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HM Treasury News Release
164/98 13 October 1998
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SPEECH ON THE GLOBAL ECONOMY
Attached is the text of Patricia's Hewitt speech to the Fleming's
Conference on Tuesday 13 October.
PLEASE CHECK AGAINST DELIVERY
SPEECH BY PATRICIA HEWITT MP, ECONOMIC SECRETARY TO THE
TREASURY, TO THE FLEMING'S SEMINAR ON 12 OCTOBER 1998.
Introduction
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.
Structural reform
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.
Progress
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.
Free trade
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.
Conclusion
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.