The Deputy Prime Minister gave a speech to TheCityUK annual dinner on 24 October 2012.
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Bluntly, with the economy still fragile, this is not the time for dogma. There’s a lot of speculation about what tomorrow’s GDP figures will bring. Whatever they look like, we know that, overall, we’ve set the economy on the right path. But recovery is slow and fitful. Repairing the damage following the shock in 2008 is a gradual healing process. And the Government must remain absolutely focused on the reforms that will drive growth.
Indeed, it’s dogma - at least in part - that got the economy into this mess. It was blind faith in the unrestrained operation of financial markets that helped take the banking system to the edge of a precipice. Political, regulatory and financial elites were so intoxicated with an unfettered and over-leveraged banking system that they refused to hear the alarm bells as the financial crisis loomed; they refused to see the deep, structural weaknesses that had emerged in our economy.
So we’re turning a page on the economic ideology of our recent past. And, as we navigate these extreme times and uncharted waters, we should be vigilant against kneejerk or dogmatic responses to our economic challenges. And tonight I’d like to single out three areas where pragmatism is especially needed from both Government and business, as we work together.
First, we need a balanced, engaged approach to Europe - essential to the interests of the City. Second, we must prioritise lending to sound business - critical for our economic recovery. Third, we need to lead the shift to a more responsible, more sustainable corporate culture - crucial to our long term success.
First, defending the City in Europe.
The Coalition’s starting point is simple: we support difficult regulatory surgery - at home and abroad - where that is needed to stabilise the financial sector. But we will not accept steps that are anticompetitive or protectionist. The playing field must be level.
That’s why, for example, I don’t support a Europe-wide Financial Transaction Tax. Though I would support a global one. Limiting the FTT in this way would skew the playing field. It would be bad for Europe in the world, and bad for the UK in Europe. And, what’s more, at a time of high unemployment in Europe. The Commission has itself said that it would cost more jobs than it creates.
On the other hand, I welcome the Liikanen Report: a set of reforms for Europe’s banking system. It’s largely consistent with our domestic intentions, as set out in the Vickers Report. And I’m keen that we support implementation of the Liikanen proposals across Europe. Alongside implementing Vickers here in the UK.
Where our situation is less straightforward is the Eurozone banking union - at the top of the agenda at last week’s European Council. And it’s here that we need a sophisticated approach.
Clearly it’s not a good idea for the UK to be part of a full Eurozone banking union designed to break the vicious circle between sovereign debt and bank debt in the single currency area. But let’s not forget that we’re already part of a banking union-lite: the single market in financial services. And so, while we have an obvious interest in the full, Eurozone banking union succeeding. At the same time, we need to make sure it doesn’t prejudice the UK. The worst outcome would be the creation of an over-powerful banking bloc. Able to undermine the single market. Able to undermine what remains - by far - Europe’s largest financial centre: the City of London.
So the question is: how do we get the best outcome? As someone who worked in Europe for years, my view is the best approach is to engage fully and properly in the debate. Making our case and winning the argument over and over again, while decisions are being made.
That’s why the Coalition Government will now do two things: One: after last week’s summit, we’ll work flat out to make sure that the rules governing the relationship between the European Central Bank, in its new supervisory role, and the Bank of England - and the role of the European Banking Authority - are settled in a sensible manner.
Two: we want to work with you to show that the City is not just a British asset, but a European asset too. It’s responsible for over a third of the European wholesale market. 80% of the EU hedge fund industry is based here.
Our financial and professional services employ more people than Paris and Frankfurt put together. We’ve got more foreign banks than any other city. The largest insurance industry in Europe. AIM - Europe’s biggest equity market for small business. The City is the biggest exporter of financial services in the world. And you know better than anyone that if London-based firms decided to leave they wouldn’t all head straight to Frankfurt or Paris. Many would go to New York, Hong Kong, Dubai.
That’s the reality I’m pressing with my European counterparts. And I implore the industry to do more to push this message yourselves - not least City UK. The rest of Europe needs to be crystal clear: If they integrate in a way that hurts the City, they potentially hurt Europe as a whole.
Second: lending. The thing our economy needs most, right now, is money flowing through it. Especially for SMEs. That is urgent. And it’s essential if we’re going to build a private sector that is vibrant, entrepreneurial, diverse.
So Government is doing everything we can to help finance business: working with the Bank of England to deliver the £80bn funding for lending scheme; creating a new Business Bank to support up to £10bn worth of loans; setting up a Green Investment Bank for low carbon companies specifically; investing directly - and leveraging private money - through schemes like the Regional Growth Fund; as well as seeking to boost non-bank forms of financing like peer-to-peer-lending, supply-chain finance; and so on. But with such tight constraints on the public finances, we can only do so much; the bulk of the money has to come from you.
I know that there are issues with demand - I don’t discount those. But perception is as big a problem as any: many small firms simply don’t think they’ll get the loans. I know that the banks feel restricted by their capital and liquidity requirements. But the FSA has recently announced more flexibility in those requirements - a move I very much welcome. Precisely because it increases the banks’ capacity to lend.
Third: responsible enterprise - the theme of my last speech here, in January. It’s an issue David Cameron and Ed Miliband have also spoken about. And, while it is encouraging to see the parties converge for once. This must not be mistaken for a political bandwagon that will, eventually, roll on.
It won’t. Responsible capitalism is not a fad, it’s hard-headed economics. It’s about empowering shareholders, investors and ordinary workers to create a check on reckless decisions. It’s about rewarding people who drive short-term profit but who think about long-term stability too. It’s about fair and healthy competition so the best companies flourish and the most talented individuals rise.
That’s a corporate world more sustainable, ultimately more profitable, and which commands public support. Business doesn’t operate in a social vacuum. Especially at a time when banks have come to rely - for their very survival - on an explicit or implicit taxpayer guarantee. The public backlash against the banks hasn’t just been uncomfortable for the sector, it has threatened the basic consent in society. Without which the modern commercial banking sector would be unable to operate. So it’s in businesses’ own interests to be sensitive towards their social context.
In government, we’re delivering a range of reforms that will strengthen our corporate culture, many led by Vince Cable:
- New powers for shareholders, for example, to hold directors to account.
- Greater corporate transparency for investors;
- I’m pushing employee ownership to give more ordinary workers a stake;
- We’re intervening to curb excessive supermarket dominance, providing extra protections for smaller retailers.
- Taking action to open up more boardrooms to more women.
The list goes on. But there is no silver bullet, and government can’t do this alone. So, where companies are moving in this direction themselves, that is extremely encouraging. Because this has to be the direction of travel. If we want a prosperous future, enlightened enterprise is the only way. And I ask this audience - the powerful commercial enterprises represented here tonight - to lead the way. I want us to work together as we rescue, repair and reform the British economy after the damage sustained in 2008. A partnership based on hard-headed pragmatism, not dogma, and an unshakeable belief in the dynamism and innovation of British business and the British people.