7 Feb 2002
SPEECH BY THE ECONOMIC SECRETARY TO THE TREASURY, RUTH KELLY MP ON The importance of EU Financial Services to the Lisbon Agenda
Thank you for inviting me to speak here today.
The European project, the moves towards ever-closer Union, are founded on the human need for peace and prosperity. It is the goal of prosperity that prompted the European Council, coming together at Lisbon and again at Stockholm, to call for a step change in the levels of productivity and employment in the Union. Two years on from Lisbon, two years into the process, it is time to review what progress we have made and rededicate ourselves to the objectives of peace and prosperity. It is these objectives that will drive us on at Barcelona and beyond.
In the 1980s it was estimated that the economic benefits of the single market would equal a 4.5 per cent increase in GDP and 1.8 million new jobs. At last estimate, the GDP improvement has been only a third of what was hoped for and employment benefits only half. This is an unacceptable state of affairs - unacceptable for the citizens of Spain, unacceptable for the citizens of the UK, and unacceptable for hard working families across the EU.
To achieve the promised gains in productivity and employment we need to make progress on the priorities identified by Prime Minister Aznar - progress on:
- Network industries; where we need to open and integrate transport and communication networks, creating real freedom of mobility for people, for goods and for capital;
- Energy liberalisation; where we need to liberalise and link up European energy markets to bring lower costs and greater security;
- Education and Skills; to bring opportunity for all and create a knowledge-based economy;
- Reforming Labour Markets, to make work pay and promote active ageing; and - the focus of my talk....
- Financial Services; creating a genuine single market to enable firms to cut the cost of accessing capital, and benefit consumers by giving them a wider choice of competitively priced products.
In the light of recent events the need to pursue the agenda of European economic reform has acquired a greater, not lesser, urgency. The slowdown in the world economy and the introduction of the euro in the twelve Member States are an incentive to get on with the job - not to put it off.
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As Patricia Hewitt said yesterday: the Lisbon agenda is not just for the good times, it is for the bad times as well.
Flexible, dynamic economies are better placed to withstand difficulties. They have shallower recessions and they recover from them faster.
Economic reform is the engine of growth and the best defence against turbulent times. To fuel the engine we need to strengthen investment in the EU. The completion of the single market in wholesale financial services is an integral part of our efforts to increase investment and so it is also a crucial component of our programme of economic reform.
The Spanish EU Presidency has highlighted the Single Financial Market as one of its five key priorities for its Presidency, and with good reason. An integrated financial marketplace would allocate capital more efficiently; allow better diversification of risk; be more competitive, and hence more innovative and lower-cost for a broader range of borrowers and investors; enjoy economies of scale; and be better placed to win ?export? market share outside the EU.
The arguments are clear: investment is a key determinant of economic growth and efficient, integrated capital markets are the best means of generating and allocating investment. All the evidence suggests a strong causal link between competitive capital markets, investment, and growth.
To boost the levels of investment and increase productivity in the EU we need to increase the efficiency of our market mechanisms. Our shared objective must be to create an effective and dynamic financial services market that will efficiently link sources of capital - investors and savers - to users of capital - firms and individuals seeking to raise finance. We must aim to reduce the costs of accessing capital, narrow the margins between savers and borrowers, and increase the efficiency of its allocation across the EU.
The link between economic reform and dynamic, integrated capital markets is clear. Let me give you two examples?
One of our European Economic Reform objectives is to open up access to the energy industry. Yet liberalisation will be ineffective unless new companies can enter the market and existing companies can reposition themselves to compete in the new environment. Neither would be possible unless these companies could access capital at competitive rates. So efficient wholesale financial markets are a pre-requisite for open energy networks. We need to ensure we do not create unnecessary barriers to their development.
A second objective of economic reform is to deliver flexible labour markets and put in place the economic conditions necessary to encourage job creation. We must ensure that this objective is not put at risk by misguided regulation. Pensions, for example, are a significant part of non-wage labour costs. To meet the Lisbon target of 20 million new jobs by 2010 we have to ensure that pension regulation has the effect we want - affordable pensions and increasing employment opportunities - not one at the expense of the other.
Pensions are the means by which we all save and invest for our future. Each Member State will decide on the appropriate balance between state and private sector provision, but we must ensure that barriers to the development of private sector funded provision are removed.
Such schemes will only develop if the regulatory regime strikes the right balance between security and costs. An approach that limited the freedom for individual pension schemes to pursue an investment and funding policy appropriate to the circumstances of the scheme would not be in the interest of pension scheme members. European Member States, working with the European Commission, must ensure that we get the balance right as we take steps towards allowing pension schemes to operate across borders.
The links are clear - pension regulation - part of the financial services agenda - is also part of our wider attempts to create sustainable employment opportunities, promote higher levels of growth, and secure a better standard of life for the EU's aging population - now and in retirement. Getting it right on the Financial Services Action Plan is also getting it right on European Economic Reform - the two are inextricably linked. It is only when we consider pensions in this light - and for that matter other financial services directives like prospectuses and investment services - that we will move forward on the Lisbon agenda.
The absence of an integrated market in wholesale financial services is not just a problem for the financial centres in London, Frankfurt, Paris and Madrid, it is a problem for the entire EU and solving it must be central to our economic reform agenda.
The financial services industry makes a substantial contribution to the UK economy - accounting for 5.1% of GDP and employing over a million people but, more than that, it is a key determinant of economic growth. In Spain the financial services industry makes a similar contribution. Efficient and effective financial markets in both of our countries stand behind the development of all other areas of the economy. And as financial markets are increasingly international they also contribute to increasing productivity across the entire EU and beyond.
If we are to make genuine progress against the Lisbon targets we need to recognise the importance of the EU's financial centres and remember the contribution they make to the EU economy as a whole. We need to step back for a moment, consider what we are really trying to achieve with our capital markets, and identify the measures required to support their development.
The European Commission's mid term review of the financial services action plan later this month will provide a good opportunity to do so and will help prepare the ground for the Barcelona Council.
It is not good enough just to approach the completion of the Financial Services Action Plan as a series of boxes to be ticked. We need to use the mid term review and the Barcelona council to take stock of what is actually being achieved on the ground. We need to prioritise measures that will bring the greatest benefits to firms and the consumers of financial services.
The European Roundtable on Financial Services chaired by Pehr Gyllenhammar is studying the costs of failing to achieve a single market. This will be a useful starting point for identifying the benefits of integration. The mid term review and Barcelona will be an opportunity to build on this to develop and publish indicators of progress. These should define and measure those single market benefits we have already realised and track future progress.
Measurement of areas like cross border price differentials will enable us to make an assessment of where progress has been made and where more needs to be done. The fact that in Belgium the average interest rate charged on a credit card is three times that in the Netherlands indicates the benefits that could be realised for consumers from our efforts to create an integrated market.
Publicising these facts, regularly, in a Commission report, will create the incentive to reform. Two years on from setting the Lisbon objectives we have done a lot, but there is a lot still to do - developing appropriate indicators will tell us exactly how much.
In the UK's view achieving the Lisbon objectives must also mean implementation of the recommendations of the Lamfalussy group to speed up the EU legislative process for financial services. In the agreement reached at Stockholm we can see the blueprint for the completion of a dynamic single market.
Lamfalussy also emphasised the need to focus our attention on the securities market measures that will provide the greatest economic benefits. That must be the right way forward. The citizens of Europe expect us to make progress: enabling companies to grow and savers to realise a better return on their investment. That is the prize on offer - and it is a prize worth fighting for.
And we need to take the legislative process closer to the markets by increasing consultation and transparency, as recommended in the Lamfalussy Report. In carrying forwards our priorities for the securities markets we must ensure that the legislation reflects the changing realities of the modern market place, and that the public policy objectives of our proposals are clear.
The European Parliament's vote on Tuesday in favour of the Lamfalussy process is very much to be welcomed. We must now press forward and maintain the momentum at events like this, and at Barcelona.
Our overarching objective must be to cut the cost of accessing capital for EU firms, especially SMEs. We need to ensure that priority measures currently under discussion deliver this outcome. I believe the key priorities are:
- A Prospectus Directive that provides an effective passport for issuers - lowering the cost of accessing capital for firms across the EU, and making the EU capital market more efficient and liquid, whilst ensuring that there is an appropriate level of protection which distinguishes between professional and retail investors. Legislation must seek to capture and support the valuable diversity of market types and business needs. I hope that we can work collectively to ensure that the directive helps us achieve these objectives.
- A Collateral directive that provides legal certainty for the collateral backing cross border securities transactions - reducing the cost of accessing capital and promoting flexibility in collateral arrangements;
- An International Accounting Standards Regulation that will introduce global accounting standards. This will increase the transparency and attractiveness of EU accounts. Global markets need global accounting standards and the EU should be an enthusiastic participant in their design and their implementation;
- An Investment Services Directive that delivers a clear and proportionate legal framework for professional investors
More generally, we need to move decisively away from the notion of universally harmonised EU wide rules. Instead we should concentrate on agreeing core standards to deliver genuine consumer protection and allow mutual recognition of home state regulation of financial services.
Progress in these key areas will enable us to deliver deep, broad and liquid financial markets. The benefits are self-evident: lowering the cost of accessing capital and improving the efficiency of its allocation will increase productivity across the EU - helping us achieve the Lisbon objectives.
So what does this mean for Barcelona? We should set our sights on
- Reaching agreement on those key areas where good progress has already been made: Market Abuse, Collateral; and International Accounting Standards;
- Setting an overarching goal to reduce the cost of accessing capital and enable its more efficient allocation throughout the EU
- Making progress on indicators of success - where we could consider setting a timetable for this work
- Welcoming the Lamfalussy agreement between the European Parliament and the Commission, and then focus on implementation of Lamfalussy's recommendations.
Two years ago at Lisbon we set ourselves ambitious goals - every single Member State signed up to them.
It marked a sea change in European thinking away from heavy handed regulation and intervention towards knowledge, skills, enterprise and innovation.
An ambitious agenda aimed at over-taking the US on productivity within ten years.
We understood that that was the route to solving Europe's problem of high unemployment.
And it was explicit as a goal: 20 million new jobs to be created by 2010 and rising levels of prosperity for all our citizens. We are not tilting at windmills - unemployment is a real giant and economic reform driven by integrated efficient capital markets is the way to take it down.
Now, we have a shared opportunity to create a real single market that will bring genuine benefits to retail consumers, businesses and the whole EU. We have a collective responsibility to our citizens to seize this opportunity with both hands. To do this we need to think radically, to change the way we do business, focus on what we are trying to achieve, and move to a new approach that recognises the importance of the link between integrated capital markets and economic reform - investment and productivity.
We need to take forward the project of economic reform and strive to build an integrated market in financial services - not as ends in themselves - but as means to achieve the Lisbon objectives, rising levels of prosperity for the citizens of Spain, the UK, and the EU as a whole. These are the concerns we wish to see reflected in the Commission's mid term review, and these are the concerns we will take forward at Barcelona and beyond.
Thank you.