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Mr. Nick St. Aubyn (Guildford): We have heard for many years that the benefit of the euro is that we shall have a hard currency. Now we are hearing from the Liberal Democrats that the benefit will be that we shall have a soft currency. Does the hon. Gentleman understand why those who have doubts about the euro remain totally unconvinced by the arguments on this subject?

Dr. Cable: The possible answer to the hon. Gentleman's question is that people use the words "hard" and "soft" in totally different ways. The argument for belonging to EMU is that the euro will be hard, in the sense that it will have a low rate of inflation, but it may well have a rate that is competitive--one that devalues against the dollar and the yen. Both of those characteristics are possible and desirable, and we would welcome them.

Mr. St. Aubyn: Surely if there is to be a soft euro, it is because of the expectation that, with the participation of states such as Italy, the inflation rate will be higher. If one has a soft currency, there is a very high risk of inflation creeping into the system.

Dr. Cable: I do not think that the hon. Gentleman has read the financial press for many months, if not years. If he had, he would know that the inflation rate in Italy is now very low and that the Italian economy is one of the better managed economies in western Europe.

The other incompatibility that has been raised is the difference between fiscal and monetary policy. It is a genuine technical issue; it is also a political issue. It is perfectly possible for Governments--or, in this case, an independent central bank--to run a tight monetary policy and for it to be undermined by profligate fiscal policy. That is why the Liberal Democrats argue very strongly

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that this measure should be followed by another, which we would call the Fiscal Responsibility Act, which would make a set of rules for fiscal policy to match those in the Bill. Were those complementary measures to be taken, many of the difficulties that have been described in this short debate would not exist.

Mr. Darling: This has been an extremely long debate for what is a fairly short point. I will try to reply in short measure.

My hon. Friend the Member for Great Grimsby (Mr. Mitchell) and I disagree on a central point. The Government believe that low inflation and price stability are an essential precondition for sustainable growth and high employment. One has only to look at the history of this country since the war--it had high inflation, which was into double figures in very recent memory, and the boom and bust, with swings between one extreme and another--to realise that instability was one of the main reasons why we have not had the long-term sustainable growth that competitor countries have had.

If my hon. Friend were to ask any investor or business what it wanted more than anything else, it would say that it wanted certainty and stability. That is why we attach so much importance to price stability. I know that my hon. Friend disagrees with that. I do not claim to have read the books that he wrote with our former colleague, Bryan Gould, but I know that central to their belief was the argument that rising inflation was not necessarily a bad thing. I have to disagree with him.

Where I do agree with my hon. Friend is that interest rate policy is not the only matter with which the Government need to concern themselves. We have made it clear that we intend to maintain fiscal as well as monetary stability. That is why we are ensuring that public spending will be maintained in a sustainable way and that is why we are taking steps to expand the capacity of the economy, so that it can grow in a sustainable way, as was not possible in the past.

Central to monetary stability are confidence and certainty. The rationale behind our setting up the Monetary Policy Committee is that the markets and the general public will know that the Government are serious about their commitment to long-term price stability. We have already seen the benefits of that, because long-term rates fell almost immediately following the announcement by my right hon. Friend the Chancellor earlier this year.

I shall now deal with a point that the Opposition made much of on Second Reading, and to which they returned in Committee. They should look at clause 11, which is written in plain terms. The key objectives of the Monetary Policy Committee are

my hon. Friend the Member for Great Grimsby will no doubt note--

    "objectives for growth and employment."

It is precisely to encourage sustainable growth and employment that we want to ensure price stability. A plain reading of clause 11 makes it abundantly clear that the Bank, in achieving the Government's inflation target of 2.5 per cent., must have regard to the Government's other objectives--growth and employment. That means, among other things, that if there were some violent shock to the

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economic system, the Monetary Policy Committee would have to take account of the Government's policy on growth and employment to decide the time frame in which it would reach the inflation target of 2.5 per cent.

7.45 pm

We have also made it clear that if the Bank does not believe that the inflation target will be met and that the rate will deviate by more than one percentage point from its target, it must write an open letter to the Chancellor explaining why the rate will not reach the target and the period within which the MPC expects to meet it. The point of all that is that the House and everybody else will be able to judge what the Bank is doing and be satisfied that it is acting in accordance with the strictures established by clause 11. It is as clear as day to anyone who wants to see it. The problem with the Opposition is that they are not concerned about clause 11. It is becoming increasingly clear that, after eight long months, they are edging towards outright opposition to the idea of giving the Bank operational independence. That is their real objection. They have no real interest in the wording or phraseology of particular clauses.

The Government are responsible for exchange rate policy and for fixing the inflation target. There is no conflict. The Chancellor of the Exchequer is, as always, accountable to the House for the overall conduct of economic policy, so there is no dubiety about the framework that we have established. We are ensuring that we get something that this country has wanted for many years: price stability and economic stability, which, more than anything else, will benefit the long-term prospects for growth and employment.

Mr. Mitchell: I am very disappointed at the Minister's reply, although I expected him to say what he did. The point that he made about the Government being responsible for exchange rate policy provokes me to ask: if they are responsible for exchange rate policy, why is the exchange rate so high? Given the manifest problems of industry and agriculture--the rise in imports, the difficulties with exports, the threat to close capacity and therefore lose jobs--why do not the Government act and exercise their responsibility for exchange rates by getting them down? The answer is, of course, that it is interest rates and the uncertainties in Europe that determine our current exchange rate and the current over-valuation, which will be disastrous. I do not agree with my right hon. Friend on that; nor do I agree with my right hon. Friend that low inflation is the precondition of economic growth.

I do not defend high inflation--nobody is advocating high inflation--but some degree of inflation is an inevitable concomitant of growth. There cannot be growth without some degree of inflation. We are making low inflation more important as a priority than growth. Growth and jobs should be the Government's central priority. Inflation should be treated as a residual, not the determining aim of policy, as seems to be imposed on the Bank of England. Although my right hon. Friend said that the Government can introduce objectives of growth and employment, and the Bank of England has to support that, the paramount requirement--according to Maastricht--is to maintain price stability, and subject to that, because it is paramount, to support the economic policy in respect of growth and employment.

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I had hoped for some more concessions because we are embarking on a doomsday machine. We are locked into a target of 2.5 per cent. inflation, which risks doing severe damage to the economy. It is wrong of the Government to abdicate their democratic responsibility for economic growth and jobs to bankers, who will always act like bankers. However, there is no point in my going on because the new Government have decided their priorities and will pass this Bill tonight. They have a responsibility to be right in what they do and say, and I do not think that they are. We shall live to regret this day because of the inflexible requirements that the Bill imposes on us.

I realise that my fellow Members of Parliament want to get away, as I do. I was told that I am building up extraordinary resentment among northern Members. I am a northern Member, and my fellow northern Members are gathering on these Benches solicitously to persuade me. It would have been better to have discussed this matter in Committee. Given their large majority, the Government should not be frightened of appointing people with dissenting opinions to Standing Committees. Had they done so, we could have had a longer discussion in proper and appropriate circumstances, rather than trying to discuss this matter now, late at night, with hon. Members pressing to go home. It is a question of the Government's confidence in their priorities, which they should allow to be thrashed out in the appropriate environment.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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