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Mr. Tim Smith (Beaconsfield) : Last week the right hon. and learned Gentleman told us that he supported an industrial strategy. Will he be a little more specific? We are all concerned about the prospects. Is the right hon. and learned Gentleman talking about tax incentives or greater public spending? What policies does he have in mind?

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Mr. John Smith : I do not know whether the hon. Gentleman was present during our debate last Tuesday--he probably was--but I am prepared to accept his assurance that he is concerned about manufacturing industry. The Opposition have many more Conservative Members to work on.

Let me spell out, as I did last Tuesday, the three crucial elements of that industrial strategy--first, the repairing of the ravages of the neglect of education and training by a massive education and training programme ; secondly, a policy to introduce new technology by Government support for research and development ; thirdly, a strong regional policy to tackle the continuing decline of the under-used regions of this country. Once again, one may be told-- Several Hon. Members rose --

Mr. Smith : Conservative Members should allow me to speak. Given what happened earlier, I have been reasonably generous in giving way at all to some Conservative Members.

As the hon. Member for Beaconsfield (Mr. Smith) will come to realise, perhaps before his colleagues on the Government Front Bench do, that is the essential precondition of any successful economic policy for this country. The Opposition have also urged the abandonment of the one-club golfing of exclusive reliance on interest rates and recommended the limitation of bank lending as a superior alternative to the control of demand, as long as that is necesary. In addition, the new Chancellor should take the opportunity today to rule out tax cuts in the next Budget. He should use the Autumn Statement, again as the Opposition recommended only last Tuesday, to initiate regionally targeted public investment to strengthen education and training, and research and development, and to stimulate regional economies.

That is not only an alternative policy--it is the alternative policy which Britain desperately needs. It is a policy which will secure our prosperity not just for the year or two to come but throughout the 1990s. Let us never forget that the crucial folly of the former Chancellor's policy was to lecture the Federal Republic of West Germany that its economic miracle was over and that ours had just begun.

When we look at the massive trade deficit and how it has gone throughout the whole of this decade, despite North sea oil revenues, which the Conservative party had and which they frittered away, we see an adequate commentary on the effectiveness of the Government's policy. Let it not be forgotten that other countries of the EC, which, in the Prime Minister's warped view of our continent, are so badly trailing behind, have superior economies and are much better fashioned societies than ours.

The purposes of economic policy are to be centred on four objectives-- steady and balanced economic growth, control of inflation, the attainment of full employment, and reasonable equilibrium in our balance of payments. The last objective--the balance of payments--has been downgraded as we have seen a decade go by in which our North sea oil wealth has been frittered away and our economy and society made the laboratory for Thatcherite

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experiments in free market economics, social unfairness and the retreat of Government from their proper responsibilities. Because of the conduct and content of Government policies, I fear that our economy has been gravely weakened and the social cohesion of our society put at risk. This country desperately needs a change in the style of Government and in the economic policies that have been pursued--a change in both the conduct and content of Government. But we are told that it is business as usual. The country received that statement as a threat, not as a promise. In an interview in the Daily Express, the Prime Minister told us that her convictions had to be seen

"in every piece of policy."

That must have sent a shudder through every independent-minded Minister--if there are any left in this Administration. The Prime Minister's convictions "in every piece of policy" tells us more about how the Government are run in this country than almost anything else. If it is business as usual, we will continue with a debilitating balance of payments deficit, and the highest interest rates and the highest inflation rate of leading industrial countries. I fear that, both economically and socially, we will continue to lag behind the rest of Europe.

This confused and divided Government cannot provide the leadership which Britain needs for the 1990s. They cannot do so, because they cannot change while the Prime Minister remains at their head. As the Financial Times editorial observed on Saturday

"As she has become pre-eminent her Government has become much more vulnerable."

What concerns the Opposition is not so much the vulnerability of Government as the vulnerability of our country. What Britain needs is not a new Chancellor but a new Government--a Labour Government. 4.55 pm

The Chancellor of the Exchequer (Mr. John Major) : I beg to move, to leave out from "House" to the end of the Question and to add instead thereof :

congratulates Her Majesty's Government on the determination with which it has pursued policies to bear down on inflation and improve the supply side of the economy ; welcomes the sustained growth of output, productivity, investment, employment and living standards which the United Kingdom has enjoyed as a result ; and endorses the Government's resolve to continue with the policies which are in the long-term interest of the British economy.'.

At the outset I wish to say how much I regret the resignation of my right hon. Friend the Member for Blaby (Mr. Lawson). I had the pleasure of serving with him in the Treasury for three years--for one year as Treasury Whip, and for two years as Chief Secretary. I enjoyed that experience enormously. I supported his policies and those of the Government when I was Chief Secretary. I believed that they brought increased prosperity to the country then, and I have not changed my view since then. Whatever the controversies of the day may be or may bring, I believe that history will record that few Chancellors brought about so many fundamental improvements to the economy of this country. Only the grudging and mean-spirited will deny that. My right hon. Friend was a great reforming Chancellor and will be remembered as such.

The right hon. and learned Member for Monklands, East (Mr. Smith) made his usual forceful speech--both forceful and his usual speech. It was good music hall. He

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has become the Jasper Carrot of parliamentary debate. For all the humour, however, it was an empty speech. It was empty of policy, it made no serious attempt to diagnose the problem, and it provided no solutions whatsoever. On the one single issue on which he was questioned by my hon. Friend the Member for Northampton, North (Mr. Marlow) it was not until some minutes had passed and someone had whispered to him that he actually provided the answer.

There is no difficulty at all about a diagnosis of the economic problem that we face at present. As a result of over two years of exceptional growth on a scale which no one expected, least of all the Opposition, we have seen the re-emergence of inflationary pressures. They are evident both in rising domestic prices and in the growth of imports.

Let me be quite clear about the main priority before us. It is progressively to reduce inflation and bring the economy back to the path of steady growth. There is no doubt about that. I know that inflation is not high by the standards of the 1970s, and it is still as low today as in the best month we ever saw during the period of the last Labour Government. I know, too, that some people argue that a little inflation is no bad thing, that one can live with it, that it induces a feeling of well-being and does no harm. Emphatically I do not share that view.

I do not share that view because inflation has two particularly destructive effects. First, it damages the economy--it brings uncertainty, it discourages investment, it breeds suspicion and conflict in industrial relations, and it puts a premium on playing safe at all levels of management. It is no coincidence that the past eight years, which have seen the longest period of sustained growth--strong and steady growth--since the war, has also been the period in which inflation has been reduced.

Ms. Clare Short (Birmingham, Ladywood) : Given that inflation is destructive in all the ways that the right hon. Gentleman has described, why have the Government allowed it to rise?

Mr. Major : The hon. Lady would have done far better to address that problem to her right hon. and learned Friend the Member for Monklands, East. She should also be aware that, if we were to see the implementation of the policies that her right hon. and learned Friend has in mind, inflation would be back in the stratosphere. I shall turn to that particular question in a moment.

Mr. Tony Banks (Newham, North-West) rose --

Mr. Major : But the social effect of inflation is even more pernicious, as we saw during the period of office of the last Labour Government. It bears most heavily on those least able to protect themselves. In the last five years of the 1970s, with high inflation and low interest rates, pensioners saw the value of their life's savings halved and their retirement security diminished. Indeed, many pensioners today may be on social security benefits, not because they failed to save and prepare for a secure retirement--often they did so at some hardship and sacrifice-- but because the Labour Government lost control of inflation and destroyed their security. That happened because the Labour Government had neither

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the courage nor the foresight--or both--to pursue the necessary but occasionally unpopular policies to curb inflation.

The Opposition have learnt nothing since then--as the hon. Member for Birmingham, Ladywood (Ms. Short) should know. Their present policy is clear. They would reduce interest rates prematurely and relax monetary policy. They would increase spending massively, and undermine fiscal policy.

Mr. Tony Banks rose --

Mr. Stuart Bell (Middlesbrough) rose --

Mr. Major rose --

Hon. Members :-- Give way.

Mr. Speaker : Order.

Mr. Major : Labour would devalue the currency as each and every previous Labour Government have done-- [Interruption.]

Mr. Speaker : Order. I must say to the House again--as I had to say to Conservative Members earlier--that if the hon. Member who has the Floor does not give way, hon. Members must resume their seats. It only wastes time to shout, "Give way, give way."

Mr. Major : I understand that the Opposition do not like being reminded about how their policies destroyed people's security, but they deserve to be reminded because they are peddling the same policies again. The policies that they operate would not stop inflation. They would unleash hyper-inflation, with all the economic and social consequences that we saw before.

There is no conviction whatsoever in the Opposition's concern about inflation. Their conviction is against the very policies that would curb inflation and bring it down. That is their concern.

We need to be quite clear about the need to bring inflation down and I have no doubt whatsoever that we are right to use all the practical levers at our disposal to do so.

Mr. Bell : I should like the Chancellor to concentrate for a moment on the Government's present policies. The OECD review stated that the Government have been raising interest rates to bear down on inflation and to stabilise the exchange rate. Is that still the policy of Her Majesty's Government?

Mr. Major : If the hon. Gentleman will wait a moment I shall turn specifically to that point. Indeed, I have already begun to do so. In my judgment, we are absolutely right to use all the practical levers at our disposal to bear down on inflation. One of these--an important one, of course--is fiscal policy. One of the great achievements of my right hon. Friend the Member for Blaby has been the transformation of the Government's financial position. Public expenditure-- [Interruption.] Opposition Members racked up debts day after day when they were in Government--we have repaid the debt that they racked up. Public expenditure remains under firm control, and we are now repaying Government debt--the debt that the Labour Government built up--on a massive scale. By the end of this financial year we shall have repaid roughly one sixth of the public debt accumulated over two centuries, at an annual saving of £3 billion in debt interest costs.

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No one should doubt that my right hon. Friend the Member for Blaby had a tight fiscal policy, and no one should doubt that I intend to keep it equally tight.

The key lever on inflation is monetary policy--the use of interest rates. I understand very clearly that high interest rates are often unwelcome and often painful, but they are effective and they are having their intended effect now. Spending is slowing down, with retail sales in particular falling over the past three months ; so are house prices, which rose much too fast over the past two years ; and so is monetary growth, which is now moving close to its target range.

I understand very well that present levels of interest rates make things very difficult for some home owners, particularly young people who have large mortgages in relation to their incomes, but there are others who should also concern us. We also have to be concerned about those young people who could not afford to buy in the first place, because of the pace of rising prices-- [Interruption.] If only for their sakes, there had to be a correction to rising house prices to prevent them being priced right out of the market. That correction is now happening-- [Interruption.] It is clear that Opposition Members hate the thought of home ownership and the independence that it brings. The harsh truth is that too many people have been borrowing too much and saving too little, and high interest rates provide a direct incentive to redress that balance.

Interest rates have other important effects, however--not least on the exchange rate. A falling exchange rate directly raises the prices of things that we buy from abroad and reduces the discipline on British industry. That can only feed inflation. A firm exchange rate helps underpin the policy to stop inflation, and for these reasons it should be clear that I favour a firm exchange rate.

Mr. Eric S. Heffer (Liverpool, Walton) : The right hon. Gentleman talks about the housing problem. Is he aware that the Government have been responsible for cutting council housing? They have encouraged the idea that people should buy their own homes and now they have implemented a policy of high mortgage rates, which means that the very people whom they encouraged to buy are suffering under their policies. How can the right hon. Gentleman explain why the Government should be so cruel to the people whom they encouraged to buy homes and why they are also leaving people without any houses at all?

Mr. Major : The hon. Gentleman should bear in mind that under this Government this country has seen its greatest ever growth in home ownership -- [Interruption.]-- and that will continue.

Not surprisingly, exchange markets were unsettled last Thursday, but less so than many imagined and far less than the Leader of the Opposition predicted. On Friday he said, "today when the pound plummets"-- [Hon. Members :-- "Disgraceful!"] But it did not plummet. And I hope that in future the right hon. Gentleman will keep his market predictions to himself and not seek to talk sterling down. Markets can see for themselves that policy has not been changed and will not be changed.

Mr. John Smith : If the right hon. Gentleman believes that markets sustain the Government's policy, is he aware that a year ago today the pound was valued at DM 3.15, but today it is valued at DM 2.90? Is he also aware that

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interest rates were then 13 per cent., but today they are 15 per cent.? What kind of market verdict is that on the Government's economic policy?

Mr. Major : Two years ago, markets were at almost precisely the same level as they are today, a point that the right hon. and learned Gentleman has overlooked. Markets can see that policy has not been changed and will not be changed, and no change in policy means just this. It means that I will set interest rates as high as is needed for as long as is needed to bring down inflation, and in this I will continue to be guided by a range of monetary indicators, including the exchange rate.

I will deal comprehensively with the Government's approach to economic and monetary union and the Delors report in the debate on Thursday, but I shall say something now about the exchange rate mechanism of the European monetary system.

Mr. Jack Straw (Blackburn) : Has she seen this speech?

Mr. Major : As a matter of fact, my right hon. Friend has not seen the speech.

Hon. Members :-- Oh.

Mr. Speaker : Order.

Mr. Major : I am sorry to disappoint the Opposition on that point. The exchange rate mechanism, as its name implies, is no more than a contrivance, a means for promoting a greater stability of exchange rate between Community currencies and greater price stability. However, it is not a recipe for problem-free economic management, and it should not be seen as such. We should recognise that it does not change the economic fundamentals. It does not reduce the pain of bringing down inflation. It does not mean that a country does not need reserves and can forgo intervention in the exchange market--far from it. It does not, and cannot, absolve a country from an adequately tight monetary policy. It does not insulate a country from high interest rates. Anyone who believes that early British membership would bring interest rates in the United Kingdom tumbling down would be sadly disappointed. Indeed, the very essence of the exchange rate mechanism is a strong commitment to set interest rates at whatever level is needed to keep the exchange rate within its bands.

Although it is no panacea, experience in recent years suggests that the exchange rate mechanism has helped participants both to bring about greater stability in exchange rates and to reduce inflation. I am in no doubt that in the right circumstances it would help us, too. But the circumstances have to be right if it is to be in our interest to join. The exchange rate mechanism will face new tests as exchange controls are abolished throughout the Community, and as the single financial market develops. In these circumstances, it would be very risky both for the United Kingdom and the present participants to introduce sterling--a currency which is traded much more widely than any other in Europe with the single exception of the deutschmark--when there is such a large differential between our inflation and interest rates and those in Germany.

Following the Madrid summit, the Government reaffirmed their commitment to join the ERM and specified precisely the conditions under which we will do so. The question is not whether we should join, but when. I repeat the conditions now for the avoidance of doubt.

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We will join the exchange rate mechanism when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community, and real progress has been made towards completion of the single market, freedom of financial services and strengthened competition policy. That was the position that was set out at the Madrid summit and it remains the position today. There should be no doubt : when these conditions are met we will join--clearly and in good faith. Were it not a question of good faith, my right hon. Friend the Prime Minister would not have set out the conditions so clearly some time ago.

Mr. A. J. Beith (Berwick-upon-Tweed) : How long does the right hon. Gentleman think will be a reasonable period of time within which to assess whether these things have come to pass?

Mr. Major : As the hon. Gentleman will have understood from what I have just said, that is not wholly within our hands, for much of the action needs to be taken by other people, rather than us, so how speedily that will be done is in other people's hands as well as ours.

Without those conditions being met, entry into the exchange rate mechanism would be neither in our interest nor in that of Europe. With them, membership of the exchange rate mechanism will bring benefits to this country as it has, in my judgment, to its present members. That is a further reason why economic policy must be addressed to bringing inflation down--both for wider economic reasons and as the necessary preliminary for entry into the exchange rate mechanism. We have set out our conditions for entry clearly. We are not hiding behind "certain prudent conditions", as the Opposition sought to do.

Bringing inflation down is an important task, but it will be neither easy nor speedy. Inevitably, anti-inflation policy is bound to slow the economy down for a time. Therefore, I do not expect to see domestic demand growing anything like as fast next year as it has in recent years. Nor would I expect anything more than a fairly modest rate of output growth. With spending slowing down, businesses will have to take a hard look at ways to keep down their costs, including wages. If they do not succeed in that, the harsh truth is that jobs may be lost, needlessly. I hope that management and unions will ensure that that does not happen, and that Opposition Members will reinforce that message.

In recent months, much has been made of the rapid growth of our trade deficit, not least by the right hon. and learned Member for Monklands, East. It has grown.

Mr. Robert Sheldon (Ashton-under-Lyne) : Does what the right hon. Gentleman is saying confirm that he does not believe that the exchange rate mechanism is a half-baked scheme?

Mr. Major : The right hon. Gentleman may reflect on what I have just said. I have said that when the conditions are right we shall enter into the scheme. That is self-evident.

In recent months, the right hon. and learned Member for Monklands, East has made much of the rapid growth of our trade deficit. It has grown, and by far more than is

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comfortable. It cannot continue at present levels and it will not, as we have always said. In due course, it will come down as demand growth slows.

But the Opposition paint far too black a picture of the trade deficit. What they have never been prepared to admit is that much of it reflects investment and not consumption. Over the past two years, investment has grown by 23 per cent.--the fastest two years of investment growth on record --and over the whole life of this Government investment has grown far faster than consumption. This investment does suck in imports--often capital equipment--and it may widen the trade gap in the short term. That effect is clearly unwelcome. What must be understood is that in the medium term, to the extent that these capital imports build up extra productive capacity, that will play a part in reducing future deficits. Much of today's problem is a preliminary to better performance tomorrow, and exports have been performing better and now stand at an all-time record level.

I suppose that it was a little optimistic to expect the right hon. and learned Member for Monklands, East to acknowledge the facts on investment. Business investment is a higher proportion of gross domestic product than ever before, but as far as the Opposition are concerned, that does not count. Why not?

In their view, it does not count because investment is not investment unless it is paid for by the taxpayer, because training is not training unless it is publicly financed by the taxpayer, and because the supply side of the economy cannot possibly be right unless it is managed from the centre. It would be a tragedy for industry if that form of thinking ever returned to the government of this country.

Over the last decade, under our economic policies, the underlying strength of the economy has improved and British industry is in fundamentally good shape. Our approach is working. In the past two years profitability has been higher than at any time since the 1960s. There is a record rate of new business start-ups--more than 1,600 per week so far this year, by far a new record. Productivity in manufacturing has grown faster in the 1980s in the United Kingdom than in all the other major industrialised countries. And that is after two decades in which we were bottom of the league, much of the time governed by a Labour Government. Moreover, employment has risen faster over the past five years than at any time since the war and by more in this country than in any other European country.

Mr. Graham Allen (Nottingham, North) : As the new Chancellor of the Exchequer has put forward such a convincing view of how rosy the economy is, will he tell the House why in such circumstances his predecessor resigned?

Mr. Major : I should have thought that the hon. Gentleman could do a good deal better than that. I suspect that my right hon. Friend the Member for Blaby (Mr. Lawson) will be able to speak for himself on that matter.

None of those improvements is accidental. Each and every one of them is a direct result of the policies that we have pursued over recent years. It may be that we shall face a difficult year ahead, but if that is to be so, industry is far better motivated and equipped to handle it than at any time in the 1970s.

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Only the Opposition refuse to recognise the changes that have occurred in the past 10 years. Their persistent denigration of the economy bears no relation to reality. Business men, both here and abroad, are well aware of the improvements that have taken place. They know that this country's economy is strong. That is why they are investing in this country at record levels. Work forces know this too. That is why workers, more involved than ever before in the success of their companies, have increased their productivity faster than in any other major industrial nation--and we have more people in work than at any time before in our history.

I believe that people recognise that we must deal with the short-term difficulties before us, and they expect us to do so. They know that our economic prospects have been improved out of all recognition in the past decade, and they expect us to build on that. The fact that the right hon. and learned Member for Monklands, East does not recognise it is a sign of how out of touch he is now and will be shown to be at the next general election. I have no doubt that the policies that we have been following are the right ones and I propose to continue them. I see no need for radical changes in policy.

We must never go back to the policies which nearly destroyed our economy in the 1970s and led to the inflation rate of a banana republic under the Labour Government. The Labour party is well aware of that. That is why it has invented Mr. Mandelson and his public relations gloss and disinvented Socialism. Socialism is rarely mentioned from the Opposition Front Bench except to deny that it exists. The Labour party knows what poison it is for most of the people in this country. Occasionally, even-- [Interruption.]

Mr. David Shaw (Dover) : Listen, Kinnock!

Mr. Major : If the Leader of the Opposition is back with us, I shall continue.

Occasionally, even BBC interveiwers ask what Labour would do. The Leader of the Opposition tells them with delicious frankness that he has not a clue. But the Labour party's policies, however it tries to hide them, seep out one by one. The Labour party is in favour of credit controls--just as everyone else is abandoning them. It would renationalise wherever it could. It would increase taxes on companies and individuals. It would abolish the trade union legislation. The Leader of the Opposition would reinvent sector working parties. A Labour Government would spend more-- [Interruption.]

Mr. Speaker : Order. I do not need to remind the House of the pressure that there is to participate in the debate. I ask the House to give the Chancellor of the Exchequer a fair hearing for the rest of his speech.

Mr. Major : The right hon. and learned Member for Monklands, East said a few minutes ago that he wished television were here in the Chamber. I wish that the public could see the behaviour of Opposition Members. They cannot bear the fact that over the past few years the levels of prosperity in this country have risen by an unprecedented amount and the people are well aware that that is the case. They know very well that the policies of the Opposition would take us back precisely to where we were in the 1960s. A Labour Government would spend more, borrow more and, yet again, they would devalue, as each and every successive Labour Government have done. The

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policies that they espouse are the failed policies of the 1960s. The electorate rejected them before and it will do so again. I invite my right hon. and hon. Friends to reject the motion and to support the amendment.

5.26 pm

Mr. Nigel Lawson (Blaby) : I am old-fashioned enough to believe that my first comment on recent events should be made to this House. This is not an easy speech for me to make, and I am sure that the House will understand that. I shall do my best to be brief, and I hope that the House will assist me in this.

I am most grateful for what my right hon. Friend the new Chancellor of the Exchequer has said about me, and I wish to take this further opportunity to wish him every success in the task that lies ahead of him. As he reminded the House, we worked closely together for just over two years, and he has my full and unstinting support. As for my own record, I have no doubt that I have made my share of mistakes ; but I am content to be judged when the passage of time has provided a greater sense of perspective than is possible today. No one, however long he has held the post, lightly gives up the great office of Chancellor of the Exchequer. Certainly I did not. As as the resignation letter that I wrote to my right hon. Friend the Prime Minister clearly implies, it was not the outcome I sought. But it is one that I accept without rancour--despite what might be described as the hard landing involved. I would only add that the article written by my right hon. Friend's former economic adviser was of significance only inasmuch as it represented the tip of a singularly ill-concealed iceberg, with all the destructive potential that icebergs possess.

I have long been convinced that the only successful basis for the conduct of economic policy is to seek the greatest practicable degree of market freedom within an over-arching framework of financial discipline to bear down on inflation. That being so, a key question is where the exchange rate fits in. Is it to be part of the maximum practicable market freedom, or is it to be part--indeed, a central part--of the necessary financial discipline?

I recognise that a case can be made for either approach. No case can be made for seeming confusion or for apparent vacillation between these two positions. Morever, for our system of Cabinet government to work effectively, the Prime Minister of the day must appoint Ministers whom he or she trusts and then leave them to carry out the policy. When differences of view emerge, as they are bound to do from time to time, they should be resolved privately and, whenever appropriate, collectively.

But to return to the exchange rate. Faced with the question that I posed a moment ago, my answer is, unhesitatingly, that it should be seen as an essential element of financial discipline, with the rider, incidentally, that exchange rate stability is itself an economic benefit.

There is nothing novel, of course, in any of this. The House will recall the classical period of the gold standard before the first world war, the Bretton Woods system after the second world war, and, of course, over the past 10 years, within the European context, the EMS.

None of these systems were or are panaceas or soft options. Tough decisions still have to be made. None of them were or are without difficulties. But those difficulties, in my judgment, are very much less than the practical diffculties and disadvantages which the world has

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experienced during periods of freely floating exchange rates. Nor, incidentally, can there be any doubt that the less credible the exchange rate discipline is, the greater the weight that interest rates will have to bear, and the higher they need to be to maintain the necessary anti-inflationary pressure.

Full United Kingdom membership of the EMS--I was glad to hear much of what my right hon. Friend the Chancellor said--to which, again, as my right hon. Friend the Prime Minister made clear at Madrid, this Government are committed, would signally enhance the credibility of our anti-inflationary resolve in general and the role of the exchange rate discipline in particular, and thus underpin the medium-term financial strategy. Indeed, given the existence of the EMS, our continuing non-participation in the exchange rate mechanism cannot fail to cast practical doubt on that resolve, however ill-founded such doubt may be.

There is, I believe, one other way in which anti-inflationary credibility might be enhanced in the eyes of the market and that is why, a year ago, I proposed to my right hon. Friend the Prime Minister a fully worked-out scheme for the independence of the Bank of England. But that would be a buttress ; it would not be a substitute for what I was saying earlier.

But if full United Kingdom membership of the EMS, although not indispensable, would facilitate the conduct of economic policy in general and the battle against inflation in particular, as those already participating have demonstrated, there is also a vital political dimension.

As my right hon. Friend the Prime Minister made clear in her Bruges speech, Britain's destiny lies in Europe as a member of the European Community--and let me be clear that I am speaking, as she speaks, of a Europe of nation states. Within that context, it is vital that we maximise Britain's influence in the Community so as to ensure that it becomes the liberal free -market Europe in which we on the Conservative Benches so firmly believe. I have little doubt that we will not be able to exert that influence effectively, and successfully provide the leadership, as long as we remain largely outside the EMS. So, for economic and political reasons alike, it is important that we seek the earliest practicable time to join, rather than the latest for which a colourable case can be made.

Finally, a word about the short-term prospects for the British economy. There always has been, and there always will be, an economic cycle. During our period of office so far, we experienced a sharp downturn between 1979 and 1981, followed by a remarkably vigorous and prolonged upswing which lasted from 1981 right through to 1988. We are now once again on the downswing, and I see no need for a further policy tightening. While this downswing will not be as sharp as the previous downturn, not least given the very much lower level of inflation that we now have, a dull 1989 is bound to be followed by a difficult 1990.

But from then on, I have every confidence that, with the policies that the Government have been pursuing and will continue to pursue, as we heard from the Chancellor today, the long-term upswing will continue, based on lower inflation and on the unprecedented underlying strength that the British economy now possesses. I have every confidence, too, that this will lead at the end of the day to a fourth election victory under the

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