House of Commons Hansard Debates for 24 Sep 1992

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hon. Friend the Member for Slough (Mr. Watts) : in my view, the Governor of the Bank of England did everything possible in the circumstances, and could have done no more had he been independent. Mr. Delors, Mr. Bangemann and others have suggested that the problem arose because we were not operating a single currency. I believe that the argument that we should solve our problems by rushing into a single currency, quite apart from being unworldly, is unbelievably dangerous. If we gave up the present arrangement for all time--long before the introduction of any degree of convergence--in favour of a single currency, parts of the Community would suffer from perpetual unemployment. Moreover, the demand for more and more cash to flow across the exchanges would cause terrible political tensions--although I believe that it would never happen in any event. Those tensions would be vastly greater than they would be if we acted in 10, 15 or 20 years' time, when reasonable convergence had taken place.

Finally, let me say something about the Maastricht treaty. Our dilemma is this. From a British point of view, the negotiation at Maastricht was remarkably successful : once the Community had refused to introduce a general opt-out clause to which anyone could subscribe, my right hon. Friend the Chancellor said, "Very well, we will write our own," and that is what we did. Our clause included many measures--on the fiscal control side, for instance--that we would never have secured in a general clause. I consider it highly unlikely that, in a new negotiation, we would ever obtain terms as good as those that we now have.

We should watch carefully to see how matters develop. My right hon. Friend the Prime Minister said that, for the rest, it must be an ambition postponed. Surely, in the light of the events of the past two weeks, the idea that we can actually proceed on the timetable proposed at Maastricht-- although, as has been pointed out, we have been excluded from it--must breathe some air of realism, across the Community, into those who have adopted the almost pro-federal approach that has been reflected in some speeches this afternoon. These are highly complex issues, entirely unsuited to a referendum. The concept of a referendum is, in my view, an alien one, completely incompatible with our system of a representative parliamentary democracy that allows us to consider the issues in depth. If we do that we shall find the right solution, and it will be seen that the way in which the Government have handled their economic affairs in recent days has been wholly appropriate. We shall then be able to continue to pursue an anti- inflation policy, and to get the economy going again.

Mr. Cryer : On a point of order, Mr. Deputy Speaker. I wonder whether you have been notified by the Government of any request for a statement about the resignation of the right hon. and learned Member for Putney (Mr. Mellor).

Mr. Deputy Speaker : I have had no such request from any quarter.

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5.49 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch) : It is a great pleasure to follow the former Chairman of the Treasury Select Committee, although I do not agree with everything, or indeed much, of what he said.

I am interested in the fact that the sounds that we are hearing in the House are different from those that we heard in July. The Conservative party will hereinafter be known as the party of devaluation ; the party with policies that are both calculated and designed to create inflation ; the party that does not understand the workings of the international monetary markets ; the party that is led by a Prime Minister who, on his own admission, has betrayed his country because there is a fault line in his brain. The Labour party will hereinafter be known as the party of monetary responsibility ; the party that, when the sterling crisis was at its height, stood to attention and sang "Land of Hope and Glory" before declaring that never again would the pound in our pockets be devalued ; the party that, in the pitiless pursuit of political virility, put that before intellectual integrity--perhaps the least valuable currency in politics, even less valuable than the pound.

Today of all days should be a day of penitence in the Chamber on the part of the British political establishment. Their folie de grandeur over the value of the pound has cost the British taxpayer between £500 million and £750 million, perhaps even more. Outside the Chamber there are people who are out of work, people whose homes have been repossessed and people without a future. They are asking why the establishment has let them down so badly. They believe that, if politics is to be more than a means of rising in the world, our political leaders must learn from their mistakes. Their message to the Labour Front-Bench team is that, if democracy is to succeed, politics has to be about competing ideas, not elites competing for political power.

It is not often that I agree with international financiers, who every day push about $1,000 billion across the foreign exchanges, sometimes in a speculative frenzy. But I believe that those poisonous vipers who speculated across the exchanges on black Wednesday were right and the politicians were wrong. Sterling's parity against the deutschmark was unsustainable ; the right course was devaluation--the word that dare not speak its name. The fault lay not with Germany, Chancellor Kohl or Mr. Schlesinger, the president of the Bundesbank, but with British politicians, British civil servants and the Bank of England--an institution that claims to bat for Britain, although one would not think so to judge from its role in black Wednesday's debacle.

For at least two people in Great Britain it should be hail glad confident morn never again. I refer to the Chancellor of the Exchequer and Sir Terence Burns, the permanent secretary at the Treasury. Those hapless characters behaved like physicists defying the laws of gravity or mathematicians who, when adding two and two, continually came up with any answer but four. If the Chancellor of the Exchequer has a brilliant mind until he makes it up, no one is better at giving in to his own mistakes than Sir Terence Burns. Some people are smirking at the Government's plight since black Wednesday, saying that they have no policy on inflation, no policy for recovery. Sanctimony in the expression of unctuous

self-satisfaction is not my style, so

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I would not dream of saying, "I told you so." However, for the record, on 15 June 1990 in the House I argued, using the fundamental exchange rate theory, that Britain should enter the ERM at DM2.60 to the pound. My argument was based on the need for a real exchange rate which, in the medium term, would generate a sustainable account on the balance of payments. Subsequently, and since we joined the ERM, I have tried on four occasions on the Floor of the House to enlighten the Government on the need for devaluation. They took no notice and the result is there for anyone to see.

As the recession tightened, there was another obvious reason for devaluing the pound : the need to reduce interest rates. My argument has always been that devaluation was a useful and necessary step for economic recovery, but a far from sufficient condition for recovery. In current circumstances, it merely helps to provide a macro-economic framework in which other measures can be made to work. The Labour Front Bench team's policies on housing, employment, training and investment are relevant in that context.

Mr. Winnick : I am grateful to my hon. Friend and share his criticisms of Government policies. However, he might remember that, when he spoke in the debate on the Maastricht Bill in May, he was extremely enthusiastic about the measure, and wondered whether he should vote for it. Does he agree that, if we were in that framework--I hope that we never shall be--we would certainly not have the flexibility that he rightly advocates now?

Mr. Sedgemore : I am one of those old-fashioned, fastidious people who believe that a speech should have a beginning, something like a middle and something like an end. My hon. Friend the Member for Walsall, North (Mr. Winnick) has raised an issue that I shall discuss at the end of my speech--I certainly shall not duck it. My hon. Friend falls into the category of most of those anti-Europeans who are and were opposed to ERM. The mistake they make is that they are drunk on devaluation and believe that one devaluation after another, or a permanently depreciating pound, provides the cure for all our economic ills.

My hon. Friend asked about the future. I believe that we must reject the idea from the plebs of Southend and the nobility of Chingford that we can stop the world and get off, that we can henceforth act in splendid isolation from our European partners, ignore the decisions of the Bundesbank and prepare once again to fight the Germans on the beaches and on the landing grounds. Such Europhobic fantasies are, as the Italian Prime Minister said when rebuking our Chancellor and Prime Minister, for five- year-olds only. Certainly, only a five-year-old could have advanced the idea a fortnight before Armageddon that Britain would have the strongest currency in Europe.

I do not believe that the Government intend to rejoin the ERM this year, next year or the year after that. The Government do not have the slightest intention, whatever happens to the Maastricht Bill, of accepting the main thrust of the treaty. We are about to witness one of the greatest exercises in political hypocrisy ever seen in Britain. Ministers will talk good about Europe, but, in practice and behind the scenes, they will slowly try to unravel the progress made in the past two years. The Government are

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about to betray Europe, and 'twas ever thus. I imagine that Foreign Office officials are competent enough to carry out that policy as they have been doing for the past 200 years.

The Government have cast aside the ERM and are casting around for old and new fly-by-the-seat-of-the-pants monetarist signals : M0, M1, M2, M3, M4, M5, DCE, house prices, asset prices, PSL1, PSL2 and God knows what other bogus indicators. One might as well try to control the economy by tracking the prices of second-hand lavatory seats. Last week our economy was under the control of financial speculators ; this week it is back in the hands of Thatcherite quacks. At present, the only sensible option open to the Government is to go for a system of managed exchange rates. In the medium term, a new exchange rate system for the Community would involve three substantial changes from the ERM and two changes in Britain's domestic policy. At EC level, three changes are necessary. First, a semi-fixed system of exchange rates cannot be operated as if it were a fixed system. The flexible operation of any system has to allow for devaluations. Secondly, as the Chairman of the Treasury Select Committee said, currency realignments should be more symmetrical. Strong currencies have to be prepared to appreciate just as weak currencies have to be prepared to devalue.

Thirdly, we must create within the international monetary system weapons to enable Governments to take on the speculators. I know that people sneer, but I see no way to achieve that without some new form of exchange controls. We should do what we did when we last introduced exchange controls : send a little man from the Bank of England away for a fortnight and tell him to come back with a new scheme. I am sure that it can be done.

Two changes are required in domestic policy. First, we need to place more reliance on fiscal policy rather than on allowing interest rates to take all the strain. Secondly, domestic credit expansion should be controlled by administrative and other direct interventionist measures, as well as by interest rates.

The ultimate goal should still be the creation of a single European currency. I suspect that Germany, France and a few other countries would go ahead, leaving Britain behind. I suspect that Britain will have to pay both the political and economic price of last week's catastrophe for a long time to come. Let no one forget that that price has been brought to bear through the mistakes of the very political establishment that says that it supports European integration.

Yesterday, the Shadow Cabinet redeemed themselves by backing the idea of a single European currency and warning against the dangers of a referendum. The Government have done nothing to redeem themselves, and I shall happily vote against them in the Lobby tonight. Several Hon. Members rose --

Mr. Deputy Speaker : Order. I remind hon. Members of the 10-minute rule between 6 o'clock and 8 o'clock.

6 pm

Sir Peter Hordern (Horsham) : I know that the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) will forgive me if I do not follow him, because of the shortage of time.

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I thought that the speech by the Leader of the Opposition was brilliant--for a Leader of the Opposition--but it masked the fact that for the past two years his policy has been to shadow the deutschmark at a rate of DM2.95, which has also been the policy of the Liberal party and has certainly been the policy of my right hon. Friends. Now that that policy has come unstuck, a great howl of triumph has emerged from critics of the exchange rate mechanism, who say that one cannot buck the market.

It is worth examining what they mean. Saying that one cannot buck the market is not in itself an economic policy ; they really mean that we should return to the days when we tried to run monetary policy by watching carefully the course of M3, M0 and M4--and all those other forms of enjoyment--which caused such great difficulty. That policy was not effective, and because of what was then called the benign neglect of where our currency stood, the pound has fallen. Whenever it has fallen, higher inflation has followed after a suitable lag.

It is not surprising that that is the case, because overseas holders of sterling recognise that the pound is not going to remain strong, and demand an ever higher interest rate for keeping their money in sterling. During the time that the pound floated freely, that has been very damaging.

Many people now think that it is fashionable to have a floating pound. I must remind the House of the time when we had a fixed rate, with the Bretton Woods agreement. At that time--in 1963--there were $2.80 and more than DM11 to the pound. Short-term money rates were 2 per cent. and the Government could borrow for 20 years ahead at 5.3 per cent. That is so far beyond the bounds of possibility now that no one can believe it. Yet it was achieved by a fixed exchange rate system with the US dollar.

The thrust of my right hon. Friend the Prime Minister's policy to have a fixed exchange rate within the ERM was absolutely correct from that point of view. It was successful in reducing interest rates from 15 to 10 per cent. and markedly successful in reducing the rate of inflation to its present rate. I was a keen advocate of monetary policy and control many years ago, but I have to admit that it was a failure. For that reason, Baroness Thatcher brought us into the ERM. So sure was she that that was a good step, and as a mark of confidence in the pound, on joining we reduced interest rates by 1 per cent. At that time, there was no talk of bucking the markets. When we joined the ERM, we thought that we were joining a currency--the deutschmark--which would exhibit its sober and exemplary record of low inflation and low interest rates. No one imagined that the Federal German Government would have an enormous row with the Bundesbank about the cost of East Germany, that the Government would refuse to raise taxes as they should have done, and that the Bundesbank would raise interest rates instead. That has produced a strain on Europe which has been difficult for other currencies, including our own.

I am sure that my right hon. Friend the Chancellor did his best, and I do not believe that he is to be blamed in any way for the holocaust which has swept over the lira, the franc and the peseta, as well as sterling.

The important question now is what is to be done. Some of my right hon. and hon. Friends seem to think that we can reduce interest rates to 5 or 6 per cent. right away, and bother the pound. I read that my right hon. Friend the Chancellor was said to be cheerful after devaluation and even went so far as to sing in his bath. I regard any cheerful

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Chancellor with the greatest possible suspicion. I remember that Lord Barber was about the most cheerful person that one could ever hope to meet--look what happened to him.. Denis Healey once won a prize in Germany for comedian of the year. Of course, that says more about the Germans than it does about Denis Healey. When I see a Chancellor looking happy and content, I am very cautious. I hope that my right hon. Friend the Chancellor will take to heart his admirable speech to the European Forum in July, and will be very chary about reducing interest rates. There is no room for any further reduction at the moment. I say that because our monetary policy was tried for an extensive period. People say that we failed to apply it properly and that we should have done it in 1988, instead of reducing interest rates to 7.5 per cent. in that year. It is interesting to note that that year interest rates were quickly increased, to 12 per cent. in August, and by November they were at 13 per cent. The take-off in bank lending did not occur until the following year. It is extraordinarily difficult to run our economy and to control inflation, quite apart from the difficulty of monetary targets. There is a delayed effect and there is also the difficulty of having an impact on the spending public once they have got it into their minds that spending is the thing to do.

I commend my right hon. Friend's remarks to the European Forum. I have taken them to heart and I trust that he will also do so. All that throws considerable doubt on the single currency. That doubt is properly shared by the Government and that is why we have the opt-out. That is a sensible thing to do. If a single currency is to be gained by the terms and conditions set out in the Maastricht treaty, there is no possibility that a single currency will be reached, because all the countries are way above the 3 per cent. limit for deficit for gross domestic product, including Germany. Germany's deficit is rising faster than that of any other country. Surely we wish to broaden the boundaries of Europe and to take in the countries of eastern Europe as well. I do not see how we can do so with the strict conditions that exist for the single currency. I should prefer to proceed with broadening the bounds of Europe than with achieving a single currency, which would put an impossible straitjacket on any natural development of the European Community. Our posture on the single currency-- the opt-in and opt-out arrangements, if we should wish to do so--is entirely right. The truth is that we cannot isolate ourselves from world markets. We have to have regard to the value of our currency. We cannot afford to let sterling fall too far without causing damaging inflation and job losses. I hope that we may ultimately rejoin the ERM, once the Germans have sorted themselves out and reduced their interest rates. I do not say that with any particular enthusiasm for Europe, but simply as the best long -term method of dealing with inflation and with more than inflation.

It is nearly 30 years since inflation was consistently under control. A whole generation has grown up knowing and expecting nothing else. Property empires and service industries have been built up expecting nothing but inflation. We read about upwards-only rent reviews. What has that done to manufacturing industry, which depends upon stable prices for investment, stock and work in progress? In the past two years, inflation has been brought right down. Of course there is still some way to go, but for the

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first time in many years business has had to win new orders by reducing prices and offering better services, not simply by offering more floor space to satisfy swollen spending. That has been a sea change over many years. After all the hardship of the past two years, it would be criminal folly to allow prices to rise again. That is the key to a successful economic policy, and I trust that we shall stick to it.

6.10 pm

Mr. William Ross (Londonderry, East) : When Charles Haughey, as Prime Minister of the Irish Republic, was confronted by a series of crises, he always described them as grotesque, unbelievable, bizarre and unprecedented. A much more acute mind than mine immediately shortened that description to "GUBU". If that word had found its way into the dictionary, it would have been much over-used last Wednesday, because it is so descriptive, and fits perfectly what was happening in the markets to the Government's whole economic strategy. We did not simply wake up last Wednesday to find that that situation had been created overnight. Its genesis lay some time in the past, when the Government decided to grant control of United Kingdom's economic life to hands that were not British, and were not responsible to the British people. They did that by fixing the value of the pound in relation to other currencies.

When the Prime Minister ascended the steps of the throne left vacant by his predecessor's departure, those steps were heavily stained with her political blood. Her political assassination and replacement represented more than a change of personalities. They were the outward sign of the triumph of a different policy within the Conservative party.

So far as anyone outside the Conservative party can judge, the previous Prime Minister viewed the concept of monetary union and its inevitable consequence--a federal European super-state--with some misgiving. It was interesting that her predecessor, the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), said today that he believed a single currency to be the natural outcome of the road upon which Europe has set out. That was not clearly said before 1972, and even today it is rarely said by people who are in favour of the economic Community. It is said only by those such as myself who are against the concept.

I wished to ask the right hon. Member for Yeovil (Mr. Ashdown) a question during his speech, but he did not give way to me. If the right hon. Member for Old Bexley and Sidcup, a former Prime Minister, were still here I should ask him the same question. When a single European currency comes into existence, will it float, or will it be fixed to some other currency? I believe that it will float. I do not see how it could operate otherwise. People are really saying that, if an economy is big enough, its currency can float. I do not accept that that idea is necessarily tied to large economies ; it is tied essentially to successful economies. In so far as the market value of the currency is a measure of how that economy is doing, we should accept that. Whoever succeeded Margaret Thatcher as the leader of the Conservative party would have been the prisoner of those who brought her down, and would have had to tread a path different from hers. Over the past few years, that is what has happened.

The policy of the Ulster Unionist party on such matters is clear, and was set out in our manifesto. We had hoped

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that that manifesto would be widely read, but it appears to have escaped the eyes of some--certainly those of the Prime Minister. Whenever the right hon. Gentleman referred to people who agreed with the Government's policy he described them as "the Opposition parties", and said that they all supported the same thing. However, the Unionist manifesto said :

"Two distinct strands of Treasury affairs have to be recognised and addressed. In the first place, the whole question of control of national finances is central to the exercise of power because without such control no Government can be master in its own house. Ulster Unionists are, therefore, opposed to the concept of European monetary union and a single currency since the inevitable consequence would be the transfer of this most fundamental power of government from the elected representatives of the people of the United Kingdom to an unelected body which cannot be dismissed from office by United Kingdom electors.

For the same reason, we oppose the creation of an independent central bank. National Governments should have the courage to exercise responsibly the power conferred by the electorate. Ulster Unionists are committed to the concept of a balanced budget and, in the long term, to the reduction of the national debt."

I believe that the Chancellor of the Exchequer will agree that that is not the policy which the Prime Minister suggested had been pursued by all the Opposition parties. We certainly did not and do not accept that it is.

Because that was our policy, I asked the Chancellor after his autumn statement last year whether the increases in public expenditure that he had signalled foreshadowed an abandonment by the Government of the concept of a balanced budget. He replied that he intended to balance the budget over the cycle. I have heard a lot of elaboration on that theme, but I must say that it still does not mean very much without such elaboration. The reality was that, with a fixed exchange rate, the Chancellor's room for manoeuvre was severely restricted. He was back in the position of every Finance Minister who has to wrestle with the attempt to hold a fixed value for a currency which is constantly changing under market pressures.

One more burden that has to be borne by politicians in such a position is that they have to be economical with the truth in any public statements that they make on the subject. They cannot be as open, frank and truthful about the economy and the real value of the currency as they would wish. Like Mr. Helmut Schlesinger, they make comments for public consumption and discuss the truth in private. The Government--any Government, but especially the Prime Minister and the Chancellor of the Exchequer--have to defend their stated position to the last ditch before they change. If they did not fully understand that before, I am sure that the Prime Minister and the Chancellor of the Exchequer now have burnt into their brains that simple truism : "You can't buck the market." The market value of the currency reflects the performance of the whole economy of the nation. It is strange to me, and to any objective observer, that the party that worships at the altar of the market in relation to every other commodity, whether labour costs, the price of turnips or the price of energy, had to spend £10 billion during the ignominious escapade last Wednesday before finally capitulating to the very market forces that they so respect and applaud in every other sphere. Our

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Government paid out £10 billion, and the Germans paid out a lot of deutschmarks for pounds that are now worth much less than what was paid for them.

Her Majesty's Opposition and the Liberal Democrats are equally loud in condemnation of the Government. The Ulster Unionists have scant regard for their censure. For years those parties have been demanding that the Government go faster down the slippery slope on which they had already set out.

The world did not end because of the events of the past two weeks, and it will not end. Both the Government and the Opposition are now scrabbling around looking for new policies. The Labour party has apparently gone for "floating and flexible". To me that means that, instead of holding on until the last ditch one goes down the steps as soon as one possibly can. If it does not mean that, no doubt we shall be told what it does mean. I should like to know, because that seems to be the only way in which it can work. A currency either floats and reflects its true value in the market or it drops in large and small steps. Those are the only ways in which the system can operate. The Government are returning to limits on spending. However, if they have learnt anything from the past two years they will not be regarded as having taken the nation through a defeat. They can accept it as a golden opportunity. Recent events have returned to this Parliament the fundamental power of financial control which was so foolishly and tamely handed away, at a high cost to individuals in this country in terms of homes, jobs and businesses.

There will of course be an autumn statement this year. This time the Chancellor of the Exchequer and the Prime Minister will be free agents as they have never been within the confines of the ERM. They can do something about interest rates--but not too much, because the productive capacity of the nation has been so reduced that we could not produce the goods which a relaxation of monetary policy would allow to be purchased. More imports would be sucked in.

The Government can do something about the projected public service borrowing requirement--but not too much about that either in the short term, because the framework has already been set for next year. I know that the Government will not call that autumn statement a Budget, but the reality is that there will be an autumn Budget, and it will be a long time before we are back in the ERM.

6.19 pm

Mr. Kenneth Baker (Mole Valley) : Some time ago the right hon. Member for Bethnal Green and Stepney (Mr. Shore), in an illuminating aside, said that there was too much passion in exchange rates, and I would agree with him. People invest into exchange rate systems a degree of intensity and passion which is not needed. One should address the problems of exchange rates drained of passion, with a cool realism, and see what is in the best interests of one's country. That is really the job of the Chancellor of the Exchequer whom I therefore congratulate on withdrawing sterling from the ERM last Wednesday. [Interruption.] My right hon. Friend needs a few congratulations. There have not been too many winging around in the course of the past few days.

My right hon. Friend also knows clearly the reservations that I have always had about the strength of fixed parity systems. I expressed them to him when I was

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in Government and after I left the Government. The advantages of fixed parity systems have been exaggerated this century. One has only to consider the trouble that this country got into by being fixed to the gold standard in the 1920s. That led us into the slump and the then Chancellor of the Exchequer, Winston Churchill, described that experience in a memorable phrase when he said :

"I wish that finance had not been so proud."

In addition, the fixed rate system of Bretton Woods came to an end in the 1960s and collapsed in 1971 when my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was Prime Minister and we welcomed that.

The advantages of the ERM have been exaggerated and they have been made more difficult for our country by the fact that the German economic cycle has not been in tune with the British economic cycle, and vice versa, for about four years. When we shadowed the deutschmark we had in effect to reduce interest rates at a time when we should have been increasing them. In 1990 we entered the system which I argued against at the time but I did not win the argument. We entered at a time which was historically difficult because Chancellor Kohl had made a political, not an economic, decision to pay for the reunification of Germany, not through the German taxpayer but by borrowing. The inevitable consequence of that was higher interest rates just at the time when Europe and Britain needed lower interest rates.

One cannot blame Mr. Schlesinger or the Bundesbank. Their job is to be concerned with the German money supply. They cannot be concerned with jobs in Yorkshire, Surrey or London. Mr. Schlesinger took action to control the German money supply and figures yesterday show that he was probably wise to do so since the German money supply is now increasing and it increases for every franc that is bought. I hope therefore that the search for a replacement of the ERM will not be too vigorous. I notice that the Prime Minister said that we cannot readily return because there are fault lines. The thing about fault lines is that they are there from the beginning and they are there after the end. The only thing that one can do about fault lines, as any geologist knows, is to wait for an eruption of the earth's surface and then they will be corrected. The search for a system of managed exchange rates is difficult. Such a system is likely to be inherently unstable. The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) put his finger on that, as did other hon. Members. If one wants a stable system one is driven to a single currency, a single monetary policy, a single bank, a single fiscal policy, a single Budget and a single Government. I for one would not want Britain to go down that route.

I hope that on the minutes detailing conditions for re-entry into the ERM which I am sure are winging their way up to the Chancellor from the officials of the Treasury the Chancellor will scribble Kipling's comment :

"Only the burnt fool's bandaged finger goes wobbling back to the fire."

This debate has been something of a search for people to put in the pillory --the Chancellor or the Prime Minister. Sir Terry Burns has also been mentioned. I have little sympathy for him because one does not have to be in Government for long to know that the economic pundits and the mandarins of the Treasury are held in high esteem in Whitehall, not least by themselves. Their advice has been not marginally wrong but comprehensively wrong.

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They have also failed to forecast the extent and depth of the recession. The Treasury forecast in the future will be given the validity that is accorded to a horoscope. The great Treasury forecasting computer has no more validity than the crystal ball and the gipsy's tent.

I hope that my right hon. Friend will follow the path that he has already mapped out. I welcome the reduction in interest rates. I heard what my hon. Friend the Member for Horsham (Sir P. Hordern) said. We must not abandon an anti-inflation policy. That is important. Floating should not be inflating. I accept that. But in my judgment, with the money supply growth in Britain virtually negative at the moment, there will be scope for further cuts in interest rates. That is certainly what British business needs and it is certainly what British homeowners need. My right hon. Friend now has scope to do that. Therefore, I welcome the road that I think that he will be treading.

It seems irrefutable that last week tore a gaping hole in the Maastricht treaty. The centre of that treaty is economic and monetary union. Clearly, there are hon. Members on both sides of the House who want that to come about. I do not believe that that accords with the real interests of our country. The Danish and French referenda have shown vividly in the past six months that there is a movement across Europe which is not anti-Europe but anti-bureaucratic and against a centralised and bossy Europe. That is what I believe the no votes in France and Denmark were saying and what many people in Britain feel. The Danes have given us an opportunity to think again about the next step forward. Clearly, there will be significant changes to accommodate the Danes. We heard today from the Prime Minister that we will want to know what those changes are. The House will want to debate those changes. It may well be that we will want some of those changes for our country as well. Why should there be changes for just one country in a Community of Twelve? We shall want to examine that carefully.

Mr. Toby Jessel (Twickenham) : Is my right hon. Friend aware that one of the changes likely to be proposed by the Danes, which was not mentioned by our right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), concerns nationality because the Maastricht treaty contains a provision that anyone who is a national of any of the 12 member states thereby becomes a citizen of the European Union ? There is a rising tide in Denmark to be exempted from that, perhaps by way of a protocol.

Mr. Baker : I am grateful to my hon. Friend. That is an important matter ; but much more important is what is described by that rather ghastly word subsidiarity. The paragraph in the treaty dealing with that is vague and meaningless, and to the extent that it is interpreted it will be interpreted by the court which is obliged to make decisions in favour of European integration. Therefore, one needs to know exactly what that means. Subsidiarity is not the Commissioners saying what they will leave to us but what we as nation states are prepared to allow the Commissioners to do on our behalf. This centres upon the Commission. The Commission is too powerful. It is interesting how quiet the Commissioners were in the run-up to the French referendum. They were overcome with modesty. They had no ambitions. But as soon as the referendum was over Commissioner Bangemann went on television and, misquoting Nelson, said, "Now is the time for you in Britain to do your duty."

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He has learnt a little of our history, but we do not need lectures from Mr. Bangemann. He is a federalist. He has admitted that he wants a united government of Europe with him in a prominent position in it. When I was Home Secretary he was the Commissioner who led the campaign against Britain retaining its own immigration controls. Therefore, in the re-examination of Maastricht, we shall have to address the powers of the Commission, and that will be important. I am clear that Britain will be inextricably linked with Europe in the future as it has been in the past, but Britain's future in Europe is not that envisaged by the Euro-fanatics. I want to see a wider and looser Europe. I want to see a Europe which draws its vitality and strength from the nation states because that will provide the growth and vitality of Europe in the course of the next 10, 20 or 30 years. I want to see Europe not at any price but at the right price. Above all, I do not want a united states of Europe but a united Europe of states.

6.29 pm

Mr. Tony Benn (Chesterfield) : On 18 August, I wrote to Madam Speaker asking for Parliament to be recalled. I must tell the House that this has been a totally unrealistic debate. Why did people want Parliament recalled? I will give three examples. One man telephoned me and said, "I am going to be evicted on 5 September. I have a mortgage and I owe £700 to a finance company. I am paying it off at £120 a month, but I am still to be evicted." I was unsuccessful in getting that action stopped. Am I to tell that constituent that we are squeezing inflation out of the system?

When I was first elected, 25 per cent. of the employment available in Chesterfield was provided by the coal industry. Soon there will not be a pit left. Am I to tell them in Markham, "We are shadowing the deutschmark"? I met an unemployed building worker who is also homeless. What was I to say to him, "We are managing our currency"? Today, the House has failed to speak for the people that it represents. It has held a second-class, management seminar, addressed by a lot of people who would not even qualify to appear on "Newsnight".

I will not make a political speech, but my own opinion is that this country's problems will be solved in Britain, by us--and only when we have solved them will we be able to have satisfactory relations with other countries. If we want an industry, we must see to it that there is an industry. We do not leave the police, Army and hospitals to market forces ; we decide to have them. Agriculture has been sustained that way. No economic magic--devaluation, floating pound, exchange rate mechanism or independent central bank--will guarantee that Britain retains and expands its industrial base.

The real cause of the problem stretches across the House. In the 1980s, most, if not all, of us were persuaded that market forces would provide a prosperous economy. They do not, because one cannot close down Rolls-Royce today and open it tomorrow, any more than one can close down a farm today and reopen it tomorrow. That is the only controversial point that I will make.

This is not an economic debate but a political debate. Longer ago than the 1980s every party--my own was

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equally involved--reached the conclusion that, because world capital was so powerful, the country must integrate itself deeper and deeper into a structure in Europe, where power was to be moved from the electors of the Parliaments to the European Commissioners and to a Council of Ministers, which makes laws in secret. It must be the only Parliament in the world that meets in secret. The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) asked why the Council of Ministers should meet in public, as though it were a Cabinet--but it is a parliament.

We are rapidly moving towards full European union. I do not use the word "Maastricht" any more, because it does not mean anything to a pensioner who cannot manage on his money. If we ask, "Do you want this country absorbed into a full European union?" people know exactly what we are saying. A referendum does not mean much to people. But if we ask, "Do you think that you have the right to decide before this country is put into a full European union?" the public understand. Let us not use terms such as Maastricht, referendum, or managed exchange rates--let us call a spade a spade. The people have the right to decide the future of this country. The treaty that was meant to unite Europe has divided every nation, every party in Europe and every party in the House. I have never known anything more divisive. I will not mention the treaty's name because I do not believe in it, any more than I believe in talking about Thatcherism. I can only say that I only represent Chesterfield and Denmark tonight, so I have a bigger constituency. I also represent half of France, so I cannot be described as holding isolated views, or be called a typical little Englander when the Danes agree with me.

To talk of being pro-Europe or anti-Europe is a plain lie. We were born Europeans and will die Europeans. It is a matter of geography. The question is what sort of Europe it will be. Am I anti-British because I do not like the Prime Minister or his policies? Of course not. Is one anti-American because one does not believe that they should have done this or that in Panama? We are discussing our own future and that of Europe. I introduced the Commonwealth of Europe Bill, and when the Maastricht treaty--there, I have said it now--dies, I believe that that Bill will acquire greater relevance.

There are some honest differences. I respect the right hon. Member for Old Bexley and Sidcup for being a committed, passionate federalist. He does not think that the British people have any right to comment on this country's future. One hears talk about the peasants in France. On the BBC the other day, one commentator said, "It has become clear from our analysis that it was the poor and uneducated who voted no' in the French referendum." That is only half a minute away from taking the vote from people who are poor and uneducated. I believe that the right hon. Member for Old Bexley and Sidcup would be happy to return to 1832--he has a slight 18th century flavour about him anyway.

There are some federalists in my own party, though they are a little more discreet. They talk about pooling our sovereignty. They do not want to pool their sovereignty with the British electorate, but they are happy to pool it with the Commission. There are also the nationalists. I am not one of them. I would rather die than go on a platform with Mrs. Thatcher, because the woman who abolished the Greater London council is not for me the best advocate for greater devolution of power. Do not ask me to go along with a woman who thinks that foreigners start at Dover

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and that some of them have got to Wolverhampton. That is not my idea of Europe. I am a democrat, not a nationalist.

There is the question whether the people had any choice. My right hon. Friend the Member for Islwyn (Mr. Kinnock), the Prime Minister, and the leader of the Liberal Democrats completely agree on this unmentionable treaty. I know from experience that when people really agree with one another, the level of abuse rises to a huge height to conceal the agreement that everyone knows exists. I have seen that happen time and again. The electorate were given no choice. They were told that the treaty would be agreed through parliamentary democracy. We have all been here a year or two and know that the vote on the treaty will be decided by two Johns. Party discipline determines our vote. The BBC asked me today, "Why are all the opponents of the treaty on the Back Benches?" The reason is that if one is on the Front Bench and opposes it, one ends up on the Back Benches--and if one is already on them, one never gets to be a member of the Front Bench.

I have no confidence that the House will reach a decision on the basis of the merits of the treaty. Party loyalty is very strong. I am a good party man in matters of current policy, but do not tell me that the rights of the British people can be handed away on the pretence of parliamentary democracy, when that is done under the discipline of the Whips.

Tomorrow, I am launching a national petition, like the chartists did, because I have no confidence in the House being allowed to reach the judgment in which it believes. If right hon. and hon. Members believed in their decision, that would be one thing. My petition ends with a prayer that the House will ensure that

"before the Maastricht Treaty, or any modification or amendment of it, is approved by Parliament, or ratified by Her Majesty's Government, the Citizens of the United Kingdom shall be given the right to vote for or against that Treaty in a National Referendum, and that the decision reached in that Referendum be accepted as binding upon the Government and Parliament."

I will also present a Bill tomorrow--the Treaty of Maastricht (Referendum) Bill. The long title states that it is a Bill to provide

"for the holding of a national referendum, and for the procedure for the subsequent decision of the House of Commons, on the question of British ratification of the Treaty of Maastricht before Her Majesty's Government may lawfully adhere to the Treaty on behalf of the (United Kingdom"--

and so on. That is all that I can do. Anyone who is listening to this debate or watching it on television will not have any confidence in the House to decide those matters. If there is an outside campaign for a referendum it will sweep the country. It was not for nothing that the chartists and suffragettes struggled for the vote. They did not do that so that the vote could be taken away because business managers and Eurocrats feel that they know better than we do. That is trying to reverse the gain of those who campaigned for the suffrage, and that will not work. I warn the House that if it tries, the next thing that will be undermined will be not the currency but the reputation of this Chamber in which we were all elected to serve. 6.39 pm

Mr. David Howell (Guildford) : After that non-controversial but very enjoyable speech by the right hon. Member for Chesterfield (Mr. Benn), I want to tell my right hon. Friend the Prime Minister how greatly I

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welcomed his statement, which confirmed his plan to hold a special European Council on 16 October and to have a profound look at the position in Europe after the French referendum and various other developments.

I understand that the agenda for the conference has three main parts. The first is that there is an obvious need to sort out what, if anything, will bring the Danes back on board. They are signatories to the Maastricht treaty, which cannot live again unless they are persuaded to vote for it-- which is entirely a matter for them. The second part of the agenda involves reconsideration of the systems for monetary co-operation in Europe. They have broken down and clearly need reforming.

The third and, perhaps, the most significant part of the agenda is to consider the growth of public concern in Europe since the signing of the treaty and the dramatic events of recent times. We need to examine the whole development of Europe and the fundamental worry whether it is a process of ever-accumulating power at the centre or, as my right hon. Friend rightly said this afternoon it should be, a settled arrangement and a settled sharing of powers between the ancient nation states and the Community institutions.

I shall comment briefly on each of those agenda points. First, what, if anything, will persuade Denmark to support the treaty? None of us yet knows the answer to that, because the Danes have not agreed it among themselves. They are talking about a variety of devices and it will be interesting to see whether they open up the treaty. They are talking about binding supplements, new protocols and other additions to it. It is inevitable that that will have to come before the House. We must wait to discover what comes out of the special European Council, but that matter must be examined. It is clear that some quite fundamental questions have already been raised by the Danes. Secondly, on monetary co-operation, it is clear that the over-rigid version of the ERM was brittle. However, we must remember that that rigidity was created not by the founding fathers of the European monetary system, but by those who came along in the mid-1980s and said, "This is not enough. We must make it a stepping stone to a full single currency and single monetary union." Those people injected the rigidity into the system, which made it much too brittle and unable to sustain shocks, such as the excessive fall in the dollar and rise in the deutschmark, the cost of unification and a few indiscreet remarks from the Bundesbank. The system blew up. We cannot re-enter it and my right hon. Friend the Prime Minister is right to urge that we think again. It is no good the great policy authorities of Bonn and Paris saying, "It is good ; it continues." It is a fundamentally weakened system and we must not rejoin it.

There are those who say, "Let the pound float." As my right hon. Friend the Member for Mole Valley (Mr. Baker) said, we must be careful that floating does not become inflating. It may feel good now because it is the fashion. The economists are switched on to the fashion of floating. They are great lemmings when it comes to fashion. When the chill wind blows, they will wish that there was some sort of ordered system, some sort of harness of co -operation across international currencies. That time will come, as sure as night follows day, and then we will need to think about what sort of co- operation we want. In the meantime, and even when we do have some new system, our monetary and fiscal policies must be very

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tough. Indeed, our monetary policy must have a toughness and quality which, under the present arrangements in this country, we cannot provide.

I have one point of agreement--although I am afraid it is the only one-- with the rather prolix speech of the right hon. Member for Yeovil (Mr. Ashdown), which is that we need to depoliticise some parts of our monetary policy and so enable them to be run in ways that place emphasis on the monetary factors that concern bankers. The Opposition will cry, "That makes them unaccountable", but too much politics in monetary policy makes it unworkable. If we want a strong pound in any future sort of international system we will have to revise our monetary structures. That day will come. The pure floaters may feel happy and ring bells now, but they may wring their hands later. Finally, let us consider my right hon. Friend the Prime Minister's fascinating suggestion that we take account of the vast change of mood throughout Europe, not just in this country and in Denmark, but in France, Germany and elsewhere. After the dramas of recent days, my right hon. Friend has set out a new agenda that will carry forward my idea of the European dream, which is not the same as some of the ideas held in Bonn, Paris and Brussels. I urge my right hon. Friend not to be diverted or deflected--and I do not think that he will be--by the flat assertions of Bonn and Paris that we must carry on as before, slap through the Maastricht treaty, go back to the ERM and keep on with the steamroller, the process, the train or whatever. I do not believe that that is the voice of Europe or the line that is good for this country. My right hon. Friend is right to argue for a third way and a new agenda for building the sort of Europe that fits the 21st century and the post-cold war era.

People talk of a two-speed Europe, but it is much exaggerated. There is no guarantee that the deutschmark will always remain the strongest currency. Perhaps for the time being it will and perhaps there will be a zone, but it will not be a Community zone--it will be one of Switzerland, Austria, Belgium, Holland and, perhaps, France on high days and holidays, together with Germany and the deutschmark. That may not last. The franc has problems, as has the German political system. The speed may alter and the runners may not stay the same distance apart. We should not assume that everything will fall into a two-speed Europe.

There is an unfinished European agenda that Maastricht does not address. In pointing out the issues that must be profoundly reconsidered post- referendum, my right hon. Friend is creating opportunities--out of what admittedly is a crisis--and giving a lead in what good Europeans should be doing. The unravelling of the whole of European co-operation would be a disaster, but, as others have said, the attempt to solidify the whole of European co-operation into an over-centralised and over-rigid united states of Europe, failing to take account of the diversity of the nation states, would be an even greater disaster. Even now, that has caused much difficulty that good Europeans, including my right hon. Friend the Prime Minister, must reject. We must move on to a recovery that is in the right direction for Europe.

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