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‘Most Dangerous Time For Global Economy’

Statement by the Chancellor of the Exchequer, Rt Hon George Osborne MP, on the global economy

HM Treasury
Thursday, August 11, 2011

Mr Speaker, people will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe.

I want to use the opportunity of the recall of Parliament to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.

As of this morning, after heavy losses yesterday, markets in Asia and Europe are calmer.

But over the past month:

The Dow Jones index has fallen by over 14%;

The French market is down 23%, the Nikkei by 11%

And it is striking that the German market is down 24% and even Chinese equities are down 20% since November.

Bank shares in all countries have been hit particularly hard.

Many sovereign bond markets too have been exceptionally volatile – with market rates for Italian and Spanish debt soaring, before falling back in the last three days.

Sadly Britain is not immune to these market movements.

In the last month, the FTSE 100 is down by 16% and British bank shares have also been hit hard.

However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours.

The market for our government bonds has benefitted from the global flight to safety:

UK gilt yields have come down to around 2.5% – the lowest interest rates in over 100 years;

And earlier this week the UK’s Credit Default Swap spread, or the price of insuring against a sovereign default, was lower than Germany’s.

This is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability.

And it is a reminder of the reckless folly of those who said we were going too far, too fast.

We can all see now that their approach would have been too little, too late – with disastrous consequences for Britain.

Mr Speaker, it is not hard to identify the recent events that have triggered the latest market falls.

There has been the weak economic data from the US and the historic downgrade of that country’s credit rating.

And the crisis of confidence in the ability of Eurozone countries to pay their debts has spread from the periphery to major economies like Italy and Spain.

But these events did not come out of the blue.

They all have the same root cause.

Debt.

In particular, a massive overhang of debt from a decade-long boom when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage, and a failure of governments to put their public finances in order.

Unfortunately, the UK was perhaps the most eager participant in this boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.

History teaches us that recovery from this sort of debt-driven, financial balance-sheet recession was always going to be choppy and difficult.

And we warned that would be the case.

But the whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped.

Markets are waking up to this fact.

That is what makes this the most dangerous time for the global economy since 2008.

I think we should be realistic about that.

I think we should set our expectations accordingly.

As the Governor of the Bank of England said yesterday, and the head of the Office for Budget Responsibility has also noted, the British economy is expected to continue to grow this year.

Some 500,000 new private sector jobs have been created in the last 12 months – the second highest rate of net job creation in the G7.

But instability across the world and in our main export markets means that, in common with many other countries, expectations for this year’s growth have fallen.

This is what our response must be.

First we must continue to put our own house in order.

I spoke again yesterday to Sir Mervyn King, and I can confirm that the assessment of the Bank, the FSA and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence.

We have in place well developed and well rehearsed contingency plans.

We must also continue to implement the fiscal consolidation plan that has brought stability to our bond markets.

I believe that events around the world completely vindicate the decisions of this Coalition Government from the day it took office to get ahead of the curve and deal with this country’s record deficit.

While other countries wrestled with paralysed political systems, our Coalition Government united behind the swift and decisive action of in-year cuts and the Emergency Budget.

While other countries struggle to command confidence in their fiscal forecasts, we have created an internationally admired and independent Office for Budget Responsibility.

These bold steps have made Britain that safe haven in the sovereign debt storm.

Our market interest rates have fallen, while other countries’ have soared.

And the very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our AAA status.

This market credibility is not some abstract concept – it saves jobs and keeps families in their homes.

Families are benefitting from the lowest ever mortgage rates and companies are able to borrow and refinance at historically low rates, thanks to the decisions we have taken.

Let me make it clear, not only to the House of Commons, but to the whole world.

Ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction.

Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis, at the cost of many thousands of jobs.

We will not make that mistake.

The second thing we need to do is to continue to lead the international response in Europe and beyond.

In the G7 statement agreed between finance ministers and central bank governors this week we said that we would “take all necessary measures to support financial stability and growth”.

In the Eurozone, there is now a growing acceptance of what the UK Government has been saying, first in private and now in public, for the last year – that they too need to get ahead of the curve.

Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems.

Existing Eurozone institutions need to do whatever necessary to maintain stability, and I welcome the ECB interventions through its Securities Markets Programme this week to do just that.

But this can only ever be a bridge to a permanent solution.

I have said many times before that the Eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration.

Many people made exactly this argument more than a decade ago as a reason for Britain staying out of the single currency – and thank God we did.

Solutions such as euro bonds or other forms of guarantees now require serious consideration. And they must be matched by much more effective economic governance in the Eurozone to ensure fiscal responsibility is hard wired into the system.

The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the Eurozone, while ensuring we are not part of it and our own national interests are protected.

That is the message the PM has clearly communicated in his calls with Chancellor Merkel, President Sarkozy and others this week.

And I have done likewise with individual finance ministers, in Ecofin and in the G7 call at the weekend, and will do so again at the September Ecofin and G7 meetings.

But this is a global, as well as a European, crisis.

At this autumn’s meetings of the IMF and the G20 we need far greater progress on global imbalances.

We need an international framework that allows creditor countries like China to increase demand and debtor countries to make the difficult adjustments necessary to repay them.

Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions let alone any concrete actions.

The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.

Finally, the UK, like the rest of the developed world, needs a new model of growth.

Surely we have now learnt that growth cannot come from yet more debt and government spending?

Those who spent the last year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: why has the US economy grown more slowly than the UK’s so far this year?

More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it.

Instead, we’ve got to work hard to have a private sector that competes, that invests, that exports.

In today’s world, that is the only route to high quality jobs and lasting prosperity.

In the developed countries, and especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies

Internationally we have the greatest stimulus of all sitting on the table in the form of the Doha round – a renewed commitment to free trade across the world – that should be taken up now.

Here in Britain our Plan for Growth has set out an ambitious path.

23 of the measures in the Plan for Growth have already been implemented.

Another 80 are being implemented now.

On controversial issues such as planning reform we will overcome opposition that stands in the way of prosperity.

On tax we have already cut our corporation tax by 2p, with three more cuts to come over the next 3 years.

In welfare and education reform we will continue to pursue a radical reforming agenda.

But there is much more we can do – much more that we must do if we are to create a new model of sustainable growth.

All of us in the House must rise to that challenge in the months ahead and confront the vested interests. They are the forces of stagnation that stand in the way of growth

Mr Speaker, in these turbulent times for world markets we will:

Continue to lead the international response;

Redouble our efforts to remove the obstacles to growth;

And stick to our plan that has made Britain a safe haven in the global debt storm.

And I commend this statement to the House.

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