Speech - No Excuses: The European Crisis Of Confidence




"No Excuses: The European Crisis Of Confidence"




Thank you for that kind introduction, for such a warm welcome, and for inviting me to come and talk with you here in London.

Just a fortnight ago I addressed a similar group in New York, where the global financial crisis of 2008 and 2009 began.  And it's fitting that today I find myself in Europe, where we find the causes of current instability, and where this crisis of confidence is most acutely felt.

Like the Australians on Wall Street that I addressed in those dark days in 2008 and 2009, you now represent our nation in the most adversely affected part of the world.  A part of the world with such a proud tradition of economic innovation and trade, but which now has billions of eyes fixed on it, imploring it to get things right.

Of course, you represent more than just the Australians with an acute economic interest in Europe.  You also represent bonds going back to the first days of white settlement in Australia.  Bonds that led our greatest historian Manning Clark to begin his famous history of Australia with the observation that “so far there have been two cultures in Australia – one aboriginal and the other European”.  That was written half a century ago, and we are now writing a new chapter of our history in our own region.

But we are a nation that still retains a European sensibility in so many aspects of our lives.  Europe is part of us.  It is in our DNA, our traditions, our laws, our culture, our art and architecture, and in a political system that Churchill famously described as the worst except for all of the available alternatives. 

There is an enduring attachment that saw even our most eloquent activist for Asian engagement, my friend and predecessor Paul Keating, become a passionate admirer of European enlightenment culture.  It's a broadly similar story for the far more numerous Australians who prefer rugby codes in winter and cricket in summer to collecting art and clocks like Paul does.

But even though many Australians appreciate all that we have inherited from Europe, many would not understand how important the European Union has been as an historic advance in peaceful cooperation.

I know the EU has many critics at the moment and they are not all without foundation.  But in the 75 years to 1945 Europe collectively experienced three major land wars.  In the 65 years since it has overwhelmingly experienced peace among its great powers.  That is a great achievement of itself, and one of the reasons so many around the world want the European idea to succeed.

Two Engines Misfiring at Once

Today, with the eyes of the world on Europe, it's fitting I come from Paris to the city where the G20 met in 2009 for one of the most important meetings in modern political and economic history.

That London Summit decided to inject $5 trillion in fiscal stimulus into the global economy, plus an additional $1.1 trillion in resources to our international financial institutions.

That meeting is rightly remembered as a pivotal spur to coordinated global action that did so much to pull the global economy back from the brink.

That crisis emerged out of Wall Street, while the new threat emanates from Europe.  There are many differences, but the consequences of failing to take coordinated, decisive action would be just as severe.

So the question the world is now asking is whether Europe's leaders have the courage and conviction to manage the new crisis with the boldness and determination that was evident in London two years ago.

I have long observed that the recovery from the global financial crisis would be painful and difficult, and this is proving to be the case.  The legacy of the global recession for Europe has been unsustainable sovereign debt and financial volatility that has plagued markets.

The global downturn and increased risk aversion that followed exposed problems in Greece, Portugal and Ireland that would sooner or later have become evident.  Because of the crisis these problems became evident at a time when European bank capital was already stressed and growth was slowing.  At the same time, across the Atlantic, the US is suffering from soft growth, a weak housing market, and persistently high unemployment.  So what we have are two of the world economy's biggest growth engines misfiring at the same time.

While leaders in the US and Europe have made some welcome steps recently, and despite good progress made by G20 finance ministers over the weekend, we still have cause for serious concern. 

Traditional policy arsenals are depleted and deep political divisions mire efforts to overcome economic problems on both sides of the Atlantic.  While these are problems in themselves, the market's reaction has compounded the situation, and the whole world is feeling the tremors. 

Indeed the IMF only just last month downgraded growth forecasts across the board for the global economy and major advanced countries, citing inaction in the US and Europe as clear downside risks.  There have been many interpretations about all of this, but the most considered view is that we should reasonably expect for the time being a “new normal” of global volatility.

Asian Century

While all this is sorted out, and the world is focused on short term challenges, a major change is playing out as global economic weight shifts from West to East.  So, like the UK, and like Europe as a whole, Australia is turning its attention more and more to our own dynamic neighborhood.  That's one of the reasons why Prime Minister Gillard has just commissioned a new White Paper exploring Australia's prospects in the Asian Century.

We are fortunate to have a role to play in the development of the world's most populous region, where our economic future predominantly lies.  The tyranny of distance which so deeply coloured our relationship with the world through most of our modern history has been turned around.

I want to give you a couple of new facts to help you understand the shift underway.

  • In 1990, just under one-quarter of world economic activity fell within 10,000 kilometres of Australia.
  • By last year, it had risen to more than one-third. 
  • And by mid-century nearly two thirds of global production and consumption will be taking place within 10,000 kilometres of Australia.

In trade, Australia's profile has shifted significantly across the decades, reorienting away from Europe and towards the Asian region.

For instance, over the past twenty years, Australia's total goods trade with Europe and the UK has declined from 20 to 13 per cent of all traded products, while at the same time, our trade with Asia has increased six fold, to represent nearly two thirds of all traded goods.

Our banks are swiftly expanding their lending into Asia, while loans to the Euro area are now minimal, with negligible exposure to troubled European borrowers and no exposure to sovereign debt in Greece.

The UK also remains an important tourism market, but Asian tourists are forming an increasing share of our tourism intake and short term-inbound arrivals from China and India have more than tripled over the last decade.  And in immigration, we saw for the first time just last year that new immigrants from China and India have exceeded those from the UK.

Australia and Europe

What all this means is that Australia's traditional economic partnership with Europe, while still important, is slowly making way for a newer, larger partnership with Asia.  But despite this shift, we shouldn't underestimate how important Europe remains for our economy.

It is not just the vital financial and economic links to Europe that endure, despite Asia emerging as our predominant trading partner.  Europe represents much more to Australia than a column in the current account.  Our psychological exposure to Europe is crucial.  And this is the first of the two main points I want to make today.  That just because our direct links to Europe are less prominent than in the past, this doesn't mean the impact of a crisis in the Euro area can't be very damaging for Australia.

Already the impact on confidence alone has had consequences for our own growth and budget revenue, and there is every prospect this could get worse if we accept the proposition that the extreme volatility of recent months is likely to continue for some time yet.  We can also expect to see impacts beyond Australia because we know that factors which impact on confidence do not respect national borders.

Given the relatively greater exposures of other economies to Europe, the indirect consequences of European and North American sluggishness could well be transmitted through the Asian region to us.

Amidst all this, however, Australians can take confidence that we have a proven track record of dealing with the worst the world can throw at us.  And we have perhaps more levers to pull than any advanced nation to help withstand the fallout from any worsening of the European situation.

It remains the case that we are located in the brightest corner of the globe where economies are still growing stronger than everyone else.  It's also important to keep in mind that China's economy in particular is increasingly driven by infrastructure and business investment focused on domestic factors.

China also proved during the crisis that it has the policy fire power to support growth if external demand falls sharply.  Strong conditions in our region continue to support the commodity prices most important to us – like iron ore and coal prices – which have been holding up relatively well to date.  And the enormous appetite for our natural resources has also underpinned a record pipeline of business investment, worth around $430 billion in resources alone, with around 40 per cent of these projects already at an advanced stage.

It's crucial to note that these are long term investments that provide a cornerstone of strength for our economy in these uncertain times. Of course at the same time we should recognize that the nature of our tax system means there are substantial costs to our revenue during the investment phase.

Australia's other strengths have been well canvassed – we have a growing economy, low unemployment, an exceptional record of job creation, a healthy financial system and very low government debt.  And while some of our sectors are still under pressure from a cautious consumer, a high dollar and ongoing global uncertainty, we've recently seen some really encouraging spots in the domestic economy.  Just the other week we saw another solid rise in retail sales – the strongest back to back retail performance in nearly two years – and very healthy export growth.

We also have a Government focused on delivering the major economic reforms that we need to boost productivity and make the most of the opportunities that lie ahead in the Asian century.  It often surprises outside observers when they hear about how much we have achieved in Australia despite the finely balanced numbers in our parliament. 

The Gillard Government has set an interesting record – winning more support for legislation in the House of Representatives in the first 12 months of this term than any first term government.  Just last week we passed through the House the most significant environmental and economic reform in a generation – the establishment of a carbon price in Australia.

So for all these reasons, amid another wave of global turbulence, Australia is better placed than probably any other advanced economy.  And faced with this situation we know two things:

One, that we have runs on the board when it comes to necessary reforms, getting the big economic calls right and, because we are a Labor Government, securing jobs.

And two, that we can take heart from having fiscal and monetary room to move in the future if that is required – a point made by our central bank in its most recent statement, and by the IMF just a few weeks ago.

No Excuse to Fail

But in an interconnected world, the decisions we take as a Government in Australia are obviously not enough to guarantee our success. 

In spite of our strong fundamentals and tiny exposures to European banks, we shouldn't kid ourselves that our economy isn't already being hit by what's happening here or that it can't be hit harder.

Already we are seeing substantial consequences for Government revenue which makes our target of surplus by 2012-13 more difficult to achieve.  This flows in part from the anxiety Australians feel today, which manifests itself in more cautious spending and employment intentions.

That's why the decisions taken here in Europe, and the decisions taken at the G20, the decisions taken in Washington, and the decisions taken in the capitals of Asia, matter so profoundly for Australia.

That's why we look to European leaders this weekend to adopt a program sufficiently bold and comprehensive to convince markets that the crisis can be managed.  That the EU can flourish, that the currency union can survive these challenges and come out stronger, that European banks are sound and reliable partners for each other and throughout the world.  And this brings me to my second main point: that the global economic leadership has absolutely no excuse for failure here. 

We know what is happening, we know what needs to be done, and we have a good understanding of the consequences if only half measures are applied.

We know that Europe needs to regain the confidence of markets – it needs to get its house in order and it needs to do this now by setting out credible plans for fiscal consolidation.

As I told my counterparts in Paris, the time for half measures, the time for finger pointing has long passed.

While progress on the European Financial Stability Facility is encouraging, more needs to be done; we also need credible and sustainable action to address debt levels.

We also know that Europe needs a credible plan to recapitalise the European banking system and it needs to deliver that plan.

I'm now confident that my European colleagues understand the seriousness of the threat and that they need to speak with one voice.  Most crucially, they need to deliver at their meetings this coming weekend.

At the same time we need to see from the United States a credible long-term plan to get their budget in order.  And there needs to a be a concerted effort to support growth quickly and create jobs for the millions of US unemployed, which is why despite the disappointment of the Senate vote we still need the major components of President Obama's jobs bill passed in some form.

At the G20 level, ministers have committed to take all necessary actions to ensure stability of the financial system and support domestic growth through structural reform efforts.  But it also needs to ensure the IMF has the resources to support adjustment, in particular in Europe, to meet all possible contingencies.  These are the messages I voiced at the G20 meetings on Saturday and I was pleased with the response. 

I know the G20 has the capacity to act effectively because I sat around the table when we took action three years ago to avoid catastrophe.  And I believe G20 Leaders will resolve in Cannes to take the hard but necessary steps to address the global economy's challenges.


Let me conclude by saying it's hard to recall a time when Australia has been more engaged in the global economic architecture than over the past four years.  There would not be a Treasurer in our history who has spent as much time as I have with international counterparts.  We invest a great deal of time and we engage directly and intensely because the stakes in recent years have been so high.  The world can ill-afford further hits to confidence.

I said earlier on that 2008 and 2011 are very different beasts and they are.  We are better prepared now, we have a plan, our banks are stronger, and we know what needs to be done.

Whether you're here in London, or in Sydney, Paris, New York or Shanghai, we all have a very large stake in seeing that same commitment and resolve of recent years brought to bear.

That's the call to action I delivered in Paris over the weekend, and in Washington a few weeks ago.  And it's the message the PM will be taking to Cannes in just a few weeks time.

It wasn't long ago that the politicians of the world gathered here to respond decisively to problems which began on Wall Street and rocked the world.  Today we can accept nothing less than the same boldness and resolve. 

Thank you.