Category: Speeches

  • Defence Committee – 2021 Evidence Given by General David Petraeus

    Defence Committee – 2021 Evidence Given by General David Petraeus

    The evidence given by General David Petraeus, the Commander of US and NATO forces in Afghanistan (2010-11), at the Defence Committee on 23 November 2021.

    Examination of witness

    Witness: General Petraeus.

    Chair: Welcome to this Defence Committee hearing on Tuesday 23 November 2021. This is our final session looking at Afghanistan. We have two panels today. I am delighted to welcome General David Petraeus, who will be our witness in our first panel. We will be looking at various aspects of Afghanistan, and we may at the end, if time permits, look at Poland, Belarus, Ukraine and eastern Europe as well. We are very grateful for your time this afternoon. You have had a huge amount of experience, firstly in the armed forces—I think it was 37 years. You have had a series of four-star command appointments and were USCENTCOM commander. What is pertinent to our discussions this afternoon is that you were in charge of US and international forces in Afghanistan itself. To kick us off, I turn to John Spellar.

    Q191       John Spellar: General, the US, UK and other allied troops withdrew from Afghanistan following the Doha agreement, but how might the withdrawal through 2020 and 2021 have been better managed from a military perspective?

    General Petraeus: First of all, I think it is important to recognise that there were alternatives. We could have finally acknowledged that although you cannot win Afghanistan, because of the sanctuaries that Pakistan provided or allowed for the Taliban and other insurgent and extremist elements, you could manage it. For all of the imperfections, the flaws and the maddening issues with the Afghan Government, I would submit that it was vastly preferable, not just from our national perspectives, but from the perspectives of most of the Afghan people—certainly the women—to the Taliban Government. It will have a very serious challenge not just governing and providing basic services, but even keeping the lights on and keeping the banking system solvent, among a variety of other challenges.

    There were a lot of ways that this could have gone more smoothly. The biggest would have been to recognise the potential for the psychological collapse of the Afghan security forces. This was not inconceivable; in fact, I publicly said on air some three months prior to their collapse that I did fear a psychological collapse of those forces because of the way in which they are structured. They had to be fairly large—an army of, say, 130,000 to 150,000; they were certainly not at full strength and there were challenges with that—and they had to defend everything around the country that matters: the major population centres and the major elements of infrastructure. There is no alternative to that. They have some help from local police, but not much.

    Then you have a very large reserve, with local reserves out in the provinces but then a central reserve in the major bases of Afghanistan, so you need to have both rotary-wing and fixed-wing air mobility. The US insisted on providing sophisticated US helicopters and planes for transport and close air support, and these required some 15,000 to 20,000 contractors to keep operational. They were way beyond the capacity of the Afghan maintainers, if you will. The Afghans could maintain the old Soviet or Russian systems, but they could not maintain the much more sophisticated—and, to be sure, much more capable—US systems. Once I realised that these were going to be pulled out in addition to our forces, which necessitated the withdrawal of the other coalition forces, which were between two and three times the size of the US ground forces, I feared that the Afghan forces out in these far-flung locations would realise that no one was coming to the rescue with reinforcements—that is where the commandos and other special operators would come into the mix, and they were quite capable—close air support, emergency resupply and aeromedical evacuation capabilities. Once they realised that was not coming, I do not know how you would rationalise continuing to fight.

    In particular, as they discussed, their local political counterparts were getting text messages from the Taliban as the Taliban carried out quite a sophisticated campaign of simultaneous attacks all around the country, augmented by the more than 5,000 Taliban detainees that, as part of the Doha agreement, we had insisted be released by the Afghan Government, which we did not allow to participate in the discussions over the future of their own country. Again, the big mistake here was not anticipating this kind of collapse, hence we first pulled out all of our military along with all the diplomats and all the others to whom we had a moral obligation to withdraw.

    We then had to rush them back in when the Government collapsed and the forces surrendered, essentially. Of course, we had what was on the one hand a very impressive withdrawal of individuals—some 120,000 or so in a matter of less than two weeks—but also a very chaotic process, and one that has resulted in essentially leaving behind many tens of thousands of the former Afghan battlefield interpreters who served with our forces on the ground, and their family members, all of whose security is in jeopardy because of their service with us; not to mention many, many others whose service to the Afghan Government or various other organisations and entities affiliated with the US or coalition elements put their lives at risk as well.

    Q192       John Spellar: Was this a long‑term and systemic problem of assessment by ourselves of the Afghan capabilities, or was it greatly exacerbated during the course of this year?

    General Petraeus: Once again, you withdraw this critical element. There is no other way to structure forces in a country that is vast, very mountainous, in the shadow of the Hindu Kush—in fact, as you know, the Hindu Kush defined the spine of Afghanistan—and has very limited road and other line-of-communication infrastructure. You have to have individuals out there defending all of that and you have to have forces that can respond to it. That requires air mobility, both fixed and rotary wing, depending on how far you are going to have to take the troops that are reinforcing.

    Again, once that critical element may not be present, once you realise that that could be rendered inoperable because of the lack of maintenance—keep in mind, by the way, that in the early weeks of this Taliban offensive, there were impressive responses. There were impressive responses north of Kabul in the Baghlan‑Kunduz areas; there were impressive responses outside of Kandahar, to some degree, and Herat; but over time, the capability of the Afghan forces to respond became limited. Again, once that happens, you cannot conceive of forces out there continuing to fight if they know they are essentially doomed. We would never put our own forces in that situation, yet by our withdrawal of the US forces, the coalition forces and the maintenance personnel, that is exactly what we did in this situation.

    Again, keep in mind that we were the ones who insisted on providing American‑provided stuff. I am pretty sure that when I was the commander—having departed some 10 years ago—we were still issuing Russian types of systems and some old Soviet systems, which again were much simpler: much less capable, but much more maintainable by the Afghan maintenance personnel.

    Q193       Chair: Would you agree that the actual departure—the manner of our departure, but also the general departure from Afghanistan by international forces—has been a humiliation for the west and western forces?

    General Petraeus: I think it was our Chairman of the Joint Chiefs who assessed that it was a strategic setback or a strategic failure, or words of that nature. In that regard, it is important to note that at a time when we most want to show our allies and partners around the world that we are a dependable partner and that we are not a country in decline, this handed would‑be adversaries materiel, if you will, to say, “See, we told you. They’re not a dependable partner, and they are a country in decline.” I do not believe that, and I think it is imperative that we demonstrate that that is not the case. I think that without question the individuals, the senior leaders, and the Administration in the United States and elsewhere recognise the importance of showing—not just talking about, but showing—that we are dependable partners with enormous capabilities and with the willingness to use those capabilities. At the end of the day, that is the essence of deterrence.

    If you draw it out fully into the real global context in which we are operating, clearly the most important of the big ideas—maybe the biggest and most important plate that we have to keep spinning, if you use that metaphorical image of the guy in the circus who has a lot of plates spinning, and the US has to keep more spinning than any other country, albeit with a lot of help from others, including the UK—is that which represents the US and its allies and partners’ relationship with China.

    We obviously very much want to ensure that that is as mutually beneficial as possible—co-operate where we can, compete where we must and, above all, ensure that we deter what could result in real conflict, given the potential enormously dire results of such conflict. The essence of deterrence is an adversary’s perception of our capabilities and our willingness to employ them. Certainly, this situation—at the very least, the optics of which and the reality of which were quite chaotic—does not reinforce the image of the dependability of the United States. It is incumbent on us to reverse that kind of perception, as we did, frankly, in past years, after a red line turned out not to be a red line in some other cases. Inevitably, such cases will come along, and this is certainly one of them. We have to make sure that we demonstrate that this is a one-off, not a pattern.

    Q194       Chair: We will come back to the perception and the consequence of that from an international perspective towards the end of our session. Just wrapping up on the Doha agreement, the Afghan Government was not included in the conversation there whatsoever. Would you agree that that was an error? Secondly, would you also agree that in future, it would be wise to include the British there as well? We offer alternative thought, we can give a different perspective and we can actually help provide an insight, which the United States might benefit from.

    General Petraeus: The challenge is that you have to recognise that the negotiators were trying to get an agreement that would allow us to leave. If that is your objective and you allow the enemy to know that, you are not negotiating from the strongest of positions. Your foundation is pretty weak. Unfortunately, we put our negotiators in that position, starting with the enormously capable Richard Holbrooke, for whom I was the military partner when I was the commander of US Central Command and he was the AfPak representative of the United States, as you will recall, starting around the 2009 timeframe. Fairly early on, in the speech that actually announced the build-up of US forces and also alluded to the fact that other countries had built up as well, there was also the announcement of the eventual drawdown date. From the very beginning, we made it very clear that we wanted to leave. That is certainly understandable; no country wants to continue some obligation forever, but it does not mean that you should tell the enemy that that is the case.

    Q195       Chair: This was the trouble, General. It was Donald Trump’s ambition to leave because it was part of his election manifesto, if you like, to say “Bring troops out” without recognising the consequence of what would happen next. That became the objective, simply to bring troops home, and then all the Taliban had to do was wait.

    General Petraeus: Essentially, and not only that; not only did we give them what they wanted, but we also forced our Afghan partners to release more than 5,000 detainees, so that the Taliban would agree to let us do what we wanted to do and what they wanted to do. Again, that was not one of the better diplomatic accords that we have ever reached in our diplomatic history, to put it mildly.

    Chair: Thank you for that, General.

    Q196       Sarah Atherton: General, I was going to ask about the prisoner exchange and the fact that the Afghan Government were not involved in the Doha agreement, but were effectively signed up to that prisoner exchange.

    General Petraeus: They were forced to do that. They were compelled by our senior diplomats to accede to that. I should note that they got 1,000 or so of their detainees back as well, but that is a pretty lop-sided detainee exchange, if you will. Certainly, the well over 5,000 by and large, according to most accounts, went right back into the front lines and helped enable that simultaneous Taliban offensive of which I spoke earlier.

    Q197       Sarah Atherton: You just answered the second part of my question, which was: how much did that impact on the Afghan Government’s security forces collapse? By the sounds of it, you would probably assess that it had quite a large impact. You mentioned before the Foreign Affairs Committee that the US should have maintained a continued presence in Afghanistan, and I think the UK Government would agree to that, although the US is taking a slightly difference stance. Has the withdrawal damaged the trust of the special relationship, and what about the credibility of NATO going forward?

    General Petraeus: I think I have spent three of the last seven weeks in Europe. One was in Warsaw for a security forum—in fact, Tobias was there as well, as were a number of other individuals from throughout the alliance in Europe. Another week was in Rome, at a major defence industrial company’s anniversary and a variety of other events and activities. Then I had six days in London. Before going over there and resuming international travel, having not done much of that over the course of the previous 20 to 22 months or so, I thought I understood that the relationships had been bruised somewhat—in other words, that our NATO leaders and partners in particular felt that they had not truly been consulted on this. Rather, they had been told that this is what we were going to do, without much dialogue about it. Indeed, many, if not most, of the European countries and, I think it is fair to say, the leadership of NATO preferred to manage what was going on in Afghanistan, rather than to leave.

    Again, the challenge is that you have to accept that you could not win but that you could manage. It would be frustrating, unsatisfactory, maddening and so forth, but demonstratively better than the alternative. We are seeing the alternative now: it is a return of the country to a seventh-century interpretation of Islam. Girls cannot go to school—certainly not high school—and women cannot go to college. Women, by and large, are shut out of the economy and basically told to stay home. The banking system is in freefall and will probably collapse. They had the worst drought in 35 years, except that they now have those about every five to 10 years, and they are going to have a very hard time just keeping the lights on in Kabul, much less keeping people fed.

    Again, I would contend that the alternative to this flawed Afghan Government, however imperfect, was preferable, noting that it would have required us to keep some 3,500 US troops, a very substantial armada of drones and close air support, and other capabilities there. It would have also required us to advise and assist units to help our Afghan partners on the battlefield, in addition to the very important train-and-equip missions that were being shouldered by the coalition effort, and it would have required the critical maintenance personnel who are maintaining the sophisticated US transport and close air support air assets.

    Q198       Sarah Atherton: If trust has been damaged, how do we rebuild it?

    General Petraeus: You have to demonstrate. You can talk about it and say that this is a one-off, and you can certainly make a case for why we withdrew. The President of the United States did as well as you can in making that case in some of his speeches. But that said, it is all about what we do going forward, particularly when it comes to the really significant threats that are out there right now—the one confronting eastern Europe and our NATO allies and partners is obviously that represented by Vladimir Putin’s forces massing on the borders of Ukraine and Belarus. There is also the substantial competition that is ongoing—that is the term in Washington—between the United States and China. Of course, it is the US and all its allies and partners together, because we want this to be a coherent, comprehensive and whole of Governments—with an “s” on the end—approach to China.

    Again, it comes down to what we do about our posture in Iraq. Do we keep forces in Syria? How about at al-Tanf? What about in Africa? What about in other locations around the world? What do we do about eastern Europe? How can we be firmer, but not needlessly provocative, together with our allies and partners? You just have to rebuild it, but we should acknowledge that this has damaged the very important trust between our country and others, including the special relationship with the UK. Again, this has happened in the past, and you have to get through it. We can get through it, and I think we will, but it takes first an admission—maybe not public, but certainly private—that that is the case. I think that is present in Washington. Then it takes actions, based on that acknowledgement, to indeed demonstrate that the US is a very dependable partner and has the capabilities and the willingness to employ the capabilities that are necessary to deter would-be adversaries from taking adverse actions.

    Sarah Atherton: Thank you, General.

    Q199       Chair: Would you concede that our adversaries and competitors have watched very carefully what has happened in Afghanistan? They have seen a hesitance; they have seen us become perhaps more risk-averse collectively. They could certainly try to leverage that.

    General Petraeus: I think that is a fair observation, but I do not want to take that too far. This is the result of a conviction formed at the very highest level of our Government some years ago that this was not worth continuing; in that respect, this is a bit of an isolated situation, if you examine it. But, again, the onus is on us to disprove the notion that we are not a dependable partner when it comes to issues that really matter. In terms of the ongoing situation in eastern Europe—I know we are going to talk about that at the end—the US has already been very firm and very public. US leaders at the very highest levels have called their counterparts and had firm conversations with them. We have discussed this with our NATO allies and partners and with Ukraine as well. There have been trips out there by the Defence Secretary and others. Our NATO allies and partners, and the Secretary-General and others, have all made statements. We have forces deployed on the ground in the three Baltic states, for example. There are considerations on other actions that can be taken to shore up Ukraine and so forth. That is a demonstration that the US is a capable, dependable partner, but we will have to continue to demonstrate that in the months and years that lie ahead.

    Chair: Thank you for that. Emma.

    Q200       Mrs Lewell-Buck: Afternoon, General. Could I move on to the fall of the Afghan Government? Like a lot of people, despite being on this Committee, I am still struggling to get my head around why it fell so quickly. Could you share you views on why that was? Was it a failure of training support given to the Afghan security forces, or was it a failure of planning intelligence from NATO allies?

    General Petraeus: At heart, it was really about that critical element of the Afghan security forces degrading in its operational capacity. That was the ability to reinforce forces who are under pressure around the country with capable soldiers, equipment, close air support, emergency resupply and aerial MEDEVAC. The readiness of the helicopters and planes degraded, as was inevitable, and they got shot up—a lot of them had battle damage and so forth. The 18,000 or so western contractors that used to maintain this alongside Afghan maintainers, while trying to train the Afghan maintainers, were no longer present. Once the troops on the front lines realised that, you saw this, what I term, psychological collapse. They could have fought on, but in many cases the Taliban were massing forces against Afghan elements. Although the Afghans, on paper, had 300,000, half of that is police, so strip those out, and then take out the reserves and take out ghost soldiers, and you are down to smaller numbers.

    The Taliban at these different locations around the country could mass forces that were larger and more capable than the Afghan security forces on the ground defending population centres, critical infrastructure etc. They were essentially doomed. They realised that. Their political counterparts at the local level were texting with the Taliban in a number of cases—again, another element of sophistication of the Taliban offensive, which was simultaneous around the country. And these political figures were saying, “Why should we fight?” Why are you going to destroy this city when you know you can’t win because there is no help coming the way you have anticipated, because of the way the entire structure has been set up?

    That is not to say we were perfect by any means in all our train and equip. It is to say, by the way, that the notions that some have suggested—that we should have made our Afghan security force partners more like the insurgents—are nonsense. They were counter-insurgents, not insurgents. They have to defend. Insurgents can withdraw up into the hills; they can attack at a time and place of their choosing and then withdraw. In this case, the insurgents have pressured enormously—they could literally withdraw back across the border into Pakistan. There is a reason the Taliban leadership is called the Quetta Shura—because it is located outside Quetta, the capital of Balochistan, a province of Pakistan. There is another element called the Peshawar Shura, which again is because it is in North Waziristan not far from there.

    At the end of the day, that was the critical challenge. This is something that, as I said, several months before it happened, I began to worry could be a result of the withdrawal of our forces, which necessitated the withdrawal of the coalition forces, which necessitated the withdrawal of the western contractors.

    Again, could we have done better at various aspects? Sure, we could have. One of the questions that we have to ask ourselves is, was it right to insist that we provide very sophisticated US helicopters and fixed-wing aircraft, or could we have continued to provide Russian or old Soviet types of systems that were less capable but more maintainable for our Afghan partners?

    Q201       Mrs Lewell-Buck: General, I will try to drill down a bit more. You have explained why the fall happened so quickly, but what was happening in terms of the intelligence that was around at that time? How did nobody see it coming? You have given a clear account of what happened and why you think it happened. Why do you think that nobody else spotted that it was on the horizon and put things in place to mitigate it?

    General Petraeus: Obviously I am not inside the CIA any more and I was not privy to the intelligence, so it is pretty hard for me. My understanding is that, as this transpired, the timelines grew shorter. There were some who did say, “We fear this worst-case situation.”

    Certainly, the inability to imagine that was one reason that we ended up in this paradoxical position where we have withdrawn the military first and left the diplomats, development workers, intelligence officers and Afghan partners behind. It is a little bit as if we do not realise how fully damaged the Titanic has been by hitting the iceberg, so all the men leave first on the lifeboats and the women and children are all left behind.

    In this case, we had to go back in with the military in substantial numbers—I think at least twice the number that we had had on the ground prior to our withdrawal—to secure the international airport because of the enormous pressure it was under from people trying to leave. By the way, just as an aside, for all those who say, “It’s great now that the security has improved,” actually, there are attacks all around the country by a combination of the Islamic State resistance forces that are developing and others, and even internecine, if you will, disagreements between the Afghan Taliban and the Haqqani element of it.

    The Haqqani element seems to have prevailed right now, including the individual who is the Minister of Interior, Siraj Haqqani, on whose head was a $5 million bounty. He is the guy picking the governors and a variety of other positions, presumably with the approval of the overall leader of the regime.

    It has been a difficult situation to try to assess. I have a degree of understanding of that, having been a director of the CIA and having tried to anticipate what can happen. At the very final end of the day, what you are trying to do is understand Ashraf Ghani, who all of a sudden just left with a number of his close associates without giving any real notice, presumably because he decided, “Well, we could fight around Kabul, but how much damage will that do to the city?”

    All the leaders, of course, remember the horrific situation in the early to mid-1990s when there was a true civil war between a variety of different factions, some closing in from the north, some from the east and others from the south, all of whom ended up shelling Kabul and doing enormous damage to the city that was still very visible in the early years of our return to Afghanistan. I think Ashraf Ghani decided, “Let’s just avoid that. We can’t win, so let’s just leave and they will take charge of it.” Of course, that left a vacuum that was part of the problem.

    It is hard for me to second-guess individuals without knowing what they said, when they said it, and what basis for that was offered.

    Mrs Lewell-Buck: Thanks, General. I appreciate it.

    Q202       Chair: Before we move on, can I just ask for your thoughts on Pakistan? Were you frustrated with their outside and proxy influence in what was going on in the country?

    General Petraeus: Sure. Obviously, it is very frustrating to deal with Pakistan. At certain junctures, particularly in 2009, Admiral Mullen and I and Ambassador Holbrooke and others invested an enormous amount in relationships with key individuals in the Pakistani Government, especially with the chief of army staff in the case of the military, who really is not just the senior military leader but, in many respects, the most powerful individual in Pakistan.

    In 2009 there was a superb offensive by the Pakistani army against the elements of the Pakistani Taliban—not to be confused with the Afghan Taliban or the Haqqani network or others—that were threatening; they were almost a dagger pointed at the heart of Islamabad from Swat valley. They did a terrific job of conducting offensive operations and then counter-insurgency in Swat, Bajaur, Mohmand, Khyber, Orakzai, South Waziristan. They were closing in on North Waziristan when they seemingly culminated, as that term is used—in other words they could go no farther. The problem was that it was in North Waziristan where you had the Haqqani network headquarters and many of their bases. You also had a number of al-Qaeda elements, the Islamic Movement of Uzbekistan and a handful of others.

    The army never did anything about the Taliban down in Balochistan. Years later, there was a confession by a very senior Pakistani leader that they had an agreement, essentially, with the Balochi leaders that they would do nothing in Balochistan other than run the staff college, which is in Quetta, the capital. They had border posts, as well as the major border crossing into Kandahar province, but nothing else, for fear that they would set off a Balochi insurrection. That meant that the Taliban had free reign inside Balochistan, by and large. There was only one strike ever publicly known in that particular area.

    So Pakistan was very frustrating. Despite professions like, “Okay, we’ll do this” or “We’ll do that,” it never quite materialised. We were totally dependent on the lines of communication into Afghanistan from Pakistan until we got the northern distribution network established during my time as US Central Command commander, but that didn’t help at all. Certainly, it did not help the forces that were down where yours and ours were, in places like Kandahar and Helmand and so forth, nor did it help those in the east, which would come through the Khyber Pass. Those two crossings were essential. We did not want to have to fly everything into the country, as we had to for a 45-day period when they did close those lines of communication in late 2011 as a result of a terrible incident in which a number of Pakistani soldiers were killed in a dispute over whether they were over the border or not. The result was they were dead, and the Pakistanis closed those lines of communication. We saw how problematic that was. It was as problematic as we expected it would be—and as costly as well.

    That was one of the most frustrating elements of the context in which this was carried out. It was the principal reason that, when I did an assessment in Afghanistan as a three-star general coming home from my three-star tour in Iraq—Secretary Rumsfeld asked me to do an assessment of Afghanistan on the way home—the very first slide in that briefing was titled: “Afghanistan does not equal Iraq”. The No. 1 difference between Afghanistan and Iraq was the enormous sanctuaries that the insurgent and extremist elements had in Pakistan. They became more prominent, actually, as the war went on. That meant that you literally could never totally prevail, and therefore you had to ultimately acknowledge that the result was going to be unsatisfactory, but again, as I mentioned, it still might have been managed.

    Chair: Thank you for that; it was very comprehensive. Let us turn to the last few months of the campaign itself and the decision to depart. Derek, over to you.

    Q203       Derek Twigg: General, after you finished your terms as commander of ISAF and director of the CIA, what was your thinking on where we would be on Afghanistan 10 years later?

    General Petraeus: I had a pretty measured expectation of what we would be able to do. The unknown, certainly when I left command in Afghanistan and went to the agency, and frankly even after leaving the agency, was whether we would withdraw based on conditions having been achieved that enabled and supported that kind of withdrawal decision, or whether we would withdraw regardless of the conditions. Of course, ultimately, the previous US Administration and the current one withdrew regardless of the conditions, perhaps not appreciating how bad it would be, but with an expectation that it was going to be much worse than it was while we were there.

    That is the key aspect of this. If you are going to withdraw regardless, you have to accept what will transpire. If you are going to withdraw based on conditions, presumably you can continue to manage the situation longer, but it will be frustrating, costly and all the rest of that. I would have argued that it was sustainable. Sustainability is measured in the expenditure of blood and treasure. We had not had a battlefield loss in 18 months prior to the tragic loss at the gate at Kabul International airport when the suicide bomber blew himself up. Frankly, the cost was vastly reduced as well. It was not trivial; it still would have been in the order of the small tens of billions of dollars, but in a Defence budget of $730 billion or $740 billion, that can be accommodated, especially if you assess that the result could be pretty catastrophic and that you will still have to devote a considerable amount of resources to keeping an eye on extremists and others who could cause challenges for you.

    That is the reasoning, if you will. Again, I was very careful, especially with Congress, to lay out that we would not be able to achieve in Afghanistan what we achieved in Iraq. As you will recall, during the course of the 18 months of the surge in Iraq that I was privileged to command as well, we drove down violence by 85%. We gave entire new opportunities to the land of the two rivers, if you will. That was sustained for three and a half years. It was the Iraqi Prime Minister’s actions that undid that, not the actions of the enemy. His actions allowed al-Qaeda in Iraq—by then Islamic State—to reconstitute itself over the course of a couple of years, which forced us a few years later to have to return troops to Iraq. That was actually a very sustainable situation, but it was undone by the host nation leader, not our actions. They had pretty good security forces at the outset; in fact, we were able to reconstitute those pretty quickly when we went back in to enable them to defeat Islamic State and eliminate its caliphate and so forth, not only in Iraq but, with our Syrian Democratic Forces partners, in north-eastern Syria as well.

    I never assessed that that was going to be possible in Afghanistan. I said we could drive down violence year on year but that we should not expect a transformation of Afghanistan in the way we were able to transform Iraq, given the sanctuaries and the other challenges of Afghanistan, a country that has virtually no money and very little revenue. Iraq could generate $100 billion if oil prices were over $105 a barrel, if we could get the pipelines patched up, the pumping stations all going and the electrical lines providing power to it.

    You had no prospect remotely like that in Afghanistan. There was a very high illiteracy rate, which required us literally to teach individuals how to do basic reading and mathematics before they could do basic training. Just on and on, the challenges in Afghanistan were vastly greater than those in Iraq, even though the levels of violence historically in Afghanistan generally were a good bit below the levels of violence prior to the surge in Iraq and during probably the first four to six months of the surge as well.

    Q204       Derek Twigg: Based on your experiences as commander of ISAF and director of the CIA, do you think that there was ever a possibility of retaining a stable, “democratic” Government, or were the Taliban always going to come back at some point?

    General Petraeus: It depended on what we were willing to do. Again, there is a lot of argument about that here in Washington, but I think that with 3,500 troops, a lot of drones and the right rules of engagement whereby we could help the Afghans fight not just the extremists but the Taliban, we could have sustained a situation. It would have been difficult in the areas that were being contested, but by and large the major population centres, the major infrastructure and so forth could be secured, and I would contend that that is preferable to what it is that we are seeing now in Afghanistan and what we are likely to see in the months that lie ahead, which are going to be brutal. This winter is going to be horrible for the Afghan people. They are going to suffer in innumerable ways, even if we work out methodologies to get humanitarian assistance into the country in a way that doesn’t enable or enrich the Taliban in so doing.

    Q205       Derek Twigg: What lessons do we learn from the collapse of the Afghan security forces in terms of going forward with other partner security forces for the future?

    General Petraeus: If you build them around the importance of a capability to reinforce them when they are under attack, and then you undermine that capability, you should expect a collapse. I mean, that is the simple—again, there are lots of issues that we didn’t get right at the outset.

    By the way, let’s remember that the most important issue here is that we didn’t even get the inputs right in Afghanistan until late 2010, which was nine years on from the invasion and the toppling of the Taliban in late 2001. And that was because very early on we were reluctant even to plant a flag—in other words, to put a headquarters and a two-star or three-star general on the ground. We ultimately did that. Read the book Not a Good Day To Die by Sean Naylor about how chaotic the command and control and operational control situation was during Operation Anaconda, during which Osama bin Laden and many of his al-Qaeda elements were able to escape to Pakistan.

    We then did put a headquarters on the ground, but we shifted focus very quickly to the campaign that was going to be conducted in Iraq. That kicked off, of course, in March 2003. And as Admiral Mullen used to say in later years, “In Iraq, we do what we must; in Afghanistan, we do what we can”. And I was part of that problem, because as a two-star, three-star, four-star commander I was always asking for more, especially as the commander of the surge. We basically got everything that was available in the US military and then some additional coalition forces as well, and we required all of that to achieve the results that we did, especially before the patience of Congress ran out.

    It was only after the drawdown of the surge forces, and then a further drawdown, that we could begin to shift assets to Afghanistan, starting in late 2008 and into 2009, with the Obama policy review. The catalyst for the second review—the big review—was the McChrystal report in the late summer of 2009.

    As a result of that policy review and the commitment for 30,000 additional US forces and other capabilities, and other coalition forces, by late 2010—when coincidentally I was the commander, but again a lot of this was put in motion by General McChrystal and me as his boss at central command and the Pentagon—we had the inputs almost right. By “inputs”, I am talking about the rough level of resources, the right strategy of big ideas, the right people to execute it, the right preparation of our forces, all kinds of programmes, the right organisational architecture, which we also didn’t get right for a very long time, and different elements like the anti-corruption taskforce that General McMaster established when I was the commander, and the Afghan local police, which was probably long overdue but then proved to be unsustainable over time—a whole host of these initiatives—and the effort against the opium trade and the crop substitution and all these others.

    The problem then was we knew that we only had a limited period of time before we were going to have to start the drawdown in July 2011. That was staring us in the face, and as a result we tried to accelerate everything, and that is probably not good because you throw money and resources and everything at it that distorts various elements of the economy and so forth. It makes corruption more possible.

    Again, the big issue here is that we did not even get it right roughly until late 2010. There were nine long years where we missed the opportunity to capitalise on the many early years when there was very little violence, during which the shattered Taliban were in Pakistan reconnecting, regrouping, gradually putting their toe back in the water in Afghanistan and coming back. So by the time we finally committed the forces, it was because they were on the march. Keep in mind that 2008 and 2009 were very tough periods in Afghanistan and, again, it was not until 2010 that we halted that momentum and reversed it, achieved a good bit of progress during the year leading up to the summer of 2011 and then had to start drawing down. Something that we had right from the beginning, and it was really hard, is that we failed to capitalise on the opportunities we had, and as a result we were always reacting to the enemy instead of the enemy reacting to what we were doing. And then, of course, we stated that we wanted to leave; we told the enemy we wanted to leave. How can your negotiator negotiate from a position of strength if the enemy knows you want to leave?

    By the way, in Iraq, I refused to tell Congress that we were going to pull our surge forces out in accordance with a certain timeline, even though I knew we were going to have to do that. There was no alternative. We had already extended our soldiers—the army forces—from 12 to 15-month tours on the ground in Iraq and Afghanistan to accommodate the need in Iraq for those additional forces. We had to draw down. It was, again, inevitable, but the Administration supported me saying to Congress, “I will tell you when the conditions are met.” Happily, the conditions were also met, in part because the enemy knew we were not going to leave and therefore there was a greater inclination to conduct reconciliation as well as we went around and got this comprehensive civil-military counter-insurgency campaign there.

    Q206       Chair: Thank you, General. That was a very comprehensive reply. We are going to slowly turn to the recent evacuation and then look ahead in the last few minutes. Before we do that, can I have two concise responses, please? You mentioned General McChrystal. Back in 2009 he observed in his 60-page analysis, which I think you referred to, that you had an over-centralised model of governance. You know, and we all know now from all our studies of the country, that it has never been run from the centre. Surely, this was something back in 2001 that was a schoolboy error. We should not have been trying to do everything from Kabul. Would you now concede that that is the case?

    General Petraeus: I generally would. For what it is worth, I am literally working on the top 10 reasons we did not achieve all that we should or could have, and this is one of those. I am on a bit less firm ground here, candidly. I was not at Bonn and I was not part of the original political structure. I was riveted on Iraq all the way through September 2008, other than that one assessment that I conducted for Secretary Rumsfeld in September 2005 on the way home from Iraq. I think that is correct and I do have it as one of my top 10 reasons, but I am a little less certain, specifically, about how, for example, provincial governors and provincial chiefs of police have been selected. I would argue that we were sensitive to this. Certainly, when I was the commander, our mutual good friend Brigadier-General Mark Martins and I tried to re-establish the Huqooq system, which is a local legal member whose president district ties into the province and so forth. It is challenging and I am on less solid ground there than in, say, the security areas.

    Q207       Chair: In the same vein, I think the quote of yours that I have used more than any other is, “It is not enough to defeat the enemy; you’ve got to enable the local.” That sums up what should happen in every combat situation and in every area of conflict. When I look at Afghanistan, in so many projects across the country—the copper mine contract that it took forever to sort out; the Salang tunnel, which you will be familiar with; the Kajaki dam—we did not take advantage of the umbrella of security that you created. You probably visited Helmand province. America went there in the 1950s. You can still see the stamps on the agricultural structures that created the irrigation systems that allowed the province, and the River Helmand, to become the bread basket of the country. There was nothing like that, on the scale required, in these 20 years. We didn’t really lean into it, did we?

    General Petraeus: This is my point: especially in the early years, instead of going all in on Afghanistan, we hesitated. We shifted focus, and then ultimately we had to go all in on Iraq. That required everything that we could possibly muster. It meant that Afghanistan was a supporting effort, not the main effort. Had that been different, it is very possible that the outcome would have been much more positive for Afghanistan.

    Let me take advantage of this opportunity to say this. There are people who say, “It all went wrong when we did nation building.” Look, you have to do nation building. If you do not build the host nation’s security forces and critical institutions, how do you hand off tasks that you are performing for the country? By the way, we are now finding how many different institutions were established and performed various roles—some more important than others, to be sure. They are all basically collapsing. Those services, the actions that they took and the activities in which they engaged are all withering or ending. These were all important to the Afghan people. We will see the impact of that, especially during the course of what will be a brutal winter for Afghanistan.

    Chair: General, thank you for that. Let us turn to more recent events. Richard Drax.

    Q208       Richard Drax: General, good afternoon. Time is pressing and you have, I think, answered this question in part already. I noted your comment about the withdrawal; that is what I am putting the spotlight on. You said it was an “extraordinary logistical accomplishment”, but you were not so keen on the lack of “meticulous organisation and co-ordination”; you described the withdrawal as “quite chaotic”. Bearing in mind that hindsight is a wonderful thing, in your view, as a professional soldier, how should it have gone?

    General Petraeus: Again, this hinged on the recognition, which was not present sufficiently clearly, that once this critical component—this ability to reinforce Afghan forces out on the frontlines—was degraded, you would see an epidemic of collapse. What would happen is they would see some units somewhere surrender to the Taliban, and then begin to wonder, “Why are we still fighting if there are no reinforcements coming, and there is no emergency resupply and no close air support?”. You would have this epidemic of surrender. I did somewhat envision this and warn about it some months in advance, when looking at the degradation of the air resupply and close air support capability, but without accepting that that would be the outcome.

    Of course, you could go ahead with what we did, which is pull all the military out except for a security force around the US embassy, and say, “Well, this is done”—except, of course, it wasn’t. Then the Government collapsed, and the Taliban rushed in; and then we were in a situation where all our diplomats, development workers, intelligence officers and a host of others—American citizens and green card holders—were left behind. We had to go back in and get them out.

    Of course, there was panic in the city—a city of some 7 million people, many of whom were trying to get into Kabul international airport. That press meant that it was impossible to have an orderly process—with a few exceptions. I might note with a bit of quiet pride that the CIA—it is publicly known—did a very orderly evacuation of many of the individuals with whom it had partnered in the country, using a very careful method; but that wasn’t available to other elements.

    Q209       Richard Drax: General, can I quickly butt in? That is what happened. I am just asking you what, in your view as a professional soldier, could or should have happened better. For example, should people have been withdrawn far earlier, or should the withdrawal have begun months before? Should there have been more than just one exit point? From a military perspective, you have said it was quite chaotic. It was chaotic because it was rushed—you’ll accept that—but could it have been done better?

    General Petraeus: Obviously, it could have been done better, and with the prescience of hindsight we can map out how it could have been done. You could have done it from, say, Bagram, Kandahar, maybe Mazar-e-Sharif and maybe even Herat, so you get north, east, south, west and the centre of the country in Kabul international airport. It could have been, “Okay, let’s pull all of our diplomats out except for a very, very small number. Let’s close down all these other activities.” Of course, if you do that—we have to be fair to the Administration in this regard—the fear in Kabul and apparently expressed by the Afghan President and others was, “If you pull out everything like that, everyone is going to lose hope and everyone is going to try to leave the country.” I do not doubt that whatsoever.

    By the way, we also did an abysmal job—not just in this case but in the previous Administration, and arguably even dating back a bit to the earlier one before that—in meeting our obligation to those who qualify in the US for a special immigrant visa by having served two years on the ground with our soldiers as a battlefield interpreter. I am part of a group called No One Left Behind—I am on their board of advisers—

    Q210       Richard Drax: General, forgive me. Would it be fair to say that had this pull-out happened in another way, it would have put the fear of God into people earlier that the withdrawal we had was inevitable?

    General Petraeus: You are asking all kinds of hypotheticals, and I have always been uneasy with hypotheticals from elected officials in my own country, as elsewhere. Yes, there are other models that could have been employed, but they had downsides. I am trying to be fair to an Administration that was keenly aware of these and trying to balance all of it, but that in the end did not embrace the potential for what eventually would happen, which was the collapse of the security forces and the collapse of the Government, which then meant that Kabul was going to be undefended. Eventually, they just handed it to the Taliban.

    Q211       Chair: Thank you very much for that. Before we move on to the final points that we talked about, General, you shed a lot of blood, sweat and tears in Iraq. There are now comments being made that politicians in the United States felt that Afghanistan was not moving swiftly enough as an illustration of promoting liberal democracy in another part of the world post 9/11 and another example was required. That was therefore used to justify invasion in Iraq. I am conscious, as I said, of your service there and of the British commitment, but does it resonate with you at all that somehow the politicians in the United States wanted to illustrate the power to promote post-9/11 liberal democracy by choosing another part of the world to expand its interests?

    General Petraeus: I will defer to the individuals who were policy makers. I was a division commander at that time and trying to focus on how to get a division of 15,000 soldiers, 254 helicopters and 5,000 vehicles to Iraq, frankly, to conduct an invasion. There were a variety of motives, I am sure, behind why it was that we shifted focus from Afghanistan to Iraq pretty quickly. There has been a lot written about that, and I just refer you to that.

    Q212       Chair: As somebody who is dealing with what is going on in Afghanistan and Iraq, do you think that the international community lost its way with the opening up of Guantanamo Bay, and the utility of that, as we tried to deal with terrorism in a modern context?

    General Petraeus: Even before the Obama Administration came into office, I was saying publicly on the record that No. 1, advanced interrogation techniques were both wrong in the sense that they violate international law, and do not work well.

    By the way, for what it is worth, nobody has been responsible for more detainees than I have as an American commander in many, many decades. We had 27,000 of them in Iraq at the height of the surge and we had small thousands of them in Afghanistan, and generally, if you want to get information from a detainee and you have the time—so I am now dismissing the ticking time bomb scenario. I should be fair: in the wake of 9/11, there was a sense of a strategic ticking time bomb. I was actually deployed in Bosnia, partly with a special mission unit, part-time as a US hat—albeit a NATO officer—and we were inside the intelligence on all of this. In fact, the first counter‑terrorism operation after 9/11 was in Sarajevo, not in Afghanistan. There was a sense of a ticking time bomb at that time, and we should be fair to those who were engaged in this then.

    That said, again, our experience is that if you want information from a detainee, become his best friend rather than waterboard him. We paid a price for that, and I think Guantanamo was also wrong, in the sense that you need to approach these operations with a law enforcement mindset so that you get evidence, not just intelligence. For what it is worth, in Bosnia, we had FBI agents with us in the operations that were conducted there, and that enabled us to put, for example, the head of the Benevolence International Foundation behind bars in the United States based on the evidence that we found there, not just information that we scooped up and used as intelligence. You have to have a different mindset. By and large, in subsequent years, we have embraced that concept: when we have detained extremists overseas, we have tried to put them into our courts rather than a situation like Guantanamo, which has been so frustrating.

    Q213       Chair: Thank you, General. Just looking ahead, what next for Afghanistan itself? The Taliban spokesman was on the BBC today, saying that this winter—as you touched on yourself—is going to be harsh on the entire country, the 30 million people who are left behind, and blaming UN agencies if there is any form of famine, starvation or humanitarian crisis, rather than themselves taking responsibility for that. How do you see us firstly getting through this winter?

    General Petraeus: It is going to be brutal. Again, the economy has collapsed. The banking system is near collapse; it is certainly not functioning normally, and the drought this past year—the worst drought in 35 years, except they come more frequently now—means that the local sources of food are considerably reduced from normal. Again, this is a country that used to be able to feed itself. It cannot any longer, but it can do much better than it has done this year because of that drought.

    You are also going to have enormous refugee outflows, and I fear that Pakistan will be the recipient of most of this and the brunt of most of this. It is a fragile country to begin with; it is going to experience enormous difficulties, so there is going to be widespread starvation. The lights could go out: again, most of the electricity in the country either comes from the central Asian states by high‑tension wire lines or is generated through refined products sent in by Iran. Are they going to continue to send that if the bills are not paid? Who is going to pay the bills of all the government servants, the security forces and all the rest of that? Again, I think the projection is exceedingly dire.

    Q214       Chair: Finally, turning to terrorism itself, we went into Afghanistan to defeat an insurgency. We have handed it back to an insurgency; we have left space for terrorism to advance once again. Are you concerned that ISIS-K is going to be able to recruit and to advance its training capabilities and, indeed, its threat beyond Afghanistan itself?

    General Petraeus: Yes. By the way, if I could, with respect, we went into Afghanistan to eliminate the sanctuary in which the 9/11 attacks were conducted and the regime that refused to eliminate that sanctuary when we requested that they do that. Since they supported al-Qaeda and allowed them to retain that sanctuary, we had to go in and topple the regime in addition to eliminating that sanctuary. Our most important mission in staying was to ensure that that sanctuary was not re-established, something that al-Qaeda tried to do repeatedly, including during my time as the commander on the ground and later when I was director of the CIA, and it happened subsequently.

    Then, of course, you see the establishment of an Islamic State affiliate—the Islamic State Khorasan group—operating in the Pakistan/Afghanistan region. It has gained in strength, both from the release of its detainees from the Afghan prisons in which they were being held, when the Taliban freed all the prisoners, and now from actually attracting some reinforcements from the ranks of Afghans who want to take on the Taliban. It is a little bit akin to what happened in Syria, where when we did not support the moderate opposition sufficiently in the beginning, the moderate opposition decided, “Well, we will go with whomever has resources and is fighting the murderous Bashar al-Assad,” even if that is an al-Qaeda affiliate or even, for a period of time, the Islamic State there.

    Let’s remember that just a few weeks ago, the Under Secretary of Defence for Policy, the No. 2 policy official in the Department of Defence, stated that the assessment was that there could be an external threat within six to 18 months. That is pretty alarming. So I am concerned about that. We will have to conduct a campaign that is so-called “over the horizon”, which is very challenging.

    Q215       Chair: Okay. Thank you for that, General. Final question: we said we would turn to Eastern Europe. We spoke about NATO feeling bruised from what has happened here, looking to regroup and find a sense of purpose. Perhaps it should return to what it was originally designed to do, which is to act as an effective capability to stand up to Russian intent. Russia and Belarus are agitating in eastern Europe. First, there is Belarus and Poland, then there is Ukraine—surrounding Ukraine with battlegroups. Could you give your reflection on whether you think an invasion of Ukraine is likely and whether the threat against Poland from Belarus has now dissipated, or whether that will also continue?

    General Petraeus: Of course, we should include the Balkan states in that as well—some of course also have a border with Russia.

    I strongly embrace what you said about NATO focusing on that particular threat. Arguably, you could say that Vladimir Putin is the greatest gift to NATO since the end of the cold war. It has given NATO a very substantial reason to live. Especially if you are in eastern Europe, this is a very real concern and a very real threat.

    The challenge for us is how to respond in a way that is firm but not needlessly provocative. In this case, US policymakers, together with NATO leaders and leaders of individual countries, have actually done quite a good job in directly warning their Russian counterparts not to take certain actions, warning of the kind of dire consequences, and imposing additional sanctions in a variety of different ways already, including the ones that were just put on entities connected with the Nord Stream 2 pipeline by the US. That is the way you go about this. That is what we need to do.

    And, of course, we need to do it with special attention—candidly—to France, given that you have the additional element of the AUKUS agreement. However desirable or admirable in certain strategic respects for the Indo-Pacific, it very seriously bruised the relationship between the US and its longest standing ally. I don’t want to remind you of the fact that had it not been for the French fleet defeating the British fleet off of—

    Q216       Chair: Okay—that takes us into a whole other area.

    I mentioned that Ukraine is now surrounded by Russian troops. We know Ukraine is not a full member of NATO. Us demanding that Russia pulls back clearly falls on deaf ears. Should we be doing more to bolster support for Ukraine at this moment?

    General Petraeus: That is what is under active consideration in Washington right now and I do think that certain of the measures that are being considered would be advisable. I am very hesitant in this case to offer specifics about that, but certainly they include the prospects of additional advisers and assistants, and perhaps moving the shoulder-launched anti-tank guided missiles that we ultimately provided to Ukraine to a position closer to the eastern front. Those are not offensive weapons systems; you are not going to run to Russia with that anti-tank guided missile on your shoulder. Those kinds of actions—again, the big idea here is to be very firm but not needlessly provocative. We should not give Vladimir Putin any excuse to take action that we do not want to see.

    Again, it is about what additional sanctions could be in the offing but maybe not actually implemented right now. I know for a fact that that kind of discussion is going on as we speak, not just here in Washington, but between Washington and London and Brussels and a variety of other capitals in Europe.

    Chair: General, we have a quick final question from Richard Drax.

    Q217       Richard Drax: Forgive me, General, but that is the second time that you have used the expression “needlessly provocative”. How much more provocative does Russia have to be before we actually do something?

    General Petraeus: Well, I think we have done something; we have done a lot of things. Again, some of those were obviously responses to the seizure of Crimea and the Donbass, and their continued provision. We have done lots of things over the years. I would contend that we were not as firm as we might have been earlier on, and one can argue that the red line not being a red line in some other instances perhaps gave Vladimir Putin a sense that we would not respond to the initial actions that he took.

    Again, you should never provoke someone; that is my point here. We just have to be conscious of the potential of provoking a bully or giving him a reason to do something. We have to think that through. I do think that should be part of the overarching big idea for guiding this.

    Q218       Richard Drax: How many tanks, men, guns and artillery need to be on the border before we are needlessly provoked?

    General Petraeus: Well, you are the politician; I am the implementer. Why don’t you answer that question for me?

    Richard Drax: I am asking for your military perspective, sir. You are the expert, not me.

    General Petraeus: Okay. We have done a great deal to shore up the Ukrainian defence forces. We have provided a lot of materiel, funding, training, equipment, observers—you name it. By the way, I have been to the Donbass—I do not know if you have. I have been to the front lines in recent years. It is like going into world war one except that it has drones and optics—otherwise, it is trench warfare. We have given an enormous amount of assistance; the question is how much in addition and what should be the character and capability and all the rest of it. I think that is the bigger question.

    Q219       Chair: That is the question. There is a serious amount of hardware now sitting on the border with Ukraine. As a senior military leader yourself, you have to ask how much of that hardware is there simply for show. You would need only a third of that if you wanted to make a statement, but if you were intent on doing something, it just seems that, with the scale of what they have there, it is difficult to think that Putin will not take advantage of that in the very near future.

    General Petraeus: Look, again, that is the kind of judgment that, were I still in the intelligence community, I am sure would be demanded of that community and the analysts. There is no certainty in this; you are going to assess. Look, he has an extraordinary capability if he chooses to do this. It gives him enormous options that could be very dangerous to Ukraine and to security there. He obviously does not want Ukraine to succeed, which is really the biggest of his objectives. The worst nightmare for Vladimir Putin would be a successful and vibrant democracy with a market capitalist system that shows what bright looks like, right on the border with Russia, which has had such a moribund economy that, were it not for oil prices being back above $80 a barrel, would be in very dire straits.

    Q220       Chair: Would you agree that Afghanistan might mark the high-tide mark of post-second world war western liberalism?

    General Petraeus: I am not sure that I would link the high watermark of western liberalism with Afghanistan, because there are plenty of other examples—

    Chair: I say that—maybe I should expand on it—simply because we decided to back away. We retreated. We did not have the strategic patience to see it through. Now we are looking at Ukraine, where a democracy is under threat, and the resolve is not there either to step forward and support it. We are effectively giving space to an adversary—an authoritarian regime—to advance its own interests.

    General Petraeus: Again, there are one or two countries inside the EU that have become illiberal democracies, if you will, and we see that elsewhere. The truth, as judged by the annual assessments conducted of the state of democracies around the world, is that democracy has been under pressure for about a decade or more. I would not link that with Afghanistan or even with Ukraine or others. It is not always about what we have done for a country; in many cases, it is what has happened domestically to a country. My own country, I would submit, has experienced some of these kinds of challenges, and I would contend that the same is true in yours.

    Chair: I do not doubt that.

    General Petraeus: The populism that has featured there, here and in other places has gone farther in a number of other countries around the world, and that in aggregate is really what marks in a sense the high-water mark of democracy. My hope is that we are going to reverse that and, to come back to the most significant elements of the geostrategic context, realise that this is a systemic competition between a Chinese system that in 42 years has achieved results economically that were never even imagined before and US democracies, free market systems and so forth that have experienced various challenges in recent decades in particular.

    Chair: We will certainly have to invite you back to explore China—that takes us to a completely different chapter, which I think will certainly dominate. General, on behalf of the Committee, thank you so much indeed for contributing to our inquiry into Afghanistan. You have illustrated, as we have known all along, why it is important that we have this inquiry and understand what happened in the past so that we can learn for the future. Thank you very much indeed for your time, sir.

    General Petraeus: My pleasure. Thank you.

  • Patricia Hewitt – 1998 Speech at the Downing Street Seminar on Profitable Community Banking

    Patricia Hewitt – 1998 Speech at the Downing Street Seminar on Profitable Community Banking

    The speech made by Patricia Hewitt, the then Economic Secretary to the Treasury, at Downing Street, London, on 3 November 1998.

    Introduction

    1. Good morning and welcome to Downing Street.

    2. We invited you here today to explore community development banking, to hear about the US experience, and to consider what we can learn from it. Community banking can offer a win-win solution – it improves services for people in the poorest communities, and can prove profitable for the banks.

    3. How can we ensure people have basic cash access facilities? What is the best way of helping people begin to save and get credit? How can we expand Credit Unions? How do we bring small scale capital into deprived areas? Do we do this through banks? Through credit unions? What about micro-credit organisations? These are some of the many questions I hope we will explore today.

    We are extremely fortunate to have with us:

    Ron Grzywinski of Shorebank;

    Greg Hattem of Bankers Trust;

    Cliff Rosenthal of the National Association of Community Development Credit Unions; and

    Susan Rice, currently with Bank of Scotland, but formerly with NatWest’s US subsidiary, Bancorp.

    4. I want to start by why there is a problem with social exclusion. Then I want to move on to talk about the steps the Government is already taking to tackle social and financial exclusion. I will conclude by looking at how to take the agenda forward.

    General policy considerations

    5. My concern is financial exclusion, which is both a symptom and a cause of social exclusion. Combatting social exclusion is at the very heart of this Government’s agenda.

    6. We have watched the gap between rich and poor in this country widen over the last twenty years.

    7. Most people in Britain have benefited from rising living standards; and this is reflected in the growth and prosperity of the financial services industry.

    8. Of course this is good news, and we will be doing all we can to ensure it continues.

    9. But for the poorest people, concentrated in the most deprived neighbourhoods, it is a different story.

    10. They have not shared in the increased wealth and greater opportunities so many of us enjoy.

    11. And, crucially, they do not – or cannot – access financial services products.

    12. In my own constituency in west Leicester, there are outer city estates with too few jobs and too much crime, where most children leave school without qualifications – and where financial services all too often mean benefit cheques and illegal loan sharks.

    13. It is in the poorest communities that we find the highest concentrations of people without bank accounts, without access to other financial services.

    14. People in these communities can very often by locked into the cash economy, cannot get affordable property or possessions insurance, can only access credit at unbelievably high interest rates, and do not use mainstream savings opportunities. Also, the chances of accessing appropriate finance and support for self-employment or starting their own businesses may be effectively zero.

    15. This Government is not prepared to accept a society where economic opportunity is restricted in this fashion.

    Government response

    16. For many of those living in our most deprived neighbourhoods, the policies of the past bear much of the blame.

    17. But the past is the past. We must now get on and deal with the problems head-on.

    18. We have to bridge the gap between the poorest neighbourhoods and the rest of the country – and this is a priority issue.

    Tackling financial exclusion

    19. The Government cannot overcome problems of social exclusion on its own, and nowhere is this more evident than in the area of financial exclusion.

    20. Our policy is to promote wider access to financial services, where progress has been made, but is in danger of becoming stalled.

    21. We set out overall agenda for deprived neighbourhoods, in the Social Exclusion Unit report, Bring Britain together, which was published in September.

    22. This set out our proposals, to be taken forward by 18 policy action teams, over the next year.

    23. Two of these action teams concern financial services. They are to be run by the Treasury and will report to me by July next year.

    24. One of them will look into prospects for increased access to personal financial services for people living in poor neighbourhoods, especially retail banking, but also credit unions and insurance.

    25. The other will concentrate on encouraging enterprise in deprived neighbourhoods.

    26. This means better access to capital for small firms especially those starting up in poor neighbourhoods; and better access to appropriate advice.

    27. Let me now turn to the main areas of interest to the banking industry.

    Access to bank accounts

    28. First, access to bank accounts, and those who don’t have bank accounts.

    29. Whilst access to banking is the norm, at least for those in regular full-time employment, there is a conspicuous unbanked minority, predominantly poor and not in regular full-time work, for whom life without a bank account is becoming increasingly inconvenient.

    30. We are talking here about somewhere between 2 1/2 and 3 1/2 million people, concentrated in the most deprived neighbourhoods.

    31. We used to think that the main reason people did not have bank accounts was that banks turned them down.

    32. But recent research, sponsored by the British Bankers’ Association, dealing specifically with people without current accounts, reveals a far more complex pattern.

    33. Only a very small number of people had been refused accounts, or did not ask for one because they feared refusal.

    34. Far commoner were people who thought traditional bank facilities were not for them, the so-called self- excluded.

    35. But to depict the main problem as self-exclusion is to avoid the issue, which is how banks can redesign their products, to better suit the circumstances and preferences of those currently without access to them.

    36. I would like to think that such difficulties can be overcome. Some banks are offering new accounts where an on-line debit card replaces the cheque book and access to credit is withheld until the customer and the bank feel comfortable with it.

    37. I know a number of you are already thinking on these lines.

    Contribution of credit unions

    38. Credit Unions too have an important role in tackling financial exclusion. They provide savings facilities, a source of low cost personal credit and financial education and advice.

    39. Our approach to credit unions is to encourage the movement to grow, while retaining and strengthening its traditional focus on the poorer members of society. This will be partly through legislative change, lifting some of the restrictions on Credit Union operations.

    40. We have also been thinking about how the movement should be regulated in future; and the scope for setting up a share protection scheme. Proposals in these areas will be published soon.

    41. But even within the existing legislative framework, we believe there is considerable scope for expansion. We have established a taskforce to explore ways in which banks can work more closely with credit unions to increase their effectiveness, and are studying existing good practice here and in other countries.

    42. I am delighted to see most of its members here today, and we look forward to Cliff Rosenthal’s presentation, later in the morning, on how the banks have helped the credit unions in the United States.

    Small firm finance

    43. Just because a neighbourhood may be poor in its physical and economic standing does not mean that it cannot be rich in people with ideas and initiative to start up and run their own businesses.

    44. But to realise their ambitions for business, these budding entrepreneurs will often need more capital, advice and mentoring than is presently available. Access to capital is a key component of strategies to regenerate poor neighbourhoods and encourage greater self-reliance.

    45. At present there is too often a mismatch between potential enterprise and the support needed to realise it, with the deficit greatest in the poorer areas where it is most needed.

    46. The key to generating sustainable and productive enterprise in deprived neighbourhoods is to create the right incentives for the private sector to work with public agencies. This could help lever in fresh capital where it is needed most. Without access to capital there will be no new enterprises to support.

    47. We need to help pull together the expertise and disciplines which commercial finance and business advice can bring, along with the local understanding of neighbourhoods which local agencies provide.

    48. The work of the Treasury action team involves examining the current roles of large corporations, banks and professional service firms in community regeneration, and how this complements the voluntary sector and community support networks.

    49. The role that innovative community investment projects can play in building and sustaining local economies has already been vividly highlighted in some the world’s poorest regions. The Grameen Bank in Bangladesh, for example, offers Microfinance – savings and loans at a human level, providing first stage finance to enable individuals to make a go of their enterprise. This has proved itself viable.

    50. We will look at the availability of debt and equity finance, and we will see how that capital can be put to best use by making sure enterprises have the right technical advice and mentoring when they need it most.

    51. We will also examine critically the role of the various Government support schemes, such as the loan guarantee scheme, Business Links and Training and Enterprise Councils.

    52. So we – and I hope you – are interested in innovative approaches to small firm finance, to help overcome the disadvantages experienced by those seeking to start up on their own in poor areas.

    Conclusion

    53. Like the Clinton Administration in the US, this Government believes strongly that wider access to financial services – through positive action by the banking community – is vital.

    54. And we also believe that the driving force will be banks searching for new, profitable market opportunities.

    55. This has been the experience in the United States, as our guest speakers today will testify.

    56. In the US, the banks are obliged to report on their provision of credit to all sections of the community; but they are not required to do anything that is inconsistent with sound banking principles.

    57. The result, so we are told, has been a huge injection of finance into low and moderate income neighbourhoods. And US banks have found profitable market opportunities in areas they might otherwise have ignored.

    58. I think there is much to be learned from considering the implications of that message for what we do in this country. I should emphasise that we are not planning to copy the US legislation. But we are interested in increasing the response of UK banks to the opportunities that exist for profitable banking in our poorer communities.

    59. That is the objective of this seminar, which I hope you will find enjoyable and thought-provoking. So it is a pleasure to hand over to Ron Grzywinski, the Chairman and Chief Executive Officer of Shorebank, considered by many to be the pioneers of community banking in the United States.

  • Gordon Brown – 1998 Speech to the CBI Conference

    Gordon Brown – 1998 Speech to the CBI Conference

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, to the CBI Conference in Birmingham on 2 November 1998.

    Introduction

    I am delighted to join you once again here in Birmingham on the first full day of your Conference, grateful for the opportunity to address business leaders, to pay tribute to the contribution you and your companies make to the prosperity of Britain.

    One look at your agenda and the speakers you have invited to address you – last night President Menem of Argentina, today Prime Minister Aznar of Spain, tonight Chancellor Gerhard Schroeder of Germany – I am grateful to have a look in. But the fact that you have speakers from all over the world tells us much about the global economy in which business now operates and the international and European nature of all our interests and concerns.

    And so I am pleased to take this opportunity to talk to you about the forces at work in the global economy, which we must meet and master; to outline with you the steps we are taking at home and through our work in the international and European communities that will help Britain – and your businesses – steer a course of stability in this uncertain world, and discuss with you the reforms in labour markets, capital markets and product markets that we need in Britain and Europe if we are to be equal to any and every challenge this uncertain global economy brings.

    Globalisation

    The global turmoil we are witnessing could not have happened in the same way in the old sheltered economies of the past, with their national barriers and their limited capital markets. The challenges that we have to confront today arise from us being part of a global marketplace – with its ever more rapid waves of innovation and its fast-moving and often destabilising capital markets.

    When the world’s second largest economy, Japan, is likely to contract by 2.5 per cent in one year, when countries hitherto the growth areas of the world economy now face unprecedented declines and when world trade growth falls by two thirds in one year then, it is everyone’s business – not only because we are dependent on each other’s goods and services but also because – as we have seen – a weak financial system in one country can threaten another country’s financial system.

    This afternoon I will make a Statement to the House of Commons detailing a number of reforms which the G7 Ministers and Central Bank Governors have now agreed to strengthen the international financial system.

    Our challenge is to create the best conditions for stability and growth in the world economy. Firstly, by recognising that the balance of risks in the global economy has changed and therefore being vigilant in our monetary policies. Secondly, by avoiding protectionist tendencies when trade imbalances begin to appear. And finally ensuring that our policies for transparency, supervision and financial stability are as sophisticated as the markets they have to deal with. Hence our proposals for a new mechanism for crisis prevention, improvements in global financial regulation and codes of conduct that require all countries to pursue transparent procedures in their monetary, financial and fiscal policies.

    Stability in the domestic economy

    Monetary and fiscal stability is a precondition of economic success. And just as we must work with our international and European partners to create the best conditions for global stability and growth, so we must work together to steer a course of stability for Britain.

    In the 1970s British inflation averaged 12 1/2 per cent, and went as high as 27 per cent. In the 1980s it averaged 7 per cent. And having reached a high of 21 per cent. Even a few years ago in the early 1990s it stood as high as 10 per cent, revealing a still inflation-prone economy not capable of sustaining non-inflationary growth without a resort to boom and bust.

    That is why on coming to government we took immediate action to set in place a credible and long term monetary policy framework, making the Bank of England independent. By tackling inflation head on, inflation is now at our target of 2.5 per cent and expected to stay close to there for the period to come. And as a result long term interest rates have fallen from over 7 to 5 per cent, the differential with Germany narrowed by almost 1 per cent, the lowest long term rates in Britain for 35 years, the lowest since the boom-bust cycle in Britain became entrenched.

    It is also because alongside our monetary framework we have created a new framework for fiscal stability – with similar rules, similar disciplines and a similar transparency – that we are eliminating the current structural deficit while maintaining our commitments to health, education and infrastructure investment.

    Having kept within rigorous spending ceilings in our first two years, we reduced the deficit by 20 billion pounds, tightening fiscal policy by 3 per cent.

    We have consistently taken a prudent and cautious approach to managing the public finances and we will continue to do so. Our projections have been based on cautious assumptions which have been audited by the independent national audit office and our plans have built in margins to cover uncertainties, including the risk of slower growth.

    And it is because Britain now has an explicitly long term fiscal as well as monetary framework and policy from which we will not be diverted that, as world growth has weakened, monetary and fiscal policy can now work together. Let us not forget that in the last downturn the inflationary problems of our economy were such that even after the economy turned downward interest rates remained at 15 per cent for a whole year and in double figures for 4 years. In contrast, the Bank of England has now been able to reduce interest rates, to respond to a changed international environment – able to respond more quickly and in a more forward looking way than in past British economic cycles.

    I know your concerns about the pound and I have heard them.

    Set against the deutschmark the pound is now 10 per cent lower than at its peak, lower than May 1997, and I think everyone here would agree that the greater danger for our economy would have come if we had taken the wrong action and returned to the double-digit interest rates of the past.

    We are conscious, of course, that there is a balance of risks: the risk on the one hand of a sharper slowdown in the world economy, the risk on the other that inflationary pressures might persist.

    But because we have a long-term framework within which we are eliminating the current structural deficit and because we will continue to meet our inflation target Britain is now better placed to steer a path of stability in these troubled times for the global economy.

    If the country’s wage responsibility matches the Government’s inflation resolve – and this is as relevant to the public sector as to the private sector – then Britain can have a low inflation environment for many years to come that will end the violence of stop-go economics in our country.

    It is my objective to start a virtuous circle of low inflation, low long term interest rates and rising long term investment that will become the platform for driving our economy forward. And that in the face of the current international difficulties is a prize for Britain, one that has eluded us for too long. Higher productivity

    But in the global economy every country has to face ever intensified competition. For all the changes that brought liberalisation and flexibility in the 1980s, no one can doubt that Britain in the 1990s had two great economic challenges to resolve – the stop-go instability I have referred to, and a productivity gap with our competitors, which we must bridge if we are to rise to the challenge of more intensified competition in the global economy.

    So as you know over the past six months the Secretary of State for Trade and Industry and I have been holding a series of seminars with many of you, examining together some of the barriers to high productivity in our country.

    Because we believe it is businesses and companies not governments that create prosperity and jobs, we have already cut the main rate of corporation tax to its lowest level ever, first to 31p and from April to 30p. And we have cut the rate to 21p and from April to 20p for small businesses. This is the lowest of any major industrialised. And to encourage long term investment, we have also cut the long term rate of capital gains tax from 40 pence to 10 pence.

    But we can do more. Tomorrow I will present to Parliament our Pre-Budget Report. It will set out for the coming year the next steps that we must take to increase competition, cut red tape, increase investment and to equip the British economy for all the challenges ahead. And this will inform the Competitiveness White Paper Peter Mandelson is preparing.

    The Pre Budget Report on raising productivity will be the start of a process of discussion and debate leading up to the Budget in which I hope every part of the business community will be involved.

    This is not a theoretical exercise it is entirely practical because as I will say tomorrow, in preparing this Budget and the next the Government is ready to consider all tax, spending and regulatory changes that will help us bridge the productivity gap with our competitors and equip us to succeed in the future.

    Part of the solution to bridging the productivity gap is through a modern employment policy. And I want to say how grateful I am to hundreds of you for joining more than 29,000 employers in supporting our Welfare to Work Programme.

    Europe

    But there is a further area in which Government and business must work together to equip ourselves for the future – that is in moving forward our relationship with Europe, where we do half our trade, and being ready for the euro in little more than eight weeks time.

    My view of Europe is of a continent that has to accelerate change and modernise through pushing ahead with reforms in labour markets, capital markets and product markets for more competition, more flexibility, more investment and more employment.

    So we need a pro-business, pro-opportunity Europe that must not turn its back on necessary reform.

    The Single Market must not remain just an aspiration, in all areas it must become a reality.

    European-wide competition must not just be talked about. Markets must be opened up not least in telecommunications, energy, the utilities and public contracts.

    Budget reform must reduce wasteful expenditure in favour of a rigorous selection of priorities.

    The adaptability and flexibility which modern economies need, free of burdensome regulations, must become a reality across the continent.

    And this does not require the people of Europe to reject the strong desire for social cohesion. For by committing ourselves in this new Europe to maximising opportunity for all, and to getting the best out of people and their potential, Europe can be both enterprising and socially cohesive.

    This Government has decisively and unambiguously put this country on a new road of constructive engagement with Europe.

    Our position on the euro is as we set out last year, that we have committed our country to active preparations that will allow us to make a decision, subject to a Referendum, early in the next Parliament and our strategy is to prepare and then decide.

    When I spoke to you last November, I set out the challenges that economic and monetary union would mean to British businesses. How EMU would lead to fiercer competition for trade and for future investment across Europe and what we in Government would do to help you take advantage of the new opportunities.

    I can now report back to you on the results of our work.

    First, when we found that only 30 per cent of firms thought they needed to prepare for the euro and only 5 per cent had done anything, we decided to tackle this directly under Lord Simon’s leadership – through direct mailing of 1.6 million firms and a series of television adverts.

    Twice as many businesses are now making preparations.

    Second, we have brought together firms, business advisers, trades unions, and Government through 12 new Euro Forums in every region of the country, led by local business people.

    Over 500 personal advisers from business links, Chambers of Commerce and local authorities have been on training courses organised by the Treasury’s Euro Preparations Unit.

    Third, we have put in place arrangements to enable firms to pay taxes, file accounts and issue shares in euros. The tax authorities have issued guidance and the DTI will legislate next year to make redenomination of company shares into euros even easier.

    By the end of this year, over 10,000 of Customs and Excise staff will have been trained to deal with enquiries or deliver services in euros to the business community.

    The next stage is that in January, we will publish an Outline National Changeover Plan which will set out the practical steps which would be needed for the UK to join the euro.

    We will set out the stage-by-stage procedures that will need to be followed, we will spell out the practical implications of changing to the euro and we will give new advice to companies on the way to take forward their preparations.

    Finally, I am conscious that a test that business will apply is whether the public sector is prepared to take a lead in making preparations. And I can tell you today that every Government Department is playing its part, that we are investing in what is necessary to keep preparations on track and that as a further step a cross-party group of Members of Parliament on euro preparations will be set up to discuss euro preparations.

    Conclusion

    My themes therefore: our economy founded on a platform of monetary stability equipped to steer a course of stability in an uncertain and unstable world. Sound finances through prudence and investment in reform. A national drive for higher productivity through economic reform, and a new purpose in Europe. The great British qualities – our commitment to the virtues of enterprise, creativity, of hard work, fair play and being open and outward looking – put to work for a new era of global competition.

    A modern Britain, founded on lasting British values, the values of the British people.

    An economy that, because our commitment to opportunity for all means getting the best out of people and their potential, is both enterprising and fair.

    And a Britain where there is a mature patriotism that is outward looking and internationalist – giving us a renewed sense of national purpose and a long term direction as a country.

    A Britain ready to fulfil its role in the new world, and to realise the potential of all its people.

  • Gordon Brown – 1998 Speech at the Kennedy School, Harvard University

    Gordon Brown – 1998 Speech at the Kennedy School, Harvard University

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, at Harvard University, the United States, on 15 December 1998.

    Introduction

    There can be no more appropriate country to discuss the challenges facing the new global economy than the United States of America: the pre-eminent architect of the post-war global system.

    There can be no forum more appropriate than the Kennedy School, named after the President, who on July 4th more than a third of a century ago, matched the Declaration of Independence of 1776 with a new declaration of economic interdependence for our time.

    And there can be no more appropriate institution than Harvard where 50 years ago, the Marshall plan, the most ambitious multi-national effort for economic reconstruction the world has seen, was first launched.

    More than half a century ago, leaders who were still engaged in war took the time to prepare for peace. In a breathtaking leap into a new era, the world created not just new international institutions – the IMF, the World Bank, the GATT as well as the UN- and a whole set of new rules for a new international economy, but gave expression to a new public purpose based on high ideals.

    A generation of leaders who had known the greatest of depressions and the greatest of wars knew also that just as peace could not be preserved in isolation, prosperity could not be maximized in isolation.

    What they did for their day and generation was so dramatic that Dean Acheson spoke of that period as akin to being present at the creation.

    One of the signal events was the Bretton Woods conference – and I ask myself why it was held not in Washington, or New York, or Boston, but in the white mountains of New Hampshire. In fact the location was the price the Roosevelt administration had to pay to persuade a New Hampshire senator to abandon isolationism. As Tip O’neill used to say, “all politics is local” … Even global politics. If Massachusetts and not New Hampshire had threatened to be isolationist we might be talking today of the Cambridge Agreement. Nothing could more vividly show the practical nature of the visionaries who created the new world than their choice of Bretton Woods.

    But as practical as it was, Bretton Woods also defined a new public purpose characterised by high ideals. The conference was about more than exchange rates, the mechanics of financial arrangements or even new institutions. As the American secretary of the treasury said at the very start of the opening session:

    “prosperity has no fixed limits it is not a finite substance to be diminished by division. On the contrary the more of it that other nations enjoy the more each nation will have for itself.

    “prosperity like peace is indivisible. We cannot afford to have it scattered here or there amongst the fortunate or enjoy it at the expense of others…..”

    in short, prosperity to be sustained had to be shared. Practicality and morality went hand in hand.

    George Marshall reaffirmed this in his own historic speech here at Harvard. We must fight against “hunger, poverty, desperation and chaos”, he insisted, to secure “the revival of a working economy in the world [that would] permit the emergence of political and social conditions in which free institutions can exist”.

    So the post-war arrangements were founded on the belief that public action on a new and wider stage could advance a new and worldwide public purpose of high ideals rooted in social justice:

    • to achieve prosperity for all by each co-operating with every other:
    • new international rules of the game that involved a commitment to high levels of growth and employment.

    In short, the job of every economy was to create jobs for all.

    The founders of Bretton Woods resolved that the failed policies of laissez-faire which resulted in vast inequities and recurring depression from the 1870s to the 1930s would not be repeated. Untrammelled, unregulated market forces had brought great instability and even greater injustice. In the post-war era governments had to work collectively if they were to achieve either justice or stability.

    The initiatives and institutions of that era were shaped to the conditions of the time – a world economy of protected national markets, limited capital flows, and fixed exchange rates. And for nearly thirty years the system worked, for hundreds of millions who enjoyed unparalleled prosperity Bretton Woods took us a long way. Yet even in the 70s with hundreds of millions still in poverty we had still a long way to go.

    In the first historic phase of international economic management, nation states spoke unto nation states, with an unprecedented degree of co-operation between separated and still largely insulated economies. The international rules of the game then largely consisted of open current accounts, fixed exchange rates and closed capital accounts and of collective support when countries ran into balance of payments problems.

    But over the next generation, that new world, too, became old, as the existing order of nation states and collective international action was increasingly bypassed by the growth and eventually the sheer force of international financial flows, successively ending dollar convertibility into gold, the fixed exchange rate system, and post-war keynesian certainties, bringing in its wake an outbreak of inflation and then stagflation that spread across the western world.

    The 1980s saw a new consensus emerge, essentially an attempt to return to laissez-faire. It focussed not on what governments should do, but on what governments should not do, emphasising private pursuits almost to the exclusion of public purpose. Enlightened self-interest gave way to sheer self-interest. Instead of rising to the challenge of applying the high ideals of the post war world to a new world, instead of aiming for high levels of employment and prosperity for all, sights were lowered, the vision was narrowed. The new right consensus focussed almost entirely on inflation and minimal government.

    Of course it was and is right to say that inflation is costly, and once out of control, it is even more costly to reverse. Macroeconomic stability, based on low inflation and sound public finances, is an absolute precondition of economic success. Indeed there is a new premium on economic stability in the global economy. A nation state relying on investment flows from round the world – and also vulnerable to them – now knows that retribution for getting things wrong is swift and terrible.

    The 1980s consensus did understand the importance of liberalizing economies from excessive regulation and bad government. But they confused means with ends and said in effect that inflation alone, not jobs and growth also, were exclusive concerns. And they said that all government was bad: that government can’t make a difference, at least a positive one, in jobs and growth, and that global markets have to be left entirely to market dogmas, which have no place for the public pursuit of high ideals. But this 1980s consensus failed even in its own stated purpose – bringing the largest fiscal deficit in American history and reducing britain to inflationary boom-and-bust.

    And by 1997, an increasingly turbulent and inadequately supervised international financial system threatened to create boom and bust on a global scale. Now both of the Bretton Woods objectives – not only prosperity for all but stability for all – were at risk. The post-war hope for an indivisible prosperity was replaced by the sudden fear of indivisible instability. The 1980s consensus could not endure.

    As the downturn in Asia reverberated around the globe, President Clinton said that ‘the world faces perhaps its most serious crisis in half a century’.

    In recent months as interest rates have come down, and the G7 group of leading industrialised nations have set a timetable for reform, financial markets have become less unstable.

    But this is no time for complacency. We must recognise how far we have come – in purpose as well as time – from 1945 and how, without public purpose in this new global economy, one set of events in one continent could inflict so much damage on so many people.

    This year we have experienced events that were unthinkable just two or three years ago:

    • free enterprise Hong Kong taking publicly owned stakes in all its private companies;
    • japan nationalising its banks;
    • russia going into default;
    • in America the mounting of one of the biggest ever emergency refinancings not for a bank, but for a hedge fund;
    • most damaging of all, the biggest growth economies of the last decade in east asia suffering larger contractions in output even than experienced in the great depression of the 1930s.

    The political dimension as George Marshall foresaw, is equally far-reaching: in only one year, revolution in Indonesia; civil strife in Malaysia; the loss of authority in Russia; and as unemployment rises, unrest in South America, typified by the outcome of last week’s Venezuelan election. It is a sign of the times that only one of the Asian finance ministers I met with in Bangkok last September is still in office today.

    The ultimate price of all this is profound human suffering. In Korea unemployment has trebled in one year. In Indonesia ten years of growth have been wiped out; and in the Asian crisis countries as a whole the number of people in poverty is set to double by 2000. We can’t simply declare whenever the stock market bounces back that the crisis is over and we can return to the status quo. We must act – both because it is in our self-interest – to safeguard our own prospects and prosperity – and because it is right.

    So now the responsibility falls on this generation to be present at a new creation – of new rules that break with the past and both effectively and fairly meet the demands of the new global economy. We must reject the false choice between clinging to laissez faire and retreating to 1930s protectionism or the tightly-controlled, restricted capital markets of the 1940s. We must meet the new challenge but we must remember that while times and circumstances change, ideals endure.

    Our aim must be an international financial system for the twenty first century that recognises the new realities – open not sheltered economies, international not national capital markets, global not local competition. It must be one that captures the full benefits of global markets and capital flows, minimises the risk of disruption, maximises opportunity for all and lifts up the most vulnerable, in short, the restoration in the international economy of public purpose and high ideals.

    Our predecessors did this for the post-war world of distinct national economies drawing closer together. Now we must do it for the post-national economy – where economically no nation is an island.

    The consensus of the 1980s with its narrow focus on inflation, privatisation and deregulation must evolve into a new 1990s consensus with a new and broader emphasis on competition, supervision and the right conditions for growth and employment.

    Before I describe the specific reforms we need, let me be clear that this new public purpose will require public endeavour.

    In the international economy the era of absentee government is over.

    We need that middle way between government doing everything and government doing nothing.

    It was here in your country that Franklin Roosevelt in the 30s found a third way for a national economy – securing the benefits of the market while taming its excesses.

    And I believe that the third way initiated and developed by Tony Blair has profound relevance for the challenge we now confront on the global stage. The issue is not one of either markets or government, but how markets and government can best work together. And the way forward for the new global economy is not to retreat from globalisation – into either protectionism or old national controls – or to retreat into a failed laissez faire. It is to ensure global markets can work in the public interest. And transparency in policy-making is one way to develop the informed and educated markets we need.

    In a world where the new frontier is no frontiers, we must rediscover the public purpose and high ideals of 1945 with four major reforms that add up to a transformation of the international financial system – a new economic constitution for the new global economy.

    New rules of the game for the global economy

    First, internationally agreed codes of conduct for transparency and proper procedures that ensure educated markets. These would cover monetary, financial and fiscal policy and corporate governance and would be applied by all countries, rich and poor, as a condition for participation in the international financial system.

    Recall that the first constitutional settlement of the world economy in 1945 was not simply about institutions but about rules of the game. And we must now return the international financial system to this idea of rules of the game. While the founders of Bretton Woods devised rules for a world of limited capital flows, we must devise new rules for a world of global capital flows. But our guiding principle remains the same – the promotion of global economic stability and international cooperation to promote growth and employment.

    The codes will require accurate reporting to the international community, by each national economy, of all relevant information – for example the size of a budget deficit, the state of bank reserves and the level of currency liabilities.

    And the codes will require not only this flow of information but the adherence to specific timetables and proper standards for transparency and disclosure.

    The new disciplines involve both the private and the public sector. We need new standards of corporate governance – including an international standard of best practice for financial institutions and their regulators.

    We used to think that all that industrialising countries required was raw materials, good communications, a supply of labour and the funds and ability to tap commercial inventions. But we now know that all nations also require a sound robust financial system: no nation can afford – and the international community cannot condone – national financial systems that are reckless, disordered and dishonest. Lack of transparency anywhere can create lack of credibility everywhere.

    By requiring exposure of deteriorating conditions, the codes would prevent the temptation for countries to deliberately mask problems, which is what happened in Thailand and Korea with consequences felt across Asia and then the world.

    And we should not be so complacent as to assume that codes of conduct are needed only in other countries and not our own. Given that the most recent threat to global stability came from lack of transparency in hedge funds in both the United States and Britain, we need tougher standards and requirements for disclosure all round.

    The codes I propose will mean radical changes in the way governments and financial markets operate.

    These new rules of the game are not incidental to the financial architecture for the new global economy: they are the financial architecture for the new global economy. They require countries to pursue self discipline with the prospect, if they do not, of imposed discipline. So the right to participate fully in the system should thus be conditional on meeting explicit responsibilities. In this way the codes will reduce the risk of future failures. And if failures do occur, a stronger financial system will be better able to deal with them.

    The codes are as relevant for underdeveloped Africa as they are for industrialising Asia and Latin America and industrialised America and Europe. They help us to lay down a route map for sequencing capital account liberalisation. By making sure that economic facts can’t be manipulated and underlying problems can’t be hidden, citizens will know their country’s real problems and prospects, the codes will deter corruption, restore public confidence and build public support for the sometimes painful reforms that are essential to long-term economic growth and prosperity. And this is critical for investor confidence in the wake of the Asian crisis. Without transparency and the proper procedures that the codes of conduct will require, investors may not reinvest on the long term scale that is necessary for jobs, growth and social progress.

    National governments should not pick and mix which standards they choose to meet and which standards they choose to ignore. So proper implementation of the codes should be a condition of any IMF and World Bank support. In the global economy national governments have rights but they also have responsibilities they must meet.

    Global financial regulation

    And because today’s financial markets are global, we need not only proper national supervision but also a second fundamental reform – global financial regulation. That is why Britain has proposed bringing together the IMF, the World Bank and key regulatory authorities: a new permanent standing committee for global financial regulation charged with delivering the global objective of a stable financial system.

    The G7 have now agreed on the urgent need for this kind of coordination, and we are grateful to the president of the Bundesbank, Hans Tietmeyer, who has undertaken the critical task of preparing detailed recommendations.

    I see the standing committee not as an additional institution but as process of monitoring developments in global finance, ensuring that necessary worldwide standards are put in place, and providing timely surveillance of financial conditions and international capital flows.

    The standing committee’s work would make co-operation between international institutions and national regulators a fact of international economic life. In short, the standing committee would be the world’s early warning system for regional and global economic risk.

    Global crisis prevention and resolution

    Our aim must be crisis prevention where possible crisis resolution where necessary.

    So in place of the old approach whereby crisis-triggered intervention, we need, thirdly, a modern mechanism, rooted in transparency and reliable surveillance, and built on public and private sectors both accepting their responsibilities, which can identify potential problems at a stage where preventative action can be effective.

    The mechanism they agreed in 1945 for crisis prevention dealt with imbalances in current account flows in a world of restricted capital flows and fixed exchange rates: to tackle public sector deficits and balance of payments crises, it offered temporary financial support or permanent exchange rate adjustment.

    The new mechanism for crisis prevention must deal with imbalances as a result of global capital flows.

    We need a process of active and transparent surveillance that is a matter of course for all countries, operating in normal times, all the time: not one triggered only by the warning signs or onset of crisis in a particular region or country.

    And all main participants, public and private, must accept their responsibilities.

    So emerging market economies in particular must not only be transparent in their activities: they must now also forge regular contacts and lasting relationships with their private investors. An open and honest dialogue, in which investors can ask hard questions and then advise, will make it more difficult to cover up bad news, and make it easier to assess what policies will increase or reduce market confidence, thus making it more likely that we can prevent today’s problems from deepening into tomorrow’s crisis.

    The short-hand phrase for these creditor-to-country arrangements is country clubs, but these are not exclusive clubs, old boy networks, an informal means of defending privilege. These are modern investor networks that can bring real benefits in return for real responsibilities: networks that every country should form and every creditor should join.

    To make these work there should, be a new presumption across the board, in favour of the release of information wherever possible.

    The G7 have proposed greater openness from the World Bank, the IMF and other international financial institutions. Their monitoring tells them much of what is happening in every national economy. Clearly in exceptional cases some policy discussions will have to be kept confidential but I strongly support the publication of the IMF’s country surveillance reports under Article IV. The case for an exception must be made and justified, while openness should be the norm.

    Put simply we should establish an international right to know that is not occasional or voluntary but ongoing and mandatory.

    This will work best if the IMFand other international institutions are more open about themselves. They should do more to explain their practices and procedures to the public. And they too should join in a new partnership with the private sector – ongoing discussions about broader and more systemic issues facing the world economy.

    With a right to a greater flow of information comes greater private sector responsibility. We need a system of debtor-creditor agreements – crisis resolution procedures signed up to in normal times with private sector responsibility clauses, such as agreement on collective representation and majority voting when creditor decisions are being made. When trouble hits an economy, the private sector must be prepared to do more than simply pull money out and accelerate the panic. On an ad-hoc basis investors did the opposite in Korea and Brazil and their decisions were essential in halting the flight of capital.

    With these three changes – transparency, enhanced surveillance and investor networks we can establish a markedly lower threshold for effective response than the old ad-hoc crisis-triggered system.

    Detailed discussion should now take place on the right mechanisms for private sector involvement in crisis resolution. Of course more information and more participation must not become a licence for reckless investment or insider dealing instead, by universalising reliable information and creating orderly consultation procedures open to all, we can minimise the risks arising from insider information on the one hand and moral hazard on the other.

    In the new framework it should be the duty of the public sector to inform, the duty of the international financial institutions to monitor and the duty of the private sector to engage.

    And because of the new disciplines we propose the public sector can now justify a system of mutual financial support, assistance to countries pursuing sound policies and to contain the spread of financial contagion.

    In the last few weeks the international community has proposed a temporary preventative facility, with short-term lines of credit for sound economies that are the victims of contagion. Once transparency, surveillance and agreed private sector responsibility clauses are embedded in the new system of crisis prevention, this facility should be made permanent, and be properly funded.

    Of course countries that do not follow these procedures or act on advice cannot expect that they and their private sectors will secure crisis support, the moral hazard would be to guarantee such support independent of whether they do the right things.

    With the reforms we propose, we have a real opportunity to move the emphasis of international financial governance from one of crisis resolution to one of crisis prevention and crisis containment.

    A global social code

    There is a fourth reform: we propose a code of global best practice in social policy which will apply for every country, will set minimum standards and will ensure that when the IMF and World Bank help a country in trouble the agreed programme of reform will preserve investment in the social, education and employment programmes which are essential for growth. This should be an indispensable goal for government in the new global economy: not guaranteeing that nothing will change, but equipping people to turn change into new opportunity.

    International economics is not just about numbers in a ledger, but about the lives of people. For too long it has been assumed that the cost of crises will inevitably be paid by putting more burdens on the poor – by cutting health, education and basic social services.

    This is wrong in the short term and it will not work in the long term because it erodes both the economic and the political foundations of a society. For reasons of self-interest as well as conscience, we cannot accept a worldwide regime of the well-off in the castle, and the vast majority at the gate. Creating national support for needed reform depends on sharing gains, and helping those who are hurt by economic crises. As Jim Wolfensohn, President of the World Bank, has so vividly put it “social and economic issues are inseparable, they are like breathing in and out”.

    In their October statement the G7 recognised the urgent need for a code for good social practice and asked the World Bank to work countries and with the United Nations and others to develop the principles and provisions of such a code.

    This is an historic opportunity to realise the enduring public purpose, the high ideals of 1945. And we should not see this code in narrow terms as merely creating social safety nets. We should see it as creating opportunities for all by investing more not less in education, employment and vital public services.

    The way forward is not leaving people defenceless – and tolerating a culture of poverty; not repeating past mistakes which have created a culture of dependency; it is equipping people to cope with change, through a new culture of opportunity.

    The first building block is, of course, minimum social provision such as safe water supplies; universally available vaccinations and basic health care; and in every society- universal access to schooling for girls as well as boys.

    The second building block is the chance to work and the assurance that work will pay, a commitment that we must, stage by stage, year by year, fulfill in developing countries as well as developed ones. The code would set out best practice that can help people find and remain in paid employment: programmes to move them from poverty or welfare to work; life-time learning so that people can move themselves up a ladder of opportunity; and pension systems that mean a lifetime of work will be followed by a decent retirement.

    We should forge new partnerships between the public and private sectors – and the ngos. But of course the existence of a programme today should never be the excuse for its perpetuation tomorrow. And the reforms the IMFand other international authorities require must be consistent with the social principles and make a virtue of preserving necessary social investment.

    For the poorest highly indebted countries of the world we must create a virtuous circle of debt relief, poverty reduction and economic development. We should never leave countries with an impossible choice between paying or defaulting on unsustainable levels of debt. Immovable mountains of debt run up in the 1980s have become impassable barriers to progress for poor countries in the 1990s. It should now be our ambition that every highly indebted poor country will be in the process of debt relief by the millennium.

    And for countries like hurricane-hit Nicaragua and Honduras, weighed down by the burden of debt and devastation, it is right to create a new World Bank trust fund – now with over 130 million dollars pledged – to alleviate their debt payments. It is also right to devise the new post-disaster facility that will give faster relief from debt, to all countries in this position. I believe 1999 must bring a new urgency to relieving third world debt.

    Conclusion

    So what we must together create is a new economic constitution for a global economy, born out of new realities, grounded in new rights and responsibilities, enshrined in codes of conduct that are agreed nationally and applied internationally, rediscovering public purpose in the international economy and bringing to life again the high ideals of 1945.

    We need to build quickly, not debate indefinitely.

    Agreement on the codes of conduct should be reached at the IMF meetings in April.

    A new system of global financial regulation should be in place by the summer.

    The new mechanism for crisis prevention and crisis resolution should be agreed in principle this summer and the detail should be the subject of intensive discussions between the private sector and national and international institutions to reach agreement by the end of 1999.

    • and the code for best practice in social policy social code should be agreed at the next world bank meetings in the spring.

    This is a programme of reform for our generation. It is more than simply a collection of proposals. It rests on a modern vision of government, doing the right thing, but not everything; of markets working, but not always perfectly; of principles of economic and social justice that reflect our best values and ultimately determine world stability and growth.

    This project is indivisible; each element is essential to the success of the whole. And all of it is built on the understanding that increasingly we are part of both one global economy and one moral universe. Now more than ever, in the phrase of the Scottish author, William Mcilvanney, we must understand that ”the economy should be there to serve the people, not the people to serve the economy.”

    Ours is an age of great challenges but also great possibilities. What Franklin Roosevelt said to the citizens of his nation in 1933 is now powerfully relevant to the citizens and governments of all nations.

    If I read the temper of our people correctly we now realise – as we have never realised before – our interdependence on each other, that we must be willing to sacrifice for the good of a common discipline – because without such discipline no progress is made.

    Today I believe that we in our generation have the vision, the values and the will – as the generation which preceded us – to make the world economy anew; the public purpose and high ideals to make a better world economy in every sense of that word.

  • Helen Liddell – 1998 Speech to the Life Insurance Association Conference

    Helen Liddell – 1998 Speech to the Life Insurance Association Conference

    The speech made by Helen Liddell, the then Economic Secretary to the Treasury, on 21 January 1998.

    Thank you for inviting me to your conference.  I know that this audience represents a wide range of insurance industry interests and I welcome this chance to get together again.

    I should like to speak this morning about the Government’s plans for  reform of financial services regulation.

    The speed with which the new Government announced our reforms in May reflected the importance we attach to the industry.  An efficient and clean financial sector is of benefit to the whole UK economy.  Effective regulation is central to attaining our wider economic aim of a stable, low inflation economy with sustainable growth and high employment.  An economy with a world-leading financial services industry, of which your own sector is a most important and valuable part.

    Single regulator

    The key element of our reforms is the creation of a single, statutory regulator.

    A single regulator will be better placed to provide effective and consistent regulation across the traditional financial sectors of banking, investment services and insurance.  This is the logical way to go as traditional business boundaries continue to get more blurred.

    The single regulator will be more effective because there will be no duplication of effort, no doubt about which body is responsible.  Firms will benefit because they will no longer be supervised by several bodies with overlapping regulatory demands.

    Many firms are currently subject to a range of statutory regimes, for insurance, investments and deposit taking.  In many cases equivalent provisions relating to different kinds of business are subtly different – in some cases radically so.  It is not in anyone’s interests for firms to have to consider in each case which regime they are operating under.  Neither theirs nor their customers.

    Stages of reform

    Our reforms are already taking shape.  Last October we launched the new regulatory body, the Financial Services Authority, under the excellent chairmanship of Howard Davies.

    The transfer of banking supervision from the Bank of England to the FSA will be effected by a Bill currently before Parliament.  At the same time, we are drafting a second bill which will complete the task of dismantling the old, fragmentary arrangements based on self-regulation and putting in place a new, fully statutory system.  We intend to publish a draft of the bill for consultation in the Summer.  As a result of the two bills, the FSA will replace nine existing regulators.  The FSA’s role will also include the authorisation of those members of the professions who carry on investment business.

    The FSA will be a unique one-stop service for financial regulation.  There will be a single supervisor for all financial services providers.  Wholesale and retail; from the smallest  independent financial advisers to the biggest City firms.  What it will not be is a one size fits all bureaucratic monolith.

    Statutory objectives

    When the Chancellor launched the FSA he announced that it would have a set of statutory objectives written into the second bill.  The objectives will set down the responsibilities of the FSA, who will be required to comment annually on performance against them in their annual report to the Treasury.

    The FSA will have a responsibility to sustain confidence in the UK financial system and markets.  The FSA’s role as a prudential supervisor of financial institutions and its oversight of markets are both essential to the maintenance of confidence in the UK financial system.

    The FSA must also protect consumers by ensuring that firms are competent and financially sound and give their customers confidence in their integrity, while recognising customers’ own responsibility for their decisions.  This will set down in law the need to protect consumers.

    I am sure I do not need to tell you how much importance I attach to this objective in the life insurance industry.

    It is essential also that the FSA should promote the improvement of public understanding of the benefits and risks associated with financial products.  I believe that the FSA has a key role in helping to educate customers, to enable them to discharge their own responsibility to themselves to make sensible choices.

    The FSA must also monitor, detect and prevent financial crime.

    In delivering these objectives, the FSA has an obligation to facilitate innovation in financial services and to take account of the international nature of financial services business.

    The FSA will also have to be efficient and economic and to ensure that costs and restrictions on firms are proportionate to the benefits of regulation.

    Cost-effective regulation

    I know that this last point will be of particular importance to you, who will be responsible for meeting part of the FSA’s costs.  I can assure that, as with all aspects of the objectives, we regard it as more than an aspiration.

    Cost effectiveness goes hand in hand with effective consumer protection.  The costs of regulation are met by firms.  This means they are passed on to consumers in the form of higher charges or lower returns.

    We will be taking specific steps in the Bill to achieve cost effective regulation.  Not only must the FSA use its resources effectively, it will need to show the industry and the public that it is doing so.   So it will be required to publish its proposed budget for consultation at the same time it publishes its proposals for fees.

    Also, where the FSA introduces a new rule or change to an existing one, it will have to consult the public and practitioners by publishing the proposals.  These proposals will include estimates of the costs and benefits, and other options.  This requirement goes well beyond the  requirement in the current legislation for the SROs to take account of the costs of compliance.

    Complaints

    Now let me touch briefly on two further areas I know are of  interest to those here today –  the issues of consumer complaints and compensation.  These are fundamental to our plans to provide an effective level of protection for consumers.

    We intend to establish a system of complaints handling arrangements which will ensure that consumers receive help when they need it in a manner that is simple and easily accessible.

    At present the Insurance Ombudsman Bureau and the Personal Insurance Arbitration Service are just two of at least eight schemes which relate to different sectors of the financial services industry. There are also separate procedures for complaints against professional bodies.  These schemes operate in different ways, with differences between the schemes in terms of eligibility criteria and limits on awards.

    The result is a confusing alphabet soup of arrangements.  Consumers do not always know where to turn to when they have a complaint.

    Whilst I welcome the recent initiatives which have been taken by the various ombudsmen to streamline their operations within the boundaries of the current system, we intend to undertake more fundamental changes to harmonise complaints handling arrangements in line with our approach to regulation.  I have recently announced our intention to establish a single, statutory Financial Services Ombudsman. Consumers will have a single point of access to the complaints handling arrangements.  There will be a clear and simple means to seek redress to a scheme which will be independent of both consumers and practitioners.  The scheme will be compulsory for firms.

    This will put firms in no doubt about the obligation to deal with complaints fairly and quickly.  Complainants will have access to a highly visible ombudsman scheme.

    The scheme will of course need to be set up in a way which draws on the best features of the existing schemes.  I am confident that the FSA will enjoy the assistance and full cooperation of the various ombudsmen and of the industry.

    Compensation

    We will also establish a simpler and where appropriate more harmonised set of arrangements for dealing with compensation when firms are unable to meet their obligations. Currently, there are multiple schemes – the Policyholder Protection Scheme, the Deposit Protection Scheme, the Investors Compensation scheme, the Building Society Investor Protection Scheme and even the Friendly Society Protection Scheme.  Each has its own set of rules and eligibility criteria.

    We will replace this patchwork with a single scheme with a single board with harmonised administrative arrangements.  The creation of a single scheme, like the establishment of the Financial Services Ombudsman, will benefit both consumers and the financial services industry.

    There will be easier access for consumers, greater clarity about who is eligible and in what circumstances.  There will be clearer governance arrangements which will be underpinned by statute.

    I believe that effective arrangements to deal with complaints and compensation will build confidence in the industry.  The Financial Services Authority is currently consulting on these issues.  I welcome their desire to work with the industry and consumers in order to get the details right.

    Lloyd’s

    There is one further very important area I would like to talk about, which is again relevant to our determination to apply statutory regulation consistently across the board.  This is Lloyd’s.

    For a vast majority of its time Lloyd’s has been a successful part of UK financial services industry, making an important contribution to the economy and balance of payments.

    As you will be aware though, it suffered huge losses – 8 billion Pounds – in the period 1988-92. There were a number of reasons for this which were out of Lloyds’ hands – such as natural and man-made disasters. But the losses were exacerbated by bad underwriting decisions and practices.

    Since then action has been taken.  I should like to pay credit to Lloyd’s for resolving its financial difficulties through the successful implementation of  Reconstruction and Renewal’ in 1996 and for all it has done to improve regulatory arrangements.

    But more needs to be done. Lloyd’s itself has recognised the need for a greater independent element in its regulation.  It rightly believes that businesses which are well regulated – and are perceived to be so -will be in a better position to compete in global markets.

    Lloyd’s is a complex organisation – many of us tend to think of it as a big insurance business. But far from being one business it is – even now – many separate businesses operating under a common umbrella. This means that it needs to be looked at from a number of different angles.

    Prudential supervision

    The first is prudential supervision. As with all insurance regulation, the first priority is protection of policyholders.  We intend to give FSA much more extensive prudential supervision powers in relation to Lloyd’s. These will be more like the powers it will have for insurance companies, such as fitness and properness checks and comparable powers of intervention. They will  also include a requirement for FSA authorisation of managing agents. These are the  people who are responsible in practice for running underwriting syndicates.

    We intend that the FSA should have reserve powers to authorise and supervise Lloyd’s members direct, if that proves appropriate in future.  But we do not intend that the FSA should supervise individual Names, so long as Lloyd’s own supervision is adequate.

    Protection of capital providers

    Protection of capital providers is another important area.  Individual members of Lloyd’s are advised by members’ agents, who act  like financial advisers.  We propose to extend the authority of the FSA in this area to the authorisation and regulation of members’ agents.  This will give increased protection to members of Lloyd’s, some of whom have suffered from bad advice in the past.

    We recognise that the main risk to capital providers is the risk to which they are exposed through the contracts of insurance which they underwrite.  The enhanced insurance supervision arrangements I mentioned should also provide a substantial benefit to members in reducing those risks.

    Capacity auctions

    Next, I would like to say something about capacity auctions. Recently, participation on a syndicate has moved from being a privilege to a right.  As a result, a market has developed in trading capacity for different syndicates.  This market, which currently operates through a series of auctions run by the Corporation of Lloyd’s, is analogous to an investment market.  This market will be overseen by FSA under a regime similar to that currently in place for recognised investment exchanges.

    Role of the Council

    Finally, these arrangements will continue to allow scope for a major role for the Council of Lloyd’s in ensuring Lloyd’s continues to be a well-regulated, successful and important part of the UK financial services industry.  This reflects the special role of the Council of Lloyd’s in controlling the affairs of the Society.

    Taken together, I believe that these changes to the regulatory regime for Lloyd’s  will however provide, for the first time in many areas, a major element of external regulatory accountability.

    Conclusion

    The Government is committed to reform and to achieving the best financial regulatory system we can. The UK financial services industry has achieved a great deal, but a lot of people remain, sometimes rightly, suspicious of its capacity to act in their best interests. This lack of confidence tarnishes the whole industry.   The FSA and the industry it regulates need to work together to ensure that confidence is maintained in those areas where standards are highest and improved where standards have fallen short.

    In short, the regulatory system must be more effective, providing an adequate level of protection for consumers. It must be transparent and inspire public confidence in the regulatory structure. It must be efficient, imposing only such burdens and restrictions which are necessary to achieve sound regulation.

    I fully recognise the  importance of working with the insurance industry and its customers in designing the new framework of regulation.

    There will be further opportunities for discussion – not least when our draft bill is published for consultation next summer.  But I do not want to wait until then to hear the views of the life insurance industry. Various representative bodies in the life insurance industry are already in touch with me and my officials to make sure we are aware of your ideas and concerns.  I urge you to continue this dialogue in the coming months.

  • Alistair Darling – 1998 Speech to Ernst and Young Network Dinner

    Alistair Darling – 1998 Speech to Ernst and Young Network Dinner

    The speech made by Alistair Darling, the then Chief Secretary to the Treasury, on 14 January 1998.

    “OUR ECONOMIC APPROACH”

    Introduction

    UK Economy

    The world has been transformed over the last few years.  We live in a global economy.  We are moving towards a single global economy in many respects.  Industries typically span geographical and political boundaries.  No country can go it alone, in economic terms.  Our objective is to ensure Britain is equipped to rise to the challenge of the world’s new and fast changing economies.

    The key objective of our economic policy is to achieve high and stable levels of growth and employment, to allow everyone to share in higher living standards.

    The need for stability

    Over the past  forty years, our economy has had an unenviable history of boom and bust.  Stop-go has meant higher interest rates, less investment, fewer successful companies and lost jobs. It has been the inevitable result of a failure to take a long-term view, and to bow to short term pressures – political and economic.

    The economy we inherited in May was in danger of over-heating, with unsustainable growth in demand and a threat of inflation rising well above its target.  And despite five years of upswing, public borrowing was too high for the point in the economic cycle.  The national debt doubled in the six years from 1990.  And at this stage of the cycle the we should not be adding to that problem.  This year alone the taxpayer will pay out 25 billion Pounds in interest payments on debt – more than we spend on our schools.

    So we need to address the fundamental weaknesses in the economy. Instability, under-investment, the need to improve education and skills and the need for welfare reform – all of which have been neglected for too long.

    In the eight months since we took office we have begun to put in place the building blocks we need:

    • first, the need to achieve stability and to raise the  rate of sustainable growth;
    • second, to increase productivity; and
    • third the need to remove barriers to growth, invest in education and modernise the   welfare state, and tackle the need to expand markets.

    In the short time since the election, we have begun to lay the foundations to secure Britain’s long-term economic future.

    Openness and transparency

    Stability will of course depend, to a large extent, on markets having confidence in the commitment of Government to prudent and sound management of the economy.  So economic policy must be open and transparent.  Openness builds confidence and credibility. It is essential in today’s global economy.

    And in our fiscal and monetary policies, we have set out open and transparent frameworks that have clearly enhanced our credibility.

    The Government will now publish a Pre-Budget consultation document each year setting out the economic issues we face.  Operational independence for the Bank of England.  The new code for fiscal stability.  All these measures add to openness and transparency, and will enhance credibility in our determination to look to the long term.

    So the building blocks are there.  Firstly stability.

    Stability

    Long-term stability – in monetary and fiscal policies, low inflation and sound public finances – is an essential pre-condition for high levels of growth and employment.

    Monetary policy

    That is why one of our first acts in office was to establish a wholly new monetary policy framework for the UK.

    This framework gives operational independence to the Bank of England for setting interest rates to meet the Government’s inflation target, while enhancing accountability and ensuring policy is conducted in an open way.  We now have one of the most open procedures for making monetary policies decisions in the world.  Since the new monetary framework was announced, long-term interest rates have fallen by more than a full percentage point, partly reflecting a fall in inflation expectations.  Clear evidence that anti-inflation credibility has been enhanced.

    Fiscal policy

    As with our approach to monetary policy, so in fiscal policy we have established clear rules, a new discipline, openness and accountability.

    A key element of the new fiscal framework is the adoption of two strict fiscal rules:

    • first, the golden rule, that on average over the economic cycle, the government will borrow only to finance its investment;
    • and second that, as a proportion of national income, public debt will be held at a prudent and stable level on average over the cycle.

    Our tough approach to public borrowing, embodied in a five-year deficit reduction plan, means, from public sector borrowing of 7 per cent of GDP four years ago, we are now set  to cut the deficit to 1 1/4 per cent in the current financial year and just 1/2 per cent next year.

    And the new Code for Fiscal Stability will require the Government to produce estimates of the cyclically-adjusted fiscal position and long-term projections, so that past policy mistakes are not repeated.  We are determined not to repeat the mistakes of the late 1980s, where the signals were misread.  Over-optimistic assumptions led to an unsustainable boom, followed by one of the deepest recessions this country has ever seen.

    We will maintain strict discipline in public spending, rooting out waste and inefficiency as part of the Comprehensive Spending Review.  This review will not only achieve discipline in the public finance but it will also set our spending priorities for the rest of this Parliament and beyond.

    Together these tough fiscal rules, the deficit reduction plan and a root and branch review of public sector efficiency will ensure a break from the short-termism and expediency of the past.  And our fiscal policy will be more credible for being open and accountable and will ensure new long-term stability for the public finances.

    Productivity

    The second key challenge is to raise productivity.

    Government and industry must work together to remove systematically all barriers to raising productivity:  in product markets through encouraging competition and innovation;  in capital markets through measures to enhance growth and investment, not least for innovative small businesses;  and in the workplace through encouraging the creativity and flexibility of inventors, managers and workforces.  We need to rediscover our capacity to invent and see that there is profitable production.

    We are examining how, to improve productivity, we can help leading-edge businesses gain funds to develop new technologies; how we can improve Britain’s poor record of investment in research and development; and how we can make it easier for small businesses to draw on venture capital to create jobs and a more entrepreneurial culture.

    We have taken measures to tackle long-term under-investment in both capacity and skills, including a cut in corporation tax to its lowest ever level.  We are determined to increase investment in education – the key to our future.

    But we still need further structural reforms if we are to encourage a more dynamic economy through increased competition and through reforms in welfare and employment policy. We are committed to a wholesale modernisation of the welfare state.

    Employment

    And to achieve high and stable levels of growth and employment we must ensure that people are skilled and employable and making work pay.  Today sees further reports of skills shortages, which constrain our ability to expand.

    We are addressing the obstacles that prevent people taking up and benefiting from work:

    • the absence of marketable skills;
    • the failure of the tax and benefits system to make work worthwhile;
    • the poverty and unemployment traps that for far too many mean that work does not pay;
    • the lack of employment opportunities;
    • and the scarcity of affordable child care.

    Reform to both the tax and benefit system is needed as part of the modernisation of the welfare state, that has remained largely unreformed since its foundation in the 1940s.

    And the Government’s welfare to work initiative will get the young and long-term employed from welfare into work.

    Since May we have made a start by announcing a New Deal worth almost 4 billion Pounds,  providing jobs for young unemployed, the long-term unemployed, and to lone parents [and the long-term sick and disabled].

    Helping lone parents into work is one of the most effective long-term ways to tackle  family poverty.

    We are also introducing a plan to extend out-of-school childcare clubs to every community in Britain.  Funds will be available to set-up as many as 30,000 new out-of-school clubs, which will provide places for nearly 1 million children.

    Last week we launched the New Deal for the young and long-term unemployed. There will be 12 pathfinder projects to give those under the age of 25 and unemployed for more than 6 months the skills to get them back to work and give them the skills they need.

    All these measures are focussed on getting the young and long-term unemployed from welfare to work.  And they are all part of our strategy to meet the challenge of increasing employment opportunities for all.

    Europe

    Key to our economic approach is our European strategy.  In October the Chancellor declared for the principle of the single currency.  There is no constitutional bar to entry.

    But any decisions to join must be based on a hard headed assessment of the economic benefits of joining.  We must have satisfactory answers to these questions:

    • would joining EMU create better conditions for firms making long-term decisions to invest in Britain?;
    • how would our financial services be affected?;
    • would there be sufficient convergence between economies so Britain could live comfortably with Euro interest  rates?;
    • is our economy sufficiently flexible to deal with any emergent problems?;
    • and will joining Europe promote higher growth, stability and a lasting increase in jobs?

    On the basis of these fives tests, the Government has decided that it would not be in our economic interest to join in the first wave in 1999.  We need a settled period of convergence before we can make a decision on membership.

    So we will join a single currency when and if it is in our economic interest.  But we believe there are potentially clear benefits for business and that is why we have begun making extensive preparations, helping and advising business with the euro.

    Pay

    The Government is taking the long term view. Our strategy is based around building a stable framework for fiscal and monetary policy, encouraging investment in our economic infrastructure, the education and skills of our workforce and rebuilding the welfare state around the work ethic.

    The challenge is to steer a long-term course towards sustainable growth.  Where prosperity can increase year on year, where public finances can deliver the public services we want and need.

    We have put the policies in place to bring this about.  But if we are to succeed we must maintain the strict discipline necessary to put the public finances on a sound footing and keep them there.

    We are not going to repeat the mistakes of the past, where the economic signals were misunderstood and an unsustainable boom led to bust – with all the consequences that brought about.

    Central to this aim is the need to ensure that pay increases are affordable right across the board, from boardroom to the shop floor, in both the public and private sectors.  People have to understand that to bring about long-term stable growth, pay increases must be fair and affordable.

    For its part, the Government will be applying these principles to public sector pay.  We are determined to deliver long-term growth and prosperity.  It is essential, if we are to succeed in rebuilding this country and increasing prosperity for all the people in a sustainable way.

    Conclusion

    We are governing for the long term.  The building blocks are being put in place to bring the long term prosperity we all want to see.  This means we have to take tough decisions now.  But it is right that on pay, as with every other issue, we avoid measures that bring short term gain but long term pain.  This is the approach the British people expect of us.  It is what we promised at the election.  And we are delivering on our promises.

  • Gordon Brown – 1998 Speech Launching the New Deal

    Gordon Brown – 1998 Speech Launching the New Deal

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 5 January 1998.

    Today marks the start of a new deal for Britain’s young. A new beginning in the war against poverty, and the first step in the modernisation of the welfare state in Britain.

    It’s the Labour Government’s 1998 new year’s resolution for Britain – to help our long-term unemployed back to work and to give them the skills they need.

    Here today from Dundee and Tayside we launch the first of twelve pilot programmes offering jobs and training to every young person six months out of work.

    From April, every long term unemployed young man or woman under 25 will be offered the new deal options of work or training.

    A total of 3 billion pounds is being invested in jobs.

    It is not just the young who will benefit from the new deal.

    From June, employers will be offered a 75 pounds a week subsidy to take on the long-term unemployed.

    During 1998 lone parents with their youngest child at school will be offered help to find work.

    And from this year too disabled men and women, denied the right to work for too long – will be given new opportunities to work.

    The old deal – of paying people a few pounds in benefit and then forgetting about them – failed the unemployed and failed Britain.

    Today begins the long haul towards full employment in the years to come.

    From now on in Britain, young people will have new opportunities and a new contribution they can make under the new deal. Rights go hand in hand with responsibilities and for young people offered new responsibilities from today there will be no option of simply staying at home on full benefit doing nothing.

    So it is something for something, not something for nothing

    Young people are our future. Yet unemployment among the under- 25s is twice the national average.

    With new resources from the windfall levy we will invest in young people and in the skills the whole country needs them to have for the future.

    From today there are pilot programmes in every part of Britain, offering every young person unemployed for more than six months the chance of work.

    Already 9,000 employers have signed up in our pathfinder areas.

    Some of the top household name companies are making their contribution to the new deal.

    In the next few weeks, 1 million employers will be contacted and asked to consider taking part.

    The programme that starts today in 12 pathfinder areas will offer young people advice, help and training to enter the world of work. From April the programme will operate nationally.

    The scheme offers four routes into work and helps each young person pick the route that suits their needs – a job, full-time education, a job  in the voluntary sector or a role in the environmental task force.

    Tayside

    300 million pounds will be invested in scotland under the new deal here in Tayside there are more than 1,000 young people  who have been nemployed for more than six months. For them opportunity is available now. The pathfinder approach is to ensure that young people receive the help they need immediately.

    Every month, 100 more young people will be entering the programme.

    I have no doubt lessons will be learned from the pilot and we will be carefully evaluating the programme in Tayside and other pathfinder areas so that rough edges can be identified.

    Here in Dundee some of the biggest companies like NCR and Michelin have committed themselves to the new deal. Stagecoach and National Express, together with Scot-Rail and Travel-Dundee will be mounting travel concessions for young people in Tayside on the new deal and I am grateful to them for their involvement.

    This programme will succeed only if we involve all employers who are able to make a contribution.

    My appeal to employers is as businesses in the community who can see at first hand the impact of social division and a wasted generation of young people and who know that failure to tackle the problem now will hurt us all in the future.

    My appeals is to employers and managers with a reputation for motivating people who will immediately understand  how a job can make the difference between what young people are and what young people are capable of becoming.

    My appeal to employers is as leaders of the economy who know that however successful their own business is, the economy as a whole will never be at its best unless we unlock the potential of all our people.

    I want all of you to feel part of what I believe is a national crusade to clear for one and for all the social divisions that are entrenched in our society because of unemployment.

    And this is just the start. The Government believes in helping thousands more from welfare to work in the years to come as part of the long haul towards our goal of full employment.

    That is why we are prepared to extend the new deal from the under 25s to the over 25s and are prepared to invest more in the long term unemployed, lone parents and disabled men and women who want the right to work, to make this ambition a reality.

    And we will do more. The new deal is our first step towards a new welfare state. And I want men and women who have been unemployed and written off by many to be able to say they now have a new chance to make the best of themselves and to make a contribution, not just to their families, but to the progress of Britain.

  • Gordon Brown – 1998 Speech at the Central Organisation of Scottish Local Authorities

    Gordon Brown – 1998 Speech at the Central Organisation of Scottish Local Authorities

    Part of the speech made by Gordon Brown, the then Chancellor of the Exchequer, in Glasgow on 27 February 1998.

    Since I took over as Chancellor I have always said that a commitment to stability and prudence as well as work and; enterprise will be the watchwords of this Government.

    We will not make the mistakes of previous Labour Governments who failed to control spending and then had to cut back.

    And we will learn the lessons of the late eighties where the public finances and the economy’s ability to sustain growth were misjudged, plunging us into the longest recession since the war.

    So the Budget on 17 March will not be a Budget with quick fixes for the short term. The Budget will be an investment Budget for the long-term, laying the foundations to build a more dynamic and successful economy.

    We will not sacrifice our spending discipline and commitment to prudence – instead there will be consistency to ensure long-term prosperity.

    With a 400 billion Pounds national debt, 25 billion Pounds a year interest payments, a borrowing requirement of 23 billion Pounds last year and with the deficit continuing into next year, ensuring prudence in our public finances is our priority – not just in one year but in every year across the economic cycle.

    Just as there will be no return to boom-bust in the economy so there will be no return to soft options in public spending.

    We are all long termists now – the best guarantee for our future.And long term measures for enterprise and work – making work pay – will come top of my agenda.

  • Alistair Darling – 1998 Speech at the Securities Institute

    Alistair Darling – 1998 Speech at the Securities Institute

    The speech made by Alistair Darling, the then Chief Secretary to the Treasury, on 6 February 1998.

    Introduction

    3.   Tonight I want to talk about three things.  First, our overall economic approach. Second, I want to say a brief word about Europe and EMU.  Finally, our reforms to financial services.  I also want to say a word about the future of the Stock Exchange.

    Our Macroeconomic Approach

    4.   So let me start by looking at the Government’s economic objectives.

    5.   We won the election because we promised to look to the long term.  To end the short-termism that had characterised so much of the past.

    6.   In the nine short months since we took office we have put in place the building  blocks we need to deliver the long term project.  Our objective is to raise the rate of sustainable growth to increase the prosperity of the country so that everyone can share in higher living standards.

    7.   First, we have introduced the platforms for monetary stability and low inflation – the essential precondition for growth.  This is good for business, for savers and for those on low incomes.

    8.   Within days of entering office, we announced that we would give operational independence to the Bank of England to set interest rates in order to achieve the  Government’s target of low inflation.  And the Bank of England Bill which delivers  this reform has now received its third reading.

    9.   We now have a central bank with the most open and accountable set of procedures anywhere in the world.  And already long term interest rates, and  inflation expectations, have fallen.

    10.  Second, fiscal stability.  The Chancellor in his Budget last July put in place a  deficit reduction plan to reduce the huge burden of debt left by the last  government.  The national debt doubled in the six years after 1990.  We spend  25 billion Pounds a year servicing public debt:  more than we spend on schools.  At this  stage in the cycle we should not be adding to the country’s debt.

    11.  Third, stability in public spending.  The Comprehensive Spending Review of  public expenditure now under way is a root and branch examination of the 320 billion Pounds the Government spends.  Over 5000 Pounds for every man, woman and child.

    It will ensure we have affordable and sustainable public finances and will set the  spending priorities for this Government for the rest of this Parliament and  beyond.  And we have already started to do that with new money for schools and  hospitals.  And of course we are committed to modernising the Welfare State.  Making work pay.  Improving skills.

    12.  And stability depends on removing barriers to growth.  We are determined to expand our economic capacity and to create the right climate for high levels of  investment.  That is why we have reformed the corporation tax system, for  example, removing the distortions that hinder long term high quality investment.

    EMU

    13.  This Government is committed to open markets in Europe and elsewhere.  We are outward looking.  We have to be and that has driven our policy in Europe as elsewhere.

    14.  Our relationship with Europe has changed.  We are now engaging. constructively  in Europe.  We are putting place the necessary preparations which will allow  Britain to decide to join EMU if economic conditions justify it.

    15.  We’re one of the most open economies in the world – trading 25 per cent of our GDP compared with America’s 10 per cent.  And nearly 60 per cent of our  exports are to mainland Europe and an astonishingly high level of international investment into Europe – 30 per cent of it – comes to the UK.

    16.  In less than a year from now the German business selling products to France  and the Netherlands will be able to do so without exchange rate risk, with lower  transaction costs and with more transparent prices, something that in itself will  be a big challenge to a British competitor hoping to supply the same order.

    17.  So EMU will lead to fiercer competition for trade and for future investment across  Europe.  And the time to prepare is now long overdue.

    18.  I know that this will be a major challenge for the securities market.  And we are working with business to prepare for the introduction of the Euro in 1999.  The Euro will affect each and every one of us.

    Our approach to the reform of the UK regulatory system

    19.  And if we are to achieve stability we need a regulatory environment that  commands the support and respect of the industry and public alike.

    20.  We promised reform at the election.  And three weeks after the election  we set  out how we would deliver the radical overhaul to the regulatory system we promised.

    21.  And in October the new Financial Services Authority was launched.  It will take over the work of nine existing regulators.

    22.  In the global economy where markets are changing every day, where innovation and diversity are an essential part, it is vital that we have a new regulator that  has both power and flexibility.

    23.  The draft financial services Bill, updating and replacing the various pieces of legislation covering financial services, will be published this year for consultation.

    24.  And lets not forget the role of management which sets the ethos and the ethics  of its business.  Management is an essential part of good business and good  practice.  That’s good for them and its good for business.  Good regulation must  be complimentary to the business process.

    25.  The FSA will cover the whole of the industry – domestic and global;  wholesale  and retail.  So let me say a word about the future of the London Stock Exchange  and where its role as the Competent Authority for Listing in the UK should  properly lie.

    26.  Discussion about financial regulation has often concentrated on the need of investors.  But we should not forget the needs of those seeking to raise capital.

    27.  Firms, public bodies and governments all use the UK’s capital markets to provide  funds for enterprise growth and efficient financing of public services.  Investors  clearly need reliable and timely information about the capital markets.  This is  where the regulation of public offers and listing of securities has a vital part to  play.  There is a clear public interest here.

    28.  However, we must recognise that the environment in which the Stock Exchange operates has changed radically, and will continue to do so.  This  gave us a  strong reason to look again at the regulatory structure in this area.

    29.  Ten years ago, the Stock Exchange was the only practical option for UK companies seeking to raise equity capital.  Now, in the world of electronic  markets and cross-border trading, they have a wider choice.

    30.  The other major change is regulation itself, and the creation of the Financial Services Authority as the central body with the legal clout and scope to cover the full range of financial services effectively.

    31.  We have had to decide whether the London Stock Exchange should continue to be the UK competent authority for listing.  Or whether this function should be transferred to the FSA.

    32.  The London Stock Exchange enjoys a substantial reputation throughout the world.  However, whilst listing is a distinct function, it is closely related to the regime for which the FSA is to become responsible for.

    33.  As I announced today in Parliament.  Having considered the matter we have decided that the balance of the argument is for continuity in practice with the  Stock Exchange continuing with its current role.

    34.  While we wish the Stock Exchange to carry on the good job they have been doing, we also recognise that circumstances may change and that we need to be prepared for it.

    35.  We will therefore take a power in the bill reforming financial services regulation so that we could transfer all or parts of the competent authority function to another body, in practice most likely to be the FSA.

    36.  Treasury Ministers will remain accountable to Parliament for this decision. Before such a significant change in the structure of UK financial regulation were made, we would need to be sure that it was fully justified on the balance of arguments and that arrangements for satisfactory transition were in place.

    Conclusion

    37.  We have been in Government for nine months.  In that time we have put in place the building blocks which will see us through not just this Parliament but beyond.

    We said that we would modernise Britain and we are doing that.

    38.  We are building the foundations for the future.  Low inflation.  Stability. Reforming and modernising the Welfare State.  We are building monetary and fiscal stability to provide a platform for the future.  We have started to rebuild the education and health services.  Building alliances in Europe where we can influence and shape our destination.  Building together long term prosperity for this country.

  • Gordon Brown – 1998 Speech to the British American Business Council

    Gordon Brown – 1998 Speech to the British American Business Council

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, in London on 28 April 1998.

    I am delighted to be here at the Park Lane Hotel today at this the first conference of the British-American Business Council to be held in the United Kingdom.

    I am pleased that so many distinguished businesses are represented here today and indeed also the American Ambassador to London, Philip Lader, whose work here is much valued.

    And as someone who already knows a great deal of your work, not least from addressing the British American Chamber of Commerce in New York in December, I want to congratulate all of you, from the 27 member organisations representing 3,000 companies and billions in trade between our two countries who are making the British-American Business Council one of the strongest voices for transatlantic cooperation. And at the start of a week that will be decisive for European economic history, as we prepare to inaugurate a single currency, I want, in the context of a new Europe, to talk not just about relations between Britain and America but about the development of relations between Europe and America.

    But first, I want to thank someone who has, as an individual, done more in recent years than perhaps any other to cement the strength of the links between America and Britain. Sir Colin Marshall has combined a distinguished career in international business with a broader commitment to the success of British business and in particular to business links between the US and Britain. He has been a driving force behind the creation and growth of the British-American Business Council. As chairman of the international advisory board from 1994 to 1996 he mobilised the key players in British and American business in support of the council at a key stage in its development.

    So we honour Sir Colin today for helping to make the British American Business Council a success. We are all grateful for his commitment to this important network of over 3000 corporations, that helps strengthen your organisations and businesses and helps maintain and develop business relations between Britain and the United States, working with the US and British governments to strengthen these relations.

    Today Britain and north America enjoy trade flows of 60 billion pounds and have a total of around 150 billion pounds of investment in each other’s countries. We are the largest single investors in each other’s countries.

    Now I believe, as I think Sir Colin’s career shows, that the connections between Britain and the USA, are stronger today, not just because a shared history links our countries but because of our shared values that bind us even more closely together.

    A commitment to liberty and to our countries as lands of opportunity for all. A belief in hard work and enterprise, and a dedication to an openness that is outward-looking and internationalist, not least in our shared commitment to free trade.

    These are values that brought America to the defence of Europe twice this century and values that allow America to rely on Britain as a bridge to Europe. Values that become ever more important as the world economy is transformed from the relatively sheltered national economies to a global market place, and when, as the insecurities that come with change affect us all, protectionist tendencies must be tackled.

    Values that represent, in my view, a partnership for progress. And it is this partnership for progress between our two countries that has been so important in securing the basis of a peace settlement in Northern Ireland. And I pay tribute on behalf of the British government to the work of the American government.

    It is this partnership for progress that has led us to work together in Bosnia, in the Middle East and now in Africa.It is this idea of a continuing partnership for progress that lies behind the transatlantic agenda launched in 1995 that has achieved much progress in lowering barriers to trade and investment in our two countries and which we must build on John Kennedy, who quoted Alexander Hamilton urging Americans in the late eighteenth century to think continentally and said the task now was to think inter- continentally, and who said that the declaration of independence should be followed by a declaration of inter- dependence – a concrete Atlantic partnership between the new union emerging in Europe and America – said he regarded a strong and united Europe as essential to the free world.

    A strong and united Europe is not a rival to America but its best partner and I believe that for America, Britain is a bridge to Europe and it is this idea of a partnership for progress that most certainly lies behind the proposals for a reform of the international institutions which the G7 heads of government will look closely at when they meet in Birmingham in two weeks time: that the USA and Britain which, more than any other two countries in the world, were the inspirational forces in the creation over fifty years ago of the international financial institutions – the IMF, World Bank, GATT – institutions born in the days of essentially national economies, often sheltered, with very limited capital markets, should now lead the way in reshaping international rules and build international institutions that are more appropriate for the new world of global markets, massive international trade flows and the need for greater international cooperation and for greater openness and transparency to secure stability

    Now, today, I want to highlight how our shared values have led us as countries to a set of conclusions about the two priorities for national government in the new era of more open, more competitive, global markets.

    First, to succeed, the need to create a platform of macro- economic stability which rejects false trade offs between inflation and growth and is based on clear long term objectives, on well understood procedural rules and on openness and transparency.

    And, second, that our economies must pursue continuous and far-reaching structural economic reform to promote productivity and employment.

    And I want to tell you that in our first year in government we have begun to tackle these tasks. And as president of the European Union we have sought to drive forward work on these objectives throughout Europe.

    Now it is true to say in Britain that the last forty years has been characterised by stop go, boom bust, instability in economic policy. And so I can tell you that the first objective of the new government has been the determination to ensure monetary and fiscal stability, in place of stop go, and to do so in an economy far more open than the sheltered national economics of the past. And here we have learned a great deal from America, and the Federal Reserve Bank.

    In any modern economy it seems to me that monetary and fiscal policy , which can no longer be based on the so called fine-tuning of the 1945-1975 period nor on the crude application of rigid intermediate monetary targets that we saw in the years that followed should be based on three central decisions.

    First, clear long-term objectives by which governments will be judged – in Britain our inflation target of 2.5 per cent and our five year deficit reduction plan to bring prudent and sustainable public finances.

    Second, orderly procedural rules for monetary and fiscal decision making – making the Bank of England independent and legislating for a code for fiscal stability which guarantees certainty and therefore credibility in decision-making.

    And third, an open and transparent decision-making process which allows proper scrutiny and which, as a result, offers a confidence that a long term view is being pursued. Our budget deficit reduced from 23 billion pounds to only 3 billion pounds in a year and indeed I believe that it is because people are now coming to believe that for the first time in Britain’s post-war economic history the inflation target will actually be met that long term interest rates have come down to below 6 per cent, the lowest for 33 years.

    And it is the same search for stability in a global economy that has led our European neighbours to agree on monetary union.

    Again clear long term objectives. First of all at the heart of the project – price stability and sustainable public finances as the key to growth and jobs; secondly orderly procedural rules – the new European Central Bank and the growth and stability pact of the European Union; and third, a system of multilateral surveillance that allows for proper scrutiny of each member’s position and offers confidence that stability can be achieved.

    As I reiterated in a speech in New York a couple of weeks ago, as far as Britain is concerned, we have committed ourselves, in principle, to monetary union. To make our economic assessment of the advantages the decisive test as to whether we will enter and to begin preparations that will allow us to make a decision, subject to a referendum, early in the next parliament. Our strategy is to prepare and then decide.

    Meanwhile, we are working closely with all sectors of business to ensure that when the euro arrives elsewhere in Europe – as it will in 1999 – British businesses benefit from it.

    The Bank of England is leading Euro preparations in the City of London. So inside or outside the euro zone, British economic policies will go on being right for business. Britain will continue to be the most profitable place in Europe from which to exploit the new business opportunities after 1999. And Britain will continue to lead Europe towards ever freer trade and more open markets.

    But although macroeconomic stability is a necessary pre-condition for growth it is not sufficient on its own to achieve the high levels of growth and employment we need. This requires far-reaching reform of our labour, capital and product markets. And I want to say that learning from each other, the United Kingdom is now, as president of the European union, leading the debate about economic reform.

    As many here will know, in the UK we have embarked on a radical programme of labour market reform, through welfare reform to move people back into work, tax reform to create jobs and improve work incentives, changes in labour market rules to ensure the adaptability we need, and educational reform to ensure the standards and skills a modern economy needs. But we have also embarked on a programme of reform in our product markets – with a new competition policy – and our capital markets – with new measures, for example, not least cutting corporation tax to 30p, the lowest of any major economy, to encourage the flow of funds to small business, to hi tech business and to risk capital. But there is more to be done in Britain and in Europe.

    We need a new approach in Europe to risk taking, we need to increase the number of entrepreneurs and to raise the survival rate of small businesses. So we must remove the barriers that exist – fiscal, regulatory, economic, cultural – as a matter of urgency. Let me give one example of where Europe’s agenda is changing, learning from the USA – venture capital.

    In the UK, only 5 per cent of venture capital funds go to start ups and early stage companies. In the USA, nearly 25-30 per cent goes to these companies. The amount of hi-tech in venture capital is 50 per cent in the USA, but only around 20 per cent in the UK.

    The challenge for Europe is to create a strong venture capital industry and to orientate venture capital to hi-tech risk, early stage and start-up companies.In June here in London we are holding an EU conference to promote venture capital in Europe.

    So, just as the new government in Britain has begun to create a new Britain, we are also working with our European partners to create a new Europe – one that combines enterprise with social cohesion, more dynamic, more competitive, more open and thus learning from the entrepreneurial and flexible labour markets of the American economy.