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Address to the Chamber of Commerce lunch, Auckland, New Zealand



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Leader of the Opposition

26 April 1991 TRANSCR/NM/0002S

TRANSCRIPT OF DR JOHN HEWSON, LEADER OF THE OPPOSITION SPEECH - CHAMBER OF COMMERCE LUNCH AUCKLAND, NEW ZEALAND

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Hewson s

Thank you very much Michael for those very kind words of introduction. Can I thank you and the Chamber ...inaudible... for the opportunity to speak today. The idea was put to us last Friday and I'm delighted that it was possible to give us a forum like this to speak with a wide cross-section of the business community here in Auckland.

The purpose of my trip is really one to learn. I came here to spend not just the traditional half day or one day in brief discussions, but to spend on this occasion four days talking with a wide cross-section o-f people about a wide cross-section

of issues.

There's been an enormous amount of change in New Zealand - you don't need me to tell you that. You'll tell me some of it's been good and some of it's been bac, and some of it's been well-timed and some of it's been poorly timed. But from our

point of view you've made a lot of changes in the right

direction - under not only the current Government, but the previous Government, that we should look at. Things like the Goods and Services Tax, changes in the labour market, some of the port reforms, are particular examples of some of the

things that I've spent time looking at since I've been here.

I'm also here to emphasise what will be our Opposition's very deep commitment to a further integration of the two

economies - a further development of the relationship between New Zealand and Australia. I do that as one who's been a long time supporter of that. Back in the late days of the Fraser Government from which the idea of CER emerged, I can remember

strongly supporting the concept, against the wishes of some departmental officials at the time who said that it would be all to New Zealand's benefit. They were right - you've done

substantially better than we have. But that doesn't matter, as far as I'm concerned because the nature of the process of change that is inherent in CER is something - it's a model in tact that we should broaden in terms of our attitudes to the rest of the world, and I'll say something about that.

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Since I took over the leadership of our Parties just over a year ago now, I've set a fairly clear course in Australian foreign policy along a direction of what I have described as "enlightened self-interest" and in that regard I firmly believe that close Australia-New Zealand relations across the

economic, political and cultural spectrum is an essential element of a policy of enlightened self-interest. It's enlightened because it's so logical and sensible. I think more countries like Australia and New Zealand, with our

geographic closeness and the complementarity of a lot of the issues and concerns that we both have. And it's enlightened because we have so much to gain from an environment like that that's been created with the CER regime - provided it reaches

it's full potential.

I think it is a fact, as I said before, that you would know better than we have - we take about 20% of your exports and are now your largest export market, yet New Zealand currently takes I think, less than 5% of our exports. But that

shouldn't conceal the fact that you are our largest market for manufactured exports and it is the direction of manufactured exports which has been a particular focus of both the

Government and the Opposition in Australia in recent years. Nor should it obscure -the fact that if we get CER

relationships right there are a lot of good things that will flow from that to the benefit of us both. It's an essential part, really, of getting a whole lot of things right that we have to do in both countries.

There's a very strong similarity between Australia and New Zealand at the present time, in our current positions and the nature of the policy choices that are before us. But one thing that struck in this trip is the presence in both

countries of what I'd describe as a "new realism" - a very realistic, 1 believe, quite hard-headed assessment of where we are at the present time and some of the things we've got to do in order to turn that around. And there is an emerging sense of urgency, more pronounced here than it is in Australia, but evident in both places, about what needs to be done. We're

both suffering from the effects of a prolonged recession, in our case, it's the longest and deepest recession we've seen since the 1930s. we're both grappling with the impact,

economically and politically, of declining living standards. We nevertheless see an increasing recognition, not just in the business community and among policy-makers, but I think importantly in the electorate, that there are some long term

structural problems we've got to deal with and they are an essential element of why we are in a recession. It's not just because the economies have slowed down or recent macro policy changes have pushed us into recession. It's also because

those problems have been compounded because in both countries we've failed to deal with some very important structural

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problems over very long periods of time. And as I say,

against that background there is an increasing preparedness in both our countries to deal, or to accept the need to change, and to get on make some of that change.

Of course, this new realism that I've referred to is very important in both countries. But it's by no means a unanimous opinion. There are those who I've met here and who I hear in Australia, who remain, I guess who continue to cling, to some

of the ideas of the past. There are a small group of people in Australia and here that I hear talking about the days when we really did protect our industries and we've got to go back and do that properly. There are people who call for us to

retain a fixed exchange rate, or to devalue the exchange rate and then re-peg it - and those sorts of policy initiatives, which I hoped we'd put long behind us, as realistic policy alternatives in the course of the last decade. But those

forces are there. So while there's an emerging realism there is also something of a backlash in terms of the reaction of some people and some groups.

And that is a great danger. It's probably a particular danger in New Zealand because a number of people have said to me that we've been at this process of change for so long and we're yet to see any real benefits. I tend to feel that you're not too

far away from those very real benefits and the last thing you can afford to do is hesitate or falter in the process of change. We are much further away in Australia from seeing the benefits. We have much more to do, and I'll say a little bit more about that in a moment.

As I look at our position in relation to CER - I would be

happy to tell you today that we firmly believe in completing the process as a matter of urgency, and I intend in due course to give some quite specific objectives in relation to that, particularly now that I've had the opportunity to hear the New Zealand side. I can go back to our Shadow Cabinet and hopefully make some quite specific proposals. But we really do need to end the trans-Tasman shipping monopoly. We do need

to open up aviation and telecommunications industries to genuine competition in a CER sense. We do need to achieve, more so on our side but also on your side, substantial reform in areas like the waterfront which are so important to us

developing a* trading and investment relationship. We need to create the environment in which there can be genuine free investment between the two countries, There are specific issues about taxation inconsistencies and corporate law

inconsistencies and so on, which I think should be elements of a firm set of commitments in relation to CER.

In both those latter cases, as indeed in all the areas that I mentioned, we shouldn't just focus however on harmonising, on bringing our tax systems into line for example, so that

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problems over very long periods of time. And as I say,

against that background there is an increasing preparedness in both our countries to deal, or to accept the need to change, and to get on make some of that change.

Of course, this new realism that I've referred to is very important in both countries. But it's by no means a unanimous opinion. There are those who I've met here and who I hear in Australia, who remain, I guess who continue to cling, to some

of the ideas of the past. There are a small group of people in Australia and here that I hear talking about the days when we really did protect our industries and we've got to go back and do that properly. There are people who call for us to

retain a fixed exchange rate, or to devalue the exchange rate and then re-peg it - and those sorts of policy initiatives, which I hoped we'd put long behind us, as realistic policy alternatives in the course of the last decade. But those

forces are there. So while there's an emerging realism there is also something of a backlash in terms of the reaction of some people and some groups.

And that is a great danger. It's probably a particular danger in New Zealand because a number of people have said to me that we've been at this process of change for so long and we're yet to see any real benefits. I tend to feel that you're not too

far away from those very real benefits and the last thing you can afford to do is hesitate or falter in the process of change. We are much further away in Australia from seeing the benefits. We have much more to do, and I'll say a little bit more about that in a moment.

As I look at our position in relation to CER - I would be

happy to tell you today that we firmly believe in completing the process as a matter of urgency, and I intend in due course to give some quite specific objectives in relation to that, particularly now that I've had the opportunity to hear the New Zealand side. I can go back to our Shadow Cabinet and hopefully make some quite specific proposals. But we really do need to end the trans-Tasman shipping monopoly. We do need

to open up aviation and telecommunications industries to genuine competition in a CER sense. We do need to achieve, more so on our side but also on your side, substantial reform in areas like the waterfront which are so important to us

developing a* trading and investment relationship. We need to create the environment in which there can be genuine free investment between the two countries, There are specific issues about taxation inconsistencies and corporate law

inconsistencies and so on, which I think should be elements of a firm set of commitments in relation to CER.

In both those latter cases, as indeed in all the areas that I mentioned, we shouldn't just focus however on harmonising, on bringing our tax systems into line for example, so that

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there's no disadvantage to investment. That's an important part of it, but we want to make sure we bring them into line in terms of the best tax system in the world - not some second rate tax system in both cases. It's important that in all the

areas where we look to further the nature of the relationship between Australia and New Zealand that we do so against the objective of achieving best international practice in whatever we do. It's very important from our own points of view as

individual countries trying to make our way in the world, and it will bring even bigger benefits to the CER process in particular, if we both work off that base.

If I could briefly comment on how I see the structural reform process here, but more particularly in Australia, I would then like to go on and make a few remarks about our position in the global situation at the present time, and hopefully those remarks will then provide an adequate basis for questions.

As I look at New Zealand you, as I said before, have done somewhat better out of CER than we have, but to some extent while the numbers stacked up that way to begin with, you deserved it, don't forget - because you have accelerated the

pace of structural change in the last 4 or 5 years in

particular - much more than we have done. You've achieved a lot more. I heard endless examples as I've been here. New Zealander's tend to like to do this, to draw comparisons between Australia and New Zealand. One that stuck in my mind this morning with a current debate that's underway in Australia relates to waterfront reform. A particular ship had

left Melbourne to come over here and one of my colleagues had been on it. He determined that that ship was loaded in

Melbourne at a rate of 8 to 10 containers an hour. That ship was unloaded in Auckland at 42 containers an hour.

That says something about the magnitude of the difference in efficiency in our two waterfronts, yet in both cases we are dramatically short of achieving best international practice, if we want to match the performance of comparable ports like

say, Yokohama for example. Even if our Government achieves its current reform agenda, we will still be 30% less

competitive than Yokohama. And our current Government in Australia is way off the mark in terms of being anywhere near those very modest projected benefits that they've identified so far. So ,we have a long way to go in that sense, but as I

say, just to make the point - you have achieved a lot more in structural adjustment than we have. You've embraced a broad based Goods and Services Tax, an important shift element in the tax system. You've certainly moved down the path of the privatisation of Government's business enterprises much

further. You're now grappling with the very important area of the labour market and the idea of employment contracts - a lot of similarities between our particular policy position and yours in that respect, but in both cases both countries have waited far too long to deal with the labour market.

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In the early to mid-1980s we got underway well in terms of the financial markets and that was a very important element in that process of deregulation. It put a lot of pressure on the labour market. It put a lot of pressure on the goods market. But we both have progressed the deregulation and reform of the

labour market at pretty much the same time and that stands out as, I think, one of the big mistakes of the 1980s as far as both countries are concerned. You at least now are addressing that issue and I think the Prime Minister and his team are to be congratulated for the courage that they're showing in biting a substantial bullet in that regard, rather than trying

to make cosmetic changes at the edges - grappling with the very fundamental issues of, the only place to make effective change in the labour market is at the workplace level - that's

the level where you can hopefully get a direct link between performance and productivity on the one hand, and wages on the other, and you've got to do that in an environment where you don't have compulsory unionism and where there is choice. And

so those key elements of the ...inaudible... which I think are very important, and it will be very interesting from our point of view to watch that debate. There are a lot of other

differences between our policy and your Government's policy at the present time, but you seem to have accelerated the process of change in that area, arid it will turn out probably to be

one of the most important changes that are made at any time in the 1990s, if it works in the direction that I perceive that it will.

in our case in Australia, well, we still have endemic

inflation. Even though inflation is going to fall to between 3 and 4% in the course of the next couple of quarters,

structural inflation is still much higher than that. We have major cost disadvantages that are locked into the system, either because our unit labour costs are roughly double those of our trading partners, and have been for the last 10 years - we're cost uncompetitive. Or because of the transport and

infrastructure cost disadvantages that really put a floor under our inflation rate and we continue to see wage increases bubbling along at around 6 or 7%, irrespective of what else happens in the economy. A lot of change has got to be made if we are to get inflation out of the system and I don't think we

should settle for anything short of eradicating inflation as the objective that we should embrace.

But if you look at our trading position we are now in the deepest and most protracted recession, as I said, since the 1930s. Yet our current account deficit to GDP is still around 5% - roughly double what it averaged right through the 60s and

the 70s. So, it's quite staggering and it's bedevilled a lot of economists I guess, that even with a very very deep

recession by historical standards, the improvement in the current account deficit hasn't been anywhere near as much as

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they hoped it would. And on a current account deficit this year of around $18 billion, nearly $15 to $16 billion of that is interest on external debt. We are in a debt trap that each year grows. I don't need to tell a New Zealander about debt

traps of the magnitude of that problem - both a balance sheet problem and a cash flow problem - but. it should, and has here, brought a sense of urgency to the policy debate, I think it will, in the very near term in Australia's case as well.

On top of that we have the worst rural crisis we've seen since the 1930s with, as you know, wool and wheat going bad at the same time and a world economy which is at the very best likely to be in a period of flat activity all through the next 12

months, and even though the US may come out quicker than people expected, Japan looks like going into its first significant post-war recession - the impact that that will have on some of our regional trading partners, and of course

large parts of Eastern Europe are in recession or approaching it, depending on how you want to measure it. So, it's very difficult to be optimistic about our medium term prospects. In the past we've been pulled out by an improvement in the terms of trade and the pickup in commodity prices. That isn't

likely to happen this time. So the lucky country's luck has probably run out, and in that sense the pace of adjustment has to be accelerated. ’ ·

To give you some idea of the magnitude of the task - we need to stabilise our debt in Australia relative to GDP by 1995 ; shift about 4% of our economic activity into exports and keep it there - just to give you a sense of perspective on that, we haven't done that in any part of the post-war period. We've never once achieved the size of the shift we have to make in the course of the next 5 years, let alone sustain it. So we are looking at a need for bigger and more sustained policy changes than we've seen at any time, in the post-war period.

4% of your production into exports is a big task, in a

depressed world circumstance, and it's therefore why you come back to all those structural issues and why they're so important in terms of improving our trading performance.

I guess the key political message, and it's a very important one these days is that you've got to get across the idea that there are no quick fixes, and there are no easy solutions. And that's why some of these ideas that are emerging about why

don't we just get the exchange rate down, that'll solve the problem - are so misguided. The exchange rate in our country, as here, is held up principally because of the risk

...inaudible... and higher real interest rates. If you want to solve that problem you deal with the circumstances that created the higher real interest rates, you don't try to find an artificial solution to the problem. But at the political

level it's a difficult message to sell, because you are asking people, as I say, to make bigger changes than they've

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contemplated in their lifetimes in most cases, and you've got to do it in a way where you leave yourself maximum room to manoeuvre politically.

In those terms the approach that I've taken since I've become Leader is to really promise virtually nothing but change. We will go to the next election in Australia seeking a mandate to change. We will list the policies that we think are essential

to making that change in the course of our first term in Government and we will seek a mandate by seeking effective control of both Houses of Parliament ·in order to deliver that change. So we're not sort of running around saying there'll be instantaneous falls in interest rates, or massive and

sustainable increases in the standard of living or so on - because there won't be. There's no way you can realistically promise that until you put in place: the policies that will bring it about. So we aren't going to have the traditional

election-style campaign speech in which we promise a lot of goodies, and please elect us. And to the extent we promise benefits they will be economically sensible things that need to be done, rather than things just simply designed to buy votes.

The one thing we have to do is give a sense of direction - a consistent sense of direction - have people absolutely convinced that you will go down a particular path and you will stay with that path. One of the big problems we have in both

our countries is a crisis of expectations, or a crisis of confidence. In large measure that has come from Governments raising expectations and then failing to deliver. So we need to begin the process of the 1990s and a new political era, I

think, by only promising what you can deliver, and if it's painful telling people it's going to be painful. And if it's electorally difficult, like we've advocated a broad based Goods and Services Tax, tell them that it's electorally difficult and that it will apply to everything, but it is an essential part of what's got to be done to turn the country around.

So that's the approach that we're taking. We have a

particular problem in Australia that you don't have. We have an Upper House, and Senator Bishop, my colleague who's here, will be one who constantly reminds me of the need to not forget the Upper House, and it's a very important message,

because in order to make change in Australia you need control of both Houses of Parliament. So we have to run a campaign, not only to win a majority of seats in the Lower House, but also to carry the Upper House.

We've said publicly, however, that if we failed in that, we will put our whole legislative package through the Parliament and if it's rejected we will put it back through the

Parliament, and if it's rejected a second time we will dissolve both Houses of Parliament and have another election

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within 6 months. I'm very genuine when I say we must have control of both Houses of Parliament in order to put through the magnitude of the policy changes which are required to start to turn our country around.

So, my message on Australia is a very clear one. We are

absolutely dedicated as . an Opposition to identifying the problems in an up-front, honest and truthful way and

identifying the policy solutions that we think are appropriate to dealing with those problems and then seeking a mandate to do that, even if that's going to be a very electorally

difficult period for us, and I'm sure it will. We've already had the daily attack from our Treasurer about a Goods and Services Tax - how it will be imposed on baby food and all these sorts of things. The debate is well underway. It's quite interesting, because he actually supported a broad based Goods and Services Tax in 1985. His memory cuts out about

1986. But we also point out that under the present Wholesale Sales Tax system there are taxes on a lot of baby products, like blankets and bottles and cots and prams and everything else - it's going to be an interesting debate. But I think people are ready for change and we're prepared to stake our political chances on delivering genuine reform, even if in the

short term, it's politically difficult for us.

I think if we put in place those sort of policies in Australia you will have a much more dynamic and exciting near neighbour in which to sell your goods, and with which to compete in the international market.

I wanted to finish by saying a few things about the

international dimension of our current situation. I'd have to begin that by talking about the future of GATT, which is very important for small trading nations like Australia and New Zealand. There's a lot of pessimism around about GATT at the present time, and clearly GATT is falling short of the hopes

and indeed in some cases, expectations that many of us have for this particular round of GATT negotiations. But it's not the time yet to give up and it's certainly not the time to start advocating trading blocs and other alternatives when you haven't fully pursued the extent of the GATT opportunities that still exist.

Australia, New Zealand and others are working very effectively in the Cairns Group as well as in a number of other more or less direct ways to bring pressure to bear, particularly for agricultural reform, and I think we need to sustain that as a

first priority in terms of our international activities in both countries in the course of the next while.

I'm not pessimistic, however, for a lot of other reasons about - as pessimistic as some, I should say - for a number of other reasons about this issue of agricultural protection, as in other aspects of the GATT negotiations. Because I think there

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are a lot of pressures underway already In some of these other countries to move the situation in our direction. People are sort of giving up on Europe and putting up these big tariff walls - you know, agricultural protectionism will never be broken down, and the common agricultural policy will be

sustained and so on. I personally don't believe that and I think the pressures are building for that to break down.

You think about the situation of just one example, now in Germany - the pressure that's coming on West Germany from the unification of Germany, and ask yourself how long are the Germans going to continue to want to sustain the subsidisation of inefficient French agriculture in that context. There are very real pressures on the German economy as there are on so many other at the present time, and I personally doubt that

that pressure will be sustained and at some point, and I think we're very close to it, there will be a reassessment of that whole internal subsidisation process which will bring change which can only be, I believe, in the direction that's

favourable for us.

Similarly, I see a situation in Japan that is very much along those lines. Think about the consequences of Japan going into recession for the first time in the post-war period. How long

are the consumers- of Japan going to go on being happy, paying seven times the San Francisco or Sydney price for rice than they could do by breaking down some of that agricultural protection? Those pressures are very real. There'll be a shakeout in Japan, I believe, as the property market and the

share market reflect that recession. There are also an enormous number of domestic consumer political pressures that are going to come to bear, and to the extent that the Japanese market opens up, it puts additional pressure on the European market and can certainly be used in that way in international

forums. I personally believe that a lot of the pessimism that's around isn't justified and it may well run for us and faster than we imagined in the course of the next few years, and that's why it is so essential that we don't give up on our processes of structural reform and we achieve best

international practice as fast as we can.

Over and above that global dimension of course, there's a regional dimension, and the focus here is on APEC and the role that our countries can play in relation to APEC. I have spent a bit of time in recent days delineating how I think APEC can be used to open up our trading opportunities. Our Party has committed itself to zero protection by the year 2000 - tariff protection - as part of a full scale industrial reform programme. Don't get me wrong - if you just cut protection you will gradually shrink industries and close them down. But

if you do it in the context of genuine structural reform which deals with the labour market cost disadvantages, and the

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transport market cost disadvantages, in telecommunications cost disadvantages and so on, they will be better off, not worse off, as a result of the composite change. And that is

our policy.

But, against that background it seems to me that we can also use that policy, that unilateral decision if you like, to cut protection, as part of a more multi-lateral regional operation to lower levels of protection. And we'll certainly argue that on a bilateral and reciprocal basis wherever we can. I've recently led a trade mission to Taiwan within existing diplomatic constraints, along those lines.

It is also possible to use vehicles like APEC for that purpose - not to set up a trade bloc; not to try and build a common tariff wall from outside that region to the rest of the world - but use that forum in a very effective way,

particularly if you're given a business base to actually lower protection levels within the region.

So, I think it's time that we stopped talking shop in APEC and gave it some substantive objectives in relation to trade liberalisation; in relation to the involvement of the business community. We expanded its membership to include the three Chinas with whom we find very important Australian links. We

shouldn't see APEC as, as i" say, exclusive, but an open GATT- consistent activity in relation to reductions in the levels of protection.

Let me just summarise a few conclusions that I've drawn from the last few days here in New Zealand. First, I think it's vitally important for both Australia and New Zealand to ensure that CER achieves its full. potential. It's an essential part of the process that I've been describing, It still has a long way to go but I think it's about time we set some quite

specific objectives in relation to the unfinished business.

Secondly, I'd say we shouldn't see CER as just an end in itself, It's a means to an end, It's not just maximising the opportunities for our joint markets of 20 million people, but it's using that process as a base on which we individually and collectively go offshore into the international trading arena

to improve our chances. The only way we're going to do that, I think, is to make sure that we match best international practice, when we move further down that CER route.

Third, the return - any return - to protectionism and large scale assistance programmes in either of our countries ought to be resisted at all costs. The most amazing thing I find in the current political debate - to some extent in both our countries - is that we are super-competitive when it comes to

areas like sport. You love beating not only us in Rugby, but

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everybody else, or in sailing or whatever it is. We all like beating the Poms in cricket. Why doesn't that attitude translate to the business arena? why isn't it that we, as individuals, not just businesspeople,- but as members of the

electorates of both countries, want to go out there and beat the stuffing out of everybody else in terns of export, penetrating third markets, competing with each other in the Asia-Pacific region or whatever it is.

I personally believe that that's probably our biggest political challenge, is to get that attitudinal shift. You are better advanced than we are in getting a shift in

attitudes and a tolerance for change, although you've run into a few problems because people think the process has been a bit long. We both have to make sure that we get the shift in

attitudes. Because once you get the shift in attitudes you will then get the capacity to make very rapid change and very significant structural change which is essential to turning our two countries around.

I'm worried of course that some people don't want to think about CER as a grand scheme - that they play it down and

reduce its significance. I think there's a danger in that. As I say, why don't we reverse that process by setting some quite specific objectives — some time scales for the abolition of the trans-Tasman shipping agreement, let's say by 1992 or

whatever is a realistic date; a single aviation market by another date, whatever. And both sides get about making sure that that happens. Unless we do, I think, upgrade and give specific meaning to the final stages of CER we may slow the process irrevocably.

Finally I think there's a lot we can do internationally, individually and together. I've mentioned, in relation to GATT, and I've mentioned some opportunities in relation to APEC - we can work as a team to some extent, in some of those

international forums as we do. On other occasions we want to be competing with each as much as possible in order to

maximise our individual and our collective benefits.

I've seen some concerns expressed, and this is my final comment, in some quarters about a loss of sovereignty of Australia and New Zealand through the economic reforms of the type that I've been talking about. I put it to you that the

argument is exactly the other way around. If we don't get on and make the change that has to be made in our two countries in the course of the next few years, we will put our

sovereignty totally at risk. We are small nations with heavy debt dependence. We've lived for years on the savings of others and at some point they're going to exercise that in

terms of the nature of our two economies. You want to ensure sovereignty, you have to make the change and buy your way back into the world by matching best international practice. As soon as we start paying our way in the world we will ensure our sovereignty, not put it at risk.