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Mr. Terence L. Higgins (Worthing) : I had intended to be in my place at the opening of the debate and I apologise to the House for the fact that a massive blockage on the motorway prevented me from being so.
This is a debate in which passions run high, but I should stress that I in no way blame that event on the exchange rate mechanism. No one's passions run higher on this issue
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than those of the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore), who has all the zeal of the newly converted. The Chancellor was right to join the ERM. He was right to join it when he did, and I even go so far as to say that the rate at which he joined was not at all inappropriate, because the economic situation as it was developing, where we had undoubtedly had an increase in inflationary pressures as a result of the reaction to the 1987 stock exchange crash and so on, had clearly reached a point where the interest rate that my right hon. Friends had rightly applied would have had an impact and made the economy turn.As the Treasury and Civil Service Select Committee pointed out, official Government forecasts invariably underestimate the size of a turning point, and in every successive cycle they have done so even more. There was a real danger--there may still be one--of recession. The Chancellor was therefore faced with a clear dilemma. If he had reacted to that possibility by cutting interest rates, the exchange rate would have collapsed and the effect on inflation would have been disastrous. The combination that he developed--of reducing the interest rate while at the same time taking us into the ERM--has got us out of the dilemma that he was facing. That is an important point which needs to be stressed.
The decision was the right one and it has not only a tactical advantage but a considerable strategic advantage. I believe profoundly that it is right to join the ERM but that it would be a massive mistake to go along the Delors road towards a single currency, and I shall say why in a moment.
We have joined the ERM and that increases our credibility in Europe. Mr. Delors sought to say that we were joining in order to prevent the making of any further progress, but I do not believe that that is so. However, it increases our credibility, and that is important in the negotiations that are about to take place in the context of the further development of monetary union.
As I have said at Question Time, the Chancellor of the Exchequer described Mr. Delors' idea that we were joining to stop things as rather rum. That was an apposite description--or perhaps "mot juste" would be the expression to apply to Mr. Delors. None the less, it is not right. We are clearly far better Europeans in many respects than the other members of the EC. However, there are some considerable dangers in joining the ERM.
I believe that the downward trend in inflation will be perpetuated, as the Chancellor has said, but once we are using interest rates to keep within the ERM we must give up any idea that we will establish a clear downward trend on interest rates. All kinds of random events may affect the exchange rate and require us to alter interest rates. That is a necessary consequence of the fact that we have joined the ERM. From a political point of view, that is a real problem. A further problem is that it is possible that those in international markets will not view the Opposition's rather uncosted programmes in as favourable a light as those of the Government. Therefore, if there seems to be any real possibility of a Labour Government --there was not at the time of the last election--that in itself will exert a downward pressure on the exchange rate and an upward pressure on interest rates, unless the threat of a Labour
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Government is such that we are forced to change the parity within the ERM. That is a danger which should be brought out.In addition, we have the problem of inflationary pressures from wage settlements. There are already substantial downward pressures of that kind. But we must remember, I am almost inclined to say, dear old Harold Wilson's remark about one man's wage increase being another man's job. Like many of his cliche s, it was a relevant and important statement of fact which, without using those exact words, we need to get over.
My other main point arises from the Chancellor's Mansion house speech. In the context of the ERM, my right hon. Friend remarked : "Some commentators have suggested that interest rates are, in some sense, allocated to maintaining the exchange rate and are therefore not available to help achieve other objectives. They argue therefore that in consequence membership will require more active fiscal policy."
That is profoundly true. If one uses interest rates to control the exchange rate, it is necessary to have an alternative means of operating domestic policy. On many occasions, the two operate in the same direction. One may need both high interest rates and a tight fiscal policy. But sometimes one might need to use the interest rate to affect the exchange rate when the domestic economy requires something rather different.
The Treasury and Civil Service Committee's report on last year's Budget remarked :
"The Chancellor pointed out that, if inflationary pressures were reflected by the position of sterling in the mechanism, interest rates will be used to sustain an attack on inflation. But this would only be possible at a time when the inflationary pressures had become sufficiently clear to be reflected in the exchange rate. There may be times, as happened in 1987, when interest rates were lowered to keep the level of sterling down when they might have been raised to prevent the development of inflationary pressure."
It is not always the case that the needs of the exchange rate are the same as those of the domestic economy.
My right hon. Friend the Chancellor said also in his Mansion house speech :
"I have no doubt that it would be a huge mistake to return to frequent mini -budgets and fiscal fine-tuning. It is not necessary, its effects are not wholly predictable, and, in my limited experience, one Autumn Statement and one Budget a year are quite sufficient!" I am sure that we would all say, "Hear, hear" to that. Nevertheless, if the interest rate is allocated to fixing the exchange rate, fiscal policy may be needed to manage the domestic economy. It is not only a question of fine tuning. One cannot avoid fine tuning by having an annual Budget. If there were a need for fiscal measures in October of any year, for example, it would be foolish to wait until the next Budget before introducing them.
Some years ago the Procedure Committee suggested an annual tax management Bill and a separate Bill concerned with managing the economy. In that context, I have almost come to the reverse conclusion. Perhaps there should be an annual tax management Bill at the time of the Budget, and another Budget as may be necessary for economic management at whatever time of the year may be appropriate. However, I agree entirely with my right hon. Friend the Chancellor that there should not necessarily be more than one a year.
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My final point arises from the speech of the hon. Member for Hackney, South and Shoreditch in relation to a single currency. We simply have not got over the fundamental argument against a single currency. Many members of the public think that it is an attractive idea, and would avoid having to switch from one currency to another as one travelled around Europe. However, if we go for a single currency ahead of a high degree of economic integration in Europe, we shall be giving up the most important means of adjusting for differential changes over its geographical area--whether they relate to labour, capital, fuel, or other costs. The effect on unemployment in various regions of the European economy could be very serious. I do not believe, as the hon. Member for Hackney, South and Shoreditch suggested, that a massive European fund would be the answer. Our own experience in this country, over a much smaller geographical area, does not suggest that such funds are effective. Moreover, there is no guarantee that the money would be transferred. We might enter into a single currency system and then find that, as a result of increased costs in Spain, there was a consequential effect on unemployment. There is no guarantee that everyone else in Europe would cough up to bail out the Spanish. Such a situation would give rise to enormous political pressures. For proof of that, we have only to remember what happened on a small but disastrous scale in relation to the CAP negotiations.I believe that my right hon. Friend the Chancellor of the Exchequer is right to take Britain into the exchange rate mechanism, and I shall support him in the Lobby this evening.
7.13 pm
Mr. Robert Sheldon (Ashton-under-Lyne) : The right hon. Member for Worthing (Mr. Higgins) is right in saying that, under the exchange rate mechanism, fiscal policy will once again come into its own. The right hon. Member for Blaby (Mr. Lawson) called Britain's entry to the ERM a momentous decision, and of course it is. I am in favour of exchange rate stability where it can be obtained, and the attempts made by the right hon. Member for Blaby to shadow the deutschmark were not unworthy. What I had against him was that the rate that he chose was wrong. It should have been much lower.
My awareness of all such matters draws on my background knowledge that many of our problems were caused by an overvalued exchange rate, and that fundamental mistakes were made in trying to deal with them. In the post-war years, there were two important decisions to devalue, in 1949 and 1967. In both cases, the rate was maintained largely in response to American pressure--in 1949 because of the American loan, and in 1967 because of a personal commitment by Harold Wilson to Lyndon Johnson.
The first devaluation, from $4 to $2.40, was very successful, and led to the benefits that we obtained through the 1950s--so that when the Community was born, we considered ourselves too successful to take part even in the Messina talks.
Our success ended with the level of spending that was reached in the "never had it so good" years of Harold Macmillan. By 1964, we again faced an acute balance of payments crisis. I entered Parliament that year convinced
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of the need to devalue. I was impressed by de Gaulle's devaluation, which was accompanied by deflation--a combination that I always thought made a great deal of sense. Devaluation opened opportunities abroad and restricted imports, while deflation released goods for export. I looked for a similar course of action to be followed in Britain, but our parliamentary majority was small, and I realised that devaluation might have to be postponed until we had a working majority.It was with something approaching horror that I realised in the spring of 1966 that there was to be no devaluation. In the following months, I and Joel Barnett, now Lord Barnett, with whom I shared the chairmanship of the parliamentary Labour party's economic and finance group, called on Cabinet Ministers, urging on them the case for devaluation. Unfortunately, the response was slow. By 1967, devaluation from $2.80 to $2.40 was forced on the Government. It was not enough in my view, but it did give industry some help, and by 1969 we achieved a balance of payments surplus.
It will be seen that fundamental adjustments were required before both devaluations. In the first instance, we had to adjust from dealing with the problems of the war years. In the second, it was a case of adjusting to the aftermath of the boom created by Harold Macmillian. As we all know, devaluation helps exports and reduces imports. It helps all industry, and manufacturing industry in particular. It can have inflationary consequences, but there is a time lag before they manifest themselves, and one can use it to limit their effects.
The City does not like devaluation. It wants a strong pound not for the reasons one might think, but because of the better investment opportunities that it offers. In deciding between manufacturing industry and the City, Governments are sometimes neutral. Occasionally they favour the City, as did the present Government initially, before realising that our balance of payments depends mainly on manufacturing industry providing tradeable goods --the largest part of our exports.
Other Governments favoured industry. Like all post-war Governments, they worried about inflation, and in the end always chose the easy way of reducing it, by operating a high exchange rate. But the price for that has to be paid in the form of lost exports and yet another decline in Britain's manufacturing processes. We are again left with exhortations to reduce pay demands and so maintain an overvalued exchange rate.
We have seen time and again a high level of optimism about our prospects, but we are entering the ERM against a background of economic failure. We have suffered nothing less than an economic failure despite the enormous advantages of North sea oil. We squandered our oil revenues, time has run out, so we have returned to the exchange rate mechanism.
In The Sunday Times of 25 February this year, the Prime Minister said that
"As the right policies"--
she was still very optimistic at that stage--
"were kept going"--
that is, throughout the whole period of this Government "economic growth and productivity would start to rise again." The article continued :
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"Then, watch out, France and West Germany. My ambition is that we catch up with France And then we catch up with Germany.' That is the kind of nonsense that we hear from time to time, but rarely to quite such an extent."The Government have gone through three phases. The first was the phase during which they said, "Pay demands don't matter ; the money supply will be the master." When that nonsense subsided, after ruining 20 per cent. of our industry--in my constituency, I am sorry to say that it ruined 30 per cent. of well-run small businesses between 1979 and 1981--and when that policy failed, the Government resorted to the second standby, which was exhortation. I have nothing against exhortation, but it is not a policy in itself. Eventually, it is seen to be inadequate and other policies are looked for. The third phase involved the ERM. There are two ways of looking at the ERM. One can look at it as a way of obtaining some stability in currency markets. I am not against that--I am in favour of it--but the Government want more than stability. They want to use the mechanism to discipline industry and to punish workers with threats of unemployment and factory closures. The right hon. Member for Blaby dealt with that. If ERM will not do that, European monetary union will be even less forgiving.
Some hope that enthusiasm for EMU will lead to a continuing strong role for the City of London. I fear that Frankfurt is likely to follow Tokyo in the fulfilment of the principle that markets follow money--and I believe that, eventually, markets do, indeed, follow money. The City was born on the back of the greatest industrial centre in the world. New York followed suit. If there is a case for EMU, it is not that it will help us to retain London as the European financial centre. We need to bear in mind Winston Churchill's comment that we should make finance less proud and industry more content. That is more needed than ever before. Of course, we must help the City of London as a revenue earner but not at the expense of our industry.
What are the prospects for a European central bank? I read with interest the article by my hon. Friend the Member for Durham, North (Mr. Radice). He suggested that Britain would have a representative and that the bank might have to report to the European Parliament and the Council of Ministers. Controlling a central bank in one country is difficult enough. I saw the day-to-day tussles here, where the central bank is nationalised. As we know, it is even more difficult in Germany. Our problems with regional policy and our problems in obtaining agreement because of language difficulties are underrated. To think in terms of other countries paying for our regional policy when we cannot even pay for a proper regional policy ourselves is to live in a dreamland.
Why did we nationalise the Bank of England? We nationalised it because it had too much economic power. We have forgotten all of that. Why did the move have the support of prominent Conservatives such as Bob Boothby? An international bank will have immense powers, although it will supposedly be controlled by different people from different countries with different views and different languages. How can one achieve such control? Since when have politicians--let alone the Labour party--been such friends of the bankers that they have wanted to hand over to them authority in the day-to- day running of monetary policy for the whole of
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Europe? We cannot be sure that our Prime Minister will be as powerful as the chairman of such a central bank. What an abrogation of power.It is arguable that Montague Norman, formerly Governor of the Bank of England, did more to create a picture of Britain between the wars than Ramsay MacDonald or Baldwin. Can we really suggest that such a powerful figure could be controlled by the European Parliament? Such a figure will run rings around it and around the divisions in it. In day-to-day operations, even the Council of Ministers will find itself outranked.
When we look at the limited powers of the Bank of England and the Fed in Washington, we find powers far less extensive than those that some of us are prepared to accept. I used to consider that I had an obligation to explain the motives of bankers to my hon. Friends and say that they were not the cruel people so many thought them to be. I now find myself having to question my hon. Friends' admiration. Why have we come to love the bankers whom we used to criticise so harshly? The reason seems to be that we are looking for a panacea--a way out of difficulties of our own making. There is no panacea : we shall rise by our own efforts or not at all.
7.24 pm
Mr. Henry Bellingham (Norfolk, North-West) : The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) has taken us on an intriguing historical tour. I am sure that he was as amazed as I was to hear an hon. Member on the left wing of the Labour party advocating a single European currency. I wonder why the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) did that. Is it because he knows that the reforms introduced by the Government--the entrenchment of the free market and the complete reform of the trade unions--cannot be overturned by an incoming Labour Government but could be overturned by centralisation through Europe? That is why the hon. Gentleman has done a complete about-turn. His speech provided us with a fascinating insight into the thinking of some on the left wing of the Labour party.
I support the Chancellor's policy of entry into the ERM. I feel that we should have entered the mechanism somewhat earlier, and we heard a fascinating speech from my right hon. Friend the Member for Blaby (Mr. Lawson) in that regard. I have a feeling that much of my right hon. Friend's policy depended critically on earlier entry into the ERM. Perhaps if we had entered earlier inflation would not have taken off as it did and perhaps we should not have the very high interest rates that we have at the moment. That is all speculation. I welcome entry, with certain reservations.
The firms in my constituency also appear to welcome entry into the ERM. Many of them are light industrial businesses, some of them small--and many of them now export their products to Europe. They are very pleased that they can now have much more firm ideas about the position of our currency. In the past, far too much management time was taken up in playing the currency markets and in hedging the currency. Firms now know where they stand, and that will enable them to compete better with their European counterparts. They are feeling the pressure of high interest rates, and they certainly welcome the recent 1 per cent. cut in interest rates.
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Some firms in haulage, construction and retailing are feeling the pinch especially badly. Haulage firms are extremely worried about rising fuel costs, although the position was ameliorated somewhat by the fall of a few days ago. The Treasury must be rubbing its hands with glee in view of the increase in revenues from taxation on fuel oil. Could not some of that extra money be forgone? Could not the Treasury ensure that the Government continued to take what they were taking before while reducing taxation on fuel oils? That would help many firms in Norfolk. I know that my hon. Friend the Paymaster General is listening carefully because he has similar firms in his constituency, and they are also concerned about the rise in fuel costs.We are at an important crossroads and this debate brings into sharp focus the question of where we go from here. We could follow the Jacques Delors route towards an integrated federal states of Europe, but I believe that it is riddled with pitfalls and has serious disadvantages. For a start, there would undoubtedly be a major derogation of sovereignty. I am in favour of derogating sovereignty over certain matters. The environment is a case in point because pollution knows no frontiers or boundaries. But the derogation of political control and contol in foreign policy matters that would undoubtedly flow from economic integration would be a grave disadvantage. Moreover, it would emasculate the sovereignty of the Queen in Parliament. That matter has not been touched on today except by my hon. Friend the Member for Stafford (Mr. Cash).
If we follow the Delors route, we shall have a centralised bureaucratic power. We shall have a form of market socialist control. Of course Jacques Delors wants that ; he is a market socialist. Of course he wants power at the centre. If we follow his route, we shall have a close-knit, inward- looking club that will not want new members coming in from outside. It will be far more difficult for countries such as Hungary, Poland, Czechoslovakia --the newly emerging democracies--to come into Europe.
Advocates of a federal European solution have already said that they do not want Europe to expand too quickly. Indeed, my right hon. Friend the Member for Henley (Mr. Heseltine) spoke in those terms the other day. Furthermore, if we follow the Delors route, our relations with America and the advanced Commonwealth countries would also be jeopardised and any idea that we could form closer trade links with those countries would be imperilled.
Many people have no idea what all this means and there is a danger that we will sleepwalk into a federal states of Europe. Jacques Delors has already said that he wants a federal Europe by stealth, and that worries me. People should know what is happening and that this Government advocate an alternative route to the Delors route. They advocate entering ERM and drawing lines under it stating that there should be not one single step beyond it.
I could certainly go along with a hard ecu. I do not want to go any further than that because a loose grouping of sovereign states have control over their own destinies. Their traditions and characters can be seen at their best. That is the way forward. Today we have heard nothing about the single market. It is crazy to begin to talk about going further forward until we get the single market to work. The United Kingdom is at the forefront in implementing the 230-odd measures for the single market.
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In fact, we are well ahead of many of our European counterparts in that regard. However, until we get that process moving, even to consider stage 2 is ludicrous.We should advocate the alternative course. We would have control over our foreign policy and over so many other aspects of domestic policy which would disappear out the window if we were to opt for the federal solution. Consider the current mess in the CAP and the discussions intended to sort out farm prices. It is clear that there is a complete shambles there.
If we are considering seriously derogating our foreign policy to a group of countries whose response to the Gulf crisis was supine and pathetic, we should think again and consider the consequences of the policies advocated by the so-called federalists.
We are at a very important crossroads. There should be far more opportunities for the people of this country to decide their future. The House must decide where we go from here and there should perhaps be a referendum. In today's debate some political hatchets have been buried, and that is very comforting. ERM membership is a momentous step forward, but the steps that are likely to be taken after entry will be far more momentous. This is indeed a time to bury political and party-political hatchets. Anyone who, like me, believes passionately that we should not go a single step further should vote for the future generations of this country.
7.32 pm
Mr. Alex Salmond (Banff and Buchan) : There has been some criticism tonight of the Government about the timing of ERM entry. The real issue is not whether the timing was a week before or a week after the Conservative party conference. The Government are vulnerable on the question of timing because the decision was taken without any policy preparation for the consequences of entry. It was a bit rich for the Chancellor to go to the Mansion house and explain to the City and to prominent industrialists afterwards the implications of his policy. That should surely have been done beforehand and preparation made. The Scottish National party supports the decision to enter ERM. We are extremely aware of the difficulties that entry will produce for the exchange rate mechanism, for our European partners, for sterling and for the United Kingdom. The euphoria generated by the initial decision to enter was unjustified. Indeed, many of today's speeches sounded very much like the morning after the night before. There are two basic problems with sterling's entry into the ERM. The first is the problem that it creates for our European partners ; it is significant that no one in this debate so far has considered entry from the point of view of the rest of the Community. Basically, the ERM has worked because the deutschmark has been the dominant currency and the other currencies have revolved around it like planets revolving around the sun in the solar system. Taking sterling into the ERM introduces a major international investment currency, 90 per cent. of the value of which is dominated and determined not by trade flows, but by capital movements. It is not like introducing another planet into the solar system. Rather, it is like introducing an alternative sun. A great tension will develop in the polarity between the two major currencies within the ERM. There is at least as much chance of sterling's entry
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destabilising the ERM as there is of ERM stabilising sterling. The Chancellor actually claimed a virtue of the fact that he had not consulted our European partners before taking his decision on entry and thus did not display the kind of attitude that will be necessary if we are to make a success of entry into the ERM.The second problem about ERM entry is traditional for the United Kingdom ; it is the problem of having an overvalued currency and a weak economy, a strong pound and weak industry.
The "economic consequences of Mr. Churchill" have already been referred to. We should remember that on reflection in later years Churchill wrote :
"I was called the worst Chancellor in British history and looking back I am inclined to agree".
He wrote that about the 1925 decision on the gold standard. I do not believe that such a consequence will befall the present Chancellor, if only because he faces strong competition for the title of the worst Chancellor in British history from his two immediate predecessors.
On consideration, I believe that the right hon. Member for Blaby (Mr. Lawson) is somewhat protected from that title because he simply generated an unsustainable boom. However, the present Leader of the House stands accused of having generated an unnecessary slump in the early 1980s.
I can understand the chagrin with which the right hon. Member for Blaby described the present policies on the exchange rate mechanism. After all, it is only a year since he was forced to resign for pursuing exactly the same policy that is now pursued by the entire Cabinet. However, he can at least take some satisfaction from the fact that the consequences of the present policy will have to be faced up to by the present Chancellor and not everything that goes wrong with Government economic policy can be blamed for ever on the mistakes of the right hon. Member for Blaby.
When the consequences are confronted, it will be obvious that pious exhortations to the bosses in the City and elsewhere to pay their workers less to make the policy a success will simply not do. When sterling starts to bump along the bottom of its banding, some very hard choices will have to be faced. It will not be good enough to commit reserves, because sterling is such a major currency that even the reserves of the whole of Europe would be used up quickly in trying to defend an unsustainable position. The hard choice will be between interest rate rises and deep cuts in the Government's fiscal policy.
To borrow a phrase, the cost of "bucking the market" will be very high indeed. When the pressure is felt, the Government and the Opposition Front Bench will have to answer a question that they have dodged throughout this debate : when the pressure is on, will they move forward to further monetary integration or backwards and break the system of which they wanted to be a member?
To claim that the hard ecu is the solution to the dilemma is not good enough. If it is treated as anything more than a diversion by the other European countries, we must realise that a hard ecu, if not monetary union or a single currency by transition, is a single currency by stealth in much the same way as shadowing the deutschmark was entry into the exchange rate mechanism by stealth. For the political health of the present Chancellor of the Exchequer, I only hope that the Prime Minister does not
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rumble this device in the way that she eventually rumbled the right hon. Member for Blaby. If that happens, the present Chancellor will also become "unassailable".Our difficulty, from a Scottish point of view, is the realisation that these hard choices are not really relevant to Scotland's economic position. Over the past year, we in Scotland have faced penal interest rates in an economy which is nowhere near overheated. I do not think that even the Chancellor would claim that the Scottish economy is in a state of overheating, so great are the underused resources in the economy. Yet we have had to suffer the interest rate regime designed to tackle economic overheating in the south-east of England.
The Secretary of State for Scotland says that we should be grateful because that measure is doing less damage to the Scottish economy than it is doing to the economy of the south-east of England. He is apparently oblivious to the fact that Scottish industry is probably more dependent on interest rates and the interest rate regime than industry elsewhere in the country. It is bad enough having to suffer high interest rates when one is suffering from the overheating disease, but it adds insult to injury to have to swallow the medicine without having the condition in the first place.
The exchange rate mechanism offers a sensible option for smaller currencies. Certainly, an independent Scottish currency would fit comfortably into the exchange rate mechanism in the same way in which other small currencies of Europe currently fit. We would not have the same hard choices which confront sterling and from which the two Front Benches are currently running away.
My last point is about attitudes, and it is a plea for a change of attitudes as we face monetary union. When I looked at the unfortunate and unpleasant article in The Spectator recently, it struck me that the former Secretary of State for Trade and Industry was not really talking about the Germans, the French, the Irish or other nations whom he disparaged ; he was actually talking about England. The Spectator was absolutely right to head the article "Speaking for England". The underlying message was that, having lost an empire, England is now frightened of losing a currency and yet more self-determination over her own affairs. Albeit more elegantly, the right hon. Member for Shropshire, North (Mr. Biffen) touched the same chord when he said that he was frightened of "foreigners"--I think that I have quoted him exactly--controlling the economic destiny of England.
There are real issues to be faced in monetary union--for example, productivity throughout the Community--to stop high productivity regions sucking in capital and labour from lower productivity regions. There is also the question whether it is compatible with the expansion of the Community to include eastern European nations. That is another real question which must be faced. If there is valid tension between broadening the Community and deepening the Community, it will have to be addressed. However, unless these questions are addressed in a genuinely positive fashion by people who are anxious to make a success of the EC our partners in the rest of Europe will understandably say, "These are not real arguments or real issues presented by the United Kingdom ; it is merely more blocking and tackling from a country that is refusing to grow up and to drive forward."
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7.42 pmMr. Julian Amery (Brighton, Pavilion) I should like at once to congratulate the Government on their decision to join the exchange rate mechanism. I do not think that it will do much to help our inflation, but it is of great importance in a broader sense. Unless we had joined, we could not really have had a seat at the table and discussed the future of the monetary evolution of the European Community. That matter is immensely important to us and will be before us next month. We could not really have gone to the December talks and made any sense unless we had been in the ERM, nor could we really talk seriously about the reconstruction of Germany and eastern Europe. That will require more than German effort ; it will require European and, I dare say, American effort as well, bearing in mind all the difficulties that our American friends have and the extent to which they can afford to help.
We must not underrate the impact on the existing ERM of the burden that will have to be taken up in the reconstruction of Germany and eastern Europe. I do not think that even in Bonn people yet have the foggiest idea of how much it will cost them and, in turn, how much it will cost us.
We now belong to a deutschmark zone, as foreseen by my hon. Friend the Member for Horsham (Sir P. Hordern) in a pregnant article in The Spectator quite a long time ago. That brings us to what we might call the German peril. My right hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), in his famous interview in The Spectator, and my hon. Friend the Member for Stockport (Mr. Favell) have drawn attention to their views on that matter. All hon. Members have been aware of the problem. The question is how we are to meet it. Do we meet it best from being inside the Community, where we may find allies if need be, or do we meet it better from being outside and alone, or almost alone? If the Americans have a penchant for any other special relationship, it is indeed with Germany. We must ask ourselves a simple question : would we prefer to have our financial affairs dictated by the Bundesbank or by some agency over which we have some influence, limited though it may be?
The German Chancellor, for whom I have the greatest regard, has been setting the pace, both in respect of the common agricultural policy and now the timetable for the agenda of the forthcoming meeting in Rome. He has said that the second stage of the approach to European monetary union should be in 1994. I ventured to interrupt my right hon. Friend the Chancellor of the Exchequer to ask whether, instead of just saying that we did not like the idea or that we had good grounds for not liking it, we could say, "Okay, 1994, if you accept the hard ecu proposal." It is perhaps an opportunity. May I now say a word about the problem of sovereignty? There is a widespread feeling in the House that, if we are not careful, we shall go down a road that will turn the House into something that is not much more than a glorified county council. What is sovereignty? It is total freedom to do whatever we wish. It existed, I suppose, in Britain in the days of Palmerston. General de Gaulle tried to achieve it for France, with his policy of defence against all horizons. But what does sovereignty mean today?
One or two distinguished speeches--for example, by the right hon. Member for Bethnal Green and Stepney (Mr.
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Shore)--were about seeking the right to inflate or devalue. There is here a very respectable case--I am not joking about it. William Jennings Bryan said :"you should not crucify mankind upon a cross of gold."
Keynes said that, in certain circumstances, it might be desirable to reflect the economy. That could happen again, but it does not seem likely at the moment.
I wish to relate all that to something. For several generations we were on the gold standard. The gold standard worked extremely well for a long time, but it produced industrial and social disadvantages that were so serious that, in 1931, we opted out. The moral that I am trying to draw is that the House of Commons does not surrender sovereignty. Nothing that we decide today can bind another Parliament, and nothing that we do can bind another Parliament. Another Parliament can make other decisions, just as happened in 1931 when Parliament decided to abandon the gold standard and we moved to the sterling area. That committed us to certain obligations, as well as conferring certain advantages. When in the 1970s the obligations became heavier than the advantages, we and some of our partners decided that we had had enough.
Nothing that we decide here is irrevocable. If we do not like what is put before us at the next stage of European monetary union, we need not sign it. If we do sign it and it does not work, we can pull out. We did that with the gold standard, with sterling and with the empire preferences. The French did it with NATO. No Parliament can bind another unless the latter is occupied by enemy troops. If anybody thinks that our present Secretary of State for Defence or our Home Secretary are shock troops for Delors, he or she had better think again.
When considering the next stage of European monetary union, the test that we must apply is whether there is a better road or an alternative policy that would suit us better. Is there a "better 'ole?" That is what we must examine in some detail. I agree with my right hon. Friend the Member for Blaby (Mr. Lawson) that we are a long way from any sort of federal arrangement in Europe. We need only look at the response of the different members of the Community to the crisis in the Gulf where there was no sign of federal co-operation. Much has happened since the Paris-Bonn axis was first created in the days of de Gaulle and Adenauer when the French were convinced that they would be the jockey riding the German horse. There have been enormous changes : German union, the liberation of eastern Europe, the disintegration of the Soviet Union and the recession in the United States, to say nothing of the middle eastern crisis. Today, everything is in flux and no blueprint that has been produced by Delors or anybody else is acceptable. I do not know whether there will be a single currency unit. Whose image or whose superscription will it bear? As to a single bank, we shall be lucky if we get a single reserve bank. However, with our experience of the sterling area and the world economy, we would do better if we were in on the act and able to contribute as much wisdom as we can and as we have both to our advantage and to the general advantage.
7.52 pm
Mr. Ken Livingstone (Brent, East) : I wish to make several points about a decision with which I disagree. I do not disagree with it in principle because I am not anti-European and I look forward to a united Europe.
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I reject completely the arguments that have been made by many hon. Members--I know that they were made with completeconviction--concerning the sovereignty of Parliament. On any comparison of this Parliament with those of the other European nations, we can be seen to be lacking in virtually every measure, whether it be control of the Executive, the way in which we carry out our business, or the lack of a proper committee system--although we have the rudiments of that now. We cannot therefore hold up the sovereignty of Parliament as something that may be lost because nothing in our parliamentary structure is superior to anything in the structures of our major European partners in the Common Market. My objection to entry is that the rate at which we have entered the ERM is profoundly wrong. It will add 750,000 people to the ranks of the unemployed as a permanent structural feature of our economy. It will lock us into years of massive industrial struggles over wages. It will be a disaster. Irrespective of which party sits on which Bench in the next Parliament, I predict that the next Government will devalue the pound within the exchange rate mechanism and the ERM will most probably lock us into a series of further devaluations in the years to come.
Many hon. Members of all parties have formed the impression that the strength of the more dynamic European economies in the past 20 or 30 years was created by the exchange rate mechanism. That is nonsense. The ERM came about because the major European countries within the Common Market had achieved roughly similar rates of growth and roughly similar increases in productivity and were thus much more able to link their currencies. To tie the British economy, with its much lower rate of productivity increases, into the economies of our major European competitors will be to lock us into something that can best be characterised by the relationship between the Scottish and English economies following the Union.
As I have said, I am not opposed to ERM entry in principle. If the Government had entered the ERM at DM2.40 and had created a series of other measures to shift our economy into major export-led growth, I believe that it would have worked, but this is a gimmick to get the Government through the next election. Irrespective of the outcome of that election, there will be massive pain for the British people at virtually every level of society as a result. Again, I must emphasise that I am not anti-European or anti- entry into the exchange rate mechanism in principle.
Many of my hon. Friends have been unduly influenced by the Prime Minister's reluctance. They have assumed that the Prime Minister's reluctance means that there was something to be said in favour of ERM entry now. However, it will be our constituents who will bear the burden of unemployment that will flow from this. Hon. Members who have a rabid enthusiasm for entry into the exchange rate mechanism at this level will have to explain it to their constituents as unemployment mounts relentlessly in the weeks and months to come. After 11 years in office, the Government have created a major economic crisis. There is a lot of crowing about the most recent trade figures, but the underlying pattern is devastatingly bad for Britain. It is easy to construct any argument by picking out a particular year or the shift in exports from manufactures to services. However, when one looks at the proportion of our GDP given to imports as opposed to exports, and compares the beginning of the Government's period in office with now, one sees that the
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picture is stark. Compared with when the Government came into office 11 years ago, there has been only a slight increase in imports as a proportion of GDP. The figure is 0.1 per cent. However, we have lost exports amounting to 3.5 per cent. Anyone who thinks that those figures do not matter should remember that each percentage point of GDP represents £5 billion. That is devastatingly bad news. Whichever party governs Britain in the 1990s must turn that problem around if it is to make any sense of the economy.This is the same old problem that we have seen before. That is why I was somewhat less than enthused when I heard the reaction of my own Front Bench to the decision to enter the exchange rate mechanism. In response to the questions, "Would you reduce the exchange rate under the system?" and "Are you happy at the rate at which we have gone in?", I heard my very good friend the right hon. and learned Member for Monklands, East (Mr. Smith) say, "That is the rate that we shall have to defend as a point of honour." If my right hon. and learned Friend really believes that, he is setting himself up to be the Harold Wilson of the 1990s, defending a completely unrealistic exchange rate.
As my hon. Friends--on both the left and the right of my party--have said in this debate, our exchange rate is about 20 per cent. over-valued if we are serious about being a manufacturing and exporting nation. However, the Government are not interested in that. Their primary concern has been the defence of City interests. The Government faced a simple choice when deciding the level at which to set our entry into the exchange rate mechanism. They could set a level to benefit the City, which they did, or a level that could benefit British manufacturing. Once again, the City won and British manufacturing lost and it will be locked into further decline in the years to come.
It is not just a question of entering the exchange rate mechanism. The reality is that we have been locked into a relative economic decline for over a century. Government after Government--of all colours--have presided over a decline, each year being prepared to accept an increase in the rate of inflation of 1, 2 or even more percentage points worse than those of our major competitors. Each year, the Government were prepared to see 1, 2, 3 or 4 per cent. less investment in our economy than was made by our major competitors. The consequence has been a loss of productivity compared to our major competitors who have achieved greater increases in their productivity year by year. All that it has taken to turn the most powerful industrial economy in the world into the 29th or 30th-ranking economy was the attitude that we should decline gracefully. Nothing about the decision to enter the ERM will break us out of that continuing graceful decline.
We are locking ourselves into a position of weakness. We could have entered in a position of strength, prepared to defend our manufacturing sector by entering at a more realistic rate or even a rate that was under-valued. Let us remember that in their reconstruction after the war Japan and West Germany made damned certain that they started a pattern of growth by having an under-valued exchange rate. They set out to create a solid manufacturing base.
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