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Mr. Matthew Taylor (Truro and St. Austell): Does the right hon. Gentleman believe that the convergence test includes the issue of the exchange rate--currently uncompetitive--and the need to have a more competitive rate for entering the single currency?

Mr. Byers: Clearly, that will be one of the issues that we shall have to take into account in connection with the five economic tests.

Mr. Geraint Davies (Croydon, Central): Will my right hon. Friend give way?

Mr. Byers: No, because I want to make progress lest I detain the House too long.

Business regards the UK as a good location, and global companies choose to locate here. A recent foreign direct investment confidence index identified the UK as the second most preferred destination after the United States for foreign direct investment. In 1998, we had record levels of foreign direct investment. Not only is inward investment increasing, so are exports. The latest World Trade Organisation figures show that, last year, the UK remained the fifth largest exporter of goods in the world. Last week, the Economist Intelligence Unit published its annual assessment of the best locations in the world to do business. The study, based on factors including policies towards enterprise and taxation, concludes that Britain's prospects for the next five years exceed those of the United States, Canada, Singapore, Germany and France. That is the environment and climate that the current Government have created.

The Conservatives' policies are becoming clearer. They complain about the value of the pound, but then the Shadow Chancellor says:

We have to get used to the idea that a strong currency is not a bad thing.

They rule out joining a single currency for an indefinite period--even if joining is in the interests of manufacturing. They say that taxes should be lowered by billions, but they do not identify which elements of health or education should be cut. They say that the burden of regulation should be reduced, but the main burden they cite is the cost of paying a minimum wage and giving four weeks' paid leave a year. Decent standards are under

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threat from the Conservatives. Of course, when they were in government, they pursued short-term objectives that led to recession twice during their period of office.

In contrast, this Government are pursuing policies that will attract record levels of inward investment and produce rising exports and increasing productivity. Ours are policies for the long term--policies to challenge the status quo and ensure that we have economic stability.

There are no quick fixes. Stability will take root over time. We need long-term solutions to tackle the long-standing problems that have held us back for too long. That is the goal that we have set ourselves in government, and it is a goal that we will achieve.

5.20 pm

Mr. Kenneth Clarke (Rushcliffe): I begin by making a declaration of interest--I am a director of a number of public companies, some of which have manufacturing interests in the United Kingdom.

As I said earlier to the Secretary of State, I found his speech unbelievably complacent. He tried to create a rather fictitious version, as I would have said in other circumstances, of the way in which he has moved from where he took over to where he is now. He insisted on using statistics gathered over an 18-year period, taking in two recessions--the last of which was many years ago--in order to try to demonstrate that the Government had taken over a difficult situation.

The fact is that the Secretary of State and his Government took over the fastest growing major economy in western Europe. The United Kingdom was an extremely attractive place for manufacturing and other investment. Stable economic conditions were in place and we were committed not to return to boom and bust. However, conditions have since deteriorated.

The background to the Secretary of State's speech today is that manufacturing industry in the United Kingdom is bleeding as it has not bled for the best part of 20 years. The principal cause of that is the high value of sterling against other currencies, particularly against the euro. In my opinion, the value of sterling is also too high against the dollar, as I shall go on to argue.

Of course, the problems in manufacturing industry, like the problems in all economic policy, are not caused by a single factor. I strongly agree with the remarks made by my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning) about the way in which the Government have produced an excessive burden of taxation on business generally in this country, and the fact that they are introducing an ever-heavier regulatory burden. Both of those are damaging a great deal of the competitiveness of British industry. That is one of the changes that has come about with the change of Government. I spoke on both matters--making the same points, but not as eloquently as my hon. Friend--in the debate on the Finance Bill.

However, the principal problem facing manufacturing industry in the UK, which is driving many good and competitive companies ever nearer to the wall, is the excessive strength of sterling on the foreign exchange markets. The problem is rarely dealt with as clearly as that by either Front Bench. There is a rather curious agreement--I shall not call it a conspiracy--between the two Front Benches that the strong pound should not be

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referred to quite so clearly, when it is raised indelicately by the hon. Member for Rotherham (Mr. MacShane), by me, or even occasionally by a Liberal Democrat. Apparently, that is a problem on which too much stress should not be laid.

The Government's motives for not speaking too much about the strong pound are that they like to pretend that, as we have just heard, all is now perfect in the economic world thanks to the brilliance of our present Chancellor of the Exchequer and his colleagues. I regret to say that I believe that there are those on the Opposition Benches who sometimes like to think that everything is going quite well for the British economy, thanks to the fact that we have not yet been able to join the single currency.

Whatever one's views on that, if we have a floating exchange rate--on any view, we are living with a floating exchange rate now and will continue to do so, certainly until after the next general election--we must address rather more carefully the fact that the exchange rate has floated to a level that is positively damaging to the country. It is damaging to the competitiveness of most companies trying to sell goods and services into the European market in particular, and if we are not careful it will damage the very prospect of keeping Britain an attractive place in which to make things. That is an extremely serious issue which deserves to be tackled, not simply dismissed in some of the knock-about that passes for debate, especially on European affairs, in this country.

There is a desire, on both sides, to dismiss the critics. Business men have repeatedly pointed out the effects of the strong pound on their business. The Government, led by the Prime Minister and supported by the Bank of England, insist on treating such criticisms as the whingeing of industrialists faced with strong currency conditions. It is implied that those of us who criticise the strong pound and the inactivity of the Government and the Bank somehow lack moral fibre and do not realise that robust and competitive industry has to take such problems on board.

There is another response from this side of the House to the critics--

Mr. Byers: Will the right hon. and learned Gentleman give way?

Mr. Clarke: I have only 10 minutes to speak, and therefore do not believe that I should give way.

Critics of the strong pound are told by many Opposition Members that the problem is the weak euro, not the strong pound. The relationship between the two currencies is thus said to be an entirely one-sided problem. That is a simplistic approach to the problems of the foreign exchange market. When any two currencies move, the reasons for that are to be found on both sides.

The euro is weaker than it should be. It has progressed beyond the early stages, when it was a positive advantage to the European economy and enabled the German and Italian economies to avoid recession and begin to grow. The European central bank and European Governments should tackle the issue and try to accelerate the process of restructuring and reform, although those are currently progressing very quickly.

However, we cannot so simply dismiss the genuine problems that the strength of sterling causes. We cannot simply wring our hands or adopt a state of denial as a

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nation in the face of our business critics. I shall not go into the issue of Rover and BMW. I am very critical of BMW and I do not believe that it can be used as a clear illustration of the consequences of sterling's strength, although that strength undoubtedly contributed to the extent of the losses that BMW suffered. In fact, the case of Ford in Dagenham is extremely illustrative of the problem.

Today, the Financial Times reports that Nick Scheele, the European chairman of Ford, is calling for the Government to make a more detailed and immediate commitment to joining the euro at the healthier exchange rate of DM2.50 to DM2.60 to the pound. Yesterday, before today's announcements of closures, Robert Radcliff, chairman of AGCO--which owns Massey Ferguson--warned that the Massey Ferguson plant in Coventry may have to close if the pound remains high and Britain fails to commit itself to the euro soon.

I shall not refer to the remarks of Mr. Toyoda or the well-known opinions of the president of Sony. These are all high-profile manufacturers, who reflect the views of many people from traditional engineering and manufacturing industry in the midlands and elsewhere. One has only to consider the potteries to realise what is happening to industry there. We already know the consequences for the textile industry. Those companies are not simply whingeing.

It is impossible for manufacturing industry to cope straightforwardly with a move from DM2.50, which was typical when I was Chancellor of the Exchequer, to DM3.40 to the pound, which is sometimes the case now. The movement of the pound from its trough in 1995 to its peak on 3 May is 37 per cent. It is no good telling people that they should respond with higher productivity to such a rapid move in their competitive position.

Instead of simply saying, "This is no problem of ours," the Government should do two things. First, they should have a tight fiscal policy to make it easier for the Bank not to have to continue to raise rates. Having committed themselves vaguely in the Budget to going beyond the tightness of the first two years, and given the Prime Minister's recklessness on David Frost's couch, which committed us to so much spending in advance, this year's comprehensive spending review will have to be very tight indeed.

The Bank must accept that the deflationary consequences of sterling at its current level are severe, despite the fact that our growth is below the European average. The euro has weakened because growth in Europe is weak compared with America's runaway economy. However, we do not have America's runaway economy, although we do have high interest rates and we do have a strong pound. It is time that the Bank, which does not talk about such matters--

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