House of Commons Hansard Debates for 19 Apr 1993

Clause 2

Economic and monetary union

Amendment made : No. 420, in page 1, line 23, at end add and unless Her Majesty's Government has reported to Parliament on its proposals for the co -ordination of economic policies, its role in the European Council of Finance Ministers (ECOFIN) in pursuit of the objectives of Article 2 as provided for in Articles 103 and 102a, and the work of the European Monetary Institute in preparation for Economic and Monetary Union.'.-- [Mr. Andrew Smith.]

Question proposed, That the clause, as amended, stand part of the Bill.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : This debate provides the Committee with the

Column 120

opportunity, if it wishes to take it, to examine the procedure provided by the treaty and the Bill for moving to stage 3. There are three elements to the arrangements, two of which are provided by the treaty and one which is provided by clause 2.

Article 109j provides for the transitional arrangements negotiated at Maastricht. The article contains four key elements, for those who wish to read it. From the Committees's point of view, the key element is the terms of the United Kingdom protocol which makes it clear that the House of Commons and the country are under no commitment to move to stage 3 unless and until the House has made a clear decision that that is what the country wishes to do.

Clause 2 gives effect to the commitment that we have given that this country is under no obligation to move to stage 3 of economic and monetary union unless the House has passed an Act of Parliament to give effect to that intention. I commend it to the Committee.

Mr. Shore : I am glad that the Committee has the opportunity to debate again what I suppose the Government regard as the jewel in their negotiating crown, the so-called opt-out protocol from stage 3 of economic and monetary union.

We have heard tonight the Financial Secretary summarise remarks that he made very late at night on Wednesday 24 March, when we sat for an unbelievably long time. Our debates lasted from about 5 pm to noon the following day. Naturally and inevitably, few hon. Members of any party attended and there was, of course, no one in the Press Gallery to pick up a word of what the debate was about.

As it happened, there were three consecutive debates which encompassed the evil heart of EMU. We debated the powers, independence and non- accountability of the European central bank ; the totally unacceptable 3 per cent. of gross domestic product capping of Government borrowing requirement ; and the content of stages 2 and 3 of economic and monetary union.

Those of us who participated in those debates remarked that it was monstrous that one subject should follow another, with the Financial Secretary answering as best he could all three of them, without the Committee having the chance to study the Hansard report of the Minister's comments in one debate in relation to the two others. As they were totally interlocked as debates, that was a disgraceful way of proceeding and a great loss to the Committee and to the country, thus preventing a serious and considered debate that would be reported and made known to our fellow countrymen.

Mr. Cash : Does the right hon. Gentleman recall that my right hon. Friend the Chancellor of the Exchequer--who, after all, negotiated the arrangements for the protocol--took no part in that debate? The most that we saw of him in the course of 16 hours was when he popped in for two minutes to talk about some matter or other. My right hon. Friend played no part in debating a range of issues, including white Wednesday : the so- called betrayal of trust that preceded it ; the fact that we were subsequently told that there were fault lines ; and the remark by my hon. Friend the Financial Secretary that we would enter the ERM when the conditions were right. In fact, only last week, at ECOFIN, Ministers said that there were no fault lines.

Column 121

The Second Deputy Chairman : Order. I remind the hon. Gentleman and the Committee, not for the first time, that long interventions are to be deplored.

Mr. Shore : I recall very well the unhappy events to which the hon. Gentleman referred. I regret to say that, in the middle of that night, I noted with concern the absence of my hon. Friend the shadow Chancellor, whom I am glad to see in his place tonight and welcome. After all, my hon. Friend's powers as a future Chancellor of the Exchequer would be vigorously and seriously affected by the treaty's provisions. It is therefore helpful to have my hon. Friend present. I only wish that the Chancellor of the Exchequer also was in his place.

Our last debate took the form of the Financial Secretary doing his utmost to give reassurances. On studying his remarks, most members of the Committee will find that his reassurances failed to be reassuring.

Mr. Renton : Before the right hon. Gentleman continues, I remind him of his incarnation as Secretary of State erion of a public sector borrowing requirement of only 3 per cent. of GNP, would he not have thought that that was a reasonable criterion at which to aim?

Mr. Shore : In 1967, which is the date to which the hon. Gentleman refers, this country had less than 3 per cent. unemployed and was just returning to a balanced current balance of payments account. It did not have the vast deficit that exists today. In those circumstances, I might well have accepted with a good heart a 3 per cent. of GDP borrowing requirement.

However, when one considers this country's present situation, the fact that the Chancellor's best estimate is a borrowing requirement of 8 per cent. of GDP this year alone, looks at the miserable state of one's fellow countrymen, 3 million of whom are registered unemployed, and considers our appalling trade indebtedness and the continuing devastation of our manufacturing industry, one knows that it would be intolerable and impossible to accept any such constraint now or, I suspect, for some years ahead--unless one wanted to inflict further misery on our fellow citizens and to increase unemployment by another couple of million to squeeze the economy and purchasing power to the level necessary to bring the deficit back into balance. We faced the Financial Secretary with the reasons for our dissatisfaction and asked him about the nature of our commitment to economic and monetary union. Far from denying it, the Financial Secretary said :

"we accept the commitment to economic and monetary union, to which this country has signed up several times including in the early 1970s."

He did not dispute the commitment, but he played about with the idea-- frankly, we gained no reassurance from it that, although we are committed in principle to economic and monetary union, it could be that there is some kind of economic and monetary union other than the one in the treaty which eventually we might accept and persuade our European partners to accept, too.

10.45 pm

The Financial Secretary was then asked a question which very much concerns us : does our commitment in principle to economic and monetary union and to the first

Column 122

two stages of economic and monetary union, which is agreed by the Financial Secretary, imply our return to the exchange rate mechanism? In reply to that question, the Financial Secretary said : "It is true that it is Government policy to return to membership of the exchange rate mechanism when the Government believe that it is in this country's interest to do so."

We are therefore committed to returning to the ERM. That is a policy pronouncement of the most serious kind.

The Financial Secretary of course reserves judgment about when the Government believe that it will be in the interests of this country to do so, but I am not convinced that I can see much prospect of it being in the interests of this country to rejoin, particularly if it is an exchange rate mechanism, as we know that it is, which is programmed to be the stepping stone to a permanent interrelationship of exchange rates, leading on to a single currency.

It is precisely the rigidity which has been introduced into the ERM that has made it such an appalling affliction not only upon our country but upon most of the countries of Europe. That, more than any other single cause, is the reason for high unemployment both in Britain and throughout western Europe, the political consequences of which have been obvious and devastating to the Government of France. I suspect that they will also be devastating to the Governments of Spain and Italy.

We are committed to rejoining the exchange rate mechanism, but the circumstances for doing so are undefined, except that we are told that it will be when the Government believe that it is in the interests of this country to do so. We were not reassured, therefore, by what we were told on that occasion.

The Financial Secretary sought to reassure us on another point. He said that, although we are committed to economic and monetary union, "I do not accept that it is necessary or, indeed, desirable, within the principle of subsidiarity, to remove fiscal policy or wider economic policy responsibility from member states."-- [Official Report, 24 March 1993 ; Vol. 221, c. 1042-44.]

His point was that there was no equivalent commitment regarding economic policy as there was--which he accepted--in stages 1 and 2 regarding monetary policy.

That was not a happy statement, either. When we turn to what we are committed to in terms of economic policy, we find that it is a very considerable obligation. I remind the Committee of those obligations. We are committed to article 103 of the treaty, which states that "Member States shall regard their economic policies as a matter of common concern".

The treaty then makes the point :

"The Council shall, acting by a qualified majority on a recommendation from the Commission, formulate a draft for the broad guidelines of the economic policies of the Member States and of the Community".

After the broad guidelines, article 103.4 says :

"Where it is established, under the procedure that the economic policies of a Member State are not consistent with the broad guidelines referred to or risk jeopardizing the proper functioning of economic and monetary union, the Council may, acting by a qualified majority on a recommendation from the Commission, make the necessary recommendations to the Member States concerned. The Council may, acting by a qualified majority on a proposal from the Commission, decide to make its recommendations public."

That is the old coercive business of collective, multilateral surveillance followed by the condemnation of any country whose economic policies are judged to be against or not consistent with those of the majority. The sins of omission

Column 123

or of commission are then made public and broadcast to the market, with all the uncertainties and instabilities, as a direct means by which to coerce a member state that falls out of line. That is yet another contradiction in what the Financial Secretary told us. The Financial Secretary knows well that the belief that economic policies are a matter of common concern is written into economic policy and leads to reasons why we should conform.

The Financial Secretary then said that we need not get worried about obligations to avoid excess deficit. He said that it was Government policy anyway to avoid excess deficit. Of course. However, when he was pressed a bit harder, he said that 8 per cent. of gross domestic product was not an excess deficit because the Government had judged it to be a proper deficit and that is why they had proposed it to the House. That is fine. However, if the Government are right in their judgment on the matter, an excess deficit is simply what the Government at any time decide that it is and there is no real meaning to the treaty obligation to 3 per cent. of GDP as the benchmark or to its use as the major and central means--not the sole criterion--by which to judge whether an excess deficit has been incurred. Those are all obligations, commitments and pressures that will fall on us in stages 1 and 2. In stage 2, to which we are committed, we do not have to face the dangers of penalties and fines being imposed on us which we would face if we were in stage 3, from which the Government have got their exemption. However, the pressure is there all the time and we agreed to best endeavours. On top of all that, we know very well that how we proceed in all these matters is constantly to be reported on and invigilated by the Commission and by other European agencies.

Mr. Spearing : To put it in plain language which we in east London would understand, is my right hon. Friend saying in effect that, whereas stage 3 is rigid iron bars, this is very strong elastic, and that we might as well be in stage 3 for all practical purposes? If that is so, the great opt-out, the bit of paper that the Prime Minister came back waving from Maastricht, is not worth very much. Is that right?

Mr. Shore : My hon. Friend has got it very nearly right-- [Interruption.] Very nearly. There are two crucial questions. One is whether the Government are right in saying that the legal obligations on us are less than those imposed on the other 10. That is still a matter for some argument. Many hon. Members are not satisfied that it is a lesser legal obligation than that which is imposed on the 10. In terms of political pressure and in terms of economic pressure--

Mr. Spearing : Bankers' pressure.

Mr. Shore : --and bankers' pressure, it will indeed be a continuing, powerful, public and private constraint on all the Government's activities in so far as they depart from the common guidelines set down and the common policies recommended by the European Community, not only for economic policy, but for monetary policy as well.

Mrs. Dunwoody : Can my right hon. Friend understand the attitude of a Labour leadership which finds it perfectly acceptable to abstain, if not to vote with the Government, on powers that would make it impossible for any Opposition party that formed a Government to take radical steps to improve its political, and, certainly, its economic, policies for the future?

Column 124

Mr. Shore : It has all been said before, but I find it quite simply incomprehensible, not only in relation to a Labour Government. If a Conservative Government had to accept what appear to be the limitations imposed on borrowing that the treaty and its protocols proclaim, they, too, would find it totally unacceptable. As we know, the Government have recommended to the House only this year that we accept a GDP borrowing requirement of 8 per cent.

Mr. Marlow : Further to the point raised by the hon. Member for Crewe and Nantwich (Mrs. Dunwoody), the right hon. Gentleman will be aware that the Government are putting it around among their own supporters--they dare not do it publicly, of course--that these provisions of the treaty are a load of nonsense and that they intend to prevent them from happening. But the treaty is by way of being a contract. What are the chances of the other parties to the contract letting the Government get away with presuming that the provisions of the treaty are a load of nonsense and that we shall not have to apply them in the United Kingdom?

Mr. Shore : That is one of the great dangers. We deceive ourselves-- though we do not deceive others--if we think that there is no real content or danger in such treaties because they are unenforceable and simply will not work. My fear is not that we would necessarily reach economic and monetary union. Rather, I fear the damage that we shall inflict upon ourselves in our efforts to get there. Given the present condition of the British economy, that must surely be at the forefront of our minds as a really major hazard. Very much a part of stage 2 of economic and monetary union is the whole doctrine of convergence and the criteria that are laid down for it. As part of the transitional provisions, article 109j says : "The Commission and the EMI"--

the European Monetary Institute--

"shall report to the Council on the progress made in the fulfilment by the Member States of their obligations regarding the achievement of economic and monetary union."

Mr. Spearing : Report on.

Mr. Shore : The Commission and the EMI will report on the member states' progress, presumably annually. The matters upon which they will report are the so-called convergence criteria that are laid down in the protocol referred to in article 109j and the extent to which countries are conforming to them.

Those four criteria will become very important, and may dominate future debates in the House. First, our cost of living must not be appreciably more than those of the best three performing member states--in other words, we must keep prices down. That is not a bad objective in itself, although much depends on just how serious the deflationary problems are in other countries. I would not necessarily rejoice if other European countries achieved zero inflation if the price of that was a massive increase in unemployment and a fall in output in those countries.

The second criterion relates to the Government's budgetary position. That refers to the excess deficit. We must conform to the 3 per cent. of GDP criterion--or the approach to it--as laid down in the relevant articles and in the protocol.

The third of the convergence criteria relates to the exchange rate. That must surely cause the Financial Secretary some difficulty, as, clearly, we have to be a

Column 125

member of the European exchange rate mechanism if we are to conform to the behaviour of the pound within the exchange rate mechanism which is laid down in article 3 of the protocol. According to that performance, the fluctuation margins must be observed for at least two years without causing severe tensions.

The last of the four criteria relates to nominal long-term interest rates which must not exceed more than 2 per cent. of the interest rates in the three best performing countries in Europe. Those are very deflationary criteria. From some of the speeches made by hon. Members on both sides of the Committee, one would have thought that the kind of protocols written into the Bill were not the kind that I have described, with their demands about monetary and inflationary criteria, but criteria relating to the achievement of full employment, a balance on current account or to output.

From the speeches that we have heard, we would suppose that all those sensible things had been written in. Not a bit of it. Instead there are the very old-fashioned, pre-Keynesian criteria and the experience that we had between the wars in terms of almost nil inflation and massive unemployment.

11 pm

I cannot see any attraction in the content of stages 1 and 2, to which we are committed in the treaty by our own signature, and our simply saying that there are dangers and that we must debate those matters but we are saved from the ultimate horrors of the third stage because we have not signed to firmly fixed exchange rates, a single currency, a European central bank and all the disciplines that go with that.

The safeguards are quite inadequate. There is a terrible blur between stages 1, 2 and 3 and we would be fooling ourselves and our fellow citizens and voters if we said that we were satisfied with the opt-out, however great a prize the Government claim it to be.

Mr. John Townend (Bridlington) : I welcome the Government's right to opt out of stage 3 and the single currency. However, I am concerned about whether the Government will ever take advantage of the opt-out. As I see it, for the Government to opt out of a single currency, they would have to go against their own policy, because they have made it clear time and again that it is Government policy that we should be at the centre of Europe.

If we exercise our opt-out and our colleagues in Europe move towards a single currency, how can we be at the centre of Europe when we are one of only a few who have not accepted the single currency? That worries me. I cannot help but wonder whether the opt-out was included to get the Bill through the House and receive the approval of the British public.

I am in favour of an economic Community. I was really upset when the "E" was dropped from the EEC without a by-your-leave. I am also in favour of the single market. However, I am opposed to full monetary union.

Monetary union without a single currency will not work. It will be impossible to get the various economies of the various disparate countries in the Community to converge. The ERM, as the right hon. Member for Bethnal Green and Stepney (Mr. Shore) made clear, was meant to be the forerunner of monetary union and a single currency. What a disaster that has been.

Column 126

Earlier this year, we saw the effect of our being forced, by our membership of the ERM, to fix our interest rates, not at a level appropriate for the British economy, but at a level appropriate for the German economy, because the German and British economies were diverging. Therefore, we had to have interest rates at excessively high levels when this country was going deeper and deeper into recession.

It was the deepest and longest recession this century. How many jobs were lost and how many businesses went bankrupt because we were stuck in the exchange rate mechanism? I must remind hon. Members that those who said last summer that this policy was disastrous for our country were told that they were economically illiterate. Four weeks later, the Government were proudly telling us that we were out of the exchange rate mechanism and that we could fix our interest rates at appropriate levels for the British economy. Interest rates came down rapidly by four per cent.

If we were still in the exchange rate mechanism, our interest rates--like the interest rates of France--would probably be much higher. Far from seeing the green shoots of recovery, the United Kingdom would not just be in recession ; it would be in economic collapse.

Mr. Ian Taylor : My hon. Friend is missing one crucial point--no country can set its interest rates for its domestic circumstances without paying attention to what is happening in other countries within an internal capital market. There are no restrictions on the movement of capital, so capital will go to the market which has the best hedge against inflation and the best real rate of return. That is precisely what is happening today in the market, although we are not in the exchange rate mechanism.

Interest rates have fallen. The currency has also fallen, and there are considerable inflationary concerns about that fall. It is a trade-off. Although there was a disequilibrium because of the problems in Germany, the reality is that the exchange rate mechanism has been a success since 1979. It is a great pity that the United Kingdom did not join it earlier.

Mr. Townend : With respect to the hon. Gentleman, that is not true. A country can fix its interest rates at a level appropriate to its economy as long as it is prepared to take the consequences on the exchange rate. If one believes in floating exchange rates, it is practical to fix interest rates to suit the United Kingdom.

Mr. Budgen : Is not my hon. Friend the Member for Esher (Mr. Taylor) falling into the trap into which so many people fall? He is saying that, because some prices are affected, it has an effect on inflation. Surely the message that was drummed home so often through the mistakes of the 1970s is that there is only one cause of inflation--an increase in the money supply. We should not confuse the cause of inflation with a relative change in prices that may occur when wages, the exchange rate or any of those factors affect some prices but not all of them.

Mr. Townend : My hon. Friend is right. If my hon. Friend the Member for Esher (Mr. Taylor) was correct, we would have the same interest rates as France. Of course that is not true. The great economic successes of the Conservative Administration were based on a floating exchange rate, monetary policy and controlling public expenditure. As soon as we moved from monetary control

Column 127

to an exchange rate policy, and as soon as we started giving in to every pressure group by increasing public expenditure and increasing the deficit, we got into trouble.

It is not simply the United Kingdom which has suffered through the exchange rate mechanism. We have seen what happened in Ireland, Spain and Italy. We have also seen what happened in France, which is the birthplace of the EEC. France, which is the most communautaire country in Europe, has been driven deeper into recession because it had to fix its interest rates at a level appropriate to Germany. When France has an inflation rate of something like 2 to 3 per cent. and a fairly successful economy, it is nonsense that it must have real interest rates at a record level which is creating more unemployment and driving the country into deeper recession.

Let us be honest : the whole of Europe, apart from the United Kingdom, is moving into recession as a result of the failure of Germany's economic policy. That failure is being transferred to the rest of the countries in the Community because of the exchange rate mechanism.

It would be disastrous if we had to rejoin the exchange rate mechanism. We can never be sure that in future, even if our economies start to converge with Germany, they might then start to diverge. If that happened, we would be in the same position as we were last summer.

Mr. Budgen : Will my hon. Friend give way?

Mr. Townend : I shall simply finish making this point.

The Government should have learnt the lesson from the damage which was done to our economy. They should not be afraid of upsetting our European partners. They should say honestly that they do not believe that we should go back into the exchange rate mechanism.

Mr. Budgen : I am sure that my hon. Friend will concede that there is a serious risk that either by political or by legal pressures, we shall be forced back into the ERM if the Maastricht treaty is ratified. Do we conclude from his powerful and moving oration that he proposes to vote against clause 2 stand part?

Mr. Townend : I do not know, because by voting against clause 2, I would be voting against the Government's opt-out, with which I agree. But I assure my hon. Friend that I certainly shall vote against the Third Reading of the Bill, because I believe that it would be disastrous for Britain.

If we move to a single currency, inevitably we shall move towards a federal united states of Europe.

Sir David Mitchell (Hampshire, North-West) : As only one country within the EC at present falls within the set of criteria for convergence which we have to meet, does my hon. Friend seriously suggest that there will be a sufficiently large block of countries which will fit the criteria for moving forward to stage 3 and a single currency? Is that a reality or a dream?

Mr. Townend : I agree with my hon. Friend that it is most unlikely to happen. It is interesting that many hon. Members on this side of the Committee who intend to vote for Maastricht, including many members of the Government, have said when they have tried to persuade me to vote for the Bill, "John, I don't know why you're worried, because it is never going to happen." The whole

Column 128

thrust of the Maastricht treaty is economic and monetary union. If economic and monetary union will not be practical in the foreseeable future, and it will be impossible to meet the criteria, why are we pressing on with this useless Bill?

I have always believed passionately in the nation state. We are an island country. While I strongly support our membership of an economic community, I am opposed to giving up our sovereignty and moving step by step towards a federal united states of Europe in which more and more decisions would be taken in Brussels, and the House of Commons would progressively be no more than a county council.

I am even more appalled--I hope to catch your eye in a later debate, Dame Janet--that we are making a major constitutional change when the British people have not had the opportunity to express their views. When every major party and its leaders support a particular policy, a general election is no way to find the view of the British people. They have no way of expressing it. The political and bureaucratic classes and big business men in Europe and Britain all seem to have been caught by the dream of a federal united states of Europe. It is strange that they think that it will work. Europe is made up of various countries with various languages and different cultures. When we look across Europe, we see that the multicultural, multilingual and multi-religious federations of the former Soviet Union and Yugoslavia are breaking up. It will never work. The whole treaty is flawed. I strongly urge hon. Members to vote against it.

Mr. Leighton : As the hon. Member for Bridlington (Mr. Townend) said, clause 2 is the essence of the Bill. It deals with economic and monetary union. It is at the heart of the centralising drive of the Bill. There is no subsidiarity in monetary policy. Short-term interest rates will be the same in Glasgow as in Naples, Berlin or Lisbon. The unaccountable central bank will be by far the most powerful institution in the Community.

Unprecedented powers will be surrendered to an autarchy of central bankers and it will be unlawful to seek to influence them. I find that prospect appalling. The fact that the Labour party is in favour of it is inexplicable. In fact, it is not only in favour, but gushingly enthusiastic about the idea.

There has been a role reversal, because the Conservatives say that they have an opt-out--I do not know how realistic that is having listened to the hon. Member for Bridlington. The Danes also say that they have an opt-out and the Germans need another vote in both Houses of their Parliament.

Mr. Rowlands : My hon. Friend just said that the Danes have an opt- out, but one of the consequences of the Edinburgh summit was their formal notification to the other Governments that they have opted out of economic and monetary union. They have already opted out.

11.15 pm

Mr. Leighton : I congratulate the Danes. The Labour party seems to have no such hesitations, because, from what I have heard, it cannot wait to get economic and monetary union. I find that inexplicable. Such behaviour is a recent aberration because it is contrary to policy over the years.

Column 129

At the time of the 1975 referendum, the Harold Wilson Government issued a manifesto that was sent to every household. It stated : "There was a threat to employment in Britain from the movement in the Common Market towards economic and monetary union."

That Government recognised the threat.

"This could have forced us to accept fixed exchange rates for the pound, restricting industrial growth and so putting jobs at risk. This threat has been removed."

My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) will recall that in 1978 the Labour Government published a White Paper to explain their decision not to join the European monetary system.

Those documents are history, but let us consider a more recent publication, "Meet the Challenge : Make the Change". Everything was put in the melting pot and that document contained the Labour party's definitive views. On Europe, it stated :

"We see the path to future progress as being one of closer and closer co- operation rather than an attempt to create a European union."

The Labour party did not want European union, but we are now discussing a union treaty. It also stated :

"We oppose moves towards a European monetary union, which could further impede progress in this area."

It also made it clear that the Labour party was against joining the exchange rate mechanism. That document contains the latest policy statement of which I am aware.

The Labour party has stood on its head on Maastricht. Its behaviour has been undignified. There is a limit to how many times it can do that, because if it changes its policy so often, can anyone believe what it says?

Next Section

Home Page