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on Treasury and Civil Service, the hon. Member for Hackney, South and Shoreditch is reported as claiming that he was told by the shadow Chancellor that three of the four conditions laid down by the Labour party were either irrelevant or idiotic. Inasmuch as they seem to involve devaluation and reflation, they would undermine the basis of the ERM. I should be grateful if the hon. Gentleman elaborated on that conversation. Which of the conditions are idiotic and which are irrelevant? Has he followed up that matter?Mr. Sedgemore : If the hon. Gentleman read my questioning of the Chancellor in that Select Committee, he would know that the main thrust of it was that most of the conditions put forward by the Government and the Opposition are artificial political hurdles, and that there are no real economic reasons why Britian should not have an early entry into the ERM. The Chancellor did not agree with that, but I am sure that I am right.
Mr. Lilley : I hope to hear more about this famous conversation, but the hon. Gentleman is too canny to be drawn. The central thesis of his motion is that Britain's entry into the ERM must be seen as a stepping stone towards creation of a single European currency. I know that some of my hon. Friends who are opposed to entry into the ERM--wrongly, in my view- -are opposed because they see that inevitable progress towards a single currency, but I believe that both are mistaken.
Pegged exchange rates do not automatically lead to currency union. There have been other fixed rate systems--Bretton Woods, the gold standard and the sterling area to mention but three--and none led to a single currency. That is not the inevitable consequence. Nor does a fixed exchange rate involve the loss of sovereignty. The decision that it is desirable--both for the stability of exchange rates and as an anti-inflationary discipline and framework--to fix a country's exchange rate is a sovereign decision for each state to take or not to take, as it chooses.
However, such decisions cannot be taken wholly unilaterally. If one country wants to fix its exchange rate at 1 to 1 with its neighbour while that neighbour wants to fix the rate at 1.1 to 1, the two are incompatible. An agreement must be reached. The purpose of the EMS and the ERM is to provide a way to establish a compatible system of exchange rates and build a framework in which monetary and exchange policies can be operated. That is sensible, and should not cause my hon. Friends concern.
By contrast, the proposal to establish a single currency and a single central bank goes to the heart of sovereignty and self-government. Virtually every state has, and has always had, its own currency. There are clear reasons why states have found it essential to issue and control their own currencies. First, a currency is a symbol of the state's authority. Secondly, it is a source of revenue, because of the seigniorage that results from issuing a currency whose value exceeds the cost of production. After all, it costs far less than £5 to print a £5 note, and the right to print it is therefore valuable. Thirdly, it is necessary to have the ability to issue money in order to act as lender of last resort to the banking system--which requires Government regulation to maintain its stability, as the hon. Member for Newham, South pointed out. Fourthly, monetary policy has a profound effect--at least in the short term--on
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economic activity. For all those reasons, states have found the benefits of having their own currency to exceed any disadvantages that their citizens may face through not being able to do business in the same currency when they trade or travel abroad.From time to time, currencies have been merged into a single currency when states have merged into a single state : we see that happening as the two German states merge into one state with a single currency. With the arguable excepion of Belgium and Luxembourg--and, possibly, west Africa, with the CFA--two or more states have never successfully shared a currency. In the foreseeable future, there is not the remotest possibility of all the European states merging into a single state under a single Government, and without a single Government it is almost inconceivable that they will be able or willing to manage a single currency. None the less, there is every reason why we should co-operate to manage our monetary policies in the most beneficial and mutually compatible way.
The hon. Member for Hackney, South and Shoreditch asked me whether the Government's views had any counterparts on the continent. I am surprised at the extent to which my remarks were mirrored in a speech that Mr. Balladur sent me. He said :
"Let us be clear, a single currency presupposes a level of political integration and abandonment of sovereignty on the part of the member states which is incompatible with the present situation of Europe, and, in my view, unacceptable to France Both symbolically, and at a practical level, currency is an essential attribute of sovereignty. There is no example of sovereign countries which have given up their currencies. Let us leave this dream world! Who thinks for a moment that Germany is ready to abandon the deutschmark, or Britain the pound sterling? No one says so, but everybody knows. In these circumstances, it makes more sense to put aside these illusions, and instead think of solutions which have a chance of coming to something."
Mr. Cash : My hon. Friend has given us an interesting insight into his own thinking--and, therefore, the Government's thinking--on such matters. Can he tell us what is going on in the mind of the other member states on the question of defining terms such as economic, monetary and political union? He has just given us an insight from France ; would it be possible for him to give us an idea of what is happening in the other countries?
Mr. Lilley : My hon. Friend is as well informed as any hon. Member about what is happening in other countries. I hope that he will excuse me if I do not take up his invitation to digress from my speech and give a dissertation on what they are doing. I hope that Europe will reach a consensus on the practical way forward. There are already good signs that it is possible to reach agreement on those issues. For example, the original Delors report on the economic arrangements within Europe stated that it would be necessary to have control over the budgetary policies of the member states. We pointed out that even close-knit federal states such as the United States and Canada exercise no central control over state budgets, so there can be no reason for leaving less power in the hands of the sovereign Parliaments of the European states.
I am happy to say that the argument has swung in our direction. The Commission has published a new paper that appears to accept our point of view. Britain's proposal--that market forces should be reinforced by members agreeing not to bail out profligate member states and to abstain from the monetary financing of deficits--is
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becoming common ground. I hope that my hon. Friend welcomes the fact that we are joining constructively in the discussions and that we are having success in certain areas.The recently published Labour party policy document goes so far as to claim that the result of that change of thinking in Europe is due to the arguments that it has advanced. That is a little bit of hyperbole, but in essence the Labour party is putting forward much the same case as we are.
The hon. Member for Hackney, South and Shoreditch refers at the end of his motion to wider issues. Division re-emerges as soon as we leave the question of economic and monetary union and consider the position of the two parties in the House. The Labour party backs wholeheartedly the social charter. I understand why the Opposition may find that some of the policies outlined in the social charter are congenial to them as socialists. If so, they should seek a majority for those policies in the House and in the country.
Mr. Tony Banks: What the Minister says is true up to a point, but the social charter also seems to be attractive to capitalists in France, West Germany and other parts of the European Community. How does he square that with what he has just said?
Mr. Lilley : I did not say that the social charter does not appeal to other people ; what I say is that it appeals to socialists. Therefore, the socialists in the House, who believe in the importance of this House, should seek a majority in the House and in the country for those policies. What I cannot understand is why they feel that those policies must be imposed by central diktat--possibly by means of a majority in the rest of the continent against a minority in this country. I do not see the point of that. The document argues implicitly for that point of view : that if the country were to pursue those policies unilaterally, they would make our industries uncompetitive, so we should follow them only on a Europe-wide basis and then all of us would be equally uncompetitive. That is an unattractive argument. Europe is not the world. If Europe makes its industries and economies uncompetitive, it will lose out against its competitors elsewhere in the world. If those policies do not stand up in their own right and are incompatible with competitive industry, we should not pursue them, either unilaterally or collectively.
Mr. Banks : That argument will not be lost on the industrialists of West Germany, France and Italy. They are as acutely aware of the need for competitiveness as the Minister and the British Government. Does he not accept, however, that the social charter is the obverse of the Single European Act and that the two must be taken together?
Mr. Lilley : No, I do not accept that argument. A number of countries believe that it would be attractive to apply those measures throughout Europe. They have already introduced them and found that they have made their industries less competitive than they would otherwise be ; therefore they would like the industries of other countries to be burdened by them as well. Therefore, we did not sign the social charter, but we look constructively at any proposals for specific measures that are well argued and justified.
This has been a first-rate debate, and I refer again to the opening contribution made by the hon. Member for Hackney, South and Shoreditch, which set a high standard
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and provided an opportunity to raise many important issues. I thank him for that, and I look forward to the contributions of other hon. Members as the debate proceeds.12.54 pm
Mr. Chris Smith (Islington, South and Finsbury) : I join other right hon. and hon. Members on congratulating my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore) on his choice of an extremely important topic, and on the eloquence with which he made his case. Sadly, the same degree of clarity cannot be said to have emerged from the speech of the Financial Secretary to the Treasury. On the question of where precisely the Government stand on Britain's potential membership of the exchange rate mechanism, we are as confused now as we were before the Minister's speech began. The most recent definitive statement from the Government came in the speech made by the Chancellor of the Exchequer to the German Chamber of Industry and Commerce in the United Kingdom on 12 June, when he said :
"I think no one has any doubt now that the Government is committed to joining the exchange rate mechanism ; and we have set out the conditions under which that will be possible. A good deal of progress has been made on a number of these conditions, but they have not yet all been met."
That is the most definitive recent statement by a Minister on the Government's intentions concerning sterling's participation in the ERM. However, it provides no guidance as to when the Government intend to take that step and in what circumstances they are prepared to commence discussions with our European partners.
Today, the Minister reiterated the Madrid conditions, which are freedom of capital movement throughout the European Community, restrictions on free competition to be lifted--the completion of stage 1 of the Delors process-- and that Britain's rate of inflation must fall to the European average.
Which of those conditions do the Government regard as having now been fulfilled? I shall address inflation in a moment. As to the others, there were two interesting exchanges during the consideration by the Treasury Select Committee of this year's Budget. When the Governor of the Bank of England appeared before that Committee on 28 March, he was asked by the hon. Member for Berwick-upon-Tweed (Mr. Beith) :
"Would it be your advice to us and the Government that all the Government's conditions except that relating to inflation have now been largely satisfied?"
The Governor of the Bank of England replied unequivocally : "Yes, I think so."
He went on to identify one or two minor issues of free capital movement that remain to be resolved, but said that they were not important.
On 3 April, the hon. Member for Berwick-upon-Tweed, who is tenacious in these matters, asked the Chancellor the same question : "Have the conditions, other than inflation,, for British membership of the Exchange Rate Mechanism been met, apart from the details?" The Chancellor's answer was in sharp contrast with the Governor's :
"No, but they are moving towards being met."
Within six days, the Governor of the Bank of England said that the conditions, other than inflation has been met, but
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the Chancellor said that they had not. We are entitled to ask the Government which of those views represents the considered view of the Government.Sir Richard Body : I thought that the hon. Member for Berwick-upon- Tweed (Mr. Beith) asked whether the conditions had largely been met, which is different from "having been met". It was not inconsistent with what the Chancellor said.
Mr. Smith : The hon. Gentleman ignores the question that the Chancellor was asked :
"Have the conditions, other than inflation for British membership of the Exchange Rate Mechanism been met."
The Chancellor's answer--no--was a clear answer to that question.
Mr. Cash : The hon. Gentleman will be aware that the Governor of the Bank of England signed the Delors report. It therefore perhaps would not be entirely surprising, given that the Opposition do not agree with stages two and three of the Delors report, for there to be a considerable difference in emphasis between the answers given by the Bank of England, the Chancellor and hon. Members.
Mr. Smith : As the Government have asserted clearly several times in the House the accountability of the Governor of the Bank of England to the Government, the hon. Gentleman's comment is somewhat surprising. Of course there may be differences of view between the Governor and Chancellor, but we are entitled to know exactly what is the Government's position. Every time I have asked the Government whether the conditions, apart from inflation, have been met, I have received no answer.
Mr. Maples : At some length, the hon. Gentleman has taken us through the Government's conditions for entering the exchange rate mechanism, which at least have stayed the same for about 18 months, whereas the Opposition's views are constantly changing. It would be helpful to know a little more about them. Last year, the right hon. and learned Member for Monklands, East (Mr. Smith) laid down the condition that the exchange rate mechanism should lose its deflationary bias, which for our purposes is almost the sole reason for its existence. In an interview in The Daily Telegraph in January he is quoted as talking about a competitive exchange rate, but the deflationary bias has been dropped. Will the hon. Gentleman enlighten us about the importance of the delationary bias of the exchange rate mechanism, as his party sees it, and what did the right hon. and learned Gentleman mean by a competitive exchange rate?
Mr. Smith : The hon. Gentleman is a little over-eager. I shall deal with those points in a moment, but I wish first to finish dealing with the Government.
Leaving aside the conditions other than inflation, let us consider inflation itself. We know from the answer that the Chancellor gave during Treasury questions recently that, as their measure of whether inflation has been reduced sufficiently to allow British entry, the Government are using what they like to call the underlying rate of inflation, rather than the retail prices index. We know that, because that was the answer that the Chancellor gave. But we have had no guidance from the Government on the meaning of
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the strange word "proximate", which has been used frequently by the Chancellor in relation to the gap between our level of inflation and the European average when the Government come to make up their mind. What precisely does "proximate" mean? It could mean anything from a very considerable gap between the two rates of inflation to an identical convergence. But when we have pressed the Government on the issue or asked them precisely what "proximate" means, they have refused to tell us. The picture that is emerging is one of continuing confusion and the Government have not told us exactly when and in what circumstances they envisage the Madrid conditions being met. There are sound economic reasons for Britain to join the exchange rate mechanism--on that I entirely concur with my hon. Friend the Member for Hackney, South and Shoreditch. A number of advantages flow from ERM membership. First the ERM will provide stability of planning for British industry, which will then be able to assume a stable exchange rate policy in relation to its overseas trade. It is significant that in January, when Financial Weekly conducted a survey of businesses in Britain, 97.2 per cent., of the companies polled in terms of market capitalisation, and 91.8 per cent., in terms of the number of companies, said that they believed that Britain would benefit by ERM membership. Many of those companies gave as their reason the benefits of a stable exchange rate. They found sterling's volatility against the deutschmark and the dollar to be one of the most telling problems facing British firms abroad. The stability brought to our exchange rate policy by ERM membership would be a significant benefit.Secondly, we must realise that much of our supposed independence of action as a country has already gone. When, last October, the Bundesbank raised its interest rate, it took the British Chancellor and Prime Minister half a hour to decide that they had to do the same. We must realise that the economies of Europe are becoming increasingly interlinked and interconnected, whether we like it or not. It is surely important for us to be part of a forum--that is what the exchange rate mechanism is--which will make joint collective decisions about the future of Europe, rather than having to respond unilaterally to decisions that are made elsewhere.
Thirdly, exchange rate mechanism membership provides protection from excessive speculation against any individual currency in the mechanism.
Fourthly, exchange rate mechanism membership provides a counter- inflationary discipline within the domestic economy. Clearly it is not an easy ride. It does not have benefits without potential disadvantages, but the counter-inflationary discipline that it could bring would act on balance for the benefit of the British economy. On all the points that I have raised, we urge the Government to commence discussions with our European partners to join the ERM immediately. We do not urge the Government to wait until some unspecified rate of inflation or fulfilment of the Madrid conditions is attained. We urge them to commence discussions now.
Of course, we want the Government to discuss with the members of the ERM the issues which the Opposition have consistently urged the Government to discuss. Here I can answer the hon. Member for Lewisham, West (Mr. Maples). Those issues include the rate at which we should join--any Government would have to engage in a discussion about that--the swap arrangements between
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the central banks to protect against speculation, the need for an enhanced regional policy to counter the imbalances which already exist within the European Community and the need for co-ordinated policies for growth across the European Community.Mr. Lilley : Can the hon. Gentleman estimate how long it would take to negotiate a strengthening of the regional support system as in the document, and which he referred to, as a necessary precondition of entry to the ERM? How long would it take to negotiate? The document says :
"Entry to the ERM must also be accompanied by effective collaboration between the central banks of the EC countries." It says that that would involve further development of the Basle-Nyborg agreement on swaps.
How long will it take to negotiate a system involving closer monetary and fiscal co-operation designed to maintain steady economic growth? Are we talking about this century or the next?
Mr. Smith : I am afraid that the Minister is grossly out of step with current thinking in Europe on the matter. I shall come to regional policy in a moment. The one Government in Europe who do not believe in strengthening regional policy across the EC is the British Government. Other countries and Governments in Europe are keen to see regional policy develop, including the Government and the political parties of West Germany. As East Germany comes in to join with West Germany, that argument will become even more powerful for the German Government and people.
Sir Richard Body : Is not there an obvious reason for this? Who will pay for the regional fund? There are only two paymasters in the Community-- Britain and West Germany. It is easy for the Greeks, Italians and others to clamour for a regional fund because they will pull the money out. Who will put the money in?
Mr. Smith : The hon. Gentleman ignores the fact that while Britain has done reasonably badly--I entirely accept that--out of the agricultural support mechanism of the EEC, we have done well out of other EC structural funds which give support to British regions. The hon. Member for Inverness, Nairn and Lochaber (Sir R. Johnston) is well aware of that. The point made by the hon. Member for Holland with Boston (Sir R. Body) does not hold good.
This debate is about not just Britain's membership of the ERM, important though that is, but the possibility of a wider process of monetary integration and ultimate monetary union. On two points alone we are on all fours with the Government. First, we do not accept the Delors proposal for central European determination of the fiscal policies and budgetary deficits or surpluses of individual member states. There is no necessity why such central control should exist even if the process of monetary integration proceeds apace. Secondly, we do not accept Jacques Delors' vision of a totally independent central bank determining, in an unelected fashion, the monetary policies of Europe. We do not believe in unelected bankers exercising an independent control over the major items of economic policy.
Mr. Cash : Does the hon. Gentleman appreciate that that contradicts exactly the point he was making earlier about the significance and importance that he attaches to the statement on the ERM by the Governor of the Bank
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of England before the Treasury Select Committee? The hon. Gentleman should take that into account, as that was the burden of my earlier intervention.Mr. Smith : The hon. Gentleman clearly does not appreciate that the structure of the Bank of England is more heavily controlled and more accountable than that of most of the central banks in Europe. Because of that, the words of the Governor of the Bank of England must be deemed to carry some governmental authority.
The Government seem to be somewhat confused and unclear about the potential process of monetary union. My hon. Friend the Member for Hackney, South and Shoreditch was right to point out that, on 12 June, the Chancellor made no reference to the idea, supposedly all the rage just six months ago, of a system of competing currencies--the so-called evolutionary approach to monetary union. Is the competing currency idea still Government policy? On 12 June the Chancellor spoke about the possibility of the parallel use of the ecu alongside existing currencies--a different mechanism towards achieving monetary union. Is that new Government policy? We simply do not know, because neither the Government nor the Financial Secretary have told us. What is the Government's policy on competing currencies or the parallel use of the ecu? What will the Government argue when they go to the intergovernmental conference later this year?
If we are to move towards closer monetary integration in Europe three points must be emphasised about the shape that such union may take. First, it must retain the essential principle of democratic accountability for the making of monetary policy. Any system of central banks that might emerge must be democratically accountable. Secondly, in such circumstances, the crucial question will concern the remit of any such central bank. If a central bank is told to concentrate--without any other factors being taken into
consideration--only on the issue of price stability, one set of decisions will come from that central bank. But if it is told, as it should be told, to concentrate on the need for price stability but to do that within the context of the need for balanced sustainable growth across the overall European economy, a different set of decisions will emerge. The latter would be a more sensible remit to achieve.
Thirdly, any moves towards European monetary union must be seen in the context of improved regional policy, a subject to which I have referred. If there is to be monetary union--if individual nations are to find that the levers of exchange rate mechanism and interest rate decisions are removed from their armoury--there must be other and wider mechanisms to ensure that imbalances within the overall European economy can be addressed, and regional policy presents that opportunity.
Mr. Peter Shore (Bethnal Green and Stepney) : The House is listening with interest to my hon. Friend's elaboration of the conditions that he thinks are reasonable for further moves towards economic and monetary union. He has not commented on proposals for the permanent fixing or locking of exchange rates. That, after all, is the essential feature of stage 3 of the Delors report and is an important component of stage 2, when any changes in exchange rates are virtually outlawed, or are to be taken only in the most exceptional circumstances. Has my hon.
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Friend considered that, and may we be assured that in no way are we prepared to accept permanently fixed and locked exchange rates?Mr. Smith : My right hon. Friend speaks with authority on matters relating to the European Community. I do not always agree 100 per cent. with what he says on these issues, but there is always a good amount worth considering in what he says, and the point he raises is extremely important in relation to any prospects for economic and monetary union. The whole idea of monetary union that some people are advocating would entail a common currency and a central monetary authority, and inevitably that would include a gridlocked exchange rate system.
As I have been explaining, our view is that if steps are to be taken in that direction, we must ensure that a number of extremely strong protective measures are taken, including the three that I outlined--democratic accountability, a remit that includes economic growth and a much stronger regional policy. Those must be part of any steps that may be taken in the direction that my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) suggested. By contrast, the Government have not outlined their view on this issue with anything like the same clarity. There has been a lack of any truly constructive approach from the Government on the exchange rate mechanism membership and any developments towards monetary integration between the countries of Europe.
We should be discussing constructively and in detail with our European partners, helping to shape the nature of those discussions, and then making judgments about what part we should like to play in any such process. The Government are not doing that ; they are sitting on the sidelines. There is a danger that a two-track Europe will be created that will leave us in the second, rather than the first, league of economic development, growth and prosperity in the European Community.
Mr. Spearing : I am grateful to my hon. Friend for giving way because in answer to my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) he said--with his label as Front-Bench spokesman on his forehead--that we would not rule out fixed exchange rates given certain conditions. My hon. Friend nods his head. One such condition was regional policy. Nobody is against regional policy, but I am sure that he agrees that where regional distress is caused by competition--competition is one of the aims of the treaty of Rome--it is difficult to accept that relief of that distress should be given in hand-outs decided in Brussels. Is the regional policy to which my hon. Friend referred that sort of policy or the dispersal-of-industry policy engaged in by the post-war Labour Government?
Mr. Smith : Truly effective regional policy can be achieved only on a democratic and decentralised basis. My hon. Friend is right to identify that as an issue. The ways in which regional policy funding decisions are arrived at is an important issue for us to discuss, as is the size of the regional fund.
My hon. Friend has correctly identified our view that we would not for ever rule out in principle the possibility of a common currency, a common monetary policy and a
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gridlock of exchange rates in the European Community. But we want to know the exact nature of the animal before we accept it without question. That is why it is absolutely essential that the conditions that I outlined are met, the issues addressed and discussions held with our European partners before we make any unqualified commitment to European monetary integration.Sir Russell Johnston : I wish to make a quick intervention while the hon. Gentleman is talking about regional policy. Is the Labour party committed to the principle of additionality?
Mr. Smith : The hon. Gentleman will have to content himself with my answer that it depends on the circumstances. It entirely depends on the purposes of the principle of additionality in any particular respect. That is the best response that I can give the hon. Gentleman.
There is a danger at present because the Government are not committing themselves in a constructive spirit to the discussions now taking place, whether the Government like it or not, between our European partners about movements towards closer integration. Because the Government are taking such a stand-offish attitude, there is a real danger that the rest of Europe will go charging ahead without us in years to come. That danger is inherent in the Government's dithering approach to joining the exchange rate mechanism and to any wider discussion that may be taking place in Europe.
That danger will certainly be visited upon us if the Government continue to evince the confusion and doubt that currently persist in their policy on our entry into the exchange rate mechanism. They have got it wrong and they ought to think long and hard about the need to get it right.
1.30 pm
Mr. Nigel Forman (Carshalton and Wallington) : We have just listened to a long and rather engaging speech from the hon. Member for Islington, South and Finsbury (Mr. Smith), containing metres, or perhaps even kilometres, of Front-Bench flannel. I sympathise with him in his difficulties, but a slightly more succinct presentation of his party's position might have stood him in better stead. He can be sure that in future weeks and months we shall be studying closely what he said and using it effectively against him and his party. On the EMU and the ERM the hon. Gentleman was making a valiant but hopeless attempt to square the circle.
Like other hon. Members, I congratulate the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) on his good fortune in being able to introduce the debate and on his elegant and amusing speech, which was full of thoughtful and almost revolutionary points and which will repay reading. I was amused by his references to Sir Alan Walters. The way in which Sir Alan Walters seems to crop up time and again probably means that any Ministers choosing to resign in future may well have to come to the House and say that they wish to spend more time with friends of the family. That is probably the way in which British politics is moving.
I was also interested to hear the hon. Gentleman concede that the age of socialism is over. That is a realistic statement on which I commend him. He also said that the age of Labour corporatism is over and is inappropriate to modern conditions. It is clear that, although his colleagues
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on the Labour Front Bench may not have learnt a great deal about the changing conditions of the 1980s and 1990s, he at least has put his time to good use. I agreed with him when he said that the European Community is now the most appropriate framework for so much of our economic policy in Britain.We have had a useful debate--and I have listened to it all--as it has given the House another opportunity to explore and examine much of Labour's policy on the European Community. As my hon. Friend the Member for Lewisham, West (Mr. Maples) said in an intervention, there is no doubt that the Labour party has come a long way towards common sense in the development of its European policy. However, it is clear from the drift of the debate and the speeches by Opposition Members that there is a terrific amount of inherent inconsistency in the position that they would take. It is not at all clear whether the hon. Member for Hackney South and Shoreditch speaks for his party, but I suspect that I know the answer to my own rhetorical question. For example, one wonders whether a future Labour Government--if there were to be one--would be prepared to follow the necessary supporting policies in the conduct of economic and monetary union of monetary discipline and a balanced budget in order to make a system based on fixed exchange rates really work as intended. I very much doubt whether a future Labour Government would be able to do that. Equally, I wonder whether a future Labour Government would accept the need for real operational and institutional independence for a central bank or a European system of central banks. It is clear not only from the quotations of my hon. Friend the Financial Secretary to the Treasury from the Labour party document, but from the speech of the hon. Member for Islington, South and Finsbury that the Opposition are not enthusiastic about the idea of statutory accountability or independence of any kind for our central bank.
If the crunch came, and if we had a Labour Government formed by the modern new-look Labour party, a Labour Chancellor and Prime Minister would fall back upon the old protectionist socialist impulses of the Labour party. The hon. Member for Hackney, South and Shoreditch rightly criticised the whole idea of socialism in one country. Those socialist impulses would be largely in response to the defensive pressures that would be put upon that party by its trade union supporters and others behind the party who would feel unable to cope in the new world of super-competition, which is undoubtedly the world into which we are moving in the 1990s.
I agree with the hon. Member for Hackney, South and Shoreditch that Britain should join the exchange rate mechanism. As the Government have frequently made clear, we shall do so as soon as the Madrid conditions have been met. That bland familiar phrase will entail important political judgments about the appropriate timing. I stress the words "political judgments" because the matter is not capable of resolution with some fine econometric calculations. It is important to join in circumstances and conditions which can be defended in the markets and sustained in terms of market credibility.
The hon. Member for Hackney, South and Shoreditch was also right to say that, once in the mechanism, Britain should stay in it. That means following all the appropriate supporting policies on monetary discipline and responsible tax financing of our public expenditure commitments. If Britain's public expenditure commitments were financed
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to any significant degree by public borrowing, it would undermine not only the integrity of the policy but, more important, in a world without exchange controls--and I understand that the Opposition have no intention of returning to exchange controls--the flight of capital which would ensue and which is all too easy to effect, would change a future Labour Government's policy whether they liked it or not. I hope that my right hon. Friend the Chancellor, who is not here today, will be able to take the decision to go into the exchange rate mechanism towards the end of this year or perhaps early next year at a time of a relatively strong exchange rate in relation to the deutschmark. That is where I disagree with the hon. Member for Hackney, South and Shoreditch. It should be done in wide bands initially, because the experience of Italy and Spain suggests that that is a good phased way to do it.I hope that Britain's approach to the future development of the Community will be positive and will recognise that it is now an anachronism to try to practise either conservatism or socialism in one country. Those days are gone. We should recognise that our partners--and that means critically the French and the Germans--are now determined to press ahead on a fairly speedy time scale towards economic and monetary union. We should deal with that reality, and our policies should take full account of the facts.
I use the word "facts" deliberately, because in an important speech on Monday my right hon. Friend the Foreign Secretary said that there would always be tension inside the Community between the Europe of phrases and the Europe of facts. He said that we, and he suspected most of our people, have a strong preference for the Europe of facts. I agree with that view. Of course it is one thing to say that we prefer the Europe of facts and another to act in the light of that preference and to be absolutely honest about it. Let us take an unblinkered look at some of these facts.
First, the most critical fact is that it is the private, not the public, sector that is leading the process of European integration, notably via the decisions of large multi-nationals, based here, in Holland or anywhere else, and the decisions of leading financial institutions. Many of these have their headquarters in Tokyo or New York, but are treating the single market and the opportunities that it gives much more positively than those based in European countries.
Secondly, our partners in the Community are determined to press ahead quickly towards economic and monetary union, if necessary leaving behind those member states that cannot or will not join in. This should be a warning to my right hon. and hon. Friends on the Front Bench. I hope that they will bear this in mind over the coming months, so that we do not repeat the errors of previous British Governments, notably in 1950 with the Schuman plan and 1956 with the Messina conference. It would be a case not of third time lucky but of third time fatal. It is vital that my right hon. and hon. Friends understand that.
The third reality, which occurs to all of us, is that the single market is being constructed even as we speak, day by day and week by week. It is essentially a process of ever-closer economic integration, driven by the private sector and now driven, ever more decisively and speedily, by the recent introduction of qualified majority voting under the Single European Act. Even Ministers have made
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it clear that this has been of assistance to us in knocking down the unnecessary and indefensible barriers that still exist in some of the countries that preach most about free trade--for example, the Federal Republic of Germany--but practise a degree of protectionism. I shall give an outline of the policy approach that we should take to these realities and facts. The first principle of our policy should be to take the necessary decisions to enable us to participate fully in every aspect of the future development of the Community. In the immediate future, this must mean deciding to join the ERM in time for us to have a real influence on the deliberations of the intergovernmental conference due to start in December.Secondly, we should continue to throw our full weight behind all those in the Community--there are not yet enough of them--who wish to maintain an open trading Community in relation to the opening up of the combined market of 320 million people, especially in air travel, insurance and road transport, which are inexcusably still protected by some of our Community parners. This should apply also to the trade and investment flows between the Community and the rest of the world, from which this country has benefited disproportionately as compared with other Community member states, notably in attracting inward investment from Japan.
Thirdly, we should give our support to the development of a much more effective central banking and supervisory role for the Bank of England and later on for the emerging European system of central banks. The best way for us to contribute to this process would be to legislate, probably not in this Parliament but in the first Session of the new Parliament, to put the Bank of England on a new basis of statutory accountability to Parliament, just as in future there will be a Eurofed, which will have to be statutorily accountable to a more powerful and more competent European Parliament.
I do not have time to go in detail into the advantages of such a structure, but I shall perhaps be able to do so on another occasion. Briefly, they would be, first, much greater market credibility for the monetary policy both of such a national central bank and, ultimately, of a European system of central banks, and, secondly, more effective day-to-day management of monetary policy, thanks to such an institution being given a clear overriding statutory mission to counter inflation above everything else. That relates to the point made earlier by the hon. Member for Islington, South and Finsbury. Thirdly, and importantly, there must be some institutional compatibility between the arrangements that we put in place and those emerging in other European countries. It is significant that even Holland, France and Spain, all of which have had central banks that were, in varying degrees, close to their Ministries of Finance, are now moving quite deliberately towards a more independent role for their central banks because they have learnt from the experience of the Bundesbank and from the Federal Reserve in Washingon. Fourthly, we should try to establish a more logical division of labour between national Parliaments--such as ours--and the emerging European Parliament, which must supervise and hold to account the activities of the Commission and the Council of Ministers.
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Mr. Cash : May I take up my hon. Friend's point about the independence of the central bank? Does he agree that, according to articles 3 and 12 of the basic law, although the Bundesbank exercises a degree of significant independence in regard to currency stability, that independence is nevertheless subject to the overall political control of the Federal Government? That is vital to the argument, as it shows that the bank is not really independent, as it is often alleged to be.
Mr. Forman : I welcome my hon. Friend's intervention, which gives the opportunity to make some more general observations. It has been a characteristic of today's debate, and of debates in previous years, that both sides have put up straw men and then knocked them down. That is not helpful to a mature and quiet understanding of the truth.
My hon. Friend is right to say that there are clauses in the Grundgesetz in Germany which mean that ultimately the Federal Government, rather than Mr. Po"hl, exercise the authority. The key point is the degree of independence that any central bank has, and the market perception of that independence. That is why I stress market credibility as an agreement for the course that I favour. Much has been said about the principle of subsidiarity, and that principle will help us to establish an effective division of labour between the institutions of government.
It should, however, apply equally to all levels of government. That is the shape of the future : in time the Community will go in that direction. Those things that can most appropriately be done at supranational level such as environmental and trade matters, should be dealt with by the Community institutions, acting in the traditional manner. Equally, taxation and bugetary policy should be kept at a national level, and should be decided and voted upon in this House and other national Parliaments. There is, of course, one notable exception--the VAT revenues for the European Community. Increasingly, in the European Community of the future, the sub- national level of government--local government in all its forms--will come into its own much more, and rightly so. That is the basis on which the Germans have encountered such success in the Federal Republic, and views in the Community--including a great deal of political opinion in France--are moving in that direction. Britain is now the last bastion in the Community of the idea of the unitary state. One day, politicians on both sides of the House will realise the error of their ways in that respect.
There is a vital difference between the notions of competence, sovereignty and identity, although they are invariably merged, rather sloppily. They have vital but distinctive parts to play. Competence in governmental matters should be allocated to the level at which it can be most effectively exercised. I have given examples : trade policy at Community level, taxation policy at national level and perhaps education policy at local level.
Sovereignty, on the other hand, is a legal and constitutional idea which is both theoretical and practical. We should be unsentimental and clear-eyed when thinking about it.
The United Kingdom Parliament has a well-established claim to what we choose to call parliamentary sovereignty, but I ask the House to ponder what that means in practice in the 1990s. Essentially, it is the right to be informed, although we are not always informed first. Invariably the gentlemen in the Press Gallery get to know things before
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