House of Commons Hansard Debates for 23 Oct 1990

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Therefore, I should have been happy to support entry into the ERM at DM2.40 or DM2.50, but I am not happy with the level at which we have entered.

The Government ignore the other issues which arise out of our entry, irrespective of the level set. If we are to reverse the crippling decline in manufacturing in Britain, which has led to a crippling decline in exports as a proportion of our national wealth, various other measures must be taken. If we had entered at a more realistic rate, we should have seen a much more rapid and dramatic cut in interest rates. We could have seen a rapid reduction of perhaps 2 or 3 per cent. in the rate of interest if we had entered the ERM at a rate which was more realistic for manufacturing.

The Government would also have had to find ways to protect the poorest elements in society. A reduction in the exchange rate and a devaluation along the lines that I and many of my colleagues would want--my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) argued for it-- would need to be balanced by measures to protect the poorest members of society from the impact of the inflation that would feed into the system. Devaluation would have to be tied into a reduction in the basic rate of value added tax. I recognise that it would be unrealistic, given the state of the economy, to allow a major increase in consumer spending, so I should have been happy to balance it by restoring the top rate of tax. To create a growing and dynamic export-led expansion, we should have been prepared to defend the weakest sections in the community, who have done so badly in the past decade at the expense of those who have done so well.

Every economist tells us that the more the Government pump money into the poorest sections of the community, the more those people are likely to spend it on domestically produced goods. A redistribution of wealth from the rich to the poor helps the basic structure of our balance of payments and the construction of a solid manufacturing base.

I do not accept the arguments of my hon. Friends who say that we have declined because we entered the Common Market or that we are about to decline because we have entered the ERM. We are declining because we failed to take the firm measures required to shift the whole balance of the British economy. Entry into the ERM has not resolved that problem, and it will not resolve it for the next Labour Government. We must take other measures to solve our problems. 8.2 pm

Mr. Nicholas Budgen (Wolverhampton, South-West) : The hon. Member for Brent, East (Mr. Livingstone) may be surprised to know that I agreed with some of his points about devaluation. As I listened to the debate I realised that I could not contribute much that was distinctive to it other than by considering the subject from a practical point of view. Many people from outside observing the debate might remark that an employer in manufacturing industry, for example, was under-represented in the debate. They might remark on how much theoretical talk there was and how little the practical implications as they might affect someone with a manufacturing concern in Wolverhampton were discussed.

If I had had the privilege of catching your eye earlier, Mr. Deputy Speaker, I should have attempted to speak with the passion and eloquence of my right hon. Friend the

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Member for Shropshire, North (Mr. Biffen). He is an earlier and more distinguished pupil of the Powell academy. He and I share most of the Powell prejudices. We are in favour of floating exchange rates. We are against foreign domination and on the whole we are in favour of some hypocrisy, but not too much.

A manufacturing employer from Wolverhampton might think as he listened to the debate that the arguments of my right hon. Friend the Chancellor of the Exchequer in favour of stability were attractive. "Stability," he would say "how much I want that." He would have been like the hypochondriac lady who would be much attracted to the doctor who could suggest to her the mystery of eternal life and no illness. He would have said, "Ah, stability, that is what the Chancellor is promising us." He would also have been much attracted by the argument that inflation is mainly caused by the working class. After all, that is what he would have preached to his foreman day in and day out. When he heard that disagreeable exchange between my right hon. Friend the Member for Blaby (Mr. Lawson) and the Duke of Devonshire's gamekeeper, he would have hoped that there was no such impertinent person in his work force when he was lecturing his employees on the need to keep down inflationary wage claims.

The manufacturer would have been attracted by the argument about stability. He would have thought about the inconvenience of needing to insure and hedge against exchange rate changes. He would have thought with gratifying pleasure that that great man the Chancellor of the Exchequer had told him that there could in no circumstances be devaluation. How dangerous that illusion would be. How wickedly dangerous.

We were fortunate that the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) reminded us that there have already been many important devaluations within the ERM. For instance, let us look forward even to the next general election. For the sake of argument, let us assume that there is downward pressure on the exchange rate and that it drops towards DM2.88 or whatever the bottom figure is.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) : DM2.95.

Mr. Budgen : DM2.95 is the centre figure. DM2.88 is the lower figure. Whatever the lower figure, it is a market figure and market figures are affected by wholly irrational factors. For the sake of argument, the market may want a Labour Government after the next election. It may want a left-wing Conservative Government or a right-wing Conservative Government. People may be punting on the pound because of their view about who will win the next football match. None of us knows about the work of the unknown hand of the market.

If it is necessary just before the next election to increase interest rates by 3 per cent. or, for the sake of argument, to raise the rate of taxation by 10p, are the Government likely to do so? Is it not likely that, however humiliating a conversation the Chancellor is forced to have with Herr Po"hl or whoever is our dominator in Europe, he would prefer to suffer that than risk being absolutely certain to lose the next general election? Yet this very day my right hon. Friend the Chancellor in effect said to the business man in Wolverhampton, "Do not worry about the possibility of a fluctuating exchange rate. Do not hedge against the risk that the pound may alter against the

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deutschmark. I tell you that there will be no devaluation." As I said, those of us who were brought up in the Powell school like a little hypocrisy. We do not believe in telling people too much of the unvarnished truth, but that is taking it a bit far. Is it not a little dangerous to start by saying in a macho way that there will certainly be no devaluation?

Let us consider the medium term. Can we be satisfied that we can keep going on the basis of some form of co-ordination between European banks, some intervention from time to time from European banks and perhaps from time to time the occasional devaluation? Can we have anything approaching stability without going towards irrevocably locked exchange rates? If that happens, it will, as the right hon. Member for Bethnal Green and Stepney (Mr. Shore) has already suggested, be a short step to a single currency.

Surely Sir Alan Walters was right when he said that there was a case for a floating exchange rate. If one was not worried about the sovereignty arguments there might be a case for a single currency of Europe. There is nothing to be said, however, for this half-baked system of the ERM.

Whatever else we do tonight we should reject the cruel illusion that ERM is a great magic system that can give people the stability they desire--in real life we can promise that to no one. If we pretend that that system will bring stability, and if people make commercial judgments in that belief, we will condemn them to bankruptcy, illusion and disappointment.

8.10 pm

Mr. Ron Leighton (Newham, North-East) : The Government, having pushed the country into a dangerous recession, were under pressure to reduce interest rates. Once they did that, however, they were frightened of the effect on the pound and inflation and thus collapsed into the ERM. We may well have further interest rate cuts and things may look good for the country for about nine months or perhaps a year--presumably by that time the Government hope that there will have been an election. Whichever party is in power after that election, however, it will face pressure on the pound and a major economic crisis.

I believe that entry into the ERM is a grave error and is a major blunder that will cause great damage to our national interest. In preparation for this debate I refreshed my memory of the policy of the Labour party. I studied the policy review document "Meet the Challenge : Make the Change", which says :

"We believe that the European monetary system, as present constituted, suffers from too great an emphasis on deflationary measures we oppose moves towards European monetary union which would further impede progress in this area. Substantial changes would therefore be required before the next Labour Government could take sterling into the exchange rate mechanism."

The document spells out that four conditions would have to be met for such entry. It states that we would need a European Community-wide trade policy to contribute to balance of trade stability for individual members. Given that we have a deficit of £16 billion with the European Community, we certainly do not have that. The document also states that we need a co- ordinated Community-wide growth policy, but we certainly do not have that. It also states that the pound would have to enter at a rate and on conditions which would ensure that British goods became and remained competitive. Given that the exchange rate is

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nearly DM3 to the pound, we are certainly far from achieving the necessary conditions. The House will note therefore that my remarks follow the main thrust of Labour party policy as decided by our conferences.

The ERM means that we shall peg the parity of the pound not to the dollar-- the dollar is going down and it would be helpful if the pound came down with the dollar as many things are priced in dollars--or to the yen, but to the deutschmark because the ERM is a deutschmark zone. We are therefore going to peg the pound to the currency of the country with which we have an enormous deficit. That is crazy economics. If we are to prosper, we must reverse that deficit, and to imagine that we can do so by linking the pound to the deutschmark is stretching credulity too far. We are being locked to an exchange rate which will ensure that that trade deficit will continue in perpetuity.

Pegging the pound to the deutschmark is the new, fashionable, fanciful theory. It is the latest nostrum and magic to solve our problems, but in effect it subordinates reality to theory. It subordinates the real economy to abstract notions. It subordinates people--flesh and blood--to the so- called iron laws of mistaken economics. We are doing things the wrong way round. Money should fit the real economy rather than the economy fit the money. Money should be our servant, not our master.

The concept of pegging the pound to the deutschmark is an arid dogma similar to putting the pound on the gold standard, and we know what that led to. The last strange dogma we encountered was the monetarism of the 1980s. That dogma led to an overvalued pound, we lost a quarter of British industry and the unemployment rate was pushed up to more than 2 million people. I did not become a Labour Member to support a huge increase in unemployment, but entry to the ERM will cause just that.

The new fanciful theory says that we should aim at convergence, which means that we should have the same productivity level as West Germany. I cite West Germany as it is the key country and I make no criticism of it as I have great admiration for that country. That convergence means that we should have the same productivity, growth, rate of investment, inflation rate and interest rates as Germany. It is a lovely theory, but can it work? Can anyone guarantee that, as a result of entry to ERM, such convergence will be achieved this year? I should happily give way to anyone who could guarantee that. What comes first--convergence or pegging the parity of the pound? Has anyone noticed what is happening in the real world? The level of German growth has been recorded at 4 per cent. for the past two years while ours has been less than 1 per cent. Compare the massive investment in the German economy with our negative investment. Compare their investment in training and education with that of our own. German interest rates stand at 8 per cent. while our own, even after the latest cut, stand at 14 per cent. The German inflation rate is recorded at less than 3 per cent., but our own is three times higher at more than 10 per cent.

Can anyone guarantee that our inflation rate will soon be the same as that of Germany? Experience suggests otherwise. One of the simple facts of economic life is that if the economic performance and inflation rates of

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countries vary, the value or price of the respective currencies--in other words, the exchange rates--will vary. That is an economic fact, not an opinion.

If British inflation is higher than that of Germany and we have fixed parities, we shall witness a continuous overvaluation of the pound and an undervaluation of the deutschmark. British exports will become dearer, foreign imports will become cheaper, the trade deficit will be huge and unemployment will increase. If we buy goods from foreign factories as opposed to British factories, it means unemployment. It will become too expensive to manufacture in this country and unemployment will rise. If we have fixed parities, all it means is that we shall pretend that the pound is worth DM3. German monetary union is a good example of what happens when one pretends that one's currency is worth more than its true rate. The West Germans pretended that the ostmark was worth the same as the deutschmark-- that was good politics. Chancellor Kohl went to East Germany and said, "Vote for me and I'll change your money one for one". They all voted for that, but as a result East Germany's industry has collapsed completely and it is facing massive unemployment. The same will happen here if we continue with such pretence.

Fixed exchange rates help the strong and reinforce their dominance. They make the rich richer and the poor poorer. If we maintain the pound at an artificially high level, it is another way of saying that we shall keep the value of the mark down--we shall keep it super competitive.

If we cannot adjust our economies by changing the exchange rate, how are we expected to make the desired adjustments? The Delors committee is quite clear on that : it advocates wage flexibility and labour mobility. That means that the wages of all workers must come down, as we heard from the right hon. Member for Blaby (Mr. Lawson). The Secretary of State for Employment does not pause for breath as he talks ceaselessly about the need for workers to have wage increases less than the rate of inflation. We are told that if that does not happen quick enough there will be mass unemployment. It is obvious that we shall end up with lower wages as well as mass unemployment. Not only wages but profit, investment, research and development and training will be squeezed. The entire economy will be put through the wringer. That will mean lower wages, more unemployment, slower growth and less wealth. In other words, the real economy will be sacrificed to a theory. Employment, growth, wealth and everything else will be subordinated to the idea of pegging the exchange rate.

If we take that step, we shall be making the mistake that we made in 1964. The Harold Wilson Government, having come to power, wasted three years shackling the Government to maintaining the rate of the pound. I recently replayed a video of Harold Wilson being interviewed by a professor of politics. He was asked why he had made the terrible mistake, which ruined that Government, of trying to peg the pound. He replied, regarding the parity of the pound :

"There was an air of sanctity about it."

He went on :

"It was considered a sin against the Holy Ghost."

He now says that it is no longer a problem, but my fear is that we shall make it a problem again. We are not learning

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from what happened over the gold standard or from what happened on that occasion to the Government of Harold Wilson. We shall be repeating the mistake all over again.

Some of my hon. Friends say that we shall have an industrial policy, and that is important. Indeed, the main difference between the two sides of the House is that my hon. Friends and I want an industrial policy whereas most Conservative Members simply want market forces to operate.

Exchange rate policy is an important part of industrial policy. We used to have what was known as the alternative economic strategy, and that was our industrial policy. We do not hear much about the alternative economic strategy these days, simply because it is unlawful under the treaty of Rome. The European Commission would not allow us to have the alternative economic strategy. So if we give up exchange rate policy, what will be left for the next Labour Government when we take office?

It is argued that we shall have the strength of the central banks wrapped around us. I have never heard anything so naive. The amount of money under that type of arrangement is limited and, in any event, the money one gets is by way of loans and must be repaid. That money will not be in any way different from money from the IMF. It will not accrue without conditions. Those concerned will be able to tell us to change our policy from whatever got us into the position of having to ask for a loan. President Mitterrand found that in 1983.

Alternatively, it is suggested that we might have a regional policy. It would take a regional policy on an heroic scale to make up for the damage that would have been caused. Indeed, we have at present a reverse regional policy because, as a poorer member country of the Community, we are paying in £2.3 billion to subsidise the richer countries. Each family of four in Britain is paying £16 a week more for its food than it need to pay. The regional policy is Britain subsidising the rest, so what nonsense it all is.

The exchange rate should not be elevated into a sort of sacred totem to be worshipped at the cost of production, trade and employment. We need a vigorous industrial policy which will combine full employment, a sustainable rate of growth and balance of payments equilibrium, and to achieve that we need a Government who can determine their own policy. We want democratic self government in this House. If our policies are to be determined not here but by people at some continental central bank, it will not matter for whom the British people vote because they will have the same policies whoever they elect. In other words, their votes will be devalued, and that cannot be advantageous.

It is always dangerous to prophesy, but I guarantee that the policy will fail. It will not be possible to sustain the exchange rate of the pound at DM2.95.

8.24 pm

Mr. Ian Stewart : (Hertfordshire, North) : Not surprisingly, much of the debate has focused on potential future steps towards monetary convergence and monetary union, rather than on the decision that the Chancellor took a fortnight ago. That is understandable because the debate takes place against the background of proposals from the European Commission to the effect that stage 1

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of the so-called Delors plan is only a staging post on a road that leads to monetary union, a subject to which I shall return. The Chancellor has been much maligned from a number of quarters, not only from Labour Members, who have a political axe to grind, but from others who are perhaps less to be excused in suggesting that to reduce interest rates by 1 per cent. two weeks ago was somehow irresponsible. I should have thought that there was at least sufficient evidence that the economy was slowing down, that the monetary aggregates were coming down, that there were conditions in the motor and building industries and in other areas of industry to suggest that the economic pace was slowing, and that it would be wrong to maintain exceptionally high interest rates under those circumstances.

Not only was the Chancellor justified in taking the decision that that was the time for interest rates to start coming down, but, having taken it, it was natural for him to link it with the decision to enter the exchange rate mechanism. I feel sure that the cause and effect was that way round rather than the way round that some have tried to suggest.

I have never been a tremendous enthusiast for European institutions. Equally, I have never been a great opponent of them. Anyone who has had the responsibility of attending the Budget Council of the European Community on behalf of this country and its Government would inevitably be aware not only of the advantages of Britain being a member of the EC, but of the difficulties that are encountered by the activities of European institutions.

It is against that background that I have gradually come to the conclusion- -more by a process of elimination than by enthusiasm for the EMS--that it is a sensible framework in which to conduct our economic and monetary policy. The Chancellor's handling of our entry was skilful. But the real question that will next face him and the nation will be about the further steps towards economic and monetary convergence, and the first of those will be the move from a 6 per cent. to a 2 per cent. band. That step will be more significant in its effect on economic and monetary management than entry itself in the wider 6 per cent. band, which allows considerable flexibility around the central rate that has been chosen.

When the Chancellor comes to consider that next step, I hope that he will ponder long and carefully on the potential difficulties of having an exchange rate mechanism that includes two major international currencies, the deutschmark and sterling. So far, the history of the EMS has involved a group of countries revolving around the deutschmark. As soon as sterling comes into the narrow band, we shall have something that goes by the technical name of bipolarity, which means having two separate potential focuses of attention in the exchange market, not necessarily pulling in the same direction at the same time.

I shall not speak at length about that because time is short, but for those interested in the debates on the subject, I made a remarkably boring speech four or five years ago, particularly boring even by my standards, because I was specifically asked by my right hon. Friend the Member for Blaby (Mr. Lawson) to make it as dull as possible. At that time, as now, the exchange rate mechanism was an extraordinarily sensitive economic and political subject and it was thought inadvisable that I should try to arouse

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any expectations in one direction or another. The speech that I made from the Dispatch Box in that debate was so exceptionally boring that no one was able to pick up any significant comment that I had made in all of it. I was proud of that achievement because it is not easy to talk about the subject without rapidly getting into contentious areas.

The first contentious subject that I want to mention is that of the narrower band. It does not go without question that it would be right for sterling to get into the narrower band in the near future, because we have not yet resolved a problem that has been with us in this country for many years, that over the years we have needed, relatively speaking, higher interest rates in sterling to achieve the same tightness of monetary conditions to counter inflation than other European countries. That is partly because our financial institutions and markets are much more highly developed. They are not quite as developed as those of the United States but we generally have more flexible financial markets. For one reason or another, that has tended to mean that we need a higher interest rate in this country to deliver the same counter inflationary pressure.

Before entering the narrower bracket we should have to be satisfied that we could, over a considerable period, retain the same counter inflationary pressure, with interest rates that were, if not exactly the same as those of Germany and other ERM countries, at least much closer than they have been historically. If we did not do that, all we should have would be a switch of borrowing and lending ; people would lend in sterling and borrow in other currencies at a cheaper rate of interest. That would frustrate the whole of our monetary policy and we should be unable to maintain the ERM for any length of time once those currency movements had been generated on any substantial scale.

The second stage of the exercise--joining the narrower band--will be challenging, and I ask my right hon. Friend the Chancellor and the Government to think carefully before they take that step. It is only a lesser version of the major step that would be taken if we were eventually to move towards monetary union.

It has been explained in the House this afternoon many times by hon. Members on both sides that monetary union inevitably carries with it either economic or political union, or both. The dangers of that are self-evident. Such union has been achieved in Europe twice in the past 2,000 years--first by Diocletian and Constantine, who had the might of the Roman army to enforce their policies, and latterly by Charlemagne, who did not manage to extend the policy to the United Kingdom, but managed to do so quite effectively through most of western Europe, again with a vigorous army at his back. The only more recent experiment was one in the post-Napoleonic period in the 19th century, which did not last long.

I hope that I shall be excused for claiming that I have been thinking about this subject for longer than other hon. Members. Nearly 40 years ago I was writing a book about Scottish coinage and towards the end of it I came across a remarkable fact, which was that after the death of Queen Elizabeth in 1603, King James of Scotland became the first King James of England and the United Kingdom, and immediately implemented monetary union between the two. The rest of the 17th century was spent grappling with

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the problems that that created. There were endless changes of valuation of Scottish coins at that time because a parity with the English currency could not be sustained in those circumstances. The problem was resolved only in 1707 by political union. Economic convergence had not been achieved by that time, but political union had, which enabled monetary union and, in due course, a degree of convergence of economic affairs to be carried through.

Although that is an arcane historical parallel, it contains important lessons for us. If we were to try to move to monetary union in Europe, where different countries and parts of different countries diverge so greatly in their economic performance, we should not, by means of monetary union, achieve greater cohesion in the European Community, but probably blow it apart.

During the recess I read a most interesting book by Professor Hawking, called "A Brief History of Time". As far as I could work it out--my physics is not very good--he was trying to say that if one starts with a big bang, one ends up in a black hole. If we tried to implement monetary union by a sort of monetary big bang and forcing that on many divergent economies and markets in a sudden move, we would be likely to blow the whole thing asunder and would have nothing left at the end.

I should have thought that the accession, in recent years, of Portugal, Spain and Greece, not to mention the addition by a side wind of East Germany, has put off the day when the countries of the European Community are likely to reach the degree of convergence where monetary union is even conceivable.

The arguments generally raised about monetary union--certainly many of those deployed in the House today--have tended to concentrate on the issue of sovereignty, which quite naturally appeals to politicians and is our stock in trade. But it is not the only part of the argument. There is an important part of the argument that should be deployed more thoroughly, and I hope that the Government, through my right hon. Friends the Prime Minister and the Chancellor at their international gatherings, will not hesitate to make plain to our fellow member states in Europe the potential implications of trying to achieve monetary convergence without economic convergence or centralised political control. That argument will demonstrate to other countries' Parliaments the dangers inherent in such a step. The evidence that we already have of European institutions is not entirely encouraging. When I was at the Treasury I spent much time trying to negotiate our way out of the financial consequences of the original structure of the common agricultural policy, and it was a painful process. A great European system had been put in place and its problems were allowed to work themselves out with painful consequences for this and other countries at various times throughout the following years. We ran straight into the financial problems because of our substantial contribution. Latterly, there have been production problems. The French liked the CAP while they were getting a decent subsidy from other countries for their farmers, but did not like it at all once they found that it was producing severe competition for their domestic output.

I fear that the European enthusiasm for notions such as monetary union will run far ahead of the practical considerations that must be taken into account before such measures can be seriously contemplated. It is unlikely that conditions suitable for monetary union will come about

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within the next 10 or 20 years. If they did, I should reconsider the issue from the standpoint of that time, but until we are much closer to economic convergence, it would be playing with fire to put monetary union firmly on the agenda, particularly if that meant that other steps would be taken in the interim designed to achieve monetary union when that was still a distant and impractical dream. While I welcome the step of my right hon. Friend the Chancellor in taking sterling into the ERM, I believe that we must be aware not only of the long-term problems, but that the second stage of going to the narrower band is a significant step that requires a great deal of thought before being undertaken.

8.38 pm

Mr. Win Griffiths (Bridgend) : Today's debate has been widely drawn, although the motion and amendments clearly focus on the exchange rate mechanism. We see that the Government are expecting the House to congratulate them on going into the exchange rate mechanism when they did and at the rate they did. It seems that the Government are using what might now be described as the Baker gambit--when they have to say something that is ludicrous, they make their claim as preposterous as possible in the hope that everybody will be diverted from what is really happening.

Entry into the exchange rate mechanism had nothing whatsoever to do with the long-term economic future of this country, with the prosperity of most of the population and with the ability of most of the adult population who want work to get that work. Entry had everything to do with the Government's desire to create economic conditions for between six and nine months which would enable them to go to the country with a faint prospect of winning an election. There is no doubt that the Madrid conditions were well and truly ditched by the Cabinet. I do not know about the Prime Minister herself. From her inability to speak today, it seems that she was probably dragged, kicking and screaming, into this agreement, and only acceded to it with the promise of a 1 per cent. cut in interest rates to dangle before the Conservative party conference. Perhaps the Government were and are hoping that, as a result of entry into the exchange rate mechanism, they will be able to cut interest rates further and that inflation will take a dramatic downward turn. The whole basis of entry into the mechanism at this time was Treasury forecasts. I do not know how many forecasts the Treasury have made, but the one chosen by the Chancellor predicts a significant decline in interest rates, to a point where they will be roughly in line with the Community average of 4 or 5 per cent., at some time next year I assume, although that is not entirely clear. If we study the Chancellor's forecasting record in the past few years at Budget time and compare his forecasts with the rate of inflation at the end of the year, we find that it overran the estimate by 65 per cent. in 1988, by 36 per cent. in 1989 and this year it will probably be about 40 per cent. above the forecast rate. What confidence can we have about such a momentous decision as entry into the exchange rate mechanism if it is based on a predicted rate of inflation which, judging by the record of the past few years, will still leave us about 45 or 50 per cent. above the Community average, which is considered desirable?

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The truth is that the teasing had to stop in October. Throughout 1990 the Government relied on dangling the possibility of entry into the exchange rate mechanism before the financial markets to keep the pound high without having further to increase interest rates which were already at a record high. This decision was the last desperate throw of the gambler's dice by the Government to try to win the next election-- not to try to strengthen the economy.

What is the state of the economy? It is such that a balance of trade deficit of £845 million can be heralded as a triumph by the Government.

Today the British chambers of commerce quarterly survey reveals that, apart from a minor but welcome exception in the north-east, manufacturing industry throughout the country is forecasting a decline in orders. More companies are forecasting a decline than an increase, and the decline averages 11 per cent. in the country as a whole.

Even more important is the fact that companies employing more than 500 people are forecasting that employment prospects next year are likely to go down by 20 per cent. The service sector is forecasting an increase of only 3 per cent. whereas last winter it was forecasting a 14 per cent. increase.

The economy is undoubtedly in deep difficulties. Our high interest rates are a commentary on the weakness of the British economy when compared with that of most other countries. Now we have been reduced to saying that the main purpose behind joining the exchange rate mechanism was to try to bear down on wage costs in the economy to make our industry more competitive. Those fair words from the Chancellor and the Secretary of State for Employment must be seen against the background of company directors getting salary increases 3 and 4 per cent. above the average that most workers are receiving. Almost without exception, salary increases for the highest paid directors are in the stratosphere compared with what their workers are getting. For example, the top directors of Barclays bank got more than a 47 per cent. increase in their pay, but the lowest paid staff got a 10 per cent. increase--these figures are from the September 1990 bargaining report.

Blue Circle's directors got a 17.3 per cent. increase, whereas their lowest paid workers got 8.5 per cent. There are one or two honourable exceptions, including two companies that operate successfully in my constituency. The directors of Sony, the television manufacturer, took a 6.8 per cent. increase in pay--if only the rest of British industry had followed that lead--and their lowest paid workers got a 9 per cent. increase. The same can be said about Ford, where the top directors got 8.2 per cent., and the lowest-paid workers got 10.2 per cent. However, the general picture is that highly paid directors get large increases, but the rest of the work force generally gets an increase below the rate of inflation. My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) rightly expressed his anxiety about employment prospects in Britain as a result of entry into the ERM at such an exchange rate. In a perfect world we would not like to start from this position. Given Government policies, there can be no comfort for unemployed people now, because they are not likely to get jobs, and, under these conditions for entry, many people who are employed are likely to become unemployed.

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It was most unkind and unfair of my right hon. Friend to undermine the argument put forward by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), which formed the basis of our amendment to the motion. Yes, we want to be in the exchange rate mechanism, but it is essential that other policies are tied in to help Britain become more competitive. We need more investment in research and in skill training. We need a better educated work force and an improved infrastructure because, without improved infrastructure and better regional policy, peripheral regions will suffer. That is why it is desirable to follow our policies now that we are in the ERM.

Some hon. Members spoke about dangers of the sovereignty of Parliament. For the last decade and at any time when there is a large Government majority, the concept of the sovereignty of Parliament is meaningless. We can talk about the sovereignty of the Government but certainly not about the sovereignty of Parliament. Hon. Members were also worried about getting tied into a single currency, independent central banks and economic and monetary union. Sovereignty is not totally independent and free standing. It is indivisible across the European Community and even there it cannot stand on its own because world events, such as the Gulf crisis, can undermine the sovereignty of nations to do as they will. They must respond to new situations. The problem can also be solved by making the institutions of the Community more democratic. That can be done by giving up the practice of the only law-making institution in the democratic world being allowed to hold its meetings in secret. I am talking about the Council of Ministers becoming open to the public. We can take steps to ensure that the European Parliament has more of a role in the Community's legislative process. We can also ensure that the House has more of a role. In this case, as in many others, the House was not consulted and not allowed to vote. Britain joined the ERM during the recess and immediately before the Conservative party conference, and the Government joined it in order to allow embarrassed Cabinet Ministers off the hook.

Doubts were expressed about the concept of an independent central bank for Europe. Those are misplaced doubts because, as my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore) said, in the last resort the bank is not independent. He cited the example of the one-for-one rate between the deutschmark and the ostmark on the unification of Germany. Herr Po"hl did not want that to happen, but Herr Kohl told him about the urgent political necessity for it. The Bundesbank may now have to reshape some of its policies, but it will still attempt to make sure that inflation in Germany does not run away.

Some hon. Members have looked into a future of economic and monetary union but that is not the purpose of the debate. There is no point in wringing our hands and saying that we do not want to be a part of this process when we are members of the club in which the process is evolving. We have to play a positive role by setting out what we believe are the necessary conditions as the process gets under way and is undoubtedly achieved.

We enter the ERM when the exchange rate was DM2.95. I shall not speculate about what might have been

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a better rate, but I shall deal with the relationship between the exchange rate and inflation and our export performance. At this time last year I asked the House of Commons research department to look into the relationship between the exchange rate and inflation. It looked at the period from 1975 to 1989. In a letter I was told : "I found no significant evidence of the expected relationship between a change in the exchange rate and the retail price index in any of the following five months."

That is, the five months during which there was a change in the value of the pound on the foreign exchange markets. The letter goes on :

"Within this five month period less than 6 per cent. of the variation in the inflation rate was attributable to the change in the exchange rate index."

The evidence seems to show that, on the whole, manufacturers and the economy absorb much of the impact of a change in the exchange rate. I also asked about competitiveness and changes in the exchange rate and was told :

"However, for the small exchange rate falls that have taken place there is evidence of a gain to competitives for a year or two. Certainly there is overwhelming evidence of a considerable loss to competitiveness after the pound rose so high for 1979-82." The message is that we should have gone in at a slightly lower rate. That would not have had a great impact on inflation and would have helped our competitiveness. If the Government were to follow the policies in our amendment, we would have a much healthier and a more prosperous economy rather than the disaster for which we are heading.

8.56 pm

Mr. Ian Taylor (Esher) : I am grateful for four minutes in which to save the world.

One of the interesting by-products of the debate has been the fissures revealed in the Opposition between those who still crave for the fully centrally controlled economy and those who do not. Industrial policies were warmly welcomed and many of the policies that were seen to fail in the 1960s and 1970s were eagerly sought after. However, Opposition Front-Bench speakers clearly would wish to introduce the discipline of the ERM if they were ever to get into power. However, they do not like the current central rate because they feel that they could not resist the sort of inflationary wage pressures that have always bedevilled Labour Governments. Therefore, they would not find the ERM providing the anti-inflationary pressure which those of us who have been advocating it for some time have always thought to be the case.

There is no doubt that the Treasury has consistently urged that there should be three golf clubs in the bag, even if that is an over-used analogy. That has been the case under the present Chancellor and the former Chancellor. Those clubs are fiscal and monetary policy, both of which are reinforced by exchange rate policy. The three reinforce each other. That is why it is so essential, if we are determined to squeeze inflation out of the economy, to use all three methods. They will work together to bear down on inflation.

The Chancellor was absolutely right to enter the ERM at this time. Regardless of the arguments for entry that I and others have been urging on the Government since 1985, the conjunction of events on this occasion not only meant that the Madrid conditions on the wider basis of

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what was going on in the Community in competition policy and liberalisation of capital movements had been met, but that the United Kingdom monetary aggregates were giving the right signals about a declining trend in inflation. Both sterling M0 and sterling M4 were giving those signals, which induced a feeling of confidence that we would be moving in at the right time and that the discipline imposed by the exchange rate would reinforce the downward inflationary curve. That strikes me as right and proper, and, in my view, disposes of the Opposition's attempt to launch a bogus dispute about whether the Madrid conditions had been fulfilled.

For those who do not support ERM entry, the real question is, what would have happened if we had not joined? In fact, most of the horrors with which they have taxed us now that we are in the system would have existed in considerably greater magnitude had we stayed outside. Strangely enough, the loss of sovereignty that is generally considered to be a consequence of ERM membership is far greater if rates are allowed to float freely : in those circumstances, the Government's domestic fiscal and monetary policies would be constantly undermined. We should do better to accept that a firm discipline provides better guidelines.

What are the next steps? Without question, we must continue to urge on our European partners the Government's plan for a hard ecu. There is far too much divergence within the Community for any single currency system to be imposed. The hard ecu, reinforced by the European monetary fund, will provide member Governments with a benchmark discipline ; economies may then converge and we shall have a chance to establish whether the ultimate use of the ecu will provide a common currency--one day, perhaps, a single currency. We must not allow the Delors option to be imposed on us ; we must allow the market to impose its own solution, with the widest possible use of a new, hard ecu. I urge the Government to continue to press that argument in all quarters within the Community.

9 pm

Mr. John Smith (Monklands, East) : We have had a most interesting debate. At times, I reflected that we had heard some of the arguments on other occasions over the past 20 years when we have debated European Community matters : some Conservative Members saw the Community as a model of newfangled socialism come to torment them in the future, while some of my right hon. and hon. Friends detected the brutalities of the market place at their worst, to be reinforced by our own participation.

We have heard a series of interesting speeches about the effect on our industrial economy of ERM membership, and about what is likely to happen in the difficult circumstances in which we find ourselves after 11 years of Conservative Government. Perhaps the most notable feature of the debate, however, was not to be observed in any of the speeches--some of them excellent--that we heard from hon. Members on both sides of the House. What was most notable, surely, was the absence of a speech from one right hon. Member who has signally declined every suggestion, invitation and exhortation to address the House ; it was the absence of a speech from a head of Government who was unwilling to account to

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Parliament, in this important debate, for policies in which she had been involved more intimately and more directly than any other member of her Administration.

The right hon. Member for Blaby (Mr. Lawson) is more obviously aware of that than anyone else. The right hon. Gentleman chose not to accept an intervention from me--I do not think that he has ever done that before--but that, perhaps, was just as well, because he must have known what I was going to ask him : I was going to ask who stood in the way of the policies that he advocated for so many years, thinking that they would be advantageous to the country. He knows the answer ; the answer is the missing Prime Minister, who will not come to the House to give us her explanation.

My point is not merely that we are discussing what many hon. Members have agreed is a momentous decision, and that it would be appropriate for the head of Government to come and tell us about it. The Prime Minister was so closely involved that she lost not only a Chancellor but a Foreign Secretary, as well as a family friend, as a result of the issue. No doubt the right hon. Member for Blaby is scribbling his account of five years of her Government in his memoirs day by day. I understand that he will not publish them before the next general election, and I expect that that will come as a great relief. It is not my task to act as an advertising agent for the right hon. Gentleman--who seems to be quite good at acquiring jobs for himself without any assistance from my good self--but he must be able to hear the sounds of enthusiasm emanating from the Benches behind me. My hon. Friends are keen for him to advance the date of publication. Indeed, may I suggest--using a word with which the Chancellor is very familiar-- that he publish them in "prospective" serial form, to titillate the nation and, perhaps, inform us a little before the time comes for the next election?

I was very sad when the right hon. Gentleman announced that soon he would no longer be with us. Having been locked in combat with him for so many years, I have almost a feeling of affection for him. Now and again, one must allow one's better instincts to come to the surface. I assure my right hon. and hon. Friends that I do not intend to make that a habit, but I was genuinely sad when I heard that the right hon. Gentleman had decided to leave us. We shall miss him in our deliberations.

Having listened to what the right hon. Gentleman said today--and he has made explosive speeches undermining the Government, from whom he has departed, on more than one occasion--perhaps some of his right hon. and hon. Friends wished that he had applied for the Chiltern Hundreds rather than taken the City thousands-- [Interruption.] One hon. Member suggests the right hon. Gentleman should call his new house "Unassailable".

The right hon. Gentleman's main purpose in this debate was to tell the Government something that the markets already knew--that there is cynicism about the reasons behind the Government's actions. In view of the importance of that, would not it have been all the more appropriate for the Prime Minister to come to the debate and settle the question of credibility and, by a stout and resolute performance, settle the worries and the fears about the motives behind Britain's entry into the ERM?

It is felt--and this is not unique to the Opposition as it is felt in all quarters--that the final decision to join the ERM was taken for blatantly political reasons. That was in character with the history of previous Government

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