"The world in flux, politics in crisis mode, markets under scrutiny: Lessons to learn"
Minister for Trade and Investment Lord Green gave a speech to the German Banking Congress on 30 March.
Thank you and good evening ladies and gentlemen.
I must admit that it is a rather strange experience for me, to come here not as a banker but as a trade minister in government. A year ago I had been expecting to retire sometime this year: it never occurred to me that I would instead be embarking on an entirely new career.
For most of my twenty-eight years at HSBC, I was involved in a global banking system that seemed so large and powerful that it would endure for ages to come.
Then, during my four years as Chairman of HSBC, I watched that system brought to its knees through a combination of too much bad debt and too little capital, through poor risk management and through sheer greed. Everyone from economists to factory workers wants to know how the crisis happened and who was at fault.
But it seems to me that a more urgent question for us should be not “who was to blame?” but “What lessons are there to learn?”. And the lessons are plainly not just of academic interest.
The full extent to which old certainties have been swept away is still becoming clear and, indeed, will ultimately become the business of historians rather than of governments. But I think that we are already beginning to make out the broad outlines of what will follow it and how that will affect the work we do.
And tonight, I am highly aware of being in the midst of people who are helping to shape the financial and economic world of tomorrow. Which is in many ways a new world, with different rules and priorities.
It is that world that I would like to talk to you about tonight. And especially about how the world is changing and about what we must do together - governments, financiers and business people - to make sure that change works for the better.
For the economic downturn has shown that the global economy has real and serious weaknesses. As a result, some of the rules of the global economic system, and indeed its values, will have to evolve.
How we respond to that fact is up to us. One option is to behave like the citizens of some latter-day Mahagonny, who resigned themselves to their fate and said:
“Konnen uns und euch und niemand helfen”?
Indeed during the Great Depression, that is exactly what some nations tried to do. Alternatively, we can say, with Goethe:
“Das Leben gehort den Lebenden an, und wer lebt, muss auf Wechsel gefasst sein.”
And the changes we must confront are indeed both profound and very complex - changes in market philosophy, changes in global macro-economics, changes in international political relationships - changes which will radically affect us all over the next generation.
Before the crisis, the market was the determinant of all, and “price” was always the best measure of values. Efficient market theory ruled supreme. Markets were trusted to allocate resources correctly and economic policies dictated that they should be left to do so. This was a failure, too, to look beyond the short-term in pursuit of quick profits. Leaders in the banking sector need to recognise the moral dimension of what happened in the years preceding the crisis. This was a failure of governance - an abdication of responsibility - which had led to destruction of value on a huge scale.
We now know how misguided that ideology was. As bankers - or in my case, a former banker - we all know that strong financial markets lie at the heart of every successful economy, lubricating the engine of growth and prosperity. But while that remains fundamentally true, we have to learn new things about economics and re-learn some old ones about human weakness.
I do not intend to ruin your dinner by listing the technical reforms which have been so extensively debated in the last three years. Suffice to say that the current agenda for banking reform is indeed critical to the future of the global economy and is one we must get right. We are now seeing global convergence on the key aspects of the model of the future.
There is plenty yet to discuss, and this year in particular will be decisive, with its ambitious international regulatory agenda. But I believe the broad direction of technical regulatory reform is clear and correct.
But regulatory reform, while necessary, is plainly not sufficient. We also have to recognise that the severity of the crisis, and the obvious failure of the efficient market theory - which almost became the god of a new form of fundamentalism - has called into question the very purpose of capitalism. Capitalism has of course survived the crisis. It remains critical to economic development and I would defend it on the same basis that Churchill famously defended democracy: that it is the worst system of government we know - except for all the others that have been tried from time to time. But the fact is that virtually everywhere in the developed world, public trust in the capitalist market system - not just in banks - has declined sharply. (Interestingly, this is not true in the new, dynamic world of the Asian economies, though.)
As a result, there is public discussion of the whole purpose of business - of its corporate social responsibilities - for the first time in a generation.
I think it is fair and reasonable to argue that the responsibility of the board of a company to which shareholders entrust their capital is to build sustainable returns for those shareholders. And sustainability means focussing on some older principles which are as relevant today as they ever were - long-term relationships with customers; high levels of commitment to those who work in the business; and it also means positive engagement in the social issues and the economic conditions in the communities where business is done, an essential ingredient to the long term viability of the business model.
Furthermore, boards need to ask all these questions about the purpose and sustainability of their business, in the context of profound changes taking place on the world stage.
For it is also now being clear that the crisis has accelerated the shift of balance in the global economy.
Even before the crisis, the scales were tipping slowly but surely towards a new equilibrium. This previously gradual swing is now faster and more visible than in the pre-crisis world.
At HSBC I saw first-hand the rise and rise of Asia; the economic miracle which allowed places like Hong Kong, Korea, Singapore and Taiwan to evolve from dire poverty in the 1950s to become prosperous economies with high standards of living.
They are now joined by China and India as formidable global economic powers.
Only last week, I returned from a visit to these two countries. I was reminded once again of the extraordinary dynamism of both these huge countries, and of the profound implications of what is happening there before our very eyes.
Many people forget that for much of history China was the world’s largest economy and India the second. The fact that countries as large and with civilisations as ancient as theirs are now returning to their former economic prominence should surprise no-one with an understanding of history. It will change political relationships on the world stage forever.
The pair account for eighteen percent of global GDP and they are host to an army of young and innovative firms which are increasingly sophisticated, creative, and international in outlook.
The rise of Asia has profound implications for every country, business and individual on the planet. It is the most important fact of the twenty-first century: it is a fact which presents us with huge opportunities, as well as significant challenges.
The growth of a huge Asian middle class presents untold opportunities. Where twenty years ago BMW and Mercedes sold cars primarily to wealthy consumers in Europe and America, today it’s the streets of Guangzhou that are full of luxury vehicles.
Within five years the Chinese middle class will be larger than the entire population of the USA. And it’s a similar story in India, Brazil and other emerging economies which are producing rapidly growing middle classes too.
Dozens of cities with names that few recognise today - like the cities along the Delhi - Mumbai corridor - some with populations larger than entire countries such as Denmark or Finland - will be the engine-rooms of the global economy tomorrow. And these cities have a pressing need for the legal, financial, infrastructure and environmental expertise in which European companies are world leaders.
Our best companies - large and small alike - now rightly look eastward for their growth markets: Tesco, the UK’s biggest food retailer is looking to more than double its Chinese stores, making Asia the focus of a major international growth strategy. The German automotive industry, the Italian fashion industry - across sectors, across countries in Europe, the signposts point in the same direction.
But if the opportunities are obvious, so are the challenges. It would be naive to suppose that the course of economic development is ever smooth: or that trading with major emerging markets is plain sailing. Notoriously, there are often risks to intellectual property in China, for example: and in many countries there is widespread corruption and lack of transparency.
Furthermore, the inevitability of urbanization - with its implications for infrastructure, for social change, and for the environment - is perhaps the biggest single challenge for countries such as China, India and Indonesia.
So many of these problems inevitably become all of our problems in a globalized world. Meeting them inevitably means global coordination. And global coordination means recognition that we now live in a multipolar world.
The emergence of the G20 is the best symbol of this new multi-polar world order. It is perhaps too soon to say that the G7 has been marginalized (witness its recent role in the currency markets at a time of exceptional Yen volatility). But clearly the G20 has become established as the principal global forum of macro-economic policy making for the new era. It is a genuinely positive sign of the world’s recognition that it needs to work in a much more coordinated fashion if we are to address the issues that we will face, and in particular the task of ensuring that markets continue to work properly.
For the challenge of global imbalance is still with us. Global imbalances were at the core of the crisis that we have lived through. Some nations were accumulating enormous reserves, whilst concurrently, others ran huge and growing deficits. The arrangement is inherently unstable.
The big question is thus whether it is the deficit countries that are to shoulder the entire burden of rebalancing, or whether - one way or another - we can do this more collectively. For without this readjustment, the risk of future crises will remain, and political pressure for disastrous protectionism will grow.
In a way, there are few places where it is more appropriate to look to the future and to speak of change than right here in Berlin. Through its times of glory and its times of darkness, the tumultuous history of Berlin, especially in the twentieth century, reminds us not only that change is inevitable, but also and more importantly of the resilience that is required to survive and change.
And what Berlin is becoming now, in the 21st century, is a world-class city, with an openness and vivacity, and a cultural richness and variety, which reminds me of my home city of London. It is that sort of openness that we in Europe are going to need. Because the economic crisis has done more than reveal flaws in the system that must be corrected to prevent something similar happening again. It has changed the environment in which the world does business and created opportunities that were not there before.
Virtually all of us here grew up in a world dominated by two military superpowers. It was, however, a world with only one real economic superpower, the United States of America. Despite the Wirtschaftswunder and the growing economic strength of Japan, that supremacy remained unchallenged for at least half a century. It was said with justification that when the USA sneezed, the rest of the world caught cold. And the world crisis showed that this remained true at least for the countries, including Germany and Britain, for whom the USA has long been the main trading partner.
And it is also true that, today, the geopolitical influence of the USA, represented mainly by its ability to project power on a global scale, remains unrivalled.
But financially, industrially and economically, the dependency of the global markets on the health of the US system that we knew in the second half of the last century is no longer absolute.
Notwithstanding that the US economy remains the world’s largest, the shift in the world’s centre of commercial gravity from West to East is going to prove, as I have already implied, the biggest macroeconomic fact of the first half of the twenty-first century.
Following the recession, the USA is going through a period of de-leveraging and economic uncertainty. The Obama administration has provided a massive fiscal and monetary stimulus to pull the country out of the recession, yet there are still clouds on the horizon. One is the scale of America’s debt burden. Another is uncertainty about what quantitative easing may do to the inflation outlook. And a third is that the stimulus-fuelled economic recovery has still not produced enough new jobs.
All this means that the critical foreign policy challenge for the USA is how to adapt in order to profit from the rise of the Asian giants. And, as President Obama’s most recent State of the Union address showed, there are signs that America is stepping up to the challenge, as he announced his target to double exports over five years.
Here in Europe, the economic crisis wiped out four years of economic growth and the average unemployment rate is similar to the USA’s but has risen to worrying levels in some places. Germany, of course, has performed astonishingly well; but overall, Europe’s position is far from robust.
Europe’s share of world output is projected to fall by just under a third in the next two decades. Average government debt in the EU is around eighty per cent of GDP. And Eurozone leaders have had to contend with governance issues around the single currency.
If our businesses are prepared to grasp the new opportunities that global economic rebalancing will bring, the effects on European countries, whether with trade deficits, like the UK, or with trade surpluses like Germany, as well as the medium-term effects on jobs and growth, could be enormous.
Hovering over all of these problems is the lingering perception that Europe lacks economic dynamism. When reflecting on the failure of the Lisbon Strategy, former Spanish PM Felipe Gonzalez blamed the lack of “mobility” in Europe. That in America a company like Google can emerge and grow quickly into one of the biggest in the world whereas the European business hierarchy rarely changes.
There is truth in this. And if we are going to expect European business to adapt successfully to changing global markets, then we must first make sure that we have put our own house in order.
That must begin with making the internal European market work better because there are still swathes of the economy that are not properly served by single market rules that have remained substantially unchanged since nineteen ninety-two.
They include, notably, new sectors, like the digital industries, where so much of our potential for growth lies.
Trade in goods across European borders is still four times lower than what it should be if the EU was as economically integrated as the USA, even when allowing for language and geographical factors.
And we are still loading far too many bureaucratic burdens, and the cost that they entail, onto business.
We must also get more serious about innovation.
To take just one example of the sort of thing I mean; words about making Europe the “most competitive knowledge-based economy” will remain cheap as long as it costs seven times as much to acquire a patent in many member states as it does in Japan and South Korea.
Finally, and most importantly, we must uphold the principle of free trade and encourage others to do the same. Benjamin Franklin said that
“No nation was ever ruined by trade”
But plenty have been ruined by lack of it.
The OECD estimates that a ten percentage point increase in trade exposure is associated with a four per cent rise in per capita income. That is why all of us in Europe should actively, aggressively push for free trade. Starting with Doha, for which, as the British Prime Minister, David Cameron, has said
“Two thousand and eleven is the make or break year”.
We cannot afford to miss this opportunity of a hugely expanding, consuming middle class in Asia. We have the goods and services the world wants to buy - now let us have the confidence to strike those deals and sell them.
But this is not just about open trade and international finance, important though commerce is for development and wealth creation.
It is about the human spirit. For Europeans, it is about recognizing our need to change with the times, to be open to the cultural currents of a globalized world, to be flexible, to be creative, to be engaged in the wider world - because that is way we will flourish, be enriched, and grow.
There is one thought with which this retired banker would like to leave you this evening, if only his grasp of the German language were good enough.
Fortunately, your greatest poet expressed it very beautifully in his greatest work, Faust.
So with your permission, I will borrow his words for one last time this evening.
“Was heute nicht geschieht, ist morgen nicht getan.
Und keinen Tag soll man verpassen,
Das Mogliche soll der Entschluss
Beherzt sogleich beim Schopfe fassen,
Er will es dann nicht fahren lassen
Und wirket weiter, weil er muss.”
Thank you for listening.”