If there is one word that sums up the Bush Administration's approach to economic management, that word is "growth".  Growth leads to higher living standards and fosters individual freedom.  The private sector drives growth.  But for this to happen, government must create the right climate with good macroeconomic and microeconomic policies.   

During my visit to Europe last November, I was reminded of these basic truths.  In Ireland, I met with a number of the leaders who laid the foundation for the creation of the "Celtic Tiger" that has moved Ireland from one of Europe's lowest income countries to one of its highest.  In Warsaw, I met Finance Ministers from Poland, Slovakia, Hungary and the Czech Republic.  These countries are on the economic move, adopting market-oriented polices and enjoying extraordinary growth.  They show that Europe can be a global leader on growth.  

The United States is doing its part to foster good growth, both at home and globally.  Real GDP rose 4.4 percent last year.  The first quarter came in at a strong 3.5 percent annual rate.  Since the employment trough of May 2003 the economy has generated 3.5 million new jobs.  Well-timed monetary and fiscal policies have contributed to this improved outlook.  More fundamentally, our higher growth and productivity stem from the resilience and flexibility of our factor markets, highly motivated workforce and investors, and open, competitive goods markets. 

Let me say a word about our fiscal situation.  Before joining government, I was not a fan of large deficits.  And I'm still not!  Some things never change.  The current budget deficit is unwelcome but understandable given the extraordinary shocks we endured: the bursting tech bubble, 9/11, and corporate scandals.  This was a "perfect economic storm."  Since then, we have made strides to trim the budget deficit.  Our solution is not to raise taxes.  Spending restraint, combined with economic growth, is the key to a lower deficit. 

Last fiscal year, the deficit came in at 3.6%, nearly a full percentage point lower than initially projected.  Due to good growth, many private forecasters are estimating that the fiscal deficit this year will come in under 3%.  Perhaps we will meet the Maastricht target this year!  Both personal income and corporate profits are coming in well ahead of forecast.  Labor's share of national income is rising and should rise even further in the year ahead.  From the budget perspective this is very encouraging and suggests we are on a good path to halve the budget as a share of GDP -- well below 2% in a few years.

This will not be easy.  But let me assure you -- I am personally committed to make fiscal consolidation a reality in the United States.  Doing so is critical for the health of the US economy and for reinforcing the continued stability of the international monetary system.  Longer term, we face serious issues with unfunded obligations represented by Social Security and Medicare.  That's why President Bush is beginning to tackle them now.

Working Toward a Stronger Global Economy

The global economy is now stronger than in many decades.  The outlook remains solid, despite higher oil prices.  But the aggregate strength of the world economy masks large global imbalances.  The international community recognizes that the adjustment of these imbalances is a shared responsibility, requiring a three-part strategy.

The first part is raising national saving in the United States.  I have already stated that we are fully cognizant of our responsibility and the deficit is being cut.  But there is no one-to-one correspondence between reductions in our fiscal and current account deficits.  Further, it is in no one's interest that US economic growth decline sharply to reduce our current account deficit.  We do not have a current account deficit target, nor should we.  The best contribution the US can make to the world economy is to continue our record of good growth, predicated on sound macroeconomic management, vibrant factor markets, and openness. 

Another part of the strategy is greater flexibility in exchange rates in emerging Asia, and especially in China.  Constrained flexibility in Asian currencies should not shift the burden of global adjustment to Europe.  Because of great progress in improving its financial sector, China is now ready to take immediate and significant action to achieve currency flexibility. 

The other part of the strategy is directly relevant to this audience – structural reform in Europe, as well as Japan.   Let us face reality: growth in the key continental European economies has been, and continues to be, weak.  European and Japanese GDP together exceed that of the United States.   Europe and Japan have a critical role to play in maintaining global economic strength, but they have not been doing their part of late.  European and Japanese growth rates must strengthen, first and foremost to improve the lives of their people, but also to help address global imbalances.

That strengthened European growth requires deep structural reform is not news to anyone in Brussels.  European officials have long recognized this reality, as reflected in the Stockholm Declaration and the Lisbon Agenda.  Further, these officials have also long recognized that the EU was not living up to its potential for growth and that structural reforms lag far behind well-publicized plans and objectives.

The EU Heads of State and Governments renewed their commitment to growth in their mid-term review of the Lisbon Agenda.  The United States applauds this. 

I appreciate that key structural reforms need to be taken by member states.  Throughout Europe, many good reforms have already been undertaken and further plans are being developed.  Many of the reforms being considered are similar to those we face – pensions, taxes, over regulation of businesses.  Some have blamed the mobility of international capital itself for undermining economic performance.  I disagree.  The growth of private international capital flows has greatly increased the growth of countries with the policies to attract those flows on a sustained basis.  The empirical evidence shows that a key foundation for growth and job creation is business-friendly policies that welcome and reward capital and investment.

I am not here to tell you what to do. Through my discussions with the finance ministers of Europe, it is clear that Europe knows what needs to be done.  And beyond knowing what needs to be done, through the G7 Agenda for Growth, they have identified specific actions that are already underway.  For instance, pension reform in France, labor reform in Germany, tax reforms in Italy.  For us in the United States, it is clear we have a lot of things we need to work on.  We are working hard to get them done.  I am here to encourage these positive steps that have already been identified and to pledge our support for these initiatives.   

I hope that when the member states submit their national action plans under the renewed Lisbon agenda, they outline not only their reform intentions, but also demonstrate the governments' resolve to muster the necessary support to make those reforms a reality.  What is needed is clear, concrete action.

The potential benefits for Europe's citizens are clear and quantifiable.  A recent OECD study determined that deregulating EU countries would raise EU GDP per capita by 2.8%.  Putting this in personal terms, this mean an average worker gets a year's extra wages over a working life.  

Given the strong trade interests of the United States and the EU, it is natural that we work closely together in the Doha Development Agenda to promote free trade that will help drive global economic growth.  Completion of the Round before the end of 2006 will be a challenge.   We need to intensify the pace of negotiations and commit to meeting key milestones along the way.  Developed and developing countries alike need to be prepared to reduce their trade barriers and subsidies.

We have worked closely with our EU counterparts on the financial services negotiations.  Together we have called for a "floor" level of liberalization to be complemented by disciplines on regulatory transparency.  Financial services liberalization offers particular promise to be a key element to a successful conclusion of the negotiations.  In view of the fact that financial services has a leveraging impact on growth and development and facilitates the flow of capital to labor, it is essential that establishing open financial sectors be at the center of the Doha Development Agenda, especially for the poorer nations.

US-EU Financial Cooperation

The United States is committed to working with the EU on financial cooperation across a number of fronts. 

            Financial Markets and Regulation

Further integration of EU financial markets is one structural reform that holds real promise to promote growth.  With the advent of the euro, bringing together national capital markets into one is a natural way to promote efficiency.  This is precisely the aim of the EU's Financial Sector Action Plan (FSAP).  Studies suggest that a liberal and integrated European financial market could increase EU GDP by as much as one percent per annum over time.  It is for this reason that the US Treasury has long supported the FSAP.

Not surprisingly, in an era of global capital markets, legislation adopted by the United States or EU may spill over into each of our markets.  The EU's Financial Conglomerates Directive required an assessment that large financial entities operating in Europe were supervised soundly at the consolidated level by their home supervisor. 

Our Sarbanes-Oxley legislation sought to ensure that firms listed on U.S. stock exchanges and their auditors adhere to strong corporate governance.   I hear complaints that the cost of doing business in the United States is now too high, and there is no doubt we can do better.  But we must remember that there were serious corporate governance weaknesses in the United States that had to be tackled.  We are not unique. Investor confidence is crucial for growth.  Sarbanes-Oxley was a necessary response.  We must adhere to the letter and spirit of the law, while implementing it in a manner that is not overly onerous and costly.  The US capital markets are among the deepest and most dynamic and attractive in the world.  I am committed to make sure that remains the case.

To manage "spillover" issues, the US Treasury, joined by the SEC and Fed, and the European Commission, established the US-EU financial markets regulatory dialogue three years ago.  When I met Charlie McCreevy in April, we agreed that the dialogue had produced good results.  Its informal nature -- with experts and officials working together, identifying looming issues, and sharing perspectives -- has led to confidence building and to problem solving.  The talks have highlighted that we share the same objective of sound financial markets, though we may have different ways of achieving them.

The dialogue is moving from problem solving to a more forward looking agenda and deepened cooperation.  The US is discussing such issues as re-insurance, solvency rules for insurance, clearing and settlement, retail banking, and corporate governance issues in the EU.  On the US side, the EU is raising such issues as SEC de-registration, regulation of credit rating agencies, implementation of Basle II, and re-insurance collateral.  Both sides are reaching out to business and academic communities.

The support of legislatures is critical for the Dialogue and for ensuring acceptance of financial regulation.  In the United States, the dialogue has benefited tremendously from Congressional support, especially from Rep. Mike Oxley, Chairman of the House Financial Services Committee, as well as from his counterpart, Senator Richard Shelby.  This afternoon, I look forward to meeting with members of the European Parliament's Monetary Affairs Committee. 

Much hard work remains for Europe to achieve the FSAP's promise.  As Commissioner McCreevy explained to me, his first priority is to ensure implementation in a way that promotes efficient markets.  He doesn't want to overburden markets with regulation and wants to ensure that any new proposal shows clear benefits.  Implementation will be key.  If 25 different supervisors implement directives 25 different ways, the promise of a more integrated EU financial market will not be realized and it will be hard for the US and the EU to achieve convergence.  I am meeting the heads of the Committee of European Securities Regulators and Banking Supervisors to learn how implementation is proceeding. 

But the US-EU financial market dialogue is tapping into a deeper reservoir.  The recent IMF Global Financial Stability Report shows that the sum of stock market capitalization, debt securities and bank assets in the EU and US was nearly two-thirds of the world total. 

All of us at times talk about the Transatlantic Financial Market.  But what does that mean?  The last decades have witnessed enormous changes in financial markets.  In the United States, interstate banking allowed tremendous consolidation in our financial market, which enormously benefited the dynamism of our economy and consumer welfare.  Consolidation is happening now in Japan.  And in Europe, several major players now stand out. 

Large consolidated financial institutions have become global players.  They increasingly see themselves as global firms, whose profits are linked to their worldwide business, not just their activities at home.  In contrast, regulation and supervision have always been inherently national.  But when global institutions -- financial and commercial -- face different regulatory and supervisory regimes in every country they operate, it is burdensome, costly, and simply an inefficient use of resources. 

Financial regulation must also continuously attune to market developments.  Markets are dynamic, innovative, and creative human endeavors that produce new ways to deal with risk.  They are to be encouraged.  There is no doubt that over the last few decades or so, derivative instruments play a much larger role in financial markets than we could have ever anticipated.  Derivatives disaggregate risks and make markets more efficient.  In the US, we have monitored these developments closely, but taken a light regulatory approach, instead relying on counterparties.  Were the government to regulate derivatives, we are concerned that counterparty due diligence could be diminished.  If it were, it is hard to see how government regulation could supplant it.

Another new development is the role of hedge funds.  Here too, we have taken a relatively light touch, avoiding financial regulation of the funds themselves, but requiring registration. 

In our view, regulators can use markets – and market discipline – to help produce desired results.  Markets are themselves self-policing mechanisms. 

In talking with European regulators like Callum McCarthy and Charlie McCreevy, I am impressed with the focus on risk-based regulation.  To enable markets to produce better results, regulators must always ask themselves where is our value added; what are we doing; and why we are doing it.   This is also a question that we in the United States need to continually ask ourselves.

These trends and realities place an enormous responsibility on financial policy-makers and regulators.  Of course, it will always be the case that our foremost responsibility is to our own citizens.  But simply put, in protecting our investors, our vision must not only be market-friendly, but it must be global.  We must work together responsibly to transcend national borders. 

Thus, regulation and supervision should converge on high-quality global standards.  This process is proceeding well, though there is much work to be done.  Let me cite several factors and examples.

·        One fundamental change is the revolution in transparency.  All of us now acknowledge that disclosure and transparency are crucial for good rule-making. Further, given the dynamism of financial markets, regulators are always behind and must work with markets to get their job done.  This means active consultation.  In the past years, the EU has done a good job in consulting market participants.  I have even heard of "consultation fatigue", but in my view better "consultation fatigue" than "consultation deprivation."  This is a case where more is better than less.

·        Another area of progress has been in the evolution of standard setting.  Groups like the Basle Committee of Banking Supervisors, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors are bringing authorities together to forge common best practices for supervision.

·        Regulation is increasingly focused on the consolidated entity.  This is mirrored in Europe's Financial Conglomerates Directive, as well as in our legislation such as the Gramm-Leach-Bliley Act and the SEC's recent Consolidated Supervised Entity rule.   It is also reflected in some ways in Basle II.

·        Accounting is another area where the trend toward convergence is firmly in place.  Several weeks ago, SEC Chairman Bill Donaldson and Charlie McCreevy agreed on a "roadmap" for the United States to accept statements using international accounting standards as a basis for listings in the US market as early as 2007 and no later than 2009.  This is an enormously positive development.  In so doing, the SEC set forth several markers, especially consistent implementation and enforcement across the 25 European member states.  The ball is in Europe's court to make this a reality.   I am confident Charlie McCreevy will make it happen.  Within a few years time, accounting in the US and Europe could become a similar exercise.  

·        The move toward "convergence" is also evident in the collaboration emerging between US regulators and the new EU supervisory implementation bodies.  The Federal Reserve has established a dialogue with CEBS, the SEC a dialogue with CESR, and the NAIC with CEIOPS. 

Combating Terrorist Financing

Another example of cooperation is our work together on combating terrorist financing. We have seen that terrorism does not discriminate against race or religion and the threat of terrorist financing does not stop at borders or coastlines.  That is why the partnership between the United States and the EU in combating terrorist financing is critical.  We must continue to work together to financially isolate terrorists and their financiers and shut down channels used to move money to al Qaida, Hezbollah, Hamas and other deadly groups. 

We are seeing the fruits of our labor.  Intelligence reporting - although anecdotal - speaks to the greater difficulty which terrorists encounter in raising, moving, and storing money.  We are seeing terrorist groups avoiding formal financing channels and instead resorting to riskier and more cumbersome conduits like bulk cash smuggling. Therefore, it is important that we continue to work together to address terrorist financing vulnerabilities introduced by informal channels, such as alternative remittance and underground banking systems. 

We also know that the enemies we face are motivated, patient and ruthless.  Terrorist groups still want to attack us, and they are very focused on our economy and financial systems in particular.  An act of terrorism is perhaps the greatest threat facing our economy today.  The further we get from September 11, 2001, the harder it may be to keep our sense of urgency, but we must never let our guard down.

There can be no doubt – the competitive forces blowing across the U.S. and European financial landscape are global in nature.  So, we need rules for the global marketplace, not just for the US and Europe.  Thus, in the final analysis, when we talk about a Transatlantic Financial Market, what we are really talking about is the reality of global financial markets, the EU creating a single financial market in place of 25, and the US and EU converging on high-level global standards.  The Transatlantic Financial Market must fundamentally be anchored in the global system and in best global practice.   That is what the US-EU financial market dialogue is all about – a new architecture for the global financial system.

Promoting economic growth and getting our financial houses in order at home while pursuing structural reforms, trade liberalization, and more efficient cross-border capital markets and regulation are part of a progressive US-EU economic agenda.  Together, the United States and the European Union must lead.