Speeches, Interviews & Other Statements

Margaret Thatcher

Speech to Bank Julius Baer ("The Real Questions Facing Europe in the 1990s")

Document type: Speeches, interviews, etc.
Venue: Bank Julius Baer, Zurich
Source: Thatcher Archive: transcript
Editorial comments: 1800-1900. Transcript as printed by Bank Julius Baer.
Importance ranking: Major
Word count: 5450
Themes: Agriculture, Civil liberties, Defence (general), Economy (general discussions), Employment, Monetary policy, Public spending & borrowing, Taxation, Trade, European Union (general), Economic, monetary & political union, Foreign policy (general discussions), Foreign policy (Central & Eastern Europe), Foreign policy (International organizations), Foreign policy (Middle East), Foreign policy (USA), Foreign policy (USSR & successor states)

Mr. Hans BärMr. Chairman your Excellencies, Ladies and Gentlemen.

Thank you very much Mr. Chairman for that most kind introduction. I am delighted and honoured to be invited to address this audience this evening.

It is no secret that I always enjoy my visits to Switzerland. There are two particular reasons why it is appropriate to speak in Zurich at this time about the future of Europe.

First, here in Switzerland we are at the heart of Europe but not in the European Community. So we can hardly forget, as some people do, that Europe and the Community are not synonymous terms. Europe is much larger than the Community. It extends far into what so recently appeared to be a monolithic Soviet empire. And in a sense, Europe extends westward almost to include North America, in the sense that she shares a common heritage of civilised values and a love of liberty with Europe.

Secondly, this is not only the right place, it is precisely the right time to talk about Europe's future. The member states of the European Community will shortly take crucial decisions about the direction of the Community's future economic and political development. And upon the wisdom or otherwise of those decisions much will rest. They will have implications, not just for those now within the Community or even those planning to join it: they will affect the nature of the new world order—a phrase of which we hear so much. [end p1]

A Time for Boldness

But let me begin, as you did Mr. Chairman, by taking you back a little in time.

As we all know, the founding fathers of what has become the European Community had a vision. They had lived and indeed often fought through a conflict which had turned great European cities into graveyards, which had cost so many European—and other—lives, and which had destroyed so many illusions about Man's natural sympathy for Man. They had begun the work of reconstruction helped by generous American assistance. But across the heart of Europe, as Winston ChurchillWinston said, stretched an Iron Curtain, behind which European countries suffered under a tyranny as dangerous as that against which the allies fought the war.

In 1949 the nations of North America came together with ten nations of Western Europe to form NATO. Though the Treaty of Rome was not signed until a decade later, it is fair to say that the European Community has since provided the economic base for the European side of the Atlantic Alliance.

The world is now, however, a very different place. The Cold War at last has ended, as Communism has collapsed in the Soviet Union. But as always, when great empires fragment, new uncertainties have come into being in its territories. The once captive nations of Central and Eastern Europe are free and the Warsaw Pact has been dissolved. And the end of Soviet backing for Communism in the Third World has brought a much brighter prospect, as regional problems are beginning to be solved in Africa, in Asia and in Central America.

So, we are now considering anew what we expect of all our international organisations. In some cases we are trying to ensure that they fulfill the tasks they were originally founded to undertake. In others, we are adapting international institutions to totally new circumstances.

We are looking, as never before, to the United Nations to give international moral authority against aggression. But we must not forget: first that the Gulf War was not fought by the United Nations but by sovereign nations who came together to enforce its Resolutions; and second, international moral authority does not diminish the moral authority of sovereign states themselves or their inherent right of self-defence. [end p2]

We are also considering how the Helsinki Accords, the CSCE of 35 nations, including the United States and the Soviet Union, and the Council of Europe of 25 nations can secure human rights in a world of new or revived nation states, each proud to express its identity. If countries sign up to international documents protecting human rights they must be required to observe them. Nothing does more to bring international declarations into disrepute—nothing does more to encourage would-be aggressive dictators everywhere—than to regard such agreements as worth no more than the paper on which they are written.

We are now reviewing NATO's strategy and scope in the light of new defence requirements. There is no doubt that its continued existence is vital to the future in a world where, as we know, the unexpected does happen.

It is equally right and necessary to ask searching questions about the European Community. And—like the originators of the Community—our thoughts must encompass principles, not eschew them in the name of mere pragmatism. We need vision and we need the boldness to apply it.

Europe's Future

I spelt out my vision of Europe's future in a speech I made to the College of Europe at Bruges in 1988. This is of a Europe of sovereign states committed to free enterprise and open trade freely cooperating one with another. You will recall that at a time when the countries of Eastern Europe were still behind the Iron Curtain, I also said that Warsaw, Prague and Budapest were European cities too and later—at the Aspen Conference—I said that their countries would want to come into our European family of free nations. I also warned of the dangers of making the European Community an exclusive club and then putting up around that club a wall so high to climb that the majority of East European countries would have no hope of joining. These problems are now all too apparent. And Prime Minister John Major, in Paris last month, warned eloquently of the consequences.

At a time when newly liberated countries in Eastern Europe and the old Soviet Union are rejoicing in their national identities, it makes no sense at all for us in the European Community to suppress ours.

At a time when the old Soviet Union is cutting back the power of its non-elected nomenklatura and slashing regulations, what are we doing in the Community extending the control of our non-elected European Commission over so many aspects of our lives, including social policies and industrial relations? [end p3]

At a time when people everywhere are demanding more consumer choice and a better deal for East European countries and for Third World countries, why are we arguing in the Community about how to keep their agricultural and their industrial exports out of our Community markets?

The European Community has to decide what it truly wishes to become. The conference at Maastricht is only eight weeks away and everyone in this debate must be as open in setting out their views as I have been in setting out mine.

Some people, for perfectly honourable reasons I am sure, want the European Community to become a European super-state. That means that the Community would have to acquire, one by one, all the attributes of state sovereignty—including a single currency and a single defence and a single foreign policy. It also means that national distinctions and loyalties would have to be submerged because people will not respect—and ultimately would not obey—authority to which they felt no allegiance.

Such a super-state would not only be difficult and costly to construct, it would also be inherently unstable. History has surely demonstrated, at the end of the last century and in this, that states put together artificially will not endure. We have seen this with the fall of one empire after another—most recently with the fall of the Soviet Union. We have also seen it in Yugoslavia. Conscious of that instability, the new super-state's rulers would have to intervene heavily and repeatedly to hold the state together. This would have the most damaging consequences, not just for the European Community—or its successor body—but for the wider international community.

All of this must be clearly addressed by those who currently use every new opportunity which arises to argue for an extension of Community powers, whether in political, military, social or economic spheres. To my mind, this qualifies as more—or perhaps less—than a vision. To me, it would be a nightmare.

Unlike any other state in the European Community, I repeat, unlike any other state in the European Community, we in Britain have not been conquered for over nine centuries and our taste for managing our own affairs is strong indeed. For me, politics is about power given to us through the ballot box for which we are accountable to the people. To me it is unthinkable, that a politician can come into office and then, using the power with which the people have entrusted him, seek to vote away not only that very power, but the powers of the generations that must follow. [end p4]

But, all this which is so important to us, may seem far removed from the practical stuff of day-to-day commercial matters. And I have every sympathy with businessmen who prefer to concentrate on profits rather than on prophecy. So let me consider three direct challenges of great practical importance to the European Community and to European business, which also raise fundamental questions about Europe's future and its relations with the wider world.

Promoting Enterprise

The first challenge which I will raise, is to create the right environment for enterprise.

We all know—though in the Seventies all too many countries forgot—that prosperity depends upon free enterprise. Higher living standards and fuller employment do not flow from satisfying governments, but from satisfying customers.

It is one thing to understand this: it is quite another to practise it. Considerable progress has been made in completing the programme of changes to create a Single European Market. But we must not lose sight of that other world market outside the Community, nor forget how intense the challenge is from the Japanese, from other Pacific Rim countries, and of course our American competitors.

Most European Community countries—with the exception of Britain—have increased public expenditure as a share of national income to levels well above other large industrial competitors, and in particular above those of the United States and Japan. We, I am glad to say, have kept our public expenditure as a share of national income down in the last ten years. Taxation in Europe is relatively high and labour markets are less flexible than in the economies of many of our competitors. Pressure to pile on regulations in the Community nevertheless continues to mount. All of these tendencies, unless checked or reversed, could reduce the opportunities for enterprise and jeopardise prosperity.

If we want to create the right environment for business in the European Community, there are three things that we have to do.

First, we have to control inflation. I need hardly tell this audience that inflation is a monetary phenomenon. It can only be brought down and kept down by effective monetary policies. Some countries may prefer to leave it to an independent central bank to plan and execute monetary policy. Some may choose to hand over monetary policy entirely to a [end p5] European institution over which they have only a minority influence and where there is no democratic accountability. Still others, like Britain since we have joined the exchange rate mechanism of the EMS, find it best to conduct monetary policy independently—but with reference to an exchange rate against what is considered to be a strong foreign currency.

Opinions may vary about which of these approaches is inherently the best. What is certain though, is that no one needs a single European currency in order to apply effective monetary policy: indeed, the monetary policy applied to such a currency may be looser and so more inflationary than would be pursued by separate national treasuries or independent banks. What is required of all governments and independent banks is a clear commitment to achieving price stability. And this will only happen when it is understood that not even a little inflation can long be tolerated without harm to the performance of the whole economy.

The second thing we must do in the European Community is to create the right environment or enterprise. The task now is for all European countries, as they emerge from recession, to reduce the share of National Income taken by the state. This is necessary in order to eliminate budget deficits—and for the tax cuts so vital to enterprise and growth. Now in most cases, this will require firm action to limit spending—even welfare spending, in spite of the demographic pressures most European countries will face over the next ten years.

The essence of financial success is strict discipline and orthodox policies. As you very kindly mentioned, Mr. Chairman, in the last three years of my Prime Ministership, we managed to have a budget surplus, and therefore to redeem £28 billions worth of debt, so that we should pass on less to future generations and not more. In my view, politicians will gain far more respect by saying “no” to extra demands for public expenditure than by landing their countries with large deficits and enormous borrowing which crowds out private investment. But when countries find themselves committed to more expenditure programs than prudence would allow, governments must finance them honestly by taxation, otherwise budget deficits grow and future generations suffer. Now, let me give you an example of this. I am not talking only from theory. I am talking about hard policies which I put into practice. In the middle of the 1981 recession, we needed in Britain to have a very tough budget, and all the economists said that we must cut taxation and increase public expenditure. I did not believe that. In a recession, as you know, expenditure tends to continue while income goes down. It would have meant having a much larger budget deficit. I did not think that was wise, and so in the 1981 recession, we actually increased taxes so that we should not have too large a budget deficit. The interesting thing is that, by 1991, the saving in debt interest due to that budget decision was equivalent to about 2.5%; of Gross Domestic [end p6] Product. All the economists said it was a most unwise thing to do, and that I would plunge the country into deeper recession. The fact is that our recovery stemmed from that budget. It was very nice to be able to say so to the economists.

Later, healthy growth because of orthodox financial policies and large reductions in public expenditure enabled us to reduce the top rate of taxation for both earnings and savings income to 40%;. When I came into power the top rate on earnings income was 83%; and on savings income it was 98%;. Later we were able to get down both to 40%;. In fact, the orthodox policies and the enterprise policies work.

The third priority for the Community, after lower inflation and strict control over public spending, must be less regulation. Every country has to find its own preferred balance between—on the one hand—controls applied for whatever reason (whether to protect customers, investors, or to preserve landscapes or raise wages) and—on the other hand—preserving the widest opportunities for business and choice for consumers. The more the balance inclines towards controls, the less the prosperity, the lower the incomes, the fewer the jobs and the more difficult it will be to extend the Community to those countries like yourselves who may wish to enter.

But what is surely quite wrong, is for the European Community itself to impose rules and regulations under the guise of a so-called Social Charter which burden business, destroy jobs and create economic distortions, irrespective of a country's particular needs and its own wishes. Indeed for some countries the proposed Social Charter would have served as a method of imposing their own particular high costs on other countries. I have seen that several times, as one country got its working week down to a lower number of hours than others, it wanted to have that regulation applied to the others. As one country got particularly high wages it wanted that regulation to apply to the others, so that it would not lose its competivity by its own action. The worst effects of the Social Charter would have been on poorer European countries, whose best hope of prosperity lies in keeping their costs down to win markets for their goods.

I am quite proud to be able to tell you, that alone among all the heads of government in the European Community. I voted against and vetoed the Social Charter, on the grounds that we were doing very well with our own social affairs, that we knew best how to manage them, and that it was no function of the Commission to thrust more regulations on a country whose economy was very successful. So we were able to stop that particular charter and stop the increasing costs that it would have meant for industry. [end p7]

The fact is that soft words and weak action can't and won't turn harmful policies into a prosperous future. I find far too many soft words these days.

Success, both at home and abroad, depends on strong economies and on a government and people willing to take decisions and to accept responsibility for them. So that is the first task of the European Community—to create the right environment for enterprise and therefore the right environment for increasing prosperity.

Helping the New Democracies

The second challenge to the Community is to look East to the new democracies of Eastern Europe and the Soviet Union.

Poland, Czechoslovakia and Hungary have not just accepted the rights which come with liberty; they have bravely shouldered its responsibilities and faced its risks. All three are now pressing ahead with economic reform to foster free enterprise and pressing ahead very bravely and boldly and encountering quite a number of difficulties. They know that it is only through the free market that they can entrench political freedom and provide higher living standards for their people. But the going is very tough indeed.

It is interesting that their wisest politicians know that political freedom and democracy would not long endure if their peoples had to ask for everything from the State: their jobs, their incomes, their houses, their pensions. If everything came from the State there would be no liberty and they would be liable to intimidation and persuasion as to how they voted. Therefore, it is vital, if political freedom is to survive, for it to be backed up by economic freedom and private property; otherwise it will not survive. And the countries of Eastern Europe know that well. I think the Soviet Union is gradually finding it out, although there is very, very little private property there, nor have they got a law on private property yet in the Soviet Union.

The countries of the European Community have already provided the countries of Eastern Europe and parts of the Soviet Union with assistance—humanitarian aid, technical help and other assistance. I am convinced that we must continue to do so; I am glad that the members of the G7 have recognised this. The countries of Eastern Europe have to set up all the structures of liberty. Hitherto they only had the structure of Communism. The law, the banking system, the finance system, the private property system, the commercial law system—all of these have to be set up before private enterprises or companies will go there in sufficient quantity. I [end p8] think that we should not be distracted from our task by the pace and drama of recent events in Russia and the other republics so that we forget the continuing needs of Eastern Europe.

Above all, we have got to open our markets to the countries of Eastern Europe. Narrow, short-term political interests must not be allowed to block the desired trade agreements with the Community which would allow us in the Community to import agricultural and industrial products from these countries. And for the Community to talk about free trade with Poland being possible only in ten years time is just not good enough. The East Europeans need to diversify their economies away from the old industries which Communism kept in being. They need to learn to compete in Western markets, rather than to rely on exporting second-rate products to be distributed in other old command economies. And this, as I found recently in Poland, has created severe problems, with the sudden collapse of the Soviet market for their goods. Indeed they are facing problems of a dimension unknown to us, as they are unable to export their goods to the Soviet Union, as they did previously, because they are not paid in any worthwhile currency and the goods are frequently not fit to be exported elsewhere. Moreover, the other reason why we must open our market to their agricultural exports is that the new democracies need to earn foreign currency, not least to service and repay some of the debts built up during the Communist years. Some of it—from government to government—has been written off as you know, but there is still quite a considerable amount to pay.

I believe the East European democracies should become full members of the Community as soon as possible. After all, East Germany has already been admitted. So there could be no fundamental objections to the East European countries joining: it is a matter of will.

More than their prosperity is at stake: membership of the European Community can help to strengthen their political freedom and give them new confidence, just as Community membership earlier bound the former dictatorships of Spain and Portugal to the democratic West. I remember saying about 15 years ago, when those two countries went from their previous dictatorships to become democracies, that no matter what it cost us in the European Community we must have them in it. Because in politics, if you are considering the future, the most important thing to a country that has come to democracy is to be kept democratic, and for that purpose it is best to bind them in the European Community, the condition for which is that countries must be democracies. Taking in Spain and Portugal we went through very very difficult transitional negotiations. But it was a political imperative to take them in, to anchor them to democracy. [end p9]

I believe it is still a political imperative to take in the old East European countries that were Communist for a time, i.e. Poland, Hungary and Czechoslovakia. I think we must not limit our horizons and our help to Eastern Europe. We have just got to look further East, to some of the newly independent republics. Both the Baltic states and the republics which are emerging from the old Soviet Union know they too will need access to Western markets. They too need urgent technical and other help. Let me give you an example of something we are now beginning to help them with. When Mr. Gorbachev first came to Britain in 1984 and I saw him, he told me then that 40%; of the agricultural harvest never got to market, because there were no proper means, either of harvesting it all, or if harvesting was possible of getting the harvested crops into proper storage and keeping it dry. Or in cases where it was stored to get it properly to market through the railway system; and even if it did go by rail, the goods rotted in the wagons on the marsh lands. When it did get to market there was not a proper system of distribution anyway. Now all of these things, including the wholesalers, the middlemen, the proper harvesting equipment, the proper storage equipment, all of these things are commonplace to us and we are now helping them to organize them. The second thing which impressed me very much when I went to the Ukraine about 18 months ago, was that they were asking me if Britain could have direct trading relationships with the Ukraine and not through the Central Government—and also diplomatic relations. Well diplomatic relations will have to wait until they decide their future, but one had to turn and explain to them that, if they dealt with a Western economy, they did not need to trade through governments, unless it were a question of selling armaments or prohibited goods. All trading in the world took place mostly without reference to governments, except perhaps for credit cover. Now this was a totally new concept, a new idea to them, so used had they become to having to get permission for everything.

However, it does mean setting up all the structures of liberty and the laws of liberty and independent courts, a proper credit system and a proper monetary system, all of which is what we can and should help them with. Because they know they want a market economy, but they do not know how to achieve it. Perhaps most difficult to achieve would be the necessary change of attitude among people, who have for years been discouraged from taking initiatives by the dead weight of Communism. If you have been discouraged for over 50 years from doing anything on your own initiative—indeed punished if you did—you are not likely to be able to take to exercising responsibility very easily. But the good news is that the young people of Moscow University and Leningrad (now St. Petersburg) University, whom I spoke to recently, have known political liberty for the last five or so years, and they are full of initiative and raring to go ahead with a new kind of economy. Attitudes do change and will change. The most significant lesson to be drawn from the failure of the Soviet Coup was that, all of a sudden, people were faced with the possibility of losing their new found political freedom. And so it was that people who had tasted democracy and freedom were prepared to fight under [end p10] courageous leaders to defend it and to defeat the Coup. And very very courageous, heroic people they were.

Twelve years ago—if you think back to that time when we had the Cold War, when we were still being told that the coming of Communism was inevitable, that all we could do was to contain it; before we could start to fight the battle of ideas—we would have given almost anything to bring about the changes which have now occurred. So let us not speak now as if in all this, we were practising a kind of philanthropy in giving them help.

It is in our interests to see free enterprise and democracy take root in the lands which once knew Communism.

It is in our interests to have access to the raw materials they possess—the mineral wealth of Russia is colossal.

It is in our interests to build up prosperous societies in those countries which will in due course offer us new markets and investment opportunities.

The main obstacle to taking this far-sighted approach to the needs of our Eastern neighbours, and increasingly a major obstacle to free trade in general, is, of course, the Common Agricultural Policy and the political interests behind it. We must fundamentally reform the CAP and face up to the short term difficulties that are involved. Otherwise, it will be highly damaging to the whole future of the European Community as well as to world trade. It is damaging in two respects. Firstly we will not allow the Eastern Europeans to export to us things which we produce in abundance here. Secondly we export our surplus highly subsidized to third markets and also to Eastern Europe, thus undermining their own agricultural industry, which obviously finds its difficult to compete with subsidized food.

I know that all of us have enormous admiration for the inspired leadership shown by the reformers in Russia and the other republics. We admire President Gorbachev for the enormous changes he has brought about. They have given the world new hope. We admire the courage of President Yeltsin and the remarkable Mayor of St. Petersburg, Mr. Sobchak, both very brave and bold during the coup. They were faced with unexpected decisions. They took the correct decisions. They had the heroism, the bravery and the leadership to get the people to follow them. We must now hope that all the reformers will pull together and secure for the people the full benefits of freedom. It is vital to get the new Constitution worked out between the Centre and the Republics, so that they can get the other structures of economic liberty in place. [end p11]

The Atlantic Community

The third challenge to the Community which I want to mention is: the need to look westwards across the Atlantic to strengthen the relationship with the United States.

That relationship has, since the War, been strong enough to secure Europe's peace and freedom. NATO has bound the United States and Western Europe in a defensive alliance for liberty, the effects of whose triumph we continue to witness.

Europe could never defend itself alone—and it never has. There are simply too many different traditions and competing interests; and there has always been too little will to make real sacrifices in the common good. We saw that again in the Gulf. We need the United States—and not just because of its wealth, power and military technology but because it provides a degree of stability in security policy which European states, individually or collectively, could never achieve.

Moreover, Europe could not alone defend the trade routes on which her supply of strategic materials—and indeed her survival—depend. If Saddam Hussein had gone into Saudi Arabia immediately and the other adjacent oil states, he would have had gained control of sixty per cent of the world's oil reserves, leaving all Western countries in a vulnerable position and open to political blackmail. Indeed, we must now apply the lessons of the Gulf War to present policy. First, we could not have responded to the Gulf Crisis unless NATO countries had remained strong on land, sea and in the air. Second, it was the decisions on defence taken nine or ten years ago which enabled us to deal with the unexpected attack when it occurred. It follows that the decisions being taken now will determine our preparedness in the future. Third, superiority in the latest technology—for example, the Patriot Missile developed from SDI technology—played a crucial role. So we must keep up our scientific and technological programmes. Fourth, although individual NATO countries responded to the crisis in the Gulf, NATO itself is limited to action within a specified geographical area. There is a strong argument for extending that area so that it can defend the strategic supply routes of the West. [end p12] Fifth, those nations who do not send forces, but rely on others to do so, should expect to pay their fair share of the cost—as indeed especially Japan has done.

So we must be very careful not to weaken NATO nor individual countries, nor the United States, by cutting back too far on our defences. NATO will have a continuing role in preserving Europe's security—but, of course, a somewhat different one. Until there has been a sharp reduction in the armed forces built up by the Soviet Union and until there is greater stability there, NATO must continue to keep up its guard. We do not know where the next threat will come from. But we do know that history has not lacked new tyrants. Our defence must stay strong enough to deter their ambitions. It is not armaments that cause wars, it is weakness on the part of some nations which tempts the ambitious nations to invade the weaker ones to increase their own economic strengths and territory.

We should also be aware that economic forces can both strengthen and threaten relationships established for the purposes of security. If the United States comes to regard the European Community as narrowly protectionist, this will have implications for NATO and so for our defence.

What we will have to do immediately is to make the GATT negotiations a success. The period has been extended. The extended period is running out. And we must not miss the opportunity. But I would also like to strengthen the trans-Atlantic relationship and reverse the current, damaging tendency towards competing trade blocs. I would like to see a Free Trade Area embracing the whole Atlantic Community, which would include the United States, Canada and Mexico on the one hand and the European Community—enlarged far to the East and including the EFTA countries—on the other. That would cover about 60%; of the world's trade, but it would not be a bloc. It would also be an example to others to extend free trade.

The smaller idea of the European Community and its tariff barriers is outdated and inadequate. We have to enlarge our vision as we enlarged our defence after World War II. We have to do away with the old view that we should somehow be forced to choose between Europe and North America as some Europeans, jealous of the relationship between the principal English-speaking powers, would like to make us do. Britain must not forget—none of us should forget—what our relationship with the United States has contributed to the success, at times even to the salvation, of our Western civilisation. [end p13]

The New Europe

These three challenges which I have described—creating the right environment for enterprise, looking East to promote prosperity in the former Communist countries and looking West to uphold Europe's warm relations with America—will show what kind of Europe and what kind of world our politicians and peoples really want. They will test our character and our courage. And they will establish, for good or ill, how our friends view the European Community in the years ahead.

A force for free enterprise and free trade—or one for state control and protection?

A force for spreading the values and strengthening the institutions of democracy across the world—or content to practise short-term politics at freedom's long-term expense?

A force for strengthening that great trans-Atlantic partnership which has ensured the liberty, peace and prosperity of the West—or a force for its disintegration?

These questions will not go away. And upon the answers will depend whether a new Europe, inspired by a new vision and finding a new sense of purpose, will fulfill its mission to the world.

Thank you being such a wonderful audience.