Banking and finance to have a lesser role in the economy, Cameron tells Davos

Banking and the City of London will have less of a role in the UK economy in the future as other areas such as exports, manufacturing, high tech and new green industries come to the fore, Prime Minister David Cameron told the World Economic Forum in Davos today (Friday January 28).

‘The tragedy of the last decade was that growth was based on too narrow a basis of our economy. Some 75% came from financial services, housing, government spending and immigration. That’s not a sustainable model,’ he said.

He explained that does not mean ignoring the City of London. ‘It will go on being a great success. But we need to see greater sources of growth for our economy as a whole because we were so over-reliant on the City, because we were so over-leveraged, that is why the crash hit us so badly’.

But fixing the problem take time, he emphasised. ‘There are no short cuts to a better future. New plants and factories need to be built, new products designed, new innovations taken to market,’ he added.

Part of the road to recovery will mean making it easier for businesses to start up ‘within Europe and between Europe and the rest of the world,’ he added, saying that in the UK Budget in March he will set out a specific plan for growth in Europe.

Cameron said that the UK has had an economy ‘built on the worst deficit, the most leveraged banks, the most indebted households, the biggest housing boom and unsustainable levels of public spending and immigration,’ and that has to change.

The new economy has to be one ‘based not on consumption and debt but on savings and investment not on government spending but on entrepreneurial dynamism not on one industry in one corner of the country but on all our businesses in all our regions, with a new emphasis on manufacturing, exports and trade,’ he explained.

He also called for more robust checks on banks and said that last year’s round of stress tests didn’t go nearly far enough. ‘They said we were three and a half billion euros short, then six months down the line Irish banks alone needed ten times that. This year’s tests have got to be tougher,’ said Cameron.

He called for test stretching over a three year period, covering liquidity as well as capital and involving independent bodies like the International Monetary Fund. ‘But above all what we urgently need in Europe is an aggressive, pan-continental drive to unleash enterprise. We need boldness in Europe too, not least on deregulation,’ he added.

He also wants to see less regulation for business. ‘I’ve had conversations with many European leaders about this, including Prime Ministers Fillon and Rutte, and we’re agreed we just cannot afford to load more costs on to business,’ he said, and said Europe should set a new and tougher target to actually reduce the total regulatory burden. For example, taking small businesses out of EU accounting rules alone would save them around €2 billion.

Cameron said a genuine single market is needed. ‘Nearly 20 years since Europe agreed to the free movement of people and services we’ve still got companies employing teams of lawyers just so they can trade across the nearest border. Jacques Delors once said that nobody can fall in love with the single market and frankly, no one ever will if we carry on like this,’ he told the audience at Davos.

‘Let’s look at how we can put an end to all those restrictive rules, who can hold shares in which companies, where businesses can set up and how many people they can employ and most importantly, let’s deliver on this with a tough, transparent approach to enforcing the single market. Fail here and we’ll fall behind. Succeed, and we could add up to €180 billion to Europe’s economy.