Council of British Chambers of Commerce in Continental Europe (COBCOE)
London, 10 January 2008
Dear Howard [Rosen], Ladies and Gentlemen,
It is a pleasure for me to be here tonight with you. It is no secret that I like London, that I enjoy the company of business people and that I like frank and open discussions. So tonight I feel in my natural element. I shall of course dutifully deliver my introductory speech – not least to deserve my dinner… But by now most of you will be familiar with my mantras. So you can relax and enjoy your drinks while I rattle off my speech. The fun part of tonight, the part I really look forward to starts when I stop talking and you share your views with me. And I do encourage you to be open and frank. You know I am not particularly known for my diplomatic and suave ways. So don’t be shy.
I was kindly allowed to choose the topic of my introductory remarks. I chose the topic of “The Importance of Open markets”. In times of big changes and uncertainties protectionism seems to be a natural reflex. Globalisation is seen by many as a threat. Fears seem to be on the rise now, especially since last summer. We do not know yet which will be the consequences of the financial turmoil for the real economy or indeed whether we should stop calling it “financial turmoil” and start calling it “crisis”. But what is certain is that the voices of the champions of protectionism are loud and getting louder.
The EU and Globalisation
Basically the question is: Should Europe open its doors to goods, people, ideas from outside or should it close them?
My answer is clear: We need an open Europe – open to each other but also open to the rest of the world. A Europe which is confident enough to promote its values, its traditions, its interests and its rules. A Europe which is a reliable partner in the world.
Globalisation, as such, is not really new; it has existed ever since the first trading routes were established. But what is indeed a novelty is its extraordinary acceleration over the last two decades. Whether we like it or not, the European economy is inextricably connected to global developments – the sub-prime crisis and its consequences on both sides of the Atlantic is a good example of that.
We should not fear globalisation. We should shape it. With half a billion people our market is the world largest exporter and importer. We have a more than 50 year experience of making rules which are compatible between different cultures, different legal systems, different countries. This is our very unique know-how. It gives us a unique “competitive advantage”. Just think of the innovative and modernised regulatory and supervisory framework that has been set up over the last 15 years or so in areas such as financial markets, industrial product standards, environmental policy or telecommunication. Europe has become the standard setter in these areas. Foreign companies cannot afford to ignore the EU market. As they say: “if you can’t beat them, join them” – so European rules and standards are not just respected but also copied.
More and more, the external dimension of the Single Market plays an important role. The Commission will continue to play its role, in international regulatory fora such as the WTO (World Trade Organization), the WIPO (World Intellectual Property Organization), the Basel Committee, or through private international standard setters such as IASB (International Accounting Standards Board), to push for the adoption of high quality global rules and standards.
Equally important are regulatory dialogues: Formal international negotiations or international standard setting are not always sufficient to respond to regulatory challenges caused by so-called regulatory “spill-overs” of domestic regulation on other jurisdictions. Think of the US Sarbanes-Oxley Act as a classical example. New domestic roles should be tested for possible negative spill-overs on other markets before they are adopted. Informal regulatory dialogues with key regulators and supervisors of third countries have proven to be a highly effective complementary means to tackle these challenges. In the area of Financial Services, we are already conducting such dialogues with some of our international partners such as the US, Japan and China, and we are building up contacts with Russia and India.
These dialogues have the potential for wider, global cooperation, notably in financial services. I have said it before. Transatlantic markets should serve as the laboratory of globalisation. Financial market integration runs deepest between the EU and the US. This is why we should lead by example and show how regulators, supervisors and legislators can cooperate. If we can’t do the job – why should we expect emerging markets to adopt some of our ways?
International cooperation goes of course hand in hand with the “home factor”: We must make sure that Europe and its Single Market remain an attractive place to invest, particularly for research and innovation activities in high value products and services which is where our businesses excel. So far, we have performed quite well in this regard: 45% of FDI (Foreign Direct Investment) worldwide are made into the EU. But improvements are not only possible, they are absolutely necessary to keep this advantage. The Commission has recently presented its revised strategy for Single Market Policy. Responding and actively embracing globalisation is one pillar of this revised strategy. One of the documents of the Commission’s Single Market Review refers to the external dimension of the Single Market. It sets out how, in a globalised world, Europe can build on the Single Market’s achievements and negotiate with third countries to achieve open markets and regulatory convergence.
Other elements of the Single Market Review are how to make the Single Market work better on the ground, to the benefit of citizens and businesses. Any new policy should be evidenced based. It should also be targeted – acting where the Single Market does not work as it should. Where we need to intervene we should chose among a range of instruments – not necessarily new rules. Where possible we should use other, less burdensome, ways of intervention, such as regulation or administrative co-operation. A better transposition and application of the existing rules is also important – It is no use adopting rules if we do not apply them correctly and on time.
Sovereign Wealth Funds
Allow me a few words on Sovereign Wealth Funds.
We witness times where there is increasing political concern in some quarters about the influence of Sovereign Wealth Funds. I do understand some of the concerns that have been expressed recently. Who controls them? What is their investment strategy? These are legitimate questions. There are also concerns about restrictions on inward investments that EU firms may want to make in the countries concerned. However, we should ensure that we do not give the slightest impression that the EU is not open for business, or that we are becoming protectionist. The freedom of capital movements is too precious to be jeopardised on the grounds of sudden unrest.
Some have argued that new legislation is needed to protect national security concerns of EU Member States. In reaction to this I would like to stress that investments which have the potential to compromise national security can already be blocked. It is often forgotten that a Member State is entitled to restrict Treaty freedoms on the basis of legitimate national security concerns. We do not need any new rules for that. This is true in respect of all investments, be they from Sovereign Wealth Funds, state-controlled companies, private companies or whoever. Furthermore, a number of Member States have, for example, measures in place that restrict investments in the defence sector. Recently the Commission proposed certain controls on investment in the energy sector. So Member States are perfectly able to protect sectors on grounds of legitimate national security concerns, and we must not allow the discussion on Sovereign Wealth Funds to be used as an excuse to raise unjustified barriers to investment and the free movement of capital. Protectionism and domestic focus is the instinctive response of some of politicians. That is why the defenders of the market and open borders have to stand firm.
I would not like to see the rise of Sovereign Wealth Funds, which are the by-products of increasing globalisation and international trade, being used as an argument against the entry of emerging markets’ investors into our corporate sector. But I do believe there are issues relating to transparency and governance that we need to engage on with certain Sovereign Wealth Funds. In addition there are also some broader issues relating to exchange rates which may be artificially depressed leading to massive increases in the resources of these funds.
We need Sovereign Wealth Funds to be transparent in their operations, preferably on the basis of an international code of best practice. The Norwegian Pension Fund is often held up as a good benchmark in this regard. One can also draw some useful lessons in transparency and governance by examining the fund I set up in Ireland when I was Finance Minister, to help fund pensions from 2025 to 2055. At the end of the day, what I believe most observers want is to separate the political from the economic considerations that could influence the decision of funds under government control.
We need to ensure open markets, not only in the EU but at the global level. That is why we also want to see a rapid elimination of barriers faced by our investors in third countries.
Let me also point out a beneficial role of Sovereign Wealth Funds. The current financial turmoil has clearly demonstrated that financial liquidity is vital for our economies. We have recently seen firms on both sides of the Atlantic – for example Barclays, Citibank, Bear Sterns and Morgan Stanley welcoming investment from Sovereign Funds. Why? Investments from Sovereign Wealth Funds will allow these companies to carry out their strategic aims or replenish losses on risky investment. I suspect in the time ahead we will see more enterprises seeking investments from such funds. Cutting off access to these important sources of liquidity would be like cutting off our noses to spite our faces. I would like to quote an editorial I recently saw in the Irish Times commenting on the current credit crisis: “Sovereign wealth funds that are state controlled should be seen as a financial opportunity rather than a political threat. In the developed economies, the greatest problem now facing financial markets is that a credit crunch may precipitate a global recession. And part of any solution to the credit crisis must be to encourage those with spare capital to invest, such as sovereign wealth funds, to do so.”
One thing is clear to me: Europe must remain an attractive place for investment. Without continued inward investment our economies will stagnate. We have no interest in erecting barriers to investment. My approach is therefore to be open to investment, avoid protectionism and engage with Sovereign Wealth Funds to encourage transparency.
Let me conclude with a quote from Goethe: “Divide and rule, a sound motto; unite and lead, a better one”. That, Ladies and Gentlemen, is our challenge. We have already witnessed that we can achieve a great deal together – much more than the total sum of what we can achieve alone. This has been true for the EU. It is also true for the rest of the world.