World Bank Borrowers Forum – Luxembourg
Ladies and Gentlemen
It is a pleasure to be invited to speak to you today.
Particularly given current circumstances.
I think I am the last of a dying breed.
- A British Member of the European Parliament
Since the “No” vote in the UK referendum and the UK population made its unprecedented decision to leave the European Union
I have been left feeling circumspect
Having passed through the many different stages of grief since June last year, I have had time to look back and think about why my country made such a startling decision.
Many put it down to campaign techniques
Blaming the Leave campaign
Fake news and alternative facts
But having seen the strength of feeling in the UK since, -
and the subsequent election of Donald Trump in America
It’s clear that there is a lot more at work here than just smart media campaigns
And bad polling
In the 1990s it was common to talk about globalisation
Heated student debates would discuss the role of multinationals in society
The idea that large companies had too much say over government
Or simply weren’t acting in a responsible way
Conspiracies around deliberate polluting of the environment
Encouraging wars and conflicts in third world countries to sell weapons
Engaging in corrupt practices in the board room.
The corporate social responsibility agenda was all the rage
How could companies fight back and show how much they were doing for the wider world?
Sponsoring school projects and well digging plans
Carefully calculated to have maximum PR effect for minimum business model change
Not that I'm cynical
A lot of these projects did good work and no doubt many companies really wanted to give back to the community
But many were also a flash in pan
A token gesture
Instead of the one company in the town that employed a significant number of people and therefore sponsored the local rugby team,
it became a bureaucratic process for people to make an application to have a random logo on their team shirts in order to get them paid for.
The cynicism has to be recognised on both sides.
Yet that debate was cut short in 2001 when 9/11 happened
Airtime was suddenly focussed on the global war on terror
Those same university campuses were devoted to debates on weapons of mass destruction
The Just war theory
Any number of discussions around the rights and wrongs of an interventionist foreign policy
All very valid topics for people to discuss
The key question that has been asked every UK Labour politician in this current election campaign is still around whether that individual MP supported the invasion in Iraq
But, it took attention away from that discussion around globalisation and the role of corporates in society.
Hot on its heels came the global financial crisis starting in 2008
And all that mistrust in faraway banks on Wall Street and in the City came flooding back
But many thought that was confined to the financial services sector
Occupy Wall street and the 99% got its enthusiasm and venom from the practices of investment banks
I'm sure many in this room, like myself, have been to lots of events about restoring trust in the financial services sector since then
Politicians have put their names to new laws and big ticket items like Curbing bankers bonuses
But the damage has already been done
Some names will always be invoked in the public consciousness alongside films like the Wolf of Wall Street and the Big Short
No matter what new rules are put in place, the reputational damage has been done.
Losing confidence and trust took very little, rebuilding it is a much bigger task.
And while we can point to triggers for loss of faith in the financial system, it's not so easy to point at the moment that that the general public lost faith in the wider social order.
But they have lost faith
While many breathed a sigh of relief when France stepped away from the precipice last week and elected Emmanuel Macron rather than Marine Le Pen as President
We still have to recognise that in the first round of voting the two historic parties of power in France collectively won only 26% of the vote,
whilst over 50% voted for the extreme left and right candidates who were united in their opposition to globalisation
The Austrian Presidential election last year saw a far right candidate fight it out against a green politician
The Uk Labour Party shadow chancellor is a self confessed Marxist.
And while normally the US elections are characterised by discussions of the leadership and governing record of a candidate
Questions on whether they had been in the armed forces
Have they been the governor of a large state
This time around, the republican primaries were dominated by candidates who had done none of these things
And of course we all know that the ultimate outsider was finally installed in the Oval Office earlier this year.
In the US, as we’ve been seeing across Europe,
Globalisation was very much the theme of that election,
Efforts made to mitigate the effects of globalisation seem to have failed
The idea that a thriving growing economy means we can afford better social provisions in Europe
and the principles of a social market economy that many in continental Europe have advocated
seems to have missed key elements
People want a stake in their own future
We are not cogs in a machine
Rattling off statistics about how trade deals like NAFTA and TTIP will help the wider economy is one thing
But when you used to have a job in a large plant that produced real things that the economy needed
And you have since re-skilled and now make cappuccinos at Starbucks
It doesn't matter if you are making as much, if not more money in real terms than you were before
Before, what you did mattered.
As crucial as my morning caffeine hit is to me, it is perhaps less so to the barista making it.
All of this feels very far away from a conference like today's
Normally I would be talking about the detail of financial services regulation
What new rules are the EU bringing in that will disrupt business models and cause changes in the financial markets that you operate in?
MiFID II will be upon us in January 2018 and it's expansion to include the fixed income markets will effect everyone in this room
But, while not to ignore the huge changes that are coming
Not just in terms of regulation but the other disrupters that other panels at the conference have discussed
I don't think they are what will cause the biggest changes in how you operate going forwards
Financial markets and bond markets in particular now operate under the assumption of stability
We can put a number to a likely outcome
Risk of certain things happening and affecting the value of an asset is measurable
We assign a risk metric to the difference in investing in a developing market bond versus that of a stable economy
Then we diversify, we look at ways to ensure portfolios are balanced
that different risks off set one another
Our assumptions are turned into mathematical models and we maintain stable markets via these assumptions
Volatility and upside happen within boundaries
Wild swings are there, but they are the aberration not the norm
My concern is that political risk and anti- globalisation is challenging all of these assumptions
The European Commission released a reflection paper on globalisation earlier this week.
A balanced document highlighting the negatives and positives of having an open economy.
SMEs being able to operate outside their own borders as well as social dumping and negative tax competition.
The central thesis of the paper was that global rules needed to work alongside trade agreements and global companies to enshrine a principle of fairness
The single European rule book operating on a Global level
I am perhaps in danger of simplifying a long document and would encourage you to read it yourselves
But these principles will not be new to the financial services world, or in the area of economics
One of the big successes of the finance crisis was the impact it had on global rules for the banking sector at Basel and the increased cooperation between supervisors of derivatives markets via forums like the OTCRG, and IOSCO
The rules have been agreed globally and then implemented nationally
Exactly as the Commission’s document proposes for other sectors
Yet it misses the downfall of the EU’s policies in this area
While the EU happily participates in the formulation of those global rules
And then adds in minor specificities for European markets when it implements them
It then refuses to trust other markets to implement them
The many different third country regimes in different pieces of financial services regulation work on the premise that if a third country entity wants to interact with an EU investor,
let alone operate within the EU
They have to have a European entity
They have to come under European rules
They insist it has to be possible from Europe to fine them for breaking those local rules
In means in effect that global standards to do not exist in most areas of financial regulation, and when it comes to protecting retail investors wherever they may reside a cautious approach should be taken
But ultimately, other jurisdictions will only participate at the global level and incorporate global rules into their own legislation if it means something and has a tangible benefit.
While the Commission’s reflection paper clearly makes the point that “protectionism doesn’t protect’
It's record on issues like third country access provisions where there are global standards, doesn't stand up to scrutiny
The paper talks about the benefit that the data economy could have to Europe
Stating it could be worth up to x% of GDP in the next x years
Yet looming deadlines around the General Data Protection Regulation which could stop all data transfers outside of Europe could put this in jeopardy.
We often hear in the European Parliament that politics is about compromise
A piece of legislation will need something for the left and something for the right in order to make it to negotiations with council
It will need to be balanced between the needs of small members states and large member states to get the backing of enough governments to become law
Some would argue that that was how the Euro was created, with a faulty foundation built on compromise that is being fixed as we go along
A zebra that has been made by a committee rather than the horse everyone wanted.
Yet balancing global rules with a protectionist tendency at application comes off as arrogant.
As though the European way will always be the best way.
I am not arguing this just because the UK is about to fall out of the European consensus and will become a third country jurisdiction in the near future
I have always been one of the few MEPs who focussed in on the tricky topic of third country access when negotiating MiFID, EMIR, benchmarks regulations – even the settlement regulation, CSDR
As for me, I’ve long been reconciled that governments and institutions do not create wealth, and although a regulatory framework is necessary, having the safest market in the world is a small consolation if it isn't possible to allow capital to flow into it.
The most stable bank in the world could have huge amounts of liquid, high quality capital on its balance sheet – lots of deposits
But it won't necessarily lend to small Businesses,
It won't offer products that allow people to save enough money for their retirement
The reality is it's not about compromise
It's not about ‘slightly’ open markets
If you decide to have a global system of regulation then you need the methods by which different supervisors supervise their own markets and then come together to work collectively
Answering the practical questions of how slightly different rules can be made to work in concert
Not overlaying one set upon the other
In financial services we have numerous global fora, including the financial stability board, Basel, IOSCO
We should be strengthening them instead of seeking to undermine them
If a new wave of protectionism led by the US , followed by Europe and others, is sweeping the world then the work of these organisations will become even more important.
Financial supervisors and central banks will have to find ways of dealing each other even when politicians have drawn lines around their jurisdictions.
Quantifying and managing risk in global financial services has become ever more dependent on global cooperation.
The interconnectedness of the world’s financial markets means that regulators need to continue to find smarter ways to supervise and monitor the risk in the system.
So whilst national politicians are all focused inwards trying to ascertain what has gone wrong in the distribution mechanism of modern capitalism and how they might reengage a populace that feels remote from the ruling elite - including their financiers.
Financial entities and their regulators need to embrace the globalisation mantle, ensuring unimpeded capital flows to finance political initiatives and ensure wealth creation.
They need to regain trust and build confidence to ensure that as good corporate citizens with respect to tax and CSR, they are seen as part of the resolution rather than a problem as the developed world grapples with a more national agenda in an ever increasingly global world.