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be for a head of Government. I believe that such delusions have been his stock in trade since he became involved in the management of our economy.

One of the most notable previous examples occurred when the right hon. Gentleman was Chief Secretary to the Treasury. On Second Reading of the Finance Bill in 1988--that heady year of so-called Conservative success--he observed :

"During the 1960s we praised and envied the German economic miracle. In the 1980s the position has been precisely reversed."--[ Official Report, 26 April 1988 ; Vol. 132, c. 214.]

To claim that the German economic miracle had been surpassed, and then, in the middle of the recession, to go on to foresee the pound replacing the deutschmark takes a certain detachment from reality of which Walter Mitty himself would have been proud.

The real lesson to be drawn from a comparison between the British and German economies is that, before one can have a strong currency, one needs a strong economy--and that to create a strong economy we need consistent investment, a recognition of the vital importance of manufacturing as the basic wealth creator, a strategy for training, for innovation and technology and for regional development--in short, an industrial strategy.

Mr. Stephen Milligan (Eastleigh) : The right hon. and learned Gentleman talks about detachment from reality. Does he agree that his colleague, the shadow Chancellor, was even more detached from reality when he suggested that the best way to defend the pound was to cut interest rates?

Mr. Smith : The shadow Chancellor has argued week in, week out, and month in, month out for an industrial strategy to put this country into a strong position. It is a great pity that his recommendations were not adopted by the Government.

The comparison with Germany is important, because Germany adopted an industrial strategy. It is a tragedy for Britain that, for the past 13 years, we have been going in the opposite direction. Instead of real achievements, the Government can produce only policy failures garnished with absurd hype and rhetorical fancy.

Mr. Geoffrey Dickens (Littleborough and Saddleworth) : Does the right hon. and learned Gentleman agree that most people expect Germany to be on the slide now? Its economy is in a mess and the Germans are paying too much in subsidy to their coal mining industry. There is nothing wrong with the United Kingdom wanting its currency to be at the top. While the right hon. and learned Gentleman talks this country down, it will be down.

Mr. Smith : If Germany is in such a mess, yet we have been forced to devalue our currency against its currency, what kind of mess is this country in?

Look at the Prime Minister's record of economic prediction. January 1988 :

"Inflation is low and will remain so."--[ Official Report , 14 January 1988, Vol. 125, c. 549.]

Fact : it doubled in the two years that followed. Prediction, December 1989 :

"The recession is neither likely nor necessary."

Fact : we have had the longest recession since the 1930s. Prediction in June 1991 in The Daily Telegraph :

"Recovery coming on in weeks".

Fact : the economy has ever since been mired in such deep recession. Perhaps the prediction most close to public memory was in the last election :

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"Vote Tory on Thursday and recovery will continue on Friday." Fact : there has been no recovery at all and now we have a devaluation. So much for the Prime Minister's key promise at the election.

Regrettably, that is but one of the promises that have been and will be betrayed as the coming public expenditure cuts--never mentioned at the last general election--rip the Conservative manifesto apart. I have little doubt that there are party workers hard at work already on the excuses ; no apologies, no expressions of regret, just excuses and more excuses. We heard a few of them today from the Prime Minister in his typical speech.

In the new situation, the Government propaganda machine clearly faces new challenges. Its principal tasks are to seek to disguise the void in Government policy by pretending that it does not exist and to divert attention from the Government's culpability by seeking to place the blame on others. A good example, I understand, is the note which, according to today's Financial Times , appeared in Minister's boxes on Monday evening headed :

"ERM. New line to take."

I am, of course, not able to say whether the line that we got from the Prime Minister today was the line advised on Monday. After all, it might have changed since then.

But the real problem for the Government in finding a new line to take is the speech given by the Chancellor of the Exchequer to the European Policy Forum on 10 July entitled "Britain and the ERM", which is helpfully reproduced in at least two newspapers today. The Chancellor expressed his support for the then policy in robust and uncompromising terms but, interestingly, he went on to examine what he described as the alternatives- -all the alternatives--to such a policy and mocked every one in turn. He said,

"Plenty of alternatives are suggested. But in my view they are all illusory or destined to fail."

I admit that it might be difficult to know which of those alternatives now is Government policy. After all, according to some newspapers, the Chancellor appears to be on quite a different path from his colleagues in the Government, including the Prime Minister, but whatever that policy is, it must be one of the alternatives that he contemptuously dismissed in his speech.

The Chancellor described the option of leaving the ERM and cutting interest rates as the "cut and run option"--a cut in interest rates and run on the pound. He went on to say :

"Many who advocate floating exchange know full well what the consequences would be. They intend a devaluation of the pound and they will certainly achieve it."

He finally dismissed the option in his conclusion :

"We would have given up after less than two years and we were back to our bad old ways."

Well, are we back to our bad old ways, lurching back to the Thatcherite economics which pulverised our economy during the 1980s? The Chancellor then went on to attack a policy of leaving the exchange rate mechanism and setting interest rates according to domestic monetary targets. Here the Chancellor had what I believe was a genuine flash of insight. He told his audience :

"We have been here before. In the 1980s we fixed domestic monetary targets, and we attempted to meet them by setting interest rates accordingly. But in practice the money supply figures often provided a poor guide to interest rate policy, particularly in the wake of the financial deregulation."

So much for all the Thatcher years--dismissed like that.

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Those of us of a generous spirit would be inclined to congratulate the Chancellor on an honest, if unrepentant, reassessment. It is, however, difficult to do so if the former sinner is determined to revert so quickly to the sins of those former years. After all, now, with the benefit of experience, he knows that it is wrong and, after this performance, who can ever believe him in anything he ever subsequently says? In his speech on 10 July, the Chancellor ruled out every alternative that he could envisage. How can any one of them be offered now as convincing Government policy?

In the wake of the destruction of the Government's economic policies, we must ask where we are now. The sad but unavoidable truth is that, instead of reaching the heart of Europe, the Government have succeeded in having Britain relegated to the second division. There are two reasons for that disaster. For years, the Government followed policies that have thrown our economy into a deep and damaging recession, which made it weak and vulnerable--weak and vulnerable, incidentally, to speculators. Faced with a crisis, the Government chaotic mismanagement and sheer incompetence forced them to abandon all that that they stood for in a matter of hours.

Mr. John Marshall (Hendon, South) : Will the right hon. and learned Gentleman tell the House whether he would take Britain back into the exchange rate mechanism?

Mr. Smith : That question was singularly not answered by the Prime Minister in the rather curious answer that he gave. I will answer the hon. Gentleman's question directly. He will not think it unfair if I point out that, when the Prime Minister was asked a roughly similar question, he did not answer it at all. He said that, if a credible exchange rate mechanism could be achieved, he might think about whether or not he would rejoin it. That, as I fairly understand it, is what the Prime Minister said. Let me say what I think. I think that there are advantages in having a system of managed exchange rates. One is that in those circumstances, one is less likely to resort to curbing public expenditure as the anchor or one's economic policy--which is one of the difficulties that we now face. The circumstances in which we would rejoin the ERM must be judged according to the state of our economy--and that is regrettably weak. The first thing that the Government should do if they are to acquire any option for Britain's economic future is to build up the strong economy that can be the only foundation for our future.

Mr. James Paice (Cambridgeshire, South-East) : I am very grateful to the right hon. and learned Gentleman. Will he tell the House what would be the cost of his recovery package ; and what effect that would have on public borrowing and on the currency market?

Mr. Smith : I did not think that point would be pursued by Conservative Members today. After they lost £1 billion in a hopeless attempt to prop up the currency, and with increasing unemployment costing the taxpayer £8,000 for every person unemployed, they have the sauce to ask us the cost of a recovery programme. I ask them : what is the cost of a non-recovery programme? That is what they appear to be committed to.

To return to the events of black Wednesday, a bewildered British public watched those tragi-comic events

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unfold. First, there was a 2 per cent. increase in interest rates, and then they were up by 5 per cent.--all in the course of a few hours. It all ended in Britain's withdrawal from the ERM. That was not some considered choice or policy but was forced on the Government by their weakness and incompetence.

The British people deserve to be told what went wrong. The Prime Minister had the responsibility to tell Parliament and the public today. We heard what he had to say--a few desultory remarks about economic policy, and a long rambling piece of nonsense about the future of the European Community.

As the Prime Minister was unable or unwilling to tell the House what happened, let us examine the facts. The genesis of the crisis was that Tory election promises of immediate economic recovery following the general election turned out to be totally false. Since April, all the main economic indicators of the real economy have deteriorated. Markets, consumers and industry increasingly lost confidence in the bogus predictions of a recovery that seemed constantly to be postponed.

What did the Government do? Nothing--absolutely nothing. Even as bankruptcies mounted, home repossessions kept rising, and unemployment remorselessly increased, the Government did nothing--absolutely nothing.

The continued weakening of the British economy that I have just described coincided with the predictable pressures on currencies arising from the uncertainties of the French referendum and higher German interest rates. The position called for prompt and decisive action to initiate and co- ordinate a Communitywide response-- [Laughter.] So this is a matter for laughter. Those who hold the presidency of the European Community deride a Communitywide response even before they hear what any such response might be. I have come across few such revealing actions. The Prime Minister and the Chancellor of the Exchequer, on this day of all days when they are in the dock, are chuckling.

As I was saying, the position called for prompt and decisive action, for a programme of growth in the Community, for jobs, for investment and for an early reduction in interest rates across the whole of the Community. Britain, holding the presidency of the Community, was uniquely well placed to take such action, as we repeatedly proposed, but it did not.

The Prime Minister : I was chuckling at the right hon. and learned Gentleman's lack of understanding of how matters work in the Community. He seems to think that, when there is a problem, all we have to do is to persuade the remainder of Europe to do whatever is convenient for the United Kingdom. What does he think happens when it is not convenient for the remainder of the Community to do that? It would have been right to persuade the Community of the need for a general downward realignment of interest rates, but if others in the Community would not agree to that, how would the right hon. and learned Gentleman face that reality?

Mr. Smith : I shall come in a moment to the question of a realignment of currencies and interest rates. What is revealing about the Prime Minister's intervention is that he obviously did not even try to persuade the remainder of the Community. As President of the Community, to a large extent he can determine the Community's agenda,

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yet he did not put on it a programme for recovery involving all Community countries. If there are those who disagree, the right hon. Gentleman should argue with them and persuade them. At the very least, he should try. Instead, at the first hint of disagreement, he leaves the field. There can be few more revealing instances. If the right hon. Gentleman had so wished, he could have told us a great deal more about that, instead of making a rambling speech that had little to do with the issues.

The only action that the Chancellor took throughout the whole period was to announce the borrowing of an additional £7 billion. We used to hear great diatribes from the Conservative party about borrowing. When anyone else borrows money, it is a total economic disaster ; when the Conservative party borrows money, somehow it is an economic triumph. However, on this occasion, given the underlying fragility of the British economy that move, not surprisingly, was interpreted by the markets as a further sign of weakness-- [Interruption.] It was, so there is no point in the Chancellor shaking his head. We can all read the newspapers, perhaps better than he can. We read them and that is what they said.

As the crisis developed-- [Interruption.] I am coming to an important point, to which I hope the Chancellor will listen carefully. As the crisis developed, crucial discussions took place over the weekend of 12 -13 September, which resulted in an announcement from Brussels on the Sunday evening that the lira was to be devalued. It was also strongly hinted, not least by British Government sources, that a substantial cut in interest rates would be announced by the Bundesbank. However, when made on the Monday morning, it was the smallest reduction possible. I do not know for certain what happened in meetings and other discussions during that weekend or in the days leading up to it. However, I know that, in the context of the Ecofin declaration in Bath only a week or so previously, it was clear that there would be no realignment of any currency. An outcome that resulted in the devaluation of the lira alone was an open invitation for speculation against another of the weak currencies.

Mrs. Judith Chaplin (Newbury) : My understanding has always been that a Leader of the Opposition does not say anything that jeopardises sterling in the markets-- [Interruption.]

Madam Speaker : Order. I want to hear the hon. Lady's intervention.

Mrs. Chaplin : As the right hon. and learned Gentleman called for a slash in interest rates three days before Britain left the ERM, does that mean that tradition has been replaced by opportunism?

Mr. Smith : I was waiting for someone to blame me for the devaluation last week. The hon. Lady has not disappointed me. Of all the charges that could have been laid against me and of all the comment that there has been in recent weeks, the argument that I have been undermining sterling is the most far-fetched that I have ever heard. It just shows that, whatever one says or does not say, some on the Conservative Benches will find it unacceptable. [Interruption.] It seems that there is a new charge : that any criticism of the Government undermines sterling, but sterling has already been undermined by those who are in charge of our affairs.

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I return to when the lira was devalued. If the Government knew anything about the markets that they profess to understand and what was likely to follow, what consideration did they give to finding an alternative to a potentially disastrous confrontation, with a speculative market in full flood? There was only one feasible alternative : to have a general realignment so that the markets were not presented with an open invitation to speculate in circumstances in which our defences to their attack were weak. If that had been done, we could have had an orderly realignment, not a rout, a co-operative change, not a crisis. Britain would not have been forced to leave the exchange rate mechanism. We should not have had to use billions of pounds of reserves, which involved damaging real losses, which some have estimated at over £1 billion, and interest rates would have been lower throughout the Community.

What is more, the possibility of considering this option did not appear suddenly and unexpectedly on the Sunday. Widespread reports in the press, both here and abroad, indicated that a number of our European partners were raising the issue of interest rate reductions and having them combined with a currency realignment in the weeks preceding the crisis. The Government must tell us why this option--the multilateral option, the European option, the less inflationary option--was not taken when it was clearly in the national interest.

The Prime Minister : What the right hon. and learned Gentleman has said is extremely important, and I shall answer it. I draw his attention first to the fact that the Italians, who did not devalue, subsequently had to come out of the system as well. More substantively, what the right hon. and learned Gentleman has just pronounced, presumably as Opposition policy, is that, whenever there is a speculative attack on the pound, he would pre- emptively devalue. That is what he has announced. That policy, if it were to be followed, would encourage every speculator on every occasion to attack the pound.

Mr. Smith : What the Prime Minister has just announced is that, if he ever goes back into the exchange rate mechanism, he will never be in favour of any realignment, ever, and he might as well call it a single currency. He must know, as everyone who operates in the exchange rate mechanism knows, that it is a system of semi-fixed and adjustable rates. In the early period of the European monetary system, it was frequently realigned and varied.

The Prime Minister did not answer the question that I put to him : faced with a situation in which the alternative was likely to be that the Government's policy would be scuppered by the speculators, why did they walk blindly on? Why did they not look at an alternative that would have been better for this country, better for our economy and better for our currency? I shall be happy to give way again to the Prime Minister if he wishes to correct me.

The Prime Minister : Neither the right hon. and learned Gentleman nor anyone else can be certain at any moment what the scale of a speculative attack would be. At this precise moment, at least one other European currency is under attack that has decided to do precisely as we have done : that socialist Government have decided to defend their currency with their reserves and to raise interest rates rather than to take the step of devaluing. They have done that because, of course, devaluation is undesirable for all

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the reasons we set out. We were forced to do it, not because we wished to, not because it was a good option, but because of the inevitability of the size of the speculation--a size that no one, not even the right hon. and learned Gentleman, could ever have foreseen.

Mr. Smith : That is the defence : overwhelmed by unforeseen events, in charge of the bridge when along came a wave and overturned the vessel, the captain pleads not guilty. That is the nature of the Prime Minister's defence. There was an alternative and I should like the Prime Minister to tell us why it was not adopted. There could have been a general realignment of the currencies. The system allows for that and we know that there were requests for that to be considered. The Prime Minister was defeated but he speaks as if he won. He did not win, he lost, and there was an alternative to that humiliating failure.

Sir Peter Tapsell (East Lindsey) rose --

Mr. Smith : I do not know whether the hon. Gentleman is in charge of the Government's economic policy.

Sir Peter Tapsell : Has not the right hon. and learned Gentleman's careful reading of the Goldman Sachs comic persuaded him by now that any discussion within the ERM of a realignment immediately sets off speculation? That is precisely why we should not return to fixed but adjustable rates.

Mr. Smith : The hon. Gentleman does not take account of the fact that such adjustments were made in the past in the very ERM of which he speaks. But they must be made with a little care. I assume that even this Government could manage to make them confidentially, although sometimes I wonder about their capacities. It cannot be argued that it was impossible, which is what the hon. Gentleman says.

In view of the debacle, one would expect at least a word of explanation or apology, but there was not a hint of that in anything said by the Government, whose most noted characteristic is that no one takes responsibility, no one resigns--at least not yet--and no one takes the blame. They are a "not me" Government.

The most ingenious and perhaps the most ironic of the Prime Minister's new excuse were in his first comments after he emerged from his air raid shelter. He told us that the problem was that the markets were irrational. What are we to make of that one? Now that the Prime Minister is possessed of a genuinely new insight, may we invite him to refrain from insisting that these irrational market forces should determine all aspects of our national life? Given the total mismanagement that has been so vividly demonstrated, may we have no more assertions about the Conservative party's unique and expert knowledge of the working of markets?

After all this, we are left with an economy and a society ravaged by recession. There is no more important priority in Britain today than the adoption of a programme for economic recovery. If that is not done, the price will be paid by millions of unemployed. The lesson of recent years as well as of recent weeks is surely clear. We cannot afford to neglect the real economy. I repeat that a strong

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economy is the only sure foundation for a stable currency. We consistently argued that case before Britain joined the ERM, and we have argued it repeatedly since.

Time after time, we have argued the crucial importance of supply-side policies that would improve our economic performance, raise investment, especially in manufacturing, boost the housing and construction industries, and promote innovation and technology. Perhaps above all, we must enter into a real and sustained commitment to education and training. The result of the Government's policies has been tragically shown by the redundancies announced by British Aerospace and Rolls-Royce.

Ms. Anne Coffey (Stockport) : Does my right hon. and learned Friend agree that, if desperately needed help and support to British Aerospace had been forthcoming over the past few years, we would not be in the present sorry state of affairs? Unless immediate help and support is given to that industry, in the way that other Governments support their industries, we shall have no aerospace industry and no jobs, and the skills of the people in that industry will be lost to the nation for ever.

Mr. Smith : My hon. Friend, whose constituency has taken the brunt of the savage redundancies, speaks well in defence of her constituents. I see that the President of the Board of Trade is sitting a suitable distance from the Chancellor of the Exchequer, but even if he cannot see these events, he can at least hear them. I hope that he will pay some attention to that, because it is a tragic comment on what is happening to Britain that British Aerospace is moving its activities to Taiwan, of all places. That is where a British pride has taken us--a Government who remove our jobs to Taiwan.

The predictable response of the Government when we argue the case for investment, training and regional policy is to say that they have heard it all before--and so they have, but I can tell them that they will hear it again and again until they change their policies. I know that the Government do not listen to us, but I hope that they might occasionally listen to employers' organisations. On black Wednesday, the Engineering Employers Federation--I hope that the Government will listen to this, because it is from engineering employers, not engineering unions--said :

"But what is essential now for the UK--irrespective of what happens to the pound--is to formulate an industrial strategy which will promote recovery and sustain economic success."

When we use the words "industrial strategy", there is mocking laughter from Conservative Members. I am glad that they are not mocking the engineering employers. The federation continues : "After the events of Wednesday 16 September, even the most ardent promoters of unrestrained short-term market forces must be seeking some shelter."

It goes on to argue for investment and support for British industry. Those are policies that the Government should consider. The end of the passage from which I am quoting says :

"The Government appears to have been paralysed over the past three months by lethargy. Ministers have not been capable of redirecting economic activity towards the manufacturing and infrastructure investment needed for a lasting economic recovery."

The engineering employers put it very clearly and concisely. I hope that the President of the Board of Trade and his colleagues will do something about it.

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I fear that what we shall get from the Government is not a change of policy, even though by their ineptitude they have caused circumstances to change dramatically, but a new hunt for new excuses, new escape clauses and new ways of wriggling out of broken promises. I have recently come across what I think is a prototype of an excuse that is being market tested. It arises in the context of the Government's policy of privatising the Forestry Commission. A query was put to the Prime Minister by the forestry trades unions and it was answered on the politically significant date of 3 April--the final week of the general election campaign. A letter headed

"The Right Hon. John Major, From The Office of : The Prime Minister and Leader of the Conservative Party"

reads as follows :

"Dear Mr. Murray,

John Major is grateful for your letter of 7th February, regarding any possible privatisation of the Forestry Commission."

It is signed by Robert Boscawen.

Subsequently, a story appeared in The Guardian about correspondence between the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland, which caused a further inquiry to be made to the Prime Minister. The reply sent to Mr. Murray on 27 August said :

"The Prime Minister has asked me to thank you for your letter of 6th August. I apologise for the delay in replying.

I appreciate your concern about The Guardian' article quoting correspondence between ministers on the possible privatisation of the Forestry Commission.

You may be unaware that the commitment given by the Prime Minister on this matter was drafted incorrectly during the frenzied activity of the general election campaign".

[Laughter.] The letter goes on :

"The correct line is that the Government has no plans at present to privatise the Forestry Commission."

It is signed by Miss Lucy Miller, political officer.

So there we have it. What a concoction of weasel words. Provided the background was one of active frenzy, no promise needs to be kept, no commitment honoured. I do not understand how a Prime Minister who gives his word in such an uncompromising and unqualified fashion can thereafter contradict it so spectacularly. There is clearly no more devalued political currency than a Conservative election promise. In their frenzied re- election campaign, the Conservatives were prepared to say anything and do anything to get re-elected. [ Hon. Members :-- "What about you?"] I fear that there will be no area in which this will be more spectacularly revealed than in the coming cuts in public expenditure. In the weeks and months ahead, pledge after pledge will be betrayed, commitment after commitment dishonoured, as cuts in public expenditure intensify the recession, weaken our infrastructure and erode the quality of our public services. And the price will be paid by the British people--paid in lost jobs, unbuilt homes, missed opportunities and declining services.

The conclusion that our people are reaching is that they are governed by a Government and Prime Minister fatally flawed by incredibility and incompetence. After all, who was it who dismissed the critics of Government policies as "quack doctors"? Who was it who told the CBI in Glasgow :

"It is too easy to regard Britain's problems as unique or blame them on the ERM"?

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Who was it who said that to leave the ERM would be "the inflationary option" and a "betrayal of our future"? Who, in that same speech, said that there was going to be "no devaluation, no realignment"?

This is a Government whose economic policy is in tatters, whose credibility is blown, whose incompetence has been exposed. It will no longer do to blame others and it will no longer do to say that their policies will, given time, come right. They have been in power for the longest continuous period in post-war Britain--[ Hon. Members :-- "Hear, hear!"]--and Tories' assent to that proposition means that they must accept that they are the only architects, the sole constructors, of our present dismal situation.

In the course of a few weeks the one policy with which the Prime Minister was uniquely and personally associated, the contribution to policy of which he appears to have been most proud, has been blown apart, and with it has gone for ever any claim by the Prime Minister or the party that he leads to economic competence. He is the devalued Prime Minister of a devalued Government.

3.57 pm

Sir Edward Heath (Old Bexley and Sidcup) : Our nation is suffering from shock and is much confused, and I believe that it is looking to this House today for clarification of the situation and for a detailed discussion of how our country can move forward in the future.

Like the Prime Minister, I should like to congratulate the Leader of the Opposition on his appointment. This afternoon he has carried out the customary duties of a Leader of the Opposition--rather well, in fact--but now we must turn to serious business.

The Prime Minister reaffirmed that he believes that the Maastricht agreement, ratified by this House, is good for Europe and for Britain. I strongly agree. He has also reaffirmed that he does not exclude a return to the ERM at some future date. I should like to say more about that in a moment. He has also reaffirmed that in no circumstances will he agree to a referendum. In that he is absolutely right. I was glad that the Leader of the Opposition succeeded in carrying at least his national executive committee with him in deciding that there will be no referendum. There is no reason why there should be.

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