Eurozone Crisis

Baroness Valentine Excerpts

Thursday 1st December 2011 Grand Committee

[Baroness Valentine]

I declare that I am chief executive of London First, a not-for-profit membership organisation that seeks to make London the best city in the world in which to do business.

I will not presume to predict the denouement of the crisis in Europe. However, whatever path to stability is eventually taken, it is likely to take until at least 2020 for Europe to find any sort of new “normal”. With our primary trading partner in a state of flux at best, and paralysis at worst, we in the UK must carefully consider how best we can avoid contagion and the steps we can take to return to growth.

Given the likely period over which we can expect to see reduced growth elsewhere in Europe, it is clear that our own path out of recession is likely to be more challenging and slower than we had previously predicted. To use a hill-walking analogy, before the eurozone crisis we had hoped that we would be gently, if challengingly, climbing our way to the sunlit uplands in the next year or two—a pleasant hike up the South Downs, if you will. We are in a different reality now. Perhaps a better analogy might be a trudge up Ben Nevis—longer, tougher and exposed in places.

Just as there are several routes up Ben Nevis, there are numerous, sometimes competing, approaches proposed for returning to growth. The one I would like to focus most on today is investment in infrastructure. In this context I welcome the Chancellor’s announcement of £6.3 billion in additional investment in infrastructure over this spending period, although this increment is modest compared with the cut in spending from the previous Parliament. The reduction in direct public investment makes it all the more important that the new approaches to funding infrastructure that he announced, such as the memorandum of understanding with pension funds, bear fruit. Investment in economically productive infrastructure shores the UK up for the long term, gives business the confidence to invest, and provides jobs.

I also welcome the review of the PFI model that Infrastructure UK begins this week. However, I would urge the Government to bring it to a prompt conclusion. Private investment will be essential to delivering the Government’s new swathe of infrastructure projects as set out in the national infrastructure plan. However, each investment must be carefully thought through so that it delivers sustainable growth rather than quick fixes or botched jobs. We must be clear about the objectives of any project and the part played by the Government in achieving them. In this context I welcome the new Cabinet committee to be chaired by the Chief Secretary.

If we look at schemes introduced under the old PFI process, a key lesson is that you need an experienced and accountable client for them to deliver well. In practice, this means government clients must resist the temptation to overspecify or constantly tinker. It means standardisation of projects like schools and hospitals and it means being prepared to employ expertise that is not present within government. I appreciate that this runs against the grain of current thinking but there is a real risk of the Government being penny-smart and pound-foolish. Investors need certainty about what will follow from PFI and the Government need to be absolutely clear where accountability sits for the whole of any project, resolving planning issues, funding and financing, and getting the best possible deal for the public sector, otherwise we are in effect setting off without a map.

There will, of course, be many competing demands for infrastructure investment. Typically, investment in London’s infrastructure shows a higher economic return than elsewhere in the country and the capital is some 30 per cent more productive than the rest of the UK. There is therefore a strong argument for supporting projects that will help London to lead the UK through the difficult times ahead. Some of these are within the City itself, such as desperately needed river crossings in east London or the extension of the Northern line to Battersea. These would have a rapid and positive economic impact. While I welcome the government support, I should like to see it accompanied by details of proposed user charges, clarity on sources of public funding and a timetable.

There will also be difficult decisions to be taken. Almost inevitably, given the nature of infrastructure projects, there is an inherent tension between economically productive investment and political antipathy. For example, it is becoming widely accepted that the UK needs an international hub airport with greater capacity than can currently be achieved at Heathrow; the Chancellor noted as much in his speech. The lack of hub capacity is stopping the UK from having the range of direct flights to BRIC and other growing countries enjoyed by European competitors, thus undermining growth and commerce. There is an obvious solution: build a third runway, where the planning application is ready, the financing is in place and services could be up and running within a decade. Ironically, that is the one conclusion that the Government have ruled out. Perhaps the chill winds of economic circumstance have yet fully to penetrate Downing Street.

Beyond infrastructure, and as the rest of Europe works its way back to stability, the competitive position of London will increasingly be challenged. Indeed, we are already seeing this in some of the financial regulation emanating from Brussels such as the proposed financial transactions tax, which has the potential to have a disproportionally damaging effect on London as Europe’s financial capital. Likewise, when I look at the way in which some of our European competitors are forging transport links with emerging markets, I see a risk that we will be left quite literally waiting at the gate.

At the moment, the capital probably has the most successful and international professional and business services sector in the world. A recent report indicates that almost two-thirds of major international companies have an office presence in London. People come here to do deals because they know that the talent and structures are here. London is the natural launch pad for American businesses looking for a European base and vice versa, as well as a toehold for Far Eastern businesses.

Retaining those businesses and attracting more is vital for our future. As Europe is stagnating, so it is imperative that we raise our game in trading terms with the rest of the world. International businesses must see London as a strong and competitive place to do business, and that relies both on their perception of current policy and on their confidence in the Government’s future plans. Above all, the UK must be—and be seen to be—open for business. Immigration policy needs to welcome productive workers and genuine students, employment law needs to create the conditions for more jobs, not fewer, and our regulatory approach needs the flexibility to accommodate these global players. Our corporate and personal taxes need to be seen to be competitive and consistent. At one end, I urge the Government to act on their ambition to lower the top rate of tax. Equally, I would like to see the personal allowance increased as speedily as possible, a measure that is fair and puts more money back in everyone’s pockets.

I began by observing that the eurozone’s path to stability was still uncertain. That being the case, it is all the more important that our own leaders demonstrate clarity of vision, certainty of direction and consistency of approach in how they address the challenges that this crisis has brought for our own country. That way, perhaps climbing the mountain ahead may feel a little more like a hike in the hills.