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10.25 pm
Mr. Barry Legg (Milton Keynes, South-West): This is a timely debate upon the issues of convergence and the monetary union. Paragraph 4.10 of the Red Book, which sets out the Government's policies on the matter, states:
- "The general government financial deficit--which is also the measure used to monitor budget deficits under the European Union excessive deficits procedure--is forecast at £33½ billion for 1995-96, 4¾ per cent. of GDP. By 1996-97, it is forecast to be close to the3 per cent. reference level for deficits used in the excessive deficit procedure."
That policy sounds fairly innocuous, but it contains economic, political and democratic perils. If we look a little further than the United Kingdom, we find that those perils are manifesting themselves even more strongly in France and in Germany.
Mr. Nicholas Budgen (Wolverhampton, South-West):
Does my hon. Friend agree that he is being most ungenerous? The Chancellor, during his Budget speech, particularly commended his Budget on the basis that it would conform to the convergence criteria. Those of us who have known the Chancellor for a long time know that, for at least 30 years, he has been in favour of further integration into the European Community. His Budget was but a step in that direction. I think my hon. Friend ought to be more generous to my right hon. and learned Friend.
Mr. Legg:
My hon. Friend has certainly known my right hon. and learned Friend the Chancellor of the Exchequer much longer than I. I would not seek to quarrel with him on those points. I believe that there are no automatic pilots with respect to economic policy; there are no two or three criteria that one can follow in economic policy to produce economic success. The world is not like that. If we look to continental Europe and,in particular, to what is happening in France and Germany, we see the follies of blindly attempting to follow convergence criteria.
We see the folly of following deflationary policies--both in fiscal and monetary terms. In continental Europe, fiscal conservatism, fiscal consolidation and inflation competition are all taking place at the same time. The terms of the convergence criteria on inflation require member states to be in the top three countries--or as close as possible to the top three countries--in inflation terms. France and Germany have suffered from overtight monetary policies over the past few years.
Mr. Cash:
Does my hon. Friend agree that the reply that the right hon. Member for Bethnal Green and Stepney (Mr. Shore) received from the Chancellor of the Exchequer shows that it may be, by chance, that we will comply with those criteria, but that overlooks the fundamental fact that this is a legal framework which is
Mr. Legg:
My hon. Friend is absolutely right when he says that those are legal obligations that we willingly placed on ourselves--legal obligations under British and European law. I know that my hon. Friend spent some time studying the treaty when we debated it in the House. If we closely examine our legal obligations, specifically article 104c, we find that there is considerable flexibility for interpretation in the excess budget deficit procedure.
Most hon. Members probably believe that there is a3 per cent. limit to budget deficits, and that countries that enter the single currency will have to meet the 3 per cent. deficit criteria, but that is not the position. A country does not need to have a deficit within 3 per cent. to achieve economic convergence and move to a single currency.
Article 104c says, about the definition of the Government deficit requirement, 3 per cent.
Under the Maastricht treaty, that is the definition on which a group of politicians will decide whether we move to a single currency. They will sit in judgment and decide whether Europe's economies have converged sufficiently. They do not have to consider 3 per cent. They need only ask, "Is it close? Is the excess over 3 per cent. only exceptional and temporary?"
Mr. Legg:
I give way to my hon. Friend the Member for Northampton, North (Mr. Marlow).
Mr. Marlow:
I think my hon. Friend can put his nightmare on one side, because I believe that it will not happen. No Conservative Government will take Britain into European monetary union. The economies of France and Germany are so destroyed and distorted that the political will would not endure a sufficient time to take them into economic and monetary union.
Perhaps my hon. Friend would go one further and look at Italy. Does he realise that the debt in Italy is such that to pay the annual interest on that debt costs Italy more than paying for defence, education, social security and health put together? Is there any chance that Italy will be able to join monetary union?
Mr. Legg:
I am grateful to my hon. Friend for those points. I know that he is a close follower of European affairs, and I am sure that it will not have escaped his notice that Mr. Weigel, the German Finance Minister, commented clearly on Italy's financial position in the autumn; it is obvious that the Germans do not want the Italians in the single currency. They accept the argument that my hon. Friend has made, that Italian debt is far too high. I am sure that, when the decision is made in 1998, Italy will not be part of the single currency.
Mr. Budgen:
I am sure that my hon. Friend responds most politely to my hon. Friend the Member for
Is it not possible for us to say, "Perhaps they do want to join a single currency. Perhaps, for reasons of their history and their economies, it is right for them to join a single currency. We rather doubt that it will be in their long-term interests, but it is not for us, in our diffidence and uncertainty, to express an opinion about what is good for them"? Is it not important for us to express an opinion about what is right for our country, and is it not right for us to say--
Mr. Deputy Speaker (Mr. Michael Morris):
Order. Interventions should be short.
Mr. Legg:
I am grateful to my hon. Friend for those comments. We cannot altogether forget those countries and their economic affairs because, in 1998, the Prime Minister of this country must sit down with the other Heads of Government and make a judgment about the Italian economy. He has to make a judgment.
Mr. Legg:
It is a requirement under the terms of the Maastricht treaty, which is the law of the land. I should have thought that my hon. Friend would appreciate that by now. The Prime Minister of the United Kingdom will have to make a judgment about the Italian economy in 1998, and he will have to cast a vote when it comes to deciding whether Italy should join the single currency.I suspect, that if the Government cast a vote, it will not be in favour of Italy joining the single currency. That, however, is the procedure that we have agreed. In that sense, the Maastricht treaty has brought Europe closer together.
Convergency criteria are creating deflationary pressures on the continent. Unemployment in France is over 12 per cent. The figures from Germany last week were extremely worrying and disturbing. More than 4 million are unemployed in Germany. These two countries are trying to achieve the criteria, including a budget deficit of 3 per cent. At the same time, however, they are pursuing restrictive monetary policies that are impeding growth in their economies. In having overshot their deficit levels, their growth is much lower than expected--it is only about 1.5 per cent.
The required criteria cannot blithely be followed.If monetary policy is overtight, unemployment increases and the budget deficit rises steadily. The process then becomes self-defeating.
Mr. Nigel Spearing (Newham, South):
I happen to agree with the hon. Gentleman's most recent point. Earlier, however, he suggested that there was a degree of flexibility. Does he agree that article 104c(2)(b) sets out two criteria? The hon. Gentleman quoted the first, which is to some degree an exception. The second, which is to some extent in parallel, states:
Is that not also a constraint that adds to the difficulties that the hon. Gentleman has mentioned?
"or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value".
"whether the ratio of government debt to gross domestic product exceeds a reference value, unless the ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace."
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