The UK Prime Minister's Speech to G20 Finance Ministers

St. Andrews
Scotland

First of all, welcome to Scotland - where both Alistair and I grew up - and specifically to St Andrews, which boasts Britain's oldest university and is of course the home of golf.

I would like to thank you all on behalf of the G20 leaders for the indispensible work you have been doing since the financial crisis first hit just over a year ago. It is a great tribute to you and to governments everywhere that a depression was avoided, that the banks have been stabilised and that countries are moving towards recovery.

Our forceful, collective and unconventional response - through the forum of the G20 - has now helped to restore a degree of confidence.

But this must not lead to complacency now or in the future. Complacency is the enemy of recovery. In most of our economies, demand is currently being sustained largely by exceptional policy measures. A self-sustaining global recovery hangs in the balance and the future is not yet secured. Indeed, for all that has been achieved, I believe we are only about half way through dealing with the causes of the crisis.

The compact we agreed at Pittsburgh - to pursue strong, balanced and sustainable growth - was a watershed in our management of the world economy. At this meeting today we must begin to bring the Pittsburgh framework to life. Today you can lay the foundations for the new economic governance that the G20 represents and begin to meet the plan for growth we have agreed.

In the short-term, the imperative is clear. We need to stick with the policies that have helped stabilise our economies this year and are underpinning recovery. While recent indications of economic expansion give cause for cautious optimism they are not a reason to end economic stimulus prematurely.

A credible medium term plan to cut deficits is needed to tackle shortfalls in public finances that have resulted from reduced tax yields and the vital actions taken to prevent a global depression. That is why in Britain, for example, we will legislate for a fiscal responsibility act which will entrench in law our commitment to halve our deficit over the next four years.

But it would be dangerous to put recovery at risk by suddenly cutting off the funding and investment that is supporting families and businesses through the most challenging times in a generation.

And in co-ordinating and timing our exit strategies within the G20 we need to recognise that in the new global economy we need a more balanced pattern of demand to underpin strong but more sustainable global growth. And together we need to reduce sources of instability, including volatile oil and commodity prices.

To make a reality of the new model for economic governance, the G20 will need to articulate more clearly and precisely these broad policy objectives. Only then will we be able to move from a broad high level dialogue - the sort of discussions we have been holding for many years - to a more specific and action-oriented discussion.

So the agreement you are explicitly discussing today commits G20 countries for the first time to set objectives; to assess how our individual policies for economic development fit together; to evaluate whether these will deliver our objectives; and judge if further action is needed. This unprecedented approach is right for the new era of global collaboration.

It was Keynes who suggested that if we do not progress by thinking unconventionally we will resign ourselves to failing conventionally. But be in no doubt. The hard work does not end here. In fact it begins now. Because over time each of us will need to be willing to make changes to fulfil our collective goals.

So while it may appear that because of the adjustments we all have to make for the framework we are not serving our national interests - in fact, the opposite is true. Because the lessons of this crisis were that our interdependence is deeper and more permanent than we ever imagined.

No country is immune from what happens in a global economy. It is by ensuring the transition to balanced, strong sustainable growth through this framework that we each serve our national interests best.

In this low inflation environment our strategy must be to go for growth but it will be less effective if we retreat from the essential financial reforms we have pledged to undertake.

No one now doubts that we will have failed collectively if the post-crisis financial system that eventually emerges looks more or less like the one that brought the world economy to the brink of collapse.

Global financial markets must be brought into closer alignment with the values held by the mainstream majority: hard work, responsibility, integrity and fairness.

In Washington, London and Pittsburgh we came together to agree far-reaching reforms - agreements that in other times would have taken decades to reach.

If we maintain our resolve, these reforms can bring about a profound transformation in the way financial markets are regulated.

Taken together they constitute the heart of an agreement on global rules, providing for the first time proper accountability of global banks and financial institutions.

But vital though these reforms are, there is no doubt that the reputation and legitimacy of the banking system has taken a severe battering from the events of the last two years and led to a fundamental questioning of the role and behaviour of the banks. There is real and understandable concern about the fairness of the balance of risks and rewards for taxpayers, citizens, shareholders and bank employees.

There are several reasons why the financial sector is subject to special attention.

First, as the crisis has demonstrated all too clearly, financial services are in many respects the most global of all sectors, with extraordinarily global mobility in revenues, profits and people.

Second, this is a unique sector that when it fails imposes such a high cost to the wider economy and damage to society that government intervention becomes essential. So the taxpayer had no real choice but to step in to keep the system afloat.

And it cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us.

There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards.

It cannot be successfully achieved other than at a global level.

Clearly capital and other regulatory requirements - the provisions needed to protect the public, as we have, from a high risk of failure- need to be internationally agreed.

Public protection from failure must also come from globally agreed requirements for what are called living wills - the acceptance by financial institutions of their responsibility to order their business in a way that contains the costs of failure.

But what we need to consider is whether in fact we need to go further in recognising the social and economic responsibility of the financial system not least in mitigating the risks to the rest of society.

In the UK we are legislating for a reformed financial services compensation scheme.

But this only covers retail deposits and not the systemic risks to the economy that come from the wholesale markets and other systemically important financial institutions, and the costs of intervention that sometimes cannot be avoided.

That cannot be achieved by a national approach - only with a global approach.

So I believe we should discuss whether we need a better economic and social contract to reflect the global responsibilities of financial institutions to society.

There have been proposals for an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transactions levy.

Any measures we consider would have to be set against four core principles.

First, they would have to be global: to reflect the existence of the world's first truly global sector and thereby create a level playing field for its operation.

They would need to be implemented by all responsible financial centres in the world - the US, Europe, Asia, the Middle East and Switzerland.

Let me be clear: Britain will not move unless others move with us together.

Second, they would have to be non-distortionary to avoid damaging reductions in liquidity, inefficient allocation of capital and the temptation of avoidance.

Third, any measures should complement - and reinforce - the action we are already taking to enhance the stability of the international financial system and the global economy.

Fourth the contribution we ask the global financial services sector to make must be fair, measured and enable financial services to make their necessary contribution to future economic growth.

I do not in any way underestimate the enormous and difficult practical and technical issues that will need to be overcome that a globally cohesive system raises.

But I do not think these difficulties should prevent us from considering with urgency the legitimate issues I have discussed. I thank Dominic Strauss Kahn for responding to our request for agreeing to review these issues and look forward to the IMF report in April. And I would like the leaders of the global financial sector to engage in a constructive dialogue to achieve a better outcome for us all.

When we look at what we are doing overall, the task this generation is having to set ourselves in advancing stability, growth, development and climate change is daunting. It is nothing less than building the new responsible global economy and society of the future.

In the last fifty years global change people thought impossible and unworkable has happened.

This weekend we celebrate the twentieth anniversary of the fall of the Berlin Wall.

In a few months time we celebrate twenty years since the release of Nelson Mandela and the end of apartheid.

Almost 10 years ago the world agreed development goals which have helped 40 million children into school and five years ago we agreed debt relief for the poorest countries.

We have proved that by common resolve and action, what people think is insurmountable today can become a reality tomorrow even when it at first seems beyond our grasp.

In a month's time the world convenes in Copenhagen to try to forge a new international agreement on climate change.

It is a historic moment: a test of global co-operation every bit as significant as the economic tests we have faced together this year.

It is essential that we urgently move toward resolving the issues that still divide our nations.

I have no illusion about the scale of the challenges we still face.

But your meeting today is evidence that we are moving beyond the fragmentation of the past to achieve our common goals.

Those goals are ambitious but they are necessary.

I believe in a strong global financial sector.

I believe in an open and inclusive globalisation.

But I believe that the global economy and global society will only thrive if it is brought within a rational and fair framework which today we are charged with bringing to life.