Introduction

One word, globalisation, has come to stand as shorthand for the whole range of rapid and radical changes taking place in all aspects of life – economic, political, cultural. This means there are many possible perspectives on globalisation, but it’s important to keep them meaningfully distinct in order to consider policy realities and priorities.

What’s common to all facets of globalisation is that the same underlying forces are driving change:

The pervasive spread of information and communications technologies enabling economic actors to operate more speedily on a truly global scale;

The adoption of policies everywhere broadly oriented towards market forces and open borders;

And, to a lesser extent, demographic and social change.

To state these trends is to make it plain that failure to respond is not a viable option. The focus must be on how to adapt.

Not surprisingly, given its extensive nature, globalisation poses a variety of specific policy challenges to all governments at every level, from local & regional to national & supra-national, and in industrialised and developing countries. In Europe, it also presents the European Union with some specific institutional challenges.

I want to offer some thoughts and raise some questions about two areas, namely the impact of policy reactions to globalisation at every level of government in Europe on the business environment; and what institutional responses to globalisation might be needed at the EU level.

My underlying message is that the EU has every reason to feel confident about the implications of globalisation. European integration has been the key trigger for the growth in international trade and direct investment for at least 20 years. That other nations are now joining us in taking to heart the mutual advantages of economic integration should be a cause for celebration, not for concern.

First, a few reflections on the political and economic context.

What do Europeans think about globalisation?

Business executives are not so naïve as to believe it is possible or sensible to ignore public concerns about aspects of globalisation. Big companies have obviously been subject to tremendous scrutiny in recent years and vehemently anti-business sentiments have been voiced by activists in a manner unparalleled since the 1960s.

Nor do I dismiss these as fringe views even though some of the groups expressing them are clearly extremist. Everyone should take corporate responsibility, climate change, fair trade and related issues very seriously, and that includes business leaders.

Public concern about such issues is part of the reaction to globalisation – to the growth in trade and foreign investment, to energy and environmental challenges which cross borders, to the sheer flow of information about what is happening in the rest of the world. Whether asked about the phenomenon of globalisation in general or specific aspects of it such as migration, or foreign investment, European citizens express concerns, to varying degrees.

Globalisation has become the scapegoat for all kinds of troubling developments. For a sense of increased job insecurity. For greater income inequality. For the ‘dumbing down’ of European culture by American influences, or, more generally, the homogenisation of culture. For decreasing civility in urban life. For poverty, debt and disease in developing countries. Not to mention the illegal drugs trade, people trafficking and international terrorism, the dark side of globalisation.

What’s more, public perceptions are becoming increasingly negative, according to some surveys.

The polling evidence needs to be interpreted with a little care. According to the Euro barometer surveys, majorities in most EU countries have said the economy was too closed rather than too open; and said they were in favour of globalisation rather than opposed.

However, the more specific the questions, the more negative the replies. On trade liberalisation versus protectionism, or the positive versus negative contributions of immigrants, for example, there are majorities on the ‘anti-globalisation’ side.

Recent surveys also express an extraordinary degree of pessimism in general. Asked whether things are going in the right direction in their country, those saying no outweigh those saying yes in all but six member countries, with Ireland the only one of the pre-enlargement member states with a positive majority. In France and the UK, pessimists outnumber optimists by two to one.

Most tellingly, almost two thirds of Europeans think life will be harder for the next generation.

In short, there is a sentiment of fearfulness present to some extent in every member nation.

This at a time when we should have so much to celebrate:

the accession of formerly communist countries to a peaceful and united European polity;

the success of the Euro and the ECB – and to have created a new currency of global status, and a respected central bank delivering low inflation and a stable economy is a huge success;

a growing Euro zone economy, albeit with long-term structural challenges which we still tackle too slowly.

Looking at the evidence, many Europeans clearly don’t appreciate these achievements. There is a dispiriting sense of a need to turn away from the rest of the world, to safeguard what we have in a walled garden, sheltered from the forces of change ‘out there’.

This is one of the possible, plausible reactions to globalisation identified by the scholar Philip Bobbitt in his magisterial study of the evolution of the nation state (The Shield of Achilles), and it is not a scenario for which he could predict a very positive outlook in his analysis of the market states of the future. Bobbitt labels this alternative ‘The Garden’, which rather brings to mind the formal garden of a Loire chateau, orderly behind its walls yet ultimately vulnerable to the chaos of the wider world.

Even if this sense of a desire to retreat is a media construct not firmly based on how citizens actually feel, there is certainly no spirit of European optimism or engagement, still less leadership, in the world.

Why is this a problem? For at least three reasons:

Staying aloof does not evade having to make choices. Change does not stop when you close your eyes. India and China will continue to grow, with repercussions for European economies, whatever we do.

Secondly, in practice it would mean a failure to respond to pressing European challenges such as the ageing and in some cases shrinking population, or the slow rate of productivity growth. Hostility to globalisation to which some politicians have resorted only cements into place the sclerosis which unfortunately does characterise some EU economies.

Thirdly, the linkages between Europe and the world are so extensive that it wouldn’t be desirable to disengage given the extremely serious repercussions that would have.

To understand the potential damage, even of a failure to participate wholeheartedly in current trends, let me turn to what globalisation means in practice to European businesses.

The globalisation of EU businesses

To understand the global context for businesses, let us cast our minds back to the mid-1980s. Work on building the Single Market was getting under way, to the great benefit of the European economy. With strong growth and tumbling internal barriers to trade, American and Japanese companies invested heavily in the EU from the mid-80s.

Amongst those seeking a firm foothold in the flourishing EU market were the major Japanese car manufacturers, who built plants and established relationships with European partners.

It is hard to remember now just how contentious this inward investment was at the time, with frequent rows about whether there was enough local content and controversy about new employment practices. Now, global partnership is the norm for European, Japanese and US car makers: Nissan and Renault have merged; Suzuki is partnered with GM and Mazda with Ford. Behind each of these global automotive partnerships lies an extensive web of alliances and joint ventures between suppliers all the way upstream to the initial research and design.

So a product could not be more transnational than today’s automobile. Car manufacture is increasingly clustered in a few countries but auto components are produced all over the world. The engine might come from Hungary, the transmission from Poland, the fabrics, fittings and electronic components from a variety of sources in Asia. The metals will probably have been processed in East or South Asia too. Meanwhile in their home bases, the western European or Japanese parent companies have specialised in research, and in design and marketing, the higher value activities in the production chain.

What’s true of cars is true of many manufactured products. Virtually any finished consumer good is no longer really ‘made in’ anywhere, as its components will typically have been designed, manufactured, processed, assembled and distributed in numerous countries. Take aircraft production, for an example, each Airbus or Boeing aircraft have such an extensive amount of both US and European content with many suppliers providing components to both.

Even simple products like a shirt: the design, fabric, thread and trims almost certainly have different national origins, even if the label says ‘Made in Italy’ or ‘Made in China’ for that matter. And most of the value added comes in the distribution and marketing stages anyway.

The combined expansion of both trade and FDI reflects the process of splitting up production chains and the global re-location of the individual links in the production process.

This has been under way in manufacturing for at least 20 years, and manufacturing output is therefore radically globalised compared with the early 1980s. A third of merchandise trade now consists of trade in components, rather than finished goods, with the proportion still rising.

This process of international specialisation is driven by multinationals which are making use of new technologies and taking advantage of policy liberalisation. And it has become increasingly fine-grained.

Individual countries possess a range of sometimes surprisingly narrow specialisations. The statistics cover very broad categories of goods, and don’t give a clear impression of the extraordinary extent of this specialisation, down to individual components out of the thousands or tens of thousands that make up the finished products. The fabric of the world economy truly has an extremely fine weave.

And the benefits are clear in the lower prices and vastly increased quality of the goods we use. Whether it is clothes or high-end cars and computers, consumers have very clearly benefited enormously from the global re-ordering of manufacturing production. Globalisation has both made it possible for multinationals to operate much more efficiently and also provided the more intense competition which ensures those efficiencies have been passed on to consumers.

The idea of cross-border operations is familiar but few people fully appreciate the scale of the switch from national to multinational production. Even fewer are aware of the extent to which this is largely an EU phenomenon.

Investment into and within the EU due to the Single Market programme was the most significant driver of the substantial cross-border investment growth we have seen since the late 1980s. Cross-border direct investment has been growing even faster than world trade – it was up by an annual average of 22% from the mid 80s to the mid 90s, and by nearly 40% a year since 1996.

In the latest year for which we have the figures, the EU accounted for nearly half of FDI inflows and nearly three quarters of outflows. Of that EU portion, 72% consisted of intra-EU investment. In earlier years the intra-EU element was even more dominant. The vast majority of inward investment in European economies comes from other EU member countries; it is more than a half of the total even in the UK, with its extensive links with the United States.

To an enormous degree, globalisation in terms of the trading and investment links between national economies has been and remains a process of European integration.

Of course, foreign direct investment overall has expanded substantially since 1985. Developing countries have been the destination for a rising share of total FDI: the developing country share of FDI inflows has risen to over a third in recent years and so the share of the OECD economies in the global stock of FDI declined from 75% in 1980. But the OECD share was still 70% in 2005, and the European share 51%.

The same process of switching from a national to a multinational form of business is starting to get under way in services too. Exports and imports of commercial services have been growing at 10% a year since 2000 and accounted for just under a fifth of total world trade in 2005.

This is a highly contentious area. Many services are politically sensitive, those in areas such as healthcare or utilities. However, the advantages of specialisation will prove just as compelling in services as in manufacturing, and after all services account for at least two-thirds of the developed economies so the potential welfare gains are enormous. I predict there will be controversy now, just as there was about FDI in the car industry in the 1980s, but the likelihood is that the benefits will steadily ease people’s concerns.

The key point is that as globalisation gets into gear in services, intra-EU and intra-OECD activity will be key drivers of the process. For all the hype about off shoring in India, Ireland is just as significant a destination for outsourced services. Developing country workforces even in India and China are some way from having the capacity to undertake the full range of activities which OECD countries can supply.

Already the great majority of intra-EU investment flows consist of service activities – hardly surprising when services form more than two-thirds of our economies. When we talk about completing the single market, cross-border delivery of services is what it will mean.

I do not believe we have anything to fear from this continuing process of cross-border investment and trade. This is our mutual investment in our joint future.

Europe has been at the forefront of globalisation, with tremendous success for EU companies and benefits for European consumers.

Many European companies are amongst the most successful multinationals in the world. Of the top 100 multinationals ranked by Unctad, 12 are EU-based, five American and two Japanese.

I would go further and say internationalisation is coded in the DNA of the European Union. The essence of George Marshall’s plan for the post-war reconstruction of Europe was that American aid should depend on Europeans’ willingness to co-operate with each other in the project. In his Harvard speech Marshall said: “The remedy seems to lie in breaking the vicious circle and restoring the confidence of the people of Europe in the economic future of their own countries and of Europe as a whole.”

My fear is that European hesitancy about the merits of a continuing process of weaving the fabric of the economy through removing barriers to trade and investment would undermine the moral and philosophical foundations of the EU’s institutions, even if that hesitancy is only supposed to apply outside the boundaries of the Union.

Challenges and questions

Either one believes in the merits of openness and the mutual advantage of trade – or not. It is essential for the health of the Union that we have clarity and commitment to the continuing process of economic integration.

The European Union is by construction internationalist. It offers the prime example of how international governance arrangements can manage the sometimes conflicting interests of individual states. The members of the EU have a head start in managing effectively the processes of globalisation, as so much of it has consisted in fact of Europeanisation.

But we have a growing credibility gap. Our own governing institutions are not currently held in high esteem by the European public, and according to Euro barometer surveys trust in the institutions has been diminishing.

Although history bears witness to the extraordinary economic success of the EU project, Europe is still constrained by an absence of European ambition and vision. Too often we debate issues and interests from a prism of economic nationalism that bears no relationship either to European and global realities. Is it surprising that public scepticism begins to take root when member state representatives do not make the positive case for European decisions and instead present Europe as the negative originator of actions which all have agreed to in the common interest? Moreover, the EU’s leaders have failed to update the principal institutions in the face of eroding legitimacy.

The institutions of the EU, like all other institutions of governance today, need to learn the virtues of transparency and engagement with a wider range of audiences than in the past.

Clearly, the debate about institutional reform is an active one and goes well beyond the issues I am raising here. However, the question of governance is important in developing a coherent policy response to globalisation not least, for an example, in international relations with, for example, Russia.

The purpose of economic integration is ultimately to deliver improvements in well-being to European citizens and ensure the benefits and costs are shared in a way which commands consent. If people do not trust their governing institutions, it cannot come as a great surprise that they are also turning away from further global integration. Having effective EU institutions is a key part of developing effective mechanisms of global governance.

This is an important time to see some decisive political leadership in shaping governance for a globalised world economy. The failure to achieve a breakthrough in the Doha Round, the lack of effective political support for the WTO, and an increase in bilateralism as a substitute does not augur well for the capacity of the international community to manage globalisation.

We should not for a moment forget the huge institutional achievement embodied in the WTO, a rules-based system for economic co-existence in which the powerful are significantly constrained. It is not an unrestrained charter for free trade, but an institution which, to the mutual benefit of its members, offers a structured way to expand trade predictably and fairly. It embodies what Keynes called the “healthy rules of mutual advantage and equal treatment”, principles he regarded as fundamental to the system of international economic management being built after the war.

The same principles remain fundamental, inside and outside the EU, and it is to affirm our commitment to them in future that we must as a matter of urgency press ahead both with reforms of the WTO and also with the ambitious global trade agenda.

I would also like to see a clear commitment to extending the single market and ensuring a healthy business environment in the EU. This will require us to address the disconnect in public opinion between the economic success story and the creeping pessimism about the future. What will this take?

Europeans must recognise that in globalisation we see our own reflection. I would hope responsible politicians can manage to resist the temptation to demonise multinationals or whatever aspect of business or financial markets happen to be catching the headlines.

The future of the single market will also require a firm commitment to integration in services. The path so far has not been an easy one. Many areas of services are highly sensitive. They are close to people’s hearts. They’re often in the public sector, although with different configurations in different countries. Most EU citizens work in services so the employment implications will be a major concern.

This means we will need to accommodate more diversity of approach within the EU – something desirable anyway in a larger Union. What needs to be uniform for the single market to operate effectively, what can vary?

Getting to grips with limits beyond which national choices undermine European markets will require some careful, detailed work. The broader point, though, is that we will have to accept there isn’t a single right way to arrange markets, or a single, European Social Model, but a plurality.

The final point I would like to make concerns the issue with which I started, the climate of opinion. The political debate sets the tone for how optimistic or pessimistic people feel about the future. I don’t want to fall into the trap of being too pessimistic in my accusations of pessimism on the part of others.

But sentiment matters. It affects decisions.

In particular, people who have no confidence in their economic future are unlikely to invest or make plans to expand, making pessimism a self-fulfilling prophesy. There is an important strategic role in expressing confidence about Europe’s capability not only to react to global economic trends but also to shape them.

This is not just management-speak. Modern growth theory in economics recognises that one of the key roles of policy lies in determining through its impact on expectations whether an economy is on a virtuous circle or a vicious spiral. The future, as well as the past, determines our capabilities today.

What is more, I think a failure by the EU to step up positively to the challenge of globalisation would be an abdication of leadership by the world’s largest economic power. While some certainly recognise this, it is rather shocking to see how little part these towering moral and political challenges play in many EU countries. They are hardly on the radar in the French election debate, for example.

We have benefitted tremendously from globalisation. It has been shaped on our terms. Europeans do have a responsibility to take a lead in addressing global issues such as climate change and poverty. The message we in business have been getting from our customers and employees is that they take this responsibility very seriously, and just as we must respond, so too must the policy process.

This is still in effect a post-Cold War challenge. Globalisation was in part a result of the end of the Cold War, the unfreezing of international barriers, the general acceptance of the mixed market economy.

The benefits have been extraordinary. The world economy has experienced its longest sustained period of growth since the early 1970s. Hundreds of millions of people in China and India have left absolute poverty behind them. Trade and investment have grown. Nor is it just a question of economic gains. On one count the number of democracies has quintupled in recent decades.

But that is the past. Now is the time to invest for future dividends. We – by which I mean European political and business leaders – have still to demonstrate that in our different spheres of action we will govern globalisation properly. Europe has essentially shaped globalisation so far, and it is our responsibility to manage it in future.

This is the text of a speech first delivered by Peter Sutherland at the Informal Council on Competitiveness, Würzburg