European Commissioner for Competition
How can the EU contribute to a more prosperous future?
Address at Chatham House Conference: "Competition Policy after the Credit Crunch"
London , 26 June 2009
Ladies and gentlemen,
Firstly thank you to Chatham House for organizing this important event. We are facing many challenges in 2009, and I think that asking ourselves tough questions in forums like this is essential for meeting those challenges. First amongst these challenges is fixing our financial sector.
I firmly believe that now is not the time for maintaining the status quo. The status quo will not deliver us from the nearly 3 trillion pounds of liabilities taken on by European Governments to prevent a banking meltdown; or the 600 billion pounds of support provided by the UK Government.
So whatever else we do during and after this crisis, we must restructure our banking and financial services industries to ensure long term stability and growth.
Today I want to explain how the EU can play a role in that process, and in doing so increase prosperity across Europe over the long-term.
So far, the European Commission has played a constructive – and I believe effective – role in adjusting to the new economic realities.
We've made competition policy part of the solution, rather than the problem, by bringing parties together, put a stop to potential subsidy races and being as flexible as we can without undoing the basic principles of competition policy.
Most importantly I think we have said loud and clear that we turn our backs to protectionism. That is a must – the level playing field of the European Single Market is our crown jewel.
Let me describe why this is our approach in some more detail …
Role of Competition Commissioner
Two lessons guide me in my view of the single market.
History shows us that our economies do best when competition policy is enforced without fear or favour; in good times and bad.
Competitive markets are an essential for an efficient economy.
How the Commission deals with State aid therefore impacts on the general health of the single market and recovery from this particular crisis. This applies not only to the banks, but also other fiscal stimulus projects.
So far we have seen around 70 rescue schemes for banks across Europe. The next step in managing a competitive single market in banking is to look at how we can get these banks off state support.
All of these restructurings, like the original rescue schemes, are developed in close co-operation with national governments. To me these efforts are the definition of real partnerships in action. They only work if both sides put in a lot of effort and goodwill – and thankfully that is what has been happening.
We need these rules for the European Single market to work. In return for extraordinary support, the EC treaty asks for changes that level the playing field again.
It’s never an easy process, but there is no real alternative:
How else can we protect the whole system and be fair to the prudent banks surviving without state aid?
How else could we ensure that there are no longer banks which are 'too big to fail'?
Having co-operatively agreed changes to several German banks, I am confident we can achieve win-win situations in the UK. For me, a win-win situation means:
the banks are viable over the long-term without state support,
the taxpayers are not left with a huge bill,
and other banks and sectors of the economy do not suffer because of aid given.
the bank has a business model that reduces systemic risk
I care deeply about getting this right. The City is Europe's leading financial centre, and is very important to the UK economy. It is far too important for us to hope it will just fix itself by magic.
So instead, we will be working with the UK government to get UK banks off aid as quickly possible and onto business models which push them to focus on what they do best. It may be that some banks will be required to divest parts of their businesses to offset the massive benefits they received in being granted aid.
We will have to decide that on the facts of each case. I do wish to stress that businesses will not be closed, just transferred to new owners. Such judgements will be made so that the viability of both the bank, AND the system are increased.
As I said, we've done this with several German banks already, and it is working well so far.
We stand firm on the need for restructuring because, whether through oligopoly or public subsidy, if competition is allowed to drain out of the UK financial services sector entirely it would be a disaster for the UK and for Europe all as whole.
Wider regulatory reform
On the question of wider regulatory reform I admit my self-interest! … often we deal with competition problems that arise because of problems the regulators don't see or can't fix. So getting regulation right saves competition authorities a great deal of trouble!!
But seriously: we not only need real restructuring of various banks - we also need a comprehensive, coherent and robust regulatory and supervisory system. For me this must include greater transparency and better supervision. And it is essential that this new system is enforced!
I would expect to see new European legislative proposals in the autumn, and I hope they are received in the cooperative spirit in which they are intended.
It does puzzle me that sometimes certain UK interests see themselves as separate from Europe – because in the case of the financial crisis – we will truly all sink or swim together.
Given that cross border investments between the UK and the rest of Europe amounts to more than €250billion a year, the figures speak for themselves. We need these investment flows and they need to be safeguarded. Self-regulation won't do.
I am sorry he is not here today, but Peter Mandelson has backed this view and Gordon Brown recently affirmed that he does not "want Britain to be outside the mainstream."
Others such as Vince Cable and Mervyn King also agree that that we have systemic problems with our financial services industries which need to be addressed via new banking cultures.
If a doctor tells a patient he has a serious tumour, the right response is to isolate the tumour. Ignoring it will not make it go away. The tumour must be cut out, and the patient must stop the habits that caused it. With surgery the patient can survive and recover. But in the long term, the patient needs to commit to real lifestyle changes in order to remain healthy.
It's going to take all of us – from the customer through to each level of government to push through this culture change. After all, we all wanted too much from the banking system for too long.
But a more responsible culture is an essential part of restoring confidence in financial markets. Any culture that lacks regard for the long-term consequences of risky behaviour will not be helping the economy achieve to long-term stability – or growth.
I'm not speaking here as an ideologue of any kind. I mean only that
The City needs to do all it can to be part of that new responsible culture. It would be wrong to let complacency to gain momentum and for anyone in The City to think the world owes them a living.
The UK needs Europe
In fact, the best thing we can all day in dealing with this crisis is to remember that is bigger much bigger than any of us. It will be a real problem for all of us, and for our children's' children if we don't all pull together now. .
National solutions aren’t going to be enough, and global solutions are not always practical. So given our European single market, and the current momentum for change, I think we need to use European responses to build a prosperous future.
Specifically, I mean to say that:
Macro financial stability requires macro prudential supervision. The EU needs to demonstrate that it has a uniform, effective and efficient system of regulation to continue to attract foreign investment after the crisis. I would not want weak regulation to undermine the role of financial centres such as The City.
We don't want to hurt good banks. If European governments were allowed to continue aid at their sole discretion there are many banks that would suffer. And the UK would suffer more than other member states because of its large banking sector. So we need European supervision of State aid to banks
We do want to ensure there is a level playing field for new entrants and to ensure that all EU banks can expand their cross border activities.
Lending to the real economy must be maintained Individuals and small business owners are the key to Europe's future productivity. They need access to finance to stay afloat, I am sure you agree. So, where I can, you will see me backing entrepreneurs. Risking one's own money and reputation on a good idea is the sort of risk we need .
I am pleased that our state aid exemptions now encourage such risk-taking, and it is great to see that Gordon Brown has appointed Sir Alan Sugar as your Government's new 'Enterprise Champion.' The following Sir Alan has gained from his TV show (The Apprentice) is huge. I only hope this idea can be converted into more entrepreneurs and more support for entrepreneurs in the UK.
Turning these arguments into practical cooperation is not easy.
It requires as a minimum, a willingness to be pragmatic, to avoid thinking engagement can be on one's our terms. Spreading and protecting the benefits of the single market requires sensible compromise.
If nothing else – we have to work together because we cannot afford a second banking crisis. With the world's largest economies piling on roughly 9 trillion pounds of extra debt over the next three years – few countries can afford another banking bail-out as they deal with the costs of aging populations.
So let me re-cap…
Responsible governance requires a European and ultimately a global response to today's situation. It’s the only way to avoid repeating this mess.
This will require sensible compromises, and consistent application of the competition rules.
As we go about this process, complacency is something that the UK financial sector can do without.
There is still good money to be made in a competitive banking sector, but that means engaging with these changes and ensuring there is a market structure that works for the whole system.
I don’t think it is just banks that need to change. We must recognize that we lived beyond our means. Everyone must be prepared to make changes to their lives - from kitchen tables to board-room tables.
My hope is that UK interests and wider European interests will pull in the same direction to achieve this.