Speech

Prime Minister's Speech at Mexico G20

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

"Europe and the advanced economies can reform and avoid the sclerosis of low growth and low competitiveness."

This is my fourth G20.

So as we meet to talk about the steps the world must take, let me start by being absolutely clear about what Britain has done to restore its economic strength.

We have acted swiftly, setting out a credible and steady plan to restore confidence in our public finances.

In two years we have cut the deficit by over a quarter.

We’ve introduced long-term reforms to welfare.

We’ve halved the long term cost of public sector pensions and increased the state pension age.

By taking bold decisions to get to grips with our debt, we have earned credibility with the markets.

Just over two years ago ten year bond rates in Britain and Spain were both about 4 per cent.

Today Spain’s rates are around 7 per cent while Britain’s are almost four times lower at 1.75 per cent.

And we’re absolutely focused on doing everything possible to support enterprise and make Britain the best the best place in the world in which to start or grow a business.

We’ve cut businesses taxes, creating the most competitive corporate tax regime in the developed world.

We’ve simplified planning, tearing up thousands of pages of regulation as part of the biggest programme of deregulation yet undertaken in Britain.

And we’ve made bold new infrastructure investments in high speed rail and roads.

We’ve cut the top rate of income tax.

We’ve injected cash into the banking system.

Introduced measures to make it easier for companies to access finance.

And cut the time it takes to set up a business.

The number of new business start-ups last year was one of the highest in our history.

I’ve led trade missions to India, China, Indonesia, Malaysia, Turkey, the Middle East, Singapore, South Africa and Nigeria - and now Mexico.

Next month as part of the Olympics in London, we are hosting a Global Investment Conference; bringing together 3,000 top business leaders to generate over £1 billion in new trade and investment for Britain.

And over the next few years, the IMF predict faster growth in Britain than any other major European economy.

Britain is pursuing an unashamedly pro-business agenda - and I make no apology for this little commercial at the start of my speech.

Here in this room, I have opportunity to talk to some of the biggest and best businesses in the world.

Many of you already invest in Britain.

But to those of you who don’t let me say this.

Britain has huge underlying strengths.

A time zone where you can trade with Asia in the morning and America in the afternoon.

The language of business.

The easiest access to the European market.

Some of the best universities in the world.

And a great industrial base.

The trade delegation I have brought with me today shows the scale and scope of the business that you can do in our country.

We are a country committed to enterprise and openness.

So I say come to Britain and invest in Britain.

Be part of this special Olympic year in a truly great country.

Here at the G20 we are equally determined to work with our international partners to take the bold steps that the world needs to stabilise the global economy and get back to growth.

We have a clear vision of the kind of global economy we want to build.

Stable, growing, competitive and dynamic powered by trade and financed by strong banks.

But as we gather here today, I believe there are five big threats to this global economy that could undermine this vision.

First, instability in the Eurozone - and the uncertainty and risk of contagion that brings.

Second, debt and the muddled-headed thinking that over indebted governments can spend their way out of the crisis.

Third, the failure to deliver the measures actually needed for sustainable growth: namely monetary activism in the short term and structural reform to deliver competitiveness in the long term.

Fourth, the risk that, faced with ever growing tensions in the global economy instead of progressively removing the imbalances in the world economy governments will put up protectionist barriers, just like the 1930s.

And fifth, the failure to follow through with the long term reforms - particularly banking reforms and sensible financial regulations - pioneered by the G20 which leaves us exposed to a repeat of the 2008 crisis all over again.

These five threats are very real.

And let’s be clear, in a global economy they threaten us all.

So by representing 90% of the world economy, the G20 is the right forum to work together to deal with these threats.

But it is easy to sign up to declarations.

Much harder to push through the difficult changes that are vital to generate the growth and the jobs that our citizens demand.

There can be no room for timidity in meeting these threats.

No ducking the essential action on fiscal discipline, monetary activism and structural reform.

And no backsliding on the hard won gains of previous summits.

This fight for the future of our global economy won’t be won by a few governments in isolation.

Nor will it be done simply by governments alone.

Business must be with us too.

Because it is you, the world’s top businesses who will create the jobs, trade and investment so essential to growth.

All the conclusions that the G20 reach, all the work that we do, all the analysis that we come up with is worth nothing unless it encourages businesses to invest, to grow and to employ people.

That’s why it’s right that the B20 has become such an integral part of what the G20 is all about.

Together we can take the decisive action that will address these five big threats head on.

Let me take each in turn.

First the Eurozone.

It looks likely that there will be a new Greek government formed, which supports staying in the Euro and is committed to taking the steps that are required as part of that.

This won’t be easy.

But those political parties who say that they want Greece to stay in the Euro need to act accordingly and can not afford to waste any time in doing so.

A successful Eurozone depends on each of its Members being prepared to take some very difficult decisions.

Now people will say, why is Britain asking the Eurozone countries to take steps that we are ourselves don’t want to take?

My answer is clear: Britain is not a member of the Eurozone. And we’re not going to join.

We didn’t join precisely because we didn’t want to give up the kind of sovereignty over our national economy that is essential to making a currency union work.

But we are full members of the European Union, and a significant net contributor to its budget.

Whether or not Eurozone countries take these steps will have a direct impact on our economic fortunes and it is right that we set out our views.

The reality is that there are a set of things that Eurozone countries need to do.

And it’s up to Eurozone countries whether they are prepared to make the sacrifices these entail.

The challenge is one of political will as much as economics.

And so we need to speak plainly.

The fact is that there was too much optimism at the outset about the economic fundamentals in the periphery of the Eurozone.

Prices and wages and the value of assets rose too fast in the periphery, driving down competitiveness and leaving a hangover of debt and deficit when the bubble burst.

Like it or not, those problems need to be met head on.

The Eurozone has two choices.

Either they try to force down wages and prices in the periphery as fast as they can to restore competitiveness, with all the political and economic tensions that will entail or the core of the eurozone has to do more to support the periphery through greater fiscal burden sharing together with a longer term system of collective support and collective responsibility - such as greater transfers between Eurozone members.

Either way the path would be made easier by more being done to support demand, through greater monetary activism by the European Central Bank.

But in the end this is the remorseless logic of a currency union.

And a banking union is a natural extension of that.

If banks in one part of the single currency area are in trouble then it’s right that other parts of the union should protect depositors to avoid a threat to the currency as a whole.

That’s the case in America.

It’s also the case in the United Kingdom, as we saw spectacularly during the global crisis of 2008, with the Royal Bank of Scotland.

Of course these things are difficult to do.

But just because these things are difficult does not mean we should not say them.

If the Eurozone is to stay together then it has to make at least some of these difficult decisions.

The alternatives to action that creates a more coherent Eurozone are either a perpetual stagnation from a Eurozone crisis that is never resolved or a break up caused by a failure to address underlying economic fundamentals that would have financial consequences that would badly damage the world economy, including Britain.

The second threat comes in the form of the muddle headed thinking that says countries with unsustainable debts can keep spending their way to growth.

Of course you need some flexibility in the way that each country addresses its debts - just as we in Britain have used the flexibility in our fiscal targets to extend the timetable of consolidation.

But debts ultimately have to be dealt with.

Pretend otherwise and the result is simple.

Markets questioning your economy. Interest rates rising. Confidence falling.

Higher mortgage rates. Lower employment. And even more of the money people work so hard for wasted paying the interest on the national debt.

That’s why in Britain we’ve taken bold and decisive action to get our public finances back under control.

Here at the G20 we need to send an unequivocal message that deficit reduction and growth are not alternatives.

Dealing with the first is vital to securing the second.

If a country wants growth in its national economy, then it has to deal with its debts.

And dealing with its debts is every bit as essential for the global economy too.
Countries simply cannot continue to run indefinite structural fiscal deficits without contributing to the fundamental imbalances that fuelled the 2008 crisis in the first place.

Likewise it’s important for surplus countries to play their part too.

We’ve made important progress in addressing these imbalances.

China’s exchange rate has appreciated by nearly 13%.

Its current account surplus is down from 9% to 3%.

America has set out a plan for the steady reduction of their fiscal deficit.

And their current account deficit has fallen from just under 5% to just over 3%.
But there is further to go - and the G20 needs to say so.

The third threat we face is the failure to deliver the measures needed for growth.

In a debt-driven crisis where countries lack the fiscal space to stimulate their economies, the most powerful tools we have are monetary activism and structural reform.

In Britain we’ve been able to ease our adjustment through loose monetary policy.

We are taking radical steps to reduce the costs of funding investment by extending long term liquidity to ensure low and stable interest rates are passed through to businesses in the real economy.

And we can also use that hard-won credibility - and use the government’s balance sheet - to supplement that monetary stimulus with active interventions such as credit easing, mortgage indemnities for first time buyers and guarantees for new infrastructure projects.

Last week the Chancellor and the Governor of the Bank of England announced that we will be doing more to ease the problems that are holding back the flow of credit necessary to support investment and growth.

In the US, the Federal Reserve has said it envisages keeping extremely low interest rates for at least the next two years and that it stands ready to undertake further extraordinary monetary policy measures to support the recovery, if required.

And it is becoming increasingly clear in the Eurozone that the core, including the ECB, must do more to support demand and share the burden of adjustment.

In short, we can not afford for central banks around the world to stand on the sidelines if we are to deliver the growth we need.

Neither can we afford to duck the long term decisions needed to improve our competitiveness.

In Europe, completing and protecting the integrity of the Single Market is absolutely vital.

That’s why earlier this year I formed an unprecedented alliance with 11 other EU leaders to get the job done.

An energy single market, a digital single market and a services single market. All of these would boost European GDP and create jobs.

But just as important as completing the single market - we need to protect its integrity.

That’s why, whatever long term decisions are made about the governance of the Eurozone Britain will always fight to protect the single market and to make sure the rules that govern it safeguard the interests of all its 27 members.

This is a red line for Britain.

And we will stick to it.

Not just for our sake but because an effective Single Market reaching its full potential is in all our interests vital for growth across Europe and beyond.

The fourth threat to our prosperity is that in the face of uncertainty, countries will forget the lessons of the 1930s and put up trade barriers.

And there is worrying evidence that this is exactly what is happening.

There have been a staggering 124 new trade restrictions introduced over the last eight months.

That’s an increase of just over a quarter.

Protectionist measures imposed since the start of the crisis are now affecting almost 3% of world trade.
In the last 8 months, investment too has been subject to restrictive measures.

We’ve seen the expropriation of a multinational company requirements that export revenues in oil, gas and mining sectors be exchanged in local financial institutions new regulations on foreign exchange assets of residents insurance companies required to repatriate foreign assets and limits imposed on investment in farmland and that’s just from one G20 member.

We have to do better than this.

We all know that Doha has come off the rails.

But that doesn’t mean we give in to the protectionists.

Quite the opposite.

It’s more important than ever that we all honour the commitment made by every country at every G20 to stop and reverse the rise of protectionism across the world.

There are elements of Doha that we can salvage - like the measures to break down bureaucracy over getting goods across borders.

And there is real progress we can make through coalitions of the willing, where countries who want to can forge ahead with ambitious deals of their own because we all benefit from the increased trade and investment these deals foster.

The EU needs to finalise its agreements with India, Canada and Singapore, launch its negotiations with Japan and really get stuck into trying to do a deal with the US.

Because the EU and US make up over half of the world’s GDP, so a deal here could provide an enormous boost to growth across the world.

We also need to work towards a free trade area in Africa which - along with the measures the B20 has set out on tackling corruption - could play such a vital role in helping Africa to lift itself out of poverty.

And you as the world’s leading businesses can really help here.

I want you to campaign on trade on a similar scale to the efforts of the NGOs on poverty.

And for my part I pledge to make trade a core priority when Britain hosts the G8 next year.

Because in the long term, nothing could do more for jobs and growth - or for the alleviation of poverty across the world.

The fifth and final threat comes from the failure to properly regulate our banking system.

In Britain, cleaning up our banks and introducing a proper regulatory framework is a vital part of clearing up the mess we inherited.

Britain has one of the largest financial sectors in the world - and we are making it one of the safest.

We are replacing the current flawed system of financial regulation with a framework that ensures proper regulation by the Bank of England.

And we are legislating for the ring-fencing of retail banking and its separation from investment banking ensuring that banks hold enough capital to keep them safe with contingency plans in place for when a bank gets into trouble so that they are much less likely to fail, but if they do the taxpayer will not pick up the Bill.

Just as we taking steps in Britain to improve the regulation of our own banks so we need to work together through the G20 to maintain the political impetus behind the reform of regulation across the global economy.

We are making important progress.

The Financial Stability Board is helping to hold countries to account for the commitments they have made.

And whereas it took ten years to complete Basel II, we got Basel III done in just 18 months.

But there is more urgent work to do.

And worsening economic conditions must not be used as an excuse for backsliding.

Six of the G20 countries have not yet brought forward plans to implement Basel III.

Banks need certainty so they can get on with lending to business.

So we need a clear timetable for us all to implement the commitments we have made.

And we need the FSB to be frank and fearless in their assessment of where we are.

We need to put into practice the rules we have agreed on dealing with the risks posed by the biggest, cross border financial institutions.

And crucially we need an independent arbiter of who has done what.

The UK stands ready to be held to account.

And we look to others to do the same.

This is no time for caution or defeatism.

The road ahead will not be easy.

But I believe that we understand the steps needed to revitalise the world economy and that together we can take the bold steps necessary.

The Eurozone members can stabilise their economies and integrate themselves more closely.

Debt ridden countries can get to grips with the debt.

Europe and the advanced economies can reform and avoid the sclerosis of low growth and low competitiveness.

New trade deals can be done.

The G20 can see through its long term reforms on financial regulation.

All these decisions lie in our hands.

The stakes are high, of course. Incredibly high.

But with courage and determination we can use these G20 and B20 summits to really begin to get to grips with these five great threats to the global economy.

That is the task that brings us together here in Mexico to secure our prosperity now and for generations to come.