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Mr. Bernard Jenkin (Colchester, North): To answer the hon. Member for Great Grimsby (Mr. Mitchell), I do not think it possible to make a judgment about the effect of interest rate movements until one or two years later. Only then will we know whether the correct interpretation of the economic data available at the time was made. Perhaps the hon. Gentleman takes the view that there is less risk in an increase in inflation than the Governor of the Bank of England and the Chancellor believe there to be. But only history will show whether we have made the right judgments.
I believe that the Government are right to err on the side of caution. All the evidence suggests that economies that perform the best are those whose authorities take the most rigorous line against inflation. To risk overheating the economy so soon after coming out of a recession would be a sad failure indeed.
The Paymaster General rather disappointed the House this evening. We expect more of him in these debates. It was evident that he did not submit this convergence plan, which is to be sent off to the European Commission, with a great deal of relish. He did not say, "Hurrah! We're on track to get into the single currency." I detected a note of discomfort in his presentation.
The purpose of these debates on the Government's convergence plan is to highlight the fact that we are locked into a progressional timetable. We are fixed into a machine that makes us submit plans towards an objective over which we have little control. I have heard that this timetable is regarded by the Government as artificial. The more we hear of the development of the Government view of the prospect of a single currency, the more distance we detect between that end and the Government's embrace of it.
Whatever the Government's attitude may be, and however determined, towards the end of the convergence period, the Government may be not to participate in a single currency, the fact is that they are stuck on the tracks. They are being driven down the track towards meeting certain objectives--
Mr. Iain Duncan Smith (Chingford): Does this not have a great feeling of de ja vu about it? The timetable is certainly one of the key problems. It may force countries to attempt to converge when their natural instincts, based
Column 806on the performance of their economies, dictate otherwise. I am reminded of the Schlieffen plan--the great first world war German plan to knock out France. It was based wholly on railway timetables. Many historians now believe that that became the cause of the first world war, because, once started, there was no way to stop the plan being put into effect--and it ended in disaster.
Mr. Jenkin: I have great sympathy with that analogy. To a certain extent, it was the intention of the Maastricht treaty. It was not designed to create an opportunity for economic and monetary union across Europe. That opportunity existed anyway, whatever the treaty arrangements. Businesses can opt to use a single currency. Member states can opt to fix their exchange rates with each other. They can even share a currency--and all without this timetable.
The timetable is, of course, political. It is not an economic weapon; it is a political weapon. The whole of Europe has been put in the straitjacket of an artificial timetable because France and Germany are determined to achieve political union. It is a tool to achieve a political end. We are playing a highly dangerous game if we put the European economies into a straitjacket for political purposes, regardless of the political consequences.
Another benefit has emerged from this debate: I detect a mood of consensus across the Chamber. Not only has the Prime Minister, speaking to the Conservative Way Forward, introduced the possibility of new criteria to qualify Britain's possible participation in a single currency; we have also heard the same idea from the hon. Member for Durham, North-West (Ms Armstrong). The hon. Lady thinks that levels of employment are important. She shares that opinion with the Governor of the Bank of England.
The hon. Member for Gordon (Mr. Bruce) told us that he wanted to introduce some extra criteria. He described the economy in Britain as possibly not strong enough to sustain monetary union. Those criteria are not in the Maastricht treaty. The hon. Gentleman is introducing new criteria for monetary union. I detect in the Chamber a consensus that the timetable for economic and monetary union is unrealistic and unreasonable. Perhaps the House should point that out to our European partners, who are more politically obsessed by the objective, and perhaps unreasonably so. They may be in danger of damaging their economies. We see France holding on manically to the franc fort policy, to the detriment of the stability of property and asset prices in France, of employment rates and of growth. We were discussing banking at length, and I am reminded of the nickname of one of France's largest institutions, "Debit" Lyonnais.
What were the risks to which the Governor referred? He was referring to the danger of seeking to impose a uniform monetary policy on several countries in the European Community. We had experience of the risk quite recently. When we were in the exchange rate mechanism we sought to impose the same monetary discipline on several countries in the European Community. What was the result? What might have been an appropriate monetary policy for Germany post-reunification, with all the inflationary effects of funding development in eastern Germany, became a completely inappropriate monetary discipline for the United Kingdom, France and Italy. That
Column 807demonstrates more graphically than anything else can the risks of applying a single monetary policy before absolute, complete and permanent convergence has been achieved.
Mr. Tim Devlin (Stockton, South): My hon. Friend has alluded to a great consensus across the Chamber. Perhaps he will briefly think about monetary union within the United Kingdom. As he knows, since 1707 there has been a monetary union of Scotland, Wales, Northern Ireland and England. Yet the financial and economic conditions in Scotland and the north of England now are different from those in the south of England. The policy that is followed in London may not be appropriate to all parts of the UK. Why is the position not the same on a greater scale throughout Europe?
Mr. Jenkin: I am extremely grateful to my hon. Friend for asking me that question. We have had a single currency in the UK for a long time. It followed political union. The two things go very much hand in hand. There are points at which the monetary policy that is pursued throughout the UK for the benefit of the entire UK is more appropriate for some parts of the country than for others. During the 1980s, for example, we had strong asset growth in the south and strong development of services, whereas in the north and in Scotland we saw the decline of old-fashioned manufacturing industries, the decline of property prices and wide differentials forming. We coped with economic disparities across the single currency area of the United Kingdom because we have huge fiscal transfers. The Government control about 45 per cent. of the national wealth. Public expenditure in Scotland, for example, is about 18 per cent. higher in the current year than it is in England. In Northern Ireland it is about 40 per cent. higher. At the moment, we are planning a European Community, and a single currency across the European Community, in which the European Union will control resources amounting only to 2.26 per cent. of the Europe-wide gross domestic product. Even in the single currency area of the United States, the Federal Government control some 17 per cent. of American GDP. The only way in which a single currency can be sustained across an area of wide disparities is to have huge, compensating fiscal measures.
Several hon. Members rose --
Mr. Jenkin: If I may continue, the Treasury did some work on the subject for the European Community during the 1970s. A Mr. MacDougall prepared a report and he reckoned that the very minimum that the European Community would have to levy in taxation to sustain a single currency across Europe would be 7 per cent. of Community GDP. That would increase the European Community budget to some £333 billion at today's prices, which is considerably larger than it is today and would increase our contribution to some £70 billion.
Mr. Devlin rose --
Mr. Jenkin: If my hon. Friend is prepared to explain that to his constituents, I wish him good luck. Nevertheless, benefits in the current arrangements are considerably cheaper and easier to finance and do not carry the same risks, as demonstrated by the Governor of the Bank of England.
Column 808The last question that I want to ask is: who wants this single currency? We are told that business men want it, but I do not think that that is the case. Following a survey, the CBI claimed that a large majority favoured a single currency, yet it remarked in its own survey that only 12 per cent. were enthusiastic about a more federal approach. That would seem to rule out a single currency for a start. More interestingly, only 28 per cent. of the sample said that a single currency was a necessary condition for a single market. Why does the CBI go round telling everybody that business wants a single currency?
Even more interestingly, the authors of an excellent letter in The Times on 9 February said:
"even if the natural core of European federalist countries were tied into ecu, by far the larger part of Britain's trade and investment would continue to be conducted outside those countries in a wide variety of national currencies.
Plainly, a single currency is not indispensable to expanding exports".
That letter was signed by luminaries such as Michael Edwardes, Owen Green, Lord Hanson, Stanley Kalms, Christopher Wates, Garry Weston and many, many more.
The fact is that British business is not enthusiastic about a single currency and that only a tiny proportion of our trade relates to the possible hard-core area of a single currency--less than 30 per cent. of our external trade or 8.7 per cent. of our gross domestic product. Why inflict an absurd, foreign-controlled monetary policy on the British economy for the sake of 8.7 per cent. of our gross domestic product?
Mr. John Butterfill (Bournemouth, West): I have to agree, on one point at least, with my hon. Friend the Member for Colchester, North (Mr. Jenkin): I do not think that there is the remotest chance of anything but a handful of nations meeting the convergence criteria in the Community by 1999, let alone by 1997.
Having said that, Mr. Deputy Speaker, I would like to explain why, from a sedentary position, I used the word frit during the speech of my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson), for which you admonished me. I did not know that it was an
unparliamentary expression; it has been used fairly frequently by hon. Members of all parties. I used the word because my hon. Friend was suggesting that under article 103 we were compelled to go down the convergence criteria. That of course is not so. Compulsion would take place only if we were to move to stage 3 of monetary union, which could not take place until after 1997, and probably not until 1999, which would be under article 104 of the treaty. We would have had to have agreed to proceed for there to be any compulsion. Guidelines have now come from the Council of Ministers and it is informative to consider those guidelines to discover whether hon. Members on both sides of the House can agree that they are entirely desirable. According to the guidelines, the economic objective is sustainable, non-inflationary and employment-creating growth. No one would disagree with that. The guidelines include reduction in unemployment. Does anyone suggest that that is undesirable? According to the guidelines, there should be a strengthening of economic convergence. If we are in a trading area, it must be desirable to bring some of our
Column 809partners up to the level of the more prosperous nations. It is also appropriate to consider the extent to which what is in the Red Book, which we are presenting to the Community, achieves some of those objectives.
With regard to sustainable, non-inflationary and
employment-creating growth, we are now seeing non-inflationary growth. We have not had such a long period of low inflation for 25 years. Growth has been continuing for some time now. Indeed, we have a little problem in that growth is perhaps running too far ahead and we have had to correct it to ensure that it is sustainable. As for reductions in unemployment, if we look at the rest of the Community, unemployment is increasing. Almost uniquely in the United Kingdom, unemployment is decreasing. The only area in which we are perhaps not succeeding is that of the strengthening of economic convergence. As convergence in other states is unlikely to take place, I believe that the timetable for monetary union, as envisaged by the treaty, is way out and extremely unlikely to be achieved.
To meet those objectives, the guidelines advocate price and exchange rate stability. Price stability has certainly been achieved. Apart from unfortunate recent events, exchange rates have been unusually stable for some considerable time. With regard to sound public finances, we need only read the Red Book to discover what has happened with regard to reduction of the public sector borrowing requirement. The Labour party said that that was completely unattainable. Labour Members said that the PSBR was likely to continue to grow. They did not believe that we could meet the objectives set out in the Budget two years ago or in last year's Budget. However, not only have those objectives been met, but they have been exceeded.
The guidelines suggest measures such as reducing the indirect costs of labour. Conservative Members would certainly agree with that objective. The guidelines include the completion of the internal market. The internal market was proposed by the Government and a single market is now one of the Government's proud achievements which have benefited our industry. Conservative Members would also agree with more flexible labour markets, although I am not sure whether the Labour party would agree to that. The Commission guidelines also refer to pay moderation. I have not seen much sign of encouragement of pay moderation from the Opposition Benches.
Mr. Heathcoat-Amory: I listened very carefully to the hon. Member for Durham, North-West (Ms Armstrong), but I was no clearer at the end of her remarks as to why she was inviting Labour Members to vote against the motion. Of course, she and her party have differences with the Government over economic policy. She gave some rather disjointed examples of what they were, but they were not the subject of today's debate. What we are deciding this evening is not whether we approve the Government's Budget policies; that was settled in last
Column 810year's Budget. Rather, we are discussing whether we approve the sending of appropriate information in the Red Book to the European Commission, as required by treaty. The hon. Lady did not even touch on whether the Labour party thought that we should do that. In the few remaining minutes, I shall try to pick up some of the other points that have been raised, in particular the status of the convergence criteria. My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) set out the four main headings of low inflation, low long-term interest rates, no excessive deficits and a degree of exchange rate stability. The point has been made several times, most notably by my hon. Friend the Member for Beaconsfield (Mr. Smith), that those are good and valid policy aims, regardless of whether they may one day pave the way for monetary union.
It is true also that the United Kingdom is doing particularly well as regards the criteria. Our Budget deficit is coming down fast, and it is expected to be below 3 per cent. of gross domestic product by 1996. Our inflation rate, our interest rates and our general Government debt are also all comfortably within the reference limits set out in the treaty and the associated protocols.
Of course those are tough criteria. In answer to the hon. Member for Great Grimsby (Mr. Mitchell), may I say that low inflation and sustainable growth are not easily achieved. The growth rate of 4 per cent., which we achieved last year, combined with low inflation, is something that very few Governments since the second world war have ever glimpsed.
Of course such matters require difficult decisions on taxation. From time to time, it may be necessary to raise interest rates to keep inflation down, but the prize is worth it. I emphasise that those are good policy aims, regardless of whether they are required or recommended as part of the treaty of Rome.
The other point which I wish to emphasise is that the debate is taking place under stage 2 of monetary union, which began more than a year ago. Economic policy and monetary policy throughout that time have remained firmly in national hands. Indeed, that is why it is the Red Book, flowing from our own national Budget, which forms the basis of the information that we are supplying to the Commission. I tell my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson), who talked about sanctions and suggested penalties, that they have no part to play in stage 2 of EMU. The only sanction, if one may call it that, that is open to the Commission or to the Council of Ministers is to make recommendations. Indeed, it has been recommended that we should continue to bring down our Budget deficit, which we have every intention of doing.
Another point of which I must remind the House is the copper-bottomed nature of the United Kingdom's protocol to the treaty, which states that the UK is not
"obliged or committed to move to the third stage of Economic and Monetary Union without a separate decision to do so by its government and Parliament".
Column 811In addition to that, under the European Communities (Amendment) Act 1993--the so-called Maastricht Act-- notification to the Council of a United Kingdom intention to join stage 3 also requires a prior Act of Parliament.
We have had some railway metaphors. My hon. Friend the Member for Chingford (Mr. Duncan Smith) introduced into the debate the Schlieffen plan. At the risk of correcting him, may I say that it was the mobilisation of the Russian army at the start of the first world war which required railways and which was so complicated that it could not be stopped. It was A. J. P. Taylor--I know that I am right on this point--who said that the first world war was the culmination of the railway age. Whether in this or in previous debates, we have always been regaled with colourful motoring or railway metaphors about whether we are in danger of missing the train leaving the station or whether we are on the wrong branch line. The truth is, however, that in terms of EMU we can watch the train assembling on the continent and decide at the right moment whether it is in the national interest for us to join it. We are in no sense committed to joining the third stage of monetary union. Doubtless my right hon. Friend the Prime Minister will say more about that on Wednesday. The convergence criteria, on which we touched earlier, do not simply stop at the four headings already described. My right hon. and learned Friend the Chancellor of the Exchequer has also raised the need to address the deep-seated structural differences in the European economies, and the Governor of the Bank of England has drawn attention to the implications of differences in productivity growth and the need for flexible labour markets. The question whether we can safely relinquish the mechanism of adjustment of nominal exchange rates or whether we should continue to insist on that possibility remains open. I ask my hon. Friend the Member for Colchester, North (Mr. Jenkin) not to assume that the entire argument is over, bar the shouting.
The hon. Member for Gordon (Mr. Bruce) asked about the social and economic goals in article 2 of the treaty. The Red Book sets out the tax and expenditure policies across the board, including a large sum to be spent on social security and the environment. The Budget included not just a new landfill tax but fuel taxes designed in part for us to meet our carbon dioxide reduction commitment. The social and environmental goals are in the Red Book, and will form part of the report that we shall make to the Commission in due course. The motion is to approve the sending of information to the European Commission, as required by articles 103 and 104c of the treaty. In 1993 the Government gave an assurance that the terms of section 5 of the Maastricht Act would be strictly observed, and that the House's approval was therefore necessary before the sending of the required information; yet this year the Labour party has again contrived a case for voting against the motion, which would entail a breach of the treaty obligations.
We are used to the Labour party's turning somersaults on Europe, but this must constitute a new low. Labour Members show craven subservience to the European Community in regard to big issues when British interests are at stake, but invite the House to break a treaty
Column 812obligation: they would block the sending of a report that is required. I invite the House to show a good deal more sense than that, and to approve the motion.
The House divided: Ayes 279, Noes 183.
Division No. 87] [11.43 pm
Column 812Ainsworth, Peter (East Surrey)
Aitken, Rt Hon Jonathan
Alison, Rt Hon Michael (Selby)
Arnold, Jacques (Gravesham)
Atkinson, Peter (Hexham)
Baker, Rt Hon Kenneth (Mole V)
Baker, Nicholas (North Dorset)
Banks, Matthew (Southport)
Banks, Robert (Harrogate)
Beresford, Sir Paul
Biffen, Rt Hon John
Bonsor, Sir Nicholas
Bottomley, Peter (Eltham)
Bottomley, Rt Hon Virginia
Bowden, Sir Andrew
Boyson, Rt Hon Sir Rhodes
Bright, Sir Graham
Brooke, Rt Hon Peter
Brown, M (Brigg & Cl'thorpes)
Browning, Mrs Angela
Carlisle, Sir Kenneth (Lincoln)
Clarke, Rt Hon Kenneth (Ru'clif)
Coombs, Anthony (Wyre For'st)
Coombs, Simon (Swindon)
Cope, Rt Hon Sir John
Cormack, Sir Patrick
Currie, Mrs Edwina (S D'by'ire)
Curry, David (Skipton & Ripon)
Davis, David (Boothferry)
Deva, Nirj Joseph
Douglas-Hamilton, Lord James