House of Commons Hansard Debates for 24 Jan 1991

Mr. Favell : The right hon. Gentleman is making a very important point extremely well. After more than 20 years of the common agricultural policy, the penny is now only beginning to drop that farmers in Greece, Portugal, Germany and Britain behave in different ways. How much worse will it be when we have to ensure that boot manufacturers, cycle manufacturers, steel makers and coal producers have to behave in the same way to achieve this convergence?

Mr. Shore : I do not think that there is time to answer difficult questions of the kind that the hon. Gentleman has posed.

I turn from the business of the convergence and regional policy to another major issue which has not been raised in the debate. We are talking about economic and monetary union. All that I have said so far, and virtually all that the House has had to say so far, has been about monetary union ; but economic union is here, too. It is spelt out in a number of interesting and important articles.

Column 507

The Chancellor of the Exchequer and my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) are anxious to retain the powers of Chancellors over taxation and public expenditure. No doubt they delight in the fact that in the latest presentation the original Delors proposal for binding rules that would limit the powers of Chancellors of the Exchequer has been withdrawn. It has been withdrawn in favour of what are now called guidelines.

I draw the attention of the House to the guidelines in the draft treaty presented by the Commission. The guidelines refer to the following matters :

"the development of Member States budget balances ; the control of production costs ; the level and promotion of saving and investment".

There is reference to other matters, and the article continues : "The Council acting by a qualified majority shall adopt these guidelines".

That of course refers to guidelines laid down by the Commission. It continues :

"On the basis of an annual report of the Commission, the Council shall each year decide on the adjustments that need to be made to the multiannual guidelines".

Later, it says that the Council, acting again by a qualified majority, may, where necessary, adopt recommendations specific to each member state determining the general thrust of its economic and budgetary policy.

Then there is the following passage :

"The Commission shall see to it that specific recommendations are implemented A recommendation concerning the measures which must be taken to rectify the situation".

That will be submitted privately to the Council of Ministers ; if the member state does not obey within a month, the Commission may make its proposals public. The measure is, of course, deliberately designed to destabilise and undermine the authority of a Government who pursue an economic and budgetary policy with which the Community and the Commission disagree. It is not a very welcome prospect. Although they have not the same strength as binding rules, these are serious guidelines.

Moreover, the harmonisation proposals for indirect taxation, although far from complete, are intended to prevent any movement away from the existing average. Following the promulgation of those proposals, indirect taxation in the form of VAT, excise duty and, I am willing to bet, corporation and company tax will become impossible within a few years.

Future Chancellors of the Exchequer will not have much freedom of action. There will still be a Budget, public expenditure exercises and the ability to raise revenue, but, as the indirect taxation will be bound by treaty rules, it seems likely that the only revenue that the Chancellor will be able to raise is income tax. I foresee a significant limitation of power-- quite apart from all the damage that would result from a fixed exchange rate, and from economic and monetary union.

We have heard a good deal about the importance of accountability. The draft treaty mentions that, as does the other document submitted by the bankers. The treaty states :

"In performing their duties, the European Central Bank, a central bank of a Member State and members of their decision-making bodies shall neither seek nor take instructions from the institutions of the Community or its Member States or from any other body."

Column 508

It is written into the terms of reference that the overriding priority must be price stability, and that external influence exercised by the Community or by individual nation states must be removed.

Never in my life have I read a document that gave bankers more power over economic, national and Community life. I am referring not to the bankers' document, but to the Commission's document, which takes account of the political worries that have been expressed. I find the whole prospect extremely unattractive. I should like to send a firm message--sadly, I cannot, because we are debating on an Adjournment motion--to the effect that we are prepared to co-operate as much as we can, and are not opposed to some policy co-ordination where it makes sense ; but, by God, we will not, not, not allow majority rule from Brussels to determine the welfare, prosperity and self-government of the British people.

6.53 pm

Mr. Quentin Davies (Stamford and Spalding) : I ought to begin by reminding the House of my association with two City institutions, Morgan Grenfell and Dewe Rogerson.

It is always a privilege to follow the right hon. Member for Bethnal Green and Stepney (Mr. Shore)--although I rarely agree with him, and did not today. I was, however, extremely amused when he said that no one but a fool would necessarily urge devaluation. I cannot recall one occasion, in all the time I have followed the right hon. Gentleman's political utterances-- whatever the state of the business cycle, and whatever the parity--when he did not urge that course. His rejection today of the idea that we could ever compete with Germany in regard to inflation or productivity struck me as the philosophy of despair, and I do not think that any Conservative Member would accept it.

Mr. Austin Mitchell : Will the hon. Gentleman give way?

Mr. Davies : I am sorry, but I am under considerable time pressure.

I wish to make five points, and I hope that the logical connection between them will emerge as I proceed. First, I welcome the Government's decision to join the exchange rate mechanism of the European monetary system. I welcomed it in October, and I do so just as warmly now. I trust, however--I am expressing confidence, not just hope--that when the decision was made, the Government did not consider the ERM a definitive solution to the monetary problems faced by this country or, indeed, by the European Community as a whole. I have no doubt that, in the short term, the ERM can act--indeed, it is already acting--as a very effective mechanism to enforce greater inflationary and monetary convergence within the Community. Clearly, we can only benefit from that, as our inflation rate is one of the highest. In the longer term, however, the ERM--like any other attempt in human history to establish a fixed exchange rate system--will inevitably run up against the fundamental contradiction that is common to all such systems : if there is no intention that parities should ever be altered, there is no reason for the retention of separate currencies in the first place. A single currency is a much better idea.

Column 509

Once it is accepted that in certain circumstances the parities will be adjusted, there will inevitably come a time when the market anticipates such changes. That will mean extremely high economic costs for member states, which must adjust demand management in their own economies--running demand at a much higher level with inflationary consequences, or at a much lower level with recessionary consequences, in order to maintain the system.

Let no one suppose that we are in a better position to avoid such problems than we were at the time of Bretton Woods. On the contrary, we are in a much weaker position to sustain such a system over a long period, for the simple reason that we now have almost entirely liberated capital movements in the OECD area. Moreover, the volume of capital transactions in that area amounts to more than 10 times that of current transactions in the world. Things were very different when almost all Governments operated exchange controls, and capital movements were a residual balancing item largely controlled by Governments. We must look beyond the ERM, and consider where it will and where it should lead.

Secondly, and for much the same reasons, I warmly welcome the Government's proposals for a hard ecu. The Chancellor of the Exchequer set out the advantages with great lucidity today and described the sharp anti- inflationary teeth built into the British plan. That, too, will be a powerful mechanism to enforce increased monetary and inflationary convergence in the Community. If accepted, the hard ecu proposal will enable us to establish the institutional basis for a European monetary institution, which could become a European central bank. Clearly, we cannot go further until the institutional structure is in place.

My third point is this. Both moves, although important in themselves, point to the emergence of a single currency at some point in the future, as the Financial Secretary to the Treasury has explicitly recognised. Do we want a single currency? That is the great question. Is a single currency in our interests? Opinion may be divided, and that is precisely why I wanted to speak in today's debate.

There is considerable academic literature on the question of what should constitute an optimum currency area, and there is a consensus remarkable within economic science that, so long as certain conditions are met, a single currency should pertain in an area and that the economic cost of separate currencies is then greater than that of a single currency.

Those conditions are fundamentally twofold. One is that there should be integrated product markets and the other is that there should be integrated factor markets within that optimum currency area. With the single market programme, we are achieving an integrated product market in the European Community and we already have an integrated factor market. There have been integrated labour markets for quite a long time, and integrated capital markets since last year when exchange controls within the Community were finally abolished. I have little doubt that in those circumstances the advantages of a single currency are potentially enormous. The first advantage, which has often been mentioned in this context, is the abolition of the transactional costs which at present are borne by individuals when they travel and by businesses when they trade across the frontiers

Column 510

within the Community. Those costs will largely remain under the ERM, as is generally recognised. A single currency would also bring about the abolition of the foreign exchange risks which currently burden business and deter some people from quoting when they otherwise might. Thus at present output is reduced and employment foregone. The ERM will help a little with the foreign exchange risks but will not, of course, remove those risks.

The third advantage, which is less often recognised in the debate, is the fact that a single currency will remove the informational barriers to trade which are constituted by fragmented separate currencies. Those barriers are considerable in all aspects of trade and particularly crippling--perhaps even fatally so--in certain sectors of activity such as retail financial services, where the Cecchini report indicated that there was substantial scope for an increase in the wealth of the Community through market integration, and where we in this country believe that we have potentially a particular financial advantage. Those are very important benefits to play for. If we can achieve them, it is our duty to do everything possible to secure for our people, our businesses, our employees and our consumers the substantial benefits that would flow.

My fourth point is that, because the stakes are so high, if we go for a single currency we must get it right. We must not rush our fences. Indeed, if we got it wrong we might lose an historic opportunity and that would be a great dereliction of the duty that we owe to the people who sent us to this place and to future generations. Therefore, the whole matter must be carefully thought through and worked out. The Government are absolutely right to be cautious, to ask the hard practical questions along the way and not to be carried away by any kind of facile Euro-rhetoric. I congratulate the Government on their pragmatic and positive approach.

Judging by the speech in the House today from the right hon. and learned Member for Monklands, East (Mr. Smith), it is almost certain that, if the Labour party were in power, it would not get it right ; in fact, it would get it appallingly wrong. I will dwell on one or two instances of that. Within a single currency area in the European Community, there will be internal payments disequilibria as there are within this country, as there are within the United States and other single currency areas. There are current payments disequilibria between the west end and the east end of London.

How will these be coped with? The right hon. and learned member for Monklands, East seemed to presume that they could be dealt with by being recycled through compulsory fiscal public sector transfers. That would be an absolute disaster ; we would go right back to the bad old days of subsidising failure and inefficiency and penalising success. I cannot think of a more fatal way to start off this important monetary venture.

Of course, if we are to get this right, current payments disequilibria must be recycled through the private sector capital flows that will take place in the Community. That is the way it is done within the United States--a very substantial single currency area--and indeed, within this country at present. That requires changes that will not come about overnight. At present the banking system in the European Community, the system of distribution of securities, the portfolio preferences of both institutional and private investors are all much too narrowly based nationally. That will not change overnight. It must change

Column 511

in order to permit those private sector capital flows to achieve their proper economic purpose. I have no doubt that in time they will succeed in doing that.

Current payments disequilibria must also be adjusted through changes in output and prices. For that reason, we need more, not less, flexible markets. Those Opposition Members who are always urging us to be more communautaire and at the same time accept the notions of the European social charter are in fundamental contradiction with themselves. If we want a single currency area to operate effectively, we must have more flexible labour prices and markets. Anything like the social charter which creates new rigidities and new costs is thoroughly unwelcome.

My final point is particularly important. Although I believe that the Government are already persuaded on this point, I hope that no-one in this House will have any illusions about it. In the course of these negotiations with our continental partners, should they arrive at a position where inexorably they go ahead with a single currency, regardless of what we propose to do, then I put it to the House that we cannot in any circumstances remain apart from that single currency. Very briefly, I will set out four concrete and specific reasons why that is so.

First, trade between this country and the Community in such circumstances would be conducted in that single currency. That would mean that our producers and our businesses would incur all those transactional costs and foreign exchange risks while their continental competitors would not suffer them. That would handicap our industry indefinitely. Secondly, the same position would apply to investors from ourside the Community who might be looking to invest in this country and to build capacity here targeted at the Community market as a whole.

An example is the Japanese, whom we have welcomed here in that context in the past few years. They would not come here in those circumstances, or they would be much less likely to come, simply because any business located here would face those transactional costs and risks in servicing the continental market. That again is a reason why we dare not go down that road.

Thirdly, it would make it impossible for the financial services sector in this country--here I refer to the retail financial services sector--to cross-sell its products in the Community, whether they be insurance products, unit trusts, or whatever. They would not get the benefit of the branding and the track record and of common computer systems and the common training of salesmen. They would have to repackage and produce different products on the continent, and that would be a very severe handicap in a field in which there is otherwise an immense amount to go for.

Finally, and most significantly, in the circumstances in which there was a single European currency and sterling remained outside, that single currency would become an international reserve currency which would be in almost every international portfolio. Sterling, on the other hand, would be considered a much more risky and volatile currency which was less desirable to hold. It follows, as night follows day, that international holders of sterling would demand a yield premium for holding it. What does that mean? Translated into ordinary language, it means high interest rates. We should be condemning ourselves to a regime of interest rates higher than those of our

Column 512

Community partners indefinitely. That position would be intolerable for any responsible Government of any party to accept.

Several Hon. Members rose--

Mr. Deputy Speaker (Sir Paul Dean) : Order. I remind the House that the 10-minutes limit on speeches is now in operation. 7.9 pm

Mr. Ron Leighton (Newham, North-East) : Joining the exchange rate mechanism was a preparation for and a first step towards economic and monetary union. It was a dummy run for a single currency. I am willing to give a prize to anyone who has seen any of the promised benefits from the exchange rate mechanism. One result is that we can no longer use interest rates for domestic purposes because virtually their sole purpose is to defend the exchange rate. Our domestic economy is crying out for a reduction in interest rates, but that is denied us because, contrary to the promise, the pound is insecure in its ERM band and few believe that it will be possible to hold it there.

In the meantime, the high interest rates push us further into recession, as the rapidly growing number of unemployed know to their cost. Already, the ERM is doing great damage to our economy. The rate of DM2.95 is becoming ever more unrealistic and the pound is becoming artificially high. The ERM now puts a price surcharge on all our exports.

We must ask ourselves how we are to close our trade deficit, especially that with Germany. It is a delusion to think that we can do it in time by supply side measures, and by education and training alone. We shall not, by some miracle, reduce our unit labour costs and increase our productivity and our output per head faster than the Germans or quickly enough, if at all, to achieve that in the foreseeable future.

There are only two main methods of approach. First, we can allow the exchange rate to be altered to a more competitive level ; or secondly, we can have deflation which pushes the economy into recession and thus reduces the demand for imports, and is what we are doing now. That is graveyard economics, which is grossly inefficient and socially unjust. It reduces output, causes unemployment and hits those who are made redundant and those in manufacturing industries. If the exchange rate cannot be altered, as we heard from the hon. Member for Stamford and Spalding (Mr. Davies), the method of adjustment has to be real wage reduction. We are already being told that ERM means that wages must not go up with inflation. Whose wages are to be reduced? It is those of the workers in manufacturing and in the traded goods sector. It is the blue collar workers and not the people in the City who will be hit hardest. The dummy run of the ERM is already doing us great damage.

After years of talk about what economic and monetary union might mean, and about whether it might mean anything or nothing, we are coming to decision time. At the inter-governmental conference, there are new treaties and the blueprint to which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) referred. We now know what that means. It means a single currency and a single monetary policy because there is no subsidiarity in monetary policy ; monetary policy is indivisible. It means a single currency and a single

Column 513

monetary policy controlled by an unaccountable central bank. Inevitably, we should hand over powers over economic affairs, over budgets and over taxation to traditionally conservative central bankers, which would involve a huge loss of democratic

self-government.

Control over taxes will go, both because of Commission policy, to which hon. Members have already referred, which talks about the co-ordination of tax policy, and because of market forces. If we are to have the so-called "level playing field", capital will move to where it will get the highest return and to where taxes are lowest. With a single currency and unrestricted capital flows, it would be a delusion to think that the Government could exercise their taxation policies to promote egalitarian or expansionist aims that do not have the support of international financiers.

Why should we want all this ? The hon. Member for Stamford and Spalding said that we should have lower transaction costs. If that is the reason, why do we not go for a world currency? Economic and monetary union will not reduce transaction costs with the yen or with the dollar. Transaction costs, even in the European Community, are unlikely to disappear, because banks will still incur costs when they transfer money from one country to another. In the United States, clearing cheques from one state to another still costs money. The costs to this country in lost jobs, in lost prosperity and in lost output far outweigh any alleged gains on transaction costs. Anyone who imagines that a single currency is merely a technical matter which always brings benefits should look, as has been suggested previously, at what has happened in Germany with German monetary union. Otto Po"hl of the German Bundesbank said that it was economic and monetary union in a nutshell. I like to call it monetary union in a laboratory experiment.

What was the effect of monetary union on two economies with different rates of productivity? It was lethal. It was a death blow for German industry and brought mass unemployment. The introduction of the deutschmark did more damage more quickly than a dozen panzer divisions could have done. The west Germans are now pouring in trillions of deutschmarks to rescue the economy of the German Democratic Republic, which is a country of only 18 million people. The east Germans are lucky ; they have a rich big brother who rescues his kith and kin. Even that is putting a big strain on the west German economy. Are the Germans really likely to do the same for us, for Greece, for Portugal and for Spain? Would they do it for the other eastern European countries? Of course not. We shall be on our own, bearing the full brunt of the cost.

I am brought to another realisation. Economic and monetary union will divide Europe ; it will not unite Europe. It will be a barrier to enlargement. The struggling new democracies of eastern Europe could not cope with a single currency or with economic and monetary union. They have seen what it has done already to the GDR which, after all, was the most advanced country in COMECON. Those countries have no big brother to bail them out. Those who want EMU do not want enlargement. The French want to institutionalise their arrangements with Germany ; they are not worried about bringing in the eastern European countries.

Column 514

I want to emphasise that we are missing a major opportunity by concentrating on the wrong agenda. We should be considering how we react to the end of the cold war and to the democratisation of central and eastern Europe. Our response is hopelessly inadequate. Here is a chance to unite the whole of Europe in an association of democratic, self-governing states with the sort of vision that we had with the Marshall plan. Instead of that, we are constructing an exclusive ghetto in western Europe on a basis that will shut out half Europe. We are throwing away the chance to put a permanent end to the post-war division of our continent. Having removed the Berlin wall and the physical barriers, we are now re-erecting damaging economic barriers right across Europe in a way that will abandon and impoverish the struggling countries of eastern and central Europe. Everyone says that there can be no EMU without convergence- -without levelling out the differences of economic circumstances. We are told that there must be convergence in growth, in interest rates, in inflation rates, in productivity, in wealth, in standards of living, in budget deficits and in trade balances. Unless that is done, there will be dislocation because the level playing field will be a battlefield. There will be winners and losers. Whole regions with weaker economies could be blighted and turned into depressed areas with mass unemployment and closed industries. At present, there is not convergence but divergence, because the process of capital accumulation and of labour migration--in other words, market forces--tends, uncorrected, towards the cumulative reinforcement of those differences. The rich areas get richer and the poor areas get poorer.

What is the answer? Everyone says that it is regional policy. Having uttered those words, they think that they have solved the problem. They do not examine what regional policy would mean. I do not have time to go into the way public expenditure is redistributive or to consider how existing federations, such as the United States, Canada, Australia and Germany, have horizontal transfers of wealth. The budgets of most countries in the European Community take about 45 per cent. of gross domestic product. The European Community budget is about 1 per cent. The wealth and the resources for a regional policy are not there.

The present regional fund is derisory. In 1990, the European regional fund had a budget of 4.7 billion ecu, which is £3.5 billion. That is 0.1 per cent. of the collective gross domestic product. Sir Donald MacDougall said that a budget of 7 per cent. devoted solely to regional policy was needed. That is a budget 70 times bigger than the existing budget.

One way to approach this is to look at Northern Ireland, where in our regional policy we spend £1.7 billion. That works out at £1,100 per head. There are 140 million people in the areas eligible for regional fund assistance in the European Community. If we had a policy there of £1,100 per head it would work out at £154 billion--4.6 per cent. of GDP. Currently it is £3.5 billion. Instead of the £154 billion which we would need to do there what we are doing for Northern Ireland, the budget is only £3.5 billion. So we would have to spend more than 44 times as much.

There is no chance of getting that sort of regional policy, and Conservative Members are opposed to it anyway.

Column 515

7.20 pm

Mr. Michael Spicer (Worcestershire, South) : The Government are absolutely right vigorously to resist the formation of a single European currency. From the point of view of Britain's national interest, it is living dangerously enough to artificially link our currency to that of another country, as we did, for instance, in the 1920s, through the gold standard, to the dollar, and, as we do today, through the exchange rate mechanism, to the deutschmark. But, as was the case in the 1920s, in these circumstances at least we retain a semblance of national sovereignty--so that if, for instance, unit costs of our industry are high in relation to those of the country with which we have chosen to link ourselves and there is therefore pressure on the artificially chosen exchange rate, we have the option of deflating the economy, as was done--with, it has to be said, disastrous effects--under the gold standard.

However, we also have the choice, in the present circumstances, of realigning our currency. That does not necessarily mean, as the right hon. Member for Bethnal Green and Stepney (Mr. Shore) said, devaluing all the time. That is a very pessimistic view of the future of our country. It is a question of allowing our rate of exchange to reflect accurately relative unit costs ; and, as we get more efficient, it may well mean revaluation. We also have the option, in the present circumstances, of pulling out of the artificial straitjacket altogether, as was done in the case of the gold standard. If, however, we were to adopt a single European currency, we would be left with no semblance of national sovereignty. Contrary to what the shadow Chancellor of the Exchequer, the right hon. and learned Member for Monklands, East (Mr. Smith), said, this cannot be fudged. As my right hon. Friend the Member for Hertfordshire, North (Mr. Stewart) said earlier, a single currency means a single Government. It cannot be any other way. A single currency requires a single policy towards inflation. It therefore requires a single budget, a single monetary policy, and a single tax-making authority. Mr. Quentin Davies rose --

Mr. Spicer : I shall not give way, because my hon. Friend had 20 minutes and I have only 10 minutes.

Of course, a proportion of the tax-making decisions could be devolved to member states, but the overall budgetary authority could not. The argument is made that in pooling our sovereignty we would, as a nation within a European monetary union, grow in stature and wax in world influence. There might, I suppose, be some merit in this view if it could be shown that we shared some overwhelming common purpose with the other nations of Europe which justified our joining them to become, in effect, one country, because that is the logic of what is involved in a single currency.

Mention has already been made in the House today of the apparent lack of common purpose among European countries in the Gulf. I recognise, of course, that some of my hon. Friends and some hon. Gentlemen have drawn different inferences from this, but the issue, in my view, goes deeper even than whether the European countries are willing to supply us with spare parts for our forces fighting for international security. The fact is that we are different nations in Europe, with differing interests, requiring different economic and monetary policies. Britain, for

Column 516

instance, still exports more per head of its population than does Japan. Therefore, in terms of narrow economic self- interest alone, there must be great British concern to maintain strong bilateral links with the rest of the world.

That does not mean that we should not continue to strengthen our economic ties with Europe. In particular, as my hon. Friend the Member for Surrey, North-West (Mr. Grylls) said in an intervention, we should be pressing hard for a free flow of capital around Europe. We have not begun to have that in many respects. We should be pressing for fully convertible currencies reflecting not some artificial exchange rate but the unit cost differences between the various countries. But a pre-emptive leap towards federalism through the medium of a single currency would be, to say the least, premature.

7.27 pm

Mr. Austin Mitchell (Great Grimsby) : The enthusiasm for economic and monetary union demonstrated by pro-European, pro-market Members or even by our Front Benchers shows a willingness to throw away vital weapons of economic management as a badge of communautaire identity. It is a defiance of the basic principles of economics. The exchange rate is simply a market clearing mechanism. The competitive exchange rate in that situation is simply the rate at which a nation can trade, balance its payments and sustain that balance of payments in conditions of full employment and sustainable economic growth. That is a market decision. We can influence the market and the exchange rate by high interest rates. The present Government have continually maintained the exchange rate too high by interest rates. We can do it by the way we run the economy. The point is that the exchange rate is essential to our trading ability. For proof of that, one need only look at the balance of payments of this country's manufacturing trade with the United States in 1986, when we had a substantial surplus of about £1 billion, and the deficit that we had last year of about £3 billion simply because the dollar had gone down and the pound had gone up since 1986. The exchange rate is absolutely vital.

I accept that there are divergent interests in connection with the exchange rate. Financial interests in this country want it high. Clearly, as they want to invest more overseas, they want a high and stable rate ; while industry wants a low, competitive exchange rate so that it can produce more and sell it overseas. The rich, who have money, want a high exchange rate. The mass of the people, who want jobs, industry and economic expansion, need it to be competitive, and that is the interest of the Labour party.

It therefore follows that it was folly to enter the exchange rate mechanism. It was folly, first, to attach ourselves to fixed exchange rates, the bad old system ; we are attempting to fix the needle on the barometer. The markets should decide that. This is not an argument for devaluation ; it is an argument for markets. I cannot understand why a Government so attached to markets should want to defy markets on the exchange rate--the central issue. We cannot fix the needle on the barometer and control the weather. It just cannot be done. Also, we cannot transfer control over that vital exchange rate to competitors who have a vested interest in seeing us overvalued so as to sustain their access to our market. That is the second folly.

Column 517

The third folly is to go in at an overvalued rate, a rate that is substantially up on the level of the last quarter to 1986--about 23 per cent.--against the deutschmark. It is no use preaching to people to hold wages. If manufacturing industry's workers took a cut in wages, that still could not get us back to the competitive level of the last quarter of 1986. We have embarked on the folly, with the same consequences that Keynes described in "Economic Consequences of Mr. Churchill", attached to our return to the gold standard at an overvalued rate in 1925.

The consequences are now the same--increasing unemployment and bankruptcies, a reduction of taxation because corporation tax will be down, and increases in spending because unemployment will be up, so Government surplus moves into Government deficit and the economy winds down. We are screwing down the lid on the recession on which we embarked. That is disastrous when one considers that our manufacturing output is scarcely higher than it was in 1973. It was a folly to enter the exchange rate mechanism, and a folly about which the Labour party should have warned. We said that we should enter at a competitive rate, but we kept terribly quiet when the Government went in at an uncompetitive rate. The consequences will be ruinous. If this country is to succeed, and if we are to stop the remorseless wind-down into depression and the rise in unemployment, there must be a substantial devaluation. It will come. We shall try to hold back the tide on the mentality that, at this stage in the economic cycle we need a futile gesture--that is certainly what the City wants--but it will come, and better that it comes early rather than late.

Economic and monetary union is a further step down the same road to folly. The currency is rather like the atmosphere around a planet--the framework that sustains life. It sustains independent economic life.

Mr. Nigel Spearing (Newham, South) : It is like the climate.

Mr. Mitchell : It is like the climate in that sense. That is the role of the exchange rate. We cannot abolish it without disastrous consequences for the life that is sustained in that climate. Hon. Members have argued that transaction costs will come down--a huge gain, particularly when we are in deficit. Transaction costs come down for importers as well as for exporters, and with us in substantial deficit that is paying a benefit to them. Sam Brittan argued in the Financial Times that the balance of payments vanishes, and so it does. It vanishes because we must then cut our ability to buy imports to our ability to produce exports to pay for them. We must cut our wages and our standard of living.

That is why it is so extraordinary that the Labour Front Bench should advocate membership of economic monetary union. The consequences of that fall on workers in manufacturing--those on the industrial front line. We are actually shelling our own front line in the industrial war. It will be used to depress, deflate and break the power of the unions and the working class--to increase

unemployment--and the consequences of that will fall on manufacturing industry, our front line. Our standard of living will be driven down. We shall become another East Germany. The consequences of one currency for East

Column 518

Germany have been disastrous in terms of employment, jobs and manufacturing. They have big brother to help them out and cushion the blow, but we shall not.

Some people say, "Let us have a machinery for redistribution." I ask those who are enthusiastic about economic and monetary union, "Why concede the principle before the framework of redistribution is agreed? It will be difficult to get it. There will have to be massive transfers on the scale that Opposition Members have indicated. That will require a huge bill to be paid by Germany. Is Germany going to pay it? Is the SPD so enthusiastic about Britain's future that it is prepared to impose those taxes--those burdens--on the German economy? Do our politicians want to turn us into the plangent, begging, scrounging nation of Europe, dependent on handouts and regional aid for our economic existence because we abolished the atmosphere that sustained our own economy? Is that a future for a great and powerful nation? Is that a future on which we can build socialism and a better society? It is not.

That is not Labour party policy, either. Policy, as adopted by conference in "Meet The Challenge, Make The Change", is of opposition to economic and monetary union. That policy was accepted by conference and put forward by our Front Bench. Our leader told us in "Looking To The Future" that its commitments are still binding. It cannot be changed until conference changes it. I am therefore espousing Labour party policy on this issue.

I did not enter the Labour party or Parliament to institute a system of rule by central bankers over this country. I entered Parliament to build a fairer society in this country by providing full employment, building our national economic and industrial strength because the nation depends on its industrial base. It does not depend on mythology or sovereignty. I entered politics to multiply well-being and to get a better life for our people. We do that by developing and building industrial strength, by generating growth and distributing it fairly among our people.

In other words, economic growth is central to my philosophy. It will not be available in the new regime of economic and monetary union. I entered politics to build a better society, not to institute a system of rule by central bankers or to ensure that east Germany is builded here in England's green and pleasant land.

7.37 pm

Sir Peter Hordern (Horsham) : There is something to be said for a single currency. Convenience in transactions has already been mentioned. However, I do not believe that convenience is everything. Nobody now argues that a move to a single currency based on the present basket of currencies does not mean the convergence of economies within the European Community. Delors has said that and the Bundesbank has said that--indeed, the Bundesbank made the point that there should be no artificial deadline before economic convergence is achieved, and it sees it going a long way ahead ; otherwise, the single currency cannot conceivably bear the weight placed upon it. Surely the Bundesbank should know. From figures that it has given, I understand that the net public sector borrowing requirement last year was DM100 billion. This year, it is due to go to DM140 billion because of the cost of restoring East Germany.

Column 519

If anyone suggested that we should have such an enormous increase in our public sector borrowing requirement, we would be absolutely horrified. It is the kind of thing to which we are accustomed under Labour Governments. For that to happen in Germany is truly astonishing. However, if that is happening in the strongest economy in Europe, what about less well-endowed countries such as Greece and Italy with their enormous financial deficits? What would it cost to correct such enormous imbalances, and who is to bear that cost? If there is to be a more equal performance on the part of all European countries, the inescapable consequence will be a large Government transfer from one country to another.

Of course, that is called the European regional policy. It means a substantial transfer of money from one country to another. I note that, already, the French are calling for Mr. Solomon Binding who advises incomes policy to be run by the Community. I have no objection to the transfer of funds from one country to another, but that should be done by removing barriers to investment--just what 1992 is supposed to be about.

There will be a call for massive funds to be transferred from richer countries to poorer countries in the European Community. That will inevitably mean higher taxation. Worse, it will mean moving gradually to a command economy, no doubt run by Brussels with substantial offices in other European countries. Our

experience--surely it is that of eastern Europe as well--is that the more we move to a command economy--the more we move from people, and the market- -the more certain we are to fail, and fail we will. There are other political consequences of a single currency and further centralisation of economic decision making--which is necessary to make a single currency work. At the least, eastern European countries will not be welcomed into the Community, because a substantial transfer of resources will be necessary to keep the single currency in being. Some issues are larger than the single currency, and one is the unity of Europe in the sense of a Europe sans frontie res in which there is free movement of capital, goods and services. If imposing a single currency means that we have to deny the countries of eastern Europe any prospect of joining the Community, then the price is too high to pay. A single currency cannot be an objective in itself, except in a limited sense. It must be the servant of the political and economic system that we want, not its master.

We must take into account how the Community deals with matters which affect all its members. I have only to refer to the common agricultural policy and my hon. Friends will know what I mean. The way in which the GATT negotiations have proceeded is a disgrace. And what would happen if Britain wished to support the United Nations against another Saddam Hussein? Would we be told that, in order not to exert too much strain on the single currency, we must find savings elsewhere in our budget to accommodate extra defence spending? That is unthinkable.

How then are we to satisfy the demand for a single currency without accepting a centralised economic and political structure close to the lowest common denominator--which the current proposal would produce? The hard ecu is designed to satisfy that demand. It is a common parallel currency, not a single currency. It is subject to a central bank and run by central bankers, not politicians. It is one alternative suggested by my right hon. Friends on

Column 520

the Front Bench. I for one would be glad to see the central bank run by central bankers, not politicians, regardless of the Opposition's view.

By definition, the hard ecu cannot be expansionary or inflationary. It could be a substitute for national currencies rather than an addition to them. Just as the gold standard allowed de facto monetary union, there could be convertibility into the hard ecu as and when people, businesses and, lastly, countries wanted it. That time has plainly not yet come.

The process cannot be hurried. It is not a decision that we in Parliament can take. It will take much longer to establish the conditions for a single currency than the most enthusiastic Community supporters accept. It is much better to establish the Europe that we wish to see--outward-looking, free of internal barriers, in favour of free trade and ready to accept our responsibilities in the middle east and elsewhere under the auspices of the United Nations, and then fashion a common currency that will allow us to pursue those ends. 7.42 pm

Mr. John Battle (Leeds, West) : With the war going on in the Gulf, it may seem to people outside the House that it is a luxury to indulge in a debate on the finer points of economic and monetary union. But behind the images of war on the television screen, the economic picture is continuing to worsen. Recent high unemployment figures hardly got a look in on the news. Interest rates are still high and result in regular bankruptcies and redundancies in our constituencies. We have a declining manufacturing base and a massive balance of trade deficit. That means increasing unemployment and poverty in many of our constituencies.

The Government's policy on economic and monetary union affects that underlying agenda. At the centre of the Government's approach there seems to be a deliberate ambiguity. The current new-look Conservative leadership attempts to present a pro-EMU stand. Effectively, it is hedging on developments leading to economic and monetary union. More crucially, it is blocking moves to Community convergence in social, regional and economic policies.

The Government still insist on a hard ecu. Today we heard that it would not be subject to devaluation, but it is hard to see how that could be avoided if the Government intend that it should eventually emerge into a common currency. The Government still persist with their hard ecu fig leaf. The key problem is that the hard ecu scheme would not do what most other EMS countries want. The Government's latest proposals on the hard ecu concede the concept of an independent central bank but do not address the key issue of who will make key decisions on monetary policy. Even if the hard ecu worked, there would still be a strong possibility that an unreconstructed Bundesbank would remain firmly in charge.

The Government's proposals for beyond stage 1, published in January, make it clear that the EMS is to be entirely controlled by bankers. They propose that the shape will mirror the structure of the existing Bundesbank. They do not propose that the European monetary fund should be properly politically accountable from the beginning. We insist that it should be. The Government are struggling to remain on the fence on the independence of the European monetary fund or central bank system. In

Next Section

Home Page