Atlantic Council

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On July 26th, the Atlantic Council’s Global Business and Economics Program held an on-the-record discussion with Mark Hoban, UK Financial Secretary to the Treasury, who set out the British government’s approach to securing strong and sustainable economic growth, and a stable financial sector. Financial Times US Economics Editor Robin Harding moderated the discussion and Atlantic Council Senior Fellow, Julie Chon, opened the event. The discussion follows a series of recent meetings to examine sovereign debt crises with Greece’s Ambassador to the United States, Vasselis Kaskarelis, European People’s Party Secretary General Antonio Lopez-Isturiz, and Austria’s State Secretary in the Federal Ministry of Finance, Andreas Schieder.

As the European debt crisis worsens and the United States toys with default, the United Kingdom has embarked on its own program of fiscal and regulatory reforms. As British Chancellor of the Exchequer George Osborne’s top advisor on banking policy and financial services reform, Hoban discussed the UK’s approach in the global context, including its response to recent events in the Eurozone and international initiatives to strengthen financial stability.

Key points from the discussion were:

• The UK has made strides to correct its unsustainable fiscal position, as other deficit economies work to implement austerity measures following the financial crisis.
• Long-term economic growth in the UK will be facilitated by promoting strengthened financial regulation, lower taxes, investments in infrastructure, a skilled workforce, start-up businesses, and credit availability.
• The UK will continue to play a vocal role in supporting higher regulatory standards, increased transparency, open markets, and international consistency; the UK has carefully assessed the economic impact of regulatory reform initiatives and believes that stronger regulation will lead to long-term, sustainable economic growth.
• Britain is supportive of the recent Eurozone decision to continue supporting Greece, and suggests that increased fiscal integration among member states would improve economic and financial stability.
• Transparency in the reporting of banks’ health and increased capital requirements will strengthen banks and help them resist future economic shocks.

Addressing global economic imbalances is a necessary component of achieving sustainable global growth and avoiding the detrimental effects of sharp deleveraging by deficit economies. Governments of deficit economies were forced to prop up financial sectors with government debt during the crisis, and now must find ways to rebalance their fiscal houses. In the UK, where pre-crisis household debt had risen to nearly 100% of GDP, the British government has responded by setting out plans to eliminate its current structural deficit by 2015. These measures have already provided signs of cautious optimism, as economic output is growing, over 500,000 new private sector jobs have been created, and interest rates on British bonds have continued to fall in recent months.

Recent events in the Europe, particularly in Greece, remind us of the fragility of the Eurozone and the interdependency of our economies and financial sectors, the Minister said. The UK fully supports last Thursday’s decision by the European Council to continue supporting Greece while lowering interest rates on Greece, Ireland, and Portugal alike. He added that the Eurozone would benefit from increased fiscal integration following its sovereign debt crisis, despite the loss of some member-state sovereignty in fiscal policy.

Moving forward, long-term economic growth will depend on government policies that increase international competitiveness while reducing barriers to private investment. Minister Hoban said the UK is promoting a recovery based on exports and encouraging foreign investment, as domestic demand has slowed somewhat, and emerging economies provide new opportunities for trade. With the financial services sector playing a significant role in the UK economy, it is important to restore confidence to that sector and ensure that it is resilient in the face of shocks by fully implementing new Basel capital standards, increasing liquidity, limiting taxpayer liability, coordinating globally, and stopping excessively risky practices through the newly-formed Financial Policy Committee within the Bank of England. Extending the deadline for implementing the heightened Basel standards will only contribute to uncertainty which could impair economic growth. Additional regulatory recommendations that are being considered in the UK include the Independent Commission on Banking’s recent report describing the benefits of protecting deposit-taking activity from proprietary trading, bailing-in banks in times of crisis instead of bailing them out, and allowing retail bank operations to continue safely while a bank is facing liquidation. The UK is also working on pilot projects for living wills and promoting internationally consistent standards for cross-border resolution of failing firms.

The financial crisis and Europe’s subsequent sovereign debt issues provide a perfect example of why increased transparency is important to ensure banks are sufficiently capitalized to survive potential economic shocks. The US and UK have benefited from being proactively transparent and recapitalizing banks in need, but the high costs of these interventions are too expensive for either side to repeat. Mr. Hoban made clear that while financial services generate job growth, provide tax receipts, and supply necessary capital lending to our national economies, their success should not come at the cost of wider economic stability.

Finally, Minister Hoban said a successful and stable financially system will come from embedding a culture of proper financial regulation with a focus on systemic risk, implementing consistent international standards, producing more resilient financial institutions, and ensuring that the taxpayer is not on the hook for too-big-to-fail banks. The financial landscape changes rapidly, so international regulation and cooperation must adapt quickly as markets innovate.

Click here to read Minister Hoban’s prepared remarks

The discussion was part of the Mapping the Economic and Financial Future Series, an Atlantic Council series co-hosted with Deutsche Bank that features high-level business leaders and economic policymakers from the U.S. and Europe. The series is a central component of the Council’s Global Business and Economics Program.