Europe in a changing world

Speech given by Minister for Europe, David Lidington, at the New Economy Forum, Madrid, Spain on the 1st February 2012

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Rt Hon David Lidington CBE


Secretary of State Mendez de Vigo, your Excellencies, distinguished guests, ladies and gentlemen. Forgive my pronunciation, but buenos dias, y bienvenidos a todos ustedes a nuestra sesion de hoy, aqui en este establecimiento tan impresionante e historico, el gran Hotel Ritz Carlton.

My most sincere thanks to Inigo for that most kind introduction. And also to the Nueva Economia Forum for organising today’s event.

In 1830, 26 year old Benjamin Disraeli, who would become one of our most famous Prime Ministers and whose local constituency I now represent, visited Spain in the midst of a deep depression caused by financial worries. The trip made a deep impression on the future leader. He wrote to his sister: “Oh wonderful Spain… I thought that enthusiasm was dead within me … I dare to say that I am better”. While it would be presumptuous of me to draw parallels between myself and Disraeli, I do agree with him when, writing from Andalucia, he said “There is a calm voluptuousness about life here that wonderfully accords with my disposition.”

I am delighted to be here in Madrid at such an important time for both our countries. I do not come depressed by financial worries but convinced that together, with the rest of Europe, we can meet the challenges ahead of us.

So my focus this morning is on the future, not the past. And it’s on our current shared efforts to promote strength and stability in what are trying times. It has been said many times before - Britain and Spain have a lot in common. We have similar history, from great seafaring and trading traditions and explorations around the world in centuries past, to the stretch of our modern global influence. In the past these links might have caused friction, but today they should serve as a reminder that we face many common problems. And we must work together to tackle them.

UK Commitment to Europe

Now I know that there are some in Spain, and indeed across Europe, who might question Britain’s commitment to the European Union. They are wrong. I want to be clear that the British government considers our membership of the EU to be in our national interest. But the EU is far from perfect and I would like to set out the changes and reforms I believe it needs to make in order to become competitive for the 21st century.

Europe in Changing World

And this is vital because how we deal with our current problems will play out not only in the short and medium term, but also in the long term. If current trends continue, by the middle of the century, leading EU nations could fall out of the world’s Top 10 most powerful economies. Indeed, the European Commission says that unless we reform now, Europe could grow at just 1.5% a year for the next decade. Compare this with current growth in Brazil at 4.1%, India at 8.2% and China with 9.5% and you can see how pressing the situation is.

And the perceptions of economic weakness will quickly translate into reduced political influence for Europe - as nations’ economies grow so does its political power. We know that power and influence is shifting to the East and South and the architecture of the world has changed; the G8 has evolved to the G20. Europe must redress the balance, in our books and in our foreign policy. Europe must remember its strengths and what makes it a formidable partner.
It is hard to believe, but twelve years have passed already since the Lisbon Agenda identified our common European challenge. The economic and financial crisis that we are in demands solutions and actions now to fulfil that Agenda. We also need to regain the confidence and trust of Europe’s citizens, which we have been losing for many years.

Like Spain, the UK is - and always has been - a trading nation and we need the single market for trade, investment and jobs.

The Single Market adds €600 billion a year to our economy and 7 out of our Top 10 trading partners are European. We are the EU’s gateway for global investors. 26% of non-EU companies have their headquarters in the UK. UK Foreign Direct Investment is £482 billion with the EU. While the EU figure is £351 billion worth of investment in the UK.

Trade between the UK and Spain now totals over €35 billion. Over the last decade the UK was the largest investor in Spain. And there are over 400 Spanish companies registered in the UK, with Santander now the 3rd largest bank in the UK.

Tackling Debt and the Future of the Euro

Whilst these figures are impressive, there is no hiding from the fact that both of our economies are suffering, as are those across the Eurozone. Like the UK, the incoming Spanish government has inherited a difficult and testing economic situation. We are both working hard to solve the problem of government debt. As David Cameron set out in Davos last week, the British government has put forward an aggressive set of plans to get our economy back on its feet. And we have saved £5.5 billion in the first financial year. We have identified greater efficiencies and cut the cost of government. We are also cutting welfare bills, freezing public sector pay, and increasing the state pension age. By taking bold decisions, we have shown it is possible to earn credibility and get ahead of the markets. And as a result our borrowing costs have fallen to the lowest in a generation. Europe needs to be similarly bold.

And it’s not just about debt. We are also facing up to the rise of unemployment. In fact, in more than half of EU Member States, a fifth of all young people are now out of work.

Britain might not be part of the Euro, but it is in our national interest that the Euro succeeds. We have a major stake in a stable and growing Eurozone. After all, 40% of our exports are to the Euro area and volatility in the Eurozone is having a chilling effect on the UK economy. We want to see quick, bold and practical action to get European economies growing and jobs created, so we will work together in the EU to complete the single market in services, promote trade and encourage innovation. The UK has been leading this debate. But we need to move much, much faster on this. And key to this are the markets, who want to be assured that the Eurozone firewall is big enough; that Europe’s banks are being adequately recapitalised; and that the problems in countries like Greece have been properly dealt with.

UK Domestic Approach: A Strong but Regulated Financial Services Sector

At home, the UK understands better than anyone the need to dramatically re-regulate financial services. We have already introduced a bank levy and we are now looking at the Vickers Banking Commission proposals built on ring-fencing riskier investment banking from retail activity. We are not averse to radical ideas and we want to work with our European colleagues to create a safer, more responsible European financial services industry.

We have learned the lessons of 2008. But a strong Financial Services centre in London has clear benefits, not just for the UK, but for the whole European Union. EU Countries exported €132 billion of financial services in 2010, more than double that of the United States. So in contrast to popular opinion, the UK has a strong story to tell on financial regulation. Our bank levy, for example, is higher in relative terms than any other major European jurisdiction, and the government has introduced one of the most transparent pay regimes of any financial centre in the world.

These safeguards on the Single Market and Financial Services were what we were striving to achieve at December’s European Council. Our proposals were modest, reasonable and relevant, and sought for the EU as a whole. We were not trying to create an unfair advantage for Britain. We wanted to move forward at 27. We wanted to keep the EU united on this, and we regret that on this occasion it was not possible. But this was the right thing for Britain. And it was a very tough decision, but the right one.

A Prosperous Europe: Promoting Growth

But the Eurozone crisis should not detract leaders’ attention from implementing measures to rebalance their economies. After all, the only long-term solution to the crisis is to encourage and promote growth in European economies.

The British government has set out its clear ideas about how we can secure sustainable long term growth in Europe in the “Let’s Choose Growth” pamphlet published last year. The Commission has recently published its own pamphlet which bears a striking resemblance to ours, which we are pleased about, as we want our principles to be adopted throughout the EU. Our ideas are based around four principles.

Extending the Single Market

First, to complete the Single Market we must strengthen it by widening its remit to focus on the digital economy, on energy, on low carbon development and on the much needed further liberalisation of the services sector. The Single Market is Europe’s greatest economic achievement, much has already been achieved - and we should all be proud of that, but it remains incomplete. It gives us a competitive advantage in a global economy, providing European businesses with access to over 500 million customers and generating €12 trillion of economic activity.

Clearly foreign companies see the benefits - and so does the UK government. One of the reasons major companies invest in the UK, Spain and elsewhere in the EU is because they want access to the Single Market. And this goes both ways. There are excellent examples where European countries can act as springboards to new markets across the globe. In Spain, this is Latin America. And elsewhere we can open new markets together. A Spanish-led consortium including the British company Invensys have illustrated this by winning two major rail contracts, one in Turkey and another in Saudi Arabia, with a combined total of over €7,000 million.

But we cannot be complacent. In some crucial areas, free trade between us is still obstructed. The Single Market has not kept up with the shift to services and changes in technology.

On-line trade has grown hugely in recent years across the EU, with over 40% of European citizens buying goods on-line. And in 2004 only 8% of Spaniards bought anything on-line. By 2010 that figure had trebled. Yet our rules in this regard remain unsuitable. Companies trying to trade on-line in the Single Market still have to grapple with different processes and procedures each time. Only one in ten on-line transactions in the EU involve buying something from a different country. That is complex and off-putting, which is why the UK is pushing for change. A digital Single Market could bring over €800 billion of benefit to the European economy.

An Open Europe: Promoting Free Trade

Second, promoting free trade. The EU has had a good track record of promoting international trade but we must do more. We’d like to make 2012 the year of EU trade deals, by encouraging ambition to open new markets and to send a strong political message on the need to avoid protectionism. We could send out a strong message on this if the Commission and Member States were to agree the outline of the EU-India free trade agreement before the Spring European Council.

We should also give political momentum to EU-US talks on deepening our economic co-operation and liberalising trade, to boost jobs and growth. The UK is not the only country supporting this approach. The European Commission estimates that concluding all ongoing trade negotiations could add €60 billion to EU GDP.

A Dynamic Europe: Reducing Red Tape

Third, we need to reduce the burdens on businesses. The average cost of starting a business is higher in the EU than in our major competitors. It costs €644 to set up a business in the US compared with €2,285 in the EU. Big businesses say EU regulation is having a negative effect, saying ‘what saps our strength are high taxes, excessive regulations, inflexible working practices and the gold plating of EU directives.’ So at home we have ended this practise of “gold-plating” with exemptions only in the case where it would adversely affect British business not to do so.

We have made some important advances in Europe too, particularly on reducing regulatory burdens for smaller businesses. Micro-enterprises have been exempt from aspects of accountancy rules. And, from now on, the Commission will assume micro businesses should be exempt from new regulations unless there is a good case for their inclusion. The Commission is also screening all existing rules for candidates for micro exemptions or special treatment. These are all steps in the right direction, but we could go so much further.

The UK is calling for a new Growth Test to ensure all EU actions support growth. I want to see an effective process to screen proposals for their impact on growth and jobs. This will enable Member States to refer dossiers for further consideration on growth grounds before final decisions are taken.

We also want to see a new progress target for agreeing a minimum number of regulations from which micro businesses should be excluded by the end of 2012.

I would urge the Commission to accelerate its now overdue review of Services Directive implementation. We could achieve further liberalisation through a tough new proportionality test that would raise the bar for justifying barriers to trade, and a commitment to cut the number of regulated professions.

We also need to boost enforcement of Single Market rules, which are frequently violated. Let’s explore options to make sure that the rules are carried out and if they’re not, then there are consequences. These measures can be introduced in a way that does not require treaty change or a transfer of new powers to the Commission: for example, appointing a new Single Market champion or ombudsman to scrutinise cases of incomplete or inadequate implementation and recommend ways of reform.

A Modern Europe: Innovation

Of course it is all very well to open markets, but we also need innovation to ensure that we are all producing the goods and services that the world actually wants to buy. And Innovation is the fourth principle that we must strive for: making Europe a global centre of ideas and of enterprise.

The relationship between innovation and economic growth is well known. In the UK between 2000 and 2008, 64% of average labour productivity growth was due to investment in innovation. And it is the same story across the continent. We have world class education in Europe producing innovative and entrepreneurial young people, brimming with business ideas. But we don’t do enough to support them. For every Euro invested in venture capital within the European Union, five Euros are being invested in venture capital in the USA.

So, we need to promote EU research and investment funds. And we need to make them simple and flexible to use, so that entrepreneurial ideas can be turned into products that will find enthusiastic buyers, and turn in a profit for the inventor and producer so we can capitalise on the wealth of creativity and experience that exists in Europe.

An Outward-Looking and Secure Europe

And while Europe tackles its own problems, it must also keep its eyes open to the changing world around it. It is imperative that we see ourselves in the context of what is happening on the global stage, both in our local neighbourhood and further afield, and remain bold and relevant to global challenges. Opportunity lies not in a European Union that is standing still, or looking inward, but a dynamic European Union that is bold, outward-facing and active in exercising its transformational power. And the UK believes that the EU is a formidable partner in tackling some of the world’s greatest challenges.

To turn first to our near neighbourhood. Britain is a strong supporter of EU enlargement and our neighbourhood policy. We believe that membership of the EU should be open to any European country that wants to join, and that meets the rigorous accession criteria. We must congratulate the people of Croatia, who made a clear choice on 22 January in favour of joining the EU. With its commitment to continued reform, Croatia is paving the way for all the remaining countries of the Western Balkans to a European future.

This is good for our stability. EU membership has a transformational power, as Spain well knows. The process of accession helps to entrench democracy, the rule of law and human rights in parts of our continent, and beyond, where those values were crushed for most of the 20th century. This stability and commitment to the rule of law and anti-corruption measures increases investor confidence. All over Europe, freedom, democracy and the rule of law have been sustained and strengthened. The magnet attraction that the EU has to our neighbouring countries should not be underestimated.

The Arab Awakening is a stark reminder that the EU must remain agile to world affairs, continuing to forge new partnerships and strengthen and embrace existing ones. And doing so on our borders is crucial. Turkey is a case in point. Turkey’s growing international stature is well deserved and makes it a vital foreign policy partner for the EU. The case for future full membership is stronger than ever.

Geographically, the UK may be about as far away from its southern and eastern neighbours as is possible in Europe, but we are all too aware of the importance of security on our fringes. This is why we joined France in taking a leading role in the military campaign to support transition in Libya. And it’s why we took a leading role in the debate last year on recasting the European Neighbourhood Policy to respond to the events of the Arab Spring.

Offering economic integration and market access in return for political reform addresses the two drivers of the Arab Spring: firstly, the lack of economic opportunity which has trapped so many people in poverty; secondly, the absence of political freedoms. But our strategy can only work if the incentives we offer our neighbours are sufficiently attractive; and if we can make our conditions stick.

And we must also stick to our guns and insist that our support will only go to those partners which are serious about reforming. The EU’s credibility has been greatly undermined by our long-standing support for corrupt regimes. Too often, that support was taken for granted and we lost leverage and influence. We must be much stricter in future in rewarding the best performers but withholding our taxpayers’ money from those who renege on their commitments.

Europe at its Best: Standing Together to Promote Peace and Security

The intervention in Libya is a powerful example of where Europe showed its international standing. We’re stronger together and can exert real influence
both within the EU and bilaterally, Britain and Spain work together on the world’s most pressing problems. Most recently the EU has been leading the charge on Iran, with a twin track approach of pressure and engagement. It’s exactly this type of unity and solidarity that we should bring to bear when dealing with international challenges, using the combined effort of the EU and working closely with Member States to achieve our objectives.

A Sustainable Europe: Climate Change

And I could not stand before you and talk about the collective weight of Europe and our international standing without talking about Climate Change. The outcome from the Durban climate change conference has breathed new life into the international negotiations. The deal saw a new alliance between the EU and the most vulnerable countries, keeps alive the prospect of a legally-binding agreement and, for the first time, recognises the gap between current mitigation pledges and what is required to keep global temperature rise to no more than two degrees.

Above all, in this context it shows the value of working through the EU to deliver international outcomes. The EU has widely - and rightly - been recognised as being a critical actor in the success of Durban, where the UK and Spain played significant roles. It’s vital that the EU continues its leadership role to deliver on our two degree goal.

Last year the Foreign Secretary led a debate in the EU Foreign Affairs Council on the need for Member States’ diplomatic networks, and the External Action Service, to co-ordinate in raising climate change as a political priority and we will seek to continue this debate throughout 2012. Spain’s global influence means we will look to your new government as partners.

The UK continues to support the EU’s move from a 20 to a 30% emissions reduction target: moving swiftly will send a clear signal to the EU’s new climate alliances with countries that are most vulnerable to climate change. Because this comes back to the importance of the EU being an engine for growth and prosperity, let us not forget that a green carbon economy is good for our long-term economic interests - it’s good for innovation, it’s good for growth and it can help to generate significant jobs and commercial opportunities in major emerging markets. The global industry in low carbon and environmental goods and services is already worth up to £3.2 trillion a year, with companies like Iberdrola and Gamesa leading the charge. You will know that Spain’s infrastructure firms are diversifying into sustainable construction and renewable energy sectors. The UK offers excellent opportunities within this sector. And we need to ensure that the investment decisions we make now support Europe’s transition to a low carbon economy.


So I would like to draw this to a close and invite questions from the audience. What I hope is clear to you is that the UK wants the EU to play a leading role on the global stage on issues that matter to our governments and citizens. We know that the EU can show leadership. We need to make sure that this leadership extends to dealing with our most pressing challenge - our economies. The most dynamic growth is now outside of Europe. But if we reduce barriers to trade with the wider world this could lead to an extra 5.2 million jobs in the EU.

Let us not forget that our economic standing goes hand in hand with our international influence, where we show leadership and innovation. We must now focus on the task in hand and move swiftly to address our most pressing problem.

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Published 2 February 2012