transatlantic business dialogue, and together make multi-lateralism work for developing countries.

Fifth, the lessons all advanced economies have learned are that in the new global economy where investors will put a premium on maintaining monetary and fiscal stability, monetary and fiscal policy has to adjust quickly to fast moving changes and to heightened risks of instability – and to do so it has to be proactive and forward looking

This demands a framework – whether monetary or fiscal – based not on short term targets but on clear long term objectives that are met and seen to be met; well understood operational rules of procedure that are painstakingly followed; and an openness and transparency that helps build public trust and market credibility.

That is why my first acts as Chancellor in 1997 were not only to make the Bank of England independent but to introduce a new British model for monetary and fiscal stability with:

instead of monetary targets, a symmetrical inflation target that is as concerned about deflation as it is about inflation;
instead of the old annual fiscal fine tuning, clearly established fiscal rules set over the cycle;
and because it is important not just to build trust but to educate decision-makers about the costs and benefits of different courses of action, an openness and transparency.

And it is precisely this kind of monetary and fiscal policy that is most attuned to the needs of an open trading global economy.

Monetary and fiscal stability cannot of course eliminate or even prevent recession but it can diminish the chances of it happening and it is because Britain imposed these rules - this ‘British Model’ for stability - that while the USA, Germany, Italy and Japan suffered recessions, Britain for the first time in 50 years did not suffer a recession during the world downturn and instead has grown in quarter after quarter, year after year, in all seven years of our government since 1997. And we will continue to put stability first, now and in the future.

Just like Britain, the euro area has also been establishing a framework for economic stability. In parallel with the creation of the independent Monetary Policy Committee of the Bank of England and our new fiscal regime we have seen the creation of the European Central Bank and the evolution of the Stability and Growth Pact. And just as we in Britain are examining how we advance, the ECB has been reviewing its monetary policy strategy and the EU has been looking at how the Stability and Growth Pact can work most effectively.

The Stability and Growth Pact has played a key role in enhancing the credibility of EU governments’ commitment to fiscal discipline and encouraged greater transparency of member states’ fiscal positions. And it is crucial that all EU Member States continue to send a strong signal of budget discipline by refusing to return to the unsustainable policies of the past. But while it is right to be tougher on deficits when growth is above trend, we must ask why in a period of low growth the European Commission should threaten to fine countries in circumstances where fiscal policy is supporting monetary policy in combating low growth.

Public investment in the new member states amounted to 3 per cent of GDP in 2003 for example – and it is vital that much needed programmes of reform are funded to combat decades of under-investment. And so we should also ask whether it makes sense to penalise countries that from a position of low debt and of consumption covered by revenues are making sensible investments to improve infrastructure and public services.

I want the Stability and Growth Pact to be a pact for long-term sustainability of the public finances and genuinely a pact for growth. And that is why we have suggested it places greater emphasis on the importance of low and stable debt levels, and to take into account both the ups and downs of the economic cycle and the quality of public finances including the importance of public investment. It is by doing so that the Pact will contribute to growth rather than risk impeding it.

And as we evolve the Stability and Growth Pact to meet changing European needs, the British Government will continue to stress that when Member States are themselves answerable to their citizens for tax and spending decisions, it is through intergovernmental co-operation that fiscal policy delivers its most effective results. That is why it is right that the conduct of fiscal policy remains the responsibility of Member States and our focus must be on ensuring that the constitution agreed enables us to promote liberalisation, flexibility and economic reform through intergovernmental cooperation.

So as we move forward - a Europe no longer of 15 but of 25, a Europe that has to adapt to the realities of the new global economy - reform is not just desirable it is an urgent necessity.

And instead of squandering the moment, the moment when an enlarged and reforming Europe can benefit from a world upturn, we should seize it to drive forward growth and employment creation --- supporting reform of the Stability and Growth Pact to strengthen sustainable finances; introducing and entrenching the structural reforms needed to deliver more flexibility; and ensuring that a more outward-looking Europe is fully equipped to succeed in the global economy. Reforms that will enable each and every Member State of the European Union to increase its prosperity in the years to come.