The international economy has been through extraordinary turbulence in the last few years. In 2007, a decade of barely unchecked growth in credit and asset prices ended with the near collapse of the world’s financial system. The future looked very bleak. It was only through joint action on an unprecedented scale, lead by the G20 but also in the European Union, that we brought our banks – our whole financial system – back from the brink.
Three years on we are seeing some signs of recovery, but the turbulence of recent months has made it very clear that crisis is not over. Bank bailouts, the recession and sluggish growth have caused many government debt stocks to soar. What began as a private sector debt crisis, now threatens to undermine markets for sovereign debt.
Just as we could not act alone before, we must not act alone now. If we have learnt anything from the last three years it is that we are stronger together, and we are weaker apart. The challenges facing European economies affect us all. So today I want to talk about the action I believe we need to take to get Europe through these difficult times – restoring stability by getting our own public finances in order working together to undertake the structural reforms that are needed to drive growth and competitiveness across the eurozone and the European economy as a whole.
Let me be clear: the new UK coalition Government will be a tireless supporter of a strong, prosperous eurozone, a strong, prosperous European Union. I say this not only as a lifelong pro-European, I say this as the Deputy Prime Minister of a coalition Government that realises that Britain’s own success is, in so many ways, dependent on wider European success. Our economies are intertwined. Other EU countries are the UK’s biggest trading partners by some distance – around half of all our exports go to the EU and over half our inward investment comes from there. Our financial sectors are also intimately linked – walk down any high street in Britain and you are as likely to see a branch of Santander as of Lloyds or Barclays. That means that economic and financial difficulties in the eurozone directly affect Britain. Indeed, continuing instability and a lack of growth on our doorstep is the greatest threat to our own economic recovery. Quite simply slow growth in the eurozone means fewer British exports, slower British growth, fewer British jobs.
So our Government realises that it is in our vital national interest that you here in Spain, and the eurozone as a whole, should succeed. As you know, we have been clear that we will not seek to join the Euro. Nor will we support the transfer of new powers from Westminster to Brussels. But we will be utterly committed to working with you to address the grave economic challenges which we all face.
I do not think it is an exaggeration to describe the current set of economic circumstances as the most challenging in a generation. That means acting now to rein in unsustainable deficits. But in doing so we must protect the sources of growth in our economies. This is a difficult balance to strike.
A few months, even a few weeks ago, people were making the argument that fiscal consolidation had to wait until strong growth was restored. As you have recognised here in Spain, and as our new Government has concluded in Britain, we no longer have that luxury. If we do not set out bold plans to bring balance to our Government finances, then the task will be forced upon us. Market reactions to recent events in Europe have dramatically restricted our margin for manoeuvre. That is the new reality, and to ignore it would be both naïve and economically irresponsible.
In the UK, we are taking action to bring down the budget deficit that we inherited - a budget deficit that is the biggest since the Second World War. We started with an immediate £6.2 billion - €7.5 million – of spending cuts for this financial year. That is a first step. We will be setting out a comprehensive plan to tackle the deficit in our first Budget later this month. And that will be followed by a review in the autumn setting out in detail the UK Government’s spending framework for the coming years.
We have been very clear: paying down Britain’s deficit is our Government’s number one priority. Is it a task we relish? No, it is not. But it is unavoidable. Are we pursuing cuts out of some kind of ideological commitment? No, we are making cuts because that is the only option we have – to ensure the future prosperity and stability of our country. If there was another, less painful option, we would take it.
But the reality is that long-term stability will only come from reducing our debt. The costs associated with high levels of debt are widely recognised. If we fail to take action now we will leave the next generation to pick up the pieces.
There is nothing progressive about passing on this huge burden to our children. There is nothing fair about leaving them servicing an enormous debt, using money that could be spent on schools and hospitals, just to pay the interest. It is our progressive values that mean we must take the difficult decisions now that do not cause more pain, worse pain, later.
That is the approach being taken here in Spain by Prime Minister Zapatero and his Government. Like the UK, Spain is suffering the consequences of fundamental imbalances in our economies over recent years. Whereas Spain has relied too heavily on the construction industry, the UK has leant too heavily on financial services. That imbalance left both of us exposed in the wake of the economic crisis.
The Spanish government is now, rightly, implementing a package of austerity measures to reduce Spain’s budget deficit by an additional €15bn over two years. I know that is having a real impact on the Spanish people. And I know that the government is working extremely hard to help people through these difficult times. Just as in the UK we will seek to ensure that the most vulnerable in our society are protected through this process and that we don’t cut in a way that exacerbates existing inequalities.
Other countries have also announced steps they are taking to balance their books and there is international recognition that the time has come for action. EU Finance Ministers meeting earlier this week agreed that substantial fiscal consolidation was required to restore sound fiscal positions while at the G20 meeting in Korea last weekend, Finance Ministers called on those countries with serious fiscal challenges to accelerate the pace of consolidation.
But the approach needed varies across countries. The IMF in its report on the eurozone published this week, concluded that “fiscal consolidation is inevitable”, but that “its pace should be differentiated across member states”.
Of course, we also need to acknowledge that national circumstances shape our actions. We all have different histories and cultures. I was struck in my meetings in Germany yesterday at how historical experiences of inflation continue to weigh heavily in the domestic debate there. As a Brit with Spanish in-laws I know that both our countries have a strong cultural attachment to home ownership – our casa is our castle.
The most important step is to recreate the conditions for growth. Without growth we will not be able to control deficits and we will not be able to achieve our social justice objectives. So, as I said earlier, as we take difficult decisions to tackle fiscal deficits, it is vital that we protect and promote sources of growth.
There is limited room for manoeuvre left to use fiscal or monetary policy to generate growth so the principal lever we have is far-reaching structural reform. European Summit conclusions have for years been littered with references to the need for structural reform. We have now run out of excuses. We must get on with the job.
Different countries face different structural reform challenges. In Germany where I have just been, there is a long-standing debate over liberalisation of the service sector and utilities. In the UK the new coalition Government has recognised that businesses are over-burdened by regulation and we are taking steps to make sure there will be “one in-one out” approach to new regulation. Here in Spain, with unemployment at nearly 20 per cent, you face particular challenges in reforming labour markets.
Action is required not only at a national but at an international level, for example through collective action to remove barriers to trade. Full implementation of the Doha round would be worth at least $150bn.
There is also much we can and should do working together within the European Union. For example we must fully implement existing single market legislation and extend the single market in new areas such as the digital economy. That may sound like a familiar refrain, but making progress is even more important in our current circumstances. The economic gains from full implementation of the single market are estimated to be worth over 2% of EU GDP.
We also need to take steps collectively within the EU to ensure our banks are transparent and sufficiently capitalised to restore confidence and to get lending going again. I often use the analogy of the human body - we need to get lending going just as the body needs blood to pumping through its veins.
As I said at the outset, we face the most challenging economic circumstances in a generation. We must take the tough decisions to get our own finances in order and as we cut the deficit we must create the conditions for growth. If we get the answer right, future generations will recognise that we did the right thing to rescue Europe from the dark shadow of long-term economic difficulties. Get it wrong, and we will condemn our continent to years of social, political and economic difficulties. The stakes could not be higher. If we cannot work through this together, we put the future of Europe at risk. The perils of retreating into protectionism, beggar-thy-neighbour economics are very real – and too often economic and political nationalism have gone hand in hand.
That is why I say to you today that the longstanding commitment to create a truly integrated market in goods and services in the European Union and the need to introduce domestic labour and product market reforms are now critical. With limited fiscal and monetary levers, structural economic reform is the key to greater growth. And without greater growth none of our progressive social ideals can be met. So we have a once-in-a-generation duty to repair our economies.
We know the dangers of inaction. Out of this turmoil there can emerge a new, more united, more prosperous Europe. We came together at the beginning of this crisis, let’s do it again now. We are stronger together; we are poorer apart.