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Hon. Members: Hear, hear.

27 Oct 1997 : Column 582

Winchester (Election)

3.34 pm

Madam Speaker: I have one other duty to perform. It is my duty to report to the House that I have received a communication from the Queen's Bench division of the High Court of Justice, in which two of Her Majesty's judges have informed me of their determination in the matter of the election of a Member for the constituency of Winchester on 1 May last.

The court's determination, reached in accordance with the provisions of the Representation of the People Act 1983, is that: there were breaches by the returning officer's agent of rules 20 and 37, as set out in schedule 1 to the Act; that the result of the election was affected thereby; that Mark Oaten was not duly elected and returned as Member of Parliament for Winchester; and that the election on 1 May 1997 is void.

I shall cause the full text of the court's communication to be recorded in the Journal. The next step is for a writ to be issued for a new election, and I hope that the necessary notice will be brought before the House in the very near future.

We now have a statement by the Chancellor of the Exchequer.

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Economic and Monetary Union

3.36 pm

The Chancellor of the Exchequer (Mr. Gordon Brown): With permission, Madam Speaker, I want to make a statement on economic and monetary union.

Since the end of the second world war, Britain has faced no question more important and more contentious than that of our relationship with Europe. Divisions within Governments of both parties, and hence indecision, have made British policy towards Europe over many years inconsistent and unclear. The economic consequences of those weaknesses have been a loss of international initiative and influence, recurrent instability and continuing questioning of our long-term economic direction.

To break with this legacy and to establish clear national purpose, which has eluded us for decades, economic leadership is essential, and Britain must now make the difficult decisions on Europe, however hard.

The decision on a single currency is probably the most important question that this country is likely to face in our generation. Yet until now, there has been no detailed examination by Government of the practical economic issues of EMU and no proper preparation for a decision, because no previous Government could agree on whether they supported it in principle, nor whether there was an overriding constitutional objection on grounds of sovereignty; nor whether, even if a single currency worked and worked well, the Government would wish to be part of it. Forms of words like, "keeping the option open"--while no preparations were ever made to render that option practicable--have similarly served as a pretext for postponing the hard choices.

Now is the time to make these hard choices and set a long-term direction for our economic future in Europe. So I shall deal in turn with the question of principle of economic monetary union, the constitutional implications and the economic tests that have to be met. In each area, I shall set down the Government's policy.

When we came into government, I asked the Treasury to carry out an assessment of the economic tests that have to be met. Accompanying my statement is a detailed and comprehensive Treasury assessment, which I am publishing today, copies of which are available in the Vote Office.

I start with the question of principle. The potential benefits for Britain of a successful single currency are obvious in terms of trade, transparency of costs and currency stability. Of course, I stress that it must be soundly based. It must succeed. But if it works economically, it is, in our view, worth doing. So in principle, a successful single currency within a single European market would be of benefit to Europe and Britain. Secondly, it must be clearly recognised that to share a common monetary policy with other states represents a major pooling of economic sovereignty.

There are those who argue that this should be a constitutional bar to British participation in a single currency, regardless of the economic benefits that it could bring to the people of this country. In other words, they would rule out a single currency in principle, even if it were in the best economic interests of the country.

This is an understandable objection, and one argued from principle, but in our view it is wrong. If a single currency would be good for British jobs, British business

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and future prosperity, it is right in principle to join. The constitutional issue is a factor in the decision, but it is not an overriding one. Rather, it signifies that, in order for monetary union to be right for Britain, the economic benefit should be clear and unambiguous.

I therefore conclude on the question of principle that if, in the end, the single currency is successful and the economic case is clear and unambiguous, the Government believe that Britain should be part of it.

There is a third issue of principle--the consent of the British people. Because of the magnitude of the decision, we believe, again as a matter of principle, that, whenever the decision to enter is taken by Government, it should be put to a referendum of the British people. Whenever this issue arises, under this Government there will be a referendum. Government, Parliament and the people must all agree.

We conclude that the determining factor as to whether Britain joins a single currency is the national economic interest, and whether the economic case for doing so is clear and unambiguous.

I turn now to the Treasury's detailed assessment of the five economic tests that define whether a clear and unambiguous case can be made. These tests are, first, whether there can be sustainable convergence between Britain and the economies of a single currency; secondly, whether there is sufficient flexibility to cope with economic change; thirdly, the effect on investment; fourthly, the impact on our financial services generally; and fifthly, whether it is good for employment.

Of these, the first and most critical is convergence: can we be confident that the United Kingdom business cycle has converged with that of other European countries, so that the British economy can have stability and prosperity within a common European monetary policy? That convergence must be capable of being sustained and likely to be sustained. In other words, we must demonstrate a settled period of convergence.

Currently, Britain's business cycle is out of line with those of our European partners. British interest rates are 7 per cent.--the level set by the Bank of England in order to achieve the inflation target--but in Germany and France, interest rates are close to 3 per cent. Across the continent, because business cycles are more coincident, short-term interest rates have been converging for some time.

This divergence of economic cycles is in part a reflection of historic structural differences between the United Kingdom and other European economies, in particular the pattern of our trade and North sea oil. These differences are becoming less distinct as trade with the rest of Europe grows and the single market deepens. However, divergence is also a legacy of Britain's past susceptibility to boom and bust--the damaging boom of the late 1980s, the severe recession of the early 1990s and the previous Government's failure to raise interest rates early enough in the current economic cycle.

Since coming into office, the Government have introduced long-term measures to ensure that we are capable of maintaining stability, by giving operational responsibility to the Bank of England for interest rates and by implementing our deficit reduction plan for public borrowing.

We will need a period of stability with continuing toughness on inflation and public borrowing. The Treasury's assessment is that, at present, the UK's

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economic cycle is not convergent with our European partners, and that this divergence could continue for some time. To demonstrate sustainable convergence will take a period of years.

To be successful in a monetary union, countries will need even more flexibility to adjust to change and to unexpected economic events once the ability of countries to vary their interest rates and their exchange rates has gone, and the euro and a single European interest rate are in place. Flexibility may be particularly important for the United Kingdom if there is any risk that our business cycle has not fully converged with those of other European countries.

The Treasury assessment on the second test--flexibility--is that, in Britain, persistent long-term unemployment and lack of skills, and in some areas lack of competition, point to the need for more flexibility to adapt to change and to meet the new challenges of adjustment. The Government have begun to implement a programme for investing in education and training, helping people from welfare to work and improving the workings of our markets.

Of course, other European countries need to tackle unemployment and inflexibility to make sure that Europe as a whole is able to withstand any shocks that arise. The Government will continue to argue that employability, flexibility and stronger competition policies must be a top priority so that monetary union can be successful.

The third test is investment: whether joining monetary union would create better conditions for businesses to make long-term decisions to invest in Britain. The Treasury assessment is that, above all, business needs long-term economic stability and a well-functioning European single market. It concludes that membership of a successful single currency would help us to create the conditions for higher and more productive investment in Britain. The worst case for investment would be for Britain to enter EMU without proper preparations and without sufficient convergence, with all the uncertainty that that would entail.

The fourth test asks what impact membership of the single currency would have on our financial services industry. EMU will affect that industry more profoundly and more immediately than any other sectors of the economy. The Treasury's assessment is that we can now be confident that the industry has the potential to thrive whether the United Kingdom is in or out of EMU, so long as it is properly prepared. However, the benefits of new opportunities from a single currency could be easier to tap from within the euro zone, and that could help the City of London to strengthen its position as the leading financial centre in Europe.

For millions of people, the most practical question is whether membership of a successful single currency would be good for prosperity, and particularly for jobs. The Treasury's assessment is that our measures to create employment and for welfare state reform must accompany any move to a single currency.

Ultimately, we conclude that whether a single currency is good for jobs in practice comes back to the question of sustainable convergence. A successful single currency would provide far greater trade and business in Europe. The Treasury assessment is that, in vital areas,

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the economy is not yet ready for entry, and that much remains to be done. The previous policy of keeping options open without actively making preparations has left parts of the economy unprepared. Our overall assessment is that Britain needs both a period of preparation and a settled period of sustainable convergence--and both require stability.

Applying those five economic tests leads the Government to the following clear conclusions. British membership of a single currency in 1999 could not meet the tests, and therefore is not in the country's economic interests. There is no proper convergence between the British economy and other European economies now, and to try to join now would be to accept a monetary policy that would suit other European economies but not our own. We will therefore be notifying our European partners, in accordance with the Maastricht treaty, that we will not seek membership of the single currency on 1 January 1999.

The issue then arises as to the period after 1 January 1999. We could simply leave the options open as before, but with no clear direction either way for the rest of the Parliament. That would be politically easy, but it would be wrong. There would be instability and perpetual speculation about "in or out", "sooner or later", that would cause difficulties in the financial markets and for business and industry. It would make it harder to prepare for the possibility of a single currency because every step in preparation every time the issue was discussed would feed fresh bouts of speculation.

It must be in the country's interests to have a stable framework within which to plan. We are fortified in this because, on the economic tests that we have set out, the practical difficulties of joining a single currency in this Parliament all point to the same conclusion.

There is no need, legally, formally or politically, to renounce our option to join for the period between 1 January 1999 and the end of the Parliament--nor would it be sensible to do so. There is no requirement to do so under the treaty, and, what is more, no Government can ever predict every set of economic circumstances that might arise. What we can, and what we should, do is to state a clear view about the practicability of joining monetary union during that period.

In applying our economic tests, two things are clear: there is no realistic prospect of our having demonstrated before the end of this Parliament that we have achieved convergence that is sustainable and settled rather than transitory; and Government have only just begun to put in place the necessary preparations that would allow us to do so. Other countries have for some years been making detailed preparations for a single currency. For all the reasons given, we have not.

Therefore, barring some fundamental or unforeseen change in economic circumstances, making a decision to join during this Parliament is not realistic. It is therefore sensible for business and the country to plan on the basis that, in this Parliament, we do not propose to enter a single currency.

There are those who urge us to seek consent in principle through a referendum now or soon, with a view to entry some time later. Any serious gap between the referendum and the actual entry date would undermine the conclusions of the referendum. Because the essential decision is economic, it can be taken only at a time when

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the Government and the people can judge that sustainable convergence has been established. So, in our view, the interval between the decision to join and our joining must not be unduly protracted.

I have said that, if a single currency works and is successful, Britain should join it. We should therefore begin now to prepare ourselves so that, should we meet the economic tests, we can make a decision to join a successful single currency early in the next Parliament. At present, with no preparation, that is not a practical option. We must put ourselves in a position where Britain can exercise genuine choice.

The questions of preparation are immense--practical questions for business as well as for Government. For example, euro notes and coins will be circulating across Europe from 1 January 2002. Some companies, such as Marks and Spencer, have already decided to accept euros in Britain; others will want advice on what is best for them.

Because both the Government and business must prepare intensively during the next few years, we will commence work on the detailed transition arrangements for the possible introduction of the euro in Britain, including notes and coins, should we wish to enter. We will step up the work on what business should do now to prepare for the introduction of the euro in 1999, whether we are in or out. We will work with business on what Government must do to prepare for EMU should we decide to join in the next Parliament.

To help with essential preparations, I have invited the Governor of the Bank of England and Sir Colin Marshall, president of the Confederation of British Industry, to join me and the President of the Board of Trade in leading a standing committee on preparations for EMU. I am pleased to say that they have agreed. I am also inviting the president of the Association of British Chambers of Commerce to join us.

I can also announce that, from January, a series of regional and sectoral conferences on preparations for monetary union will be held. In addition, my right hon. Friend the Prime Minister has today decided to extend Lord Simon's Treasury responsibilities to include European business preparations in this Government, covering the long-term planning of the new standing committee.

In addition to those practical preparations, there are reforms we can make that are right in themselves in the national economic interest, and will help us to meet the five economic tests. We will promote greater flexibility in the UK economy and in Europe through the "getting Europe to work" initiative. We will introduce new competition legislation that draws on the best of European and wider international policy and practice, as well as continuing to negotiate to secure the best interests of our financial sector and for the opening up of the single market in financial services. We will set as one of the key objectives of our European presidency completion of the European single market.

In my Mansion House speech, I said that, if we succeeded in strengthening the ability of the British economy to sustain growth without inflation, and if international conditions permitted, I would hope to lower the inflation target. So we will monitor our inflation target, and will do so in the light of the European central bank. We will ensure that our fiscal rules and our deficit

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reduction plan continue to be consistent with the terms of the stability pact, thus underlining our commitment to avoid an excessive deficit under article 104c of the treaty and supporting greater co-ordination in ECOFIN. In Britain's interests, we need to keep inflation low and public borrowing firmly under control.

The single currency will affect Britain, in or out. It is in the British national interest for it to work. Vital decisions will be made during our European presidency in the first half of next year. We will use our position constructively and supportively, and we will play a full part in ensuring that the single currency's launch is successful--something that is in Britain's interests as well as in Europe's interests.

To sum up, we believe that, in principle, British membership of a successful single currency would be beneficial to Britain and Europe; the key factor is whether the economic benefits of joining for business and industry are clear and unambiguous. If they are, there is no constitutional bar to British membership of EMU.

Applying the economic tests, it is not in this country's interest to join in the first wave of EMU starting on 1 January 1999, and, barring some fundamental and unforeseen change in economic circumstances, making a decision in this Parliament to join is not realistic. To give ourselves a genuine choice in the future, it is essential that Government and business prepare intensively during this Parliament so that Britain will be in a position to join a single currency, should we wish to, early in the next Parliament.

On Europe, the time of indecision is over. The period for practical preparation has begun. Today we begin to build a new consensus--modern and outward looking--for a country that throughout its history has looked outward to the world. We are the first British Government to declare for the principle of monetary union, the first to state that there is no overriding constitutional bar to membership, the first to make clear and unambiguous economic benefit to this country the decisive test, the first to offer our strong and constructive support to our European partners to create more employment and more prosperity.

The policy that I have outlined will bring stability to business, direction to our economy and long-term purpose to our country. It is the right policy for Britain in Europe. More important, it is the right policy for the future of Britain. I commend it to the House.

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