When it comes to tackling the deficit be open, transparent, and whatever you do, don’t over promise!
Endeavour Public Affairs interview with the Rt. Hon Paul Martin, former Prime Minister and Finance Minister of Canada – Part Two
In part two of his discussions with Richard Hyslop, founder of Endeavour Public Affairs, the Right Honourable Paul Martin, former Prime Minister and Finance Minister of Canada, discusses the impact of global forces and the banking crisis drawing on his own experiences in the 1990s. Richard continues to draw his own conclusions based on the lessons learned from Canada and how they might relate to attempts in the UK and globally to deal with budget deficits and national debt.
Over the past several years, starting with the banking crisis in 2008, the UK economy has been buffeted by global events. As the UK struggles to emerge conclusively from recession, it is surrounded by a global economy and in particular a Eurozone economy that has significant difficulties. In February 2013 the UK’s credit rating was downgraded from AAA to AA1 (a fate previously suffered by France and the United States), although the economic impact of this appears to have been minimal. A conflicting picture of the UK’s economy with low or no growth but falling unemployment does not lead to obvious solutions. So, to what extent does Martin consider that effective domestic action has and can be taken?
Since 2008 there has been considerable debate in the UK on how to approach our financial services industry. During his time as finance minister, Martin strengthened the regulations governing Canada’s financial institutions, with the result that Canada is now viewed as an international model for sound financial regulation. When the banking crisis struck, governments around the world, including the UK, bailed out their banks on the grounds that many of them were “too big to fail”. In doing so, it could be argued that we now have a situation where the Government has privatised success and nationalised failure. In other words when things are going well the banks are allowed to make huge profits, but when things go wrong, the Government steps in to bail them out with taxpayers money. If this is going to continue to happen on the basis that the banks are “too big to fail” then where is the incentive for sound financial practice on the part of the banks?
Martin believes that the UK’s policy of bailing out our banks was the right one. “Well first of all I think this is a situation where you are not being as fair to the UK as you might. The UK has handled its banks much better than the Europeans have. The incestuous issue of sovereign debt and bank debt on the continent, and their failure to have adequate stress tests means that the continental banks continue to be a major issue long after the US and the UK is an indication that the UK got it right.”
Martin believes the question of “too big to fail” is a valid one. “Bailing the banks out when times are tough and letting them take massive profits as a result of unacceptable risk doesn’t make sense. Canada having been in such financial difficulty, I knew we could not afford to have a banking crisis. So, when the British, the Europeans, and the Americans were weakening bank regulation in the mid-1990s, Canada increased capital requirements and strengthened regulation. As a result our banks came through the 2008 banking crisis in very good shape.” Martin does however believe that there is still a problem to be dealt with, “Internationally we have been talking about banks being “too big to fail” and still haven’t dealt with this. Furthermore, banking is a global industry so there must be global regulation.”
Whilst governments bailed out banks, central banks such as the Bank of England have engaged in quantitative easing (QE) and low interest rates. QE in the UK has been larger, relative to GDP (at 22 per cent of GDP), than either in the US (13 per cent) or the Eurozone (4 per cent). There are those in the UK who argue that QE has been vital in lessening the impact of the financial crisis, while others argue that it is an extreme policy with unimpressive results, citing the fact that since 2008, UK growth has been the weakest of any G20 nation with the exception of Italy. Martin’s view on QE is more positive than this, “I think that where QE has been applied, those countries have a stronger economy than they would have had otherwise.” However, Martin says, “How long central banks can sustain this kind of monetary policy before it becomes counterproductive remains to be seen. I don’t think it has been demonstrated at the present time that QE has an inflationary effect, but eventually it will and central banks will have to deal with the problem. But let’s be clear, the biggest issue at present time is the need for economic growth.”
So, if QE is not yet a concern, how about low interest rates, or even negative interest rates as recently proposed by Paul Tucker, the Deputy Governor of the Bank of England? As with QE, Martin believes there is no specific problem with low interest rates, it just depends on the length of time you have them in place. “Clearly low interest rates will affect savers, most of whom are senior citizens, pension funds, and insurance companies. There’s no doubt that there is a cost to be paid for this and the question is to what degree and for how long. The answer is not black and white; it totally depends on how long the policy is in place. But as I said, the biggest focus right now has to be growth.”
Whilst growth may be the biggest focus, it seems hard to find. After all the UK has just come out of a double dip recession and could be about to plunge into a triple dip recession. Martin stresses that we live in an increasingly integrated global economy with the economic fate of a country clearly being aligned to a certain degree to the problems and opportunities provided by that global economy. Although the Eurozone and wider global economy will have a significant impact on the UK, Martin does not believe that finance ministers, and in this case, George Osborne, are powerless. “A global economy means that there are new markets opening so the focus at home has to be how you can create a strong economy able to take advantage of these new opportunities. The German’s have been very good at this, but this is not something that you can do in one term of government. Again, the answer lies in the greatest degree of openness and transparency with your people. As long as the Government is open and is constantly communicating truthfully with their people about what’s happening and what has to happen then I think that the UK can come through the crisis. You have got to be prepared to have that national debate and to keep having it.”
Negative fourth quarter 2012 GDP figures were followed in February of this year with the news that the UK had had her credit rating downgraded from AAA to AA1. Although potentially politically damaging to the Chancellor, the economic impact appears to have been minimal. So should we be concerned with downgrades and the rating agencies? Martin experienced a downgrade in Canada and is inclined to agree with the limited impact analysis, “It was headline news for a day, but it had very little effect. Surprisingly they downgraded Canada after our budget which had been very well received by the markets and was generally regarded to be a budget that was going to deal with Canada’s deficit.” However, he does not share the view of some European politicians on the “dangerous” nature of credit rating agencies. “I think that any body that claims to objectivity requires a certain degree of oversight from an external organisation. However, I certainly do not consider rating agencies to be dangerous. I think they play a role and I think that, as we have learned from the problem of weakened bank regulations, there is a certain amount of oversight that is required of any institution. It should be for the agencies themselves to come forward with proposals in this area. If they do not then governments will and should, which would be unfortunate however given that a substantial proportion of what these agencies do is pass judgment on sovereign debt.”
The downgrade, when combined with the negative growth figures presents a pessimistic view of the UK economy which conflicts sharply with the more positive view based on the record levels of private sector businesses being created, falling unemployment, and record numbers of people in work. Martin believes there are two specific reasons for why the positive aspects are not feeding through into the GDP figures, firstly the wider economic situation in Europe and secondly global markets. When tackling Canada’s deficit, the targets Martin set in the first year were in his own words “not hard to meet”. They became harder in the second, third, and fourth years. As Martin himself says, “It was very important in the first year that we met our targets and we did. Why was this so important? Well, Canada had had 20 years of not meeting economic targets and that had led to a loss of confidence. I was criticised for our first year target on deficit reduction not being tough enough, but I knew that what was most important was not the target itself, but living up to that target and beating it and we did. Economists can make predictions a few months out and miss them, and if they have to make a new prediction it doesn’t matter much. Governments don’t have quite the same room to manoeuvre so when they make their projections it is important that they under promise.”
Finally, at the end of June, Sir Mervyn King will step down as Governor of the Bank of England to be replaced by Marc Carney. Does Martin have an advice for his fellow Canadian? “In Canada he was and still is an outstanding central bank governor. He has a very acute mind and he had a very strong grasp of what had to be done (in Canada). He is also an excellent communicator which is important when thinking about what I have said previously on the need for an open and honest debate with the people. His departure will be a great loss for Canada. Furthermore, he is the head of the Financial Stability Board which is something that people don’t seem to raise as much as they perhaps should. Essentially the United Kingdom is being buffeted by what is going on in the Eurozone and I really do believe that banking issues are global issues requiring minimum global standards. I also believe the UK is right in seeking stronger standards. In any event, to have a governor of the Bank of England who is also head of the Financial Stability board will be vitally important going forward.”
The Right Honourable Paul Martin was the twenty-first Prime Minister of Canada from 2003 – 2006, Minister of Finance from 1993 to 2002, and he served as the Member of Parliament for LaSalle- Émard in Montréal, Québec from 1988 to 2008.
Published: Monday 18 March 2013
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Photograph: © Copyright of David Chan.