House of Commons Hansard Debates for 24 Sep 1992

The Chancellor of the Exchequer (Mr. Norman Lamont) : The right hon. Gentleman said earlier that he thought that the rate of 2.95 was too demanding and could not be sustained. Now he is saying that he did not want it devalued. Which is it--or is this just the usual Liberal posturing?

Mr. Ashdown : If the right hon. Gentleman had bothered to listen, he would have heard me say that that rate could not be sustained without other policies to back

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it, such as those that I have just described. Not for the first time, the Chancellor is being highly selective. After all, it was the Government who chose the rate, not us.

There is no refuge for this country on the periphery of a Europe which is moving faster and faster towards closer unity. The right hon. Member for Old Bexley and Sidcup was right to say that the real danger that faces this country is that the core countries of Europe, France, Germany and the Benelux countries--the countries of the Schengen agreement--will now form a tight core. There will be a second-tier Europe, but we will not even be in that. We will be in the third tier of Europe, the slowest lane of all. Sooner or later this country yet again will have to face a decision about where it wants to be. Sooner or later we will be faced with a choice--are we in or are we out? Sooner or later yet again we will be faced with a choice about whether we will be in or out of a system that we have lost the power to shape and lost the will to be a part of. That is the sum of what the Government are asking us to vote in favour of tonight. It is a Government economic policy which has led to the stagnation of the British economy, which now threatens growing inflation over the next two or three years and which is fast leading to isolation. Stagnation, inflation, isolation--that is what the Government's policy has delivered to this country. That is what the Government have brought us. That is what, in the light of the Prime Minister's speech, they now offer us. Their fundamental credibility to govern this country has been, even this early in a Parliament, destroyed. They will not be trusted again. Quite frankly, the sooner they go the better. If we can help that process through tonight's vote, we will.

4.45 pm

Mr. John Biffen (Shropshire, North) : When Parliament is recalled in circumstances such as these, there is always a real danger that the entire debate may be dominated by wall-to-wall Privy Councillors. Therefore, I wish to say immediately that I shall speak for only 10 minutes. I hope that the House will excuse me if I take a relatively narrow analysis and proceed with some celerity.

I wish to discuss the evidence that has accrued over recent months of a growing and effective German power. It is quite legitimate to consider that in the context of a debate that purports to be about the Government's economic policy. Indeed, the topic has touched upon my right hon. Friend the Chancellor's every thought during the past few days.

The House might reflect on the European diary of 1977 to 1981 of Lord Jenkins of Hillhead--I introduce him for the benefit of the hon. Member for Bolsover (Mr. Skinner)--in which he made a most effective analysis of the partnership that dominated the European Community : Germany with its growing economic power and sophistication but a very relaxed political role ; and France, effectively carrying out the politics. We can now see how much that has changed.

On the whole, I welcome that change. I do not align myself with my right hon. and noble Friend Lord Ridley in taking a dire view of the implications of the revival of German power. Germany has a place in the European sun. The disasters in the inter-war years were as much a consequence of the unhappy Versailles treaty as anything else. I do not identify with those who are fearful and resentful of current German authority. However, I am

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realistic enough to observe that that fear and resentment exists on a scale that transforms the European position. That was noted with some anguish by some of my hon. Friends in the decision on the combat aircraft a few months ago. However, it was never so much noted as in the conduct of German economic and monetary management in the context of the ERM.

I acknowledge that the reunification of Germany presented the most enormous economic, fiscal and social challenges, and I could not envisage how the much vaunted power of the President of the Bundesbank failed to prevail over political judgments. However, that was the world in which we were living. My right hon. Friend the Chancellor was relaxed in his language, but our right hon. Friend the chairman of the Conservative party was rather more robust in blaming the Bundesbank for a great many of our difficulties in managing our currency within the ERM.

Many hon. Members here today will say exactly how we should have managed our currency in those circumstances, but I shall not join them. I just wish to offer my good wishes to my right hon. Friend and my appreciation of his past struggles.

The House would be well advised to identify where all this will go. It is a matter of value judgment. I believe that unification has proved such a powerful, traumatic force in the national German experience that it is no good going back to the world of Helmut Schmidt and Willi Brandt--an era so affectionately regarded by many in the House as the appropriate guide to the future.

Germany will be increasingly concerned, I believe, with what lies to the east in terms of unification, but she will also want stability on her eastern border and the opportunity of economic influence through investment in that part of the world. Everything that is made available for that purpose is not made available for financial convergence in Spain, Portugal, Italy or Greece. That brings us to the heart of the Maastricht treaty : whether, in fact, it is a prospective reality, whether, in fact, it is rooted in the present or, in any sense, rooted in a likely future.

The crucial role which has been assigned for Germany was assigned by those living in another time who made an analysis of a situation that no longer prevails. Therefore the likelihood of Maastricht being secured is remote. I am sure that it is distressing to some hon. Members that the peasantry should play a role in French decision taking, but one is faced with the position that, even though the whole business community in France voted yes, a very powerful potential political power has been given to those who voted no. I do not believe that French politics will cheerfully drift back into their previous mould. I do not believe that Giscard has that much of a golden future ; it is more that of a golden oldie. Chirac will almost certainly not be controlling the UDR party in France for any length of time. If I am right in my analysis, we shall see powerful political forces operating in major European countries whose purpose will be to carry out economic policies that will frustrate what is in the Maastricht treaty. It is not a treaty that compels Government action. It is a treaty that lays down a course of action which it is assumed that Governments will follow. However, we have now

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destroyed a great deal of the popular basis of support for those policies and for that treaty. That, it seems to me, is an uncomfortable reality.

I turn to my right hon. Friend on the Treasury Bench and say to him that I did not hide my opposition to the exchange rate mechanism and to Maastricht. However, we are now confronted with a position in which we shall be invited to put on the statute book legislation that has little and lessening relevance. It is that fact which causes speculation. Speculators are not just a lot of yuppies from Essex in their braces. They are people of considerable sophistication. If they see that politicians have committed themselves to courses of action that are wildly improbable, they will draw conclusions that are wholly proper.

May I say, in the presence of the one-time leader of the Conservative party, my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), who coined the phrase "a full-hearted consent" in the context of the European debate, and also to my right hon. Friend the Prime Minister that we have heard from the former leader of the Conservative party that Maastricht is, for him, an integral part of a process to produce one Government, one currency, one state. That, I believe, would lead to its economic provisions being seriously contested and avoided by the member states. On any count, that treaty is unacceptable. To proceed with it in the House of Commons, knowing that it gives rise to the sort of expectations held by my right hon. Friend the Member for Old Bexley and Sidcup and knowing the uncertainties surrounding the economic considerations, the true course of British statesmanship is to turn to one's neighbours and say, "Up with this we will not put." 4.53 pm

Mr. Peter Shore (Bethnal Green and Stepney) : It is always a pleasure to follow the right hon. Member for Shropshire, North (Mr. Biffen). I am particularly pleased that he drew attention to the relevance and importance of the Maastricht treaty to all that we are discussing today. It hangs like a cloud over our future. It has direct relevance to the debate about the exchange rate mechanism. If it were not for the fact that the ERM is supposed to be the first stage of a three-stage process leading to economic and monetary union under the treaty of Maastricht, it would not, I believe, have had the kind of pressures put upon it that we have seen in the last 10 days. The other point that I should bring in under this general heading is that it was the French referendum that led to particular uncertainties, for nobody could be certain what the French people were going to say. Is it not remarkable that, when the people of a country are invited to vote, they register a vote that is entirely different from the expectations of the professional politicians, the classe politique which is so Euro-federalist at present?

When the French Chamber of Deputies and Senate met jointly to decide on the treaty of Maastricht, they voted by about 580 to 68 in favour--at least 8 : 1. When the matter was put to the people of France, it received their consent by a whisker--a 1 per cent. lead. It was the same with the Danes. The Danish political establishment voted for the Maastricht treaty by 125 votes to 25, but when they put it to the people of Denmark we know very well that they rejected it.

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Therefore, I well understand why the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) should feel a certain nervousness about the awful prospect of inviting the British people to consider their own future. He has every reason to be nervous. I say both to him and to others that, if the people of Germany are invited or force their way into a referendum, we may get a very different result from what is assumed by their leaders in the classe politique.

Mr. David Winnick (Walsall, North) : Would not the opposition of the British people be even greater if they had heard what the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) said today? He conceded that a single currency would indeed lead to a single state and illustrated the position in the United States as an example of the federal structure that ought to exist among the member states. Does my right hon. Friend believe that there is the slightest support among the British people for such a concept?

Mr. Shore : One of the great things about the right hon. Member for Old Bexley and Sidcup is that in many ways he blows the gaff. He does speak for a minority view in the House and for an even smaller minority view in the country that wills a federal Europe. The right hon. Gentleman wills the destruction of the British state. He wills the transfer of power to a higher body of federal government in Europe--a united states of Europe that would be something like the United States of America. He wants to hand over all the major, crucial powers of government to that body. That is what he is about. That is what so many people fear is the basic reasoning, the basic intention in the treaty of Maastricht, even though the Government have negotiated for themselves an opt-out from the treaty's most dangerous and sinister clauses relating to economic and monetary union.

Anyone who turns his mind seriously to this question must face up to the issue. If we go along that road and if we are driven to economic and monetary union, we shall virtually say goodbye to our own effective control over our economic life and, inevitably, to our effective control over the political destiny of this country. That is the real question. Although the Government have an opt-out, as it were, they have not yet faced up to that question.

Having watched the events of the last two years since we joined the exchange rate mechanism, we very much fear that the Government are doing their utmost to fall in with the requirements of convergence, which would make it possible for them to join the economic and monetary union in 1994. I cannot think of any other rational reason why the Government should have stuck to the ERM parity of DM2.95 for so long, fought so desperately, raised interest rates to 15 per cent., virtually halved our national reserves and borrowed money from abroad, all in order to keep sterling at 2.95 deutschmarks to the pound.

That is extraordinary. The Prime Minister told us that, when we entered the mechanism, many people supported him. They did not even cavil at the exchange rate. I regret to say that some of those hon. Members should have exercised better judgment.

It is two years since we joined the ERM in October 1990, and in that time things have not stood still in the countries of Europe. Some convergence has been achieved in terms of bringing our too high inflation down towards the European average. Great progress has been made

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there, but that does not necessarily lead to competitiveness which is not only about the rate of inflation but about the efficiency of output. I shall give the Chancellor an example.

In the three years from 1989, the British economy has probably registered an output change of minus 1 per cent. In spite of its problems in bringing together east and west Germany, that country has had an output gain of at least 10 per cent. An economy that has declined over three years is not as competitive as it was in 1989, but in the meantime our principal competitor nation, on which we are basing our exchange rate, has increased its output and

competitiveness by a good 10 per cent. Unless there is a miraculous coincidence in which the rate of growth in all EC countries is the same, that is bound to happen. It is not a question of getting the exchange rate right on joining the mechanism. It is bound to be wrong in a few years because of differences in the rates of growth and competitiveness in different countries. I ask the House and the Chancellor to think carefully about that.

The Prime Minister said that we were overcome by a great tidal wave of speculation. That is a fair point, because there was such a great wave, and it affected other currencies as well. But, more importantly, we were forced to lower our exchange rate and to float because it was perceived by virtually all informed opinion that we were no longer competitive. Evidence of that can be found in our current account trade deficit, which is probably the best indicator. Despite nearly 3 million unemployed and the virtual abandonment of industrial investment by almost all firms in Britain and an immense number of company liquidations, we are still running a trade deficit this year of about £1 billion a month.

Britain is in the grip of the worst recession since the 1930s, but we still cannot pay our way. It is inevitable that, when an economy is seen to be performing as badly as ours, foreign opinion among bankers and Governments will be that the currency is out of line. That leads to waves of speculation of the kind that has finally triumphed.

I have a relevant question for the Chancellor. Do the Government think that we would be better off if we had managed, with the 15 per cent. interest rate and the squandering of reserves, to hold the exchange rate at DM2.95? Does the Chancellor think that we are better off now that we have freed ourselves from the ERM and the exchange rate is DM2.45 to DM2.48? I have not looked at the latest figures, but there has been a significant devaluation of 12 to 14 per cent. Does any hon. Member who is in favour of our membership of the ERM say that we should have remained in the mechanism at the previous rate? Do the Government or anyone else intend rejoining the ERM at a rate of DM2.95 to the pound? If no one proposes that, it looks as if the country may have been done a good turn, because we now have a chance to make industry competitive and begin the process of recovery. We would be foolish not to learn the lesson of what happens to a currency locked into an impossible exchange rate that is bound to attract speculation and pressure. Our exchange rate could be sustained only by interest rates that were so high that they were squeezing the life out of the economy.

We are only in stage 1 of economic and monetary union. If we were back in the ERM and had renounced the pound so that it was impossible to come out or devalue, what would happen? If there were a permanently fixed exchange rate, let alone a common currency, and our costs and prices were not as competitive as those in Germany, it

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would be just too bad. There would be not 3 million unemployed, but 4 million, 5 million, 6 million or more, and British people leaving universities and colleges, after all the good training that my right hon. and learned Friend the Leader of the Opposition is anxious for them to secure, would find jobs not in Britain but on the continent in areas where growth was being sustained.

Mr. Malcolm Bruce : The right hon. Gentleman cannot resist the opportunity to kick the idea of European union while it is down. His opposition is well known. Is he suggesting that sustained devaluation over the years has helped to strengthen the British economy? Was it not the weakness of his party when it was in government that helped to get us into our present mess?

Mr. Shore : It is easy to be emotional about exchange rates, but we must try to be rational about them. Leading people who insist that the index of a country's prosperity or its virtue as a nation should be measured by its exchange rate are quite mad. It is said that Japan and Germany are the two most virtuous countries in the world, but they are not. They are quite efficient countries and they have virtues, but they have immense defects as well.

We should go for a competitive exchange rate that is not out of line or overvalued. That is the only way to secure our prosperity. Of course, there were some post-war devaluations, but since we entered this fixed exchange rate arrangement, unemployment has grown by well over 1 million in the past two years. It is still going up, and nothing will check it.

Mr. Alan Williams (Swansea, West) : Does my right hon. Friend recollect that, when he and I were at the Department of Economic Affairs, the 1967 devaluation was recognised as a platform, not a solution? By 1970, we had turned the deficit into a surplus equivalent to £5 billion at today's rates. We also achieved the highest ever level of manufacturing investment, but those things were all blown away when the Government, led by the right hon. Member for Old Bexley and Sidcup (Mr. Heath), abandoned investment and went for consumer-led growth under the then Chancellor Lord Barber.

Mr. Shore : I recall that, and it is very relevant. I have never believed that devaluation is a policy in itself, but it is a necessary means of achieving not only the opportunity to recover but a balance in the current account, without which long-term measures will not work. That message should be taken on board by all hon. Members.

It is much better for Britain to float than to be locked into a permanent fixed exchange rate, which would destroy the nation. We simply cannot afford to go along that road. If we are to consider rejoining the ERM, as I suspect we shall, we must ensure that the preconditions that the Labour party laid down in its document in late 1989 are met. We said that we had to enter at a competitive rate and must have the power to keep it competitive, and that it must be part of a general policy of expanding growth in the European Community and in trade.

Last, but most important, we must break the link between the ER and the new goal under the Maastricht treaty of entering into full economic and monetary union.

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5.10 pm

Mr. John Watts (Slough) : The right hon. Member for Yeovil (Mr. Ashdown) argued that we might have been better able to withstand last week's pressure on sterling if we had had an independent central bank and the House did not have the right to determine whether Britain joins a single currency. He did not describe any measures that were not already available to the Bank of England last week. My right hon. Friend the Chancellor was not reluctant to sanction massive intervention in the markets or substantial increases in interest rates to protect the parity of the pound. There were no other measures that an independent Bank of England could have taken. The right hon. Member for Yeovil argued that the markets were in some way expressing their doubts about whether Britain intended to stay in the ERM and on course for economic and monetary union. If that is true, what have the markets been commenting on in the past week with regard to the lira and the French franc? Are there doubts about whether France wishes to remain in the ERM or whether it is committed to economic and monetary union? I suggest to the right hon. Gentleman that the markets were commenting on the clear reluctance of the Bundesbank ultimately to be involved in a single currency and on its doubts about whether, with the current policy stance in Germany that is being dictated by domestic concerns--in my view, rightly so--the ERM parities for any of the other currencies were sustainable.

By reaffirming the fundamentals of economic policy, my right hon. Friend the Prime Minister helped to remove some of the obscuring fog that has surrounded the conduct of policy recently, in particular by emphasising the importance of a policy to drive down inflation. The policy that has been pursued since 1988--when interest rates were raised to an appropriate level to counter inflation that has built up from an inappropriately low interest rate policy and when we were following the deutschmark outside the ERM--has brought about a substantial improvement in inflation.

It is a matter of record that I have never been an enthusiast of the exchange rate mechanism. I declined to go through the Lobby to support the motion in the name of my right hon. and noble Friend Baroness Thatcher to approve the Government's decision to enter. None the less, I acknowledge that the first 12 months of our membership helped to reduce interest rates without stoking up inflation. In October 1990, the great imperative was to reeduce interest rates because of the growing recession without causing a serious sterling crisis and a run on the pound. That was made possible only by our joining the ERM. As inflation at that time was much higher, the inflationary pressures that would have flowed from a weakened currency would have added to our inflationary difficulties. Therefore, although I have never been an ERM enthusiast, I acknowledge that, during that period, our membership assisted policy, the central aim always having been to get inflation under control.

For about the past eight months, our membership of the ERM has constrained our ability to reduce interest rates in order to stimulate the economy, which has increasingly become the greater imperative. I have found among my constituents a sense of relief that we are no longer bound by our commitment to the ERM.

There has been much crowing from the Opposition--understandably so--about what has been described as a

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major U-turn in Government economic policy. Opposition Members will not be surprised to learn that I analyse the situation slightly differently. If my right hon. Friend the Chancellor, being aware that the Italian Government intended to devalue the lira, had said, "Let us devalue the pound now," that would have been a U-turn in policy and it would have undermined the credibility of any policy that the Government pursue in the future. But my right hon. Friend did not do that ; he stood by the commitment that he, the Prime Minister and the Government have consistently made to seek to maintain our position within the ERM and to take whatever measures are necessary to achieve that objective. Intervention in the markets ultimately did not succeed in steadying the pound and the sanctioning of two rises in interest rates did not succeed in securing stability for the pound. Those measures were taken against the background of a whispering campaign--whispers in double forte--by the Bundesbank that the pound and other currencies within the system should be devalued. That reinforcement of sentiments already present in the market built up irresistable pressures. I therefore view the decision that my right hon. Friends took not as a U-turn in policy but as a sensible and pragmatic position to adopt. If one is facing a wall, it is not sensible to bang one's head against it ; one turns around and finds another way out of the problem.

The Leader of the Opposition seemed to offer a two-part solution to recent events, the first part of which was the oft-rejected Labour package of spending more taxpayers' money and borrowing a great deal more money. [Interruption.] Yes, borrowing and spending a great deal more than my right hon. Friend the Chancellor has planned to spend or borrow. Such a policy has been rejected by British people in successive general elections. I hope, without intending any personal malice, that the right hon. Member for Islwyn (Mr. Kinnock) does not have the opportunity, by an appointment to the European Commission, to introduce through the European back door policies that have been rejected twice by the British electorate when put forward by the Labour party under his leadership.

The other part of the Leader of the Opposition's approach is what I would describe as "bier and wurst with the Bundesbank". The argument goes that everything would have been fine if the Governor of the Bank of England and my right hon. Friend the Chancellor had got together with the Germans and asked them nicely if they would agree to a general reduction of interest rates. There should also have been a general realignment of rates within the ERM.

That approach was clearly doomed to failure before anyone even thought of trying it. While it is perfectly fair to be beastly to the Germans and the Bundesbank for a whispering campaign to undermine sterling, it is not valid to criticise German policy by suggesting that Germany adopt policies inappropriate to the needs of its domestic economy and its great need to get on top of the inflationary pressures there. It would do nothing to strengthen the economies of the European Community if the motor economy, the German one, took steps that would weaken itself, especially with reference to inflation.

Mr. Boyce : I am a bit confused. The Prime Minister said this afternoon that we will rejoin the ERM once we have discussed the matter. The Germans are not going to be kind to us ; we cannot use a reasoned approach ; and we

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certainly do not have the muscle to use a strong approach. Will the hon. Gentleman therefore explain at what stage we will rejoin and what mechanism we will rejoin?

Mr. Watts : When the hon. Gentleman reads the Official Report tomorrow, he will find that my right hon. Friend did not speak in the terms that he has just misquoted. I am about to turn to Britain's future in relation to the ERM, so I ask the hon. Gentleman to be patient.

It would do nothing to improve the position of any other European economy if the German authorities took decisions inappropriate for dealing with the considerable problems facing Germany. By all means let us criticise the Germans, but let us do so for the right reasons--

Mr. Andrew Hargreaves (Birmingham, Hall Green) : Will my hon. Friend agree that that is one of the reasons why the cosy conversation to which the Leader of the Opposition referred, saying that it should have taken place, may well have taken place? Would he further agree that the Germans might have said no, and that the French might have said, "Not until after our referendum"?

Mr. Watts : That is an interesting speculation, but it would not be helpful to speculate further about a conversation that may not have taken place.

As for the future of the ERM, one of its core members, France, has been under great pressure in recent days. Probably the logic of the situation is that the mark should have been revalued against the currencies of all other member countries to avoid this blow up. What my right hon. Friend the Prime Minister said about Britain's future relationship with the ERM was that there need to be substantial modifications to the system before we can contemplate rejoining it. We could certainly not rejoin the system as it stands ; and the fault lines to which he has referred were clearly the events of recent weeks.

It was argued before Britain became a member that the reason why we were subjected to such great pressures on the foreign exchange markets was that we were not members of the ERM and that if only we would join, the strength of the mechanism would protect us. The events of the past two weeks have shown that the system could not protect us, the lira, or the peseta, and it remains to be seen whether it can effectively protect the French franc.

It seems to me that the very least necessary modification would be a requirement for a symmetry of obligations on member currencies. There cannot be just a one-way bet. A currency that is under pressure should not bear all the responsibility for maintaining its parity. There should be an equal and symmetrical obligation on a currency that is strengthening against its central rate to take action to deal with that. That is an essential component if there is to be any prospect of this country rejoining the ERM.

Looking ahead to the Delors process, the right hon. Member for Bethnal Green and Stepney (Mr. Shore) reminded us that we have not yet moved towards Delors stage 2, under which there would be a commitment to fixed parities. In the light of the experience of recent weeks it seems to me that the only way fixed parities could be maintained would involve an absolute and unlimited obligation on every central bank to convert unlimited amounts of its currency in exchange for the currency of other member states at the fixed agreed rate. So unless there was an obligation on the Bundesbank to convert unlimited amounts of pounds, lira or francs into

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deutschmarks, and hence to expand the supply of marks without limit, this stage could not possibly be made to work.

This is why this country is so fortunate that our Prime Minister and Chancellor saw the grave difficulties implicit in the plan that Mr. Delors presented to the Community Heads of Government--the plan for economic and monetary union--and that they obtained for us the right to decide, when other member states believe that the conditions for union have been met, whether or not to take part in that union.

Mr. Derek Enright (Hemsworth) : Will the hon. Gentleman agree that the so-called Delors plan for economic and monetary union was taken forward on the instructions of the Council of Ministers? Can we get that straight once and for all?

Mr. Watts : My recollection is that, in most of these matters, it is the Commission's power to initiate and to determine the agenda that has led us into so many of the problems faced by member states in recent years-- problems that have brought discredit on the European Community in the eyes of so many of our constituents. I disagree with the hon. Gentleman ; the position is as I have explained it, although I stand to be corrected.

I urge my right hon. Friend the Chancellor not to seek early re-entry into the ERM for sterling, and I urge on our partners the merits of adopting a much more evolutionary approach to economic and monetary union, so that convergence of the economies precedes the creation of new institutions or of a new currency. The lesson that we should learn is that, when economies have become closely integrated, like those of Holland and Germany--there is little in the way of fluctuation between their two currencies--that is a natural process that comes from trade links. We should have a trade-driven Community, and institutions should be created and adapted to meet the requirements of the evolving Community. Bureaucrats or Eurocrats laying down deadlines and creating institutions and then expecting the real world to conform to their master plan cannot succeed. Several Hon. Members rose - -

Mr. Deputy Speaker (Mr. Michael Morris) : Order. I re-emphasise Madam Speaker's plea for concise speeches. The right hon. Member for Shropshire, North (Mr. Biffen) gave a powerful speech in eight minutes--let that be an example to us all.

5.28

Dr. Jeremy Bray (Motherwell, South) : My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) made a point echoed from a different geopolitical standpoint by the right hon. Member for Shropshire, North (Mr. Biffen), but the two have been long-standing allies and they are both still wrong. I should like to concentrate on where we go from here, not on the past.

The economy is in such poor shape that a crisis could have occurred at any time. Certainly, the French referendum was the trigger, but the current account deficit is running at 2 per cent. of GDP and rising, unemployment is at 9.9 per cent., public sector borrowing stands at 6.5 per cent. and is rising ; and even with renewed growth there is

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little prospect of getting public borrowing back under control at present levels of taxation and public expenditure. But even that is not the full measure of our plight.

Given the present rates of taxation and public expenditure there seems to be no level or path for the exchange rate which would bring the current account and public borrowing back to an even keel next year, the year after or at any time in the next decade, so devaluation offers no solution.

I did as careful an exercise as I could on the Treasury model, which the right hon. Gentlemen tried to use to support their arguments--they failed. It is a fairly eclectic model. I ran it in comparisons with other macro models. The results were published before the general election. The picture that emerged most strongly from the Treasury model was that there is no path for the exchange rate that brings the economy back into balance. The other models give greater weight to the improvements in exports of manufactures recently, but that improvement does not seem to be being sustained. The volume of exports of manufactures during the past three months is 3 per cent. down on one year ago, whereas the volume of imports of manufactures is 7 per cent. up although total expenditure is so depressed.

If the markets see no improvements coming through in the current account and from the recent fall in the exchange rate within the year or two it takes the J-curve to work, the pound will slide still faster and still fail to find a sustainable path. All this accords with the attrition of industry that we see in our constituencies. I was content to fight the general election campaign on Labour's platform on the expectation that, as my colleagues opened the books and saw the grimness of the prospects, real weight would have been put behind the measures necessary to improve our technological competitiveness, which is what all Opposition Members have emphasised. Such measures take time to have effect, but if the markets take them seriously--that is a big if--the benefits are felt straight away in increased confidence. The alternatives are either a return to the surgery of incomes policies or severe cuts in public expenditure and increases in taxation--despite the recession. The Government have not yet launched serious new efforts to improve our technological competitiveness. They believe--on reasonable grounds--that incomes policies would not work, so the prospect is for horrendous expenditure cuts and tax increases. The Government will feel that they could not get away with actual wage cuts, but that is probably what their figuring points to.

The countries whose currencies were under pressure before the pound--Sweden and Italy--have now announced savage cuts in expenditure and huge increases in taxation. In this situation what should Britain do?

Recent events certainly show the vulnerability of the ERM in setting up exchange rate targets against which the speculators can pitch their billions, but the treaty of Maastricht made the ERM only an interim stage towards EMU. Within EMU, there would be no room for attack on national currencies--there would be no national currencies to attack.

The problem of global stability would remain, against the dollar and the yen, but that exists now. Also, there would remain the big political question of how we would manage fiscal and monetary policy within Europe. Here, I would say to my hon. Friends that we are not offered

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equalisation of income, social benefits, unemployment or growth inside or outside the ERM and EMU. It would be nice if that is what convergence meant. The choice for us is whether we wish to manage our taxation and expenditure within the stable monetary regime of EMU or within the hazards of the international money markets.

For any country to join EMU there has to be convergence of monetary conditions--of inflation and interest rates, and limits on public borrowing --but those constraints have to be faced anyway, whether in the wilds of the international money markets or in the disciplines of the EMU. EMU offers the best environment in which to make the structural changes we must make in the economy.

We should try, first, to ensure that there is an EMU there for us to join at some time. That means Britain's ratifying the treaty of Maastricht, or its equivalent, which I believe the EC will bring forward, without Denmark.

Secondly, the Government should set out honestly the magnitude of the task we face in meeting the EMU conditions and the path they propose we should take in pursuit of them. There are differences between the way the Bundesbank and Germany see the problem of economic management and the Anglo -Saxon tradition of economic analysis. To British economists, German arguments seem crude and unsubtle ; to German bankers, British arguments seem weak and indisciplined.

The Treasury has not represented the best of British traditions in recent years, and it is in no position now seriously to criticise the Germans. There needs to be much more serious engagement in technical arguments on the design of policies between finance ministries and central banks. In human terms, perhaps the Bank of England is now in a better position to reopen the dialogue with the Germans and the Community that is the Treasury.

Thirdly, the Government have to abandon their uniquely hostile attitude to industrial policy, to practical support at a serious level and to the structural changes needed to secure Britain's technological competitiveness. I am not sure that the President of the Board of Trade has all the answers, but he should at least be allowed to reopen the debate on industrial policy. The magnitude of the challenge is revealed by the fact that we have to increase our exports of manufactures by some 2 per cent. per year--£2 billion--faster than would occur from simple considerations of price competitiveness and the growth of world trade. That is a huge task and the achievement must be sustained for a decade if we are to preserve anything like our position in the world economy. With a clear goal and a viable strategy, the Government must explain to the British people and the money markets the case for the short-term policy adjustments they will have to make. They will have to be painfully honest. They cannot expect to be believed unless they are painfully honest. If they are, and although the Opposition would have priorities different from the path the Government will pursue, I hope that we will not oppose such objectives as I have outlined or seek to frustrate their achievement.

5.37 pm

Mr. Terence L. Higgins (Worthing) : I do not think that anyone would argue that my right hon. Friend the Chancellor of the Exchequer has had an easy time in the past two weeks. I have particular sympathy for him as I was the Minister responsible for international monetary

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affairs when we joined the European currency snake--the precursor of the ERM. I studied the record and noticed that we joined on 1 May and left on 23 June. My right hon. Friend has done a great deal better than we did. We then floated the pound.

It is worth remembering that the Government joined the ERM under the leadership of the former right hon. Member for Finchley. The move was supported by the vast bulk of the Conservative party, by the Opposition and by the Liberal party.

Mr. Bob Cryer (Bradford, South) : It was not supported by this section.

Mr. Higgins : Indeed. It was not supported by all sections of the Opposition.

The rate at which we joined the ERM was not the proper one, although it was, of course, the market rate. Subsequently, there was German reunification and the German Government insisted on a particular exchange rate between the east and west German currencies, contrary to the advice of the Bundesbank. The Bundesbank effectively took its revenge be raising interest rates and we have been suffering ever since.

The Government could not readjust the exchange rate without undermining their declared policy of fighting inflation, so we have gone from month to month in the same situation, It is not so much that the Humpty Dumpty structure of exchange rates that existed when we joined fell off the Berlin wall as that the wall collapsed underneath it.

I feel strongly that, over the past few days, the Chancellor, having declared his policy very clearly, did everything possible to achieve the aims of that policy. It has been suggested that, 10 days ago, there was a good deal of confusion. I believe that anyone who had sat down to deal with the position a day before all that confusion, and all the pressures in the exchange market, would have done exactly what was done by my right hon. Friend. He would have intervened immediately, as far as reasonably possible, and then raised interest rates ; he would have threatened to raise them further, and then waited to see what would happen at 4 pm. At that point, he would know whether he had won.

As soon as it was clear that he had not won, it would have been entirely appropriate to move the interest rate in the other direction and to float the pound ; it certainly would not have been appropriate to fix another specific rate. I believe that my right hon. Friend did all that he could, in the circumstances, to stick to the policy. Now, however, we must look forward--as, indeed, my right hon. Friend has done--while again stressing the vital importance of the battle against inflation.

The crucial issue is surely the level at which the Government should seek to set interest rates. There is a fundamental balance to be struck. First, we need to set the rates at a level that will result in the pound's settling down at a competitive rate, in relation not only to European currencies but, in particular, to the dollar. The dollar, after all, has been at a very competitive rate : in any previous period, we would have heard complaints about competitive exchange depreciation, beggar-my- neighbour policies and so forth.

My right hon. Friend, then, must bear in mind the need for interest rates that will bring about a competitive exchange rate. Against that, however, he must set interest rates that will enable him to fund the public sector deficit

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from the non-bank public ; otherwise it will not be possible for him to control the money supply, and that must be crucial in the battle against inflation. My right hon. Friend must consider that balance very carefully as the markets gradually settle down. Having said that, I must add that, in that sense, the smaller the public sector borrowing requirement the better. The need for public expenditure control is very important.

Let me now refer to what was a matter of some controversy for the Treasury Select Committee during the previous Parliament. The Government seemed at that stage to change their position. It would not be right to cut public expenditure to compensate for the fall in revenue and the increase in unemployment benefit which have resulted from the recession. The so-called automatic stabilisers should be allowed to work ; otherwise we shall deflate too far.

I should add--as the Prime Minister said in his speech--that, while we must seek to control public expenditure, we need to get the priorities right within that public expenditure. It is not just a question of cutting ; increases are needed in certain sectors, to ensure--over, say, a year or 18 months--a rise in employment and tax revenues, and a reduction in unemployment benefits. I very much hope that it will be possible to include such positive measures in the autumn statement, in conjunction with an overall control of public expenditure.

It is, of course, always the case that, if a country devalues its currency, the exchange rate will not stick unless deflation takes place as well. I consider that, in the present economic circumstances, the degree of deflation that we already have is probably sufficient to enable the exchange rate to stabilise at a level that is competitive and does not add to inflationary pressures. These are complex and difficult issues, but I believe that the present circumstances do not call--as did all previous devaluations--for a policy of deflation.

When, if at all, should we rejoin the exchange rate mechanism? I assume for the sake of argument that it will still be there tomorrow morning, although that may turn out not to be the case : the Bank is under considerable pressure, and the Spaniards have introduced a fixed rate. We should appraise that question in the light of our experience over the past few days.

My right hon. Friend the Prime Minister referred to fault lines in the system. I think that we face a fundamental difficulty. Criticism has been directed very much at the Germans, but we must distinguish between the German Government and the Bundesbank. The German Government have effectively abdicated authority over many of the most important economic levers with which an economy can be controlled to the Bundesbank, an unelected body which is entirely beyond control. I take no account of the silly little cut in interest rates that it made a few days ago ; that, in my view, was intended merely as an insult.

I very much doubt whether it is possible to run an exchange rate mechanism over a broader range of countries than the narrow range of countries around Germany while an independent central bank is operating in Germany. This raises difficult questions. I certainly do not go along with those who argue that we should have an independent central bank here, for the reasons given by my

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