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Column 489Copies of this have been placed in the Library of the House and put in the Vote Office. Following the ecofin discussion it will again be discussed in December at the European Council. So this debate is a timely opportunity for the House to express its views as we prepare for those important discussions.
As I said a moment ago, there is no agreed definition of what actually constitutes economic and monetary union, but there is a large measure of agreement among all member states about what we want to achieve. We seek price stability, and currency stability. We want to achieve a single market, with free movement of people, services, and goods, free movement of capital, and equal access to capital and financial services for all citizens and businesses in the Community. We want those things for practical reasons : because they will make our businesses and industries stronger and more flexible as they compete in world markets ; because they will enable our economies to grow ; and because they will bring higher living standards, and greater choice.
There is no real controversy about these objectives either in the Community or in the House. The disagreement lies elsewhere. It is about the means by which we move towards them.
There is a fundamental question that determines the positions in this debate. It is this : do we want to start moving towards a federal Europe, with all that implies, or do we instead concentrate on developing a yet closer partnership, of individual nation states, and achieve in that way the objectives upon which we are all agreed? It will be no surprise to the House that this Government favour the latter approach. It harnesses the strength of our national traditions and political structures. It builds on the policies--the liberal, free market policies--that we have followed both here and in Europe, and which have brought success ; and it respects both parliamentary accountability and the diversity of member states. In essence, it takes the sting and controversy out of moving to our shared aims. It is this approach that we have adopted to the debate on EMU, and the Delors report.
Mr. Tony Benn (Chesterfield) : The Chancellor referred to parliamentary accountability. Will he confirm that in practice, when he or other Ministers go to the Council of Ministers or when such an agreement is reached, it is made under the royal prerogative of treaty making and is not subject to previous or subsequent enactments by the House of Commons? Therefore, to speak of parliamentary accountability in that context is to mislead those who are listening intently to this debate.
Mr. Major : There is certainly no intention to mislead. In essence, we are talking about significant changes which are proposed in the Delors report and which would have far wider significance than most of the previous ones. It is that issue, and the extent to which the House retains its control over monetary and economic matters, that concerns me and to which I shall turn in detail later.
We have already agreed to implement stage I of the Delors prescription. The elements of this are familiar to the House. They include establishing a genuinely single market in goods, services, and capital ; the strengthening of competition policy ; and the development of co-ordination of member states' economic and monetary policies. The
Column 490Commission's proposals for revised co- ordination arrangements are among the documents listed for our debate today.
Stage 1 of course, also requires all Community currencies to join the exchange rate mechanism of the European monetary system on the same terms. This we shall do, as I told the House on Tuesday, when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community, and when real progress has been made towards completion of the single market, freedom of financial services and strengthened competition policy. Our position on stage 1 is clear and constructive, and we are committed to it, but we part company with the Delors recipe on the next steps. Let us be clear at the outset what the report proposes : permanently fixed exchange rates ; a single Community currency ; binding central rules on national budgetary policies ; and a European system of central banks, with sole responsibility for formulating and implementing Community monetary and exchange rate policy. The Government--and, I suspect, the overwhelming majority of this House--have very great difficulty with these proposals.
We do not believe that Community rules on the use of national budget deficits are either necessary or desirable. They are unnecessary because monetary unions can and do tolerate diversity of budgetary positions. That is true in nearly all existing federal states. It is markets which impose a discipline and prevent deficits from getting too far out of line. On the desirability of binding rules, I can do no better than quote the conclusion of the Select Committee on the Treasury and Civil Service, chaired by my right hon. Friend the Member for Worthing (Mr. Higgins) :
"The power of the House of Commons over the centuries has depended fundamentally on the control of money, both taxation and expenditure. This would be jeopardised by the form of monetary union proposed by the Delors Report which would involve central undemocratic direction from within Europe of domestic budgetary policies."
I agree unreservedly with that judgment by the Select Committee, and I hope that our partners in Europe recognise the seriousness of this issue to us. It is fundamental to our parliamentary constitution and practice, and is not a matter which can be bargained away or cast aside.
The Delors proposals for increased regional and structural aid also seem to us to be misconceived. There must, of course, be greater opportunities for the living standards of the less prosperous regions to rise. No one denies that. Indeed, the Community's structural funds are already being doubled in the five years between 1988 and 1993 for precisely that reason. But there is no reason whatever to believe that a route to economic and monetary union that relies primarily on the operation of the market--rather than primarily on Government intervention--would harm the less prosperous areas. I believe the reverse to be the case.
Thirdly, the Delors report's proposals on monetary union are unacceptable, for monetary policy is at the very heart of macroeconomic policy and the proposals in the report make no provision for accountability for monetary policy to national Governments or national Parliaments. Yet the electorate would still hold Governments and national authorities responsible for their economic well-being, and rightly so.
Moreover, there would be no effective means of bringing the central banking system to account for any
Column 491failings--and there can be no guarantees that it would pursue successful anti-inflationary policies, whatever the treaty might require. Indeed, by eliminating competition between monetary policies, it seems likely that the proposals would lead to harmonisation not on the best inflation performance but on the average.
Mr. A. J. Beith (Berwick-upon-Tweed) : The Chancellor is inviting the House and the country to accept an alternative proposal set out in this document, which is an invitation to a race that the Bundesbank would be almost certain to win--to an independent central bank of the sort favoured by his predecessor.
In short, the Government's fundamental objection to the Delors approach beyond stage 1 is that its prescription for economic and monetary union centralises power. It relies on administrative fiat and institutional change. It skates over vital issues of political accountability. Changes in economic and monetary arrangements must reflect real changes in economic behaviour in the market place and they must work with the grain of the market and not against it. In our view, the Delors route is quite simply the wrong way for the future development of Europe. But there is a better way to meet our agreed objectives.
The better way is set out in the paper that I laid before the House earlier today. It proposes an alternative approach, an evolutionary approach, to economic and monetary union. It represents the contribution that we promised to the debate within the Community. We start from three principles : first, the overriding objective of price stability--that is clearly desirable ; secondly, increasing the influence of markets and competition, which builds directly on the single market proposals already accepted throughout the Community ; and thirdly, retaining national control over economic policy-making to the maximum extent possible, which fully reflects the principle of subsidiarity to which the Community rightly attaches such importance.
Recent debate in Europe seems to leap over the main work that we currently face to contemplate the many steps necessary for stage 1 of the Delors report. That is unwise, because stage 1 is a massive enterprise in itself. It will have very far-reaching consequences for all our economies and a profound effect on monetary policy and it will give a significant impulse to economic convergence.
Stage 1 means establishing a genuinely single market in capital movements and removing all exchange controls. A timetable has been agreed, starting with France and Italy by next summer. We of course are 10 years down that track. We welcome the commitment by others to follow suit, and the sooner the better.
Secondly, stage 1 means completing the single market. That is a huge task, and it is the dominant priority for the Community between now and 1992. Nearly half the legislative programme has been agreed, and the United Kingdom's influence in formulating that programme has been very great indeed. But there are tough issues still to be resolved, and, of course, all member states must then implement the directives agreed. On this, the record of this country is significantly better than that of many of the
Column 492proponents of a great leap forward on monetary union. By any standard, we have one of the best records in Europe- -and we should never be afraid to say so.
Thirdly, stage 1 means strengthening Community competition policy. A single market must necessarily have a level playing field. That patently does not exist when one large member state gives about eight times as much subsidy to manufacturing industry as does the United Kingdom. The Commission has powers to tackle this. It must use them, and not delay doing so.
More generally, the completion of the single market will progressively increase freedom of trade in all goods and services, and freedom of movement of capital and labour. Regulations and technical barriers will be drastically reduced ; industries will be restructured ; businesses will become more efficient and consumers will benefit. So while we consider the Delors prescription for what should happen after stage 1, let us not overlook the crucial importance of stage 1 itself, and the firm and enduring United Kingdom commitment to its early implementation.
All this has a particular importance for monetary policy, for stage 1 will create powerful pressures on member states to adopt low-inflation policies. With the removal of exchange controls and the creation of a single financial area, the capital markets will react more speedily and directly when they fear that a country is not operating sufficiently sound monetary policies. That will prove to be a powerful discipline. Greater stability of prices will in turn lead inevitably to greater stability of exchange rates. All this will be achieved not through centralised regulation and direction, but directly through the market. It achieves the desirable aims of the Delors report without the Delors apparatus.
We need to build on this. Our paper proposes that we should take the market approach of stage 1 forward to its logical conclusion rather than switching in mid-stream to a bureaucratic and centralised plan. Even after the current single market programme is complete, market forces will be muted by a number of unnecessary restrictions. For example, some countries control too strictly the investments of their savings institutions, or forbid the issues of foreign currency debt by their residents, or the purchase of their Government debt by overseas residents. Our proposal is that, as a priority after 1992, all restrictions of this kind should be examined and, where possible, removed, so that the competition between currencies and, therefore, between monetary policies is further sharpened.
This is not, as some people suggest, a matter of paying for a pint of beer at one's local with Italian lira or Greek drachma. Such a parody is to trivialise an important debate. The proposal is quite straightforward and entirely practical. It is to do away with unnecessary restrictions on individuals or firms doing business in whatever currency best suits the two parties. It is not a matter of compelling either party to use a particular currency : the aim is to reduce restrictions limiting their joint freedom of choice, thus enabling currencies to compete.
Mr. Anthony Nelson (Chichester) : Like all hon. Members, I am trying to listen carefully and to understand what my right hon. Friend is proposing. I put it to him that the Government paper of today is restating what his predecessor, my right hon. Friend the Member for Blaby
Column 493(Mr. Lawson), put forward during the summer at the Antibes meeting of Community Finance Ministers, which I understand was rejected out of hand--
Mr. Major indicated dissent.
Mr. Nelson : If I am wrong, I should be delighted to hear so. As the proposal essentially involves the use of all currencies in member states, surely the tendency will be for prominence to be given to the lowest inflation currency within the system, if this ever comes to pass? That would be to the advantage of the deutschmark and might well be to the prejudice of sterling.
Mr. Major : My hon. Friend is mistaken to suggest that my right hon. Friend's proposals were universally rejected at Antibes--that is by no means so. This is a significant development of what was initially trailed at Antibes, and if my hon. Friend continues to listen he will see the areas to which it has been extended. As for the deutschmark, the whole purpose and intention of what underpins this is to provide a system under which nations will seek low inflation policies. That will most certainly ensure and affect the monetary behaviour of each of the currencies in the system. It may be that at any one time a particular currency dominates, but the market will ensure that that dominance will not necessarily be perpetual.
Mr. Benn : Assuming that all the conditions that the Chancellor has set out were met, could he now relate that to his claim to uphold parliamentary accountability? Is he not saying that he wants the market instead of some Brussels structure to control all Governments here? Is he not also saying that in future no political party could come to power on a manifesto that included exchange control and varying the currency, because once such a Government were elected a decision taken by this Parliament--if it went through on the Chancellor's basis--would tie all future Parliaments and would make it illegal for political parties to come forward and be elected using instruments that the Chancellor's mechanism would exclude?
Mr. Major : I do not think that that follows in precisely the way that the right hon. Gentleman has in mind. Of course in strict terms an incoming Government are sovereign. That is a matter for the House and nothing that I am proposing changes that basic and essential feature of the House of Commons.
With competing currencies, the pressure under the system that we propose will be for Community monetary policies to harmonise at the level of the best. That will inevitably strengthen the process of convergence on price and exchange rate stability. Realignments should therefore, become rarer, fluctuations within the bands of the exchange rate mechanism should become smaller, and we could eventually see a system of more or less fixed exchange rates. With the minimal exchange rate uncertainty and reduced costs of switching between currencies, our approach will lead to a multi- currency solution with interchangeable Community currencies. In that way we would achieve a practical monetary union as a result of a gradual evolutionary process, but without disruptive constitutional change. In our judgment that is the right way forward.
Column 494arising from competing currencies, which is that efficient British farmers would be able to compete more effectively than hitherto with their continental counterparts in a more open market once monetary compensatory amounts and other artificial exchange mechanisms had been abolished? Is that not a progressive market solution to what hitherto has been an intractable European problem?
Mr. Major : On that point my hon. Friend is almost undoubtedly right. I welcome the pamphlet to which I know my hon. Friend has contributed. It has also reached the conclusion that competing currencies are the right way forward in terms of the future development of Europe.
I should like to deal with one argument for a single currency which I know has attractions for some in the House and beyond. Many people say that a single currency would reduce transaction costs for business men and travellers in the Community. Of course, that must be right. By definition, transaction costs must be reduced if there is one currency rather than 12, but we need to consider at what price and at what risk that convenience is bought. By going for one currency, enormous faith is placed in the ability of the European system of central banks to keep inflation down. Much safer in our view is our approach which maintains national monetary policies and allows currencies to compete to provide the non-inflationary anchor in the European monetary system.
That apart, there is the lack of political accountability to national electorates of a European system of central banks to which I have already referred. I suspect, too, that the requirement to abolish the pound and the franc would be deeply unpopular both in this and in other countries when electorates appreciated what was intended.
In any event, there can be no doubt that as the single market develops the costs of changing between the Community currencies will be reduced as a result of technological improvements and increased competition between banks. Our market approach is intended to encourage just that process.
There are those who would seek to portray the United Kingdom's advocacy of a step-by-step approach to economic and monetary union as foot dragging. I emphatically reject that view. We advocate an evolutionary approach, but not because it is slow. It would not be slow. There is no reason whatever to suppose that it would be any slower than the controversial Delors route. The merit of our approach is that it is evolutionary and practical. It is also robust--more robust than the Delors approach, which courts great risks, needlessly in my view, by proposing that decisions should be taken on the next stage of the process before we have had a chance to assess the outcome of the first stage.
Mr. Ian Taylor (Esher) : I am sure that my right hon. Friend is not alone in what he is saying. I have here a letter from the Board of Economic Advisers to the Federal German Ministry of Economic Affairs. It states :
"Informal co-ordination of economic policies through market forces shall have priority over formal ex-ante co-ordination by European bodies."
It also says :
"There is no need for an early commencement of negotiations to modify the Treaty as required by the Delors report."
That shows that my hon. Friend has a powerful ally in the German Government.
Mr. Major : I am grateful to my hon. Friend for that view. I recall that Professor David Currie, a former economic adviser to the Labour party, has also broadly endorsed the approach that I commend to the House. Plainly, we have very compelling support.
Mr. John Smith (Monklands, East) : Do I understand the Chancellor of the Exchequer to be saying that Professor Currie advocated the competing currencies theory which the Chancellor has been putting to the House?
Mr. Major : A recent paper that I saw the other day by Professor Currie broadly endorses the approach that the House has in front of it. If the right hon. and learned Gentleman cares to read that, he will find that that is the case.
Our view is gaining ground in terms of the report to which my hon. Friend the Member for Esher (Mr. Taylor) referred and it is gaining ground elsewhere in the academic world.
I categorically assure the House that we have no intention of being swept into unwise and premature decisions. The Delors report is important but it is not definitive. As the Madrid council agreed, it is a basis for consideration. It was also agreed that more work was needed. That work must be thorough and very well considered. It must not be rushed because the future development of Europe is of enormous significance.
I hope that it will be clear to the House and, equally important, clear to our partners in Europe that it is our policy to play a central and constructive part in the debate on economic and monetary union in the European Community. Our commitment to its objectives is just as strong and just as deep as that of any of our European partners. Britain is playing a full part in Europe and we intend that to continue. I commend our approach to the House.
Mr. John Smith (Monklands, East) : I agree with the Chancellor of the Exchequer that today's debate is timely and important. That is because it is, I think, the first time that the House has been able to debate in full the issues of economic and monetary union and the report prepared under the chairmanship of Jacques Delors, the President of the European Commission. The House will be assisted in its task by the excellent report on the subject published in June by the Select Committee on the Treasury and Civil Service. That report and the evidence provided by the Governor of the Bank of England and the right hon. Member for Blaby (Mr. Lawson), the former Chancellor, also provide useful background information for the debate. It is noteworthy that the Select Committee report felt it was necessary to warn against and even anticipate the lack of clarity and the deliberate ambiguities in the Government's policy on European economic issues. Hon. Members will recall that the Select Committee complained that at the European Council in Hanover in June 1988 the Government had
"accepted far-reaching language too lightly"
when they endorsed the idea of economic and monetary union. The report recommended :
Column 496"It is important that the Government should make its position absolutely clear at the Madrid summit and should not again go along with language whose full implication it does not accept." The Select Committee concluded :
"It is obviously dangerous for the Government to go on paying lip service to ideas to which in reality it is fundamentally opposed." Those were prophetic words. That is precisely what the Government have done and continue to do. In Madrid, they endorsed stage 1 of Delors while they were still internally divided over whether to join the exchange rate mechanism. As they had completely ignored the Select Committee's prescient advice, is it any wonder that the ship of state hit such troubled and turbulent waters, and that the Cabinet has been wrecked upon such "a singularly ill- concealed iceberg"? Recent events have revealed all too clearly that the Madrid formula was a fudge--lip service designed to conceal the confusion and disarray in Government policy--and it has now been totally blown apart. The gulf between the former Chancellor and the Prime Minister could not be more clear. The House, our European partners or the electorate would not find credible the argument that the former Chancellor's support for United Kingdom entry into the exchange rate mechanism--I quote his latest formulation--at the "earliest practicable time"--can be squared with the Prime Minister's sceptical and reluctant attitude towards what she calls a "higgledy piggledy system".
Mr. Marlow : I am grateful to the right hon. and learned Gentleman, and I promise that it will not. I wonder whether the right hon. and learned Gentleman would be kind enough to address himself not to Tuesday's debate but to today's.
Mr. Smith : I can understand that the events that we were discussing on Tuesday might be painful for Conservative Members, but I insist that they are highly relevant to the matters that we are debating today. Were the hon. Gentleman to cast his mind back to the matters that we were discussing on Tuesday, he would recall that they were to do with the chasms of differences within the Government over European issues.
The events after Madrid convinced the right hon. Member for Blaby (Mr. Lawson) that he could not persuade the Prime Minister on the issue of the exchange rate mechanism. He knew that advisers advise, and the Prime Minister decides. On the basis of Sir Alan Walters's advice, the Prime Minister has decided to postpone indefinitely United Kingdom entry into the exchange rate mechanism. Having struck his iceberg, the Chancellor resigned and, with his resignation, the credibility of the Madrid formula, which is highly relevant to what we are discussing today, has collapsed.
It will not do for Conservative Members to try to obliterate the events of the past two weeks from their memory. We will not allow them to obliterate their memory of the events. I invite Conservative Members to turn on the television on Sunday, when they will find the right hon. Member for Blaby going over some of the issues again.
Column 497The attempts by the right hon. Member for Huntingdon (Mr. Major), the new Chancellor of the Exchequer, to square the circle and recover a commitment in good faith to join the EMS will fail to convince, because the credibility of the Government's commitment to stage 1 of the Delors report is clearly questionable. One might almost say that it has been undermined. The House will recall that Delors stage 1 envisages that all member states should participate in the exchange rate mechanism, and stage 1 will begin as from 1 July next year. It is plain from the Prime Minister's Walden interview and from her infinitely expanded preconditions that the Prime Minister has no intention of accepting United Kingdom entry into the exchange rate mechanism before the next election. Perhaps it is no coincidence that Professor Patrick Minford, a monetarist colleague of Sir Alan Walters, believes that the issue of the EMS is "effectively dead". I suspect that the issue will not be laid to rest so easily, even if the Prime Minister and many Conservative Members wish it to be so.
At the Strasbourg summit next month, decisions will be taken on the convening of an intergovernmental conference due to be held in the autumn of next year to consider the consequent stages 2 and 3 of the Delors report. The current and future presidencies of the Community show no sign of wanting to delay the decision-making process. In fact, they appear to want to speed the process up. It is also apparent that the proposed intergovernmental conference may, on majority voting, proceed to draft an entirely new treaty, rather than amending the existing treaty, which would require a unanimous decision of all the member states. There is no guarantee that Britain can veto proposals that we do not believe to be in Britain's best interests. There is a clear risk that vital decisions can be made about the future of European economic convergence that would leave Britain on the sidelines. Given the Prime Minister's attitude, that may well be the legacy of a decade of Thatcherism.
During the Prime Minister's Walden interview, it became evident that the conditions now attached to United Kingdom entry require the whole of Europe to embrace Thatcherism, but despite all the hype about Thatcherism being exported, it has not happened over the past 10 years ; nor will it happen in the decade ahead. Let us take, for example, the Government's isolated position on the social charter, which the Prime Minister has described as Marxist. [ Hon. Members :-- "Oh."] Tory Members may not think that the social charter is relevant to the future of the European Community but we think that it is highly relevant. They have no right to determine unilaterally the terms of debate.
Column 498many accusations that might be hurled at me, being unwilling to give way is not one of them. I hope that hon. Members who do not think that the social charter is important will at least listen to what I am saying.
The extent of the Government's isolation on the social charter reveals how out of touch they remain on other key issues of economic co-operation and convergence. Our approach is to accept stage 1 of the Delors report and to negotiate entry into the exchange rate mechanism on reasonable and prudent conditions. These conditions, as I explained to the House on Tuesday, include entry at an effective rate, adequate central bank swap arrangements to tackle speculative flows, increased support for regional policy and agreement on a co-operative growth strategy. These conditions are important and not unreasonable.
Mr. Smith : Two weeks ago, my hon. Friend the Member for Dunfermline, East (Mr. Brown) and I visited Paris, Brussels and Bonn, to discuss these concerns with the relevant authorities. It was encouraging to find on many of these issues a common basis of understanding and shared concerns with our partners in Europe. In key respects, the points that we raised--
In key respects, the points that we have raised are already under discussion and are being addressed as the debate provoked by the Delors report unfolds. We find common acceptance of the need to tackle the growing payments imbalances within the Community, the importance of collective action by the central banks to tackle speculative attacks against currencies within the EMS and the crucial importance of regional policy, which features prominently in the Delors report, to ensure that growth and development are balanced and evenly spread throughout the Community as the single market unfolds after 1992.
These are not impossible conditions. They are practical concerns already on the agenda for Europe in the decade ahead. The Labour party is ready to shape that agenda. Only last week, the European Parliament voted for a resolution that embodies the Labour party's proposals, and is concerned primarily with stage 1 of the Delors report. It urged :
"The pound should participate in the EMS as soon as possible". It called for
"active industrial policy coupled with extensive regional policies control of speculative movements and the elimination of the largest inter-Community deficits and surpluses."
This resolution, which includes all Labour's conditions for entry into the exchange rate mechanism, will be presented to the Strasbourg summit as a decision of the European Parliament. I am delighted that the Parliament has embraced so much from the Labour party's agenda for Europe in the decade ahead.
Column 499disappointed, when I heard that the Conservative group in the European Parliament not merely voted for the resolution that I have just quoted but also supported some key amendments proposed by Labour Members of the European Parliament. Indeed, a Conservative Member of the European Parliament, Mr. Bryan Cassidy, the Conservative group's economic spokesman, attributed the key amendment to
"the influence of the 45 strong British Labour group which now dominates and controls the Socialist group as a whole."
Mr. Shersby : The right hon. and learned Gentleman claims that the Opposition's policy reflects that of the Labour group within the European Parliament. How does he square the policy with the views of the right hon. Member for Chesterfield (Mr. Benn) and his colleagues, who take an entirely contrary view?
Mr. Smith : I think that we are allowed to have different views. My right hon. Friend the Member for Chesterfield (Mr. Benn) and I will have differences on a number of subjects. It seems pretty rich for the Conservative party to say that there is not total unanimity among the Labour party on issues which have divided both parties. The Cabinet is entirely divided. My right hon. Friend the Member for Chesterfield has tabled an early-day motion, and I think that some of my hon. Friends have signed it. My right hon. Friend will probably attract some support from some Conservative Members.
Mr. Smith : Perhaps the hon. Member for Uxbridge (Mr. Shersby) should have checked before he asked me his deadly question that the hon. Member for Southend, East (Mr. Taylor) would not undermine him. He knows perfectly well, however, that if the EDM were passed round the Cabinet and the members of it were asked whether they would sign it, they would reply, "Cabinet Ministers do not sign these motions. You must understand that it would be difficult for us to do so." We could easily get two EDMs from the Cabinet, but neither would be published because the Prime Minister would not let either of them see the light of day.
Mr. Dennis Skinner (Bolsover) : If an EDM were circulated around the House and the Cabinet, a list of conditions would be imposed by the Government. Another list of conditions would be imposed by the anti- marketeers. My right hon. and learned Friend has already referred to four conditions and I am sure that my hon. Friends and I could produce another dozen. It would be an extremely long EDM.