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Mr. Donald Thompson (Calder Valley) : It is almost nine years since I last spoke from the Back Benches. In the intervening years, I was a Whip and therefore silent in the House, and I was then the Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food, speaking from the Dispatch Box. Others now do those jobs, and I wish them well. There is no iceberg here, but a shire horse

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unharnessed and put out to graze on the blue Conservative grass, which I now find is turning greener in every way and every day. I will be brief, so I hope that the House will allow me to be a little parochial. Europe--both the European Community and the wider Europe- -is of the greatest importance to my constituents in Calder Valley, as manufacturers on a multinational, national and local scale, as traders, financial marketeers and citizens. Many fled from the Ukraine, Poland, Estonia, Latvia and Serbia to establish themselves in our valleys. Their families still live there and form an invaluable part of our community. How delighted they must be to see the breaking of the iron grip of Socialism in their homelands. However, this debate is about the European Community and, although events in old Europe are, to say the least, making the Eurocrats in Brussels tremble, I will stick to the European Community and its effect on the United Kingdom and my constituents.

Without doubt, my constituency is lucky enough to be the most enterprising in the west Yorkshire industrial area. There are several reasons for that, including the traditional adaptability and tenacity of the people, and their ability to get on is paramount. As their Member of Parliament I have endeavoured to channel any assistance I can to that enterprise. The local "Business in the Community" team has sought to mobilise and maximise available European and Government assistance. Led by the Prince of Wales, who is their unstinting and hard-working chairman, it sets an example to the rest of Europe, showing what can be done when European, national and local resources are harmonised sensibly.

The elimination of inflation--or price stability, as my right hon. Friend the Chancellor called it--is paramount for British industrialists. High interest rates are hard to bear, but not as hard to bear as the destruction of the value of stock or of work in progress. Inflation is a tax on everything. It is permanently debilitating to have goods in store paid for yet losing value day by day and to turn those goods into manufactured items on prices that are losing profitability week by week. We should look for lower interest rates soon and low inflation permanently.

The Opposition call for us to enter the exchange rate mechanism. Many of my constituents think that the conditions are right and proper, and that the Commission and the European Ministers should accept them at once so that we can all get on with it. A responsible Opposition should be calling on Europe to accept our conditions, not bandwagoning in Europe with a set of conditions that seem to some of us to have been scribbled on the back of an envelope during a lengthy parliamentary intervention and then expanded on the instructions of Members of the European Parliament.

The details of our conditions have been spelt out and include the freedom of capital movement and the abolition of exchange controls. Unless companies can invest and reinvest freely in Europe, whether those companies are nationals or multinationals, small companies or large, their freedom is being attacked. They need that freedom, and Europe is not about inhibiting business but about creating employment.

A single market with a level playing field or, as my right hon. Friends have described it, a strengthened European competition policy, is essential, especially for my textile companies. They have enough worries with the

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renegotiation of the multi-fibre arrangement and imported Turkish yarn without a tilt here and there on the Common Market pool table. Free movement in financial services is a prerequisite. To give up that negotiating card would be considered a betrayal by companies ranging from the Halifax building society, through insurance companies and into the board rooms and the shop floors of my companies, which are not only selling into other countries but buying and running companies in non-EEC countries. British financial companies should be able to sell their products Europewide. Europeans should be able to invest their money in the Halifax or the Leeds at will. The same life policy should be available in Brighouse and Baden-Baden. Just as importantly, if one of my companies wants to buy a manufacturing company, or any kind of business, anywhere in the world, it should not concern the European Commission.

British business can help itself and the Government in this respect. Here in the United Kingdom, often with the help of the Opposition, it is possible for commerce and industry to approach Ministers who are responsible for United Kingdom policy. Industry can at least make its point, and it can and does ask the Opposition to emphasise its views. However, such systems are not always in place in other European countries. I urge British business to thrash out its own responses to directives and proposals from Europe and then to seek out its counterparts in Greece, Spain, Italy or wherever and impress on them the arrangements made for a proper way to conduct competitive business. British business should urge those abroad to adopt those ideas and to press them on their national decision makers.

Decision makers abroad, as we all know, are not necessarily Members of Parliament or Ministers. They may be bureaucrats, business men or trade associations. It is vital that our companies reach them before the Commission and the Council impose their will and their methods, which may not be the best for international business.

The right hon. and learned Member for Monklands, East (Mr. Smith) chides British Ministers for being "at it again". He says that the cry continually comes from Europe that the Brits are at it again, complaining, moaning and wanting to change the rules. However, on the few occasions when we do not do that, he complains that we have not made the British point. It would be wrong for our Ministers to stop making the British point.

We must teach our business and political counterparts how to influence the decision makers in the Council. We must teach them to lobby as well as our trade unionists lobby us. How often have we sat in Central Lobby, on the Terrace or, if we are lucky, in the Kremlin bar with trade unionists from all over the country, while they urge on us the unfairness of Europe. They tell us that "prato"--the unfairness of the social security system and slave labour in Italy coupled, with the Italian Government's massive aid-- is killing their trade. They tell us about the diabolical social security systems that allow foreign farmers to get away with murder. The fishing industry, the steel industry and every other industry tell us the same. We are now urged to accept a social charter composed by a little Jack Horner of plums from different pies. It is not a realistic concept. My constituents look rather for a huge, liberal, deregulated market, which will give small firms confidence and our largest firms a springboard to sell

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not only in that market, but unimpeded throughout the world. The united Socialist Europe urged on us a few years ago is not a runner anymore even in East Germany.

Now that the Commission has got us--or is getting us--to 1992, its role must change. It must become the secretariat to the Council of Ministers and the Council must propose the next steps after 1992. The ideas that the Council of Ministers brings back to sovereign Parliaments must be thrashed out here. The Commission can then polish those ideas and the European Parliament can at last take up its proper role of administering the wishes of the Council of Ministers. I have been lucky enough to represent British interests on several occasions in various Councils of Ministers. We must press for British interests relentlessly, not only on behalf of my constituents, but for the country as a whole.

6.9 pm

Mr. Giles Radice (Durham, North) : I will not respond to the speech made by the hon. Member for Calder Valley (Mr. Thompson) because it was very much a maiden speech. I believe that it is the courtesy of the House not to criticise maiden speeches.

I accept the point of the right hon. Member for Worthing (Mr. Higgins), who is Chairman of the Treasury and Civil Service Select Committee, that there is common ground between the parties about Europe. The cautious pragmatism to which the right hon. Gentleman referred extends across the parties. However, there is not enough common ground on the key issue, the first stage of the exchange rate mechanism, within the Cabinet itself.

Anyone who watched the Walden interview must have gained the impression from the Prime Minister that she was basically against the ERM. The former Chancellor in his valedictory bore that out. There is a fundamental divide which has been papered over by a formula about conditions--there is the Prime Minister on the one hand and a number of senior Cabinet Ministers, including the Deputy Prime Minister, the Foreign Secretary and, I believe, the new Chancellor of the Exchequer on the other. That is the political reality and I am not surprised that the right hon. Member for Worthing did not mention that problem When the Labour Government decided not to enter the ERM when the European monetary system was set up in 1979, I supported that decision because I feared that linking the pound to the mark--the strongest currency in the system--could have severe deflationary consequences.

Mr. Austin Mitchell (Great Grimsby) : It would.

Mr. Radice : However, I believe that the situation has now fundamentally changed, and I will explain why.

The EMS has been operating now for a decade and it has proved itself to be a considerable success. There has been a significant convergence of inflation rates within the ERM down towards the low German level. In particular, the gap between the French and German rates has been substantially narrowed. There has also been far greater interest rate stability. It is noticeable how, despite some variations, the level of interest rates within the EMS is far nearer the low German rate than to the high United Kingdom interest rate outside the EMS. Above all, there has been far greater exchange rate stability. Although the ERM is not a fixed exchange rate system, the limitation on changes has created the original intention of the EMS--"a

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zone of monetary stability." That has been very much in contrast with the much greater exchange rate volatility outside the system.

Mr. Patrick Ground (Feltham and Heston) : How can the hon. Gentleman say that about interest rates in view of the level of interest paid on the Italian lira over the past five years?

Mr. Radice : I said that there was much greater interest rate stability within the ERM as all the studies have shown. I hope that the hon. and learned Gentleman will accept my word for that and if he does not, he should look at the evidence.

There has been an even more important change in the conditions in comparison with the 1970s. I take issue with my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon). He did not quite grasp the point that the volume is less important than the fact that today, in contrast with textbook economics, the flows of international capital are driven as much by interest rate differentials and the desire for speculative gain as by differences in the balance of payments or inflation rates. That is a very important difference.

Mr. Sheldon : That was the case before the war.

Mr. Radice : No, it was not.

Outside the ERM, the United Kingdom exchange rate has been highly volatile. If hon. Members do not accept that, I remind them that in 1980-81, the pound was driven to a level which made manufacturing industry totally uncompetitive, so much so that 20 per cent. of manufacturing output was destroyed. In early 1986, the pound was driven down to an all-time low, to almost £1 to the dollar. There has been a considerable fluctuation.

Of course British manufacturing wants a competitive rate, and it is right to want that. However, it also wants a stable rate so that it can plan ahead. I conclude that although it is important that we should enter the ERM at a competitive and effective rate, as my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, it is even more important that rates should remain stable. I want now to consider the sedentary intervention made by my hon. Friend the Member for Great Grimsby (Mr. Mitchell). The argument about tying the British economy to a more deflationary European level has far less validity in 1989 than it had in the 1970s or early 1980s. I accept that European unemployment levels are still high, but we should remember that our unemployment levels are affected by the way in which we calculate them. Also, the French were able to narrow the gap between the French and German inflation levels without having to experience the massive squeeze which British industry faced in 1980-81. Those who talk about a stagnant western European economy must consider the fact that over the past two and half years, the main European economies--West Germany, France and Italy--have been able to expand as fast as, if not faster than, the United Kingdom economy, but in a far more sustainable way because they are not running our massive balance of payments deficit.

We are also told that the Prime Minister attaches great importance to independence and sovereignty, but the truth is that, even outside the ERM, we are affected by what

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happens within it. After all, the Bundesbank's decision to raise interest rates a few weeks ago triggered corresponding increases not just in the ERM, but in the United Kingdom as well.

I do not claim that joining the ERM is a panacea. No one would do that. It is no substitute for operating and managing the economy in a balanced way or improving the supply side of the economy, which the Government have failed to do.

I believe that there is now a powerful case for joining the ERM sooner rather than later. It would help to stabilise exchange rates and secure lower interest rates than we would have outside. In addition, it could provide a useful counter-inflationary discipline, certainly a far more effective discipline, than the discredited system of domestic monetary targets in which one or two Conservative Members still apparently believe.

In addition, we must take our political argument very seriously. Unless we join the ERM, we will not be in a position to influence the future direction of economic and monetary co-ordination in Europe. Membership of the ERM would give us the influence that we so clearly lack at present.

Mr. Spearing : While it may be true that there would be a seat at the table, does my hon. Friend believe that our £20,000 million trade deficit might reduce our influence?

Mr. Radice : I warned this Government about the problem with the trade balance a long time before many other hon. Members, and I realise that it is very important.

I want now to consider stages 2 and 3 of the Delors report and the moves towards full economic and monetary union. I want first to consider the principle of economic and monetary union. Strangely enough, there is nothing about that in the Delors report and no one in this debate has so far made much of it. However, there is a powerful case to be made in principle for such a goal, albeit a long-term goal.

The basis of a monetary union can be defined as an arrangement between countries by which their exchange rates are permanently fixed in relation to one another. Because that commitment makes currencies freely interchangeable against one another at the same rate, they become, in effect, one currency.

The benefits of such a system, which are not set out in the Delors report, are that it reduces the transaction costs of doing business and, more important, it removes the cost of exchange rate instability, which is very great at the moment.

I accept the case that has been put by my hon. Friends that the disadvantage of monetary union is that it would no longer be possible to use the exchange rate to provide adjustment to economic changes or shocks which affect individual countries.

However, as I have already argued, the use of the exchange rate as a means of adjustment is increasingly problematic for Britain in a world in which international capital is not linked, as it used to be, to differences in balances of payments, but which goes after interest rates and speculative gains.

Mr. Peter Shore (Bethnal Green and Stepney) : It may be problematic to use the exchange rate to solve our appalling balance of payments problems, but does my hon.

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Friend agree that it is inconceivable that the balance of payments problem can be solved without some major change in the value of sterling?

Mr. Radice : I agree. There will also have to be massive cuts in internal demand because we need to cut imports. We need a depreciation of our currency and that is why my right hon. Friends are right to say that we have to go in to the exchange rate mechanism at a competitive level. That is an important proviso. Once we are in the system, there will be a limit to the variation in the exchange rate. That is good counter-inflationary discipline, because we cannot go on depreciating, as that would undermine the whole economy, as we have found out before. Once we find the right level, we must try to stick to it--that is an important part of balancing and managing an economy. As the Swedes and other nations have found out, one cannot go on devaluing all the time.

Mr. Shore : Surely the additional problem is to decide what is an appropriate rate, against the background of our massive trade deficit and, I regret to say, our serious lack of competitiveness. Once that rate has been decided, there is also the problem of having to adjust it again, as so many other countries with fixed exchange rate regimes have had to do. Does my hon. Friend agree that it would be sensible to defer the whole thing until we have reached balance of payments equilibrium?

Mr. Radice : I believe that, if we continue to run a balance of payments deficit of the size that we have at the moment, the market may decide what that level should be.

There is considerable disagreement about what the level should be. I cannot give a figure, but I suspect that it should be considerably lower than it is at the moment, as that would be competitive and we certainly need a competitive edge--I think probably something in the region of DM2.50.

As I have said before, we are not talking about joining a fixed exchange rate system. The ERM is not a fixed system, but one with variability, albeit limited. It is true that full economic and monetary union would mean a fixed exchange rate system, but that will come later. I am talking about the principle of the thing. A more pragmatic argument for supporting the long-term goal of monetary union, is that the single European market is likely to lead to greater integration of European economies. That integration will require a response at a monetary level.

Under the terms of the Single European Act, as we have been reminded, trade barriers will be removed and all exchange controls will be dismembered. That will lead to greater co-ordination of monetary policy and particularly of interest rates. We have seen how the other ERM economies are increasingly following the lead of the Bundesbank. That partly explains why France supports so strongly the idea of the European central bank. The French hope to retrieve a share of sovereignty that they have lost to the Bundesbank, by participating in the decision making of such a bank. In a European economy which is increasingly interdependent, one can recover control by sharing, and that is the principle behind the idea.

One can support the long-term goals, but that does not mean that one is not sceptical about the details of the Delors proposals. The important thing is that they ar not immutable but can be cast aside.

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I do not believe that it is necessary, with full monetary union, to have binding rules on budgetary and fiscal policies of member states. It is essential that member states should be able to use fiscal policy to provide adjustment to short-term problems of balance in their own economies or the gap between the rich and poor economies will widen.

It is true that the Delors plan envisages wider structural and regional policies at the European level, but they have to be buttressed by fiscal policies at national level.

The Government have to adopt a more positive approach to economic and monetary union. Instead of the negative, nationalistic attitude of the Prime Minister, we should develop a policy that ensures that we are able to influence the outcome in a sensible, practical way. The Treasury proposal for competing currencies is not a serious runner. It has already been rejected by our European partners and it is a pretty odd proposal, by any standards. It either means little more than the present arrangement or, if competition works, everyone will turn to the deutschmark, which will become the common currency of the union. That is the reality of the situation.

A more genuine approach to EMU should be based on two things. The first is a genuine commitment to the long-run objective of EMU, and not the kind of commitment that Government have used as a bargaining proposition. Secondly, we have to insist that an irrevocable fixing of exchange rates should take place only after the full effects of 1992 have worked through the European economies. That is not likely to take place before the end of the century.

Mr. Austin Mitchell : The year 2010.

Mr. Radice : Perhaps not that far ahead, but it will take some time.

Meanwhile we should join, and then build on the existing exchange rate mechanism, develop greater co-ordination between central banks and ensure that we get realignments at increasingly rare intervals. We should also develop the ECU as a parallel and increasingly important currency. Gavyn Davies, one of our advisers to the Select Committee on the Treasury and Civil Service, said, in his valuable study of the European monetary question, that the more important the ECU becomes, the nearer European monetary policy will be to the average of member states. There is something to be said for that. He also said that that would make the Bundesbank less dominant in setting European monetary policy.

A European central bank will not be necessary until exchange rates are finally, irrevocably fixed. That is a long time ahead. Economic and monetary union has to be preceded by a major expansion of regional and structural funds, and the implementation of the social charter. We should also develop democratic institutions at national and European level, and give greater powers to the European Parliament.

Europe is one of the most important issues facing the House. Instead of standing on the sidelines, like the Prime Minister, shouting nationalistic slogans, it is essential that the United Kingdom starts to play a full part in the development of Europe's future.

6.29 pm

Mr. John Biffen (Shropshire, North) : I will be brief, Mr. Deputy Speaker, and I therefore hope that you will bear with me if I take my argument at something of a gallop.

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I much enjoyed the speech of the right hon. and learned Member for Monklands, East (Mr. Smith). He seems to have established himself as one fully conversant with European debate : his remarks were wide-ranging and, on the whole, paradoxical. He was almost a one-man pantomime horse--one half, the rear half, trying to establish Labour's credentials in warm and charitable European terms and making the party fit once more for Roy Jenkins, the other half much more pragmatic. Addressing my hon. Friend the Member for Southend, East (Mr. Taylor), the right hon. Gentleman reflected on the absurdity of some of the ambitions in phases 2 and 3 of the Delors report. It would not have been difficult for those in the Press Gallery to assume that a good deal of consensus existed between the two parties on what constituted the wider challenges, and on what was the appropriate national reaction to them.

Let me again place on record my innate ambivalence--if not hostility--in relation to fixed exchanges. The right hon. Member for Bethnal Green and Stepney (Mr. Shore) will remember struggling, as first a supporter and then a member of the Labour Government, to validate an unreal exchange rate between 1964 and 1968. Every social and economic value of that party was prostituted in the unreasonable pursuit of the untenable. The speech of the hon. Member for Durham, North (Mr. Radice) prompted the same reflections.

European monetary union would involve both pluses and minuses. The idea is not for constant changes of parity to take place to offset that, but for surpluses to be recycled through a regional policy--and doubtless a social and industrial policy. The hon. Member for Dagenham (Mr. Gould) who is clearly growing into a good European after a shaky start, has mentioned energy policy. But I can think of nothing more daunting than mechanisms whereby the resources for such policies were provided in such circumstances --that those resources should be available for judgment and distribution through public processes about as remote as they could possibly be. I do not take into account the relationship between the Council of Ministers and the House ; I merely say that the circumstances in which resources are created for distribution should cause us to think very seriously, Socialists as much as Tories. The remoteness of government is an equal challenge to both sides.

My first point of substance concerns the exchange rate mechanism. This is the immediate problem. It is alleged to be a test of the authenticity of our attempt to relate to our European partners. I must say that I am sorry that there has been so much acrimony over the safeguards that have been attached to British membership, the Madrid settlement and the statements made thereafter. My right hon. Friend the Prime Minister is clearly the object of considerable political attack, which is inevitable--I do not think that anyone would resile from that.

When I watched the Walden interview, I thought that my right hon. Friend was changing her style. In contrast to the economical use of verbiage in her statement after the Madrid summit, she now elaborated on the safeguards, as though, under the emollient influence of Woodrow Wilson, she wanted to reach the magic figure of 14. As I listened, I reflected on Clemenceau's observation that 10 was good enough for the Lord. Let me put back on the

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record what my right hon. Friend said in the House after the Madrid summit. She talked of the practice that would accompany--that would, indeed, be a precondition of--our membership of the exchange rate mechanism :

"These include completion of the single market, abolition of all foreign exchange controls, a free market in financial services and strengthening of the Community's competition policy by reducing state aids."--[ Official Report, 29 June 1989 ; Vol. 155, c. 1107.] Does anyone contest those four safeguards? Does any hon. Member on the Opposition Front Bench contest them? The silence is eloquent, and I am immensely grateful.

Mr. David Howell (Guildford) : Will my right hon. Friend give way?

Mr. Biffen : Although I have great affection for my right hon. Friend, he is not a member of the Labour party ; but I will give way to him none the less.

Mr. Howell : I am grateful to my right hon. Friend, and I am listening with fascination to his speech, as I always do. I have only one contesting point to make--not entirely minor, but interesting. The Madrid communique said something slightly and crucially different : it mentioned the exchange and other controls of major countries within the EMS, not all countries. That is just a little point for us to bear in mind, should we ever come to textual hair-splitting in the future.

Mr. Biffen : I am grateful to my right hon. Friend. In fact, I recollect that Mr. Brian Walden pressed the question of Portugal in his interview. The issue did not bring that to a halt, and I do not believe that it would bring our relationship with our European partners to one either ; I am glad, however, that my right hon. Friend has sought to fill the void left by the parliamentary Labour party.

We must emphasise the seriousness of our safeguards, and, moreover, the Labour party's safeguards. Labour makes great play of the problems of parity. The hon. Member for Dagenham, after all, said : "We must not be forced to sacrifice competitiveness to maintain an ERM parity".

It is well known that deep concern is felt about the need for legitimate and defensible safeguards before we proceed with the arrangements. There is deep scepticism on both sides of the House--I except the hon. Member for Berwick-upon-Tweed (Mr. Beith)--about the wider ambitions of economic and monetary union and Delors stages 2 and 3. What better way to demonstrate the authenticity of that scepticism than to insist on safeguards at stage 1? otherwise, the very signals set up by a relaxed "Let's get in and work it out once we are in" approach will merely encourage those who believe the old French proverb, "C'est le premier pas qui compte." I believe that the scepticism is well founded.

We have argued the matter in economic terms ; the Minister, although he is from the Foreign Office, knows that this is basically a Treasury debate. That is natural and within the conventions of the House, but make no mistake : the debate must be set in a highly political context, created by the present turmoil across Europe. I can well believe that Mr. Delors--who is, I think, as good a Frenchman as he is a European--has on his desk those wonderful words of Francois Mauriac : "I like Germany so much I want two of her."

Developments in the Soviet Union and in other Warsaw pact countries are unfolding at a pace that few would have anticipated. Old nationalisms are being

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refurbished ; old institutions are being re- established. They may be old, but set in today's circumstances, they provide a powerful new dimension to the whole of European relations. We see within that all the indications of a potential German reunification, however much it is whispered behind hands, rather than proclaimed openly. We know that there is the prospect of an eventual, but perhaps not too distant, American military disengagement from western Europe, if America can make the appropriate arrangements with the Soviet Union. It is against that background that, to my mind, there is the imperative of thinking, in the words of De Gaulle, of

"a Europe from the Urals to the Atlantic".

We should think about the political, social and economic structures that could provide the shock absorber for the impending re-unification of Germany. We should ask ourselves whether in continuing to try to bring about a closer, more integrated and centralised western Europe, we are facilitating a process that will have to reconcile those emerging factors in central and eastern Europe.

All that I can say as I bid my right hon. and learned Friends godspeed on this enterprise is that I hope that it can be done in the spirit of cross- Bench co-operation. If the right hon. and learned Member for Monklands, East wants to set out the Labour party's stall on Community affairs along the lines that the Government are foolishly trying to protect national interests in the way in which they are proceeding over the question of membership of the European exchange rate mechanism, I advise him that the debate will not end there. It will be translated to the wider issues that I have mentioned, and I look forward to that contest with relish. 6.41 pm

Dr. David Owen (Plymouth, Devonport) : For years I have believed that this Prime Minister would never take us into the exchange rate mechanism of the European monetary system. I have felt that that would and was gravely weakening this country's capacity to play a constructive and full role in the development of Europe. Listening today to the Chancellor of the Exchequer and to the right hon. and learned Member for Monklands, East (Mr. Smith), I believe that we will now enter the exchange rate mechanism of the European monetary system some time in 1990. If Italy and France abolish their exchange controls--as I think that they will early in 1990--it will be possible for us to enter in the first half of that year.

However, I do not think that it will be easy. I believe that the Prime Minister will continue to put up stubborn resistance to it. The resignation of the former Chancellor will have had a substantive effect. I am one of those who believe that policy differences and principle still matter in politics. As resignation from such a great office is not done lightly, as the former Chancellor said, I believe that it will have a profound and long -lasting effect. Indeed, I believe that it will have an effect far beyond the mere matter of joining the exchange rate mechanism because, important though that is, it is as nothing to the fundamental debate about European economic and monetary union. There is no doubt whatever that if this country continues to hold out--unreasonably, in the eyes of most people in Europe and, I would suggest, in the eyes of most hon. Members--we will not have the political weight to stop some of the more foolish aspects of the European economic monetary union that are contained in the Delors report.

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I speak as a lifelong European, but I believe that to force the European Community down the federalist route would not only damage the European Community but possibly destroy it. It is an unnatural beast, which the European Community was never meant to be. But it has never before been given such a massive federalist twist than by the Delors report. The concept of an independent and free nation giving up the right to fix its own levels of direct taxation and its own borrowing requirement is to emasculate the nation state to the extent that there would be no other option than to be a united states of Europe.

I am married to an American and my children are therefore half American, but to believe that one can draw any parallel between the United States of America and a united states of Europe is to live in a world that is wholly different from the one in which I live. If that federalist model were forced on Europe, it would eventually split it apart.

The war cemeteries of Europe are a massive demonstration of the folly of nationalism, but in the strains and stresses, and in the potential break-up of the USSR, we are also seeing all the dangers of forcing independent nations into an artificial grouping.

The cultural history and traditions of Europe allow us to develop European unity in a unique way. Few have been able to predict the path of European development in the past and the title of the Government paper "An Evolutionary Approach to European Economic and Monetary Union" uses well- chosen words. Evolution is a progressive and natural development, but one can never be sure of its pace or the ultimate direction in which it is leading.

Mr. Spearing : Will the right hon. Gentleman give way?

Dr. Owen : Time is short, so I shall not give way.

The development of Europe is therefore of fundamental importance and this is possibly one of the more important debates that we will have in this Parliament. There are some signs of an interesting consensus developing on this question as there are in relation to the European exchange rate mechanism.

The Prime Minister has allowed her prejudices and instincts to triumph on the issue of the exchange rate mechanism. It does not raise fundamental questions of sovereignty, and to pretend that it does is nonsense. We went into the European monetary system in 1978 and the Labour Government took the necessary legislation through the House, but it was always permissible within that legislation for any Government to go into the exchange rate mechanism over a mere matter of a weekend. No other form of parliamentary approval was needed. That was a recognition that we were dealing with a mechanism that did not raise the fundamental questions that are raised by some aspects of the Delors report.

I turn to some aspects of that Delors report that trouble me. I believe that the Government's competitive currency arrangement will not run. Indeed, I am surprised that the new Chancellor has put his authority behind that non-runner. It is not necessary at this stage for any of us to take firm and fixed positions about the development of the currency. None of us knows how successful 1992 will be and none of us knows the effect of all the Community countries--I hope--being in the exchange rate mechanism. It may turn out to be a naturally stable system of

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virtually fixed exchange rates, although there will always be--and rightly so--the capacity to change the exchange rate.

I would not go back into a fixed system. If we were to get stable currencies, as is well argued in a document by the Social Market Foundation, by Sam Brittan and Michael Artis, entitled "Europe Without Currency Barriers", if we were to have a virtually fixed system, there would not be transaction costs ; there would be exchange rate stability. It may well be that we could use the extension of the ecu and that that would form a sufficient balance. As has been said, we may develop a dual currency so that a European currency will run alongside national currencies.

However, when the wider public comes to understand that the system might mean giving up the franc, the deutschmark, the pound and the peseta, there will be an instinctive reaction against it. Those advocating it will have to prove that they have solid arguments for necessitating such a major cultural change. I believe that they will be hard pressed to do so.

I would be cautious about being hostile to the idea of a European system of central banks. It will not be like the Bundesbank system. That system was developed in peculiar circumstances--in the inflation of the 1920s and 1930s and the post-war German situation. If it was modelled on any existing system of banks, it would be much closer to the Federal Reserve, which has a stronger political element, as has been mentioned already in the debate. I suspect that it will be different even from that. We must recognise that at this very moment the 12 national governors of the banks within the European Community meet regularly. That co-ordination has already been found to be necessary. When exchange controls are completely lifted, there will be a need for greater co-ordination. The governors of the banks will become more important within the European Community.

I beg the Government not be too pedantic. Many of our European partners like creating institutions ; frankly, I do not. I found that my European enthusiasm always used to wane the closer I got to Brussels. We must, however, be a little flexible on this. The phraseology that describes a European system of central banks is about as neutral as one can get. If our European partners feel that such a system is an important symbol of making progress towards greater unity in this sphere, we would be most foolish to put up artificial road blocks against it. We should accept such a system provided that it meets some of our essential safeguards and provided that, within that system, our own Governor has an input which reflects his relationship with the Government of the day and, through that Government, with the House of Commons.

It will be difficult to get the balance right, but it is right to accept that we are living in a much changed world of exchange rate movements. Massive sums of money move rapidly, and within a fully fledged exchange rate mechanism we will need co-ordination mechanisms which have an indigenous authority and which operate quickly. We should be more flexible, but I will not push it any further. I do not think that I would argue against, in principle, some institutional development in that regard provided that certain democratic and national safeguards were maintained. I cannot offer a blueprint, as I think that it would be impossible even to design such a blueprint until

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we were within the exchange rate mechanism, seen it work and we were a little past 1992. Jacques Delors must frankly be told--I hope by more than one country, Britain--that a lot of the stuff he proposes is arrant nonsense. It may serve as his presidential launch pad, but much of it does not make sense within an evolving European Community.

Within that context it may be that we are developing, once again, a consensus on European matters in this House. No one can deny that that is of great value. It does not make sense for the Chancellor, the Foreign Secretary or the Prime Minister to stand up for British interests in a European Council meeting and then to come back and always have to justify being in a minority of one. There are times when it is right for a British Prime Minister to be in a minority of one--but not quite so frequently as the right hon. Lady finds it necessary to be. There are moments when it would be greatly helpful for a British Prime Minister to go into negotiation knowing that he or she is likely to be in a minority of one, but knowing that they can speak for a united House of Commons or at least for the main thrust of the political contributions made in the House. That sort of consensus--I know that the Prime Minister will not like the word-- is rather helpful in diplomatic terms.

It is also helpful within the European Community to go out deliberately to make a few friends and there are friends to be made. The Federal Republic of Germany has great reservations about whole chunks of the Delors report. It is very happy, however, for Britain to take the flak and all the odium for making sensible points against that report. For the past two decades, the German technique has been to nuzzle close to and to butter up the French on such issues. It recognises that President Mitterand and Prime Minister Michel Rocard are committed to those issues. These days they are more or less federalists and, unfortunately, we cannot rely on Gaullist attitudes to withstand some aspects of the Delors report. It is necessary to try to prise France and Germany apart on this issue.

Holland has a splendid and independent-minded Prime Minister, Mr. Lubbers. On a number of occasions he has displayed a sensible view from a committed European position, in common with previous Dutch Prime Ministers. Mr. Lubbers now heads a grand coalition with the Dutch Labour party--it has been party to negotiations despite having lost the election--with the Christian Democrats. The Danes and Portugal could also be reasonable allies on this question. It is also important to consider the social contract--

Mr John Smith : The social charter.

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