Oral statement to Parliament

European free trade is vital for growth

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

I am pleased to be the first Minister from Britain’s new Coalition Government to speak at the European Parliament. I want to give my thanks …

I am pleased to be the first Minister from Britain’s new Coalition Government to speak at the European Parliament. I want to give my thanks to Jean Pisani Ferry from Bruegel, Malcolm Harbour MEP, Fiona Hall MEP and Timothy Kirkhope MEP for making this happen.

In the last decade, our predecessors were inclined to deliver lectures to the rest of the EU from our presumed position as leaders in economic management. Since then we have led in other ways: the worst deficit in the G20, and beyond; one of the biggest property bubbles; the most overweight banking sector; one of the worst recessions. Rest assured that you will not be getting any lectures from the UK today.

The new British coalition Government believes that positive engagement with the European Union is an essential part of our economic and political relations. So I’d like to focus on our approach to trade, economic growth and the vital role of the EU, its institutions and its policy makers.

Firstly, growth - where the focus of President Barroso and others is most welcome. But the Europe 2020 strategy, with its emphasis on innovation, skills and mobility, only tells part of the story. Far more important, in my view, is the role of trade and open markets - which have always been central to the whole European project.

We must remember that during a decade in which the EU has grown by just 1.7% per year, China’s growth has averaged 10%, with India’s not far behind at 7%. Others like Brazil, Turkey and Indonesia are also keeping pace and closing the gap on the developed world. The recent crisis has accelerated a shift in the centre of gravity that has been happening for over two decades and foreshadows a re-emergence of economies that dominated the world economy until just two centuries ago.

Their impact is already massive. China accounts for the largest part of incremental demand for many commodities and world commodity prices are increasingly set by the interaction between emerging market demand and OPEC, Brazilian and Russian supply. The developed world is now a price taker rather than a price setter. There has also been a huge impact on the global flows of savings. We have a perverse position where the poorer countries are in effect lending to the richest. And global competition has driven down both prices and real wages in rich countries in the last decade.

All this is disturbing and frightening to those in Europe who have only recently got used to the idea that emerging countries are no longer peasant economies, ex-colonies, deserving of condescension or even pity. Such concern is misplaced. By far the greatest long term consequence of this rebalancing is to create a stronger and more dynamic world economy. The old adage - a rising tide lifts all boats - should apply to us.

But with a hardening of attitudes towards elements of private enterprise since the financial crisis, some instead see this moment as an opportunity to turn away from the free trading, open market model that has done so much for Europe. Turning inwards and towards dirigiste controls is precisely the wrong thing to do.

But the context is a difficult one. We are now grappling with the consequences of the most severe recession since the 1930s, though EU countries have been hit to varying degrees and in different ways. The underlying causes are complex and I have tried in my recent book ‘The Storm’ to analyse the fundamental imbalances which produced a global surplus of savings and low, long-term interest rates; easy credit conditions which produced asset bubbles in the UK, the US, Spain and Ireland; and poorly capitalised banks which overreached themselves in mortgage markets and in the manufacture of complex derivatives. The subsequent banking collapse has had many historical precedents, most recently in Scandinavia two decades ago, but its scale is unsurpassed.

The economic storm and its aftermath had the effect of exposing the weaknesses in many national economies: those highly dependent on banking; those exposed to inflated property markets; those which had large amounts of public debt and in consequence a dependence on the forbearance of bond markets to finance themselves. Deep structural weaknesses manifested themselves differently: in the UK and Ireland, through a severe budget deficit caused by a substantial part of the revenue base disappearing; elsewhere in the Eurozone, through steadily losing competitiveness over a period of time.

These problems are different in origin, but now overlap. The EU now faces two opposing problems. On the one hand, volatile and risk averse capital takes flight at any signs that budgets are not under control. On the other, a simultaneous assault on budget deficits has the effect of transmitting deflationary pressures across Europe. That is why countries have agreed to take a differentiated approach to consolidation. Governments like mine had little alternative to focus on the former problem. But unfortunately there is no compulsion on countries with a stronger fiscal position to support spending, and demand, across the EU.

Last week I had a friendly exchange with my German opposite number, a fellow Liberal. I quoted Keynes to him. He quoted back to me another British economist, Ricardo. “Ricardian equivalence” says that it is pointless to stimulate economies through critical deficit since the public will expect future tax increases and adjust their spending accordingly. I don’t want to parody the difference - the Germans have applied a Keynesian stimulus and Ricardo has a following in the UK. But clearly we lack a full meeting of minds.

These are demand-side issues - vital in the short term. But for the longer term we should be looking to the agenda of Europe 2020 or what economists would call supply side reform.

Let me start with trade: trade defined in its widest sense to include that in goods, services, labour and capital. I happen to think this is one of the biggest intellectual and political challenges of our time. I am an old-fashioned, unreconstructed, believer in free trade. Trade is not a zero-sum game where one country gains at the expense of another. It benefits all countries because specialisation reduces costs and broadens access to a wider variety of products. Technology and good practice is disseminated. Competition stimulates and rejuvenates economies. A relapse into policies of nationalism and protectionism - whether in relation to goods or services or investment - would be a massive, and costly, mistake.

The first way forward is to push on with the Doha agenda. At present little is happening. This worries me, since I subscribe to the theory of Jacques Delors that trade negotiations, like bicycles, tend to fall over unless they are pedalled. At present, the main obstacles are in the US, China and India, but the EU will have to engage and make concessions on access. I’m not naive about the difficulties but the prize is worth fighting for - and safeguards against much worse outcomes. I don’t want to scaremonger but those with some knowledge of history will recall that four years after the Great Crash we had Smoot-Hawley and the downward spiral of economic nationalism in the 1930s. Today, the contribution by trade policy to growth will be even more important, for good or ill, since economies are now much more interrelated.

Failing to make progress on Doha does not make the agenda of liberalising trade go away. We also have the option of regional Free Trade Agreements: the almost complete deal with Korea, and good possibilities in India and Mercosur. On a recent trip to Brazil I was told that there is now a serious will to negotiate. We must match that will.

We must beware of environmental and labour concerns serving as fig leaves for protectionist policies. Developing countries tend to regard trade conditionality of this kind as simply an excuse to erect barriers - which can harm not hinder dialogue on these deeper social concerns.

And let us remember the huge benefits gained by the developing world from access to markets. Consider the devastation caused by the recent flooding in Pakistan. Yes, we should send aid. But trade offers the Pakistanis themselves a far more durable route out of poverty. I hope the Council and the Parliament will work together to cut tariffs on key Pakistani exports, to provide a boost to Pakistan’s economy and provide much needed employment at a time of desperate need. This is a compelling way of showing that new powers the institutions have under the Lisbon treaty work.

This is also, why I’m looking forward to Michel Barnier’s Single Market Act, which could restore energy and relevance to the single market. Professor Monti’s report makes a really major contribution by identifying potential areas of liberalisation. I am flattered to notice that he is here. But I don’t agree with Monti on one point: that we need a “package deal” to ‘compensate’ people for freer trade - by for example introducing social legislation. The pill doesn’t need sweetening, and the sweeteners may also do serious harm.

I urge Barnier to focus on areas of real economic gain - such as the digital and low carbon sectors and the unfinished business in energy liberalisation; and let’s eliminate barriers to cross-border trade in business-to-business services - far too many service industries remain relatively cosy and national. I do not mean the wholesale privatisation of public services, but the cosy relationships in the private sector like accounting and audit, legal services, construction and tourism where the closed shop is often alive and well.

In the past - being ‘pro-business’ was too often equated with standing up for those large companies with the closest links to government - self-styled national champions. This was a huge mistake which we should not repeat. The Single Market re-launch won’t work unless it helps those smaller companies that are not only key to job creation but often drive the sort of creative innovation that leads to greater competitiveness- the very point of the Lisbon agenda. Many European SMEs consider trade too high risk and too costly. They should be confident that if they encounter barriers, someone will stick up for them. This means stronger, more accessible means of redress in the single market. I hope Michel Barnier will devote a section of the Single Market Act to this.

The Single Market also ensures a level playing field for competition, in particular through state aid rules. All Member States, including the UK, have been guilty of special pleading in the past. I welcome commissioner Almunia’s commitment to ensuring that the Temporary Framework is true to its name - temporary! As he says, Europe’s long term interests demand that we keep the market “open, integrated and competitive”. It strikes me as crazy that cash-strapped Governments are forced into competing with each other to send cheques to profitable businesses.

What is true of goods and services is also true for labour. I urge the EU to recognise the value of flexible labour markets, and consider the interests of those seeking to get back into work, and not just those who already have jobs. There is much that Britain has got wrong but our flexible labour markets helped us get through the worst of the recession with only a moderate impact on employment. We must also move beyond stale old debates on issues like the Working Time Directive and its ‘opt-out’. In the 21st century, with stalled productivity and a looming demographic crisis, it is neither fair nor sensible to force people to work fewer hours than they would freely choose. Many member states are rueing the day they adopted early retirement schemes, supposedly to cut employee liabilities.

It is in capital markets that the risks of market failure have been most serious, and demand a regulatory response. A healthy, competitive, market economy is not the same as laissez faire. As you may know from my views on “casino” banking and regulatory failure in the banking sector, I believe that Member States and the EU Institutions have to work together to reform financial services. I’m grateful to Sharon Bowles for her leadership in the European Parliament on this issue.

I am anxious that these issues should not be drowned out by a row over the European budget. I have to sound the alarm here. At a time when national governments, including mine, are having to make very painful cuts in public spending, no one can understand why the European budget is not being subjected to the same discipline. There is a big backlash on the way, not only in the UK. Can I plead with you to tackle this issue sensibly? Any sense that the European Parliament and Commission are not acutely sensitive to this issue will be seriously damaging.

Our new Coalition Government has engaged positively with Europe in a way which has caused some pleasant surprise. That is not just the influence of the LibDems. Our Conservative colleagues, from the Prime Minister down, are realistic too. We all recognize that our economic fate is inextricably linked with the rest of Europe. We want Europe to work; to put aside all quarrels; and make common cause to deal with the massive economic problems which we now face.