The text of the speech made by Patricia Hewitt, the then Economic Secretary to the Treasury, on 12 October 1998.
1. Thank you for inviting me. The current turmoil in the global economy makes the timing of this conference pertinent.
2. Today, I want to focus on the reform that is needed to respond to globalisation. Both in Europe and the rest of the world. I also want to raise the issue of free trade and capital controls.
Global change and Europe’s response
3. Today’s global economic problems are ones of the modern age. They could not have happened when finance was confined within sheltered and wholly national financial systems. These are new global problems which require new global solutions.
4. Today, in an interdependent and instantaneous global marketplace, nations depend on investment flows from all over the world. And the punishment for getting things wrong can be immediate and severe. The premium everywhere is on monetary and fiscal stability.
5. All countries will benefit from setting clear long-term policy objectives for monetary and fiscal stability that build confidence.
6. But equally, in today’s deregulated, liberalised financial markets, governments can no longer try to deliver stability
through the strict application of over-rigid monetary targets. Stability will come through setting out clear objectives for monetary policy, and having the openness and transparency necessary to give credibility to the process.
7. There have been considerable advances in stability and prudence over recent years.
8. Member states have taken the Maastricht process very seriously and this has not been easy.
9. In the 1990s deficits, which were a high proportion of GDP right across Europe, have fallen very heavily, from a peak of around 6 per cent of GDP to around 2 1/2 per cent.
10. Inflation, which has been very high in some countries over many decades is now very low, around 2 per cent compared to a 1990 peak of over 5 1/2 per cent.
11. Of course there is room for more progress on debt, which remains around 72% of GDP. But overall these are big changes signalling big advances in stability and prudence – and these advances have also brought greater convergence.
12. Macroeconomic policy will not in itself guarantee the levels of employment and growth that we want to see for Europe and the rest of the world. It is on the supply side that the rate of sustainable non-inflationary growth that an economy can achieve is determined. Structural reforms are essential for any country to remain competitive in this global age.
13. Reforms of labour, product and capital markets that are now being suggested represent a third way for Europe. A third way which combines our enduring commitment to social cohesion and social justice with a commitment that, through economic reform, we help to ensure that Europe enjoys the rewards of an efficient dynamic economy.
14. Globalization brings big opportunities and significant economic and social benefits, but it brings risks and social costs too. The benefits are not evenly distributed. People must now respond more quickly to the uncertainty and unpredictability. Jobs may not last as long and skills may quickly become obsolete as technological change accelerates. This can be difficult for people to accept and those who are unable to adapt quickly can get stuck in a vicious circle of social exclusion. But we can be sure that the social costs of doing nothing of isolationism or of protectionism are far higher. Open international markets benefit us all.
15. In Europe, the challenges may not appear so severe. The EU has some of the most efficient, competitive, and well- regulated markets in the world. But we must be frank. With the advent of the single currency from 1.1.99, prices will become more transparent, exchange rate uncertainty will be reduced, and competitive pressures will sharpen. Less efficient industries will no longer be able to hide behind the fig-leaf of exchange rate uncertainty. If we want to make EMU a success, and if we want our economies to be able to deal satisfactorily with shocks, Europe’s governments must turn to the supply side, undertaking fundamental reform of labour markets, product markets and capital markets.
16. It is vital that as Governments we take the actions that are needed to help tackle unemployment and raise employment. We need to combine making the structural reforms that are needed in our labour markets with measures to improve the employability of our workforces. We need, for example, to review our tax and benefit systems and make sure that they give the necessary incentives to make work pay and we need to ensure that our education systems are producing school leavers with the written, oral, numeracy and other basic skills that employers need and should expect.
17. We have already made good progress. At both the EU level and individually within member states we are all doing this. With the Employment Chapter, Employment Guidelines and Employment Action Plans we have a new framework for policy and action at the European level. We have agreed employment guidelines with specific targets for action and each member state has produced Employment Action Plans showing what they are doing to implement. It is only by making the necessary reforms that we will tackle unemployment and raise living standards across the EU. But we have made good progress.
18. But it is not only in the labour market that structural reform can yield significant results. In product markets, we must strive for a competition policy that creates more dynamic markets, is effective against those cartels and monopolies that hold new businesses and job creation back, and – in large areas where European-wide competition is still inadequate – pushes forward the frontiers of the single market. We must also work to increase competition internationally. So the era of anti-competitive policies is ending. The era of new pro-competitive policies and prosperity is beginning.
19. In the financial markets, EU states have increasingly opened up to firms from other member states, widening the choice for consumers to let them widen portfolios and diversify risk. Many are working on far-reaching pension reforms which will significantly expand their capital markets. Regulatory and investor protection systems are being improved. But we know that there is much more to be done.
20. More efficient equity markets have the potential to expand significantly, to the benefit of investment and jobs. The era of ignoring capital market reform is over. The era of pro-investment capital market reform has begun.
21. There is also significant potential growth for venture capital markets. Britain’s venture capital market has been a significant creator of high quality jobs and companies. But it is much smaller than that of the USA. There is a new interest throughout Europe in examining how to enlist capital as a more effective route to job creation.
22. The EU has made significant progress in advancing the economic reform agenda. This year at Cardiff, Heads of Government agreed that Member States should each produce short annual reports on their product and capital markets, for discussion with their peers. And the Commission will produce a report too, for those common policies which impact on product and capital markets, such as competition and the Single Market.
23. It will clearly take time to get results – there are no quick fixes with economic reform. But we should be encouraged. Economic reform has been recognised as the next big challenge for Europe in the globalised economy, and together Member States have set out an ambitious programme.
24. Globalisation requires us to look beyond Europe. We remain committed to working with others to keep markets for trade and investment open while pushing for further and deeper liberalisation for the benefit of all.
25. The gains from free trade are clear : better quality and more choice at lower prices. Efficient and innovative firms building a dynamic economy with rising growth productivity and living standards.
26. But some fear free trade and globalisation leading to calls for protectionism. These pressures are increasing in the
face of widening trade deficits with Asia. However, these fears are misplaced and must be resisted. The global economic crisis is causing painful adjustment – which is a necessary part of the cure for the crisis. We must not yield to the temptation to fall back on a protectionist response against cheaper imports. This is not an example of ‘unfair’ competition. Trade must be allowed to drive the restoration of global growth levels and re-integrate the countries in crisis back into the global economy. We have already pledged to guard against protectionism – but the surest way to fight protectionism is through further global trade liberalisation.
27. The free trade message must be kept on the agenda – especially given the slowing of the growth of trade. This is why we are giving our full support to an early start to a millennium round of comprehensive liberalising trade negotiations at the WTO.
28. The recent turbulence in world financial markets has led to some calls for capital controls. It is certainly clear that
short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and when institutions lack credibility.
29. But a retreat to capital controls is not the solution. This simply damages the prospects for stability and growth.
30. So we favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation. It has become clear that a host of preparatory reforms are needed before countries can fully benefit from integration into the world economy. Orderly liberalisation requires sound banking and financial systems and appropriate macroeconomic policies – consistent with the codes of good conduct we have proposed fiscal policy and monetary and financial policy.
31. I hope that all in Europe can firmly back this consensus – both in encouraging properly sequenced liberalisation and in opposing unilateral actions taken as a substitute for necessary reform.
32. This programme of economic stability and structural reform will maximise our contribution to global stability and growth.
33. We will have a Europe that builds on our long standing strengths of stability and cohesion as a continent but which makes reforms where necessary to compete more effectively globally.
34. And it will mean we are better placed to steer a course of stability in an uncertain and unstable world.