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House of Commons

Wednesday 3 March 1999

The House met at half-past Nine o'clock


[Madam Speaker in the Chair]

EMU (Economic Convergence)

Motion made, and Question proposed, That this House do now adjourn.--[Mr. Hill.]

9.33 am

Dr. Vincent Cable (Twickenham): I am grateful for the opportunity to present this Adjournment debate. It was very clear from the Prime Minister's statement on the euro last week that we are moving into new terrain in the debate on Europe. The pace is accelerating, and I think that it is important that as many hon. Members as possible are able to contribute to the argument.

Mr. Eric Forth (Bromley and Chislehurst): There are not many here today.

Dr. Cable: Perhaps 9.30 am is a little early for some of the right hon. Gentleman's colleagues--and maybe for some of mine, too.

In the past week, we have identified several areas of concern about where the new Government process is leading. Some of us have talked to our local business communities--I spoke yesterday to my local chamber of commerce--and I think that the reaction to the changeover plan in general has been rather positive. However, there are questions about what that plan will mean.

There is a new formula in terms of the months involved in the changeover--the X + 4 + 30 + 6, as I think we must learn to call it. The question is what is X: how long will it be before the changeover process begins? As the Minister knows, the Liberal Democrats have long argued that that period should be as short as possible because of the need for an early political mandate.

Mr. Alan Clark (Kensington and Chelsea): On a point of order, Madam Speaker. A minute ago, the hon. Member for Twickenham (Dr. Cable) mentioned as an aside that 9.30 am is a bit early for our colleagues to attend the Chamber. As that remark will go into the Official Report, I should also point out that the number of Conservatives in the Chamber exceeds the combined number of hon. Members from all other parties.

Madam Speaker: I am really not into the numbers game. There are sufficient hon. Members present to carry on the debate.

Mr. Denis MacShane (Rotherham): Further to that point of order, Madam Speaker. We should also place on record that that is the first time that that has happened this Parliament.

Madam Speaker: At least I am always here.

Mr. John Bercow (Buckingham): Further to that point of order, Madam Speaker. I know that you are always

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anxious for the factual record to be correct, so it should be placed on record that, during consideration of the treaty of Amsterdam in Committee, the Conservative presence--as the hon. Member for Rotherham (Mr. MacShane) well knows--was invariably greater than that of Labour.

Madam Speaker: I can see that many hon. Members have a good sense of humour. We are starting the day very well.

Dr. Cable: Conservative Members have made their point about the quantity of Conservative participation in the debate, so I hope that that will be matched by the quality of their speeches--judging from experience, I rather doubt it.

My second introductory point relates to the concern expressed by business about how precisely the changeover plan will work given uncertainty about the lead-in time. However, an even bigger issue has begun to be raised in some of the testimony to the Treasury Select Committee in the past week. As the Government have moved ahead with their business preparations, the macroeconomics underlying the Government's approach to entry have been left behind.

I refer the House to the comments of two witnesses who appeared before the Committee. The Governor of the Bank of England acknowledged openly that there was a potentially serious conflict between his goals, as currently defined by the Chancellor of the Exchequer, in pursuing domestic inflation objectives and those that he would have to pursue if he were seeking economic convergence. He made it clear that, until he received a fresh mandate from the Treasury, he could not begin to address that problem.

It was also clear from his testimony yesterday that the Minister for Trade and Competitiveness in Europe, Lord Simon, had great difficulty defining what a future competitive exchange rate would be when we join EMU. That is also a great concern to much of manufacturing industry. Major areas of economic policy have not yet caught up with the speed of the Government's actions in terms of business preparation. I shall try to focus on some of those issues in this debate.

The Liberal Democrats believe that the vehicle for joining EMU that the Government have set in motion may have a gearbox but it also needs a steering wheel. It is all very well to say that we must achieve economic convergence, but the Government must make it clear how economic convergence will be achieved and sustained. Today, I shall offer a series of specific and pragmatic proposals as to how the Government might take that aim forward.

Mr. Ian Bruce (South Dorset): I thank the hon. Gentleman for giving way so early in his speech. Is there not a strange dichotomy in this situation? The Chancellor of the Exchequer is not allowed to interfere with the independence of the Bank of England, and the euroland nations are not entitled to interfere with the central bank. However, our Chancellor is able to speak to the governor of the central bank and suggest that he should increase interest rates in euroland because the bank is currently effecting competitive devaluation of the euro for short-term gains in Europe.

Dr. Cable: I agree with the hon. Gentleman to the extent that I believe that the model of independence that

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has developed in the United Kingdom is very satisfactory. I think that the hon. Gentleman and his colleagues were bitterly critical of that structure when it was introduced a year ago.

I shall address the point for which the hon. Gentleman provided a cue. The first issue that we need to deal with is the extent to which the position of the Bank of England might now need to be changed. I start from the assumption--Liberal Democrat Members strongly believe this, as I am sure do Government Members, and perhaps we even have a convert on the Conservative Benches--that the Bank of England's independence is desirable and its creation was a valuable step forward.

Despite many reservations among Members on the Liberal Democrat Benches and Labour Back Benches, many of the fears about that independence have not been realised. It is difficult to believe, for example, that a politically inspired series of interest rate cuts by the Bank of England over five months would have been accepted by the markets. The experiment has been extremely successful so far and we are anxious that the spirit of independence should be retained whatever changes to arrangements take place.

It is clear, however, that the Bank of England now faces the dilemma of how to take into account European convergence. The Bank's terms of reference now state that the objectives of the Monetary Police Committee are to consider inflation and other Government objectives, but the Bank is making it clear that those objectives do not, at this stage, include European convergence. There is a large blind spot about how to address that issue.

I have a modest suggestion for the Economic Secretary, which involves a series of steps that the Government might now begin to take. When the Chancellor introduces the Budget next week, he should modify the terms of reference within which the Monetary Policy Committee operates and instruct it to take convergence into account. That does not necessarily mean immediately shadowing an exchange rate or any other objective, but the committee should monitor economic convergence and begin to discuss the problem with other relevant Departments, especially the Minister's own.

It is important that the Bank of England's independence is maintained in that process, but at some point we must confront the dilemma that the objectives of convergence may well involve moving interest rates in the opposite direction from that of domestic inflation. Over the next few months, for example, the objective of convergence might best be achieved by cutting interest rates to bring down the pound. On the other hand, a recovery in the United Kingdom economy may require interest rates to go up. That dilemma must be resolved, and it can be done only by using the Treasury's fiscal policy.

A careful process must evolve whereby monetaryand fiscal policy can be considered together without compromising the Bank's independence. I hope that the Minister will reflect on that and suggest how she and the Government expect the process to work. It is difficult to believe that it can simply be left until the next Parliament, so we suggest that the process may be set in train whereby the terms of reference of the Governor of the Bank of England are modified to allow him to begin to take convergence into account.

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The second issue on which I want to focus--the role of sterling and the exchange rate--is potentially much more difficult, but it must be addressed.

Jacqui Smith (Redditch): Does the hon. Gentleman accept that his suggestion that the only way in which to achieve convergence criteria is directly to target them is contrary to what was discussed in the Select Committee yesterday and to the clear statement from Lord Simon that the Government's current policies on the Bank of England's independence and long-term fiscal stability are precisely those that should lead to convergence? Does not he accept that it is not necessary to have a strict objective of convergence, but that it is important that we put into place the policies that will achieve that aim?

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