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5.53 pm

Mr. Malcolm Bruce (Gordon): In his opening speech, the Foreign Secretary said that the Government saw Europe as an opportunity, not a threat. From the Liberal Benches, I welcome that positive approach. I believe that, ultimately, the Government will be judged on their ability to deliver.

At the moment, it is not surprising that there are certain contradictions: conciliation is followed by telling Europeans what to do. I believe that someone was reported as saying that Tony Blair occasionally sounded like Mrs. Thatcher, telling them how he was going to sort out Europe. Nevertheless, I believe that the Government's clear indication that they intend to proceed in Europe by constructive negotiation and as participating members

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seeking to advance our interests by negotiation and by being constructive, will yield better results than the 18 years of confrontation that have pushed us to the margins of decision making in Europe.

By contrast, the Leader of the Opposition, the former Prime Minister, appeared confused and contradictory in his speech this afternoon. I agree entirely with the right hon. Member for Old Bexley and Sidcup (Mr. Heath) that in that speech there was a lack of commitment to Europe and a continuing feeling that the Leader of the Opposition must somehow address the two irreconcilable wings of his party. One would have thought that the consequence of the general election might have liberated him from that stress and enabled him to tell us exactly what he thought about this issue, but I regret to say to the right hon. Member for Old Bexley and Sidcup that I think the chapter of Europe is not yet closed as far as the Conservative party is concerned.

The right hon. Member for Chesterfield (Mr. Benn) made a speech that we have heard him make many times. Although he certainly does not polarise things in a national sense, he is in danger of doing so in an ideological sense. It is understandable.

The right hon. Member says that, by definition, the European Union is deflationary. I think that by "deflationary" he means that its members have set themselves the object of living within their means and operating budgetary discipline, recognising that one cannot spend money that one does not have and that it is impossible to borrow one's way out of recession indefinitely.

There is room for flexibility in such an approach, but it is not a question of a commitment to stability; it is a question of a commitment to sustainability, to achieve the climate that will secure long-term employment and prosperity by giving people confidence in the economic institutions that we are trying to create. In that context, most of my remarks, as Liberal Democrat Treasury spokesman, will be about progress towards monetary union. My hon. Friend the Member for Somerton and Frome (Mr. Heath) will address some of the wider issues.

Before I discuss monetary union, I would say that, as a lifelong Liberal and now Liberal Democrat, and admitted supporter of home rule for Scotland and the progress of the European Union, I have never understood why people find those things contradictory. Those who believe that we need to achieve a co-operative Europe that involves all the peoples of Europe must also be aware of the need to conduct decision making at the appropriate level. If people are to relate to a wider Europe, it is important that their own institutions are close to them, so that people may directly shape and influence them, too. That is my simple definition of subsidiarity.

No one is calling for a European super-state. The only people who are calling for, or threatening us with, a European super-state are those who wish to destroy the European Union by creating a bogey that does not exist, so that they can frighten people into opposing the constructive idea of a Europe that is seeking to build institutions to enable us to avoid conflict and achieve progress on a variety of fronts--which cannot be achieved unless institutions are genuinely open and accountable.

To return to the issue of monetary union and to indicate to the Government that we shall support their motion, which is basically innocuous, and not the Opposition

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amendment, which simply expresses the deep divisions and difficulties in the Conservative party, let me say that it is important to set out some of the key issues that have arisen as a consequence of developments in France, Germany and other EU nations in the context of monetary union.

I wholly reject the Leader of the Opposition's analysis that he can determine now that monetary union at the beginning of 1999 is no longer a viable proposition. That is questionable and he is not entitled to make that assumption. It has been made only because of the convenience that it provides for his party.

The Liberal Democrats take the clear view that membership of a soundly constructed and fully converged monetary union in Europe would greatly benefit the British economy. It would reduce transaction costs for both individuals and companies, encourage trade by reducing exchange rate volatility, and help to secure low interest rates and low inflation. Ultimately, those achievements would boost jobs and incomes in the United Kingdom.

Those are real prizes to be won. In many ways, this country has as much, if not more, to gain than almost any other member of the European Union, not least because in post-war times we have not secured a credible record of stability on exchange rates, inflation rates and inflation. That is one reason why we have been unable to create the climate of sustained investment and growth that we all wish to achieve.

When I intervened on the Leader of the Opposition, I noticed that I struck a spark. Having spoken of the dangers of joining on time, he told the House even more passionately of the dangers of being left outside if monetary union went ahead and worked. We should not lose sight of that. If this country permanently rules out membership, we risk losing foreign direct investment and the City of London risks losing financial interest to other European centres, notably Frankfurt. Had the previous British Government taken a more positive attitude towards monetary union, the European Monetary Institute and the European central bank might have been located in London, not Frankfurt. If monetary union is successful, the fact that the Conservative Government sold out the opportunity for London to be the pre-eminent financial and monetary centre for the whole of an enlarged European Union will go down as one of their greatest betrayals.

We shall therefore certainly lose if we are excluded. We shall also suffer from potentially damaging exchange rate instability, affecting trade with some of our biggest markets. On Black Wednesday, when Britain was forced out of the exchange rate mechanism, the then Chancellor of the Exchequer was reported to be singing in the bath because he was freed from that constraint. Somehow or other, that was supposed to liberate a whole new economic revival. Ironically, three or so years later the exchange rate is exactly where it was the day we were driven out of the ERM. Such volatility makes it extremely difficult for businesses to plan. The removal of that factor would be one of the greatest prizes that monetary union could deliver. It simply would not be a risk that any business would have to analyse.

Mr. Andrew Tyrie (Chichester): Does that mean that the hon. Gentleman thinks that we should have tried to defend the parity of the ERM rather than withdraw?

Mr. Bruce: No. It shows why the Conservative Government mishandled entry to the ERM in the first

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place. In many speeches in the House before entry to the ERM, it was pointed out that it was in our interest to go in at the right rate. Instead of going in at the right rate, however, we went in at a politically convenient time--the day before a Conservative party conference--to secure a headline about a reduced interest rate, and we paid a heavy price for that political opportunism. As a matter of detail, one reason why the Liberal Democrats called for operational independence for the Bank of England was so that such decisions would not be taken in that way. That was not in the Labour party manifesto, but it is now in the Government's programme.

We should not underestimate the difficulties of achieving monetary union, or the enormous prize that is there to be won. We have always recognised that it is a major project which will not be achieved simply and easily. We said that we would attach conditions to underwriting its success and to British participation. A referendum of the British people on joining monetary union, should it be determined that we should go ahead, is sensible not just to secure democratic assent, although, by definition, that is the prime reason for such a referendum, but for securing market acceptability that the decision is real and unlikely to be reversed at short notice. The trouble is that Britain's posturing in Europe has damaged us so much that people do not believe that a decision taken on one day will not necessarily be reversed in the near future. The great advantage of a referendum is that it secures the decision by giving the British people and the Government consent for the act.

I was therefore somewhat surprised and disappointed that at the weekend the shadow Chancellor appeared to back away from the Conservative party's commitment to hold a referendum. For the reasons stated, we believe that such a referendum is desirable and in the best interests of democracy and long-term security of the decision. Once the Conservative leadership election is over, we may get some clarification from whoever emerges on whether it remains Conservative party policy.

We accept that the convergence criteria must mean what they say. The trouble is that few people know what the treaty says. It allows for a restricted degree of flexibility, in terms of both the criteria and the timing. The criteria should be applied within the terms of the treaty. It is extraordinary that the Leader of the Opposition has decided that he knows better than anyone else what the outcome will be in 12 months' time. At least the Foreign Secretary acknowledged that, although the decision is coming closer all the time, it cannot be clearly assessed at this stage.

The right hon. Member for Old Bexley and Sidcup pointed out that, whether or not we agree that the timing of the German proposal for revaluing its bullion was entirely felicitous, German gold is worth a hell of a lot more than ours. It therefore comes a little ill from us to lecture Germany about how securely founded the German economy is to sustain strong monetary union.

We would therefore not support monetary union that was clearly in fundamental breach of the convergence criteria. I hope and believe that nobody would contemplate that. We should make it clear to our partners in Europe that the criteria should be properly addressed by those who will join and those who aspire to join. If those criteria are met, if the decision goes ahead, and if

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Britain meets the criteria, it will certainly be in Britain's interest to be in on the ground floor. That is why it is also important to have a clear understanding of the stability pact. It is no good having a set of criteria that determine who qualifies then allowing countries to go their own way. There must be continuing disciplines to ensure good, sound economic management. They should not preclude Governments' rights to set their own tax or spending levels. They should prevent them from borrowing excessively, which is a good external discipline, but should allow countries to pursue their own policies, provided that they are within those broad economic criteria.

Having achieved the disciplines of convergence, it is essential that nations stick to the criteria. It is also essential that sovereign nations retain maximum flexibility over domestic fiscal policy, which means that there must be maximum fiscal subsidiarity. It is not necessary for the terms of monetary union to tell us how we should run our tax-and-spend policies. Countries with lower debt burdens in relation to gross domestic product should be allowed more flexibility over their annual deficits than countries such as Belgium, which have unacceptably high debt-to-GDP ratios. I hope that the Government will promote flexibility that takes account, at the point of departure, of where people started from.

There is flexibility on timing within the convergence criteria. We have always said that it is more important to get monetary union right than to get it on time. If it is not possible to meet the criteria--at this stage there is no evidence to suggest that it is not possible, but there are some obvious difficulties and concerns--a short delay would be preferable to seriously breaching the criteria or losing the entire project.

We Liberal Democrats will be working with our political allies in the other member states in the European Union to achieve a framework for monetary union that will be credible and viable, and which we could recommend that the United Kingdom should join.

It remains the Liberal Democrat view that Britain should be active in the great projects of Europe, that monetary union is one of the great projects of Europe and that we should still consider the possibility of joining on the ground floor. We should do our utmost to ensure that, whether or not we join on day one, everything that Britain does is designed to ensure the success of monetary union and our ultimate participation.

We welcome the Government's departure from a confrontational approach that has so long damaged Britain's interests. It is time to try a constructive approach. We are certain that that is entirely compatible with developing and protecting this nation's legitimate sovereign interests.

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