House of Commons Hansard Debates for 23 Oct 1990

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actions. The Prime Minister wanted to reduce the burden on industry before the Conservative party conference. She discovered that that could not be done without joining the ERM because otherwise there would be pressure on Britain's currency, so the deed was done. That is wholly in keeping with the right hon. Lady's confused, irresolute, highly partisan and politically opportunist technique of dealing with affairs of state. Few people have found her explanations convincing. The right hon. Member for Blaby gave it away, and if he is convinced that the operation was cynical, it must have been so. I think that he knows quite a bit about that sort of operation.

At the beginning of his speech the Chancellor sought to throw away the Madrid conditions as though they had never been uttered. Indeed, one Conservative Member suggested that it was almost in bad taste to reiterate them. Let me remind the House of them. They were not forced on the Prime Minister by the other members of the European Community in some late-night haggle in Luxembourg, Strasbourg or somewhere else in Europe. They were not even the subject of negotiation between the Prime Minister and other member states. They were negotiated between the Prime Minister and the members of her Cabinet. The Madrid conditions were, first, that Britain would not enter the ERM until inflation had come down. It was not whether it might come down, whether it would come down or whether it was likely to come down ; it was whether it had come down. Right hon. and hon. Members have reminded us of the detail of that and other conditions.

The Prime Minister prescribed other conditions that required action by others. I seem to remember that during the famous Walden interview she invented a new condition as each minute passed, until the programme was littered with new conditions. However, as she said rather disarmingly during Prime Minster's Question Time recently, "We had all these conditions, and they have all been fulfilled except one." The interesting point is that all those other conditions had to be fulfilled by other people, and they were. Only one had to be fulfilled by the right hon. Lady, but it was not. The right hon. Lady thought it to be some sort of victory-- a triumph over the conditions that had been set, as a result of which she could boldly go forward into the ERM.

Underlying all that, and at the heart of the credibility question, is the right hon. Lady's well-known aversion to joining the ERM. Why else, during the revealing Walden interview, would she have described it as the

"higgledy-piggledy set of rules."?

I do not profess to know quite what she meant by that, but generally such an expression is not meant to be favourable. It has what might be called a marginally pejorative tone about it. We certainly did not feel that she was straining at the leash to join the ERM. But there we are, strange things happen. Opportunities and pressures are such that the Prime Minister will do almost anything to keep power and to oblige the narrow party political interests of her party. Inflation was to be the major condition.

The Chancellor was not quite as brass-necked as that. He tried to find a way out. I shall be drawing the attention of the House to the way in which the Chancellor uses words. Before the Treasury and Civil Service Select Committee in April, he said that the Government were looking for a proximate rate of inflation between ourselves

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and the Community. I think that he went on to define what he meant by a proximate, saying that Dr. Johnson had described it as meaning "near to".

I do not know whether the members of the Committee needed such education. They seemed pretty educated to me. My hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore), who made an extremely skilful speech, did not need such education.

By September the same year, in his speech to the IMF, the Chancellor had further refined his choice of words. He realised that not only would the Government not get anywhere near the rate of inflation ; they would not even get proximately near it, so they had to change the time scale. Therefore, he said that what mattered was the prospective movement. The Chancellor, not quite so brazen as the Prime Minister, gradually sought to wriggle out from his commitments ; she just threw them aside.

Whatever the Prime Minister did, this was a humiliating u-turn for a Prime Minister who had set her face in another direction. She abandoned commitments and, in the process, displayed an underlying lack of conviction, which has worked its way through into the market place.

The decision having been taken, we are now in the difficulty that the Prime Minister's economic policies have left Britain in a weaker position than other member countries, less well able to face the opportunities and challenges that the single market offers, especially now that it is to be operated within the confines of membership of the ERM.

In this debate, and in debates that we shall have in the months to come, we must consider what has to be done now ; what policies should be adopted. The Opposition never believed for one moment that it would be enough to enter the ERM. That has to be accompanied by a strong supply side policy directed to building a strong economy. Before I consider the matters at the heart of the debate, we need, as the Chancellor did, to look at what is proposed for the next steps in the consideration of European economic and monetary affairs.

Mr. Norman Tebbit (Chingford) : The right hon. and learned Gentleman has been dealing with the conditions set out by the Prime Minister at Madrid some time ago, but he will recollect that this afternoon the right hon. Member for Bethnal Green and Stepney (Mr. Shore) asked how many of the conditions set out by the right hon. and learned Gentleman in his Labour party policy document 12 months ago had been satisfied. Does not he think that he should reply to his right hon. Friend?

Mr. Smith : If the right hon. Gentleman will forgive me, I shall make my speech in my own way. But he must understand one thing. We advocated entry into the ERM and we said that it should be accompanied by Government negotiation on certain conditions. I did not conduct the negotiations ; they were conducted by the Government. That point must be evident. It is evident to me, to the right hon. Member for Chingford (Mr. Tebbit) and, I am sure, to my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore)--I made the point last Monday in the House, but I do not know whether the right hon. Member for Chingford was present ; he has been here only intermittently today--that the regional policy conditions have not been fulfilled. The Government made no attempt

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to strengthen our European regional policy. I shall go on because what I have to say might interest the right hon. Gentleman and he should pay particular attention to it.

We have not heard much from the Chancellor about the central banking system. My right hon. Friend the Leader of the Opposition argued clearly the need for political accountability. Nor did the Chancellor say much about the single currency and the arguments that there will be about that. No doubt the Chief Secretary will deal with that in his reply. All those matters are brought together conveniently by the Government under the so- called hard ecu proposal. That is the Government's new response. It may help the House to know what the Government have been saying about the hard ecu, how they have moved in respect of the ERM, and the techniques that they have used in the manipulation of language.

Before I do so, I am bound to be asked what the Opposition's view is on a central bank and a single currency. My right hon. Friend the Leader of the Opposition made clear our belief that a system of central banks must be politically accountable. At this time, when the gap between Britain's performance and that of other members of the Community is so wide, it would not be prudent to commit ourselves to an irrevocable exchange rate or to a single currency. We want to play an active, participative role in the European Community. We are already in the single market and have advocated membership of the ERM. We shall now work for a stronger regional policy.

Conservative Members are as foolish about regional policy at home as they are about it within the Community, but such a policy is vital in building a strong Community that operates fairly in respect of all its member states. We shall work to support the social action programme, which is vital to the balance between economic success and social cohesion. The need for that is understood by many countries in the Community, but not by Conservative Members-- [Interruption.] Government Members keep asking about Labour party policy, but they will not listen when I explain what it is.

We shall all the while seek to close the gap between our economic performance and that of the rest of the Community, and between our social standards and those of the rest of the Community.

Mr. Cash : The right hon. and learned Gentleman has not said a thing.

Mr. Smith : The hon. Member for Stafford (Mr. Cash) should listen to what I have to say.

The Chancellor of the Exchequer said that the hard ecu is based on market choice and will evolve into a parallel currency. He said that it was the choice of Governments and of people. However, the "Treasury Bulletin" published yesterday set out the argument in more detail. I remind the House that it is proposed that a European monetary fund be established to act as the monetary authority for a new currency--the hard ecu. The distinguishing characteristic of that new currency is that it will never be allowed to devalue against any other Community currency. The "Treasury Bulletin" explains that "the hard ecu would always be at least as strong as the strongest currency"--

and we can guess which one that will be, although the bulletin adds disarmingly,

"whatever that happened to be."

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It adds :

"It would be the responsibility of the EMF--a fundamental one enshrined in Community law"--

members of the Bruges group please note--

"to ensure that hard ecu devaluation never occurred."

The hard ecu was first presented by the Chancellor as a form of common or parallel currency that would be useful to exporters and people engaged in foreign trade, but nothing terribly exciting for the rest of us. It was just viewed as a useful device. I understand--and the Chief Secretary can tell me whether this is true--that the concept was sold to the Prime Minister by Sir Michael Butler, a former ambassador and a permanent United Kingdom representative to the Community. He is also chairman of the British Invisible Exports Council. Sir Michael's technique was to argue that the hard ecu was a market-led resolution of the problem. If one says the magic words to the Prime Minister, she just rolls over. The process of ratiocination may have stopped, but the magic words were said, and the right hon. Lady thought that since it was a market solution, it must be all right. The Prime Minister should take a little more care.

The difficulty of judging the hard ecu proposal is knowing whether it is designed to fail or to succeed. At a cynical level, one could understand the proposal if it were designed to fail. That would take time, which would allow the Government to say something at meetings of the intergovernmental council. However, if we take the proposal at face value and accept that it is meant to succeed, the House should examine it carefully. It was surprising that the Chancellor did not tell us more than he did. The first impression gained was that the hard ecu is an alternative vehicle for exporters, but the way that it has been described by different Ministers puts me on my guard. There is the belief in the House, and probably in the country, that the Prime Minister is against all this stuff--that she is a resolute defender of sovereignty and an even more resolute defender of parliamentary accountability. [Laughter.] That is her stock in trade. One might think it odd that, at this stage in this debate, one should be reflecting on her habit of constantly mentioning parliamentary accountability. The fact remains that she has said it. The question that I want to ask the Chief Secretary to the Treasury is this : is the hard ecu an alternative to a single currency which would avoid our having to face questions of sovereignty and accountability? Or is it another route to a single currency--perhaps even a convenient transitionary mechanism through stage 2 of Delors, which unavoidably raises questions of sovereignty and accountability but seeks to keep them suppressed and to move them away from our consideration?

Listeners must have been alerted by the Chancellor's use of words at the Conservative party conference--in the euphoria of those heady days. What a long time ago it seems since the Chancellor was in Bournemouth. He must be reflecting on how one should enjoy the plaudits of the Conservative party while one may. Certainly, the financial markets seem to be a corrective to some of the political feelings that were expressed there. The Chancellor said to the conference :

"Joining the exchange rate mechanism does not mean that we are now on a road leading inexorably to a single currency."

That word "inexorably" flashed up in lights for the benefit of anyone who was paying attention. Why use that word?

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Was it accidental? Did the right hon. Gentleman simply think, "This is the day for being inexorable"? I think that he chose it with some care.

I used to think that the Foreign Office was the Department of weasel words, but the Treasury is getting pretty smart at them too. It has certainly never before had such a willing user of them as the present Chancellor. The right hon. Member for Blaby would scorn that kind of thing. We got it pretty straight from him. It was not very nice when we got it, but we got it fairly straight. One can either do what the right hon. Gentleman did or one can wriggle one's way round the issues with weasel words.

Only a few days ago, in his Mansion house speech, the Chancellor said :

"Joining the exchange rate mechanism did not commit us to adopting, and cannot oblige us to accept, the imposition of a single currency in Europe."

I do not know how one adopts an imposition. The Treasury might care to have a look at that infelicity before it sets out to equip the Chancellor with his next set of words for avoiding answering questions on these matters. But perhaps I fuss too much. That apart, what on earth does it mean that we are not to have a common single currency forced upon us? In what conceivable circum-stances would we have it imposed upon us? If we were going to have a single currency, we should have to agree to it. We should have to go along with it. I have no doubt that, if it came to making a decision in the House, there would be fierce arguments about it. No one would be imposing it on anyone, so I do not know quite what the Chancellor meant in that speech.

The right hon. Gentleman went on to say :

"the hard ecu could ultimately evolve towards a single currency if it were the wish of Governments and peoples that it should be used in preference to their own currencies."

That leaves the door open, but the use of the word "ultimately" suggests that there is still some time to go, so the Bruges group should not get too worried just yet.

One is led to wonder what the Prime Minister was thinking about the question when she came back from the Dublin summit, at which the question was aired, and reported to the House on 28 June this year. When asked about the hard ecu, she said :

"I do not believe that that formula could develop into a single currency."- -[ Official Report, 28 June 1990 ; Vol. 175,c. 493.] The Prime Minister tells us that she does not think that the hard ecu could develop into a single currency while the Chancellor tells us that it will, or would, if people decided to follow that route. What is the latest position? Alerted to the question, I have been examining matters with some care over the past few days. The new addition to the Treasury team, the Financial Secretary, who, I am sorry to say, is not with us tonight, was speaking at the EMU seminar of the British Invisible Exports Council on the 10th of this month. Describing the hard ecu, he said :

"It would be a genuine common currency and one which could easily develop into a single currency as Governments and peoples decided." Even more interesting is the report in today's Financial Times to which my right hon. Friend the Leader of the Opposition has already referred. I shall quote from the

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Financial Times report of the evidence that the Minister gave to the House of Lords Committee on economic and monetary union : "Mr. Frances Maude, the minister responsible for European Affairs, put the Treasury's case succinctly in evidence earlier this month to a House of Lords committee. The hard Ecu, he said, offered a direct route to a single European currency."

He added :

"I would argue personally that the next stage of having a single currency could actually happen more quickly going down this path." We have moved from that potential, useful device for exporters and other curious people to another route by which we could achieve a single currency not only feasibly, but easily and quickly. Things have moved quite a bit.

The Chancellor said that we should consider the next steps and he wanted a careful definition of the Opposition's position. However, in the light of all the contradictory advice to which I have just referred, the Chief Secretary to the Treasury should explain what is happening.

Mr. Tony Marlow (Northampton, North) : Will the right hon. and learned Gentleman give way?

Mr. Smith : No. The hon. Gentleman is doing well enough listening to me. I am sure that he will find my comments illuminating. The "Treasury Bulletin" states that if the hard ecu catches on, the circulation of weaker currencies will fall and national monetary authorities will have to take action by pursuing tighter monetary policies. They will be forced to keep up. There is also a requirement to reimburse the EMF against exchange losses on devaluation. That is a strong disincentive to depreciate, as the "Treasury Bulletin" makes clear.

We need to be more clear about the constitution of the European monetary fund. Who is accountable for it? How does it work? To whom does it report? All those issues raise sovereignty and accountability questions. If the Government believe that I am making too much of a fuss about that, I shall quote Mr. Gavyn Davies of Goldman Sachs who examined the hard ecu and concluded :

"All of the problems associated with accountability and independence of the Eurofed, which have so exercised Mr Major, would apply in equal measure to his alternative European Monetary Fund." I was put even more on the alert by a statement made by Sir Michael Butler, to whom I referred at an earlier stage in this saga. He has been thinking about the issue and how to incorporate the proposal into the treaty. He realises that there must be treaty amendments if the EMF and hard ecu are to be adopted. I know that this is not Government policy yet, but it is an interesting proposal. At a seminar at Hambros bank on 11 October, Sir Michael Butler proposed a treaty amendment that would

"create a European System of Central Banks consisting of the twelve national Central Banks and a European Monetary Fund owned and run by the Central Banks, to be operational from day one of Stage 2". Clearly the EMF is linked with a system of central banking. Sir Michael then states that a treaty amendment should

"lay down the aim of price stability for the whole EMU process and of permanently fixed parities leading to a single currency in Stage 3".

Is that Government policy? If the Prime Minister was here, she could clear all this up. If I could get the Prime Minister

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to answer my questions, I should not be quoting Ministers. She could speak on behalf of the whole Government--at least one would hope that she might.

These are important sovereignty and accountability issues and I hope that the Chief Secretary will consider them. The House will not let the matter drop. We have seen how the Government twist and turn, how they say one thing and do another and how they profess principles and then so easily abandon them.

The crucial point about the debate, to which all hon. Members have referred, is what we do from here. After having entered the exchange rate mechanism, we have been left with the weakest economy of the member states. The right hon. Member for Blaby may disagree, but we hear no more from him about the so-called economic miracle under which we were to have overtaken Germany and be pressing hard on Japan. Germany is now well ahead ; France is significantly ahead ; Italy is overtaking us ; and Spain is coming up fast behind--and all of that after this Government have been in power for 11 years with large majorities and huge oil resources.

We have an ailing economy that has been damaged by the Government's policies over the past 11 years. As our amendment states, what we need now is what we have argued for in debate after debate, day after day--we shall do so in the House and in the country. To build a strong economy and a fair society, we need a vigorous regional policy, a new drive to provide British industry with the best of modern technology, a proper infrastructure, good social services, a good transport system, and, above all, an education and training system that gives our people the chance to compete. In the new Europe we have the opportunity to compete. We shall have to compete.

An hon. Member asked whether the other member states were partners or competitors. They are both--they are partners and competitors. We have opportunities and great challenges. We shall be able to realise them only if one thing above all is comprehended--that is that the crucial determinant of success in a modern economy is the way in which we utilise the skills of our people. That is what the next Labour Government will be committed to do. We shall make a success of our economy and our society, even with the difficult inheritance that will be our unfortunate and unhappy lot.

9.30 pm

The Chief Secretary to the Treasury (Mr. Norman Lamont) : I agree with the right hon. and learned Member for Monklands, East (Mr. Smith) at least on one thing, and that is that this has been a remarkable debate. We have heard some strong and powerful speeches, many of which have certainly cut across party lines.

The right hon. Member for Bethnal Green and Stepney (Mr. Shore) made a remarkable and passionate speech in which he declared his strong opposition to fixed exchange rates. He said that, when he was a Minister, he had experienced the constraints of fixed exchange rates, which--I hope that I do not sound impertinent by saying this--is one reason why some of us have come round to being in favour of them.

Hon. Members also heard a powerful speech by my right hon. Friend the Member for Blaby (Mr. Lawson). I express my sadness that my right hon. Friend announced his decision yesterday to retire at the next election. His departure will represent a great loss both to the House and

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to my party. The debate is a bitter-sweet moment for my right hon. Friend as a long-standing advocate of the ERM. He made his views very clear today. Also, the House was interested to hear his comments about EMU. Although he is a strong opponent of EMU, my right hon. Friend urged the Conservative party not to fear too much stage 3 of EMU on which he had doubts, for example, whether it was a real threat and would happen.

Hon. Members also heard an eloquent speech by my right hon. Friend the Member for Shropshire, North (Mr. Biffen). He joined the right hon. Member for Bethnal Green and Stepney in opposition to fixed exchange rates. There was one point on which I sharply disagreed with my right hon. Friend. He referred to entry into the ERM as a sort of European incomes policy. I do not think that that is the effect of the ERM. If it were, I certainly would not be in favour of it. As my right hon. Friend the Member for Blaby explained, it is a monetary framework. Just as the control of monetary aggregates is a framework of which wage bargainers must take account, so will wage bargainers have to take account of the new regime of fixed exchange rates. My right hon. Friend referred to what the Chancellor said about wage claims. My right hon. Friend the Chancellor was not urging an incomes policy ; he was just drawing the attention of wage bargainers to the consequences for employment and for themselves if wage claims were excessive. That is certainly very different from an incomes policy which in the past has been designed to control inflation, but, of course, never has controlled inflation.

My right hon. Friend the Member for Shropshire, North made most of his remarks, however, about his clear preference for floating exchange rates. I remember, as he will remember, the occasion when a former Chancellor of the Exchequer, Lord Barber, came to the House and announced that the pound was to float free. I take a different view from my right hon. Friend. The consequences of that decision have not been as beneficial and as benign as they then appeared to be. The period of floating exchange rates worldwide has been one of higher inflation. Looking back, the period under Bretton Woods and the fixed exchange rate was a period of greater stability and lower inflation.

The temptation to let exchange rates depreciate has always been powerful for Governments. However, that temptation has not brought any benefits because the effects of depreciating the currency have been short lived in terms of promoting output and competitiveness, but have been lasting in terms of inflation. That is one of the reasons why the Government concluded that it would be right to join the ERM.

Another part of the debate has dealt with whether joining the ERM should lead automatically to European monetary union. My hon. Friend the Member for Stafford (Mr. Cash) and my right hon. Friend the Member for Blaby referred to that. It is very much the Government's view that joining the exchange rate mechanism does not mean that we have to go down the road of the Delors plan towards European monetary union. The House was interested to hear the speech of my right hon. Friend the Member for Blaby who has always been strongly in favour of the ERM, but who, as everybody knows, has always been passionately opposed to EMU. It was interesting that my right hon. Friend quoted Mr. Volcker, saying that he did not think that we could have a single currency without

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also having the full institution of a common Government. That is why we unequivocally and unambiguously are not in favour of the Delors plan.

The Leader of the Opposition made an interesting and important speech in which he seemed to carry forward his party's policies. However, neither after his speech nor after that of his right hon. and learned Friend the Member for Monklands, East is it clear that the Labour party is opposed to the Delors plan. That was not clear from the speeches that we heard today.

Mr. Tebbit : My right hon. Friend knows that, like a number of my right hon. and hon. Friends, I am rather an agnostic about the ERM itself. On balance, I believe that, at the moment, our entry is probably more likely to be helpful than unhelpful--

Mr. Teddy Taylor : In the short term.

Mr. Tebbit : Yes, in the short term. However, what worries me, like many other hon. Members, including the right hon. and learned Member for Monklands, East (Mr. Smith), is whether it will lead to a single currency and, therefore, to a single Government. Will my right hon. Friend be a little more robust in what he says? He has said that the Government are unequivocally opposed to the Delors plan, but will he say that the Government will refuse absolutely, clearly and flatly to go along with any pretence of a single currency?

Mr. Lamont : I have made it clear that the Government are wholly opposed to the Delors plan for a single currency. If my right hon. Friend is asking me whether it is conceivable that the hard ecu could become a single currency, the answer is that a hard ecu could not become a single currency unless Government and Parliament decided on that. We do not believe that that is something which has the support of the House or the people of this country at this time. It may be a decision that future generations or future Governments may wish to make, but it is not the policy of this Government.

Mr. Tebbit : I am grateful to my right hon. Friend because he has come a long way along the road to making this matter clear-- [Interruption.] Of course, it is correct that entry into the ERM, the hard ecu or even the fact that today's date is 23 October could lead at some time--if people wanted it to--to a common currency. I am asking my right hon. Friend to confirm that the Government are irrevocably opposed to a common currency, whether it is Mr. Delors' common currency or anybody else's. [ Hon. Members :-- "Single currency."] I beg the House's pardon--I mean a single currency. I want to know whether the Government are irrevocably opposed to a single currency, whether it is Mr. Delors' single currency or anybody else's.

Mr. Lamont : The Government are opposed to a single currency. The hard ecu has tremendous attractions for developing co-operation on an evolutionary basis and on the basis of a parallel which recognises the reality of commerce becoming more integrated in Europe. But that would not become a single currency unless a future Government so desired.

Mr. Spearing rose --

Mr. Leighton rose --

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Madam Deputy Speaker (Miss Betty Boothroyd) : The Chief Secretary is not giving way.

Mr. Lamont : I gave a clear answer to my right hon. Friend's question.

The right hon. Member for Bethnal Green and Stepney attacked the Government's decision on the ground that we had entered the ERM at too low an exchange rate. I have no doubt that the central rate of DM2.95 strikes the right balance between the need to maintain a firm anchor against inflation and the importance of preserving the competitiveness of British goods on world markets.

The right hon. Gentleman chose to quote some figures. He compared the level of the deutschmark today with the level of 1927-- [Interruption.] I should say 1987. The right hon. Gentleman made a selective point but it was not so selective as that. He selected a period when sterling's real rate aginst the deutschmark was at its lowest for the whole of the past 10 years. As my right hon. Friend the Chancellor of the Exchequer said, the real rate of exchange at which we have chosen to join the ERM is close to the rate of the recent past and of the past decade.

We have heard some wild speeches about the decision to enter the ERM and about the parity. It was said that our decision was akin to the decision to join the gold standard in 1925 at the pre-war parity. Those speeches were wildly off the mark. When sterling returned to the gold standard in 1925 the rate chosen was not that which prevailed in the markets at the time but that which had prevailed before the war. It is fanciful to compare my right hon. Friend's decision with that decision. To have chosen that sort of parity, he would have had to choose a level of sterling to the deutschmark from many years ago.

Mr. Morgan : Does the Chief Secretary accept that the rate of DM2.95 to the pound may be right for today, but that the British rate of inflation will not fall from 11 per cent. to 3 per cent. overnight? It will fall from 11 per cent. this year to 7 per cent. next year, to 4 per cent. the year after that at best. Yet German inflation will fall from 4 per cent. this year to 3 per cent. and then to 2 per cent. So over two and a half years our competitiveness will decline in relation to the deutschmark by 15 percentage points. That will mean that DM2.95 today will be DM3.40 in two years. How many British industries will be competitive at DM3.40 to the pound? That is where we shall be in two and a half years' time.

Mr. Lamont : The hon. Gentleman illustrates precisely the reason why we have joined the ERM. He puts forward the theory of constant competitiveness and devaluation. It is precisely because other countries' economies inflate at slower rates than ours that we want the discipline of the ERM influenced by the Bundesbank so that we can compete and our costs and productivity can gradually attain the same levels as in Germany. That is precisely the reason why the Government have joined the ERM.

Much of the speech of the right hon. Member for Bethnal Green and Stepney was about the conditions under which the Government have joined the ERM and whether the Government satisfied the conditions that they laid down for themselves. For some time the only issue has been the rate of United Kingdom inflation, but, as my right hon. Friend the Chancellor of the Exchequer said, it is clear from both the monetary indicators and the real indicators that the economy is slowing down. Both the narrow definition of money and the broad definition of

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money have slowed sharply. We have good reason for feeling confident that we are about to see an early fall in inflation. Given the relationship that existed in the past between monetary aggregates and inflation, we feel confident that, next year, we shall see a fall in inflation.

Given that the evidence was so clear and the economy was slowing down, was there any point in waiting any longer to join the ERM? I believe that it would have been sheer masochism to delay that decision any longer, especially given the uncertainty in the financial markets. They wanted a decision and that decision will reinforce the Government's anti-inflation policies.

Some people, including the Leader of the Opposition, have criticised the 1 per cent. cut in interest rates. That is a bit rich coming from him, considering that all that he has done in the past year has been to call for interest rate cut after interest rate cut. The moment we made that cut, however, he accused us of having done so for political reasons. There were three good reasons for doing so : first, the state of the economy justified it ; secondly, at 14 per cent., interest rates remain high ; and, thirdly, those high levels of interest rate are reinforced by our membership of the ERM. Nobody could judge the combination of a 1 per cent. cut in interest rates and joining the ERM as a loosening of policy.

It was noticeable that the Leader of the Opposition and the right hon. and learned Member for Monklands, East said little about their own policies except in one respect : we were told that the Labour party wants to introduce credit controls. Now that we have joined the ERM that is the Labour party's one remaining distinctive policy. On the whole, I think that the Opposition would have been better advised not to mention credit controls, as they are widely regarded as outdated, ineffective and irrelevant. Even the right hon. and learned Member for Monklands, East is rather half-hearted in his defence of them.

The right hon. and learned Gentleman spoke about a Walden interview with the Prime Minister, but I enjoyed another Walden interview in which the right hon. and learned Gentleman was taken apart by Mr. Walden on the subject of credit controls. Again and again Mr. Walden pointed out that there is not much point to credit controls if they do not apply to building societies. Mr. Walden pointed out that the main beneficiaries of credit control are likely to be the offshore foreign competitors of the British banking system. Mr. Walden's most telling argument was that if one restricts the supply of credit through controls the likely consequence is to drive the price--interest rates--up. To deny that is to deny the laws of economics and of supply and demand.

If there are unsatisfied borrowers unable to borrow and lenders willing to lend but prevented from doing so by the Government, how can the result be anything other than an increase in interest rates? Does the right hon. and learned Gentleman really believe that lenders will just shrug their shoulders and take a fall in profits? The right hon. and learned Gentleman should know that life just ain't like that. That is why some countries use the mechanism that the right hon. and learned Gentleman and his right hon. Friend the Leader of the Opposition confuse with credit controls. They use that mechanism as a method of regulating interest rates. Mr. Walden tried to make that point clear to the right hon. and learned Gentleman, who was curiously obtuse on that occasion.

Mr. Walden even pointed out to the right hon. and learned Gentleman that, even if he did not intend that

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credit controls should drive up interest rates, that might still be the consequence. Mr. Walden pointed out that the right hon. and learned Gentleman could not do anything about that unless he passed a law to stop it happening, but the right hon. and learned Gentleman said that he had no intention of passing such a law.

During the interview the right hon. and learned Gentleman muttered and mumbled and spoke about a control in the 1970s known as the "corset" which was a form of credit control that did not drive interest rates up. The right hon. and learned Gentleman's memory is not very good and I believe that it is arguable whether the "corset" put up interest rates. One thing is certain, however : the credit controls that existed under the Labour Government of the 1970s may or may not have kept interest rates down, but they certainly kept inflation up. When we had credit controls in the early 1970s of the kind about which the right hon. and learned Gentleman was talking, we had inflation in excess of 25 per cent. That was the effect of credit controls.

The right hon. and learned Gentleman then gave the game away completely. He threw in the towel and said :

"Having credit controls, there to be used if they are necessary, and that depends on whether demand has already dropped."

Note the words :

"that depends on whether demand has already dropped."

A little later the right hon. and learned Gentleman went on to disagree with the Chancellor of the Exchequer. He thought that the economy was in a recession and added :

"My judgment is that demand is falling very fast in the economy at the moment."

In other words, strip away the rhetoric and the right hon. and learned Gentleman conceded that, if there ever was a case for credit controls, the time had long since passed. Despite that, Labour Members retain credit controls in their amendment and in their policy, although everybody knows that such a policy cannot, and will not, work and is utterly irrelevant.

I find the attitude of Labour Members in the debate utterly astonishing. What are they criticising? About what are they complaining? We have had many petulant tears, as though a child had seen its rounders bat stolen. We have heard cries of, "They have not done it for the right reason" and, "They do not believe it." It all smacks of sour grapes.

For some time, the right hon. and learned Member for Monklands, East has been telling us that we must join the ERM. Indeed, it has been his only policy, other than credit controls. It has been his answer to every question and problem. When asked how he would control inflation, he answered, "We shall join the ERM." When asked how Labour would run the economy without interest rates, he replied, "We shall join the ERM." Asked how he would achieve growth, he replied, "We shall join the ERM." Many of his answers have been contradictory and many have been wrong. They have been the cloak behind which Labour Members have concealed their complete absence of policies. It is a clear case of the right hon. and learned Gentleman and his party suffering--

Mr. Leighton rose--

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