57/05

22 June 2005

Speech given by the Chancellor of the Exchequer Gordon Brown at the Mansion House, London

Global Britain, Global Europe: a Presidency founded on Pro European Realism

My Lord Mayor, Mr Governor, My Lords, Aldermen, Mr Recorder, Sheriffs, ladies and gentlemen.

Thank you for your invitation - and let me start by congratulating all of you here tonight for the outstanding, the invaluable contribution you and your companies make to the prosperity of Britain.

For three centuries since the earliest years of Britain's industrial revolution your enterprise as businesses, your unique innovative skills, your courage and steadfastness, and your outward looking internationalism have led Britain's trade and commerce and helped Britain lead the rest of the world.

As the world has changed, as industrialisation spread from Britain round the whole world, you have changed too - adapted and innovated, so that you prosper still - indeed as never before. With London today the largest trading centre for foreign equities and bonds, the largest foreign exchange market, host to a greater number of foreign bank branches and subsidiaries than any other city, the City of London continues to lead the world.

And as the world changes again, and faster than ever before - with the pace and scale of global change pervasive and relentless - so that nations' fortunes will rise and fall ever quicker, so too you are called upon to show the flexibility, innovation and dynamism necessary for global success in these times.

Not only is the City the most global part of our economy.

But more nationalities are represented in the City than any other financial centre.

And more countries are represented here this evening than at any time in the history of the Lord Mayor's banquet.

And here tonight at the Mansion House as we prepare for what I believe will be the most rapid shift in the global balance of production the world has ever seen, it is appropriate that I make my theme -- 'Global Britain, Global Europe'. And I want to consider with you how we make the long term economic changes in the national interest that will equip us, Britain, for this new global era.

One of the many memorable sayings of Winston Churchill - who addressed this gathering on four occasions between 1925 and 1928 - was that those who try to build the present in the image of the past will miss out entirely on the challenges of the future.

It is globalisation that is our greatest future challenge: world trade doubling every decade, China's trade doubling every three years, world trade now rising nearly twice as fast as world output.

Two decades ago just 10 per cent of manufacturing exports came from developing countries. Soon it will be 50 per cent.

China’s wage costs are still just 5 per cent of those of the European Union. But we are not simply competing in low skilled low wage mass production manufacturing.

With 4 million graduates a year from China's and India's universities, we are now competing with Asia on high tech, high skilled, high value added goods too.

And so no country or continent, however successful today, can take its long term prosperity for granted.

History shows how countries which felt invulnerable can experience rapid decline, and the risks are all the greater with the unprecedented pace of change today.

When I spoke to the CBI last month, I set out the long term commitments we have to make for global success – investment in science and education and a renewed commitment to entrepreneurship and trade.

It was said in the 1950s Britain managed decline, then in the 1960s we mismanaged decline and then in the 1970s we declined to manage. And our stop go history is now legendary -- so much part of our psychology that it was essential in 1997 to start a new chapter by making the Bank of England independent.

Looking to the future, the Britain that fails will be the Britain that fails to lock in our hard won stability, forgets our unique role as an outward looking open trading and entrepreneurial economy, fails to rise to the competitive challenge by neglecting to invest long term in skills, science, and infrastructure -- the key drivers of success in the modern world.

The Britain that will succeed will rise to the global challenge – the Britain that entrenches stability not for a year or two but for the long term. And I can assure you that nothing this Government does now or in the future will put at risk the fundamental stability that we have achieved.

The Britain that will succeed in this open global economy will be the Britain that, true to our history, rejects any form of protectionism or parochialism and, instead, sees the channel not as a moat cutting us off, but as a highway to the world.

That is why I am so keen to break down trade barriers between Europe and the USA and to build strong trading links between Britain and Asia - especially between Britain and China and Britain and India.

And in a global economy that requires not just entrepreneurial traders but all round flexibility, the Britain that will succeed will be the Britain that nurtures the spirit of enterprise from our classrooms to our boardrooms, and makes the long term decisions so that as a nation we will move up the value added chain and invest in science, skills and transport and infrastructure, not least by speeding up an all to inflexible planning system to speed up investment in housing and commerce – making Britain the premier location for R and D and the world leader in skills and the creative industries.

And I can assure you that nothing we seek to do as a Government will be more important than preparing and equipping Britain for these great challenges ahead and building within Britain - among all sections of society and in all regions and nations - a shared sense of long term national purpose about our economic destiny.

And it is in Britain's interests that not just our own country but the whole of Europe - our biggest market responsible for 50 per cent of our trade, involving 700,000 companies – the Europe is fully equipped to meet the global challenge.

In the last eight years, here in Britain, we have had to make and continue to make hard, long term choices to achieve stability, growth and flexibility.

Now to be globally competitive, the European Union must make these long term choices too.

So I want to discuss with you in more detail the reforms Europeans must address together during our European Union Presidency and beyond: changes that move Europe from the trade bloc it is today, to the Global Europe it needs to be to secure its long term future.

Last week Tony Blair stated that the rebate was a symptom of an even bigger issue – the unfairness of the budget.

And with 40 per cent of the European union budget spent on agriculture, only 2 per cent of Europe's economy, the budget issue itself is a symptom of an even greater issue about the future of the European economy – what changes Europe must make to meet the competitive challenges of globalisation

You know the issue as companies: thirty, twenty and even ten years ago the challenge for you as businesses was how to secure the maximum benefits from a European market.

No business planning for growth in the future can ignore the facts: 80 per cent of our potential markets are outside Europe and a decade from now the Asian market will be 50 per cent larger than the European.

And the referenda in the Netherlands and France have given these issues the sharpest possible focus and indeed a new urgency: questioning not just what is the right policy for the European economy but what is the right balance, economically and politically, between national decision making and European decision making to fit us to meet these challenges.

So questions that Europe might find it easier to avoid – how we reform inefficient state aids, especially in farming; how we might break out of all too the familiar stand off in trade with the one other advanced global power, north America; how, with 20 million unemployed and almost half of them half long term unemployed, we reshape and modernise the European social model – are questions that must be addressed if we are to meet the challenge of globalisation.

And I want to suggest tonight that to be fully equipped for the global economy, Europe must itself become global: more open, more outward looking, and then more flexible, more competitive and more committed to reform to enable us to compete worldwide and move to full employment again. And the pace of globalisation requires us to push ahead with greater determination and greater urgency a set of comprehensive economic reforms.

Let us recap where we have come from and where, as a result of globalisation, we are now going.

It was once said that Europe was divided into two - those in the west who had Europe and those in the east who believed in it. Today east and west are united in one Europe, thus ending centuries of division.

From 1945 after the horrors of war the task was, literally, to turn swords into ploughshares.

You could argue that in our enthusiasm for the Common Agricultural Policy, we found ourselves with too many ploughshares - ended up paying for too many ploughshares.

But, seriously, we must never forget that peace across Europe – now stretching from the Atlantic Ocean to the Urals – is a huge achievement of European Union.

Today the European Union – whose founding ideal was a Europe at peace – is now tested, however, not just on whether it can secure peace, but whether it can also generate prosperity.

And the challenge for our generation of European leadership is the global flows of capital and global sourcing of products, not least from Asia, that keeps Europe under intense and sustained competitive pressure, forcing Europe to change – and change quickly.

The Europe that progressed from the Coal and Steel Community in 1951, to the Common Market in 1957, to the Customs Union completed in 1968, to the single market and then in 1992 to the European Union, grew into the world's first modern trade bloc - leading the world with its internal rules, preferential agreements and its openness to trade within its boundaries.

Understandably the principal focus of attention and policy was how this new trade bloc could best manage its affairs - what institutional arrangements were required, how a social dimension could be created. Indeed the assumptions that became rooted in the very idea of European integration were that the single market and single currency would lead to tax harmonisation, a federal fiscal policy and something akin to a federal state.

But by its very nature globalisation changes all this. The issue is not just how Europe integrates from 15 to 25, but how all 25 reach out to the rest of the world.

While the old assumption was that we would move from economic integration at a national level to economic integration at a European level, it is in fact global not European flows of capital that now dominate; the global, not European, company; and the global, not European, brands.

So as Europe enters the second stage of its history, as a Union it is finding that as a result of globalisation the agenda relevant to its first phase - the era of a trade bloc - has changed utterly. The challenge for Europe now is that of global competition.

Already European trade with the rest of the world has - in just 3 decades - risen 1,000 per cent, with foreign direct investment flows rising in just one decade by 400 per cent

But, more important, it is because global competitive pressures bearing down upon Europe are so intense --- Chinese exports to Europe 100 per cent up in just three years; up to 5 million European and American jobs potentially outsourced by 2020; and today 9 per cent unemployment - that Europe must reform and reform quickly.

And the question for us is how Europe can move from the older inward-looking model to a flexible, reforming, open and globally-oriented Europe - able to master the economic challenge from Asia, America and beyond.

Let me give one example of how in the move from trade bloc Europe to Global Europe, old policies will not be just out of date but counter productive for the global era.

When I first attended European Finance Ministers meetings in 1997 the inevitability of tax harmonisation was not only assumed, but the first project savings tax harmonisation was underway. And you in the City of London campaigned with us, the British Government, warning of the risks of savings tax harmonisation for the London bond market. But it was only when European leaders came to realise 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 from countries such as Austria and Luxembourg back to their own country of residence, but by sending their savings out of Europe altogether, and that it began to be recognised that the very openness of global capital markets made this next step to harmonisation problematic.

But in a global economy it is not only tax barriers, but other rigid barriers and inflexibilities that shelter and protect countries and companies from global competition that have to be challenged in the interests of long term competitiveness.

Indeed today there is hardly a product that is manufactured in Europe and that does not now have an Asian or American competitor often able to exploit the advantages they have in either low wages or higher productivity. So the only way to tackle low growth and high unemployment is to master the economic challenge from Asia and America by moving up the value added chain and becoming more competitive once more.

And the same global pressures that force tax competition and economic reform onto the European agenda also force Europe to rethink the most basic of political assumptions that have underlain 50 years of development.

The post war authors of European integration made two major assumptions: not just that we would move from being economically integrated at a national level to being economically integrated at a European level, but also that cultural and political integration would follow economic integration.

In their desire to secure a Europe at peace they came to believe that a European identity could supersede national identities.

But things have not worked out this way.

The global not European company now dominates, with global not European flows of capital. And under challenge amidst global change too is the second assumption of the old European model about cultural and political integration. And this is how I believe we must read both the referendum results and the response in all European countries to a period of low growth.

In my view Europe’s voters are telling us that globalisation has led them to feel economically insecure and that in an interdependent world new opportunities may open up, but not necessarily on an even handed basis.

We must respond to that concern, but we must also respond because the referendum results suggest identities have remained rooted in the nation state – and that familiar national, cultural and political attachments are important.

So I suggest that the necessary in depth debate about Europe's long-term future should be conducted in this context: that the economic reality is no longer as it was in the 1980s – 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 at the same time the political reality remains people's attachment, for example on issues of what is taxed and by whom, to their national values.

So if the old assumptions about federalism do not match the realities of our time, now more than ever we need a pro-European realism that starts from the founding case for the European Union, the benefits of cooperation among nation states for peace and prosperity, but strengthened by the insistence that Europe looks outwards as a Global Europe. And is driven forward by the need for reform

Our position should be one of pro-European realism.

Pro-European because we recognise the economic benefits of cooperation and a pooling of sovereignty to secure an enlarged single market of 450 million consumers. And pro-European because we know that - as trade shows - there must be a European dimension to how we respond to the challenges of globalisation.

But pro-European realism, because we know that Europe can only succeed if it recognises and faces up to the scale of the long term changes that need to be made to meet today’s global realities. And pro European realism because we understand that it is by intergovernmental cooperation – recognising national values - that we build the long term political will and sense of purpose to implement these changes.

And we demonstrate our pro-European realism best by showing that being both pro- European and being pro reform is the best way forward, achieve both economic prosperity and a return to full employment.

And I believe that those of us who have always been supporters of the benefits of European cooperation have a duty not to be silent about the need for Europe to reform. Instead the best pro-Europeans can do is to show how Europe by reforming can meet the long term needs of its citizens in future years.

The starting point must be a European wide commitment to long term structural reform founded on greater flexibility, and starting with a political commitment to completing the single market.

In 1988 Cecchini estimated that single market liberalisation itself would add 4.5 per cent to Europe's GDP, cut prices by 6 per cent and increase employment by 1.75 million.

But while completing the European single market is a shared ambition, it is not yet - because the political will has been lacking - a shared achievement. We are still behind the USA in business creation, innovation and venture capital. Having agreed each nation would legislate to open up telecommunications by July 2003, but in 2005 over a third of Europe's pre-enlargement 15 have not done so. Equally the pledge to open electric and gas competition for business by 2004 and for all customers by 2007, has yet to be met in seven of the Europe's 25 states.

So we should set and hold to timetables for the opening up of sectors from energy to utilities and we should be insistent about moving forward quickly in the area this audience have most interest in – the opening up of the European financial services market. And we should correspondingly reduce and then eliminate the billions of state aids, the inefficient subsidies which prevent full and fair competition.

And just as today in Britain independent competition authorities, rather than politicians, make the crucial decisions on monopolies and mergers and market access, so too in Europe there should be a more independent competition policy and, using in-depth market investigations, such as those planed for energy and financial services we should open up all markets that today are sheltered.

And we should start with agriculture.

In 2013 Europe still be spending almost 40 per cent of its budget on protecting and sheltering inefficient and counterproductive agricultural subsidies.

The reason why Tony Blair has made the reform of the budget such an important issue is that the failure to reform the budget impedes the very economic changes we need.

While the priority should be to face up to the science, skills and infrastructure challenges of global change, 55 per cent of the total European budget in 2013 will be spent either on agriculture or on subsidies for the richest countries of the union.

Both 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 - and our proposals start by agreeing a timetable to eliminate export subsides.

Budget reform also reform also means reforming Europe’s regional policy – focusing it on Europe’s poorest countries, on supporting the structural reforms necessary to strengthen the single market, while creating a framework within which individual states can also make their own allocations.

And structural and economic reform must go hand in hand – as in Britain know - with a macroeconomic policy for Europe that promotes stability and growth.

Second, this long term commitment to achieving a competitive global Europe should be matched by creating a modern social dimension to meet our objectives of a full employment Europe.

To those who say there should be no change without security, we have to reply, there can be no security without change.

But while there is less that government can do to stop people losing their last job, but there is more government should do to help people gain their next.

We know at the national level markets need a social dimension. So too at the European level. While we will continue to resist removing the opt out to the working time directive and any other regulations that threaten jobs, we will support European cooperation where a European response is most appropriate - such as information and consultation, high environmental standards, and support for labour mobility -- a social dimension that does not hide from change but one that matches fairness with flexibility.

As we set out in the Treasury’s report on the European labour market, we have much to learn from not just the USA but from European countries which match flexibility with fairness to create jobs. So instead of viewing flexibility as the enemy of full employment, we should recognise - as Europe did at Lisbon in 2000 - that the right kind of labour market flexibility is essential in helping the 20 million unemployed Europeans into work.

Third, moving from the trade bloc era to the era of Global Europe requires a long term commitment to regulatory reform that balances the need to lessen the burden of regulation and enhance our flexibility while still ensuring high standards.

In Britain I am determined that we not only impose a competitiveness test to all new regulations but pioneer a risk based approach to regulation - no inspection without justification, no form filling without justification, and no information requirements without justification.

Because Europe must now move from a trade bloc dominated by its own internal rules to a more flexible Europe for the global era, it is urgent that the same competitiveness test and the same risk based approach is adopted for EU regulation. In our presidency we will propose an independent business-led advisory group to give business a clear voice in the EU legislative process and we will work with the Lamfalussy committees on banking, insurance and securities to build upon the successful work of our Financial Services Agency and take forward the European financial services action plan. I know you will agree that the emphasis should be on mutual recognition of financial services providers in insurance, banking and capital market.

Fourth, at the heart of moving from trade bloc to Global Europe is a long-term commitment to a new, more outward looking relationship between this Global Europe and the rest of the world.

In the old trade bloc economy Europe there was always a risk that while internal trade would be seen as a benefit, trade with the rest of the world would be seen as a threat. But it is now trade with the rest of the world that will not only grow fastest of all, but be critical to future prosperity. So trade liberalisation matters - in our stance for the WTO talks in Hong Kong, in developing better dialogue with India, China and Asia generally and – as we will promote in our Presidency - in developing a strong transatlantic economic partnership.

Already the largest bilateral trade and investment relationship in the world - accounting for up to $2.5 trillions of commercial transactions each year and supporting 14 million jobs, and removing the remaining transatlantic barriers could generate one million more jobs and bring permanent increases in per capita GDP of up to 3 per cent.

I want to see a more regular economic forum between European Economic Ministers and those of North America to break down old barriers and to discuss common approaches to regulation, competition and transatlantic commerce.

Having already established the EU-US financial markets regulatory dialogue we should now agree a road map to creating a genuine barrier - free transatlantic financial market.

And at a business level through the transatlantic business dialogue and at a governmental level we should expand our dialogue outwards to other areas including pharmaceuticals, it, chemicals and energy efficiency, bringing European and us regulators together to set priorities for closer cooperation.

Europe and America should see ourselves as partners not rivals – not fortress Europe versus fortress NAFTA, but working together in trade policy but also in far wider policy areas to reduce insecurities and benefit from global change.

So with structural and budgetary reform, social reform, regulatory reform and trade reform our task now and in the years to come is to move Europe from the old trade bloc Europe to the new Global Europe.

And we do so under the banner of a pro-European realism where Europe looks outwards to the world, where Europe sees the USA as partners not rivals, where Europe becomes more competitive, more flexible, more enterprising and in doing so delivers more opportunities for all its citizens.

This is the long-term programme of economic reform that we will promote in our European Presidency and in the months and years to come.