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Mr. Ian Bruce (South Dorset): I am sure that the hon. Gentleman agrees that the problem is not an appreciating pound but a depreciating euro. It is clearly the job of the European central bank and our partners to do something about that.

Dr. Cable: That is entirely incorrect. I received a fax today from the Organisation for Economic Co-operation and Development, which has calculated what it calls, in economic jargon, the real effective exchange rate. That is, Britain's exchange rate against the exchange rates of the rest of the world, and not only the euro, allowing for changes in inflation. Since the low point in 1996, the pound has appreciated against allcomers. It has not done so against the dollar, but it has risen against currencies in general by more than 30 per cent. Since the Government came into office, it has appreciated by 15 per cent. That matters enormously in the context of the debate. BMW has argued that, for every pfennig by which the pound appreciates against the German currency and against the euro zone, it has been losing £8 million.

Mr. Geoffrey Robinson: Why is it that BMW, through the 1960s, the 1970s and the 1980s, lived with an

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appreciating deutschmark? The answer is that it increased productivity and quality. Why could it not have done that in the UK? It is a simple question.

Dr. Cable: The answer to the hon. Gentleman's question, which is a perfectly fair one, is that BMW has inherited a plant that, because of its low productivity and history, is exceptionally dependent on price competitiveness. Commodity production depends on price competitiveness. BMW says openly that one of the major sources of its losses is the exchange rate.

Mr. Robinson: BMW lived with that for three decades, from the 1960s to the 1980s. Indeed, it built up a company that was a glittering success, with productivity and quality to match it. All we asked is that it did that at Rover. It failed to do so because it did not put in the necessary effort.

Dr. Cable: I think that the right hon. Gentleman is failing entirely to grasp that the conditions in the car industry now are wholly different from those that applied in the 1960s, when there was rapid growth and a need for new investment in the industry. The crucial feature of the European car industry in which BMW and, on this side of the channel, Rover are having to compete is excess capacity. Price competitiveness is severe and losses are sustained because of the exchange rate. BMW has said that it is losing £200 million or £300 million because of the exchange rate. It is passing some of that back to its suppliers, many of whom have been forced to move on to euro contracts so that small manufacturers around the west midlands have absorbed the losses. That has been a key factor in BMW's decisions.

As I said in an earlier intervention, much of the optimism about proposed investments at Longbridge and in the Rover group was based on a wholly unreal assumption about the exchange rate. At some point, BMW would have to decide that conditions had changed and that it would have to respond to that.

Mr. Tony Baldry (Banbury): Is not the hon. Gentleman concerned by the Government's complete inability to realise that the exchange rate and the strength of the pound constitute a problem? Not only the car industry, but all United Kingdom manufacturing industry and farming are haemorrhaging. If the Government talked to dairy farmers as often as they talked to the automotive industry, they would receive the same message.

Dr. Cable: The hon. Gentleman is right, but the problem also applies to the Conservative party. The Leader of the Opposition is travelling around the marketplaces of England and talking about poor, unfortunate Europeans who are suffering from a weak currency, apparently unaware that most of their manufacturers are laughing their way to the bank. That is a problem for both sides of the House. However, it is important to tackle that complex difficulty.

Macro-economic management, trying to achieve stable inflation and a lower exchange rate, is not easy. It is linked to our entry strategy for the euro. Until we get the policy right, not only the car industry, but many other traded-goods industries in agriculture and manufacturing will suffer the same torment. That is the main point, and why I say that the wrong Minister has been targeted.

Dr. Lynne Jones (Birmingham, Selly Oak): Some Labour Members accept that the strength of sterling is a

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problem. However, it is mainly a problem in relation to the weakness of the euro. Will the hon. Gentleman explain his perception of the cause of the strength of sterling and how he would reduce it?

Dr. Cable: Statistics suggest that the difficulty is not only caused by the euro, although it constitutes a large part of the problem. We are considering a European market, and the euro-sterling exchange rate matters in that context. The hon. Lady asked what we could do about that. I had already begun to develop the argument--[Interruption.] The Liberal Democrats, perhaps uniquely, because we have a commitment to entering the euro zone, believe--

Mr. Geoffrey Robinson rose--

Dr. Cable: Let me finish the answer to the previous question. We have a commitment to the euro zone and we believe that it is the Government's responsibility to define a competitive exchange rate for the British economy at an early stage. They should do that by building on evidence from the International Monetary Fund and other organisations in recent months, and beginning to work towards their objective as quickly as possible through the Bank of England.

Mr. Robinson: If we accepted the hon. Gentleman's prescription for our problem--it is unique for a Labour Government to have an exchange rate that is too high--and we entered the euro and reduced our interest rates and our pound accordingly, the consequences for inflation would be catastrophic. Surely the hon. Gentleman appreciates that.

Dr. Cable: The Government missed the boat two years ago and our discussion is slightly academic. [Interruption.] The hon. Gentleman knows perfectly well that the consequences for inflation of a realistic exchange rate will have to be paced through monetary policy. The Government could and should do many other things to tackle inflation, for example, acting through the property market--stamp duty and property taxation--to deal with the inflated asset market. That supplementary policy should be adopted.

The hon. Member for Coventry, North-West (Mr. Robinson) seems to be totally blind to the fact that there is a real problem. I am not pretending for a minute that there is a simple solution, but there is a solution--or a complex of solutions--that would put the economy on a more stable basis in relation to its external exchange rate. However, simply pretending that the problem does not exist is myopic in the extreme and very damaging. He may think that that is a joke, but a large number of his constituents and many British manufacturers think that the Government have severely neglected their undertakings.

The Chancellor has told the House on many occasions that having a stable and competitive exchange rate is a Government commitment. It is not remotely competitive. If it is not competitive, why have they committed themselves to that policy objective? If they have no idea of how to realise it, why promulgate it as an aim?

Mr. Robinson: What would the hon. Gentleman do?

Dr. Cable: I have already explained to the hon. Gentleman what I would do about that.

Mr. Michael Howard (Folkestone and Hythe): The hon. Gentleman is making an extremely interesting point,

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but does he recognise that the inescapable inference is that early entry to the euro, which is the policy advocated by his party and which would inevitably build in permanently the disadvantage that we are suffering from the present exchange rate, would be a disaster for this country?

Dr. Cable: The early exchange rate with the euro would have been based on the average of the two years previous to 1997, which would have been relatively competitive. We now have a problem. We have to navigate our way back to that point, but it will be some years before the British exchange rate reaches a level at which we can once again contemplate entry. That is the challenge that we have to face. Labour Members who pretend that that is not an issue and Conservatives who believe that we can have a floating exchange rate against the euro zone indefinitely are dodging a fundamental issue of national importance.

Dr. Evan Harris (Oxford, West and Abingdon): Will my hon. Friend give way?

Dr. Cable: I am happy to debate this matter indefinitely and my hon. Friend wants to do so as well.

Dr. Harris: Will my hon. Friend accept from me that my constituents who work at the Oxford Cowley plant feel tremendous solidarity with, and concern for, the people who work at Longbridge? They will be anxious that the Conservative party wants to play politics with the exchange rate and that Ministers have refused to answer the point about the effect of the high exchange rate consequent on their policy of appeasing the tabloid press over the euro, rather than putting the interests of British manufacturing first.

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