European Rhetoric and European Reality

Speech by Chris Huhne MEP delivered to the European Commission Conference on the Financial Services Action Plan, Brussels. Speech at the dinner for speakers, Palais d'Egmont on Tue 22nd Jun 2004

Ambrose Bierce once defined the future as that period of time in which our affairs prosper, our friends are true and our happiness is assured. I guess that there are enough people in this room with grey hair to have seen such futures come and go, and to have found the reality fall a little short of the expectations. By contrast, the expectations of those us involved with the Financial Services Action Plan were as I remember relatively low when it was launched. Yet here we are, only a few years later, 39 out of 42 measures completed. We have been through controversies that looked as if if they would sink the whole ship. We have surmounted obstacles that looked enormous and even insuperable at the time. Many of the routes around those obstacles are curious and do not go in a straight line. But overall, the body of legislation is an achievement of which I think all of us can be proud. As the period of primary legislation nears its end, it is worth remembering just how far we have travelled.

What is more, it has been over particularly hazardous terrain. Adam Smith, in a gloomy passage in The Wealth of Nations, said that free trade would never be completely attained even in Great Britain, for which he had higher hopes than most. 'Not only the prejudices of the public' he said 'but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it'.

And in financial services, free trade is even more difficult because of the political sensitivity of the field. It was not an accident that financial services was the great left over of the single market programme. This is the allocative heart of the market economy that switches savings into investments. Not only do savers have a legitimate expectation of receiving their cash back when they want it, but the system itself crucially determines the efficiency of the whole economy. Finance has to say yes or no, and those choices are crucial.

My main criterion in approaching all the proposals from the Commission has been the liberal one. Will it make competition easier? Will it open up the market? Will it extend choice? And I have asked these questions for the simple reason that, whenever I am trying to buy something, I prefer to have two people trying to sell me something than one. And three is even better. The best means of consumer protection is choice and free markets. But I am not naïve enough to believe that open markets are enough: financial services products are often so complex that their intricacies are way over the head of many customers, and those customers need help. So competition is crucial for consumers. But so is information. And so is understanding. And so often is regulation where we cannot rely on informed consumers.

The key is balance, and the appropriate balance shifts. Professional investors need little if any regulation. It is no disrespect to my aunt Agatha to say that she needs a lot of help with financial matters. But that regulation must be non-discriminatory between member states and their businesses. It must allow as much competition as possible.

Indeed, a single market programme that merely replicates excessive levels of regulation in some member states across the whole union would be actively counter-productive. Basic welfare economics tells us that protection moves prices away from a market-clearing price. If that protection is extended, more prices will move further away from market-clearing prices, and overall economic welfare would be reduced. So a single market programme only makes sense to the extent that it introduces more competition and choice, and moves prices towards the free market.

Enough of the generalities, I was asked to speak tonight to try to provoke. To call a spade and spade, and say when the Emperor has no clothes. So let me turn to unfinished business, and particularly to failures of understanding and logic in some of the member states. As a representative of Britain's most pro-European political party, I find my own fellow citizens' inability to follow the logic of the single market deeply curious.

It seems obvious to me that there can be no really effective single market without a single currency. Could the single US market be a reality without the US dollar? Of course not. It is also obvious that participation in the euro should be a logical step onwards from the thinking of so many British people who championed the single market, not least the Conservatives. Given our own track record of sterling crises, I cannot see that we would be giving up much. But I can see real benefits from tearing down the tariff barrier of having a separate currency.

I am also astonished at the lack of UK debate on the subject: the fact that our Chancellor of the Exchequer can still congratulate himself on Britain's relative economic performance when he is paying more to borrow ten year money than every other of the 15 old member states, including countries like Greece and Italy with public debt ratios three times as high. And the plummeting share of the UK's foreign direct investment into the EU - down from 27 per cent in 1998 to 7 per cent in 2002 - would worry me if I were in his shoes. Britain is performing worse than many of the euro-area's members such as Spain, Ireland and Greece.

But one of the difficulties of selling the euro in Britain is the sluggish performance of France and Germany, the two countries with which we most naturally compare ourselves, and the political economy of which deeply concerns me. Start with Germany, which was responsible for perhaps the biggest defeat of the single market legislation during the last parliament when the hard-negotiated Takeover directive was defeated in July 2001 on a tied vote in the parliament. After a massive national campaign, every single German MEP except one - honourable mention should go here to Christoph Conrad - voted against the directive. Why? In theory, because it did not go far enough to open up a cross border market in corporate control. In reality, because German public opinion thought it went too far.

The warning signs were there when Vodafone took over Mannesmann in a contested takeover bid. Reading the German press, you would have thought that it was the rape of the Sabine women. There is a marvellous doctrine in economics called revealed preference, which says that you should judge people by what they do, not what they say. And Germany just does not like foreign investors: equity capital owned by foreigners is worth just 12.1 per cent of GDP. France, by the way, is 11.9 per cent of GDP. That compares with twice as much - 24 per cent of GDP - in Britain. Or 33 per cent in the Netherlands. Or 21 per cent in Spain. Or 104 per cent in Ireland.

By the way, the comparisons are even worse when you look at a sensitive sector like financial services. The proportion of bank assets that are foreign controlled in Britain is 51 per cent - more than half. The proportion in Luxembourg is 94 per cent. In Belgium, it is 25 per cent. But the proportion in Germany is just 4.7 per cent. Looking at these numbers, you have to ask yourself whether Germany really wants to integrate with its neighbours. And so we have the delicious irony that the most reluctant European when it comes to political integration - Britain - is wholly relaxed about foreign ownership. Siemens is one of the biggest manufacturing employers in Britain. But Germany, the champion of political integration, hates the idea of working for foreign bosses. Germany is all in favour of European politics, just so long as Germany does not have to integrate with other European economies.

Germany is going to have to face these nationalist demons, and for a simple reason. Monetary union without free capital flows is not going to work. The single currency deprives member states of the adjustment mechanisms of a separate interest rate and a separate foreign exchange rate. It keeps the adjustment mechanisms of separate price levels and wage levels. And it adds a powerful new adjustment mechanism - crucial to the working of the US monetary union when for example Texas went into recession following the 1986 oil price dip - of free capital flows. These capital flows can be much larger within a monetary union precisely because of the lack of exchange rate risk, but if countries block one of the most important avenues, this mechanism cannot work. So I very much hope - for the sake of the euro area - that the new Commission brings forward a new takeover proposal. And that the Commission holds the German government's feet to the fire.

I have criticised my own country, Britain. I have criticised Germany. Let me now turn my attention to France. I was a student in France. I speak French. I am an enormous admirer of France and the French. But I am astonished by the extraordinary hypocrisy of the French Government. According to President Chirac, we need to abolish more vetoes in the new constitution so that we can build Europe more quickly. There are even hints of moving forward with a select group in enhanced cooperation. And he is highly critical of Britain for putting a brake on European progress. Well, all I can say is that people should learn to walk before they try to run. Pehr Gyllenhammar this afternoon pointed out that some of the most sceptical countries are the ones that best apply the EU's rules. He did not say that the Government that likes to employ the most high-flown European rhetoric and deliver the most stern lectures to others is the worst of all when it comes to European reality.

If you look at the latest single market scoreboard, France is the worst EU member state for directives that are overdue by more than two years. It has 9 overdue, more than twice the number of Germany or Britain. France also has the longest delay of any EU member state in implementing directives after their deadline, with an average of 14 months, more than double the time of the UK, Sweden, Finland or Denmark. And France has the worst record of any member state when it comes to open infringement cases for breach of EU law: 220 cases at the last count compared with 200 in Italy, 136 in Germany and 121 in Britain. If I came from a country with a track record for failing to apply European agreements like France's, I would not feel it appropriate to be lecturing anyone else about being good Europeans. I would want to put my own house in order first.

That track record is now particularly relevant to the next stage of financial services legislation, where implementation will be all. Just to ensure that I can maintain my reputation for biting the hand that feeds me, let me say that I very much hope that the Commission puts the resources into making this area work. Generally, the Commission has been far too slow to allocate staff to areas that have become 'hot', like merger control in competition, or financial services in the internal market. The Commission employs 22,453 people, about the same number as an average sized county council in my own country, and fewer people than Gordon Brown managed to add to the British civil service payroll in just one year to April 2003. But I would not argue for more Commission officials, just for a much more responsive allocation to important areas. And to a much more ruthless pruning of areas that are frankly unnecessary. The Commission tries to do too much, and that is one of the reasons why it does not always do what it does at all well. It needs to prioritise its tasks, and do less better.

Now that I have laid about me with fair abandon, you are entitled to ask 'what about the European parliament?'. And my response is that the list of needed improvements in my own institution would be far too long to bore you with this evening, but the recent elections show that the parliament needs to improve its game if it is to perform the essential function of any parliament, which is to create consent among the electorate for the decisions that it takes. Overall, though, the parliament has I believe been on the side of the angels when it comes to the financial services programme, and indeed the single market more widely. The big exception is the Takeover directive. But generally, we have toughened up those provisions that open up markets and ensure more choice. And that it is a real achievement both for us and for Europe. Freeing up markets is difficult politics. It is never easy to introduce changes that benefit many millions of people a little, while disadvantaging a few people a lot. The many millions of winners do not get very enthusiastic, while the few losers tend to get very angry. But we - the Commission, Parliament, Council - have done it, and it's a real achievement.