0:00:03 > 0:00:07Britain and the West are on the brink of financial and economic catastrophe.
0:00:07 > 0:00:09The squeeze on real incomes is
0:00:09 > 0:00:11possibly the worst since the Great Depression.
0:00:11 > 0:00:14I think people in the street have figured out the game's up.
0:00:14 > 0:00:16In this series I'm investigating
0:00:16 > 0:00:20how we flunked the challenge of the relentless rise of China,
0:00:20 > 0:00:22how we boosted our living standards by
0:00:22 > 0:00:26borrowing lethal amounts, and why the party's over.
0:00:26 > 0:00:30You cannot go on living beyond your means for ever.
0:00:30 > 0:00:32How are we in Britain
0:00:32 > 0:00:35going to pay our way in this challenging new world?
0:00:35 > 0:00:38It's a whole change we have to go through in our society,
0:00:38 > 0:00:40in order to deal with globalisation.
0:00:42 > 0:00:44Change is painful,
0:00:44 > 0:00:47will it lead to further unrest in Britain and the rest of Europe?
0:00:47 > 0:00:49The big question will be asked, "Why?"
0:00:49 > 0:00:51"Why is this happening?"
0:00:51 > 0:00:54The kind of Armageddon scenario is that you have disintegration.
0:00:54 > 0:00:56In these dangerous times,
0:00:56 > 0:01:01can we cure our addiction to debt and build an economy
0:01:01 > 0:01:03on more stable foundations?
0:01:12 > 0:01:16NEWS REPORTS: Greek MPs will begin voting on a new round
0:01:16 > 0:01:20of austerity measures against a backdrop of mass protests.
0:01:20 > 0:01:24It all comes back to Greece. The reason these banks are in trouble
0:01:24 > 0:01:27is because they lent so much money to Greece.
0:01:27 > 0:01:30Public sector workers in Greece
0:01:30 > 0:01:32have begun a 24 hour strike in protest
0:01:32 > 0:01:34against spending cuts and tax rises.
0:01:34 > 0:01:37Violence has continued in the streets of Athens
0:01:37 > 0:01:41while Greek MPs were voting to accept austerity measures.
0:01:41 > 0:01:44The protestors say they're not giving up the fight.
0:01:51 > 0:01:54I'm working as freelance engineer for different companies,
0:01:54 > 0:01:58but most of them don't have the money to pay you...
0:01:59 > 0:02:02So you choose either to stay at your house and do nothing,
0:02:02 > 0:02:05or work and don't get paid.
0:02:08 > 0:02:10Nasos is on his way to work.
0:02:10 > 0:02:15But like thousands of his fellow countrymen, he's not getting paid.
0:02:15 > 0:02:18It's what happens when a country goes bust.
0:02:22 > 0:02:26Nasos works in Perama docks, part of the port of Piraeus
0:02:26 > 0:02:29just outside Athens, one of the largest in Europe.
0:02:29 > 0:02:32At its peak, thousands of men worked here
0:02:32 > 0:02:35repairing and building ships.
0:02:35 > 0:02:38Today the port is a ghost town.
0:02:41 > 0:02:44This is the floating dock of Perama,
0:02:44 > 0:02:49there are two actually, one here and the other there,
0:02:49 > 0:02:51and as you can see, we have the infrastructure,
0:02:51 > 0:02:55we are ready to go, but we don't have work here.
0:02:59 > 0:03:01If you come in the morning you will see
0:03:01 > 0:03:04people waiting to get some job,
0:03:04 > 0:03:09although they know that there is no job here.
0:03:09 > 0:03:13They have a big problem for survival.
0:03:14 > 0:03:18Nasos isn't a dock worker, he's a highly-skilled engineer
0:03:18 > 0:03:21who helped design and build the world's first
0:03:21 > 0:03:24floating, wind-powered, desalination plant.
0:03:24 > 0:03:27It makes drinking water from the sea,
0:03:27 > 0:03:30a huge potential boon for the Greek tourist industry.
0:03:30 > 0:03:32But funds have dried up.
0:03:35 > 0:03:40Greeks are furious about what has happened to their country.
0:04:13 > 0:04:17He's had to sack 14 of his 16 team,
0:04:17 > 0:04:21and like many Greeks, his income has been slashed.
0:04:22 > 0:04:26The problem is if you're not working, and I'm working, I'm your friend,
0:04:26 > 0:04:29OK, we can manage somehow, I will lend you some money,
0:04:29 > 0:04:33but if nobody is working then it is a huge problem.
0:04:34 > 0:04:37Greece's lethal mistake was that its government borrowed more
0:04:37 > 0:04:40than the entire value of what the country produces every year,
0:04:40 > 0:04:45to finance a bloated public sector. Fighting back is very hard,
0:04:45 > 0:04:48because its private sector is small, inefficient and in mortal combat
0:04:48 > 0:04:53with the far bigger and more productive companies of Germany.
0:04:53 > 0:04:58The moment when the European Union started sending us a lot of money,
0:04:58 > 0:05:01for example to modernise agriculture,
0:05:01 > 0:05:04well, we didn't modernise agriculture,
0:05:04 > 0:05:11just distributed the money among the peasants and the agriculturals,
0:05:11 > 0:05:15and they spent it in buying Mercedes cars
0:05:15 > 0:05:18or, er, beautiful apartments...
0:05:18 > 0:05:23then we had the facility of borrowing at the very low tariff,
0:05:23 > 0:05:28so we borrowed a lot and had a very nice life.
0:05:28 > 0:05:30But we did not produce enough
0:05:30 > 0:05:33and that is the number one problem of Greece.
0:05:33 > 0:05:37Greece could be a precursor for things to come.
0:05:37 > 0:05:42So Greece was a weak link, of a much longer chain.
0:05:46 > 0:05:49The problems of Greece as well as Portugal, Ireland, Italy and Spain
0:05:49 > 0:05:54are threatening to tip the world economy back into recession.
0:05:54 > 0:05:56Greece is a chilling example
0:05:56 > 0:06:00of what happens when a country loses the support of its creditors.
0:06:00 > 0:06:02It faces many, many years of high unemployment,
0:06:02 > 0:06:06and crashing living standards.
0:06:06 > 0:06:11So what about Britain? What economic fate awaits us?
0:06:11 > 0:06:15Britain, too, is buckling under the weight of its debts.
0:06:18 > 0:06:23Greece is the extreme version of the Western nightmare, which is...
0:06:23 > 0:06:27you know, you've been living on the never-never for 30 years,
0:06:27 > 0:06:31you've been running up deficits. It can't go on.
0:06:31 > 0:06:35UK, like many other countries,
0:06:35 > 0:06:38many of the people were living beyond their means,
0:06:38 > 0:06:40that was the whole basis of debt.
0:06:46 > 0:06:49This wasn't a normal recession,
0:06:49 > 0:06:52it was a debt crisis.
0:06:52 > 0:06:54It was caused by too much borrowing...
0:06:54 > 0:06:56by individuals,
0:06:56 > 0:06:58banks,
0:06:58 > 0:07:01businesses and most of all, by governments.
0:07:02 > 0:07:05It's a crisis which is happening in your town,
0:07:05 > 0:07:09your street, and maybe even your home.
0:07:09 > 0:07:15It's a crisis of the promises made over the last 30 years.
0:07:15 > 0:07:18If you look at all debts, not just government debts,
0:07:18 > 0:07:20Britain has borrowed more than Greece.
0:07:20 > 0:07:23Adding together household, banking and business debts
0:07:23 > 0:07:26we've borrowed almost five times the value
0:07:26 > 0:07:28of everything we produce each year.
0:07:28 > 0:07:34It's a record and it's still rising, especially the Government debt.
0:07:34 > 0:07:37For almost the last 30 years, but especially the last 10 years,
0:07:37 > 0:07:41we've been living beyond our means, spending much more than we earn,
0:07:41 > 0:07:44with economic growth fuelled by ever increasing borrowing.
0:07:44 > 0:07:50It's a habit we've got to cure, but there's no successful treatment,
0:07:50 > 0:07:53unless we face up to our debt addiction.
0:07:53 > 0:07:55There are some who believe
0:07:55 > 0:07:59that the true scale of Britain's indebtedness, is yet to be revealed.
0:07:59 > 0:08:03Terry Smith is head of one of the world's largest money brokers.
0:08:03 > 0:08:06He fears our heads are in the sand.
0:08:06 > 0:08:11How far do you think this denial about the scale of the debt burden
0:08:11 > 0:08:15bearing down on the British economy goes? Do you think in Government,
0:08:15 > 0:08:18there is any recognition of what needs to be done?
0:08:18 > 0:08:20I don't think there is much recognition.
0:08:20 > 0:08:24I engage with the people that you describe quite regularly,
0:08:24 > 0:08:28people who are leaders of banks, erm...Government regulators,
0:08:28 > 0:08:33and I actually think that they've got less acceptance of the problem,
0:08:33 > 0:08:37or the scale of the problem, than many of the people in the street.
0:08:37 > 0:08:40I think people in the street have figured out the game's up!
0:08:40 > 0:08:43The Office Of Budget Responsibility, this forecasting body,
0:08:43 > 0:08:45they've taken a look and said,
0:08:45 > 0:08:47"Actually, because of the aging population
0:08:47 > 0:08:50"and rising health care costs,
0:08:50 > 0:08:56"this level of public sector debt is going to grow pretty rapidly,
0:08:56 > 0:09:00"to over 100% of GDP in the coming decades."
0:09:00 > 0:09:04- How bad will it get for people? - Very bad indeed, I think, Robert,
0:09:04 > 0:09:07because the Government debt people think we're shouldering now,
0:09:07 > 0:09:10doesn't include a lot of off balance sheet items.
0:09:10 > 0:09:14The things they've promised in terms of the National Health Service,
0:09:14 > 0:09:16welfare and particularly pensions,
0:09:16 > 0:09:19probably take the known debt that people are up
0:09:19 > 0:09:22by three or four times. I think it will get very bad for people.
0:09:24 > 0:09:27The Government has embarked on the toughest round
0:09:27 > 0:09:31of expenditure cuts and tax rises for 60 years,
0:09:31 > 0:09:34with the opposition saying their speed and size is reckless,
0:09:34 > 0:09:38and undermining our recovery. Some are protesting,
0:09:38 > 0:09:42and that's even before the cuts have bitten.
0:09:42 > 0:09:46I remember meeting a government minister shortly after
0:09:46 > 0:09:50the first round of spending cuts was announced and there was
0:09:50 > 0:09:53a deep sense of shock and anger and he said that the thing that
0:09:53 > 0:09:56had worried him was the cuts hadn't even started yet.
0:09:56 > 0:10:00They hadn't even started filtering through and people were,
0:10:00 > 0:10:03were in revolt and he said, well what's going to happen
0:10:03 > 0:10:06when actually this becomes real?
0:10:08 > 0:10:10It's been described as the new era of austerity
0:10:10 > 0:10:13but do we know what that will mean?
0:10:16 > 0:10:18Not much to be honest.
0:10:18 > 0:10:20I have no idea.
0:10:20 > 0:10:22Pulling in the old belt a bit
0:10:22 > 0:10:25and so on and so forth, not for the first time.
0:10:25 > 0:10:28Make do and mend like I never have before really.
0:10:28 > 0:10:30Having to be sensible,
0:10:30 > 0:10:33which is quite difficult when you've never done it before.
0:10:45 > 0:10:50So is 21st Century austerity a journey back into our past?
0:10:50 > 0:10:55It will be about wearing shabbier clothes, not having a new car.
0:10:55 > 0:10:58Going on camping holidays rather than going abroad.
0:10:58 > 0:11:02And in case you're wondering why a dinghy needs a streamline trailer,
0:11:02 > 0:11:06we should explain it's a collapsible caravan, believe it or not!
0:11:06 > 0:11:11Even a moron, mechanically speaking, can fix it up in just minutes.
0:11:11 > 0:11:13Downgrading one's expectations
0:11:13 > 0:11:17and one's lifestyle and most people will get through it.
0:11:17 > 0:11:19I mean we did in the 1930s, we will do again.
0:11:19 > 0:11:23Or it could be quite drastic over periods of time that we find
0:11:23 > 0:11:27that things that we've taken for granted both as individuals
0:11:27 > 0:11:31and as a society, are no longer strictly affordable.
0:11:31 > 0:11:35We thought we had it bad in the '70s and '80s, but today's
0:11:35 > 0:11:39public spending cuts, low wages and inflation are squeezing
0:11:39 > 0:11:43living standards more savagely than at any time since the 1930s.
0:11:45 > 0:11:51The squeeze on real incomes at the moment is by some measures the worst,
0:11:51 > 0:11:56since the early 1980s and possibly the worst since the great depression.
0:11:56 > 0:12:01And in this economic crisis it's the young who pay the biggest price.
0:12:01 > 0:12:03We're coming into the main supermarket.
0:12:03 > 0:12:08This is our seasonal aisle, so all the things ready for Christmas now.
0:12:08 > 0:12:14These are the main tills. This is our fruit and veg department
0:12:14 > 0:12:19so we keep this all filled up and looking nice...hopefully.
0:12:22 > 0:12:24- Vanessa is 27.- Morning.
0:12:24 > 0:12:27She has a part time job at the local supermarket,
0:12:27 > 0:12:30working in the grocery section.
0:12:30 > 0:12:33It's my responsibility to get the orders in from the market
0:12:33 > 0:12:37and pack everything up, price it, put it out here for sale,
0:12:37 > 0:12:40keep it looking tidy.
0:12:41 > 0:12:45It's better in the summer than it is in the winter, I have to say.
0:12:45 > 0:12:49She's been working here part time for two years, on minimum wage.
0:12:49 > 0:12:52It's not enough to get by,
0:12:52 > 0:12:54so she takes on as many other odd jobs as she can.
0:12:57 > 0:12:58I'm kinda of the go-to-girl.
0:12:58 > 0:13:02I house sit for my parents' friends when they go on holiday.
0:13:02 > 0:13:06I do some dog walking, dog sitting, cat sitting, babysitting.
0:13:06 > 0:13:10But it doesn't really accumulate to any more than £400 a month.
0:13:10 > 0:13:14I can't put anything aside to save, I can't think about moving on,
0:13:14 > 0:13:18moving out, buying a place or even renting.
0:13:18 > 0:13:23It's not really what I dream of doing with the rest of my life.
0:13:26 > 0:13:28And why should she?
0:13:28 > 0:13:32She's a university graduate with a first in psychology.
0:13:32 > 0:13:34- Can I help at all?- Not really.
0:13:34 > 0:13:38She enjoys what she does, but it was supposed to temporary.
0:13:40 > 0:13:44Yeah, I was really hoping that after I'd worked really hard and got
0:13:44 > 0:13:47a 1st class degree, that I wouldn't be stacking shelves and
0:13:47 > 0:13:52stuck in a job that I'd been doing all the way through my studies.
0:13:52 > 0:13:55It was supposed to be a stop gap job, it wasn't supposed to be
0:13:55 > 0:13:57what you end up doing afterwards.
0:13:59 > 0:14:01I've spent four years studying
0:14:01 > 0:14:05and I'm still working in retail jobs that I could have done straight from school
0:14:05 > 0:14:09and it, you know, it just makes you think why have I got myself
0:14:09 > 0:14:13into this much debt, why have I spent the last four years not really
0:14:13 > 0:14:19earning so, you know, I can now do something that I was doing anyway?
0:14:22 > 0:14:24When Vanessa finished her degree and couldn't find work,
0:14:24 > 0:14:28she did a post graduate course to improve her prospects,
0:14:28 > 0:14:30but it didn't work.
0:14:30 > 0:14:35I've applied for at least 30 jobs in the last three months.
0:14:35 > 0:14:40Probably 15 actual paid positions and between 15 and 20 internships.
0:14:40 > 0:14:45You lose count. You just fire off CV after CV after CV
0:14:45 > 0:14:50to various agencies and quite often you don't even get a response
0:14:50 > 0:14:54you know, not even a 'thanks, but no thanks', just absolutely nothing.
0:14:56 > 0:15:01The economy is failing young people. That's MY generation's fault.
0:15:01 > 0:15:03We mortgaged our economy in a dangerous way,
0:15:03 > 0:15:07in the selfish short-term pursuit of higher living standards.
0:15:07 > 0:15:10So how do we put it right? For Vanessa and her generation?
0:15:17 > 0:15:20The economic model that generated the longest
0:15:20 > 0:15:24period of uninterrupted rapid growth in our history is bust.
0:15:24 > 0:15:28So how do we build a more robust economic model?
0:15:28 > 0:15:32Well, perhaps we need to abandon our rampant consumerism,
0:15:32 > 0:15:37to become less dependent on debt-fuelled consumer spending.
0:15:37 > 0:15:39We have to learn that there's no such thing
0:15:39 > 0:15:41as borrowing on the never-never.
0:15:41 > 0:15:46When our debts fall due for repayment we should repay them
0:15:46 > 0:15:50rather than replacing them with even bigger debts.
0:15:52 > 0:15:56Our economy became far too dependent on consumer spending,
0:15:56 > 0:16:01which is equivalent to two thirds of everything we produce in Britain.
0:16:01 > 0:16:04I've never bought anything on higher purchase before,
0:16:04 > 0:16:05I've always paid cash.
0:16:05 > 0:16:08We call it deferred terms, Mrs Turner.
0:16:08 > 0:16:11And where does HP go from here?
0:16:20 > 0:16:23At the peak in 2008, UK households had borrowed more
0:16:23 > 0:16:25than they ever had before.
0:16:25 > 0:16:28A sum equal to 180% of their disposable incomes,
0:16:28 > 0:16:30that's the money we have to spend.
0:16:30 > 0:16:33And although some of the loans have been repaid,
0:16:33 > 0:16:37our personal debts remain dangerously large.
0:16:37 > 0:16:42Thrift and prudence and things which used to be quite important virtues,
0:16:42 > 0:16:45it's like it was chucked out the window and we've moved towards
0:16:45 > 0:16:50a culture that embraces consumption, spending and to an extent, excess.
0:16:50 > 0:16:55We are actually going to have to get used to not be able to borrow
0:16:55 > 0:16:58any amount of money to buy any amount of old rubbish
0:16:58 > 0:17:00we never needed in the first place.
0:17:00 > 0:17:02We've got to earn what we consume.
0:17:02 > 0:17:06we haven't done that in this country for an awful long time.
0:17:06 > 0:17:09But when we pay back our debts, we spend and consume less.
0:17:09 > 0:17:13And because consumer spending is so disproportionately important
0:17:13 > 0:17:17to the economy, that's a problem as well as a necessity.
0:17:17 > 0:17:20Because if we reduce our spending too fast,
0:17:20 > 0:17:23the entire economy grinds to a halt.
0:17:23 > 0:17:24The great conundrum,
0:17:24 > 0:17:27is getting away from a reliance upon consumer spending
0:17:27 > 0:17:30and getting to something that we can actually export.
0:17:30 > 0:17:32We can't export consumerism.
0:17:32 > 0:17:33Quite a lot of growth,
0:17:33 > 0:17:38not just in Britain but in other economies, is driven by consumption.
0:17:38 > 0:17:42But consumption requires, well, spending by consumers,
0:17:42 > 0:17:46by households and it's hard to have spending if you're repaying debt.
0:17:46 > 0:17:51As its currently structured, the UK economy may have no prospect
0:17:51 > 0:17:53of recovering to the kind of prosperity
0:17:53 > 0:17:54people enjoyed in the last 20 years.
0:17:54 > 0:17:57It will need a fundamental restructuring and rebalancing
0:17:57 > 0:18:00away from those sectors which it is currently relying on.
0:18:00 > 0:18:03SHIP SOUNDS HORN
0:18:06 > 0:18:09So what's the answer?
0:18:13 > 0:18:17A clue can be found here in China. Unlike us, the Chinese produce
0:18:17 > 0:18:19lots of the things the world wants to buy,
0:18:19 > 0:18:25and also unlike us, they save a huge proportion of the money they earn.
0:18:25 > 0:18:29It's the flaw in globalisation - they make and save,
0:18:29 > 0:18:33we consume and borrow. What we need is a role reversal.
0:18:33 > 0:18:39This kind of shopping by the Chinese is something that we in the West need to see a lot more of,
0:18:39 > 0:18:42because although Chinese consumers are spending
0:18:42 > 0:18:45a bit more than they did, as a share of the economy,
0:18:45 > 0:18:47well, they spend about half as much as we do.
0:18:47 > 0:18:51If they could only be persuaded to save less and spend more,
0:18:51 > 0:18:54that'll provide opportunities for Western companies,
0:18:54 > 0:18:56and that'll help the US, the UK,
0:18:56 > 0:19:00much of the eurozone, get their excessive debts down.
0:19:03 > 0:19:06But as the Chinese start to consume more,
0:19:06 > 0:19:10that only helps us if we start making the stuff and selling the services
0:19:10 > 0:19:12that the Chinese actually want to buy.
0:19:12 > 0:19:14It requires an overhaul of our economy,
0:19:14 > 0:19:17so that our businesses invest much more,
0:19:17 > 0:19:20and start exporting much, much more.
0:19:20 > 0:19:21We need to transform our economy
0:19:21 > 0:19:25from one fuelled by borrowing and consumption
0:19:25 > 0:19:28to one powered by investment and exports.
0:19:28 > 0:19:33So where can we turn for guidance on how to do it right?
0:19:33 > 0:19:37MUSIC: "Ride of the Valkyries" by Wagner
0:19:38 > 0:19:41- Germans coming here? - Just for a couple of days, Major.
0:19:41 > 0:19:45- I don't care much for Germans. - Well, I know what you mean, but...
0:19:45 > 0:19:49Bunch of Krauts, that's what they are, all of 'em. Bad eggs!
0:19:50 > 0:19:54Like the Major in Fawlty Towers, in popular culture and the media,
0:19:54 > 0:19:59we traditionally mocked and denigrated the Germans for their famous efficiency...
0:19:59 > 0:20:02- Good morning!- ..whilst celebrating our supposed superiority.
0:20:08 > 0:20:11MUSIC: "The Dam Busters" theme
0:20:11 > 0:20:12We're not laughing now.
0:20:17 > 0:20:20Next year, I am 40 years in the company.
0:20:20 > 0:20:25I am second generation. My father founded the company in 1919.
0:20:25 > 0:20:31This is my father. He was born in 1888, died in 1972.
0:20:34 > 0:20:36That's Plant No.1.
0:20:36 > 0:20:41It was established in 1928. It was the first building my father built.
0:20:42 > 0:20:44Nestling in the heart of Bavaria,
0:20:44 > 0:20:46Kathrein started as a one-man enterprise
0:20:46 > 0:20:49in a cellar after the First World War.
0:20:49 > 0:20:52It's now a global operation,
0:20:52 > 0:20:56exporting antennae to China, the US and the rest of Europe.
0:20:56 > 0:20:59This is the Olympic Tower in Munich.
0:20:59 > 0:21:03The new antenna we delivered, we have to install it by helicopter.
0:21:03 > 0:21:06Every piece of this antenna is about five tonnes,
0:21:06 > 0:21:10and only the Russian helicopter Kamov can hold this five tonnes,
0:21:10 > 0:21:12so it was, yes, an experience.
0:21:16 > 0:21:20We are the oldest antenna company worldwide.
0:21:20 > 0:21:22We are also the biggest one.
0:21:22 > 0:21:25The turnover this year will be EUR 1.4 billion.
0:21:27 > 0:21:30But Kathrein is not an isolated success story.
0:21:30 > 0:21:34It's part of a vitally important sector of the German economy,
0:21:34 > 0:21:36known as the Mittelstand.
0:21:36 > 0:21:40Mittelstand is a mindset. They are patient capitalists.
0:21:40 > 0:21:42You're not in there for the short term.
0:21:42 > 0:21:44You're in there for the long term.
0:21:44 > 0:21:47You run your company not in the interest of short-term shareholders,
0:21:47 > 0:21:51but you want to create long-term wealth for your company.
0:21:51 > 0:21:57You work with your employees not in a way that you treat them as a disposable human resource,
0:21:57 > 0:21:59but as a very valuable part of your company.
0:21:59 > 0:22:02You integrate yourself into the community you're working in.
0:22:06 > 0:22:10Mittelstand companies account for half of Germany's economy, and most of its exporters.
0:22:10 > 0:22:13They employ almost 80% of German workers.
0:22:13 > 0:22:15Most are family-owned,
0:22:15 > 0:22:18and many produce highly specialised,
0:22:18 > 0:22:21highly-engineered goods in hi-tech industries.
0:22:23 > 0:22:30Being the best at making an unglamorous but vital component or machine is typical.
0:22:30 > 0:22:34They focus on a specific area they're really good at.
0:22:34 > 0:22:36Products you don't see usually as a consumer.
0:22:36 > 0:22:39They're products who go inside other products.
0:22:39 > 0:22:41Gut.
0:22:42 > 0:22:44'As Mittelstand, we have to focus.'
0:22:44 > 0:22:47We are not a grocery shop. I cannot do everything.
0:22:47 > 0:22:51We are focusing since 92 years on our main business,
0:22:51 > 0:22:53and this is the antenna business.
0:22:54 > 0:22:55Gut.
0:22:55 > 0:22:58Comparable British businesses are often listed on the stock market,
0:22:58 > 0:23:01and owned by shareholders that have little corporate loyalty,
0:23:01 > 0:23:05and tend to be interested in a quick buck.
0:23:05 > 0:23:10'The stock market looks mostly on very short profits.'
0:23:10 > 0:23:14They want to maximise the profit. We don't maximise the profit.
0:23:14 > 0:23:17If we have a project and say, "OK, it takes five years,"
0:23:17 > 0:23:19then we invest in this project.
0:23:22 > 0:23:27One Mittelstand tradition is that businesses are very active in local communities.
0:23:27 > 0:23:30They work closely with schools and universities in finding apprentices.
0:23:30 > 0:23:34Education is tailored for the needs of the Mittelstand.
0:23:34 > 0:23:37We have to invest in our brains.
0:23:37 > 0:23:43Because, as you know, Germany has no natural resources.
0:23:43 > 0:23:47This we are doing here, and I'm very happy that a lot of our young people
0:23:47 > 0:23:51are coming back into the company, and then stay as technicians,
0:23:51 > 0:23:54as engineers, as members of the company.
0:23:54 > 0:23:58In two years, my son will come. He's third generation.
0:23:58 > 0:24:01He plans to make an MBA, and then he will come to the company.
0:24:01 > 0:24:05- And I'm waiting for him with a lot of work to do. - HE CHUCKLES
0:24:07 > 0:24:11German attitudes to money spread beyond the companies of the Mittelstand.
0:24:11 > 0:24:17Most Germans don't borrow on credit cards, and have consistently saved more that 10% of their income,
0:24:17 > 0:24:20while we periodically save nothing at all.
0:24:20 > 0:24:23This thrift has its roots in a painful shared memory
0:24:23 > 0:24:25of when German credit was worthless.
0:24:26 > 0:24:30In 1923, we had this big hyper-inflation after World War One,
0:24:30 > 0:24:32and it's still, as silly as it may sound,
0:24:32 > 0:24:34a traumatising sentiment here.
0:24:36 > 0:24:39During the hyper-inflation crisis,
0:24:39 > 0:24:43the German exchange rate was one trillion marks to one dollar.
0:24:46 > 0:24:49The sheer volume of paper money handled by industry and commerce
0:24:49 > 0:24:54had to be collected almost daily in handcarts, taxis, lorries.
0:24:54 > 0:24:57Every day was payday,
0:24:57 > 0:25:00and wages were rushed to factories by the truckload.
0:25:00 > 0:25:03And the same accounts for after World War Two.
0:25:03 > 0:25:08Everything was reset, every German citizen got 40 marks, and could start from scratch.
0:25:08 > 0:25:12So I think there's a relation, and this is the good German tradition,
0:25:12 > 0:25:15that you basically spend what you earn, and not more.
0:25:15 > 0:25:19This comes a little bit from this, you know, "Schaffe, schaffe, Hausle baue," yeah?
0:25:19 > 0:25:22Just be serious and earn your money, put it well away,
0:25:22 > 0:25:25save for the kids, and so on and so forth.
0:25:33 > 0:25:37Germany is Europe's largest exporter of manufactured goods,
0:25:37 > 0:25:39and the second biggest in the world.
0:25:39 > 0:25:44Exports account for almost half of German national output.
0:25:44 > 0:25:48Its companies make high quality, highly-priced goods,
0:25:48 > 0:25:51and importantly, many of the complex widgets inside them.
0:25:51 > 0:25:56Things that everyone wants and few others can replicate.
0:25:56 > 0:25:59Even the Chinese.
0:25:59 > 0:26:04So can we, indeed, should we, turn German with a British Mittelstand?
0:26:06 > 0:26:09Someone at the top of government seems to think so.
0:26:09 > 0:26:14We should all learn lessons from the successful Mittelstand model
0:26:14 > 0:26:16which has operated in Germany for so many decades.
0:26:16 > 0:26:18The medium-sized companies
0:26:18 > 0:26:21that are such a source of strength for that country.
0:26:23 > 0:26:27But it wasn't so long ago we thought we had it sussed. Britannia was supposedly cool.
0:26:27 > 0:26:31We were creative and smart, and our economic model was trouncing even Germany's.
0:26:31 > 0:26:35A third of our record-breaking growth was being generated
0:26:35 > 0:26:38by our enormous banks and City of London firms.
0:26:38 > 0:26:41We derided the sclerotic German economy and its leaders,
0:26:41 > 0:26:44who were so mistrustful of British and American finance.
0:26:44 > 0:26:48How foolish they were to make stuff you could hold,
0:26:48 > 0:26:51rather than complicated financial products
0:26:51 > 0:26:53that no-one could understand!
0:26:53 > 0:26:56If you look today on Germany, you feel like Germany's really fine,
0:26:56 > 0:26:58and wealthy and booming, and so on and so forth,
0:26:58 > 0:27:03but you remember, for the early parts of this decade, Germany was the sick man of Europe,
0:27:03 > 0:27:08and everybody was complaining about Germany, and the missing economic engine in the middle of Europe.
0:27:08 > 0:27:10We would slightly deride them here in Britain,
0:27:10 > 0:27:13and say, "oh, you know, old-fashioned Germans,
0:27:13 > 0:27:17"think that bashing metal is still the route to wealth,
0:27:17 > 0:27:19"can't they realise that wealth is to be found
0:27:19 > 0:27:21"in front of a computer screen?"
0:27:21 > 0:27:28Today we're not so smug, and we'd dearly love a piece of the manufacturing action.
0:27:28 > 0:27:31British business will hope to sign deals worth more than £1 billion
0:27:31 > 0:27:36when the Chinese Prime Minister Wen Jiabao attends a summit in Downing Street today.
0:27:36 > 0:27:38He'll sign an agreement with David Cameron,
0:27:38 > 0:27:43enabling British firms to branch out beyond Beijing and Shanghai...
0:27:43 > 0:27:46A billion-pound deal with the Chinese looked great,
0:27:46 > 0:27:49until we saw that the Chinese Prime Minister had gone on a plane,
0:27:49 > 0:27:54flown to Germany, and signed a deal for £9 billion with the German Chancellor, Angela Merkel.
0:27:54 > 0:27:59Germany ranks about sixth in terms of China's largest trading partners.
0:27:59 > 0:28:03Well, Britain doesn't quite rank in the top 20.
0:28:03 > 0:28:07The main reason is that Germany sells the kinds of things
0:28:07 > 0:28:10that China wants to buy, which is high technology,
0:28:10 > 0:28:12especially high-end capital goods.
0:28:12 > 0:28:16Britain has great brands. Look at the car brands.
0:28:16 > 0:28:20We're delivering, for example, the Rolls-Royce, we are proud of this.
0:28:20 > 0:28:26Ok, Rolls-Royce is BMW now, but, OK, so there are companies in Britain also with a very good reputation,
0:28:26 > 0:28:30and I think there is a chance to re-establish a Mittelstand.
0:28:32 > 0:28:36We can work together. Our hands are open.
0:28:36 > 0:28:38In the aftermath of the financial crisis,
0:28:38 > 0:28:43suddenly, that manufacturing-driven German model looks great.
0:28:43 > 0:28:46Because the German economy is doing well,
0:28:46 > 0:28:48and it's doing well by exporting.
0:28:48 > 0:28:51And exporting is back in fashion.
0:28:51 > 0:28:55Exporting has become the centre of British foreign policy.
0:28:55 > 0:29:00Cameron is going around the world trying to sell Britain, to sell British goods.
0:29:00 > 0:29:05It's an uphill climb for us, trying to emulate the German model of investing and exporting
0:29:05 > 0:29:08that's ingrained in their culture. Where do we begin?
0:29:10 > 0:29:15We don't have very many facts, true facts, in economics,
0:29:15 > 0:29:21but one of the very few is that tomorrow's growth
0:29:21 > 0:29:24always comes from today's small firms, OK?
0:29:24 > 0:29:28So the big firms of tomorrow are today's small firms.
0:29:28 > 0:29:34That's as close as we get in economics to a fact of life.
0:29:34 > 0:29:41And that means investing in that cohort if we are to deliver
0:29:41 > 0:29:44on not just exports tomorrow, but growth tomorrow,
0:29:44 > 0:29:49to facilitate this rebalancing process and paying down of debts.
0:29:50 > 0:29:54Can we reinvent our distorted economy, so that more small firms
0:29:54 > 0:29:57are nurtured to become the industrial giants of tomorrow?
0:30:02 > 0:30:08We have a world-class business services sector, selling everything from advertising to architecture,
0:30:08 > 0:30:13but that's only 14% of our GDP, and as for manufacturing,
0:30:13 > 0:30:17well, that's even smaller, just 12% of the economy.
0:30:20 > 0:30:24Britain has great companies that design and make things,
0:30:24 > 0:30:27but, arguably, not enough of them. I've come to Malmesbury
0:30:27 > 0:30:31to try and learn the secrets of success of one of them.
0:30:33 > 0:30:36We've got here a lot of the things we've made.
0:30:36 > 0:30:39This is our historical underground showcase here.
0:30:39 > 0:30:44- Is there anything you have to license in from others?- Absolutely nothing.- It's all yours.
0:30:44 > 0:30:47It's all here, all developed here, everything.
0:30:47 > 0:30:51But there was a time when Dyson actually made its vacuum cleaners here.
0:30:51 > 0:30:55They churned out not only the ideas, but the finished item.
0:30:55 > 0:30:57Not any more.
0:30:59 > 0:31:02NEWS REPORT: This fearsome advocate of UK manufacturing
0:31:02 > 0:31:05said at least some production will go to the Far East.
0:31:08 > 0:31:10Now, you used to make your stuff here,
0:31:10 > 0:31:14and then you took this decision that for the good of the business,
0:31:14 > 0:31:17manufacturing had to be located offshore.
0:31:17 > 0:31:21- How difficult a decision was that? - Well, it was very difficult,
0:31:21 > 0:31:24and not least because we were making 500 people redundant,
0:31:24 > 0:31:26which is not a nice thing to do.
0:31:26 > 0:31:29What I've experienced over the last 30 years,
0:31:29 > 0:31:33I think is the exact experience we've had of British manufacturing leaving Britain.
0:31:33 > 0:31:3630 years ago, if I wanted components, I went to Birmingham,
0:31:36 > 0:31:39and there were several companies who made those components,
0:31:39 > 0:31:41so it was very easy to have a factory in Britain.
0:31:41 > 0:31:43By the time I was making the vacuum cleaner,
0:31:43 > 0:31:47I had to buy all my components from five and ten thousand miles away.
0:31:47 > 0:31:50- So it became untenable. - Is there any turning back?
0:31:50 > 0:31:54Can you conceive of any circumstances which would make commercial sense
0:31:54 > 0:31:58- for you to manufacture in the UK again?- Well, how I would love that.
0:31:58 > 0:32:01What we need to do is encourage components suppliers.
0:32:01 > 0:32:06What happened, really, over the last 40 years, is we drove them out of business.
0:32:06 > 0:32:11Is there anything that a government can do to encourage businesses
0:32:11 > 0:32:13that are going to create wealth for the nation?
0:32:13 > 0:32:17The really important thing, I think, is to concentrate on a sector,
0:32:17 > 0:32:20which is technology, the high technology sector,
0:32:20 > 0:32:24because it creates jobs, it creates wealth by exports.
0:32:24 > 0:32:27And we shouldn't be frightened of spending money on this.
0:32:27 > 0:32:30So we should encourage people to stay at university,
0:32:30 > 0:32:33and we should pay them the sort of salaries they'd get in the City.
0:32:33 > 0:32:38Because the work they're doing is extremely valuable for this country.
0:32:44 > 0:32:48If the economy's going to recover, we need to do more high-value manufacturing.
0:32:48 > 0:32:54One of our most successful companies is Rolls-Royce, which sells aircraft engines around the world.
0:32:54 > 0:32:58They don't only sell engines - they provide a complete backup service.
0:32:58 > 0:33:03An engine health monitoring unit collects data about the performance of every engine in flight,
0:33:03 > 0:33:07and allows them to communicate with their customers in real time.
0:33:07 > 0:33:10This kind of operation is often called a manu-service,
0:33:10 > 0:33:12and many see it as the future of manufacturing.
0:33:12 > 0:33:16But not every British company is so forward-looking.
0:33:16 > 0:33:18We're not at the races in Britain.
0:33:18 > 0:33:21We're being carved up in this new world,
0:33:21 > 0:33:24and in a world where three fifths of American manufacturing companies
0:33:24 > 0:33:27now describe themselves as manu-service companies,
0:33:27 > 0:33:30you ask the same question to a sample of British manufacturing companies,
0:33:30 > 0:33:33and they wouldn't even know what the term meant.
0:33:33 > 0:33:34That's how far we are behind.
0:33:38 > 0:33:41Vince Cable is the minister charged with trying to build up our exports.
0:33:41 > 0:33:44He tours the country trying to learn what's needed.
0:33:44 > 0:33:48But when will we again have the kind of strong economic growth
0:33:48 > 0:33:51that we took for granted?
0:33:51 > 0:33:56How long do you think it will take to reconstruct the British economy
0:33:56 > 0:34:01so that we can have that kind of 3% growth on a sustainable basis?
0:34:01 > 0:34:05Well, 3% growth on a sustainable basis is quite ambitious.
0:34:05 > 0:34:07You know, we're talking...
0:34:07 > 0:34:10Most of that growth has got to come from innovation
0:34:10 > 0:34:12and technological change, and achieving that
0:34:12 > 0:34:16would be very substantial. It's not going to happen within months.
0:34:16 > 0:34:18- But years, we're talking years. - We're talking years.
0:34:18 > 0:34:20Five, ten years...?
0:34:20 > 0:34:23There's no point artificially putting a deadline on it.
0:34:23 > 0:34:27But two things are happening at the same time. We're having to sort out the country's finances,
0:34:27 > 0:34:31and at the same time, we've got to do the investments in the technology,
0:34:31 > 0:34:35the apprenticeships, the university training, to get the knowledge economy,
0:34:35 > 0:34:40so that this kind of change can take place, and it certainly isn't going to happen quickly.
0:34:40 > 0:34:43There are millions and millions of people in other parts of the world
0:34:43 > 0:34:46who are educating themselves to a very high standard,
0:34:46 > 0:34:48who are ready to work harder,
0:34:48 > 0:34:51and with whom we are not competing effectively.
0:34:51 > 0:34:54China's investing large amounts in their universities,
0:34:54 > 0:34:58and committed to having 10 global-class universities
0:34:58 > 0:35:01within the next 10 years.
0:35:07 > 0:35:12Perhaps the most important battlefields in a globalised world are schools and universities,
0:35:12 > 0:35:17where young people acquire the skills to create the wealth that they, and we, need.
0:35:17 > 0:35:19China gets that.
0:35:19 > 0:35:24Massive investment in education is the next great leap forward in China's economic development.
0:35:24 > 0:35:26Cheers.
0:35:26 > 0:35:29Good health. What do we say in Chinese?
0:35:29 > 0:35:31- Kan Bei.- Kan Bei.
0:35:31 > 0:35:35In Shanghai, I met 15-year-old Lin Lin and her mother, Rena,
0:35:35 > 0:35:37a manager in a lighting company.
0:35:37 > 0:35:39Rena is ambitious for her daughter.
0:35:42 > 0:35:45TRANSLATION: In China, we have an old saying -
0:35:45 > 0:35:50"Don't let the child lose the race at the starting line."
0:35:50 > 0:35:52Education is a long process.
0:35:52 > 0:35:55People say it takes a hundred years to educate a person.
0:35:55 > 0:35:57It's not something you can do in a day.
0:35:57 > 0:36:01I don't want my daughter to go through what I went through as a kid.
0:36:01 > 0:36:03I want my daughter to have an easier life than I had,
0:36:03 > 0:36:06and to have a bright future.
0:36:06 > 0:36:09That's why I want to give her a good education.
0:36:09 > 0:36:12Like millions of Chinese young people,
0:36:12 > 0:36:17Lin Lin studies six days a week to secure herself a prosperous future.
0:36:17 > 0:36:21These are the extra classes she takes outside of school time.
0:36:23 > 0:36:27TRANSLATION: On Saturday, I come here to get some extra studies in.
0:36:27 > 0:36:30It's a chance to get ahead and study stuff not taught at my school.
0:36:30 > 0:36:33It helps me to get to a higher level.
0:36:33 > 0:36:37It also allows me to get a head start on work
0:36:37 > 0:36:40that I'm going to learn again at school.
0:36:42 > 0:36:47The first stage of China's phenomenal growth was based on cheap, unskilled labour.
0:36:47 > 0:36:50Now, like us, it wants to win through brains, not brawn,
0:36:50 > 0:36:55and like most of her classmates, Lin Lin is set on going to university.
0:36:55 > 0:36:59China is pouring money into higher education,
0:36:59 > 0:37:03because bicycles, books, students... well, they're an economic weapon.
0:37:03 > 0:37:09China is churning out enough students every year to fill a city the size of London.
0:37:13 > 0:37:17It's a sign of the country's determination to challenge,
0:37:17 > 0:37:21not just in low-cost manufacturing, but also against us in other ways,
0:37:21 > 0:37:27including taking on our precious businesses based on knowledge, research and expertise.
0:37:29 > 0:37:33Engineers, programmers - these are the highly skilled areas
0:37:33 > 0:37:36where Britain and the West once had a monopoly.
0:37:36 > 0:37:37No longer.
0:37:39 > 0:37:42We should be very worried,
0:37:42 > 0:37:45because the Chinese produce half a million engineers every year
0:37:45 > 0:37:48out of their universities, and we produce 21,000.
0:37:48 > 0:37:51So they're producing 20 times as many.
0:37:51 > 0:37:55There's quite a lot to be said about what economists can't measure,
0:37:55 > 0:37:59which is the extent to which there's a great deal of entrepreneurship,
0:37:59 > 0:38:03focus on education, there is a lot of that in China.
0:38:03 > 0:38:07You certainly see that in terms of Chinese graduates moving overseas -
0:38:07 > 0:38:09they're very competitive, very disciplined.
0:38:23 > 0:38:26This is engineering. A lot of my time I spend here.
0:38:26 > 0:38:32Practically, on average, about five, six hours a day, pretty much.
0:38:32 > 0:38:36The impressive Chinese work ethic
0:38:36 > 0:38:39has been brought to the UK by students of Chinese origin,
0:38:39 > 0:38:43who frequently outperform their indigenous rivals.
0:38:43 > 0:38:46Ben is in his second year at Warwick University,
0:38:46 > 0:38:48one of the UK's leading engineering schools.
0:38:48 > 0:38:52I'm doing general engineering. This is a pipe flow lab.
0:38:52 > 0:38:55It's one of the labs we do in our module.
0:38:56 > 0:38:59I was born in China. I went to primary school there.
0:38:59 > 0:39:01The workloads are quite different.
0:39:01 > 0:39:05During primary school, I did a lot of practice on maths questions,
0:39:05 > 0:39:08and a lot of things, yeah, which wasn't...
0:39:08 > 0:39:12..so evident over here in the UK sort of thing.
0:39:12 > 0:39:16If it's not changing, then it means there's an air bubble.
0:39:16 > 0:39:18We are measuring the pressure drop,
0:39:18 > 0:39:22the temperature and the flow rate of these two different pipes.
0:39:22 > 0:39:27The drive of Chinese students is fuelled by their determined parents.
0:39:27 > 0:39:31My parents, obviously, are more driven for me to succeed,
0:39:31 > 0:39:34so they sort of drive, make sure they're...
0:39:34 > 0:39:37Well, my mum used to make sure that I'd do a lot of work.
0:39:40 > 0:39:43Ben's mother brought him to Britain in 2003.
0:39:43 > 0:39:46She's a molecular biologist who now works at Oxford University.
0:39:46 > 0:39:49Bringing Ben here meant missing out
0:39:49 > 0:39:52on great career opportunities for herself in China.
0:39:52 > 0:39:57I came here only for him, because I can have a very good job in China.
0:39:57 > 0:40:01But because of him, I really just want to sacrifice everything,
0:40:01 > 0:40:04and then focus on him and just for his success,
0:40:04 > 0:40:06and for his achievement.
0:40:07 > 0:40:11His life is my life. This is in China.
0:40:11 > 0:40:14Sometimes I really push him,
0:40:14 > 0:40:19and go to his room and check what he's doing, and he wasn't so happy.
0:40:19 > 0:40:22And he'd always say, "Why do you interrupt me all the time?"
0:40:22 > 0:40:25But I really want to see if he's doing, you know...
0:40:25 > 0:40:30He's not always playing on the computer or maybe doing other sorts of things.
0:40:30 > 0:40:32- It gets annoying! - HE LAUGHS
0:40:32 > 0:40:34It gets annoying sometimes. It really does.
0:40:34 > 0:40:37But I can see why she's doing it.
0:40:40 > 0:40:44Education is pretty much everything to Chinese parents.
0:40:44 > 0:40:48If you don't have, like, a really good education,
0:40:48 > 0:40:52it somehow links to becoming a failure in life.
0:40:52 > 0:40:55And also, because there's so many people
0:40:55 > 0:40:58and huge competition for university places.
0:40:58 > 0:41:02People concentrate a lot on just working hard.
0:41:03 > 0:41:06The acquisition of knowledge and skills
0:41:06 > 0:41:09is perhaps the single biggest challenge we face here in the UK.
0:41:09 > 0:41:15In this globalised world, there are millions who are educating themselves to a high standard,
0:41:15 > 0:41:19so our young people need to acquire even better skills and know-how
0:41:19 > 0:41:23if we're to stand any chance of improving our living standards in the decades ahead.
0:41:23 > 0:41:29We should all help and encourage school students to make the most of what they can be,
0:41:29 > 0:41:32for their sake, and the sake of our economy.
0:41:33 > 0:41:34All the best.
0:41:34 > 0:41:35Where do we go?
0:41:35 > 0:41:39- They're in there. They're all expectantly waiting.- OK.
0:41:39 > 0:41:42I'm Anthony, and at the moment, I'm studying business and drama.
0:41:42 > 0:41:47- My main interest in the future is to get a degree as an economist.- OK!
0:41:47 > 0:41:50A lot of economics is up in the air at the moment
0:41:50 > 0:41:53because of the great crisis we've been through.
0:41:53 > 0:41:55And that means, actually, that, you know,
0:41:55 > 0:41:59when everything's up in the air, you can go back to first principles,
0:41:59 > 0:42:02and all that basic thinking isn't about maths, it's about,
0:42:02 > 0:42:04you know, it's almost philosophy.
0:42:04 > 0:42:07It's easy to underestimate our young people.
0:42:07 > 0:42:10In my experience, they're determined and diligent.
0:42:10 > 0:42:13So why, when we need to encourage them to study,
0:42:13 > 0:42:17has the Government so greatly increased
0:42:17 > 0:42:19the university fees they pay?
0:42:19 > 0:42:23When I talk to young people, which I do quite a lot, they all say,
0:42:23 > 0:42:27"why should I go to university now that it's become so much more expensive?"
0:42:27 > 0:42:30How would you persuade them to invest in themselves?
0:42:30 > 0:42:32I think they first need to understand
0:42:32 > 0:42:35that when they go to university, they don't pay out any money,
0:42:35 > 0:42:39there are no upfront fees. They pay later in life,
0:42:39 > 0:42:41if they have a high income, in relation to their income.
0:42:41 > 0:42:44It is, in effect, an additional tax on their income
0:42:44 > 0:42:48if they benefit from a university education. That's how it works.
0:42:48 > 0:42:51Intuitively, you must think that that's...
0:42:51 > 0:42:55If... Since we're having a crisis about debt,
0:42:55 > 0:42:58we're forcing students to take on debt.
0:42:58 > 0:43:02A lot of them will then go off and seek ways to immediately pay back the debt,
0:43:02 > 0:43:06by doing the, kind of, lucrative but not particularly socially useful things.
0:43:06 > 0:43:09That must be a quite likely risk.
0:43:10 > 0:43:12The City of London.
0:43:13 > 0:43:16For graduates with big debts to repay,
0:43:16 > 0:43:19or those who simply want to make a pile when they're young,
0:43:19 > 0:43:23banks, hedge funds, finance - they're a seductive career path.
0:43:23 > 0:43:26For years, many of our brightest graduates,
0:43:26 > 0:43:28especially scientists and mathematicians,
0:43:28 > 0:43:32have ended up in financial engineering rather than
0:43:32 > 0:43:34the nuts-and-bolts kind.
0:43:34 > 0:43:38The last 20 to 30 years, you've heard this enormous sucking noise
0:43:38 > 0:43:42where the City of London has basically sucked in an enormous amount of talent.
0:43:42 > 0:43:46And that's partly because if you come out of university with a decent science degree,
0:43:46 > 0:43:48you can earn a fortune in a hedge fund,
0:43:48 > 0:43:51- and rather less working for Rolls-Royce.- That's right.
0:43:51 > 0:43:55And if you look at other countries which have been highly successful
0:43:55 > 0:43:58at manufacturing and export, for example in Japan,
0:43:58 > 0:44:00you can be somebody who's got an engineering degree,
0:44:00 > 0:44:05and becomes the best designer of car door mirrors in the world,
0:44:05 > 0:44:08and be revered for that. Whereas here, you'd be regarded
0:44:08 > 0:44:11as a schmuck because you didn't go into the City or a hedge fund.
0:44:11 > 0:44:14I wish they wouldn't keep pinching scientists and engineers
0:44:14 > 0:44:18who'd be much happier in industry, making real things.
0:44:18 > 0:44:21It's partly, also, thinking at an individual level
0:44:21 > 0:44:25about people investing their careers in things like engineering,
0:44:25 > 0:44:29which, of course, don't produce the kind of short-term return to your education
0:44:29 > 0:44:32that you'd get if you went into a City bank, for example,
0:44:32 > 0:44:35but represent long-term careers for young people.
0:44:36 > 0:44:40A bulging financial sector doesn't just suck in your best minds,
0:44:40 > 0:44:42it inflates the currency.
0:44:42 > 0:44:46And during the boom, a strong pound hurt manufacturers
0:44:46 > 0:44:50by making British products that were sold overseas very expensive.
0:44:50 > 0:44:53So does the City of London's international success
0:44:53 > 0:44:58hobble the other vital parts of the economy?
0:44:58 > 0:45:02This business, Tullett Prebon, in the heart of the City of London, is world class,
0:45:02 > 0:45:06one of the two biggest brokers of its kind in the world.
0:45:06 > 0:45:11On this floor alone, some 400 billion of transactions
0:45:11 > 0:45:14is executed every single day.
0:45:14 > 0:45:18So the question that's posed by the success of the City of London is,
0:45:18 > 0:45:23has financial services become simply too big for the health of the British economy?
0:45:26 > 0:45:30Is it possible to reconstruct the British economy in a positive way
0:45:30 > 0:45:35- without shrinking the City?- Um... Probably not.
0:45:35 > 0:45:38I think the City, if you put it in perspective,
0:45:38 > 0:45:44if the City were the same size to the British economy that Wall Street is to the American economy,
0:45:44 > 0:45:49which is the other largest financial centre in the world, it would be about one sixth of the current size.
0:45:49 > 0:45:53And so I think it's pretty unlikely that you can get the remainder of the economy
0:45:53 > 0:45:57in any foreseeable timescale that we could rely on,
0:45:57 > 0:46:02to grow at such a rate that it rebalances the economy away from the City.
0:46:02 > 0:46:06The City is a major contributor to tax income,
0:46:06 > 0:46:09to government income in this country.
0:46:09 > 0:46:11It's a major source of the funding for schools,
0:46:11 > 0:46:13hospitals, for the Welfare State.
0:46:13 > 0:46:15So I think we should protect it and nurture it,
0:46:15 > 0:46:19we should make sure it's properly regulated and controlled.
0:46:19 > 0:46:23Most of our problems in the UK were centred on the banking sector,
0:46:23 > 0:46:25which, frankly, did grow
0:46:25 > 0:46:28disproportionately large for the UK economy,
0:46:28 > 0:46:32balance sheets four times our GDP, one of the largest in the world,
0:46:32 > 0:46:35- and that was a problem. - So to be clear, your view would be,
0:46:35 > 0:46:38banks became too big, but the City didn't become too big.
0:46:38 > 0:46:40I think that's a fair summary.
0:46:42 > 0:46:45Yes, it's those banks again.
0:46:45 > 0:46:48Vital to any economy, and massive in Britain,
0:46:48 > 0:46:50in the boom years they became bloated
0:46:50 > 0:46:53by all that reckless lending.
0:46:53 > 0:46:56If we hadn't rescued our big banks after the 2008 crash,
0:46:56 > 0:46:58the economy would have been paralysed,
0:46:58 > 0:47:02and the consequential losses would have bankrupted us.
0:47:02 > 0:47:04Never again.
0:47:05 > 0:47:07I think the banks really acted
0:47:07 > 0:47:10pretty disgracefully over a period of time.
0:47:10 > 0:47:14They are a powerful transmission mechanism for this to happen.
0:47:14 > 0:47:19And the banks themselves borrowed a lot in order to lend to people,
0:47:19 > 0:47:24so they were a very, very powerful mechanism for these unpleasant events to arise.
0:47:24 > 0:47:28Have you had to revisit in a personal sense
0:47:28 > 0:47:32how much good or bad you and your mates here do?
0:47:32 > 0:47:36Yes, Robert, I have. Not at this moment, because it's been
0:47:36 > 0:47:40striking me for quite some time before the crisis struck
0:47:40 > 0:47:43that there was increasingly limited utility
0:47:43 > 0:47:46or social usefulness to an awful lot of what went on.
0:47:46 > 0:47:48And, yeah, it's reasonably convincing now
0:47:48 > 0:47:51that some significant portion of the activity
0:47:51 > 0:47:57is, at the very best, not contributing to social good, society,
0:47:57 > 0:48:01wealth in the real sense of the word, not just additional cash, but...
0:48:01 > 0:48:05And, in fact, at worst, it might be quite a lot worse than that.
0:48:05 > 0:48:09What banks do, in theory, should have enormous social utility.
0:48:09 > 0:48:14How do we get finance back to a place
0:48:14 > 0:48:18where it is plainly serving the public interest?
0:48:18 > 0:48:22Banking should be boring. Banking should be about taking deposits
0:48:22 > 0:48:24from people who've got excess cash,
0:48:24 > 0:48:27and lending it to people who want to borrow.
0:48:28 > 0:48:31Gosh, remember when banking was calm and dull?
0:48:31 > 0:48:35What's all this, then? Shakespeare's birthplace?
0:48:35 > 0:48:38No, this is a bank, too.
0:48:38 > 0:48:43Banks need to get back to their vital social and economic function
0:48:43 > 0:48:47of turning our savings into the loans that businesses need for investment,
0:48:47 > 0:48:51and that individuals need, to pay for a home, for example.
0:48:52 > 0:48:54Money.
0:48:54 > 0:48:58It keeps flowing round lie the circulation of the blood.
0:48:58 > 0:49:00And the banks keep it flowing.
0:49:00 > 0:49:02What's in it for the bankers themselves?
0:49:02 > 0:49:05Well, they might turn from pariahs
0:49:05 > 0:49:08into respected pillars of our communities again.
0:49:08 > 0:49:10Opening time.
0:49:10 > 0:49:13And here's the first customer, Mr Baker.
0:49:13 > 0:49:15The village butcher, oddly enough.
0:49:15 > 0:49:19- Morning, Jack.- Hello, Vera.- Lovely day.- Beautiful, ain't it? Beautiful.
0:49:22 > 0:49:25- Morning, son.- Been busy?
0:49:25 > 0:49:27You've got to pay in before you can draw out.
0:49:27 > 0:49:30- True.- Very true.
0:49:30 > 0:49:32I think it's essential for banks
0:49:32 > 0:49:36to get back to what they should be doing,
0:49:36 > 0:49:40providing credit, especially to small and medium-sized enterprises,
0:49:40 > 0:49:44for two reasons. If the lending function isn't restored,
0:49:44 > 0:49:47the strength of the economy won't be restored.
0:49:47 > 0:49:51And secondly, if these banks are too big to fail,
0:49:51 > 0:49:54if they continue to engage in this risky activity,
0:49:54 > 0:49:59knowing that they're too big to fail, knowing that the Government will bail them out,
0:49:59 > 0:50:03we're going to have another crisis of the kind that we've seen already.
0:50:10 > 0:50:12The banking system is being reformed,
0:50:12 > 0:50:15though some would say not radically enough.
0:50:15 > 0:50:17Such is the influence of the City,
0:50:17 > 0:50:20don't expect any of our leaders to demand
0:50:20 > 0:50:23that the financial sector should be shrunk.
0:50:23 > 0:50:25As for the notorious bonus culture,
0:50:25 > 0:50:30it's not quite as rapacious as it was, but it's still there.
0:50:33 > 0:50:36If we're going to rebuild our economy on firmer,
0:50:36 > 0:50:40sounder foundations, we're all going to have to make sacrifices.
0:50:40 > 0:50:42But are we really all in this together?
0:50:42 > 0:50:45Most people are enduring a really sharp squeeze
0:50:45 > 0:50:47in their living standards, but the bankers,
0:50:47 > 0:50:49who many blame for getting us into this mess,
0:50:49 > 0:50:52well, they're still expecting big bonuses
0:50:52 > 0:50:54and those who run our biggest companies,
0:50:54 > 0:50:58they're enjoying an increase in their rewards of around 50%,
0:50:58 > 0:51:01on top of the millions they already earn.
0:51:01 > 0:51:05Given the scale of the taxpayer bailout of banks
0:51:05 > 0:51:09and the role that banks played in causing this mess we're in,
0:51:09 > 0:51:12do you think it would have been sensible for big banks to,
0:51:12 > 0:51:16in general, declare quite a long moratorium on bonuses?
0:51:18 > 0:51:22I can understand the moral position on that,
0:51:22 > 0:51:25I think, completely.
0:51:25 > 0:51:28I can actually understand it to a large extent
0:51:28 > 0:51:32in relation to business drivers. If banks aren't performing well,
0:51:32 > 0:51:36then, why would you pay people still large amounts of money?
0:51:36 > 0:51:41The rock that it breaks on from my point of view is the pragmatic one
0:51:41 > 0:51:45which is we need to employ people in a dynamic and competitive market
0:51:45 > 0:51:49and we struggle to find ways that we can continue to employ people
0:51:49 > 0:51:53if we're not paying what the rest of the market is.
0:51:53 > 0:51:56It's a trap, frankly, that everybody's in
0:51:56 > 0:52:00because a lot of people would say what I say is that, objectively,
0:52:00 > 0:52:02a lot of this doesn't make much sense,
0:52:02 > 0:52:05but it is where the market takes it.
0:52:06 > 0:52:09As for the job market experienced by Vanessa,
0:52:09 > 0:52:11well, it couldn't be more different.
0:52:11 > 0:52:15These top executives don't even have an idea of what it's like
0:52:15 > 0:52:17for someone sort of average.
0:52:17 > 0:52:20I'm probably middle class, if you had to define it,
0:52:20 > 0:52:25but, you know, my parents can't afford to support me indefinitely
0:52:25 > 0:52:29and, you know, I don't want to be supported.
0:52:29 > 0:52:32I want to be able to be an independent adult
0:52:32 > 0:52:35and I don't think that these top executives
0:52:35 > 0:52:39have any idea what it's like to live on sort of £25,000 a year.
0:52:39 > 0:52:41The big question will be asked - why?
0:52:41 > 0:52:44Why is this happening? Is it fair that it's happening?
0:52:44 > 0:52:49Is it legitimate that, actually, I'm in these circumstances
0:52:49 > 0:52:53where the people who actually caused the crisis are, in many respects,
0:52:53 > 0:52:56living high on the hog or suffered nothing?
0:52:56 > 0:52:57That, I think, is going to be...
0:52:57 > 0:53:00There's going to be big political kickback on this.
0:53:02 > 0:53:05CROWD CHANT: We got sold out!
0:53:05 > 0:53:09What's your own view of the Occupy Wall Street
0:53:09 > 0:53:12and related popular campaigns around the world
0:53:12 > 0:53:16to criticise banks and the financial sector?
0:53:16 > 0:53:20I'm actually slightly surprised it's taken so long, really.
0:53:20 > 0:53:25The financial crisis and the failure of banks and so on
0:53:25 > 0:53:28has been going on for three years
0:53:28 > 0:53:31and most people think it's going to go on for a bit longer.
0:53:31 > 0:53:36No, I absolutely feel the sense of outrage about what happened in the banking sector.
0:53:36 > 0:53:39I think it is absolutely disgraceful that British banks,
0:53:39 > 0:53:43for the first time in 300 years of British banking,
0:53:43 > 0:53:45needed massive taxpayer bailouts.
0:53:47 > 0:53:51And with our economy so weak, this sense of injustice,
0:53:51 > 0:53:55that those who caused the mess haven't been properly punished,
0:53:55 > 0:53:57is growing.
0:53:57 > 0:54:00The boom years won't return any time soon.
0:54:00 > 0:54:02As we repay our public and private debts,
0:54:02 > 0:54:04there's less money available for spending
0:54:04 > 0:54:07and that makes it really hard for the economy to grow.
0:54:07 > 0:54:11But there's another huge threat looming over us
0:54:11 > 0:54:16which could snuff out even what little growth we manage to achieve.
0:54:18 > 0:54:24It's almost two years since Europe's debt crisis first erupted.
0:54:24 > 0:54:25What started out as worries
0:54:25 > 0:54:29over the Greek government's ability to repay its massive debts
0:54:29 > 0:54:34has spread like a virus throughout the eurozone.
0:54:34 > 0:54:37I was in Athens, talking to people and one of the Greeks said to me,
0:54:37 > 0:54:40"There's something very wrong with the world economy
0:54:40 > 0:54:42"if the collapse of a couple of Greek banks
0:54:42 > 0:54:45"could cause another global financial crisis".
0:54:45 > 0:54:47And maybe he's right.
0:54:47 > 0:54:50Maybe we are now so interconnected
0:54:50 > 0:54:53to a sense that it's really got dangerously out of control.
0:54:53 > 0:54:57The kind of Armageddon scenario is you have sort of disintegration.
0:54:57 > 0:55:01I think that's unlikely. The more likely negative scenario
0:55:01 > 0:55:04is that, you know, one or two countries peel off
0:55:04 > 0:55:06because they can't cope.
0:55:06 > 0:55:09You'll get the gradual fall in sort of confidence
0:55:09 > 0:55:12and endless attempts to kick the can down the road
0:55:12 > 0:55:16and not really succeeding - a very negative effect on growth.
0:55:16 > 0:55:20But I mean, I'm optimistic that the political leaders of Europe
0:55:20 > 0:55:25who, in the past, have always risen to the challenges we've had, I think they will again.
0:55:25 > 0:55:29The world is, once again, on the brink of financial disaster.
0:55:29 > 0:55:32This time, the most imminent danger is the break-up of the Euro.
0:55:32 > 0:55:34At their umpteenth emergency summit,
0:55:34 > 0:55:38eurozone leaders said the future of the euro was safe.
0:55:38 > 0:55:41But someone forgot to tell the financial markets.
0:55:52 > 0:55:56The eurozone crisis is weighing heavily on the world economy.
0:55:56 > 0:55:57Next year's crunch time.
0:55:57 > 0:56:00That's when the huge debts taken out by banks
0:56:00 > 0:56:03and governments in the boom years come up for repayment.
0:56:03 > 0:56:05Now, if any of them fail to pay what they owe,
0:56:05 > 0:56:08the ensuing losses could lead to a devastating banking crisis
0:56:08 > 0:56:12and even the possible break-up of the eurozone.
0:56:12 > 0:56:15That's why the Treasury and Bank of England
0:56:15 > 0:56:19are working on emergency procedures for a possible financial Armageddon.
0:56:19 > 0:56:21Will the eurozone survive?
0:56:21 > 0:56:24Er, no. Not as it's currently constituted.
0:56:24 > 0:56:27Greece will certainly default and leave the eurozone.
0:56:27 > 0:56:31I think one of the many, many problems with the eurozone is,
0:56:31 > 0:56:34to quote a great aphorism - he who defends everything defends nothing
0:56:34 > 0:56:38and it's possible that the German-French axis, that is really Germany,
0:56:38 > 0:56:41will spend so much of themselves defending the indefensible
0:56:41 > 0:56:44in keeping Greece in that they won't have the fire power
0:56:44 > 0:56:49to defend what they should be defending which is probably Italy.
0:56:53 > 0:56:55If the eurozone avoids collapse,
0:56:55 > 0:56:58the challenge faced by Britain is big but not insuperable.
0:56:58 > 0:57:01We're not insolvent like Greece.
0:57:01 > 0:57:04Nor are we like Italy with a government living in daily fear
0:57:04 > 0:57:06that no-one will lend to it.
0:57:06 > 0:57:10We're still a very rich country, whose people's incomes
0:57:10 > 0:57:14are still almost ten times those of most Chinese.
0:57:17 > 0:57:19The most likely scenario is that we'll end up
0:57:19 > 0:57:24with many years of low growth, a bit like what happened in Japan.
0:57:25 > 0:57:29Who knows what the average rate of growth will be over the next decade,
0:57:29 > 0:57:32but, you know, it might be nearer to one per cent.
0:57:32 > 0:57:37- Is that really such a disaster? - One per cent isn't so bad.
0:57:37 > 0:57:40It means we're still... It means we're still growing.
0:57:40 > 0:57:46People point sometimes to the Japanese experience in the 1990s
0:57:46 > 0:57:49as having been shocking how terrible it was
0:57:49 > 0:57:53that growth in Japan flatlined for,
0:57:53 > 0:57:55you know, the better part of a decade.
0:57:55 > 0:57:58But if you look at the Japanese population,
0:57:58 > 0:58:02they weren't unhappy with their lot. They were perfectly content.
0:58:02 > 0:58:05What we didn't have was a huge boom
0:58:05 > 0:58:09but nor did we have...were we going through a huge bust.
0:58:13 > 0:58:18The best we can hope for may be many years of one per cent growth,
0:58:18 > 0:58:20versus the three per cent a year we enjoyed
0:58:20 > 0:58:23during the 16 years before the crash.
0:58:23 > 0:58:25Living within our means, paying our way in the world
0:58:25 > 0:58:30will force us to relearn the virtues of deferring gratification.
0:58:30 > 0:58:34Politics will no longer be about sharing out an ever-growing cake,
0:58:34 > 0:58:39but will be about allocating scarce resources to the public services
0:58:39 > 0:58:43that really matter to us. The presumption of the boom years -
0:58:43 > 0:58:46that we could have it all, well, that's gone.
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