House of Commons Hansard Debates for 2 Nov 1989

Dr. Owen : That was a Freudian slip. The social contract has a long history in French politics and it is not something that has been discussed in this country alone.

The biggest absurdity in the social charter is the minimum wage legislation. It is a big enough nonsense to argue in favour of such legislation for the United Kingdom, but it is an even greater nonsense to argue that it can be run on a European level. It has its political advantages, but they evaporate the moment one fixes the level. Any Government--I am sure that the right hon. and learned Member for Monklands, East would discover this--would find that they would have to fix the minimum wage at such an embarrassingly low level that they would back off it.

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What we should be talking about is a guaranteed minimum income. That is a perfectly legitimate demand on a national Government and there are strong demands, in social terms, for Europe to have guaranteed minimum incomes. That would link wages, sometimes grossly inadequate, with the benefit and tax systems. If we were signing up for a social charter that stood for a minimum wage or income, it would not cause many problems to the present Government. Why do they not argue that case instead of getting themselves into a great lather?

There are other aspects of the social charter to which objections can be raised. The Commission has modified it substantially and has made it clear that most of the legislation is the responsibility of the member Governments and that it will become Commission responsibility only where appropriate.

Every possible piece of phraseology within the social charter does not fit us and it does have some grandiose elements within it, but it is fairly harmless stuff. If we get ourselves into a great lather about it and put ourselves in a minority of one, it looks as though we are incapable of giving any ground in what is, essentially, collective bargaining. Effectively we are expected to operate within a coalition. We know that the Prime Minister has some difficulty with that even within her Cabinet, but we should remember the basic facts. We are in the European Community and we are not coming out. There is no question of a two-tier Europe, which would be strongly against British interests. At various times we must give a little to maintain a vital national interest.

I hope that the Chancellor's resignation means that the Prime Minister has been reined in. There is no doubt that the former Foreign Secretary and the former Chancellor bent her over before the Madrid summit. No sooner was the agreement reached, however, than it was clear that, with one bound, she was free. One had only to listen to the press conference that she gave to understand that. She was undoubtedly heading to undermine that agreement.

The Prime Minister has a political purpose in not wanting an exchange rate mechanism. She fears that in the four weeks during an election campaign an opinion poll may well be published to show that the Labour party might win. There might be a run on the pound, although if people listen to what the right hon. and learned Member for Monklands, East said, I am not sure that there would be. If there was a run on the pound, instead of letting the rate go down we might be forced to raise interest rates because of the exchange rate mechanism. That might be slightly embarrassing during a general election campaign.

That mechanism could also stop a consumer boom being generated before an election. Some of the disciplines within the exchange rate mechanism of the European monetary system would be helpful in stopping the gross manipulation of the economy prior to an election. We saw that happen at the time of the 1987 election, but the Conservative party did it in 1955 and 1959 and it jolly nearly got away with it in 1964. If it could, the Labour party would have done the same. The disciplines within the mechanism would inhibit to both sides of the political scale at the time of the general election. I welcome that.

The European Community has been a political, divisive issue in this country from 1962 until about 1988, which is far too long. I have listened to the debate today, and for once I am beginning to believe that our membership of the

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European Community is becoming something to which all sensible people in this country can give a wholehearted commitment.

Mr. Deputy Speaker (Sir Paul Dean) : The 10-minute limit on speeches begins at 7 o'clock. Hon. Members will find the digital clock winking at them when they have half a minute to go.

7 pm

Mr. Nigel Forman (Carshalton and Wallington) : I must begin by saying how much I agreed with a large part of what the right hon. Member for Plymouth, Devonport (Dr. Owen) has just said in a good-humoured and sensible way.

The idea of economic and monetary union obviously poses problems for this House and for political decision makers in this country. That is mainly because, although a distant goal, it implies a real shift of political power away from politicians at national level to politicians, bureaucrats bankers and judges at the European level. In the long run of history, this may happen. If it does, it will do so only with the prior approval of the national Governments and Parliaments concerned--through a new Community treaty which will need the unanimous approval of all the member states if it is to be brought into being.

In the shorter term, the priority for Her Majesty's Government must be to resolve the doubts and contradictions in their attitudes towards the European monetary system. The Financial Times correctly argued in an editorial yesterday :

"Membership of the EMS has become a litmus test for Britain's commitment to the broader political aspirations of the European Community".

The most pressing problem for the Government is to resolve the issues raised by the interaction of European policy and monetary policy. That cannot be sensibly managed without taking full account of the European--and even the global--dimension of monetary policy. We should consider carefully the interaction of these two great issues before spending much more political time and energy on the longer-term issues of institutional shifts and political deficits in the European Community, to which this House will doubtless return on numerous occasions.

In an open economy such as that of Britain today, with more than 30 per cent. dependence on foreign trade, the Government cannot be indifferent to significant movements or volatility in the exchange rate. If they are, damaging consequences will follow. Between 1979 and 1981, Ministers seemed indifferent to a rapid and large appreciation in the pound which rendered at least 20 per cent. of our manufacturing capacity obsolete, drove up unemployment, exacerbated the seriousness of the recession and significantly tightened the monetary stance.

In early 1985, the dollar shot up like a rocket and the pound plummeted towards parity with it. Not even the most relaxed monetarists felt able to sit on their hands in those disturbing circumstances for the exchange rate and British interest rates were raised by four percentage points in as many weeks to prevent the pound falling further and weakening the monetary stance.

The moral of the tale is that monetary policy must have regard to significant movements in the exchange rate. Indeed, that is an understatement of what is required in the modern world because internal indicators of monetary

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conditions, and hence future inflation, have been shown to have only limited utility. M0 is an accurate coincident indicator of monetary conditions, but a poor predicter of future inflation. Sterling M3 should have had a better record of prediction, but experience in the mid-1980s showed that it was not giving the correct signals. M4, sometimes known as broad money, probably provides the least unrealiable domestic indicator of monetary conditions, and hence future levels of inflation.

However, all these internal indicators of monetary conditions take insufficient account of changes in monetary velocity and especially of externally triggered economic developments such as changes in German interest rates or violent swings in the dollar, both of which can have a significant impact on monetary conditions in this country.

Any Government of this country, which is no more than a medium-ranking power in today's world, are obliged to run their monetary policy with more that one eye on external monetary conditions. The only reliable way to measure these and their impact on the economy is to look at the pound's performance in relation to a particular key currency of a basket of currencies.

It may be possible for great economic powers such as the United States, Japan or West Germany to run their monetary policies principally according to domestic conditions, but it has become effectively impossible, and hence most unwise, for Britain or France, South Korea or Taiwan, Australia or Canada to attempt to do so. We are forced to recognise the reality of our position. If we really want to defeat inflation--and we do--we have no alternative but to give considerable and perhaps overriding weight to an external standard for our monetary policy.

Before the first world war, this was provided by the gold standard and it was relatively easy for us to work within it because for much of that period we were the dominant economic power in the world and it suited us better than anyone else. Between the wars, there was no absolutely reliable monetary standard and leading currencies gyrated for a variety of reasons. A weakened Britain attempted heroically to go back on to the gold standard in 1925--at an overvalued parity--and was eventually obliged to break the link and devalue in 1931 at the time of the great depression.

From Bretton Woods in 1944 to the Smithsonian agreement in 1971, the world was effectively on a dollar standard and the regime of fixed dollar exchange rates provided the necessary signals and disciplines for periodic adjustments in British monetary policy. That period was brought to an end by the surge in United States inflation associated with the Vietnam war, which obliged the Americans to break the link between the dollar and gold, and by the emergence of other economic power centres in the world--notably West Germany and Japan--which began to create what Henry Kissinger described at the time as an emerging multi-polar world.

That is the world in which we have been living ever since--a world that is multi-polar, increasingly liberalised and economically interdependent, in which the turnover in foreign exchange dealings in one day on Wall street may be equivalent to three times the total foreign exchange reserves in this country. In a world subject to capital and

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currency movements on such a scale, the idea of achieving national monetary autonomy is no longer realistic, especially in a country of the economic weight of Britain today. It is not even completely possible for the economic super-powers. We should recognise that reality and apply its lessons to our policy.

We are left with three choices in the conduct of monetary policy. First, we can operate an ineffective, misleading and vulnerable monetary policy based on the best available indicators of internal monetary conditions--perhaps M0 and M4 together. Secondly, we can operate a more realistic but still vulnerable monetary policy based on a mixture of internal and external monetary indicators. In the process, however, we run the risk that our policy will be misread and misunderstood by the markets, thus forcing us to incur unnecessary extra costs in terms of short-term interest rates which are higher than they might otherwise have needed to be, and exchange and interest rate volatility greater than might otherwise have been the case.

The third, and most effective, choice is to opt for a framework capable of providing both a higher degree of certainty and a higher degree of financial confidence in the markets by joining the exchange rate mechanism at the earliest sensible date. In effect, that will mean putting ourselves and our domestic monetary policy on to an external deutschmark standard. That may be disagreeable for those who cling to anachronistic notions of national monetary autonomy, but our recent experience of having to maintain our interest rate differential with the Germans by raising our rate 1 per cent. when they raise theirs should have cured us of any lingering misconceptions on that score.

Even that course of action will be no panacea and may bring considerable difficulties for us, especially in the early stages after we lock ourselves into a fixed parity with the deutschmark. With French experience as the best evidence to go by, it may take between three and six years in the ERM for us to converge completely down to German inflation levels, and we may not even achieve that if we persist with the short-sighted industrial attitudes shown by the Confederation of Shipbuilding and Engineering Unions. Initially, we would almost certainly have to pay the price of high interest rates and considerable interest rate volatility, but after a while the markets should settle down, confidence that we are in to stay should increase, and hence the interest rate premium and the inflation differential should gradually diminish.

Since all this could be a difficult political pill to swallow, the question of timing becomes important, as does the question of the best institutional arrangements to support it. With the next general election now probably delayed at least to the autumn of 1991, and perhaps even the spring of 1992, the best time to lock ourselves into the ERM would be either in the autumn of 1990--once French and Italian exchange controls have been fully removed and our own inflation rate has fallen closer to that of Germany--or in the first week immediately after the next general election.

If the latter choice seems politically preferable, it should be accompanied and supported by an unambiguous commitment in our next manifesto to establish the Bank of England on a new basis of strength and independence analagous to that of the Bundesbank or the Federal Reserve. That will give extra confidence to the markets and increase the credibility and, if necessary, the austerity of

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monetary policy in this country. I had meant to read a quotation from Mr. Poehl in my support, but I have not time to do so. This will also make it institutionally easier for Britain to co-operate in a future European system of central banks such as that proposed by stage 2 of the Delors plan for progress towards economic and monetary union.

These are large issues. The interaction of economic and European policy will probably be the most critical area of decision-making for the Government between now and the next general election, and probably well beyond that. Despite the temptation to follow the advice of many in this House by playing the nationalist card, it would be an historic mistake for the Government to do other than to follow through the European commitments that they have already made in the Single European Act and at the Madrid European Council. Let us therefore press ahead, as the Government and the party best equipped to defeat inflation, restore a competitive edge to our economy and lead Britain further towards its European destiny in the 1990s and beyond.

7.11 pm

Mr. Austin Mitchell (Great Grimsby) : It is interesting that this debate has concentrated on the EMS and the exchange rate mechanism. That is appropriate because commitment to the ERM is a central part of the first stage. It is also interesting to look back at the conditions set out in 1978 by the Labour Government for membership of the EMS, two of which--and they are basic--have not yet been fulfilled.

There were eight conditions. The third was that the EMS "should provide a basis for improved economic growth and higher employment in the Community".

Since the system came into being on 1 April 1979, Europe has become both the high unemployment and the low growth black spot of the advanced industrial world. Between 1980, the first full year of operation, and 1988, manufacturing output in France grew by only 4 per cent. and in Italy by 8 per cent. Both countries were growing far more rapidly before they entered the exchange rate mechanism. Unemployment in both countries is now at record levels ; that is not unconnected with the fact that they are members of the ERM. The other condition that was not met was that the system "should impose obligations on its stronger members symmetrical with those falling on its weaker members".

As with Bretton Woods, it does not do that. West Germany is still running up a huge surplus and dominating the Common Market economically by keeping the mark deliberately undervalued to enhance its surplus in manufactured trade and its domination of the markets of other countries, all of which are in deficit to West Germany. This is a real problem. The only way in which Europe can trade fairly is if the mark is revalued upwards--yet the exchange rate mechanism acts as a series of guy ropes using the other currencies to keep the deutschmark down. The system forces these currencies down to the unnaturally low level of inflation in West Germany. In that sense, it helps Germany to keep the deutschmark down so that Germany's manufacturing surplus can grow to the dominant level at which it now stands.

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The system has ruined the Mitterrand attempt to recapture the French market ; it ruined his expansion in 1981 when the French Government were forced to choose between membership of the exchange rate mechanism and sustaining their expansion. They chose Europe, and Delors went off to his reward in Brussels.

If, as the document on the evolutionary approach suggests, we join the ERM, we should issue another Green Paper to explain why the two unfulfilled conditions can now be dispensed with and why they are no longer relevant. I believe that they are still relevant.

My party stipulates that we shall enter the ERM on four conditions. I am happy with that--although I was not consulted--because those four conditions are unattainable, especially the one about a full and competitive exchange rate. What is a competitive exchange rate? The only possible definition is the exchange rate at which a country can balance its trade in conditions of full employment and a high and sustainable rate of growth. We are nowhere near that, and it is difficult to imagine the scale of the devaluation that would be necessary to bring us to that level of competitiveness. The pound is substantially overvalued in real terms against the deutschmark, even compared with 1986 levels. The deficit in manufactured trade is directly due to that over valuation.

This brings me to some of the more naive arguments for membership of the mechanism. They are advocated by the Democrats and the Confederation of British Industry in a united chorus. They say that the mechanism would help to bring inflation down. It will : it is easy to achieve nil inflation in a graveyard. The exchange rate mechanism has certainly been successful in giving France and Italy high levels of unemployment and low levels of inflation--that is its achievement.

The other argument advanced by this group is that industry wants a stable exchange rate because that would encourage trade. But we are a country in massive deficit. If the system encourages trade, it encourages those who import into this country to build up the deficit as much as it encourages those who export to whittle it down. If that is the benefit of stability, we shall suffer under it.

None of the studies carried out by the Federal Reserve or the Bank of England shows that such stability is necessary--fluctuations are no great barrier to trade. In a context of massive deficit it will be impossible to maintain any exchange rate at which we entered the ERM.

The central difficulty and the nub of the argument over the ERM is that it imposes on us--if we enter it--an externally determined exchange rate. That was the difficulty on which the Labour Government broke themselves in the 1960s, but with this difference : this determined exchange rate would be determined by competitors who have every interest in seeing the currency of this country overvalued because of the massive surpluses that they are running up in their trade with this country. That is the treadmill that will be imposed ; we shall be back in the trap of the 1960s, only worse.

It is true, as hon. Members have said, that there are wild fluctuations, but it is also noticeable that they mainly affect the deregulated economies with strong financial sectors--the United States and Great Britain, which are the only two countries to have experienced the wild overshoots that have been so detrimental economically. Over the long term, we can still affect and manage the exchange rate largely through interest rates. That is what the

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Government have done. They have done so for the wrong purposes, keeping interest rates too high and thereby greatly overvaluing our currency. That is folly, but it proves that we can manage and use the exchange rate for national purposes. It would be central to the policy of any Labour Government whom I would want to see in power to use the exchange rate for the purposes of the people--for expansion and growth, to rebuild the manufacturing base of this country. We are at a turning point. The economy has fundamental problems ; it is in comparative decline and it has just wasted the great opportunity that oil gave us to expand our industrial base, which is now too shrunken and weak to fulfil these purposes for the people--providing growth and jobs and generating the surplus that we need for our well-being. If we now go further and faster into an open market that weakens weakness and strengthens strength, leading to the phenomenen of peripheral decline--draining development from the periphery to the centres of population and wealth--we compound our problem. If we also accept monetary union on top we compound the problem of peripheral decline even more for then a balance of payments problem becomes a regional problem.

This is the danger, and we are now at a time of choice. Either we act for ourselves using the traditional weapons of the exchange rate, interest rates, control of credit and tax policy to rebuild our industrial base, or we throw ourselves on the mercy of Europe. That requires us to demand as a weaker element in that relationship ever stronger central institutions to help us even more. That is implicit in the commitment to allow the EC to redistribute in the way that the national state redistributes in a national economy. In other words, if we pursue this path, we shall become dependent, especially on West Germany. Is West Germany's record of generosity such as to encourage the belief that it will support us in that situation, or will it look, as it must, towards reconstruction in eastern Europe? That is the choice. The Opposition have no alternative and certainly I have no alternative but to choose our own weapons for our own purposes for building up our own strong economy.

7.20 pm

Mr. Ian Taylor (Esher) : It is a great privilege for me to speak after my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), who made a first-class contribution to this important debate. If one of the possibilities that emerges as a result of the unfortunate events of the last week or two is that my hon. Friend is free to speak on economic issues, the House will be better for it. We are having two debates--one about the relatively short-term policy impact of the conditions on which we join the exchange rate mechanism, there no longer being any doubt by the Government that we shall join, and the second about the longer-term problems of how the consequences of the development of the exchange rate mechanism would work out in terms of economic and monetary union. Britain has been committed to economic and monetary union for a long time, and that was reinforced by the Single European Act. The definition of

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how that should be shaped was never made crystal clear until it came to the Delors programme. I shall return to that.

In the short time that is available it is difficult to rehearse all the arguments that led me to conclude that it would be better for this country and for sterling to join the ERM sooner rather than later. The arguments advanced by my hon. Friend the Member for Carshalton and Wallington were clear and concise. However, it is important that if we regard exchange rates as an important part of economic policy, although not the most important part, it is better to look upon them in the context of a co- operation agreement with our major trading partners rather than to try to continue treating them in isolation. For that reason I do not agree with some of the arguments of the hon. Member for Great Grimsby (Mr. Mitchell). The protection that will be provided for stability within the exchange rate mechanism, the benefit of the collective action of reserves, can have a major beneficial impact and also give the clear sign that there is a policy of stability that will require strict monetary discipline in this country rather than an excuse to avoid it. That seems to be a double advantage. The benefit, of course, would be increased because, as soon as our rate of inflation was declining, we would be more able to manage the problems of our interest rates on the downward side if we were part of the exchange rate mechanism at that stage.

There is no questioning the clear conditions that were laid down at the Madrid summit about our entry. As my right hon. Friend the Chancellor of the Exchequer said in his speech two days go, it would not make sense either for this country or for the members of the exchange rate mechanism for us to join if the conditions were not being met. Therefore, I fully endorse the reality that we must make sure that the conditions are adhered to.

As regards timing, we need to look closely at exactly what is happening to those conditions and keep them under supervision. We can leave aside for the moment the prospect of a declining rate of inflation in Britain and the rate to which it will decline. We must not assume that the member countries of the Community are static. For example, the French have gone a long way down the track of removing their exchange controls and liberalising their currency movements. There remains a problem for individuals who wish to have foreign bank accounts or hold foreign exchange in France. But as any French Minister will confirm, France has already removed most of its controls and yet that has not had a destabilising effect on the exchange rate mechanism.

It is most unlikely that the Italians will fail to reach their target, despite the problems that anyone who looks at the Italian economy will understand. Politics comes into this, because the Italians will hold the presidency of the European Community in the second half of next year and 1 July is the target date for the removal of exchange controls. That may be when the intergovernmental conference is held, should one be called.

It is possible to say that by July 1990 there will be no exchange controls in countries which represent 80 per cent. of the Community's output. That is a significant and important factor. The timing must also take politics into account. The highly desirable achievement of the conclusion or a move to the conclusion of the internal market could well be speeded up if our colleagues understood that joining the exchange rate mechanism was part of a political trade-off. That needs to be kept in mind,

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because it is in Britain's interests that the internal market should be realised. That implies that we must support the Commission when it wishes to take tough powers to enforce the deregulation of the European Community. That applies particularly to Sir Leon Brittan, the Commissioner responsible for competition policy and for removing state subsidies in countries which still practise it to an alarming extent. We should bear those factors in mind, because occasionally statements are made which appear to give the contrary view of our attitude to the Commission.

I shall now deal with economic and monetary union. It is not at all inconsistent for me to have stated clearly that I believe that we should join the exchange rate mechanism earlier rather than later and then to say that I utterly reject stages 2 and 3 of the Delors plan. They seem to be reminiscent of the constitutional discussions that are quite popular in France, where people spend much time trying to set up an edifice in order to solve a small problem. It seems that that is exactly what is happening in stages 2 and 3 of Delors. It is an unacceptable transfer of sovereignty to somewhere. I do not like the word "sovereignty". Let us say influence, power and decision-making being transferred somewhere with no provision for democratic accountability. Many of the measures relating to whether countries should be allowed budgetary and fiscal control seem to be meddling of the worst sort. What is worse--this is where we accord with the Bundesbank and the advisers to the Ministry of Economic Affairs in Germany- -is that it does not guarantee the one thing that is very important in the whole process--sound money.

There is no guarantee that stages 2 and 3 of the Delors plan will ensure the one thing which will come out of the exchange rate mechanism, which is that we shall be linked to a sound monetary policy and the anchor currency, the deutschmark. The Bundesbank is worried about that. It has made it clear that it does not wish to see the move from the current system, where it calls the shots with a strong anti-inflationary policy, to something that is amorphous and in which no clear ground rules are laid down. Therefore, it must be clearly rejected.

I welcome as a major contribution to the debate the Government paper "An Evolutionary Approach to Economic and Monetary Union". The evolutionary approach must make sense because we are moving into an unknown area. It is impossible for us to try to invent institutions in the hope that the path that the process is taking will meet them at the right time and in the right place. That could well not happen and, as I said earlier, it could undermine the whole exercise. I am delighted that it is called "An Evolutionary Approach to Economic and Monetary Union" because there is an occasional thought that the Government might wish to keep resubstituting the word "co-operation" for the word "union". That is a significant point, because we have now to show our Community partners that our ideas are the best way to achieve in a much more effective manner what they have already decided that they want to achieve and that therefore they are not going back on their political commitments towards the realisation of economic and monetary union.

I urge my right hon. and hon. Friends in the Treasury to make sure that we develop allies among the members of the European Community who think in a similar way. As has been pointed out, there is often a tactical difference because we go in making our objections well known when

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it is clear that many other members of the EC have profound worries about what the Delors report has done. We must realise that our job is to get a lot of them on our side so that we can have a great influence on any outcome of calling an intergovernmental conference. A block of 11 against us on the continent, pursuing a different economic and monetary union, would be a grave disadvantage to us. Therefore, I urge the Government to make their proposals with great energy and to win friends for our cause.

7.30 pm

Mr. Tony Benn (Chesterfield) : This is a political debate, and not an economic seminar in which people discuss inflation rates and money supply. We are talking about the future of Britain and of Europe. There are interesting questions about the rapidly changing situations. We are not discussing the Europeans against the anti-Europeans. We are all European. History and geography decided that. How do we want to see this rapidly changing continent develop? We are not discussing nationalism against internationalism, because nobody believes that one country can isolate itself from what happens in the world. We are discussing whether we should be free to respond to what is happening in other parts of the world or whether we are to be told by others how we ought to respond. We are not discussing the past versus the future, because the founders of the treaty of Rome have been wholly overtaken by the events in eastern Europe. Furthermore, this is not a party battle, as is evident from the variety of opinions expressed. We are discussing the guiding principles on which we should proceed.

The hon. Member for Esher (Mr. Taylor) spoke as if the purity and clarity of the market were the beginning and the end, and that if one had a pure and clear market one had solved one's problems. Listening to him, I wondered how many other guiding principles we had had in our history. When Julius Caesar and William the Conqueror tried to get us into the Common Market, separated by 1,000 years, their ideas were either to uphold the Roman empire or to uphold the glory of Normandy. I suppose that later, when the crusades were conducted by Richard Coeur de Lion, it was the Christian versus the infidels. Then there were the mercantilists, who said that if one could get all the money one would have the world. They set up the board of trade, with Mr. Speaker on it. I do not think that a Speaker has been on it for 100 years. Then there were the imperialists, who said that it was all about the empire ; then it was all about free trade ; and then it was about the gold standard. One has to decide what one thinks life is all about before one can decide what structures one wants. I do not believe that a pure and open market is what life is about. Nor do I believe that those who struggled hard to elect Members of Parliament to come here think that that is what it is all about either, or they would have taken shares in small companies, attended annual meetings, and hoped that they would have had some influence via the financial market.

Furthermore, we are discussing the constitution under which we are governed. The French had a revolution on the basis of "liberty, equality and fraternity". The Americans, a year or two later, had one based on "life, liberty and the pursuit of happiness". We are told that it is about the "free movement of capital and labour" and we must sacrifice everything else to that. I have heard of people going to the stake for their belief in liberty, but I

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have never heard of somebody going to the stake because he took a different view of the public sector borrowing requirement. That is not what life is about. That is not what motivates people, so let us cut some of that out of the debate and have a real discussion. Since the Common Market was set up after the war, for a variety of reasons, there has been an inexorable drift towards greater central control. We debated the EEC in the House, and I participated in the debate from the Front Bench in 1971. I played some part in the referendum, which decided the matter publicly. The Prime Minister went along with British membership. She was a member of the Cabinet that signed the treaty of assession. In 1985 she signed the 1992 agreement and she has given assurances in Madrid, which, however one interprets them, show that it is at least the public posture of the Government to go in. I think that she will be driven into the ERM mighty quick, for one reason. The power of capital is so great that they will not accept a Prime Minister, even an elevated Prime Minister, who stands against what they demand.

I remember the Prime Minister once making a speech from the Front Bench in which she said that she would not pay our contribution. That was the boldest stance on Europe that I have ever heard anybody make, from either Front Bench, and within a week or two it had changed. In the latest Cabinet that she has appointed, the majority are in favour of joining the ERM, and perhaps even the economic and monetary union. With pressures, we shall see her change. We are told that the lady is not for turning, but perhaps she is for wriggling. As the right hon. Member for Plymouth, Devonport (Dr. Owen) said, within a few months, we shall be in the ERM.

Some intend to go in for a full political union, but I have detected in the debate a sort of turning of the tide. I do not know how to describe it, but I think that the last federal enthusiasts have begun to get themselves out from under. I detected in the speech of the new Chancellor of the Exchequer, whose views are important, a certain healthy caution. I agree strongly with what my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said about the nationalisation of the Bank of England, and he sounded a note of caution about it. We are beginning to recognise that the changes in the world are not in the direction of bigger and better, and are turning against an idea that was popular when I was Minister of Technology 20 years ago. It was then that, if one merged everything in, the end result would be stronger. We are moving in the opposite direction.

The Commission and the organisation in Brussels are centralised, bureaucratic and secretive. I remember, during the time of my presidency of the Energy Council, suggesting that Ministers met in public. My right hon. and learned Friend was a Minister in the Department of Energy then. The last thing that they wanted was anyone to know what they said in the privacy of the Council of Ministers. They wanted to give things away in the Council of Ministers and then give press conferences to say how marvellous they had been upholding their national interests.

Nobody has yet mentioned that the Federal Republic of Germany is the one country that could leave the Common Market the day that German reunification occurs. The Federal Republic has always made it a condition that they

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would never sign a treaty that bound a united Germany, which it did not then have. The bargaining power of Germany is not the Bundesbank or the strength of the deutschmark ; it is the power of Germany to dictate the future of Europe by deciding whether to stay in the EEC or move in another direction.

I strongly welcome the changes in eastern Europe. But does anybody think that the development of democracy and the desire for representative Government instead of the dictatorship of proletariat would be replaced by an enthusiasm for the dictatorship of Jacques Delors or of the Bundesbank? Does anybody think that the market place, with its special Brussels bureaucracy, will look better than Gosplan, which they are just getting rid of? Does anyone think that the United States would agree to be governed by 15 commissioners instead of a president whom the people elect? Does anyone think that the structure of the EEC has any future? Of course it has not. It is in retreat because it is out of date and meets neither our interests nor the interests of Europe.

The Prime Minister has set down funny conditions for going into the ERM, with which I do not agree. I do not agree with the Prime Minister on many things. She says that if the power of the market were supreme, she would go in, if only the other member states would give up their democratic safeguards and reservations. That would mean that the market would be in charge, instead of Delors. I do not believe that bankers should run this country, because I am a democrat and believe that people should be in power through election. The day that bankers are elected, I shall look on them with greater favour. I do not agree with the assessment made by my right hon. and learned Friend the Member for Monklands, East of the policy review. I will try to read what was said, but I have left my specs somewhere.

Mr. Tony Worthington (Clydebank and Milngavie) : Have mine.

Mr. Benn : I do not know whether they would help much, but I will try. I suppose that, now there is a charge for eye tests, we shall all be sharing specs soon. Yes, I can read well. The policy review says :

"We believe that the European Monetary System, as at present constituted, suffers from too great an emphasis on deflationary measures as a means of achieving monetary targets and that it imposes obligations which are not symmetrical. We oppose moves towards a European Monetary Union which would further impede progress in this area."

That is followed by other references to the European exchange rate mechanism.

The problem that I have with my right hon. and learned Friend is this : we have had one Chancellor of the Exchequer resign and I do not want my right hon. and learned Friend to resign before he assumes that office. I think that the incoming Labour Government will find that they are in office before 1992. The Prime Minister will become the Countess of Dulwich living in Finchley or the Countess of Finchley living in Dulwich. There will, however, be a change of Government, and the incoming Labour Government will be faced with a massive deficit, high inflation, high unemployment, weak industry and a weak pound that is under pressure.

My right hon. and learned Friend is wrong in supposing that the ERM will offer full protection and that confidence will return. Instead, pressure will be institutionalised and legalised, and he and the other members of the next

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Labour Government will have to live with it in the same way as the IMF made the previous Labour Government live with it, and that cost us the general election in 1979.

The instruments that we shall need will be wide-ranging, and I do not suppose that Conservative Members will agree with them. We shall need exchange rate control, exchange control, industrial policy, public investment and perhaps import controls. We shall have to use the Bank of England and interest rates, and that will be our right, if a Labour Government are elected. If the Conservative party does not like that, let it defeat us. No one can say that, because a deal has been done with Mr. Delors, a Labour Government must abide by it. The only answers to Britain's problems lie in Britain. We cannot get Delors to give us a social charter. We shall have to fight for that ourselves. We cannot get the Prince of Wales to get us better buildings: we shall have to fight for decent architecture. We cannot rely on proportional representation to defeat the Prime Minister: we shall have to win a parliamentary majority. Until the Members of this place recognise that responsibility for change and the future of Britain lies with those who elect them, which is why we must speak the truth to them, we shall continue pursuing the chimera of economic and monetary union and a federal Europe, and we might on that exceed our time limit.

7.42 pm

Mr. Neil Hamilton (Tatton) : We have heard a most beguiling speech from the right hon. Member for Chesterfield (Mr. Benn). I thought I heard the right hon. Gentleman speaking with the same enthusiasm, nay passion, that we hear from my right hon. Friend the Prime Minister on similar topics when she has appeared on television without a script. We may find that the right hon. Gentleman has more in common with my right hon. Friend than he would like to think.

I agree with the right hon. Member for Chesterfield that in Britain there is not the slightest desire for economic and monetary union with other countries in the European Community, apart from a few harmless eccentrics such as the hon. Member for Berwick-upon-Tweed (Mr. Beith). In general, Britain is entirely opposed to Mr. Delors's proposal. I suppose, however, that there is one compelling reason for at least going so far as to accept stage 1 of the proposal, and that is the threat of a Labour Government. Labour Governments have always needed external disciplines to control the domestic money supply. That benevolent function was provided by the gnomes of Zurich in the mid-1960s and by the IMF in the mid-1970s. It usually takes about two or three years for the bailiffs to be called in. At the end of the day they have had to do roughly what has been proposed by means of the exchange rate mechanism of the EMS.

I do not believe that the Labour party has a serious policy on the EMS. I am sorry that the right hon. and learned Member for Monklands, East (Mr. Smith) has left the Chamber temporarily because I am about to refer to my attempts to intervene in his speech. I was unable to intervene because he has taken to not to allowing me to do so. He is not as amiable to me in the Chamber, unfortunately, as he is in the Tea Room. I wanted to ask him how he can reject stages 2 and 3 of the Delors plan, on the basis that they would give power ultimately to the Bundesbank, which would be outside Britain's economic

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policy, and yet accept stage 1. The ERM is effectively a deutschmark zone. It is because of the stability that is provided by the Bundesbank, which drags along all the other currencies in its wake, that the economic sovereignty of Britain would be prejudiced by the ERM.

Policy in the Labour party is usually made in unscripted interviews with the hon. Member for Dagenham (Mr. Gould), who is then swiftly contradicted by the Leader of the Opposition. In this case, however, even that degree of policy making has not been adopted by the Labour party. It has produced a remarkable set of conditions for entry into the ERM, and I think that we should find that it would be impossible for them to be met.

It is extraordinary that the Opposition say that the essential element in their negotiations to join the exchange rate mechanism of the EMS would be an agreement by all the other members to change the most essential feature of the arrangements. which is the extent to which the control of the ERM bears down upon inflation and monetary control within the Community. It is moonshine to believe that the other member states, especially Germany, will be ready to negotiate away the one redeeming feature of the system. I do not believe that the Opposition's policy is a serious one.

I welcome the adoption by my right hon. Friend the Chancellor of a policy of competing currencies. As with so many of the successful policies of the Government, it was first foreshadowed in a No Turning Back Group pamphlet entitled "Europe Onwards from Bruges", which was published in April. I am sure that once the good sense of that pamphlet sinks in, it will be met with a great deal more support than it received initially.

I believe that it is dangerous for us to get mixed up once again with the world of rigged exchange rates. It has produced tremendous problems for us in the past three or four years. We shall be presented with many more problems if ultimately we enmesh ourselves in it permanently. The inflationary stimulus which we have suffered over the past three or four years derives from the G5 and G7 meetings at the Plaza and the Louvre, which were designed to attempt to massage downwards the value of the dollar.

Our temporary, unscripted and unannounced membership of the EMS in 1987 until the early part of 1988 was responsible for exacerbating and prolonging the inflation that we have suffered. A requirement of maintaining a certain value of the deutschmark was that we should intervene massively in the foreign exchange markets to hold down the value of the pound, thus boosting enormously broad money measures. It was necessary for us sharply to reduce interest rates, and that compounded the inflationary stimulus which was present. That was a catastrophic development which produced ultimately the political turmoil which we have suffered over the past few days. It is a pity that we have not learnt fully from the experience of the right hon. Member for Leeds, East (Mr. Healey) when he was Chancellor of the Exchequer in the late 1970s. The right hon. Gentleman learned that it is impossible simultaneously to pursue monetary and exchange rate targets, except in limited circumstances.

I believe that we have a choice. We can have either a stable exchange rate and volatility in our domestic economy or a flexible exchange rate and reasonable stability in our domestic economy. There is a distinct choice, and I think that the conditions that the Government have placed upon our entry into the exchange

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rate mechanism will be sufficient to determine that we shall never enter it. If we were to enter it, however, many of the difficulties that we have experienced in recent months would become permanent features of our political and economic system until the system itself broke down.

I believe that that will happen when the other countries in the Community abolish their exchange rate mechanisms. Those exchange controls have managed to reconcile the conflicting pressures which we, who have not had exchange controls over the past couple of years, have been unable to reconcile, but I am not in favour of the restoration of exchange controls. I consider that their abolition was the most significant act for which the Government have been responsible over the past 10 years, and it has been beneficial in the main.

I am astonished that Opposition Members are nostalgic for all the economic difficulties from which their Administrations have suffered. If anyone wants an object lesson in the troubles that those difficulties would bring in their wake, let him read the autobiography of Harold Wilson, as he then was, and the distinguished memoirs that have recently been published by the right hon. Member for Leeds, East. I know that autobiographies more properly should be shelved under fiction, but in the memoirs of Lord Wilson of Rievaulx, as he now is--I have in mind pages 447-61 on the 1964-70 Labour Government--there are wonderful passages about the difficulties and complications that were imposed upon that Government because of their absurd fixation in keeping the pound in a fixed relationship with the dollar. Paradoxically, the attempt to maintain a stable exchange rate in a world that is anything but stable ultimately produces an instability the opposite of that which it is desired to achieve. I am sorry that eminent gentlemen such as the Governor of the Bank of England should seek to promote the argument that if we do not join the EMS now, whatever the cost it might impose on the British economy, Britain, in some mysterious way, would lose influence in the Community, or within the world, or within the financial world generally. I have never heard such arrant nonsense in my life. As if Britain's importance depended in any way on grand meetings of bureaucrats, bankers and politicians. The real strength of a country depends on what its people produce and consume and their economic strength in relation to others.

The City's success would not in any way be compromised by our failure to be part of the EMS. After all, the City has gone from strength to strength in the past 40 or 50 years, particularly since Britain deregulated its financial markets, although we have only been a member of the European currency rigging mechanism for a small portion of that time.

That opinion ignores the important trend in recent years towards the increasing internationalisation of business and decision taking and the increasing internationalisation of capital. As markets are freed up and regulations are done away with around the world, capital is footloose and fancy free, and that is one reason why, above all, artificial mechanisms designed by politicians and bureaucrats to attempt to control what are, in effect, uncontrollable amounts, because the official

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