First Minister Alex Salmond
Euro Finance Week
November 17, 2009
- I am delighted to have the opportunity to address you here today and to speak in such distinguished company.
- Today I want to do three things.
- To briefly give a sense of how Scotland's economy, and particularly its financial sector, can contribute to European recovery.
- To look at the subject of financial regulation and how we can improve regulation while still encouraging innovation.
And I want draw on Scotland's history of financial advances, to look at how we can develop improved financial approaches to rebalancing the global economy.
This session as a whole is looking at 'Restructuring the Global Financial Architecture - The Road Ahead'.
To restructure the global financial architecture is an ambitious target.
Scotland is a good place to stand to look at rebalancing the global economy.
Part of the European Union and therefore located midway between the developed economies of North America and the emerging economies of Asia.
And with a long history of punching above its weight in financial services.
A long history and, despite current difficulties, a still successful present.
And for the future, Scotland is well placed to deliver high quality financial services at economic cost.
Financial and business services are hugely important in Scotland - employing over 350,000 people, and contributing €19 billion to the Scottish economy.
Even through the recent hard times, major pillars of Scotland's financial sector have continued to grow - in insurance, asset management and pensions.
Our capital city, Edinburgh, remains in the top 10 global centres for asset management. Altogether our industry has some €518 billion of funds under management.
Those of you who were at the earlier panel session will have heard Benny Higgins, the Chief Executive Officer of Tesco Bank. Just in June of this year I was delighted to open their new headquarters in Edinburgh. Already employing over 250 staff, that will have built up to 450 in around 6 months' time.
Tesco were drawn to Edinburgh by the strong, skilled workforce that Edinburgh and Scotland offer the financial sector.
As Benny Higgins said at the time, 'Edinburgh is the ideal place from which to move what is already a successful business into the next stage of its development. We have continued to attract some of the best talent from within Scotland and from those looking to move here for the right opportunity.'
And the company now has declared plans for 1,750 jobs in Scotland.
And Glasgow, too, has much to offer and has seen significant recent investment from Esure and BNP Paribas.
Peter Wood, the Chairman of Esure said earlier this year that:
"The combination of excellent people, superb infrastructure and a can-do ethic makes this a perfect place to do business, and I cannot understand why anyone with telephone and internet-centred businesses would choose anywhere else"
So Scotland's financial sector remains in a position of real strength.
And Scotland is a country where there are opportunities to expand.
That might be through organic growth.
Or, indeed, through acquisition.
Because all crises bring opportunities.
Over the next few years, as the Royal Bank of Scotland and Lloyds Group restructure and refocus, there will be a number of opportunities for acquisition of attractive and competitive operations.
The Scottish Government and its trade and inward investment arm, Scottish Development International, stand ready to work with potential bidders for these assets to secure maximum benefit for the company and indeed for the country.
Of course this is not the first time of financial crisis and nor will it be the last.
In 1772 the philosopher David Hume wrote a letter to his friend Adam Smith, the future author of The Wealth of Nations and founder of economics.
Hume wrote to Smith complaining about "Continual Bankruptcies, universal Loss of Credit, and endless Suspicions" and asked "Do these Events any-wise affect your theory?" The theory of course was whether the free market would necessarily lead to an optimum economic outcome.
In fact, the British banking crisis of 1772 was a powerful impulse towards the completion of The Wealth of Nations, Book Two of which has much to say on financial regulation.
I draw three lessons from this.
First, that times of trouble always provide, out of necessity, a powerful impulse towards better economic understanding.
If there is destruction, it can be, as Joseph Schumpeter would put it, "Creative Destruction".
I believe that it is no coincidence that Adam Smith founded economics on a sound, systematic basis at a time when Scotland and Europe was undergoing the growing pains of rapid industrialisation, with its attendant successes and inevitable failures.
Similarly it was the attempt to explain the Great Depression of the 1930s that prompted the very different insights of John Maynard Keynes.
We wait to see what fundamental insights will be inspired by the crisis of the last year or so.
The second lesson that I draw, is that we can learn from such crises not just in terms of economic theory but of financial practice.
Partly that's just about the salutary effects of a catastrophe.
As J K Galbraith wrote of the Great Crash of 1929 - "As those days of disenchantment drew to a close, tens of thousands of Americans shook their heads and muttered, 'Never Again'."
And of course, it is only in very recent years that those lessons were forgotten.
It is just over 10 years since the repeal of the Glass Steagall Act, which from 1933 split the activities of Investment and Retail banking. This, many argue, helped create financial conglomerates which led to the problem of Institutions that were "Too Big Too Fail". This debate will form part of the regulatory response to the current financial crisis.
But it is also about the way in which we learn to adapt our financial and regulatory structures in the light of such events. Clearly we need an environment which encourages competition and innovation, rewards excellence in performance but does not provide incentives for short term profiteering or moral hazzard, which does not bear equivalent risk.
The better management of the developed economies in the second half of the twentieth century reflected lessons learned from the failures of the first half and, particularly, the Great Depression.
Similarly, the relative resilience of the South East Asian economies during the current recession was preceded by regulatory changes following the 1997 Asian financial crisis.
I visited China in April of this year and the growing sophistication of their financial sector is clear.
People pointed to 1997 as being the key to stability in 2008. Significantly the key practitioners in the Asian financial sector had experienced 1997 and learnt from experience.
The third lesson that I draw, is that this crisis too shall pass.
Financial crises are resolved over time.
But if that is to happen within a reasonable timescale, we need concerted action.
The recent International Monetary Fund report on global financial stability underlines how uncoordinated action in one country can have spillover effects in another - effects often greater than those in the home country.
Co-ordination has certainly improved as a result of the crisis.
As the immediate financial pressure starts to recede we must not withdraw into our domestic economies in an attempt to avoid external shocks.
Rather, we need to maintain co-operation and consistency across borders, while still benefiting from cross-border trade.
Since the Enlightenment of the 18th century, Scotland's greatest export has been ideas.
Partly that has been at the level of high theory - I have already mentioned David Hume and Adam Smith and could mention a multitude, from a variety of disciplines.
But just as much, Scots have been responsible for real, practical innovations: the fax machine, MRI scan and penicillin. We even invented the overdraft - although we're not so proud of that at the moment.
And numerous practical innovations in the financial sector.
John Law from Edinburgh, who as Minister of Finance in France in 1720 pioneered the use of a Central bank issuing money in paper, backed by central control of tax and revenues.
Robert Fleming, known as the father of the investment trust, who in the late 19th century grasped the potential to harness the wealth of the rising middle class in the United Kingdom to meet the need for investment in railroad infrastructure in North America, through safe, broadly based high yield securities.
More recently Peter Wood, whose investment in Glasgow I mentioned earlier, pioneered the sale of general insurance in the 1980s through the telephone with DirectLine.
So Scotland has an outstanding record in financial innovation.
Inevitably, recent events should make us think again about some financial techniques - or in particular how we can distinguish between good innovation and bad practice.
Clearly some innovations have been proven to be bad: for example the theory that chopping up sub-prime mortgages and then reassembling them in different packages makes them any safer as an investment.
I should add that this was not a Scottish innovation.
Many innovations are successful virtually from the start, such as Robert Fleming's investment trusts.
Some innovations, though, prove their worth over time and after a period of experimentation and refinement. John Law's paper money founded on the nation's overall wealth rather than gold or silver reserves initially contributed to a financial collapse in France. There is no move now, however, on the part of advanced economies to go back to a gold or silver standard.
A background of macroeconomic stability, particularly for inflation, is very important - as Professor Dr Stark of the European Central Bank has reminded us.
Achieving better regulation is vital - as Monsieur de Larosière has just covered.
But stability and regulation should not be allowed to crowd out desirable financial innovation.
And the measure of what is desirable is in many ways now the same as when David Hume wrote to Adam Smith: what innovations allow banks to do what they do best: holding people's funds securely, maintaining liquidity, and investing effectively in sustainable economic growth.
Because we have to recognise that we are working against a dynamic, unstable background.
Some of that instability is clearly undesirable: climate change caused by global warming, and the effects on energy supplies as readily available mineral sources begin to be used up.
And, sometimes, very positive developments can have side-effects that are undesirable or at least need to be managed.
The integration of the newly emerging economies such as China into the world economy is a tremendous move forward.
It offers the prospect of raising the living standards of over a quarter of mankind to current Western standards.
Naturally there will be issues to manage on the way such as limiting adverse effects on carbon emissions.
But this is certainly a positive development.
Some authorities see a catalyst of the current crisis as being the way in which excess funds from emerging economies such as China have led to asset price inflation in developed economies.
However, the imbalances in the world economy have to be tackled in some way.
To use a metaphor, if excess funds in countries like China are like a flood, then our current response seems focused on building higher dams through regulation to control the flow of water.
Another approach would be to seek to drain away the flood waters at source by encouraging the Chinese propensity to save to diminish over time, for example by increasing demand and by better welfare provision. This will take time and it is something that can only be pursued through Chinese domestic policy.
As I said earlier I am in no doubt about the sophisticated policy approach being pursued.
But there is also a responsibility on us in the developed economies to produce more creative solutions. Perhaps to continue the metaphor, we should be looking for ways to channel the flood waters where they can create growth through irrigation rather than destruction through inundation.
In plain language, we need to shift the inflow of liquidity from emerging economies away from the creation of virtual wealth through unsustainable price inflation of existing assets, towards genuine wealth through new infrastructural and other investment.
We have to bring new assets into existence to redress the imbalances of the old.
In all these things, there are similarities with crises of the past. The extent of recent financial shocks may be unprecedented but aspects are very familiar.
I remember, as a student of economics in the 1970s how it took time to adjust to the OPEC surpluses of countries with new oil wealth.
I remember, also, as a young economist working in the financial sector how new financial instruments and innovative techniques were developed to exploit North sea oil and gas.
I also remember in the 1980s how the Bank of Scotland was among the first in converting sovereign debt to equity investment to help South American nations emerge from their debt crisis.
So we have faced the challenge of finding productive use for an influx of funds before and we can again.
And we must do so in a way that contributes to achieving a sustainable future for our planet.
The greatest threat to economic stability is not the financial imbalance of today, but the climatic instability of tomorrow.
And Scotland is already playing its part.
Our Climate Change Act, passed earlier this year, is the most ambitious in the industrialised world, committing Scotland to cut greenhouse gas emissions by 42% from 1990 levels by 2020 and by 80% by 2050.
The Scottish Government is offering one of the greatest innovation prizes in history - the £10 million Saltire Prize - around €11 million - for the team that creates the best, commercially viable wave or tidal energy project, using only sea power.
And these initiatives build on existing expertise: Scottish and Southern Energy's Centre of Engineering Excellence in renewable energy in Glasgow; the Scottish European Green Energy Centre in Aberdeen; companies such as SeaEnergy Renewables in Aberdeen, developing wind farm technology from the Moray Firth in Scotland to the South China Sea.
But wouldn`t it be extraordinary if we could identify new infrastructure development on a scale which could make a significant difference to climate change goals - the kind of goals that I hope will be agreed at the Copenhagen summit - and also provides an attractive home for the investment of funds from the surplus economies.
How can we make that kind of massive infrastructural project happen?
Who will make it happen?
Lets take just one project of the sort of scale which could make a contribution both to short term ambitions and long term requirements. An electricity connector across the North Sea to maximise use of renewable energy from wind or wave power in Scotland and hydro power in Norway, and carry that vast resource across the North Sea to mainland Europe.
Today the EU Commission is taking forward a North Sea Grid Study, led by Georg Adamowitsch, looking into this up to £100 billion project. The initial investments are being made as part of Europe's Economic Recovery Plan including in a groundbreaking transmission hub off the north coast of Scotland.
It has been estimated that Scotland's marine renewable energy potential is more than 60 Gigawatts - or ten times our own peak electricity consumption.
Combined with Norway these green energy supplies could meet the electricity needs of a nation the size of Germany
So this type of investment could both contribute to achieving climate change goals and in enhancing energy security.
How do we channel investment into such a project and how is it managed?
Potentially I can see the role of the European Commission expanding from facilitators to regulators of the project. Because someone has to regulate to ensure access for the producers, protection for the consumers and a proper and safe return for investors.
At the European level, the European Commission's communication on financing low carbon technologies of 7 October 2009 is to be welcomed.
The practical work by the European Investment Bank, as the EU's financial institution, for example in developing funds for carbon capture and storage and enabling access to these by small and medium sized enterprises is also very important.
But I see a further potential role for the European institutions in facilitating large scale infrastructural development.
For the private sector, I see the development of new financial instruments that allow us to harness the resources from the emerging economies to promote sustainable economic growth and reliable, returns for the investor, based on real wealth not virtual wealth.
Such innovation would allow investment opportunities that benefit developing economies by providing the opportunity to share risk and return in new technologies, industries or sectors.
As First Minister of Scotland I lead a government that is determined to see Scotland playing the fullest part in Europe and the world.
Earlier I mentioned the Saltire Prize, a prize that I believe will hasten the development and commercial deployment of tidal generators around Europe's shores. Our partners in the Saltire Prize are National Geographic, the world's largest educational charity.
National Geographic have described the prize as a "great example of a small nation, making a big difference to a global challenge".
That has been Scotland's role throughout the ages. In finance, life sciences, energy, engineering and more. Scotland has long punched above its weight.
We need to rebalance the global financial architecture and we can do so in a way that adds real strength and depth to our economies - in a way that ensures the sustainable future that is now such a necessity.
It is a challenge for all of us - and Scotland stands ready to play its part.