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9.10 pm
Mr. Howard Flight (Arundel and South Downs): This hotch-potch privatisation--the independence of the Bank of England--will, like the Chancellor's Budget, soon lose its initial popularity. If we are to have an independent central bank, let us do it properly like the Federal Reserve and have proper, full and open accountability and let those who are responsible be properly serviced and have objectives that cover the full range of economic activity, not merely over-narrow, anti-inflation objectives.
The Government are claiming that there is some democratic accountability in the Bill and that they are opting for a midway house--the best that Britain can do at this stage. In that case, I cannot understand why the Chancellor is so keen on the proposed arrangements for the European central bank. That will be the worst sort of independent central bank arrangement--a bank that is not in any way democratically accountable and that leaves the door wide open for all the dangers that the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) described so well. My great fear is that the ECB will be besotted with the desire to make the euro a strong reserve currency when Europe already has a large trade surplus. Over-valuation will result, and we will have Japanese-style deflationary and stagnatory problems.
My main concerns relate to the dangers that will face Europe, given the coming climate. The proposals for how the Bank of England is to manage banking problems are weak. At the starting point, there are signs of misunderstanding. The Chancellor pointed out in the early summer that it was frightfully important that the
management of interest rates should be purely for inflation control and should not be contaminated by other factors. Was he not aware that in America, for example, this very decade, interest rates had to be managed to be low for quite some time in order to rebuild the capital base of the banking system, which had been ravaged by the previous recession? Was he not aware that the same situation obtained in Japan? Interest rate policy and being lender of last resort is a crucial part of a central bank's job in managing the overall stability of the banking system.
My great fear is that the debt deflation and the competitive devaluations in the Asian economies will blow a nasty cold wind to the mature economies of America and Europe. The climate will be extremely difficult for the banking system. It is worrying that responsibility is not clearly laid out in those areas. One cannot have a central bank that might have to take large decisions against the background of systemic problems when responsibilities are not clearly laid down.
To know what to do with particular banks, the Bank of England has to have responsibility for monitoring them, yet that power has now been sent off to the FSA. It is noteworthy that Alan Greenspan pointed out when the proposals were made that, in his opinion, it was extremely unwise to separate the responsibility for monitoring the banking system from overall responsibility for maintaining stability.
The arrangements have not been clearly organised in the Bill: the co-ordination arrangements and the process for decisions on when the Bank of England may need to intervene massively to support the banking system and what authority it requires from the Government are not clear. I was around during the 1974 crisis, when many of our largest banks had to be supported by the Bank of England in the lifeboat. The lifeboat was a great tribute to the effectiveness of the Bank during a major systemic crisis. Given the current economic winds, I am greatly concerned that, because of the insufficiently clear and divided responsibilities, we might find that, at the crucial moment, these new and ill-defined arrangements will leave the Bank of England and the banking system ill equipped to deal with problems.
Mr. Ross Cranston (Dudley, North):
I have only four minutes to make a few points.
I support the Bill without deviation and without hesitation. First, it puts the constitution of the Bank of England on a firm basis. It sets out the mechanisms for accountability that my hon. Friend the Member for Norwich, South (Mr. Clarke) described. Secondly, it sets out quite clearly the Bank's status in terms of monetary policy. Opposition Members do not seem to agree on that point--the right hon. and learned Member for Rushcliffe
(Mr. Clarke) says that we should leave things as they are, but others have said that we should make the Bank completely independent.
Some hon. Members do not seem to have read the Bill, and I include some hon. Friends in that number. Clause 12 makes it clear that the Government set monetary policy; clause 11 makes clear that it is up to the Bank of England to set interest rates to meet the targets that the Government have determined. Under the Bill, the Bank will not be completely independent, but neither will it be completely under political direction. There is a fine balance, and the Government have got it right. The arrangements reflect those in other countries, such in as the Bundesbankgesetz.
Thirdly, the Bill puts financial services on a firm footing. One of the problems that now face us is that, unfortunately, the Conservative Government did not implement properly the Gower report. They set up a range of self-regulatory organisations: we started with seven, reduced that number to five and then got down to four. It was a complete shambles.
Mr. David Heathcoat-Amory (Wells):
This most interesting debate has revealed deep cracks in the facade of new Labour. The most notable speeches by Labour Members were made by hon. Members who obviously do not believe that it is one of the tasks of a Labour Government to hand over control of economic policy to bankers, however eminent those bankers may be. Although they are bound to be dismissed as the voice of old Labour by the trendies on the Treasury Bench, they nevertheless represent a more authentic Labour tradition, from which we shall hear much more before this Parliament is out.
More generally, the debate has shown that the Government proposals for a central bank that is independent in this country are not proposals for an independent bank in a real sense. They would be better described as proposals for a quango bank, designed to take unpopular decisions about things such as interest rates, but leaving the powers of appointment, the power to override and many other important powers, in the hands of the Chancellor of the Exchequer and the Government.
As a result, the Bill will not satisfy those who believe in a genuinely independent central bank. They must be pretty numerous on the Labour Benches, because they are now committed in principle to the most independent central bank in the world, to be set up in Frankfurt--the European central bank. That bank, as we heard in the debate, will be forbidden to take any instructions from national Governments or Parliaments, and will not be accountable to any democratic body or institution, anywhere, for the foreseeable future. That is entrenched in treaty law--which is, of course, superior to national law.
The Government, and Labour Members who want the United Kingdom to join a single European currency, have not followed through on that in the Bill, or even taken the
halfway step of setting up such a genuinely independent bank for our own purposes, so the Bill will not satisfy those who believe in a genuinely independent central bank. Nor will it satisfy those hon. Members from whom we heard tonight who believe that interest rate decisions should remain in democratically accountable hands. It is a dog's breakfast of a Bill, which will satisfy no one.
Mr. Nigel Beard (Bexleyheath and Crayford)
rose--
Mr. Heathcoat-Amory:
I had better give way to the Chairman of the Treasury Select Committee.
Mr. Radice:
If it is such a dog's breakfast of a Bill, why do not the Opposition say that they will repeal it if they get into government? If it is so bad, why not repeal it?
Mr. Heathcoat-Amory:
That point was dealt with satisfactorily and comprehensively by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley).
The hon. Member for North Durham (Mr. Radice) will know, because he was in the previous Parliament and the one before it, that Labour made several ill-judged promises to repeal legislation when it achieved office. There was scarcely a privatisation that was not accompanied by a ringing commitment to renationalise when Labour came back into office. All that has been ditched under the impact of events and reality.
We shall not make the mistake of making knee-jerk reactions and promises to repeal legislation, but we are entitled to draw attention to the deficiencies in the legislation so that we do not need to repeal it, because it will not have become law by receiving a Second Reading. I hope that Labour Members who have spoken against the legislation will join us in the Lobby at 10 o'clock.
Supporters claim that the Bill and the thinking behind it will establish a low-inflation culture in this country, and will commit everyone to the national imperative of low inflation. If that is the case, why did the Chancellor make no effort to consult anyone before he announced, four days after the general election, his intention to hand over powers to the Bank of England? There is nothing about it in the Labour manifesto, apart from a few weasel words about the Bank of England.
As the right hon. Member for Llanelli (Mr. Davies) pointed out, the business manifesto--which is the really important one--contains a commitment to do something else: to set up a statutory advisory committee in the Bank of England. No preparations were made in the Labour manifestos, yet an announcement was made almost immediately, not to the House of Commons in the normal manner but by letter to the Governor.
That announcement conflicted with the Chancellor's assertion in opposition that the Bank should demonstrate a successful track record in good advice and build greater public credibility. That is what he said on 26 February this year, but, rather than wait for the Bank and its committees to establish a track record of good advice,
he rushed in with this ill-considered proposal. Today the Chancellor of the Exchequer showed further contempt for the House by failing to introduce his legislation--he is not even present for the winding-up speeches. That is his attitude towards accountability to the House, and it is reflected in the Bill.
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