Davos World Economic Forum – Europe: Back to the Drawing Board?
PRIME MINISTER
PRESS OFFICE
January 27, 2011
The session includes:
- Nick Clegg, Deputy Prime Minister of the United Kingdom
- George A. Papandreou, Prime Minister of Greece
- Jean-Claude Trichet, President, European Central Bank, Frankfurt
- Jacob Wallenberg, Chairman, Investor, Sweden; Co-Chair of the World Economic Forum Annual Meeting 2011
Moderated by
- Lionel Barber, Editor, Financial Times, United Kingdom
L. BARBER: Good afternoon, ladies and gentlemen.
It’s a great pleasure for me to be chairing this session, not just as Editor of the Financial Times, but also as a former Brussels correspondent. We spent six years watching the euro created in the 1990s, and now we have, ten years on, some very severe challenges for Europe, and we have an expert panel, a panel with different perspectives, from the political to the Central Bank, to the private sector. And I think we are going to have a very interesting discussion this afternoon.
Now, the format is that each of the speakers will speak briefly. I will then ask a few very gentle questions, as is my wont. And then I will open it up to the floor for questions, and we can have an interactive discussion.
So without further ado, I’d like to ask the Prime Minister of Greece, Papandreou, to speak. Thank you.
G. Α. PAPANDREOU: Thank you, Ivan. Thank you very much, Lionel. I am honoured to be here this year again.
I will begin by just a few comments on the general theme here in Davos, which is on governance and equity and do we have common values in this world, and link that to Europe and say, well, why Europe? What is Europe’s purpose?
And if we go back to where it began, it was basically a peace project, a project for democracy. And it still is, and it still should be. And even if we see what is going on in the Maghreb and the Mediterranean, Cyprus, the Balkans, it still is a peace project.
But I think the major challenge for Europe today is to be a model of governance, which is also sustainable, just, towards green development, which in the end humanises our globalised economy. In saying that, I just want to make three points. One is on governance.
The Greek problem is not a debt problem. It is a debt problem also, but that’s the symptom. It is, was, a problem of governance. And we have, over the last year, made major changes in a system which was non-transparent, clientelistic; there was graft, there was waste; we weren’t competitive. Major changes, cutting our deficit by 6%, reforming our pension system; it’s a viable, a robust pension system today.
Opening up professions: We are doing that right now. We already have done some. We have changed the tax system, reformed the local government and reforming central government by making everything online, very transparent. But the markets haven’t responded. Last year, the question to me around these halls was “Will Greece default?” This year the question is “Will Greece default?”
And the question is we have been doing everything by the book. We have done what the recipe says. So why aren’t the markets responding? Well, I think the question, when it’s towards Greece, is really looking at somewhere else. It’s looking at Brussels, it’s looking at Frankfurt, Berlin, Paris, maybe even Washington, maybe even Beijing. But basically it’s “What is Europe doing, as far as governance is concerned, for the eurozone?” and this is the challenge.
And I think there are three things which need to be done, where I would say it’s not simply – I don’t want to use the word ‘austerity’ – I would call it responsibility. And there are three areas of responsibility.
First, it is with the member states. We have to do our homework, and we are doing that. Secondly, it is the financial system. Jean-Claude Trichet will be talking about that, obviously, but there we need more transparency, the necessary regulation, possibly. The stress tests are moving ahead in some areas where they may need recapitalisation.
And thirdly, the necessary tools and rules, an arsenal for the European Union, so that we can calm the markets, do what we can to calm the markets, whether it’s the bond markets, whether it’s the issues of debt – and this is where the EFSF, this new mechanism, should be able to be robust and flexible enough to intervene and help in this way.
Finally, I would just say that it means also that we need full transparency, and if last year Greek statistics was, as they said, the shortest joke, I think today we are at the forefront of being the most transparent country, or one of the most transparent countries, in the world, I would say, with everything online. And I think the age of transparency is very important in this, to develop the trust and the confidence in our societies and in the world.
Before I finish, there are two other points, but I’ll get back to these in the question & answer. The question of equity and inequality and the social cohesion – very important, if we want to be managing the risks we are talking about. And the questions of green development and development and growth in general, and how that links up with our European future. Thank you.
L. BARBER: I’d now like to turn to Nick Clegg, Deputy Prime Minister of the United Kingdom, the leader of the Liberal Democrats and a leading member of the new coalition government, which didn’t actually go back to the drawing board; it tore up the rule book for British politics, forging a coalition. Nick.
N. CLEGG: Lionel, thanks. I speak as probably a rare British politician who is still prepared to both admit to and still defend my view that, at the time the euro was created, it was something that deserved everyone’s support. In fact, at the time I even advocated Britain’s entry into the euro.
When I think about the drawing board that I believed in then, however many years ago, and what has happened in the eurozone since, I don’t actually think, in direct answer to the question do we need to go back to the drawing board, it’s a question of rewriting the drawing board. It’s kind of actually returning to what the drawing board said in the first place. I mean when the euro was first established I remember being particularly attached in my own mind to two things:
Firstly, that having this monetary policy straitjacket on a range of different countries with different conditions would at least force all the countries within the eurozone to implement meaningful and far-reaching structural reform. But because – so the theory goes – without the ability to devalue yourself into the growth and to use monetary policy in a capricious way, you have to find other ways of really hardwiring competitiveness into your economy.
So I was from a small-l liberal economic background, who felt that this would be a good thing for the long-term competitiveness of Europe as a whole and certainly of those who are part of the eurozone, because all the burden would then be placed on governments to actually do the kind of domestic homework that I believed, and still believe, is necessary for Europe’s long-term benefit anyway. That was the first thing.
And the second thing was, of course, the flanking walls, the Stability and Growth Pact and so on, and all the other belt-and-braces assurances within the Treaty at the establishment of the euro, which were designed to make sure that member states would conduct themselves fiscally in a way that was responsible, sustainable and consistent with their sort of mutual duties towards each other within a monetary union.
And I felt that was a neat way of resolving this perennial debate about does monetary union lead to fiscal union, and so on. You know, I kind of believed and I still believe now that, if the kind of rules and disciplines that were there in the first place are fully adhered to, actually you wouldn’t create many of the tensions which lead to that debate.
What of course has happened is that, on both of those counts, things didn’t quite turn out that way. Governments didn’t stick to the rule book, and they certainly didn’t implement a lot of the structural reforms which I thought were going to be an inevitable consequence of the creation of the Europe, in part because – and everyone is familiar with this in a meeting like this – money became so readily available; credit was so cheap.
And so cheap credit kind of papered over the cracks. It reduced pressure on politicians and governments to do the difficult, controversial stuff to make their economies competitive. And that’s how we had these asset bubbles, and we had highly indebted behaviour by consumers, both in the private sector and of course in governments as well.
So I start, as an observer, if you like, as deputy prime minister of a government that is not part of the eurozone, firstly fervently hoping that the present issues and problems are comprehensively resolved, because I am a passionate European by conviction and indeed by upbringing, but, much more prosaically, because it is overwhelmingly in Britain’s self-interest. We are utterly interdependent on the economic fortunes and ups and downs of the eurozone. Over half of our trade is with the eurozone. We have a massive strategic national self-interest to see the eurozone succeed.
And my view is, for it to succeed, we don’t need to redraw the drawing board in full. We need to return to some of those basic insights which were on the original drawing board, that you can’t grow unless you do the difficult homework of structural reform domestically, and you can’t have a strong, sustainable currency union if the basic rules upon which it was established are not adhered to in the first place.
L. BARBER: Thank you, Nick. And very interesting you said that you favoured UK entry into the euro in 1999. Do you still favour British entry?
N. CLEGG: Not now, no. Not now.
L. BARBER: Jean-Claude Trichet needs no introduction. Nick Clegg made a very interesting point there about what Mervyn King, the Governor of the Bank of England, calls “the NICE decade,” non-inflationary credit expansion.
Jean-Claude, your perspective now on the eurozone crisis and going back to the drawing board.
J.-C. TRICHET: Well, first of all I would say that even without the UK we are now 331 million people, the order of magnitude of the United States of America.
And I would like only to say a word on monetary union, before going to economic union, because it was very much what you said, Deputy Prime Minister, on the structural reforms, the governance, and so forth; it’s economic union.
As far as monetary union, we have, after 12 years of the euro, delivered price stability, in line with our definition – less than 2%, close to 2%. It’s exactly a yearly average of inflation of 1.97%. It is a track record which is, again, fully in line with the definition that we gave ex ante, and it is better than any such average inflation over any such period during the last 50 years.
So I can say in every capital in Europe the euro delivered what had been asked from it, namely price stability. And the information that we are extracting from financial markets and various panels are crediting us from the same stability in the next 10 years. So in that sense I would say monetary union has delivered as was foreseen.
Economic union, it’s a different story. We had the problem of benign neglect, which was more or less a universal problem in all advanced economies. Benign neglect vis-à-vis fiscal policies, and in many respects benign neglect vis-à-vis all elements that were creating a fragile financial system, and by way of consequence a fragile real economy. So there we have a lot of work to do.
But that will replace the work, the hard work that the Europeans of the euro really are, and the Europeans of the 27 single market endeavour have to do within the framework of all advanced economies. We all have now to draw all the lessons from the worst crisis since World War II, which could have been the worst crisis since World War I, had we not reacted boldly and promptly. And I am speaking of central banks and of governments and parliaments.
So these lessons have to be drawn by all of us, and in the case of the euro area particularly. We are drawing them, by the way, at the global level and at the European level, very actively. All the reinforcement of regulation, prudentials, all what permits to have a better understanding of systemic risk and macro prudential. All that is work in progress, I would say, on both sides of the Atlantic, and we cooperate very intimately.
In the euro area in particular, there we have really to improve governance, and improve governance on two pillars. One is the Stability and Growth Pact. With the benefit of hindsight, it appears absolutely extraordinary that in 2004-5 the major countries in the euro area wanted to blow up the Pact.
SPEAKER: That’s France and Germany.
J.-C. TRICHET: Yes, France, Germany, Italy considered that the Pact was, probably echoing what was said by others, that the Pact was stupid. There was a benign neglect which was quasi-universal. The markets were not looking at these parameters and indicators.
And I have to say that we had to fight very, very fiercely only to maintain the Pact, with the small countries, small and medium countries, that were in favour of the Pact. Now of course it’s absolutely un-understandable, when we have, again, the benefit of hindsight, how we could be loose to that extent.
A second issue which is also very important, and we admit the point ourselves: Very soon in the course of this formidable endeavour, which is the single currency endeavour, we had the idea that it was necessary to follow very carefully competitive indicators, unit labour costs, the imbalances, national imbalances, in order to be sure that we would have appropriate coherence within the euro area.
And now it’s work in progress. There are debates between the Parliament and the Council, the governments, on the best way to improve governance. We ourselves call for a quantum leap of governance, and we already said that even the first proposals of the Commission were considered by us too timid, too shy.
To the extent that the governments had then weakened the proposals of the Commission, we are shipping our messages to both governments and parliament, because really, as was said by the previous speakers, reinforcing governance is absolutely of the essence. It’s one, in our case, of the major lessons to be drawn from the crisis.
But again, all advanced economies have their problems. The paradox of Europe, as far as fiscal position is concerned, is that the euro area is in a better position, at the end of the year, as a consolidated position, in a better position, with 4.6-4.7% of the deficit of public finance, than, say, the US and Japan.
So, as a group, as a single market with a single currency, we are in a consolidated situation, which is better than others. But it’s no time for complacency, and in some cases it’s far from being sustainable, so we have to continue to work very, very hard. And again, it is no time for complacency in any respect.
L. BARBER: Thank you very much. Now you’ll see that this panel is very carefully balanced here between public and private sector, those in the eurozone and those outside the eurozone.
Jacob Wallenberg, your Nordic perspective here. As you are probably going to say, the job creation and the growth has been pretty impressive in recent years.
J. WALLENBERG: Yes, it has indeed, and it’s something which is debated in many places here.
But if you allow me to be the sole voice of business here, and just make a few reflections, putting myself in perspective, I am the chairman of an investment company, Investor AB in Sweden. And we’re a family; we’ve been in business 150 years, and we are main shareholders since a long time in companies such as ABB, Ericsson, Electrolux, and Skandinaviska Enskilda Bank.
Now, they all have a strong historical base in Sweden, but today they are all truly global, spanning the world from South America to Asia, all around.
Now, on the question on how to move Europe forward, let me just say the obvious. Politicians, as we heard, have a central role, and I would just like to underline that I think you have done a lot. I think during the financial crisis the kinds of decisions that were undertaken by politicians are commendable and should be applauded. And I think it was extremely well done.
Now, ultimately I believe that, in order to deal with many of the challenges we then have today that have been discussed, we have to cooperate. We have to cooperate between business and politics, and I guess we have to communicate and be in the spirit of Davos, if you wish.
Because now, from a business perspective, as the world has changed and as a shareholder I have pushed the companies I am involved with on a number of points, we pushed them towards restructuring, to increasing productivity, improving efficiency, how to invest for the long term through research and development, and of course how to go global and get even closer to the ultimate client, to the consumer.
Now, that’s what I push for. And with that in mind, of course I then turn to my fellow European politicians, or leaders, and ask: What more can you do? Or what more can we do together, moving forward?
Let me just say a few things. In the aftermath of the financial crisis, I believe that you need to make sure that we get public budget stability in Europe. It has been mentioned by all of you, but I really want to underline it: We need solid agreements, leading to transparency, to clarity, level playing field, ultimately that we have an order in our public finances to finally create that full trust that we were talking about in the capital markets.
On a second point, we need to further focus on education and research and development. I think ultimately both the public and the private have to invest even more. On infrastructure, I take note that Europe came apart late fall, as snow started to appear on the scene. And I think that Europe, collectively speaking, is heavily underinvested in railroads, airports, roads and ports. I think we have a lot to do there.
Labour markets is something where I think we can develop a lot. We’ve come a long way; I think we can do more. Immigration, integration are hot issues. It’s part of the Davos issue; we can come back to that. But I think if we summarise, when we hear President Obama’s State of the Union Address two days ago, and he speaks about the need for the United States to be more competitive, now how often do we hear the President of the United States come forward so strongly? Well, then I believe that Europe, we don’t have a lot of time to waste. I think we all see how countries such as China, India rapidly are becoming much more competitive. In my book, they are hungry, they are good, and they want to achieve.
So I believe that Europe now has to be decisive. We have to deliver. And we all, business as well as politicians, have to participate. And I think we have to take responsibility, and we have to show a sense of urgency, because if we are going to move forward I think we have to realise that there are new competitive powers out there. It’s not a matter if they are going to bypass us; I think the risk is they are going to run us over.
So I think we have a tough challenge, but I think we all have to pay respect to that and debate that. Thank you.
L. BARBER: Thank you very much. I think there are three themes that come out of the comments which have been made by the various speakers. One is obviously: How do we get back to growth? And not necessarily the kind of anaemic growth which many countries on the Continent have experienced over the past decade.
Second, the question of market confidence. How you actually can get ahead of the markets and convince them that the measures will work. And third, this question of governance, complicated.
Now first of all, Prime Minister, your government has, as you say, taken some very bold – belated but bold – steps to both curb the deficit and to introduce very difficult reforms, particularly pension reform.
But you are not getting much credit in the markets, and the markets are saying: Whatever they do, they’ve got a huge stack of debt and a huge deficit. And that’s the combination which means that at some point there will have to be a restructuring.
And second, the growth. Whatever you do in terms of growth is not going to be enough to bring these levels down. What do you say to the markets and to this audience listening, to crack that?
G. Α. PAPANDREOU: Yes, a good question. It’s something which we see written about almost every day.
I would say – and of course the question of restructuring has been there for a long time over the last few months, since last year. The question of default, I’d say, no to default. And I’d also say we are not moving to restructuring. We have a very clear path and I would say roadmap to move out of the debt problem. And I think there are two elements here.
One is that we are doing what is necessary. All these major changes, and they are very painful, very difficult, but we have shown the will. Last year I was getting the questions: Can you do it? Will you do it? Can the Greek people sustain the pain? We have shown we can.
And we have done most, I would say, of the difficult things; there are still many things ahead. We frontloaded the changes: 6-6.5 reduction of deficit is huge for a country. Next year it will be over 2% more reduction. And we are on a path where we think that we can get to growth in 2012 and restore confidence, and we are hoping to open up to the markets even this year.
Now, we are doing what we should. The other thing that I was talking about, of course, is that OK, we can’t live in a situation where, as the philosophers of chaos would say, the flutter of the butterfly in one part of the world can create a storm in the other part of the world, where we have felt over this last year that, even though we are on a very robust path of change, the markets are going up and down and we are going up and down with them.
Of course we are protected by this new mechanism, but that’s not enough, because this doesn’t create the confidence, even in our country…
L. BARBER: So you need a bigger mechanism.
G. PAPANDREOU: So I think that the discussion that is ongoing about a stronger mechanism, a more flexible mechanism, all the necessary tools – I don’t want to get into the details – are there to be able to deal with the market. There even have been discussions about the Eurobond. Politically that might be a bit further down the road.
But still, the EFSF could be I think a very major tool to calm the markets and deal with some of the debt problems; for example the lengthening of the debt we have to the IMF and the European member states will, if you look at the graph – we don’t have a graph with us here – will I think alleviate a lot of the fears of the markets about the bump we would be facing around 2013-2014.
L. BARBER: I’m going to ask the same question to Nick so he’s got lots of time to prepare. But what some people would say is: Why is it that, when contracts have been rewritten, say, in the public sector, where people are losing their jobs and where the terms of pensions, those contracts are being rewritten, why is it that we can’t rewrite, in effect, contracts for bondholders, where they take some losses, too?
G. A. PAPANDREOU: You are asking a theoretical question which I think Jean-Claude Trichet could answer.
I have understood that when questions, we politicians sometimes, in this world of communication, have much more power through our statements than is always needed. And it can be very constructive when we answer questions very constructively.
And a question like that obviously…
L. BARBER: It’s a very philosophical question.
G. A. PAPANDREOU: Not at all, but I would say we have made a decision, very clearly, that we are moving on a path. Yes, this is a decision already made in the European Union: a lengthening of the debt that we have to the IMF and the European Union. There have been discussions about the terms of the loan also. These are in the pipeline.
I think these are things which all will be positive, and at the same time I would say that we have to see – you have mentioned the growth scenario in the European Union, which is, on the one hand, a new confidence by the markets towards our countries. But it also is, I would say, using a number of methods, EIB, the Eurobonds – this I think is something that generally people have approved of, as methods of investing in projects and particularly into a greener Europe, which I think is very important. And that will bring growth.
And if we have growth, you can see immediately with the graphs that the debt of Greece will come down quite quickly.
L. BARBER: Well, we’ll come back to that question, the green question, in a minute.
Nick, perhaps you could offer a British perspective, a coalition perspective, here, where essentially you’ve taken a calculated gamble or a calculated decision to act early and decisively to reduce the deficit, in a way to try and get ahead of the markets, to head off any loss of confidence in the bond market. Perhaps you could explain the thinking here. And whether you are overdoing the austerity.
N. CLEGG: As you can imagine, I bridle at your characterisation of what we are doing as a gamble.
L. BARBER: No, it’s a decision.
N. CLEGG: Well, it was an unavoidable decision.
I mean I think sometimes memories are very short. People tend to forget that when this government was first formed in May we had one of the largest deficits in the G20, one of the largest deficits in the European Union. We are spending as much per year simply on the interest on our debts than we are on the whole of our defence budget. We are spending GBP120 million a day just on the interest on our debt. That’s enough to pay for a primary school to be built every hour.
And, as I think you implied in your question, if you don’t act yourself other people will force you to act. It becomes a very fundamental issue of economic sovereignty. Do you, particularly as a newly elected government, try and impose your will on your own economic future? Or do you say no, it’s too difficult; we’ll be forced to do it on terms over which you will have no control?
And I think it was exactly the right thing for a new incoming government to say, “We have to seek to take control of this.” Otherwise what is the point of saying that we are going to try and sort out the mess over the next five years, if we don’t equip ourselves with the means to do it? That’s the first point. It’s a fundamental issue of kind of control and sovereignty.
The second one is, what we have done of course is we haven’t imposed a sort of sword of Damocles of cuts overnight. We have announced a plan which will be implemented over four or five years.
I understand psychologically that for many people when they hear the announcement they think it has happened. Actually what is now going to happen is that the vast, vast, vast majority of the savings and cuts haven’t even started yet. And they will now be introduced in a very carefully staged way, over a four-and-a-half year period.
Yes, that is faster than the deficit reduction plan we had introduced. But I think the kind of pendulum certainly in the public debate has swung to the other extreme. Everyone sort of is assuming that it has been done abruptly overnight.
As it happens, at the end of this comprehensive spending of the EU period in 2015, in cash terms we’ll be spending more as a state than we are today. As a proportion of GDP, we’ll be spending about 41% of GDP on public spending, which is about a 4-5% more than Gordon Brown and Tony Blair were when they came into government.
We will employ around 200,000 more people in the public sector than Gordon Brown and Tony Blair did when they came into government in 1997. So yes, this is a bold plan. But it is not a plan which is being unthinkingly imposed overnight.
And when you put it in the perspective of a) the pressures we were under last May, and the kind of context of how much we will still be spending after we have balanced the books, I kind of hope over time people will see that, yes, it’s determined and it’s clear, but it’s also measured.
L. BARBER: And just to pursue, just briefly, this point about going back to the drawing board, clearly the United Kingdom in the previous decade had benefited from a very strong suddenly performing financial services industry. Do you think now that Britain needs to rebalance its economy in that respect? And where do you see the growth, other growth engines coming from?
N. CLEGG: Well, I think we are, again, inescapably having to do two very big things at once. It’s extraordinarily difficult and complex, this. We are first having to deal with excessive government debt, an over-leveraged banking system, and excessive private, consumer debt. And that takes time to unwind, and that itself is a challenge.
At the same time, we are having to deal with an economic order which for the last 10-15-20 years was over-reliant on one particular sector of financial services, in one particular part of the country, acting as a locomotive of growth for the rest of the country.
That doesn’t mean you should try to in any way inhibit the entrepreneurialism and dynamism and growth of the financial services sector. We need and we must continue to have a strong financial services sector.
But we shouldn’t, in strategic terms, over-rely on any one sector, because it has created this imbalance such that you’ve got parts of the country which are, as I say, very over-reliant on one commercial sector, and other parts of the country – I am, for those of you who don’t know, my constituency is in the north of England, in Sheffield, in a part of the country which has almost become wholly reliant on the public sector.
And that’s very, very unbalanced. It’s socially unbalanced, it’s sectorally unbalanced, and it’s regionally unbalanced. And so what we are having to do is, as well as dealing with over-leveraged banks, excessive government deficit and debt, excessive debt amongst consumers, we are also having to re-balance growth, which I think requires a number of things.
It requires a stable macroeconomic environment; it requires continued investment in infrastructure, particularly transport and energy infrastructure; crucially, it involves the ability to improve the performance in terms of skills that we equip people with, where we’ve traditionally been very weak in some important respects.
And then to provide the right incentives for growth in new areas, whether it’s advanced manufacturing, where even, notwithstanding the rather disappointing figures of GDP in the last quarter of last year, there is some very significant growth in the British economy, or in new sectors where we think we have a competitive advantage.
L. BARBER: Thank you very much. Jean-Claude Trichet, you described in graphic image the time when the two major countries in the eurozone, Germany and France, the leaders, the political leaders, sought to blow up, in your words, the Stability and Growth Pact.
Now, is the lesson from that actually that this curious halfway house that we have in the European Union and in the eurozone, where we have a supranational European Central Bank but we also have clear discretion for the nation-states to manage their budgets, that actually that’s not feasible?
You need to move, in other words, to what the Germans call a transfer union, to get the kind of economic union to match the monetary union which you described.
J.-C. TRICHET: First of all, I mentioned a period which has been a period of benign neglect. And as I said, the major countries were sharing the view that the fiscal framework was not necessary. The markets were sharing that view, and even, I would say, other European institutions were thinks also that it was too tough, and so forth. That is the past.
In any case, what had been constructed at the very beginning, EMU, had an element, a component, which was quite strong as regards the constraint on fiscal policies. Because as you remember, for the 27, for the European Union members, there is no sanction.
But for the members of the euro area, the recommendations, the corrections that had to be taken by the various countries, were sanctions, comprehensive sanctions, and that’s precisely at the moment where the major countries had the sentiment they could have sanctions, that they tried – and succeeded in some respect – to weaken the Pact, weaken the letter and weaken the spirit of the Pact.
So we had to go back to the fundamental consideration, that when you have a single currency, of course you need a very strong economic union, with elements of, as we say ourselves, quasi-automacity of sanctions.
Otherwise you would unavoidably, at a certain moment, be in a situation where the configuration of the political constellations would call for being loose. And we cannot afford to be loose.
Again, I say that for the European Union. Let me say that other major economies also had some problem. And they were in a situation where they had to engage into corrections. I think that what the UK is doing is very important. And I would say this motto of being ahead of the curve is exactly the appropriate motto, in all domains but particularly in this domain, where you have to improve confidence.
And confidence is a very comprehensive concept, you know? If you have confidence, you have both the confidence of the savers and the investors in over-simplifying the markets, but we have also confidence of the enterprises.
And we consider ourselves at the level of all our observations in Europe and in the euro area that there is no contradiction between having a solid and sound and reasonable path towards fiscal sustainability, and what is necessary to pave the way for sustainable growth.
We see that the channel of confidence is essential to illustrate this complementarity in the two goals.
L. BARBER: Again, just a very quick historical perspective, because you went through the really severe currency crisis in 1992, where the British pound and the Italian lira were expelled from the exchange rate mechanism.
You went through that period when essentially there was an improvisation and the currency fluctuation bands were expanded. And then we went on to the launch of the single currency.
Now here in this crisis we have gone through a similar, really severe storm, and some mechanisms have been created. What do you think is different now, in the mood amongst the member states today, compared to a year ago?
J.-C. TRICHET: Compared to a year ago?
L. BARBER: Yeah.
J.-C. TRICHET: Well, I think that we are all – and again I don’t think it’s only the process of the European Union on drawing the lesson for the crisis, but all over the advanced economies, we are crystallizing our own lessons to be drawn.
And it’s absolutely clear that what was perhaps still a little bit possible a year ago, namely to say well, after all, fiscal policy as a quality of the signature of the governments, is not that important. Now nobody can challenge that. And there has been a driving change from that standpoint. And I would say it’s not only a European change; it’s a global change.
And by the way, I have a side remark. We are working a lot at global level to introduce an element of resilience, of solidity, in the global financial system. The European member states are working very actively in this domain, and together with Mervyn King we had the inauguration of the Systemic Risk Board, which has been created by the Europeans. We have exactly the same kind of entity on the other side of the Atlantic.
But all that being said, it is absolutely striking that if, despite all our efforts, we had a new problem, of the kind of the 2008 difficulty in the private sector, if the public authorities had no authority, no credibility, how would we arrest the catastrophe?
We arrested the catastrophe because we were credible, at the time, in ’08 or ’09. And I think that we have also to reflect on that. We cannot let the signature of the public authorities in a situation where the market would have a lot of doubts on that, because again we would be then in a world which would be much too dangerous.
L. BARBER: Well, as Editor of the Financial Times, I couldn’t possibly put words into the mouth of the President of the Central Bank. But I would say that I think, just picking up what Nick was saying about interdependency, it seems to me, as an observer, that there is a higher level of appreciation in certain countries in the European Union about the interdependency.
J.-C. TRICHET: I wanted to say that myself. I appreciate enormously what Nick said on the dependency of the UK on our own prosperity, and it’s so obvious.
But we have to know that the UK is for us, as far as trade is concerned, more important than the US. So we have ourselves an immense stake in the prosperity of the UK.
L. BARBER: Let’s go finally to Jacob Wallenberg, and then I promise I’ll open those. I’m afraid it’s such an interesting discussion.
Just talk to us a little bit more about job creation and growth, from your private sector perspective, because this is really where Europe, continental Europe, has lagged in the last decade. A bit of an exception with Germany recently, but still it’s a big problem.
J. WALLENBERG: Obviously it’s a problem here. It’s an area where the Swedish current government, the conservative one, has won two consecutive elections on the basis of job creation. And so indeed it’s something which is very much in focus.
I think, broadly speaking, that European business has to rethink. And we have to work together with our fellow politicians, as I mentioned before, in order to stay more competitive.
And it goes back to the very fundamental question of education, research and development. It goes back to having a more educated population. It goes back to moving – I think we have to have an understanding with labour unions, with the labour movement, that it’s acceptable to move jobs to other places, but have some kind of flexibility in your system, like they have in Denmark.
And that we are working on in Sweden, where you accept that you can move a factory, which we’ve done from Sweden in great numbers. You re-educate the people in Sweden, and out of this you have a collaboration in the issue; we call it job creation market, entrepreneurship, and so on. And we re-create the new jobs, but at the higher knowledge content.
It works. It takes time. You need a lot of flexibility from all the interested parties. And it goes dead against a number of accepted premises in labour relations.
L. BARBER: Such as?
J. WALLENBERG: Well, that if you have a job you don’t move a factory. You don’t run the risk of losing lots of jobs long-term, and they will never be re-created locally, and so on.
I mean of course people are afraid that you are not going to re-create jobs. It’s sort of like you have to jump, and it take a lot before you actually dare to do it. Our experience is it works. But it’s just one example of many.
But my point about talking about India and China before is that they are so much on the move, also when it comes to high tech. We’re not talking about the old times, when, you know, you had low-cost, low-value-added products coming out of these countries. They are competitive at the highest technological level.
And I think we have to accept it and we have to deal with it with open eyes. And that, I believe, means that we have to break a lot of traditional values.
L. BARBER: Fine. I’m going to open it up to the floor. We don’t have an enormous amount of time, but would anybody like to ask a question? If you just raise your hand. I can’t see a thing, but that’s fine. The gentleman there.
QUESTION: A question on monetary union. It’s interesting that we talk about a euro crisis, but at the same time the Federal Reserve and the US government has both 16% of its own GDP, printing money with quantitative easing. Sterling and the UK government has done the same with the Bank of England.
And the euro and the central bank, the ECB, has not printed a single euro. If we add the Greek bailout and the Irish bailout, it’s 200 billion. It’s less than 2% of GDP. So is there a way to solve the situation, when the key counterparty trading pounds and dollars have printed 15% of GDP, and Europe, with the two bailouts too, adding the ESF another four, if and when it will be used…
L. BARBER: OK, I think I’ve got the drift of that question, and I think probably Jean-Claude Trichet should perhaps say something.
J.-C. TRICHET: I think the question would call for a very, very long response, and I have to say that I am not sure that I would share entirely your presentation. You have also to take into account the inflation expectations, in the medium and long run.
You have to take into account the various non-standard measures that have been utilized by the various central banks, which were not the same, as you rightly say; as far as we are concerned, we did not engage in quantitative easing.
That being said, we engaged ourselves very early, because it was appropriate in the case of our own economy, in unlimited supply of liquidity at a fixed rate, which is something very unusual.
By the way, Barber, that we started the 9th of August 2007. And that marked, in our own constituency of the Central Bank, the start of this turbulent episode that we had to cope with.
So let me say that I consider that between central bankers we are very united in purpose. The purpose is to solidly anchor inflation expectations in the medium term, in line with our understanding of what is price stability. Very easy in my case. It is less than 2, close to 2.
I think it’s very easy also in the United Kingdom; it’s 2% in the medium term. And our friend Ben Bernanke says himself, “If I am asked what is price stability, I would say, in the medium term, 2 or slightly below 2.” You see that when I speak of unity of purpose, I am clear.
That being said again, I don’t dispute that we have different economies, different shocks, different structure of the economy. For instance, our own economy is financed massively by banks, which explains that we concentrate on banks. The US economy is financed massively by markets, which might explain that they have concentrated on markets.
L. BARBER: Yes, I think it would be fair to say that, although the European Central Bank may not have engaged in quantitative easing, the EU governments, including Greece and the UK, have definitely engaged in quantitative tightening. Thank you. Who is next? Yes. There is somebody waving at me.
QUESTION: Thanks very much. I wanted to come back to the point that was raised first of all by Papandreou in his introduction on the question of social cohesion. And it’s also to take up the whole question of jobs and so on.
And I am grateful for what Wallenberg has said, because he has talked about the question of state investment in infrastructure and so on, which could be part of job creation work.
I think one of the issues which has been forgotten in the short-term memory problem that there is very much in Europe and elsewhere has been that, when the response to the crisis was being dealt with and assistance was being given to the markets, particularly in the financial services area, there was a lot of talk and rhetoric at the time about a jobs-led recovery, about the need to maintain social cohesion and about creation of jobs.
If we look at the latest figures from the ILO, the job situation across the globe, and in Europe, has got markedly worse. And unfortunately there is a real problem, and a question that could be asked by people outside this room: What steps need to be taken to promote social cohesion? We’ve seen already…
L. BARBER: OK, got it. Otherwise we’re going to have a little speechette. So would you like to tackle this question of how you create jobs while maintaining social cohesion?
G. A. PAPANDREOU: Well, I just wanted to be controversial on this a bit, taking up what Jacob Wallenberg said, and the Nordic model which I very much appreciate. I lived in Sweden some years.
Competitiveness is absolutely essential for Europe. at the same time, the fact that other parts of the world, the emerging countries, are competitive is also – and we have to recognise this, and there is a lot of ideological baggage behind this, but I want to put this out – low wages, no collective bargaining in some of these countries, a lack of any kind or very small types of pensions or health services, the capability to easily degrade the environment for production purposes. These all do give a competitive edge. That’s not the only thing that’s at play, but it is part.
Now, the question for Europe is: Do we emulate that model? And that is a very big political question. And this is a debate, and this is a controversial debate, because what we are seeing – and I am saying this to a group here that represents some of the wealthiest in the world – we are seeing, on the one hand, a race to the bottom, at the level of the middle class, and they are being squeezed, and the working class. And at the top, we are seeing a race to the top: Who will concentrate more wealth and more riches? That is unsustainable.
The question of equity which Davos has put is very important. Politically, I believe we are at a tipping point, where we could see – and there are signs in Europe – more nationalism, more racism, anti-Muslim, anti-Semitism, fundamentalisms of all types, populisms. And I think we need to go to a different model.
Is there a different model? Yes, it is a Nordic model. But the Nordic model has two things. It doesn’t only have a leap of faith, but there is a net there when you leap. And you need the flexibility, but you also have been able to show that this social welfare system, that model, is important.
You have been able to combine and show the competitiveness. You can have competitiveness, if you invest in innovation, education, make sure that our democracies are robust because that creates an innovative spirit. And I think this is where we need to go.
L. BARBER: Do you want to have a quick word on this? The question of a new economic model?
N. CLEGG: Yes, very quickly. I think if you are trying, as I said earlier, to unwind the effects of private, corporate, government debt, and rebalance an economy, I would say you need absolutely the following ingredients in place:
Firstly, obviously a stable macroeconomic environment. Without stability and a kind of clear sense of a kind of macroeconomic plan, you have uncertainty, and uncertainty means that people sit on their money, they don’t invest, they don’t spend. And that is absolutely destructive for job creation.
Secondly, certainly in the case of the United Kingdom we need to do much, much more to release the potential for more job creation in the private sector. And that means playing our bit to try and get the banks to particularly lend money to those cash-starved parts of the private sector. It means providing a tax regime which is favourable to private sector activity, a regulatory regime which is favourable to private sector activity.
Thirdly, infrastructure investment – George mentioned this earlier – I think particularly in the area of green investment. We are establishing in the next few weeks a Green Infrastructure Bank, to leverage in significant amounts of both public and private capital into new energy infrastructure, a huge, most ambitious renovation of the building stock in Britain that has been seen in generations, what we call the Green Deal, could potentially create hundreds of thousands of jobs. I think that’s a particularly job-rich area.
We need to maintain demand. We are making changes in the tax system, notably by actually lowering the tax burden in the income tax system for the 23 million basic rate taxpayers, people on low and middle incomes. Not only because it’s socially the just thing to do; it’s also a way of getting the wheels of the economy moving.
I’ll only say two other things. Welfare: absolutely. And this is absolutely germane to the European model. It’s not a welfare system that picks people up when they’ve fallen down, that protects the vulnerable, that protects the weak. But you can’t and you mustn’t have a welfare system that actually destroys incentives to work. That then almost becomes a self-defeating form of welfarism, and I think there is plenty of evidence that the way in which the disincentives to work have accumulated, at least in our welfare system, needs to be changed.
Final point: There is a real, real problem, if not a crisis, across Europe. And actually, from Claude’s point, not just Europe but across developed economies, about underemployment amongst young people. It’s not actually just an issue which is acute at times of recession.
There is a longer-term trend of young people leaving school and college and not able to find work in sufficiently large numbers, which is a problem which existed in good times. It has now of course become much more acute in bad times. And I think that is something that I would put right at the top of the political agenda.
G. A. PAPANDREOU: I would just agree with Nick that – and we’re doing this in Greece also – the social welfare system should not be something where you put somebody sort of on the side and in a refrigerator, as we say in Greek, but you have them being very active, getting out on the market and so on.
But I think that Europe can also play – and this is an important role – as we are consolidating fiscally and being very robust, that Europe, as the European Union, can invest in big areas such as green growth and infrastructure, opening up the market even more, to make it – you know, in the patent system, the e-commerce and so on – to really make Europe much more a growth model.
L. BARBER: I am under strict instructions not to go over time. So I think I am, at this point, going to have to call a close to what I hope you found a very interesting discussion. I’d like to thank, on your behalf, all of the participants for having to put up with my questions. Thank you very much indeed.