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Mr. Smith : If Conservative Members ever need any assistance, they should turn to the practical working knowledge of my hon. Friend, who has described the position so well on this occasion. It is not for the first time that he has offered Conservative Members help that they do not deserve.

Mr. Eric S. Heffer (Liverpool, Walton) : I want to understand precisely what is being said. My right hon. and learned Friend has said that the Labour party's proposals were accepted by the European Parliament. When did the Labour party discuss these matters? Were they discussed at the party conference, or were they discussed by the European Labour group and agreed to? Have we discussed the matters within the parliamentary party? Surely we started that discussion only yesterday. I am not being difficult.

Mr. Smith : I draw the attention of my hon. Friend to the Labour party's policy review, which was discussed at the Labour party conference.

Mr. David Shaw (Dover) : On a point of order, Mr. Deputy Speaker. I think that we have arrived at a stage where we should suspend the sitting so that the Opposition can get their act together.

Mr. Smith : The less said about that intervention, the better. We are delighted that some Conservative MEPs understand and even welcome the wisdom of the Labour party's approach. The fact that they are taking our lead and following the Labour party's team in Europe speaks volumes for the style of leadership and the quality of teamwork that they have seen operating within the Conservative party in the United Kingdom. Unlike Conservative Members, they have recently had an encounter with the electorate. That concentrates the mind wonderfully. At the ballot box in June they saw all too painfully the result of the Prime Minister's attitude to Europe and her bungled European election campaign.

In recent years, the British people--

Mr. Neil Hamilton : Will the right hon. and learned Gentleman give way?

Mr. Smith : I shall not give way to the hon. Gentleman. Mr. Hamilton : The right hon. and learned Gentleman is frightened.

Mr. Smith : I resent that remark, and I shall take it into account when deciding whether I shall give way to the hon. Gentleman on another occasion. He must learn that there are some courtesies in this place. It is obvious that he has one or two to learn. In recent years, the British people have become increasingly concerned at the growing gap in terms of economic success, standard of living and social provisions between Britain and other leading Community countries. They perceive--I believe that this was reflected in their votes in the European parliament election--that it is harmful to the Community as well as to the Government to resist in a niggardly negative manner the moves to raise social standards and provide a floor of rights for employees. They understand that that is bad for Britain generally. We are not leading Europe ; we are falling behind. The Government's obsessional insistence on unrestricted market economics, the removal of social

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protections and a minimalist role for Government, in opposition to the widely held views of the rest of the Community, prevents progress and harms Britain's political interests. It shows that Britain is being unreasonably unwilling to compromise and co- operate with our European partners.

I fear that Ministers are as partisan abroad as they are at home. Whenever their narrow ideological obsessions collide with the idea of greater European co-operation, it is the European concept which is sacrificed. The coming clash on the social charter at Strasbourg is wholly unnecessary. The Government are wrong. They will once again isolate themselves within a Community which is becoming increasingly less tolerant of the Prime Minister's Don Quixote-like charges at European windmills.

The plain truth is that Europe will always be politically diverse. It is as unlikely as it would be illiberal to expect or to demand the entire Community to embrace one economic or political set of values, let alone the absurdities of Thatcherism.

The social, economic and environmental issues of the 1990s will not be resolved by the universal panacea of laissez faire. The EMS has spent the past 10 years curbing the excesses of the currency markets, but in other important policy areas more than the price mechanism will be required to sustain growth and improve the quality of life. Such realism about the limits of market forces will dominate the agenda of the 1990s and influence the evolving trend of economic convergence in Europe. It is vital that in the decade ahead Britain has a Government who are capable of combining that realism with the commitment to deal constructively with our partners in Europe.

Mr. Beith : Will the right hon. and learned Gentleman tell us at some stage whether the Labour party's policy on one of the main issues in the debate remains as it was at the time of the European elections? It was then said that the Labour party saw no advantage at that time in trying to create full-scale European monetary union.

Mr. Smith : I shall deal with that when I reach the appropriate part of my speech. I ask the hon. Gentleman to wait a little longer. For the reasons that I have given, it is important that Britain participates in good faith in the debate on the Delors report. The Labour party has indicated its willingness to consider these issues. We are prepared

The Minister of State, Foreign and Commonwealth Office (Mr. Francis Maude) : Come on

Mr. Smith : Perhaps the Minister will allow me to proceed with my speech. The hon. Gentleman is in the Parliament of the United Kingdom and not at a Conservative party conference. He is not sitting at some Thatcherite footstool. He will be questioned in an environment in which debate is allowed. I might have to say everything again so that the hon. Gentleman understands my arguments.

The Labour party has indicated its willingness to consider the issues. We are prepared to accept stage 1 of the Delors plan and are ready to negotiate the conditions under which the United Kingdom should enter the exchange rate mechanism.

What will follow stage 1 of the Delors report remains to be seen. The agenda for the proposed intergovernmental

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conference has yet to be agreed. The proposals set out by the Delors committee for stages 2 and 3 of economic and monetary union are very far reaching, and represent only one among a number of possible proposals to achieve greater monetary co-operation and economic convergence.

There has been-- [Interruption.] Will hon. Members please allow me to continue my speech?

There has been cogent criticism of the Delors report. In many ways, it is far too schematic in tone. It makes assumptions which are neither argued nor justified, and it is on the whole dangerously insensitive to the political dimension of economic decision taking and the need for democratic accountability. Perhaps it suffers from being the product of a committee dominated by central bankers.

Mr. Teddy Taylor : By a Socialist.

Mr. Smith : I am glad that the hon. Gentleman agrees with that. The Delors report may be a useful starting point for debate and discussion, but it could never be regarded as a blueprint for the future of Europe. I hope that that answers the question that the hon. Member for Berwick-upon-Tweed (Mr. Beith) addressed to me. I mention two major reservations that we have about states two and three. Let me make it clear that we would not be willing to accept any system of central banks which would be independent of political control, just as we strongly oppose an independent status for the Bank of England such as the former Chancellor, the right hon. Member for Blaby appears to have been considering a year ago and which was only tantalisingly revealed in his post-resignation comments this week. I do not know whether the present Chancellor will pick up that idea and seek to persuade the rest of his colleagues--

Mr. Major indicated dissent.

Mr. Smith : Almost undoubtedly, the Chancellor looked as if he was saying no, but I am not sure.

We are firmly against such a concept for the EC and we do not accept that binding rules for budgetary or fiscal policy are a necessary condition for the achievement of monetary union. I remind the House that that is one of the central parts of stages 2 and 3.

Mr. Nigel Spearing (Newham, South) : I am following closely what my right hon. and learned Friend is saying, particularly on the matter of democratic accountability, with which all Opposition Members would agree wholeheartedly. Is it in his mind that such accountability would be with the Council of Finance Ministers, appointed by their respective national Parliaments, or has he some other method in mind?

Mr. Smith : In the proposed system of independent central banks there is no democratic accountability at all. The whole point of having an independent banking system, Bundesbank-style, is that it is insulated from politics. That was somehow regarded as a desirable feature. There is no form of democratic accountability either from Ministers or from any kind of parliamentary mechanism. That is a fundamental objection to the proposal, and, as my hon. Friend reminds me, that will be the unanimous view of my right hon. and hon. Friends.

The binding rules are not a necessary condition for the achievement of monetary union in any event and I agree with what the Chancellor of the Exchequer--

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Mr. Teddy Taylor rose --

Mr. Smith : May I finish the sentence?

The Chancellor of the Exchequer drew attention to the Select Committee's conclusion that

"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 am happy to accept that enthusiastically, and I am sure that all Opposition Members accept it too. Does the hon. Member for Southend, East still wish me to give way?

Mr. Taylor : I thank the Minister for his excellent recent remarks. We have had some fun, but he has made some excellent recent remarks. He seems to agree with my right hon. Friend the Chancellor that stages 2 and 3 of the Delors report are completely unacceptable as a blueprint for the future. Would he honestly say--I mean this sincerely, John--whether there is anything at all in the three conditions laid down by the Government and the Chancellor for joining the ERM with which the Labour party would disagree--apart from its own reservations? If we could agree, we could send a unanimous message to Strasbourg. Is there anything in our three conditions--freedom of movement of trade, freedom of financial stability and the right exchange rate--with which he would disagree? If not, we can for the first time for many years send a unanimous message to Strasbourg.

Mr. Smith : I am tempted to say, "Well, Teddy, I can't remember when I last heard you speaking like that, whether it was in Cathcart or at Glasgow university." The hon. Gentleman referred to me as the Minister. I must ask him to exercise just a little patience in that respect. In two years' time I shall be happy to accept his words. But I shall do him the courtesy of answering his question. The conditions that have been attached to stage 1, not stages 2 and 3, by the Government are not the appropriate conditions, and the ones that the Labour party has proposed are.

For example, I do not know to what level inflation has to be brought down before the Government are satisfied. I suspect that that might be a moving goalpost. If the Government really mean what they say about these conditions, they would define the level of inflation that would be regarded as desirable. That might be a useful line of inquiry for the hon. Gentleman to pursue when he is asking questions of Ministers who are responsible for formulating policy now and for conducting the negotiations in the EC.

Mr. Benn : What my right hon. and learned Friend said about the retention of the Bank of England under the Bank of England Act 1946 is important and welcome. He will know that under that Act, the Treasury has the power to give directives to the Bank of England, the Bank of England has the power to give directives to any other bank and the Treasury has the power to define what a bank is. Therefore, enormous powers will fall to him as Chancellor and I hope that he will follow that through by saying that, if necessary, he intends to use all of them.

Mr. Smith : The constitutional position of the Bank of England in relation to the Government is satisfactory at the moment. I see no reason why that should be changed. A wide range of powers is available to the Chancellor of

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the Exchequer and no Chancellor should willingly give them up. He certainly should not contemplate handing over power over key economic monetary issues to bankers who are not accountable to the British people. As I think my right hon. Friend has gathered, that conditions our view of the proposals contained in the Delors report for a system of central banks and it is consistent with the view that we take at home.

I was shocked and astonished to discover that the former Chancellor was contemplating handing over the power to decide some of those matters to the present Governor of the Bank of England. I am sure that most hon. Members would basically agree with that proposition, although the fact that the former Chancellor revealed that view makes one wonder whether there are not some in the Conservative party who might take a different view.

The Chancellor has revealed a new plan today. He has produced the plan for competing currencies--to give it a shorthand title. It formed an important part of the Chancellor's speech I am tempted to say that it is one of the matters that should be referred to the Select Committee, since the right hon. Member for Worthing is the Chairman. I am rather torn on whether this wheeze of competing currencies should trouble the Select Committee. I would enjoy the prospect of the Chancellor explaining it to my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore), but I am sure that there are many more useful matters that could occupy the Select Committee's expert attention.

It is clear that the Treasury's plan for competing currencies would have pleased Heath Robinson. It is yet another example of the Conservative's addiction to unfettered market forces. It is envisaged that currencies in Europe would engage in a Darwinian struggle for supremacy within the single market after 1992. It is an idea which, as the Chancellor knows well, received a cool reception--to put it as politely as I can--from the other European Finance Ministers when it was informally floated at the regular council meeting at Antibes in September. No other member state in the Community supported the scheme and typically, even the Conservative Finance Ministers of Europe found the idea more than a little bizarre.

A multi-currency scheme would lower the efficiency of the single market. Not for the first time, the application of free market ideology would damage the very market that it seeks to advance. Transaction costs would soar dramatically with the complexity of making payments in numerous different currencies. It is much more likely that a multi-currency system would quickly degenerate into a single currency system. The laws of the currency jungle would guarantee the supremacy of the deutschmark, and to adapt a well-known sentence from Thomas Hobbes, life for the pound would be "nasty, brutish and short."

It is hard to imagine a scheme that would more rapidly hand British monetary sovereignty to the German authorities in the Bundesbank. If ever there were a "half-baked scheme", this is it. It does not reach even the minimum level of plausibility. It is hard to escape the conclusion that the plan for competing currencies is nothing but a diversion, a further attempt to conceal the Government's divisions over the EMS. As the editors of the latest edition of the Oxford Review of Economic Policy conclude :

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"The idea seems so risible that we can only believe that it is not a serious suggestion but a delaying tactic to confuse the debate over economic and monetary union."

I thought that it might be the last joke by the Chancellor of the Exchequer, left as a little surprise for whoever might be his successor. I am astonished to discover that his successor takes it seriously enough to present it unvarnished and unamended to the House.

The other 11 member states of the Community show no sign of wishing to indulge the Government's enthusiasm for competing currencies. Still less do they accept the patronising tone of the Prime Minister when she demands that they catch up with Thatcherism. Far from Europe catching up with us, it is high time that the Government concentrated on catching up with our Community partners and competitors. Economically and socially, over the past 10 years Britain has fallen behind. We have failed to match the level of investment in education and training, in research and development, in the regions and in manufacturing industry, which has been achieved, for example, by West Germany. The result is our massive trade deficit with the Federal Republic. Despite all the hype about economic miracles and arrogant assumptions that we have now surpassed the German miracle, there is still a lot of catching up to do.

Why are the Government prepared to stand back while social provision in this country falls behind the best practice in Europe? When will the Government conceive the ambition to catch up with European levels of pensions, with European standards of protection for the low paid and with the best levels of European child care provision? Those are the key elements of the social dimension to Europe which the Conservative party opposes, cannot understand and does not even want to discuss today. That is why it has tried to block the social charter, even though it is clearly supported by the majority of British people.

The social charter and the legislative action programme that will flow from it are indispensable to the successful conclusion of the single market. Without adequate minimum standards, the social and political cohesion of the Community will be seriously weakened. Without the social charter, it will be harder to build the strong economy and fairer society that Europe and Britain will need in the years to come. Labour Members know that there can be no lasting economic convergence and monetary co-operation without a strong commitment to a social Europe, which is why Britain needs a Labour Government to build a Europe that is not only a market for business but a community for people.

5.34 pm

Mr. Terence L. Higgins (Worthing) : I suspect that the last occasion on which a European issue of such complexity and with such an unattractive name as the exchange rate mechanism of the European monetary system was debated in the House was probably the Schleswig-Holstein question last century. Both controversies are difficult to understand and the arguments hard to remember. It is fortunate that the House has this opportunity to debate the issue in depth. The extent to which there is a considerable degree of common ground among hon. Members has emerged from the speeches made by the Chancellor of the Exchequer and the right hon. and learned Member for Monklands, East (Mr. Smith). I

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believe that that will strengthen the hand of my right hon. Friend the Chancellor when he pursues these matters in Europe.

I regret that the Delors committee--or, more accurately, Mr. Delors--has succeeded in setting the agenda for this discussion. I profoundly disagree with paragraph 39 of the Delors report, which says :

"The Committee agreed that the creation of an economic and monetary union must be viewed as a single process. Although this progress is set out in stages which guide the progressive movement to the final objective, the decision to enter upon the first stage should be a decision to embark on the entire process."

There are strong arguments for proceeding to join the exchange rate mechanism, but that does not imply that we should go further down the road of stages 2 and 3 of the Delors report. Considerable advantage, such as exchange rate stability and co-operation between members of the Community, is to be gained from joining the exchange rate mechanism. I agree with those who say that it is not a panacea, but none the less I believe that we should join. It is important to appreciate that joining the exchange rate mechanism would involve no greater loss of sovereignty--indeed, rather less --than we gave up for many years under the Bretton Woods system.

I do not believe that Professor Alan Walters's views on the idea of perverse capital flows are valid. In my view, they are not so much half- baked, if that is the right expression, as grossly overdone. The Government have made their position absolutely clear--we shall join the ERM when the time is right and the Madrid conditions fulfilled. Clearly, the object of the exercise is to achieve a degree of exchange rate stability. Today is not the right moment to join, because it is obvious that once exchange controls are removed in France next July there is likely to be considerable readjustment of currency. It would therefore be paradoxical to say that we shall join to achieve exchange rate stability without anticipating that there are likely to be further changes in the next 12 months or so. None the less, I hope that we shall be able to join soon after that. Much attention has been given to the Walden interview with my right hon. Friend the Prime Minister. There were many interpretations of the fact that she elaborated on the Madrid conditions. If we are to join the ERM, it is not unreasonable at the same time to insist on certain moves towards the European single market. That is how I interpret the Prime Minister's position, rather than her saying, "I shall impose a series of conditions which effectively mean that we shall not join at all." The Chancellor of the Exchequer clearly set out the position in good faith, which is important.

However, there may be a problem if, as I hope, we join in the near future, because sooner or later--perhaps not that much later--we shall be facing a general election. If we join the ERM, the danger is that as we approach that election the prospect of a Labour Government may exert considerable downward pressure on sterling. If the Government then have to realign the currency, it will be difficult to make it clear that that is the fault of the Opposition and not a defeat for the Government. The window for joining, between next summer and the election, may be quite small. None the less, we should take the opportunity whenever it arises because the case has clearly been made. I welcome the fact that my right hon. Friend the Chancellor clearly set out the basis on which we should proceed.

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Sir Peter Tapsell (East Lindsey) : Will my right hon. Friend give way?

Mr. Higgins : Alas, I do not have time because I want to try to keep my speech to 10 minutes.

I turn to the broader issues of economic and monetary union. The Treasury and Civil Service Select Committee report--I am glad to see that a number of points made in it were endorsed by my right hon. Friend the Chancellor and the right hon. and learned Member for Monklands, East (Mr. Smith)-- makes a valuable contribution, as does the evidence that we received. Often the evidence that we receive is more valuable than the report. Members of that Committee will know that, although I wholeheartedly endorsed the report, I was not entirely happy with one paragraph of it. Chairmen of Select Committees can express their views on amendments only if there is a tied vote, and that did not happen.

My feeling is that the proposal for a single currency is seriously defective because it means that giving up for all time any opportunity of using a change in relative prices between countries to deal with fundamental changes and variations in underlying costs. That could have a serious effect on regions. I do not believe that the proposals, even on the elaborate and expensive scale put forward by Delors, would be sufficient to overcome that on a permanent basis.

I have serious reservations, too, about the proposals for a European central bank and I concur fundamentally with a view that has been put forward by hon. Members on both sides of the House--that it would be unaccountable to the House and to other Parliaments. Of course, in some countries--for example, the United States and West Germany--existing central banks are not so accountable. Strangely, I find myself once in a while in favour of nationalisation. We nationalised the Bank of England, and the present relationship between the Treasury and the Bank of England is desirable. It would be highly undesirable to extend the idea to a system of European central banks which are in no sense accountable--in Delors, it is not clear to whom they would be accountable--and I would not wish to go down that road.

The trouble with the expression "economic and monetary union" is that it is the wrong way round. The progression must clearly be from monetary union to economic union, not the reverse. We come to the crux of the matter, and there the Select Committee was unanimous. Progress towards monetary union does not require the abdication of control over fiscal matters to any supranational organisation, accountable or not. I wish to make a rather technical, but fundamental, point, which is stated in paragraph 22 of the Select Committee report and is spelt out in greater detail in our earlier report on international monetary co-ordination. The report states : "We wish to stress that it is by no means clear what the impact of fiscal policy is on exchange rates. Fiscal policy may affect demand, but its direct impact on exchange rates is ambiguous. Binding rules on fiscal policy seem to be unnecessary even in stage 3 of a monetary union."

There is a strong case for joining the exchange rate mechanism of the European monetary system. It does not involve any more of an abdication of sovereignty than we had for many years under the Bretton Woods system, but stage 2 of the Delors position, where he seeks to hijack control over taxation and public expenditure, is irrelevant and simply a device to expand the powers in Europe over national Governments. As has rightly been pointed out by

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my right hon. Friend the Chancellor and the right hon. and learned Member for Monklands, East, that is the fundamental basis on which the power of the House has rested over the centuries. For that reason, and because the proposal is irrelevant, I hope that my right hon. Friend the Chancellor will continue to make progress on joining the exchange rate mechanism but that he will make clear, as he did this afternoon, our view on the longer-term issues set out in the Delors report.

I hesitate to comment in depth--alas, I do not have time--on the paper that my right hon. Friend the Chancellor lodged in the Vote Office this afternoon, but I should like to make one slightly technical point. I was brought up on Gresham's law--the idea that bad money drives out good--and I am slightly worried about what I suppose one should even now call Lawson's law, which is that good money drives out bad. It does not follow that the most inflation-proof currency is necessarily the one that we most use for transactions. Many companies conduct transactions in a multitude of currencies. They will not necessarily use the most inflation-proof one most often. They may well use that which is weakest and which has the highest rate of return on short-term balances.

These are more complex matters which it is perhaps difficult to explore in great depth, even in a debate as concentrated on a particular subject as this one, but I hope that we can consider them again, perhaps in the Select Committee. The degree of common ground between the two sides of the House is remarkable and I hope that we can make progress on the basis that I have described.

5.44 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : The right hon. Member for Worthing (Mr. Higgins) talked about the nationalisation of the Bank of England. One of the most interesting parts of the resignation speech of the former Chancellor dealt with that. He said : "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."--[ Official Report, 31 October 1989 ; Vol. 159, c. 209.] It is astonishing that the Prime Minister could not recall that--a fully worked out scheme from the Chancellor for the privatisation of the Bank of England, and she was not able to remember it. It is so important that I should have thought that everything in the economic or financial sphere would have been subordinated until those matters were dealt with.

It did not come so much as a surprise to me, because I had been present at the debate on fiduciary note issues in 1976, which I took, and those in 1978, taken by the then Minister of State--my right hon. Friend the Member for Llanelli (Mr. Davies). There was practically no one in the House on either occasion. I heard the right hon. Member for Blaby (Mr. Lawson) say :

"the Government could lay before Parliament each year in statutory form the annual monetary target for the coming year. The Bank of England would then, in effect, be charged by Parliament with ensuring that the target was met."

There would be legislation to give those powers. The right hon. Gentleman went on to quote someone approvingly, saying that it was "no accident that West Germany and Switzerland, which in recent years also have managed their economy better than others, happen to have strong and independent monetary authorities".--[ Official Report, 13 March 1978 ; vol. 946, c.168- 9.]

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I assume that that was an early indiscretion by the right hon. Gentleman which he had subsequently been able to overcome. With that in mind, as the House will recall, I frequently taunted him with that view. It was interesting to see that the right hon. Gentleman returned to that point.

All these matters were fully discussed in the debates on the nationalisation of the Bank of England. Those debates still make excellent reading because they are about the same problems that we have today. The circumstances are rather different. We have had exchange controls, which has changed things dramatically. Our background is exchange controls and we are comparing what happened under exchange controls with what is happening now.

What is happening now and what is likely to happen are the same features to which Boothby and others were referring when looking back to the 1930s. A number of important people spoke in those debates--Nigel Birch, Hugh Dalton, Hugh Gaitskell among them. Nationalisation of the Bank of England was the only issue on which Boothby voted with the Labour Government. Quoting, he said, "They who control the credit of the nation direct the policy of Governments, and hold in their hands the destiny of the people", Boothby went on to speak about what had happened in the 1930s : "What was perhaps worse, credit was denied to modernise our industrial plant, to build houses for our workers at home ... On the other hand, into Central Europe and, above all, into Germany, millions of pounds of good British money were poured, much of which we never saw again."

He went on to say that

"not only in the City but far beyond its confines"

there was

"the embodiment of power without responsibility."

Again quoting, he said :

"We returned to the Gold Standard in 1925 for the benefit of the City of London and so ruined our basic industries. It does not follow that what is best for the City of London is best for the country." The speech is well worth reading in full. Boothby said : "This Government might one day want to go back to a Gold Standard"--

or, if one likes, an ecu--

"but if any Government ever committed such an act of insensate folly I should want to attack the Chancellor across the Floor of the House. Further, I should not want him to say that it was really the business of the Bank of England rather than his affair."--[ Official Report, 29 October 1945 ; Vol. 415, c. 112-6.]

That is the same accountability which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) rightly said was crucial. I hope that it will be an important part of the negotiations.

It is important that we have political control. When the German Bundesbank increased its interest rates, no one in Europe questioned it. Was there no division within the Bundesbank about whether the rise should be 0.5 per cent. or 1 per cent. and whether it should follow M0, M1 or M3? A decision was made that affected the lives of 200 million or 300 million people and no one questioned whether it was the right decision. The decision on that matter of enormous importance may have been made by a majority of just one.

My right hon. Friend is right to set firm conditions for our entry into the ERM. The experts always say that these are technical matters, but my experience has always been that banking decisions tend to be political decisions. The British people are entitled to make those decisions, as are all the peoples of Europe.

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People say that the Bundesbank has done wonders for the German economy. I say that German industry, has done wonders for the German economy. German industry, with its excellent training and manufacturing potential, created a strong German Bundesbank, not the other way round. The countries that owe a great deal to their Governments are not Germany and Italy. The north of Italy is strong--it is even able to bear the nonsenses of the third of the population in the south --but its success has nothing to do with the Government.

If we enter the exchange rate mechanism it will be essential to have proper political control, as my right hon. and learned Friend said. That will not be easy to achieve, even with the Bank of England.

Mr. Mans : Would the right hon. Gentleman apply the same argument to the Federal Reserve bank in the United States of America?

Mr. Sheldon : The Federal Reserve bank is different. It has a greater measure of political control and links with the White House. Those who have experienced its operation know that it is more complicated than the German Bundesbank.

It is not easy to achieve political control. Those who work in the Treasury know how difficult it is to deal with the Bank of England. Crises can arise in minutes and decisions have to be made in a hurry. General policy can be laid down, but much depends on matters which have to be decided immediately. The following comparison illustrates my point. If, for example, I were in charge of investment in any organisation, I should expect my actions to be closely circumscribed, but if 12 superiors to whom I owed equal allegiance were appointed, I could do exactly as I liked. When dealing with day-to-day market operations, greater control is needed, not less.

The Bundesbank has the powers to which I referred. There are those who say that it does not matter and that we are subservient to the Bundesbank because Germany is so strong. I say to them that that problem stems from our balance of payments deficit of £20 billion, which looks as though it will persist for no one knows how long. That is why we are and shall continue to be subordinate to strong bankers. If we had the balance of payments surplus that Germany has, I should have no worries at all. Other countries would then have to listen to the Bank of England and follow money market operations here. Our balance of payments deficit means that we shall need flexibility and a wide range of rates.

It is said that before we can enter the ERM we must sort out our inflation problem. Some say that to enter the ERM would help us to reduce our inflation to the levels in other countries. That is probably right. Inflation would probably come down for a time because people would have confidence in sterling because it was tied to a strong currency, but the cost would be a greater problem later. No one can genuinely think that we could reduce inflation immediately, if at all. We would require greater deflationary measures than if we had not joined the mechanism. That is not to say that we should not join. We have political reasons for not showing too great a reluctance towards our European partners, but we have problems which need attention and the cautious approach that my right hon. and learned Friend the Member for Monklands, East outlined.

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Some say that the nature of foreign exchange trading has altered fundamentally. They see enormous swings across the exchange markets and say that they are completely different from what went before. They say that we cannot have neanderthal attitudes, because we have new problems. However, our problems are not new although they are probably more common than they were 10 years ago before exchange controls were abolished. Until then, it was difficult to hedge on the foreign exchange markets. Now people can do what they like. There are huge flows and speculators abound. They abounded in the pre-war years.

History did not begin in 1979. Vast sums were traded on the foreign exchanges before then, although there was less international trade. There were vast fluctuations on the foreign exchanges. One has only to consider the history of John Maynard Keynes, who nearly lost his shirt playing with foreign currencies until on one occasion he got it right and made a great fortune. The foreign exchanges were the great casino of the wealthy and large sums were traded--probably larger than the sums traded today, when genuine world trade has increased enormously, creating genuine foreign currency movements.

Speculation or, as is also common, prudent anticipation of one's foreign exchange requirements--the two cannot be distinguished--have always been with us and will remain with us. A speculator or investor--sometimes it is hard to separate them--seeks high returns with security. In Britain today he obtains a high return and looks for a weekly or even daily reaffirmation that the Government do not intend to allow the pound to fall. The Chancellor of the Exchequer knows that he has to state repeatedly that he supports a strong currency. If he stops saying that, speculators will abandon sterling. We are paying heavily for that in high interest rates. The Government give that assurance, but for how long? Such questions are of great importance to investors. Large sums are involved and analysis is keenly undertaken by those with large sums to lose if they get it wrong.

How long the Government can continue to pay exorbitant rates of interest to support the market and the pound depends on the income or the capital of the borrower. If I have capital, I can deal with outflows ; if I have income, I can deal with them more easily. Speculators are aware of our foreign exchange reserves--our capital--and our negative income of £20 billion per year. They see that our capital does not last long and is being eroded.

Once again we return to fundamentals. The balance of payments surpluses of Germany and Japan make them strong. Our deficit makes Britain increasingly weak. For that reason, my right hon. and learned Friend is right to be cautious, to outline firm conditions which must be fully met, and for those reasons I support him.

5.59 pm

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