Monday, 26th October 2009
Professor Tim Congdon
Daniel Hannan MEP
The leading economist Professor Tim Congdon warns of the dangers posed by the EU’s unwarranted interference in the City of London, Britain’s most successful industry; which is under threat from the EU. Professor Congdon discussed the EU’s latest power grab where Brussels is aiming to complete its project to take full control over financial services. Daniel Hannan MEP discussed the Lisbon Treaty and the continuing assault on our democracy and our freedom. He also talked about the coming crunch between Britain and Europe.
PROFESSOR TIM CONGDON, CBE
Professor Tim Congdon is one of Britain’s leading economic commentators. He was a member of the Treasury Panel of Independent Forecasters (the so-called “wise men”) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, the City of London’s leading economic research and forecasting consultancy, in 1989. He is an honorary professor at Cardiff Business School and a visiting professor at Cass Business School. He has written a number of books on monetary policy, contributes widely to the financial press, and makes frequent radio and television appearances.
Professor Condon is also the author of the Bruges Group paper, Will the EU’s Constitution Rescue its Currency? He was awarded the CBE for services to economic debate in 1997. Professor Congdon is a member of the Bruges Group’s Academic Advisory Council.
DANIEL HANNAN MEP
Daniel Hannan is a Conservative MEP for South East England. He is a writer for the Telegraph and the German newspaper Die Welt. He sits on the European Parliament’s Constitutional Affairs Committee, and was amongst the first in Britain to call for a referendum on the EU constitution.
His publications include; A Treaty Too Far, The Euro: Bad for Business and What if Britain votes No? He speaks French and Spanish, and has been a member of the Bruges Group since 1991. He is also the author of the Bruges Group paper The Case for EFTA.
Speech by Professor Tim Congdon
I’m going to talk about the city under threat and I want to relate it to some wider themes about Britain’s position in the world. As you know Britain pioneered the industrial revolution and take us back 200 years to Lancashire and Yorkshire and the cotton mills and factories and there were like two types of work there. There were the mill hands, the factory workers on the shop floor and there were the gaffers, the bosses. Now should the nation which pioneered the industrial revolution, as the world economy grows and also industrialises, should the people of that nation try and be the gaffers of the world economy or should they be the mill hands.
I suggest that we should try and be the gaffers, the bosses. The thing about the gaffers is that can be involved with finance and marketing and design and if there is a legal problem then we can deal with that, but the managers and they need to think, they need to be responsible and they need to be quite intelligent and if Britain is to be rich in the 21st century, if Britain is to enjoy a future which is one that we deserve from our history and our past we need to be specialised in those kinds of activities and use our brains, judgments, independence, responsibility, intelligence and so on. Let the rest of the world use their hands to do routine things, we want to do things using brains which are well paid.
Now it may surprise you, this is roughly what Britain is at the moment to give you some idea of where we stand. We count for about – it depends how you measure it – but about 3% or 4% of output and it actually hasn’t changed for quite some time but is due to fall quite heavily over the next few decades but it has been stable really since about the 1970s and if we’re going to remain prosperous and influential you need to be able to set the rules to some extent at least so that we aren’t disadvantaged.
Now what I’m going to show you now is that to some extent that’s exactly what we are doing. This shows you our exports of what are called international business services, this is numbers that are prepared every year, something called The Pink Book, and you can see that these are exports, the blue line. This has dramatically, since early 1990s when the figures were first prepared in their current form, gone from about £20 billion to getting on to £120 billion in 2008 and it’s around 8% of our national income.
On the exports of goods, it has changed a lot as you can see that’s fantastic going up six times in 20 years, a fantastic rate of growth, much faster than national income. This is where Britain has been specialising; we are good at these things. Putting it a bit more precisely it shows that the breakdown of those international business exports, about half of them are financial services, many of them from... well the City of London but many are geographically outside of the square mile these days but most of them are from London. And then there is other activities: accountancy, legal work, advertising, marketing, design, management, consulting, gaffers of various kinds you know thinking, bossing people around and organising things. They need an IT backup, they need all sorts of other kinds of infrastructure and so Britain has indeed been specialising in things that are complicated, difficult and require judgment so this is what you’d expect from a nation that led the industrial revolution and whose language is the international language and so on.
So we are doing very well in that area and quite right they show you there that the areas that have been growing particularly rapidly in this 15-20 year period was actually financial services, the City. Roughly speaking the exports at present have risen by about 15% a year, compared with GDP of around about 5% a year. This is the one area in the last 15-20 years that Britain has been doing very well and its quite a sensible thing for us to be specialising in because this is likely to be high value added, i.e. accounts and so on in the long run in the 21st century, this is the kind of thing we should be doing.
By the way in the early 90s, especially then but also the early 80s there was a question that kept on coming back, well where are the jobs going to come from, how is unemployment going to come down. Let’s just be clear that there has been enormous growth in employment in really basically London based offices in this period. In fact it goes back to the mid-1990s the typical rate of growth is just under 3% a year, some years of growth, 7%-8% in employment in these kinds of activities.
The next few pictures are a little bit about London. I’m not against manufacturing, not in the least, I’ve been in those industries, all activities the same. I’m not against the rest of Britain, of course I’m not, but however the truth is that most of these activities are based in London and so I’m going to talk about them. Its about people who work in highly paid service industries, the bankers, the lawyers and accountants and so on, they take up a lot of office space. According to the figures, which is a very broad boundary, about half of them are in banking, insurance and finance, that those in the banking, insurance and finance produce about £50/£55 billion of international financial services, they also do some of the domestic financial services and these people are well paid.
I think there’s nothing wrong with being well paid, I like to live in a country with rich people don’t you, they pay a lot of tax and it’s a good thing, not a bad thing. And they, particularly for value added per person, it’s about £150,000 a year, they don’t all receive that in pay but pay is well above the national average. It’s the kind of thing that we want to be specialising in in the 21st century if we’re going to be the gaffers of the world economy and be rich and successful and influential. Say 4% of British employment, about double that of output and most of that output is in fact exported with all the backup required: offices, infrastructure, all the rest of it.
So one more thing about this pattern of specialisation, the new Jerusalem this green and pleasant land. Well the good things about these kinds of activities it’s relatively very environmentally nice. I’m not an environmentalist particularly but it’s something which isn’t polluting and again, if we’re going to be successful and rich in the 21st century, this is the kind of thing we should be doing.
Now the problem is what happens if borrowers set the rules. I mean obviously when we began we had an empire, so we could largely set the rules ourselves, I don’t quite know why we wound down the empire as rapidly as we did, but we did and we joined this thing called the European Union in which we certainly didn’t set the rules in farming and fishing, at the start the only areas where we had given control to our neighbours.
Well I’m going to tell you that in London things are very different and the Lisbon Treaty is not quite finalised but it is pretty nearly finalised and there’s going to be now I think 50 new areas in which qualified majority voting applies and the nations can’t block whatever comes up from the European Commission and goes through the European Parliament.
So we don’t set the rules, we don’t set the rules in a whole mass of areas that affect the activities in which we have been very successful including financial services, including the City of London. And what I want to do now is just talk a little bit about what I think are the two and most immediate threats at the moment. What I hope that I’ve conveyed to you in the last few minutes is that these areas where Britain has been doing very well, these areas that are highly paid that are very worthwhile in terms of Britain’s long economic future and where we really do want to be in control of our own destiny.
I think the two threats I want to focus on in the immediate future are these two. In a way talking about particular threats isn’t the point of all this, its more that if there’s a problem, if there’s something that affects our interests, we want to be able to control the outcome in such a way that you know if there’s a problem with a bank or there’s a problem with a particular kind of exchange, foreign exchange markets or stock exchange, that it goes to our Parliament and we can set the rules. That isn’t what’s happening here. Through the directive on Alternative Investment Vehicles, private equity funds and hedge funds, this is the current bone on contention, I’m not an expert on it and I’m not going to talk about it in any great detail, I’ll shortly quote you from what a German professor just said to me.
The second threat is a more general one and in a kind of way it’s produced by this crisis and that is that banks are deemed to become very risky in the last couple of years during this crisis. There’s a general pressure for a rating called capital asset ratios, now it is rather technical so much detail, but essentially they’ve got to have, although they’ve always taken risks, they must always have some capital to anticipate those risks and the regulators, governments and central banks are saying they should have more capital relevant to their risks – that makes activities more expensive because a bank can’t make profit out of its risk capital, it needs more of its capital its going to charge more. By the way these banks were all sorts of businesses but it’s very important for Britain because Britain is very big in international banking. International banking is very competitive, it’s an area where there’s been the most competitive pressure, economising under competitive pressure, you see this is the picture of the growth of the – I’m sorry this is a bit technical, to some extent I can’t avoid it – this is the international inter-bank market, the so called wholesale banking market. This market where a bank could courier these dollars with a French bank in London or a bank in Riyadh phones up their branch in Shoreditch and they transfer some dollars or some pounds or whatever. Okay that’s what’s going on here.
And this has been a booming activity since it started. It only really started in the 1960s, you can see how small it was then, it was trivial. And actually at its peak in 2007 the inter-bank loans were about half of what they are. The dealers are involved in running enormous sums of money, a lot of the actual margins are very, very narrow, very thin, there is value added in it. This is one of those activities that pay those very high incomes and actually the tremendous growth and then in the last couple of years it’s been falling.
Now I have to say that the pressure for more capital in the banking business isn’t just in the European Union, but the European Union is one of the players and I’m afraid increasingly we in Britain are not setting the rules, they are being set for us in Brussels and Frankfurt by people who don’t like us – and I mean that by the way, they don’t like us.
This just shows you how this growth is so rapid, the growth rate is celebrating in the last ten years until the recent plunge and this is the sort of – and people are affected by this – this does affect people, you know tens of thousands of people are affected by what happens in these industries and the regulation of these industries. I would think something like... how many people work in the City of London in terms international financial services its probably getting on for 400,000 or 500,000, it depends how you define it, there’s about 1/4 million in the square mile itself, I would think about a quarter of those are actually affected directly or indirectly by the pressure for more capital in the banking industry, if that goes into decline then they are affected and that will affect employment growth and so on.
Now I said that I would quote a German professor, he’s a chap called Professor Roland Vaubel, he’s from the University of Mannheim and he sent me an email a few days ago which I’m going to read to you.
“Thank you for your letter of September. The European Commission submitted sweeping proposals for the European Systemic Risk Board. This will include the European Banking Authority, which will have far reaching powers. More than that, it’s going to be decided by qualified majority and the British member could be out voted.”
This is something that Professor Vaubel included in this. He just wanted me to know he’s in favour of free markets and not a federalist.
“If the Commission considers that a national supervisory authority is not compliant with guidelines the Board of Supervisors may adopt an individual decision addressed to the financial institution to require necessary action to comply with its obligation under community law including the cessation of practice.”
What it means is that if the qualified majority of the Board of Supervisors decide that a particular bank they don’t like should close down, they could close it down regardless of what the British authorities say about the matter.
This is again according to Professor Vaubel.
“The Commission is responding to suggestions from the French Government because by the way other examples of this sort of thing exist in European regulations and directive of the arts market. Both have been pushed by French Governments and both have been directed against the UK and other more liberal countries...”
This is a German Professor sending an email. That is what’s going on.
Well what do you do about it? We have got to organise ourselves so that things we do, governments and so on, are in our interests, not those of the world, not those of the European Union, they are in our interests. That is the most important thing. We need to make sure we’re going to be successful in the 21st century international business services so we’re going to be the gaffers of the world economy, the bosses. And this is the area we should be trying to specialise in, we have been doing it anyway, but we must make sure that the rules are fair, liberal, easy to integrate within a company, English law and so on and if we’re part of European integration, part of the European Union it will be far, far more difficult.
Well ladies and gentlemen, I think if we are to remain in the European Union it will be very difficult for Britain to remain the world’s leading centre for international financial services and international business services more generally, being law, accountancy and so on and membership of the European Union, there may originally have appeared good economic reasons for it to make our nation more prosperous, in the end its turned out to be negative and we don’t want to link up our economy and our successful industries with the European Union so that we can’t control the rules under which these businesses operate in the 21st century. If we want to be rich and successful, we want to be the gaffers of the world economy in the 21st century; we must get out of the European Union.
Thank you very much.