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Secretary of State for Foreign and Commonwealth Affairs 3.33 pm
Mr. Dave Nellist (Coventry, South-East) : On a point of order, Mr. Speaker. The Foreign Secretary returned from a long visit to the middle east on Friday--I know that he was in Luxembourg yesterday. Does he intend to make a statement to the House? Some of us wonder whether the Government's position on occupations, be they in the west bank and Gaza or Kuwait, are an example of double standards.
Mr. Speaker : I have not been told that a statement is to be made today.
BILL PRESENTED
Medical Act
1983 (Amendment)--
Mr. Nigel Spearing, supported by Sir Anthony Grant and Mr. Sam Galbraith, presented a Bill to amend section 36 of the Medical Act 1983 to enable the Professional Conduct Committee of the General Medical Council to exercise greater discretion in respect of conduct which they judge cannot be regarded as acceptable professional conduct ; And the same was read the First time ; and ordered to be read a Second time on Friday 14 December and to be printed. [Bill 203.]
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Animals (Welfare in Transit)
3.34 pm
Mr. Terry Lewis (Worsley) : I beg to move,
That leave be given to bring in a Bill to provide for the welfare of animals being exported alive from the United Kingdom ; to require adequate periods of rest, sufficient food and water, and regular veterinary inspection during transit ; and for connected purposes. The House will be aware that until now United Kingdom law has been sufficient to provide significantly for the welfare of farm animals transported alive. Right hon. and hon. Members will know also that EEC regulations will shortly take the place of our own legislation, which will have enormous consequences for exported animals--unless the Commission and Council of Ministers can be persuaded to adopt a more humane approach.
That approach should be based on practices recommended by the Royal Society for the Prevention of Cruelty to Animals. By 1 January 1993, frontier controls between member states of the Community will be lifted and it will become a free trade area. The directive on international transport will be replaced by new legislation covering the transportation in Europe of all animals, whether within national boundaries or between one member state and another.
The new regulations impose requirements relating to the transport of all animals. Instead of customs checks, inspections of animals and of vehicles will take place at markets, staging, transfer and assembly points and slaughterhouses rather than at the point of departure. Random checks will also be made by the competent authorities on vehicles in transit.
Under the previous European regulations, veterinary inspection of all animals was required prior to their transportation from one member state to another. Such inspections will in future be required only if the animals are to travel for a longer time than is specified before they must be rested, fed and watered. In the case of cattle, sheep, pigs and horses, that will be 24 hours.
There is growing concern about the impact that 1992 and the abolition of tariff barriers between EEC member states will have on the live food animals export trade. There are fears that the creation of a free market will result in diminishing standards of welfare for all the animals caught up in that trade. The worry is that new European transport regulations will not only take the place of existing directives but supersede national legislation so that trade between member states will no longer be known as exporting or importing.
The transportation of live sheep over long distances to slaughterhouses in France, Italy, Germany and other member states is of particular concern. As I said, many journeys can take more than 24 hours, and one can have little confidence that other member states will enforce transport legislation as strictly as does the United Kingdom.
Under present United Kingdom law, animals that are being transported must be fed and watered every 12 hours unless the journey can completed within 15 hours. That legislation will disappear, so theoretically it will be possible for sheep to be bought at market in Scotland and transported to Dover and then over the channel into France--but one must doubt whether feeding and watering will take place when it should, because of the
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French Government's known inability properly to enforce transport regulations. Who will ever forget the disgraceful images on our television screens this summer of French farmers abusing innocent animals in such a scandalous and uncivilised way? Despite the regulations, was that not a uniquely French form of protection, and will not it arise again in other forms after 1992?Foremost in the campaign to secure post-1992 standards compatible with those of the United Kingdom is the RSPCA. Through its European organisation, Eurogroup for Animal Welfare, it is attempting to ensure that the new regulation, which has yet to be finally agreed by the Council of Ministers, is as detailed and as strict as possible. It has also been trying to ensure that the provision is properly implemented and enforced throughout the Community.
The campaign has been based on the policy that food animals should be slaughtered as near as possible to the point of production. The recent problems caused by French farmers--to which I have already referred--and their willingness to perpetrate outrages on lorry loads of live sheep coming from the United Kingdom and other countries have shown, yet again, that it is impossible properly to protect the welfare of live animals being transported through the Community. Moreover, I would argue that there is absolutely no need to transport animals long distances to slaughterhouses. British farmers get the same price for their lamb whether the sheep are taken to a slaughterhouse in the United Kingdom and the carcases transported to France or to other markets or are transported live to a French slaughterhouse. One consequence of an increasing trade in live animals being transported to slaughterhouses on the continent would be the loss of business in abattoirs in the United Kingdom. It seems logical, therefore, that the distances that animals travel to slaughterhouses should be limited in the new European legislation and that we should follow the principle that United Kingdom animals should be slaughtered in United Kingdom slaughterhouses, French animals in French slaughterhouses, and so on. To that end, we should insist on the introduction of a provision in the new transport regulations that would limit to a maximum of eight hours the journey times of animals destined for slaughter. That is a practical and logical proposal, as it would allow farmers the choice of several suitable abattoirs as well as reducing the possibility that animals will suffer unnecessarily. The regulations will also apply to animals originating in France, Germany, Holland and so on, which will all have to limit the journey time to eight hours.
The fact that the amendments have been passed by the European Parliament does not guarantee that they will be
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accepted by the Commission or the Council of Ministers. The Commission has stated that it is prepared to accept the principle of limiting the journey time of animals destined for slaughter, but so far it has not suggested that the journey time should be anything other than the period after which feeding and watering are due, which is 24 hours.We in the House and our colleagues in Europe must therefore bring pressure to bear on Ministers of Agriculture to accept the eight-hour limit on the journey time of animals going to slaughter. Such a rule would go a long way towards dissuading people from re-establishing the trade to the continent in live horses for meat. Many people have been worried about that, because the United Kingdom is having to drop its existing legislation prohibiting trade in live horses and ponies.
An eight-hour limit on the journey time of animals going to slaughter will not harm British farmers in any way. It will assist the United Kingdom slaughtering industry and, more important, it will be of great benefit to the animals. It seems illogical that we can export sheep to a slaughterhouse in the south of France, which will then make a profit on that transportation, only to export the majority of the carcases to Italy. Why cannot British sheep be slaughtered close to the point at which they were reared and why cannot the carcases then undertake the long journey from the United Kingdom to Italy? There is already a substantial trade in meat--in lamb, beef and pig carcases--from this country to other member states. At present, for every live sheep that is exported, seven lamb carcases travel the same route. It does not seem such a big step to make that eight carcases and no live sheep.
I fully recognise the unfortunate balance of power problem in this matter between the United Kingdom Government and the European Community, but I believe that the passage of my Bill--I hope, with Ministers' blessing--will serve to demonstrate our determination to prevent the dilution of our more humane procedures.
Question put and agreed to.
Bill ordered to be brought in by Mr. Terry Lewis, Mr. Don Dixon, Mr. Harry Cohen, Mr. Ron Davies, Mr. Peter Hardy, Sir David Steel, Dame Janet Fookes, Mr. Nigel Spearing, Mr. Simon Hughes, Mr. Roger Gale, Mr. Tony Banks, Mr. Alan Meale and Mr. Doug Hoyle.
Animals (Welfare in Transit)
Mr. Terry Lewis accordingly presented a Bill to provide for the welfare of animals being exported alive from the United Kingdom ; to require adequate periods of rest, sufficient food and water, and regular veterinary inspection during transit ; and for connected purposes : And the same was read the First time ; and ordered to be read a Second time on Friday 26 October and to be printed. [Bill 204.]
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Exchange Rate Mechanism
[Relevant document : Minutes of Evidence taken before the Treasury and Civil Service Committee on 25th July 1990 on Economic and Monetary Union (House of Commons Paper No. 620)]
Mr. Speaker : I have selected the amendment in the name of the Leader of the Opposition. Furthermore, as 39 right hon. and hon. Members have already submitted an application to speak, I propose to place a 10- minute limit on speeches between 6 pm and 8 pm. I am afraid that that may mean that some Privy Councillors will be called within that 10-minute period. In fairness to all, I hope that right hon. and hon. Members who are called will bear that limit broadly in mind.
3.45 pm
The Chancellor of the Exchequer (Mr. John Major) : I beg to move, That this House congratulates the Government on joining the Exchange Rate Mechanism of the European Monetary System ; notes the clear evidence that the Government's tight monetary and fiscal policies are reducing inflationary pressures in the economy ; and believes Exchange Rate Mechanism membership will reinforce the Government's counter-inflationary strategy and help to strengthen the framework for a sustained improvement in economic performance. Sterling's entry into the exchange rate mechanism is undoubtedly an important economic event and, moreover, an event which has long had the general support of the House, industry, commerce, the City and most, although inevitably not all, economic commentators. This debate is a welcome opportunity to set out the rationale for entry ; the potential advantages and constraints that it brings with it ; and to consider also the effects of standing aloof from membership. I wish also to address the details of entry : the rate ; the timing ; the bands ; and the necessary discipline of membership. And, of course, I shall touch also upon how entry affects the wider question of economic and monetary union, which is, I know, of great concern to the House.
It is now 12 years since the European monetary system and the exchange rate mechanism were established. At the outset, in 1978, the last Labour Government decided not to join the exchange rate mechanism. Since then the question whether and, if so, when we should join has been an important and contentious issue at the very centre of political and economic debate.
Two years ago my right hon. Friend the Prime Minister set out our commitment to join the mechanism and the conditions in which we would do so. On the free movement of capital, the single market, competition policy, and the liberalisation of financial services those important conditions have effectively been met for some time. It is possible to quibble about them only if excuses are being sought not to enter the ERM.
For some months the key remaining condition has been that domestic conditions--and our inflation performance in particular--should enable us to accept the exchange rate discipline. In economic terms, what mattered for that was not what happened in the months leading up to membership, nor was it the distortions in comparative inflation performance caused by different methods of measuring inflation. The important factor was that our inflation performance would enable us to converge and thus enable us to compete at the chosen exchange rate. It
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was for that reason that we did not join the mechanism until we were absolutely sure that our tight monetary policies were having their intended effect and inflationary pressures were easing. That is now the position. The evidence that this has now happened comes first from the monetary aggregates. The growth of narrow money, M0, has fallen in each of the last five months and is now back well within the target range I set for this year. M4 growth--broad money--has fallen steadily throughout 1990 and currently stands at its lowest point for nearly three and a half years. Bank lending has also decelerated sharply.In the real economy the picture is the same. The indicators show that the economy is slowing, as indeed it must if inflation is to fall. That is clear in the high street, it is clear in the housing market, it is clear in the figures for car sales, and it is clear in activity generally. It is clear also in the gradual and welcome recovery in the savings ratio, which hit its low point of 4.9 per cent. in the third quarter of 1988 and has now risen again to 7.7 per cent.
It was those conditions--that amalgam of conditions which are now clear-- which prompted me to cut interest rates by 1 per cent. at the same time as entry. Some external commentators claim that it was too early ; others claim that it was too late. I am confident that events will justify the timing of that reduction in interest rates. If I had cut interest rates before joining the exchange rate mechanism, I believe that it would have been viewed by the markets and by commentators as driving the exchange rate down before entry or, alternatively, as a signal that entry was to be delayed. Both of those were wrong and both would have weakened the exchange rate and thus our anti-inflationary position. It was for those reasons that I announced both those steps at the same time to ensure that the markets were fully aware of our position as we entered the mechanism and were fully aware of what the immediate prospect was for monetary policy.
Mr. D. N. Campbell-Savours (Workington) : On timing, in so far as it is quite clear from a series of parliamentary questions given to me by Ministers that people in the Bank of England, senior civil servants and some Ministers knew of the Chancellor's intention to make his statement at 4 o'clock on that Friday, and in so far as it is also known that Ministers and civil servants may well have met people in City institutions in the five days prior to that Friday, why cannot we now have a leak inquiry into how three separate markets in the City rose substantially in the 90 minutes before 4 o'clock, in conditions in which some people made millions of pounds in capital gains in a few minutes? Why cannot we have a leak inquiry into that? Let us have the truth.
Mr. Major : If the hon. Gentleman has any information whatsoever to suggest that there was advance knowledge of entry into the exchange rate mechanism-- [Interruption.] Perhaps the hon. Gentleman would do me the courtesy of listening. If he will give that evidence to me, I shall ensure that it is placed before the proper authorities and that the appropriate action is taken. Unsubstantiated allegations do not help. If the hon. Gentleman really believes that there was a leak, he should provide the information so that it can be properly examined and not make widespread scatter-gun allegations for which at the moment he has provided no evidence.
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As we have seen repeatedly throughout the past 30 years or so, inflation is always one of the last measures in the economy to register that the growth of demand is falling away ; and the rise in oil prices in the past few months has complicated the picture this time and, conceivably, may yet push up the headline total further. But I now have no doubt that we shall see inflation falling substantially throughout next year. It will do so particularly quickly from next April, and for two reasons : the underlying rate will improve and some of the unusual adverse factors that have artificially boosted the headline rate will drop out next year. Our inflation performance will improve therefore both in absolute terms, and, just as importantly for entry into the mechanism, relative to those of our European competitors. I shall make a detailed forecast in the autumn statement in due course.There was, therefore, no reason for further delay in meeting our long- standing commitment to join the ERM. There is a further point of some importance. The persistent market rumours of entry and non-entry were damaging to stability and created uncertainty for industry. Week after week some chance remark, some speculation, some unsubstantiated rumour changed the value of sterling. I wished therefore to end the damaging uncertainty at the earliest possible moment, and I believe it was right to do so.
Mr. Harry Ewing (Falkirk, East) rose --
Mr. Major : Perhaps the hon. Gentleman will forgive me if I do not give way for a moment.
The House will remember that I answered questions on this matter for an hour a week ago. I shall be here at the Dispatch Box on Thursday and a vast number of hon. Members-- [Interruption.] Perhaps hon. Members would listen for a moment. A vast number of hon. Members wish to speak today. I shall give way to a small number, but perhaps not as generously as I sometimes do.
Mr. Harry Ewing : I am grateful to the Chancellor for giving way. If the right hon. Gentleman is pleading that the reason that he took this country into the exchange rate mechanism was to get rid of all the rumours about whether we would or would not join, is not that the fault on the one hand of the Prime Minister, who constantly said that we would not join, and of the Chancellor himself on the other hand, who constantly said that we would join? Which of the two of them was the City and the country to believe?
Mr. Major : The hon. Gentleman will do well tomorrow to read my speech in Hansard . He will then see that I made it perfectly clear that we entered because I thought that the conditions were right for our entry. I set that out plainly. I also set out a subsidiary matter that weighed on my mind--that the essential reason for entry was that the market conditions were met and the preconditions that we had set out were now right for sterling to enter the mechanism.
The belief that we should end the uncertainty and that we should enter early was also held by others. We got a great deal of advice. In June we were told :
"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."--[ Official Report, 15 June 1990 ; Vol. 174, c. 636.]
That was not an overenthusiastic Member of the European Parliament speaking --it was the Opposition Front Bench in the persona of the hon. Member for
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Islington, South and Finsbury (Mr. Smith). Nor was that an isolated comment. In August the hon. Gentleman was strongly supported in that view by his right hon. and learned Friend the Member for Monklands, East (Mr. Smith), who said :"I don't think there is ever going to be a perfect time for Britain to enter the ERM, and I think therefore that we should take the opportunity to do so at the earliest time."
That is what I have done and the reason why Opposition Members attack us is that they know that we have taken the right decision and they do not want to acknowledge it. They want to hide the fact that their party is split asunder on the issue. [Interruption.] Oh yes. Of course, Opposition Members want it both ways. If we had delayed they would have questioned our intention of going in. They would have said that my right hon. Friend the Prime Minister was preventing us. Now that we have gone in they question our motives and claim that my right hon. Friend has been pushed. The simple truth is that my right hon. Friend first stated our commitment to entry during stage 1--over two years ago. She and I have been discussing possible dates for months. Four months after the start of stage 1 we found an appropriate date and honoured our promise. That is what Opposition Members cannot stomach. Their attitude is the typical triumph of expediency over conviction--[ Hon. Members :-- "Your attitude."] That is their attitude.
Now that we are in the ERM we need to be entirely clear about what it means. First, maintaining the exchange rate will be an important discipline. Tight monetary conditions will have to be sustained to put continued downward pressure on inflation. Joining the ERM in no way replaces the need for a tight monetary policy ; it reinforces it. Indeed, making a success of the ERM means making a success of our own domestic monetary policy, not abandoning it. That is why joining the ERM is in no sense a soft option or a short-term one.
The euphoria with which some people greeted the news of our entry seemed to me mistaken ; and the argument that entry has short-term advantages and a long-term cost is wholly misleading. In fact, it is a complete misunderstanding of the ERM. In the short term, membership will require tough action to ensure that we achieve low inflation thereafter. The rewards are long term with that very low rate of inflation. That does mean making no further reductions in interest rates until it is prudent to do so.
Mr. Anthony Nelson (Chichester) : My right hon. Friend has referred to the prospect of reductions in interest rates. Is not it probable that, if we were within the narrower band of fluctuations within the ERM, as certain other European countries are, we would enjoy lower rates of interest, as they currently do? As it is a matter of enormous interest to millions of mortgage payers and others in Britain, can my right hon. Friend say a little about the conditions that must be precedent upon our becoming part of the narrower bands of the ERM?
Mr. Major : I shall turn shortly to the question of the narrow band.
In case there was any misunderstanding a moment or so ago, I was saying clearly that membership means that we shall be in a position to make no further reductions in interest rates until it is prudent to do so. I hope that that point is fully taken on board. I shall turn to my hon. Friend's specific point in a second or so.
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What we have undertaken is an express obligation to keep sterling within the bands around our central rate of DM2.95. We take that obligation seriously and we intend to meet it. We decided to enter the mechanism with wide 6 per cent. margins to give sterling an opportunity to settle down. It is a widely traded currency and it is necessary to give the markets some time to assess the implications for entry and the domestic response to it. But when conditions permit, and only then, we will move into the narrow 2 per cent. band to which my hon. Friend the Member for Chichester (Mr. Nelson) referred.I want to add a word about fiscal policy. Throughout the 1980s my two predecessors have successfully used fiscal policy to buttress monetary policy. That is precisely what we shall continue to do in future. But what we shall not do is to resort to fiscal fine tuning, the effects of which tend to be unpredictable and, in many cases, unworkable. I have no intention of returning to the era of mini-Budgets, but we will keep to our policy of a balanced budget over the medium term.
Dr. Lewis Moonie (Kirkcaldy) rose --
Mr. Major : If the hon. Gentleman will forgive me, I shall make a little more progress in the interests of several other hon. Members who wish to speak.
It is clear that membership of the ERM will impose an extra discipline on the Government's conduct of economic policy. But, equally, membership of the mechanism requires businesses and industry to take tough decisions of their own. Companies must understand the need to contain their costs-- principally, but not, of course, exclusively, their wage costs. For them, joining the ERM means that devaluing our currency to bail out uncompetitive firms is no longer an option. It was never an attractive one and now it has gone. It is ruled out by our commitment to maintain a broadly stable exchange rate. If the costs of British companies rise, inevitably orders will be lost, profits will be squeezed, jobs will be shed, and companies will put their futures at risk. That has always been true, but ERM membership will make it even more apparent, for the devaluation option is no longer there.
For business, staying competitive means relating wage rises to what is realistic and justifiable. That means what can be afforded by the individual company facing tight competition in the international market with no help from a falling exchange rate.
Sir Anthony Grant (Cambridgeshire, South-West) : On that point, does my right hon. Friend agree that the necessary exhortations to pay restraint would be very much helped if senior leading industrialists who are on performance-related pay related their pay to not only the profits but the losses that they sometimes sustain?
Mr. Major : I share that view strongly. Leadership in this matter must come from the top, and I hope that it will do so.
Mr. Dennis Skinner (Bolsover) : Is not the truth of the matter that the exchange rate mechanism is another name for a Common Market incomes policy? Why should people who work for a living, the real wealth creators, have a wages or incomes policy stuffed down their throats by the Government when the bosses got increases of 28 per cent. the year before last and 33 per cent. last year? In the
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past 10 years the wealthiest 1 per cent. in Britain have received cumulatively £26.2 billion in tax cuts ; now they are calling upon the workers to bail out this Government, but they have no intention of doing so. Everyone who is fighting to get a living wage needs the support of Opposition Members to sustain that living wage.Mr. Major : Well, so much for unity on the Opposition Benches about joining the ERM.
On the substantive point that the hon. Gentleman makes, he will be aware that I have said before--I reiterated my remarks to my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant)--that I share his view that the sacrifices that may need to be made on wages must apply to those at the top of industry as well as those elsewhere.
The hon. Member for Bolsover (Mr. Skinner) should be aware, however, of the consequences of taking his theory a stage further. The consequences for people not obeying that necessary discipline will be lost jobs. I cannot compel people to negotiate sensibly, but I have an obligation to make it absolutely clear to people what the effect of not negotiating sensibly will be. That I am seeking to do, and that I am prepared to do ; and I share the hon. Gentleman's view that that applies to all people in industry and commerce and not just to those on the shop floor. What does that mean? It means negotiating what can be afforded by the individual company facing the international competition in the market. In essence, it is that which will determine our performance.
There can be no more negotiating around the benchmark of the retail prices index as though that represented the minimum increase it was reasonable to expect. I know that that kind of inflationary psychology is deeply embedded in the consciousness of British industry. I believe that, over the years, it has damaged us greatly, and, if it continues, it will cost us jobs in the future. I do not for a second underestimate the cultural change that that will mean for many wage negotiators, but the sooner they make the change the better. That psychology needs to be shaken out of the system, for the Government cannot keep companies competitive--they can only warn them of the dangers that they face. Their fate is in their hands--the hands of those on each side of the negotiating table who will determine the future of their companies and their work forces in the next few years.
Mr. Rhodri Morgan (Cardiff, West) : I am grateful to the Chancellor for telling the House that the Government cannot bail out companies that persist in using the RPI as a benchmark for wage increases. If the Opposition accept that, will the right hon. Gentleman accept that he should not allow his Ministers to use the RPI as a benchmark for price increases in former nationalised industries now in private ownership? The electricity industry has not yet been privatised, but its prices are set to rise every year by an RPI-related formula. Is the right hon. Gentleman prepared to instruct the Secretaries of State for Energy and for Trade and Industry to give up that practice, which is applied to British Telecom, water and gas charges?
Mr. Major : Some of those increases are less than the retail prices index and many of the others are far more specifically related to investment performance than to anything else.
Those are the constraints and restraints which management and work forces will need to accept if we are
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to make a success of membership of the exchange rate mechanism. I know that they are not easy, but I believe that they are worth while because they will help us to achieve lower inflation by reinforcing existing policies. I am delighted that, fully understanding those points, the CBI has given such a warm welcome to our decision to enter the ERM.In recent years, the average inflation performance of the countries participating in the ERM has been significantly better than that of all those outside the mechanism. Between 1979 and July 1990, inflation in countries within the mechanism fell by nearly two thirds ; in European countries outside the ERM, by one sixth ; and in OECD countries outside the mechanism, by two fifths.
As inflation in member countries has come down, the prospects for steady, sustainable economic growth have improved, and that is the prize to be achieved. The growth rates in Germany, France, Italy and a number of smaller mechanism countries have increased in the last few years and the prospects for growth continuing at favourable rates in the future appear good. I believe strongly that that is a goal worth pursuing by us as well.
Mr. Jeff Rooker (Birmingham, Perry Barr) rose --
Mr. Major : I hope that the hon. Gentleman will forgive me if I do not give way. I have given way on a number of occasions, and I am conscious of the number of hon. Members who wish to take part in the debate.
Moreover, maintaining a broadly stable exchange rate will assist British companies to plan ahead and to invest with greater certainty about the future. Since the mechanism has been in operation, there have been a few changes of parities, but there has been no substantive realignment since the beginning of 1987.
That stability will enable firms to develop their business strategies in Europe and be well placed for the opportunities of the single market. They will no longer face the problems of exchange rate movements disrupting their plans by imposing on them unexpected cost increases or pricing their goods out of the European market. It will mean, in my judgment, that Britain will prove still more attractive to inward investors. We already attract more direct investment from abroad than any other Community country. Membership of the ERM can only add to that.
During my statement last week, a number of hon. Members expressed concern at the exchange rate at which we had entered. For some of them the argument was a surrogate for outright opposition to entry at any exchange rate. But others are concerned lest the rate we have chosen is too high. That reflects a longstanding argument over whether devaluation is required for economic success. It is a legitimate argument which has a long political pedigree, but I believe that it is wholly wrong.
I believe that our central rate can be sustained, and I will explain why. Some hon. Members fear that the exchange rate will damage exports and encourage imports. But experience in recent years suggests that other factors are more important. The volume of our exports, excluding oil and erratic items, is up 8 per cent. on last year, and our share of world trade in manufactures increased in 1989 and is likely to rise again this year. Japan and Germany, with the firmest exchange rates over the last decade, also have the best current account performance.
The rate that we have chosen is also sterling's recent market rate and the average real exchange rate over recent
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years after making adjustment for differential inflation performance. Other subsidiary information suggests that we have not put sterling at a competitive disadvantage. Independent analyses suggests that DM2.95 is sustainable. Indeed, a report by CBI economists only recently advocated entry into the mechanism at around the bands that we have chosen. Some comments that I have read have focused on the dollar. I would only make the point that our membership of the ERM does not in any way determine the sterling dollar exchange rate.Mr. Peter Shore (Bethnal Green and Stepney) : The
inflation-adjusted real exchange rate of DM2.95, or the right hon. Gentleman's choice of that rate, is 20 per cent. higher--that is, an appreciation of sterling against the mark--than it was in the first half of 1987, which was the last time we were in current account balance with the rest of the world. We are now disastrously in deficit. We are going in at an exchange rate 20 per cent. higher against the mark than it was when we were last in balance. What does the right hon. Gentleman say about that?
Mr. Major : We are in deficit because of the growth of demand, which is self-evident from the change in our position during the past year as sterling has appreciated and the trade gap has begun closing. Therefore, there is no reason why British companies should not compete successfully in Europe at present exchange rates, and, in the medium term, with lower inflation, they will compete even more successfully.
Although entry to the mechanism is part of our commitment to stage 1 of economic monetary union and the single market, it in no sense commits us to the Delors approach for stages 2 or 3. I assure the House that there has been no shift, no weakening in our opposition to the imposition of a single currency and a single monetary authority. We remain opposed to that, and I believe that our opposition has the overwhelming support of the House. That does not mean that we shall play a wrecking role at the intergovernmental conference--the IGC. We have no intention of doing that. We shall continue to advocate our plans for the development of the hard ecu.
We believe that our proposals are practical, evolutionary and based on markets and choice. They offer a realistic solution that would enable the 12 to move forward together without risking damaging rifts in the Community. They leave open the possibility of the hard ecu evolving towards a parallel currency and then a single currency, but only if that were the wish of Governments and peoples. That is subject for ever to the check of the House of Commons.
Mr. Paddy Ashdown (Yeovil) : The House will have made particular note of the right hon. Gentleman's use of the word "evolutionary". The matter that isolates Britain in Europe, divides the Conservative party and splits the Cabinet is whether his hard ecu is to be regarded as the ultimate, final position or is a transition to a future European single currency. If, in due course, his hard ecu proposals were to be used as a transition mechanism to a single European currency, would the Chancellor oppose that?
Mr. Major : If the right hon. Gentleman reads what I have just said, he will have his answer.
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Our proposals are those that I have set out on a number of occasions and are subject to the check of the House of Commons at future stages.Mr. Julian Amery (Brighton, Pavilion) : While I fully understand the Chancellor's reluctance to have anything to do with the date of 1994 proposed by the German Chancellor, cannot he say that if everyone were prepared to go ahead with the hard ecu in 1994 we should be happy to go along with them?
Mr. Major : We must wait and see how the IGC develops. But the only way in which this country could proceed would be on the basis of the hard ecu, for in my judgment there is no will in the House or country to surrender the use of sterling as our currency.
During the past half an hour or so, I have set out in some detail what I believe will be the effect of membership of the exchange rate mechanism and our policies. I hope that in the next few minutes the right hon. Member for Islwyn (Mr. Kinnock) will set out his views with equal clarity. Judged by what he has said, there is more agreement between us than he may imagine. He shares my view that entry is not an alternative to the economic realities--he has said so--can work to the advantage of the British people- -he has said so--and can help in securing stability--he has said so, and I agree with him about that.
I hope, therefore, that as I have done, the right hon. Gentleman will set out his party's policy precisely--on rates, bands, timing, and fiscal policy. He committed himself to entry some years ago, so he has had ample time to consider the implications. If he does not do so, the suspicion will arise that Labour's commitment to enter the mechanism has been nothing more than a device--a clever device but a device none the less--which was intended to hide the fact that there is no real determination to tackle inflation at the heart of the Labour party's policies.
The conditions that they devised for entry into the mechanism are frankly incredible. They involve fundamentally subverting the whole purpose and structure of the EMS. The main reason why many people on all sides of the political spectrum have come to appreciate the benefits of the mechanism is that it provides a buttress and an anchor against inflation. That is precisely the feature of the mechanism which the Labour party planned to ditch.
That could not have been clearer from the remarks made by the Opposition in the House last week. Time and again they made it plain that their inclination would always be to take the easy option and to go for devaluation. When the right hon. Gentleman replies, will he tell the House : would he devalue or would he fight inflation? He cannot do both, and if he is to be credible he must tell us which he would do.
I noted with interest that the Opposition's amendment commends credit controls similar to those in other exchange rate mechanism countries. I wonder which countries he has in mind, for France had credit controls, but abandoned them at the end of 1987, Italy had bank loan ceilings, which were last used in 1988, the Netherlands had an informal corset--it lapsed some months ago. Germany has never used credit controls proper, although it uses a reserve asset ratio, as we use Treasury bills. In Europe, only Spain, Greece and Portugal have credit
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controls. Perhaps the right hon. Gentleman can tell us whether he equates our economy to theirs, and what sort of credit controls he plans to introduce. Under a Labour Government no doubt that is the sort of economy that we might move to.The truth is that membership of the exchange rate mechanism involves maintaining an agreed range for the exchange rate and it requires tight monetary discipline to counter inflation. In short, it involves all the things that the Labour party has set its mind against.
For us, the ERM stands for stability--for effective, reliable management ; it stands for low inflation--for an end to ruining money. For the Opposition it means credit controls--and excessive restrictions on mortgages. It stands for all its old policies of expropriation, renationalisation and meddling. I commend our policy to the House.
4.23 pm
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