Brussels: Opportunities and Threats

Speech by Chris Huhne MEP delivered to the Quoted Companies Alliance on Wed 15th May 2002

I am very pleased to speak to you tonight. I would like to do so informally, and respond to any questions and comments that you may have on the whole Brussels process. I am particularly pleased because I passionately believe that small quoted companies - the QCA members outside the FTSE 350 - are one of the most vital parts of any successful, entrepreneurial economy. First, you have already proved yourselves to be significant wealth-creators, innovators and employers. Secondly, you are the future champions of tomorrow's economy, whether a Microsoft, Intel or Cisco systems. Thirdly, the smaller quoted company is an emblem of so many others' hopes and aspirations, of all those other entrepreneurs in unquoted companies who dream that one day they will be able to bring their company to market, capitalise the value of their present income stream and their future hopes. You are, in short, an essential part of the motivating movement of a successful capitalist economy, and long may you remain so.

I should also add that I have been impressed over the last few months of our joint work on the proposed draft prospectus directive, and I have particularly valued the co-operation and commitment of John Pierce and Andrew Smith. As Andrew wrote in the latest QCA voice, we have won a considerable battle with the successful parliamentary amendments in the first reading, but the war is not over. For the prospectus directive to enter into force, it will need at least another reading, with the assent of parliament. But it will also need 71 per cent of the votes of the nation states represented in the council of ministers. At present, the council working group is looking at the proposals. We are making progress in pressing our case for a lighter regulatory regime for smaller businesses. I think we are seeing off the proposal for annual updating for small businesses, for example. And I think, by hook or by crook, that we shall ensure the continuation of the current succesful risk markets such as AIM.

I wanted, though, this evening to broaden out the conversation from the prospectus directive to talk about other issues. Brussels is too often perceived in this country as a threat to some cherished national way of doing things, and sometimes it is and must be resisted. But Brussels is not some demon bureaucracy hell bent on imperial conquest. The total number of employees of all the EU institutions actually numbers 23,000, which is the same as Surrey County Council and half that of Birmingham city council. Moreover, their role is rightly a narrow one that leaves the key political issues of health, education, crime, and social security to the nation state.

But Brussels is increasingly the place where we regulate business because of the need to secure the real benefits of a large single market of 375 million people. This, after all, is the objective of the prospectus directive. To enable you, coming to the market in the UK, to go to any investor anywhere in the EU with the single approved prospectus rather than, as today, having to rely on 15 approvals before you can do so. To enable you to sell your products anywhere in the EU without fear that some national regulation will impede your access. To allow you to take advantage of the economies of scale that our American cousins have been able to rely upon for so long.

And let's not become gloomy about our ability to work the EU system. As we together have shown in the successful amendments to the prospectus directive, a good case can carry weight. We can build coalitions with allies on the continent who no more want to see heavy-handed insensitive regulation than we do. I know it looks odd to anyone schooled in Britain's simple adversarial system. But I would like to pay tribute also to my colleagues. The liberalising coalition in the parliament on the prospectus directive - and on other pieces of financial services legislation - includes all of my own 54-strong Liberal Democrat group, most of the centre-right European People's party of which the Conservatives are members, and the British, Scandinavian and often Dutch socialists. And we have shown that we can win.

Just looking at the change in the culture on the continent, we in Britain often underestimate what is happening. There is increasing flexibility in many of the key continental economies. Look at the enormous falls in unemployment --more than 10 per cent in Spain, 7 per cent in the Netherlands and Finland - so that five of the Euro-area countries now have lower unemployment than we do. There is also a big change in the financial markets that can be of great potential benefit to you. If we can create a real continent-wide market for equities, imagine the increase in liquidity for the shares of small quoted companies. Imagine the reduction in the cost of capital for expansion. And the increased ability to tap the market for a well-argued project through a rights issue. These are real potential benefits that suggest to me that the QCA's members could be among the most important beneficiaries of the single market in financial services.

Look at what is happening to the growth of the equity culture. Europe is becoming more and more like the Anglo-American model. In the US, equity market capitalisation was about 150 per cent of GDP at the peak of the boom. In the UK it was about the same. But the Euro-area is catching up dramatically from 28 per cent in 1995 to 89 per cent at the end of 2000. Listings are soaring across Europe: up from 7077 on the eve of the introduction of the Euro to 8699 at end of 2000. The equity culture is catching on with investors: assets under management by investment funds have soared from €1.1 trillion in 1995 to €3.4 trillion at the end of 2000, and a steadily increasing share of the total has gone to equities. The equity share is up from 24 per cent to 45 per cent, nearly the same as the US level of 54 per cent.

On the other side of the securities markets, there has also, of course, been the explosive creation of a European corporate bond market. Euro-denominated corporate bonds have soared from €475 billion in 1998 to more than €1.2 trillion. And that is a market where small companies can now raise serious finance. For the first time, we have a genuine high yield risk bond market. That too can raise finance for small and growing enterprises.

What has been happening? Well I don't want to be deliberately controversial, but with the permission of your president Michael Heseltine with whom on this issue I am entirely unanimous, I cannot avoid the subject of the Euro. These enormous changes in the business environment on the continent are coming about because of the introduction of the euro, which in many ways is the key reform of reforms that opens up the European economy. The capital markets are changing because investors can put together big portfolios of securities - whether shares or bonds - and spread their risks. Before 1999, they were segmented by currency risks into their national markets. The Euro has opened up new financing opportunities for smaller quoted business across Europe, increasing liquidity. Increasing risk capital. Increasing the number of investors that you can tap. And all because there is no longer currency risk in making that cross-border investment.

Look at the progress too of the single market. True, price differences are still three times as great between the EU member states as they are within them. But those price differences are coming down, and particularly of course in the Euroarea. The recent Dresdner Kleinwort Wasserstein study found that they were down to 3 per cent between the big euro-area cities, whereas we in Britain are still paying 16 per cent more. And trade in the euro-area is soaring because businesses no longer have to take a risk when they contract for exports. And the idea that businesses can or do hedge their currency risk is not true. Many businesses may make perfectly respectable returns on capital, but have very slim profit margins as a percentage of turnover or sales. And those margins can vanish with a 2 or 3 per cent movement in the pound against the euro. Trade is up in France from 28 per cent of GDP to 32 per cent just since 1998. In Germany, it is up from 27 per cent to 32 per cent. But in Britain it has stagnated.

Similarly, the Euro has abolished currency risk for small businesses that want to roll out a successful business model that has worked in one member state. As a result, cross-border investment within the Euro-area is soaring. It is up from $124 billion in 1998 to $600 billion in 2000, an extraordinary increase. Again, not surprising to those of us who argued that separate currencies really are an obstacle to trade and investment and sound business. But the evidence is now coming in, and it is more conclusive by the day.

What I like most about America is the can do attitude. The people who ask how to make things happen, rather than point out why they can't. I think and hope that that is something that you as entrepreneurs can sympathise with, because you would not be where you are today if you had only seen risks, and not appreciated rewards.

And one of the problems of Britain's attitude to Europe, it seems to me, is that we look at it like tooth-sucking plumbers who point out the difficulties of the job and say it can't be done. Instead, we should see Europe not as a threat but as an opportunity. An opportunity to stamp our own style of liberal, open market dynamic capitalism onto the European scene. As we look at the financial services action plan, and at what is happening in the euro-area, you can always of course see threats. But I hope I have said enough this evening to persuade you that there are enormous opportunities too. For small companies, for their advisers and for the City, the Euro and the financial services action plan offer the prospect of great rewards.