|Government Assessment for the Purposes of Section 5 of the European Communities (Amendment) Act 1993
Mr. Hendrick: It is now the job of most central banks to consider inflation in relation to their own economies. For example, euroland has an inflation target and the central bank does little in respect of the exchange rate other than to note it. Similarly, the European central bank meets the Bank of England to discuss an inflation target, and the setting of interest rates does not necessarily relate to sterling's external exchange rate value. To a large extent, the same principle applies in the United States. If exchange rates were managed, there would be various effects on the economy. However, when we negotiate on the euro, the exchange rate will be significantly affected by the willingness of the Government of the day to participate in the euro. To some extent, the markets will manage the exchange rate for us, so the hon. Gentleman's preoccupation with the way in which the exchange rate should be described in Government documents is unfounded.
Mr. Davey: Apart from the hon. Gentleman's conclusion, I agree with everything that he said. He is right to say that central banks accept the principle that monetary policy can have only one targetit cannot target both inflation and the exchange rate. However, my point is that statements made by the UK Government on the exchange rate could be used against us in future. If the hon. Gentleman believes that matters can be left simply to the markets, he is being rather complacent. He seems to imply that negotiations on the entry rate will have no validity. I find that rather worrying, given the market's impact on the sterling-euro exchange rate in recent years, and the effect on the manufacturing industry and jobs. That is why I am making the point, which is material to the Committee's deliberations.
I refer the hon. Gentleman and the Committee to paragraph A7 of the pre-Budget report of November 2000, which states:
Although that might seem innocuous, the Government are saying, ``Yes, sterling has been strong, but many parts of the economy can deal with it, so there isn't a problem.'' I disagree. Sterling's strength remains a huge problem, and we should be worried about it. The Government will not assist negotiations in future years by placing such complacent views on the record in documents that are sent to the Commission. They are playing to a domestic political audience rather than to the international economic audience who will be crucial in those negotiations.
I hope that members of the Committee do not feel that this is a narrow linguistic point. In fact, it is crucial, in whatever form the Government send the documents.
Mr. Clappison: I shall not embarrass the hon. Gentleman by asking him whether he has had the benefit of reading his leader's book, a large part of whichI am looking at page 183is dedicated to complaining about sterling's weakness over the years. As the hon. Gentleman is complaining about its strength, can he tell us what he would like the rate to be?
Mr. Davey: The hon. Gentleman was clearly not present during the Queen's Speech debate on the economy, when my hon. Friend the Member for Truro and St. Austell (Mr. Taylor) answered that question in detail. I refer the hon. Gentleman to that answer. We believe that sterling is too strong, especially against the euro. I have been pleased to see the euro recovering in recent weeks, and I hope that that will eventually give some succour to manufacturing exporters.
I am glad that the hon. Gentleman is reading the excellent book by my right hon. Friend the Member for Ross, Skye and Inverness, West. Although it may not be high on people's reading lists, at least it has not had to be pulpedunlike the Conservative party's document, ``The Common Sense Revolution'' [Interruption.]
The Chairman: Order. I hope that we will not hear that bleeper again.
Mr. Davey: So do I, Mr. Olner.
I hope that the Minister will say that when the pre-Budget report, the Economic and Fiscal Strategy Report and the Financial Statement and Budget Report are sent to the Commission, the accompanying documentation will contain some indication that the Government are concerned about the level of sterling.
Miss Johnson: I did attend the debate in the House about these matters. As many hon. Members argued, there are meaty matters to be considered. The Committee offered Liberal Democrat Members the opportunity to do so, but few are presentalthough they could have attended even if they were not members of the Committee. Many of those who are absent made a fuss about the fact that the Committee would provide a mere hour and a half's debate, yet only representative of the official Opposition is herethe hon. Member for Hertsmere (Mr. Clappison). It is disappointing that so much fuss was made on the Floor of the House by hon. Members who have revealed that they did not mean what they were saying by not being here to contribute.
This opportunity to discuss this matter is the result of an amendment, tabled on Report by my right hon. Friend the Chief Secretary to the Treasury, to the European Communities (Amendment) Act 1993 . The amendment was successful and has given rise to these section 5 debates. We have an honourable history in discussing the subject.
I turn to some of the European issues raised in the debate. The first is whether economic and monetary union and the euro has been a success. What my right hon. Friend the Chancellor said in his 1997 statement was restated in his relatively recent Mansion House speech. He repeated that
and that they would help us create the conditions for higher and more productive investment in Britain and far greater trade and business in Europe. He added that almost
A successful euro would also deliver a zone of macroeconomic stability as a foundation for sustainable, non-inflationary growtha subject dear to the Government's heart, as the Opposition know. It would also reduce the damaging effects of volatility on investment, employment and, ultimately, economic prosperity. It is important that the single currency should be successful.
Mr. Clappison: The Minister sets out what the Chancellor believes to be the potential benefits of the euro, but they were known to him from the start. So that we can judge how close we are to the Government's recommending membership of the euro, will the Minister say whether the euro has been a success so far?
Miss Johnson: I can tell the hon. Gentleman how a successful single currency should behave. It should complement the single market by reducing transaction costs and exchange rate uncertainty for trade within the euro zone, and should make prices more transparent, boost competition and provide new opportunities for trade and investment. It would also give rise to a zone of macroeconomic stability, providing a foundation for the other things that we wish to do.
All hon. Members know that the Government will be making an assessment of the five economic tests early in the next Parliament. The original assessment recognised that the UK was not in line with many other European economies. It concluded that joining the single currency in the first wave would mean accepting an interest rate inappropriate to UK domestic circumstances and that we needed a period of economic stability to demonstrate that convergence was sustainable. That is why our priority is to put an end to the boom-and-bust instability of the past with sound macroeconomic policies.
I am sorry that the hon. Member for Wantage is no longer present to hear my response to his remarks. He asked about the mistakes made by the previous Government, whose fiscal policy was loose and inappropriate, which led to the rapid deterioration of public finances. We are committed not to repeat those mistakes. We continue to base our fiscal projections on prudent and cautious assumptions, that are independently audited by the National Audit Office to ensure that those objectives are met. The Government believe that a neutral assumption for the trend rate of growth over the medium term would be 2.5 per cent. a year. However, projections for public finances will continue to be based on the deliberately cautious NAO auditors' assumption of 2.25 per cent. a year. For the purposes of the PBR and next year's Budget, the Government will not bank potential gains until they are demonstrably achieved and audited.
I was asked what precautions could be taken against the effect of a slowdown in the USA. The Monetary Policy Committee will continue to respond proactively to developments in domestic and world economies. The new macroeconomic framework will thus continue to deliver stability. That is one reason for the creation of the MPC and the independence of the Bank of England, so lately accepted by the Opposition. Independent forecasters agree with the Government's assessment that the United Kingdom has set the growth at about the trend rates in 2001 and beyond.
We can look at the United Kingdom growth performance since 1997. EU growth has been faster since 1997 because it is in the recovery phase of the economic cycle but it is meaningless to compare growth figures over such a short part of the economic cycle. If we wish to compare the growth performances of the previous Government and this one, we should take the average growth rate for 1979-97, when it was 2 per cent. and compare it with the figure since the election2.7 per cent. The previous Government's record on growth and stability was dismal. Of the G7 countries, only Canada experienced greater instability than the United Kingdom.
The Government's growth forecasts are built on the assumption that growth in the United States is expected to slowa fact that the hon. Member for Hertsmere will want to bear in mind in view of his remarks. On public sector net borrowing by the end of the next Parliament and the inheritance that the Government received, I hope that the hon. Gentleman is not disputing that that inheritance
|©Parliamentary copyright 2000||Prepared 18 December 2000|