House of Commons Hansard Debates for 2 Jul 1997 (pt 6)

Mr. Michael Fabricant (Lichfield): Further to that point of order, Mr. Deputy Speaker. The hon. Gentleman may be unaware that the Financial Times states:

"A senior member of the government said".

It was not an official. As you will know, Mr. Deputy Speaker,

"A senior member of the government"

is the code for the Chancellor himself.

Mr. Deputy Speaker: This is not an matter that can be debated at this moment. There is a subject for debate before the House at present. I do not believe that it is for the Chair to rule as to whether subsequent action is taken. Any decision which might or might not be justified for the purposes of investigation by a Select Committee or any other means would not be determined by the Chair.

Obviously, there will be other opportunities for such a matter to be raised if it is justified, but I can see no point in these proceedings continuing further at this time. We must move on to the debate.

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Exchange Rate

11.7 am

Mr. Austin Mitchell (Great Grimsby): I was delighted to see the full attendance by Opposition Members for the debate; I thought that, after 20 years of maintaining an overvalued exchange rate, they had actually come along en masse to testify to their conversion to a belief in competitive exchange rates. Now that they are leaving the Chamber because they cannot face hearing the catalogue of their failures, I am a little disappointed, especially because this is an extremely important subject--potentially more important than this afternoon's Budget statement in its effects on the British economy. I am delighted, therefore, to have the opportunity to draw attention to it in this debate.

We are facing an unprecedented increase in the pound sterling exchange rate--in other words, in the competitive price of our exports on export markets--which has taken us back to the levels that we were at when we were in the exchange rate mechanism. The pound is now at a five-year high. That is the prelude, in my view--in my fears--to an industrial blood letting of the type that the two previous highs, in the early 1980s and the early 1990s, produced in British manufacturing.

The exchange rate has the potential to undermine anything that the Chancellor does. Unless British industry has the prospect of competitiveness--in other words, of generating profits--we shall not get the investment that we want in our economy. Unless there is a prospect of demand for industry's product, we cannot generate new jobs and put people back to work.

The exchange rate rise threatens both profitability--and therefore investment--and employment. The facts are stark. In the year to April 1997, the pound rose by 17 per cent. against the ecu, by 22 per cent. against the deutschmark, by 7.6 per cent. against the dollar--which is rising itself--and by 26 per cent. against the yen. Those are the currencies of our competitors.

This morning, The Guardian says that the pound is 26 per cent. higher against the deutschmark and the franc than it was last August. Those are horrifying figures. That direct loss of competitiveness comes at the end of a long period in which the pound has been overvalued. Indeed, it is a long period in which our relative export unit cost--the measure of our prices against those of our competitors for manufactured goods--has risen.

John Mills has calculated for me that, from 1973 to 1997, the loss of competitiveness on relative export unit costs was between 40 and 50 per cent. It is difficult to have a more precise calculation because the bases keep changing but an increase of 40 to 50 per cent. in the price of our manufactured exports is disastrous for competitiveness. What would happen to Sainsbury if it faced such price rises on its shelves when Asda or Tesco did not? Sainsbury would quickly close, which is the effect of that sustained rise on the British economy.

What can British industry do? Although it can cut costs, fire workers or stop research and development and other measures that contribute to its long-term survival, it can do none of those on a scale adequate to compensate for the increase in its prices which the exchange rate has forced on it against its will and its judgment--a force outside its control. That rise in prices threatens it with disaster.

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People tell me that exports are doing well. So what? Firms continue to export without profit just to retain their share of the market because they know that once they are out of the market, they cannot get back in. That has been the history of British failure for 20 years, so companies naturally try to keep their exports going without a profit by holding their prices against the rise in the currency. That, however, is a finite process--it cannot continue for a sustained period. People said that trees had survived the drought, only to find that they suddenly collapsed because they had been rotting from the inside.

The main threat from the rise in the exchange rate is to manufacturing, because that is our front line. Manufacturing generates 60 per cent. of our exports. It is an extremely competitive market, which is becoming ever tougher and more competitive as the industrial power of the young dragons of the far east grows. Price is crucial in manufacturing exports because they must be sold at a price that generates a profit sufficient for companies to invest, stay in the game and expand. Unless their exports grow, they are dead in today's competitive world. And unless we can sell exports at a price that allows all that, manufacturing companies' long-term prospects are disastrous. They must run at full capacity and use that capacity to keep down their unit costs. As exports suffer, capacity usage declines and unit costs rise.

All that does not happen immediately, but early warnings are already appearing in company reports. I have been poring over company reports, profitability forecasts and warnings issued by companies, which show that companies are cutting investment, transferring production overseas and slimming down their work force. Profitability is now falling rapidly in crucial sectors, such as building materials; textiles; food manufacturing, which is a problem for Grimsby; pharmaceuticals; the tourism and leisure industry; and in oil.

British Steel has supplied a briefing to Members of Parliament warning of the consequences in dire terms for British Steel and all the firms who use its products if the exchange rate rise continues. It says:

"Britain's loss of competitiveness will also damage the UK's attractiveness to inward investment.