Examination of Witnesses (Questions 120-127)
Mr Simon Tilford
10 JULY 2007
Q120 Lord Inglewood: It is not what
I wanted to talk about at all, but it is quite interesting that
there is this clear distinction with this willingness to move
between those from old Europe and those from new Europe, for obvious
reasons, but it may have some bearing—to get back to what
I was talking to you about earlier—about needing a bit more
pain. What I really wanted to talk about is not labour mobility
so much as flexibility or lack of flexibility of the labour market,
particularly in old Europe. It seems that there is a degree of
general agreement that we must encourage greater flexibility within
the labour market there otherwise we will have problems that can
only be dealt with by way of physical transfers, is that not right?
Mr Tilford: It is not just flexibility in terms
of excessively tight employment protection, we also have a big
skills deficit. One of the problems we have in Europe and the
reason why we are not doing as well in the high tech sectors as
we should be is if you go back to the early Nineties and the hopes
for the single market, one of the key objectives was obviously
to strengthen our comparative advantage in the high tech sectors
and close the gap with the US. That has not happened. The EU economy
has not become more specialised in the high tech sectors and if
anything we have fallen further behind the US. A big reason for
that is that we do not have the necessary skills. If you look
at the profile of our labour skills, a lot of it is most suited
to producing medium tech goods—electrical and mechanical
engineering goods—which is good, I am not down-playing the
importance of, say, the German engineering sector to the European
economy. One of the problems we have is that we are just not investing
enough capital, either at the level of schools or at the higher
education level, so when I talk about flexibility I am not talking
just about labour market regulations, I am actually talking about
the ability to do the job. Companies will only invest more in
R&D, will only innovate more, if two things are in place—if
they are confident that there will be demand for the products,
the innovative products, and also if they can actually find people
who can develop those products, and companies will only adopt
new technologies if they can find people who can operate those
new technologies. In many ways not the whole of Europe but if
you look at Europe as a whole we are lagging behind; clearly,
some countries are in the leadership, the technological frontier
if you like on all of these things—the Nordics and the Dutch—and
then there is a group of economies—the Germans and the British
do rather better—but then there is quite a long tail where
there is real under-performance in most of the sectors and where
our technological readiness is just very weak. Labour and lack
of the relevant skills is a big part of that, so flexibility I
would define more broadly.
Q121 Lord Inglewood: Is that principally
the consequence of the domestic education policies or is it something
to do with the lack of investment on the part of businesses, or
is it a bit of each?
Mr Tilford: It is a bit of each. I certainly
think we are under-investing as a whole in higher education and,
given the fiscal constraints, the additional finance will have
to come from the private sector. The US invests a similar proportion
of its GDP in public spending on higher education, but then obviously
the total amount spent is doubled by private spending. Given the
fiscal constraints we are going to have to come to terms with
a greater role for private money in higher education. At school
level there have been big improvements. You alluded to the Lisbon
agenda and I do not think it has been such a damp squib; it was
not realistic to expect it to transform the European economy.
The goals it set were hugely ambitious and obviously there is
only so much any government can do to boost expenditure on R&D,
it is the product of a complex set of dynamics, but governments
now look to see what other governments are doing and there is
more awareness of successful qualities elsewhere in the EU than
there was and there is more general debate and awareness of what
should be done and how similar economies have managed to do it,
so it has been very positive in that sense but it was handicapped
by the excessive expectations that people placed on it. Obviously,
something such as that can only achieve so much and the responsibility
for most of the things on the Lisbon agenda lies with national
governments; if national governments choose not to take steps
to address these issues then there is only so much the EU can
do beyond naming and shaming.
Q122 Chairman: On balance do you
think the euro has been a success? It has been a tremendous benefit.
Mr Tilford: On balance, yes. It is difficult
to know because it is counter-factual; where would Europe be without
the euro? We would not have seen the integration of financial
sectors that we have seen, the euro has emerged as a strong, stable
currency and the ECB has established its credentials, but we need
to set our expectations rather higher. At the moment there are
too many question marks over the adoption of the euro for it to
be a catalyst for the kind of integration and the competitiveness
gains that everyone hoped adoption of the euro would lead to.
We now have the currency, it is established and institutions are
working effectively, but we have not seen it exerting the sort
of transformation of the European economy that people hoped it
would. There is still even now an assumption that just by being
in existence things will happen, that reforms will be made, that
transformation will take place, and that is just not the case.
I agree that if the pain gets fierce enough then governments will
be forced into taking steps; the problem is of course that by
the time that happens it will be much more painful than it would
have been because their competitive position will deteriorate
to the point where they are going to feel much more pain than
they otherwise would have done. The lack of urgency is very disappointing
and of real concern.
Q123 Lord Blackwell: My Lord Chairman,
if I could just put the counter-argument. Based on your paper
it is that without the euro those countries that needed to adjust
would not have been able to put off making those adjustments and
we might have had more adjustments sooner. Similarly, Germany
would have not been able to coast along without dealing with its
problems.
Mr Tilford: That is the argument I make and
I think it is a strong argument.
Q124 Lord Blackwell: Therefore, to
the extent that actually we postponed the necessary adjustment
in Europe, is that not a counter argument on the benefits of the
Euro?
Mr Tilford: It is a counter argument, yes. It
is not inevitable that Italy would have taken those steps, it
could have just devalued again and postponed the necessary reforms
because devaluation would have given it a temporary cushion. It
might have made things even worse; Italy might now be living with
a debt to GDP ratio of 200% because it had gone through a series
of devaluations so it might have been in an even worse position.
It is a counter argument and a good one—I have made it myself—but
it is not necessarily the case that they would have adjusted,
you could have just seen a whole series of currency crises.
Q125 Lord Inglewood: Would it be
true to say that having got thus far for it to collapse now would
be as it were the worst of all possible worlds?
Mr Tilford: Yes, if it was to collapse now it
would be the worst possible outcome.
Q126 Lord Steinberg: Would you also
say that it is still not for us here in Britain?
Mr Tilford: Actually Britain fulfils more of
the criteria than most of the current Member States but we have
got in a number of areas some pretty big issues: one is the lack
of an effective market in land. The supply of residential accommodation
in the UK is incredibly unresponsive to changes in demand, so
we would definitely need to address that and also some skills
deficits and vocational training. Generally, however, we meet
more of the criteria than most of the current Member States.
Q127 Lord Inglewood: Can I ask why
the land point is so important?
Mr Tilford: Had we joined and had we experienced
much lower interest rates over the last seven years than we have
done, which we would have done—interest rates would have
been very considerably lower, they would have been higher in the
eurozone than they have been because Britain is a large economy
and would have exerted some weight on the overall average, but
interest rates would have been much, much lower and we would have
had a huge asset price boom. If you see what has happened in Ireland,
Ireland has managed because the Irish have built a huge number
of houses, a massive number of houses, and that has kept a lid
on prices. House prices have risen dramatically but that is despite
building large numbers of new houses. Despite the fact that house
prices have risen dramatically in recent years and there is clearly
a huge pent-up demand, the actual volume of houses that we build
has remained largely stagnant so we would have had to address
that problem, we would have had to ensure that land was available
to actually build houses for which there was so much demand, else
we would have had an even more problematic build-up of house prices.
Chairman: On behalf of our Committee may I thank
you very much indeed for your contribution.
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