Government's Assessment as set out in the Pre-Budget Report 2001 for the Purposes of Section 5 of the European Communities (Amendment) Act 1993

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Mr. Flook: Will the hon. Gentleman throw light on which of the powers of independence we wish to take away from the Bank of England, which has management capability over the exchange rate?

Mr. Davey: The hon. Gentleman's intervention is completely unrelated to the remarks that I was making, but I am happy to respond to it.

The Bank of England does not have independent responsibility over the exchange rate. The hon. Gentleman will find confirmation of that in the Bank of England Act 1998: I served on the Committee that passed that. He will also remember, from the Liberal Democrats' manifestos of 1992, 1997 and 2001—when we tried to improve on the Government's proposals in the 1997 Act—that my party argued for the Bank of England to be independent. It is therefore odd that he is trying to suggest that we want to take away such independence. In fact, we would like to improve it—at the European level and at the United Kingdom level.

Mr. Francois: Will the hon. Gentleman explain how he will enhance the independence and power of the Bank of England, by giving control over our economy to the European central bank in Frankfurt?

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Mr. Davey: I thought that the hon. Gentleman was trying to have a debate about central bank independence as an aspect of monetary policy. I am sure that he has read a 1977 paper that addresses inter-temporal inconsistency in monetary policy—the economic theory behind the independent central banks. That applies to both Europe and the UK. The issue about improving independence is whether we move from the current level of independence, in which the UK sets inflation targets, or move to target independence, in which either a UK bank or the European central bank sets inflation targets. At the moment, Europe has target independence. That would improve independence and would, therefore, be a step in the right direction.

Mr. Bercow: The hon. Gentleman is getting impatient. I congratulate him on conducting his surgery and hope that he will not be too pious about that. Members often conduct surgeries, and there is nothing remarkable about the fact that the hon. Gentleman has done so.

The hon. Gentleman's response to the intervention of my hon. Friend the Member for Rayleigh was a little confused. The issue is not the difference between one form of independence and another. We argued for greater independence for the Monetary Policy Committee of the Bank of England. Rather, the issue is the difference between Bank of England independence, which is subject to parliamentary scrutiny, and European central bank independence, which is not.

The hon. Gentleman should recognise the significance of the fact that European central bank independence is irrevocable and has constitutional implications, while Bank of England independence does not.

Mr. Davey: I am not being pious about the work that I was doing in my constituency, and I accept the hon. Gentleman's point that many Members conduct surgeries; it is one of our duties. The reason why I was getting rather annoyed is that we have a duty to scrutinise the Government, and the hon. Gentleman has failed to do that in relation to the pre-Budget report.

The hon. Gentleman is wrong to suggest that the Conservatives favoured greater independence. They opposed the Bank of England Act 1998, which gave independence to the Monetary Policy Committee, until the right hon. Member for Kensington and Chelsea (Mr. Portillo) changed Conservative policy. Let us put that fact on the record.

The hon. Gentleman asked whether the Liberal Democrats favour moving the power to set UK monetary policy from the UK to Europe; he knows that we do. We wish to improve European parliamentary scrutiny. My friend Chris Huhne, a Member of the European Parliament for the south-east region, has gone some way towards doing that. He has led debate and taken action to improve European scrutiny of monetary policy. He has told me that he wishes that the Conservative Members of the European Parliament were interested in scrutinising government in Europe.

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Let us return to the question whether the pre-Budget report represents the UK's interests to the European Commission. We have debated whether Britain should give up its currency and join the single European currency. The documents that we send to the European Commission before we make that important decision are important statements about what we think about our economy and its suitability for joining a single European currency. I presume that those statements are important, otherwise we would not have agreed to that amendment and would not have signed the treaty.

Given that exchange rates are the key issue, I find it bizarre that the Government did not set out their policy on exchange rates in the pre-Budget report. In response to my intervention, the Minister said that there was a policy for a sound and competitive exchange rate in the medium term. We have heard those terms before, and none has been defined. Her statement is not repeated in the pre-Budget report. I scoured it to find mention of the exchange rate.

In annexe A2, on page 140, there is a reference to the exchange rate and mention of the Government's forecasts for the world economy. On page 140, footnote 2 to table A1 states:

    ''The forecast is based on the assumption that the exchange rate moves in line with an uncovered interest parity condition, consistent with the interest rates underlying the economic forecast.''

Under box A5 on page 157 of the report, under the heading ''Recent manufacturing performance in historical perspective'', the Government try to make out that manufacturing is in long-term decline and that we should not worry that much about it. As for the exchange rate and manufacturing, paragraph 3 of box A5 states:

    ''Indeed, despite the weakness of the euro in recent years''—

in other words, the strength of sterling—

    ''the UK's trade in goods deficit with EU countries has not widened.''

That is the only substantive mention in the pre-Budget report about the effect of the exchange rate on manufacturing exports to the European Union. There is a huge omission.

That statement is highly complacent. It concerns euro bureaucrats and our European partners who examine what we say about our economy and the relevance of the exchange rate. If we have future negotiations, they will refer to the document and say, ''Well, you were not worried about the exchange rate for Britain on your manufacturing exports. You didn't think that it was relevant.''

Previous Committees that have discussed section 5 of the European Communities (Amendment) Act 1993 and debated previous pre-Budget reports that the Government have presented to the House have made similar points to those that I have made. Obviously, former reports have referred to the complacent attitude to the exchange rate and its affect on our external trade. It has always been said the Government are failing to engage in the debate about the exchange rate and that, whenever they do so, they are so complacent that it will disadvantage this country's future negotiations if the people of this country vote in

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a referendum to join the single currency. That is worrying. It is the Committee's job to say to politicians and officials in the Treasury that, when they write such documents, they should not think that they are for domestic consumption.

We all know that, when such documents are being prepared, the only matter that the politicians and officials are worried about is the initial debate in the House of Commons about United Kingdom matters and how the press describe what documents say about public finance and the economy. They take little or no notice of section 5 of the European Communities (Amendment) Act 1993 and the fact that the European Commission officials and our European partners will debate such reports. Notice should be taken of Act, because that is what the document will be used for. If I were a Finance Minister of another European Union country in future debates, I would say to the Minister with responsibility for financial matters in this country, ''Hold on a minute, you have not been worried about the exchange rate. You have told us that repeatedly over the years.''

Because the Government failed to do so, two years ago the Liberal Democrats asked leading economic international experts to look into what would need to be done if the Government wanted to join the single currency. Many detailed studies were undertaken in detail, and they concluded that the exchange rate was the relevant factor, although that is not in the Government's five tests. The experts then decided on a range of exchange rates at which it would be suitable for the United Kingdom to join the single currency. They examined what would be a sound and competitive exchange rate in the medium term, and it was significantly lower than the current euro-sterling exchange rate.

Mr. Bercow: Will the hon. Gentleman give way?

Mr. Davey: I will finish my point and give way.

The Government are failing to engage in such a debate. They say that, in principle, they are in favour of joining the single currency. They say that they will undertake the analysis, yet in documents that they are sending to the Commission not only do they fail to engage in proper debate about what would be a sustainable, medium-term exchange rate, but, to the extent that they comment at all, they are doing down Britain's interests.

Mr. Bercow: The hon. Gentleman is in an irascible mood this morning. I fear that he got out of bed on the wrong side. He made a reasonable point about the exchange rate, although there is a danger of his speech becoming distorted by his over-emphasising certain matters. It was disappointing that the Minister could not tell the Committee when the preliminary technical work being done before the main assessment of the five tests will be concluded.

Before the hon. Gentleman concludes his speech, which the Committee is enjoying, it would be helpful if he were to discuss the Liberal Democrats' view of the regulatory burden. Although he often discusses the

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significance of the exchange rate for our prospects of joining the euro, he is not often to be heard inveighing against the regulatory burden, and he should be.

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Prepared 10 December 2001