Broad Economic Policy Guidelines

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Dr. Palmer: I am grateful to the hon. Gentleman for giving way, especially as I missed the introductory part of his comments. Does he agree that the fifth point relates to the general comments on page 24 that

    ''Member States should set clear targets and timetables for environmental policies so that business and consumers can adjust smoothly...Establishing a Community level could help avoid such distortions and underpin the internal market.''

When I worked in management for a multinational company, one of the major obstacles to trade was the difference in the system of different countries, rather than the difference in the taxation level. Would the hon. Gentleman not agree that most businesses would welcome a recognisable similarity of approach across the European Union, while respecting national differences and levels?

Mr. Lidington: There may be a case for doing what the hon. Gentleman is advocating. If that is in the national interest of the United Kingdom, I would expect the Government to consider it as a policy. However, two issues still arise. First, would such a

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limited extension of European oversight of energy taxation introduce, in practice, European competence over this area of policy? That would amount to the thin end of the wedge, which could be used as a precedent on which to build greater European intervention in energy taxation matters in the future. Secondly, the fifth point, on page 25, appears, to my eyes, to be much more ambitious than the limited proposals to which he alluded on the previous page. It might be interpreted as a commitment to go a good deal further than the hon. Gentleman advocates.

On taxation, I draw the Minister's attention to page 16 of the Council document and a point made by my hon. Friend the Member for Ruislip-Northwood about the objective of pursuing tax co-ordination ''further''—an important word—

    ''so as to avoid harmful tax competition''.

The language of the Minister's response to the point made by my hon. Friend the Member for Ruislip-Northwood was reassuring, but what do the Government regard as ''harmful tax competition''? What sort of further tax co-ordination do they want to pursue? What sort of further tax co-ordination have they committed themselves to pursuing?

Although the document contains much that Opposition Members welcome as sensible economic policies for Britain and the wider European Union, we remain worried about the extent to which the commitments into which the Government have entered allow scope for European institutions to cite, if not immediately, in future, precedents for a significant further extension of the competence of supranational institutions.

12.7 pm

Jane Griffiths: I share the mild sense of frustration apparently felt by the hon. Member for Aylesbury (Mr. Lidington) and my hon. Friend the Member for Luton, North. We are debating a document that is several months old. I understand why it has reached us so late, but I should like to ensure that ways can be found of presenting such documents to us sooner, so that we are not considering something that may be historical rather than a reflection of the current state of affairs.

I return briefly to the question of regional economic divides. My area, the Thames valley, has more in common economically with greater Frankfurt or greater Milan than with Merseyside, for example. The hon. Member for Caernarfon (Hywel Williams) referred to difficulties in Wales despite its receipt of objective 1 funding. I suspect that those difficulties might be exacerbated, rather than alleviated, with future enlargement and the entry of more, relatively impoverished, countries into the European Union.

In the statements made, on page 68 of the Council document, about the UK labour market an opportunity has been missed. The Council praises active measures targeting long-term and strategic unemployment and urges the reinforcement of those measures to target

    ''communities and individuals most prone to the risk of concentrated or long-term unemployment''.

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That is extremely good, but concentrated or long-term unemployment barely exists in the Thames valley, which does not mean that the Thames valley has no difficulties. When broad economic policy guidelines are presented to us, might we not learn from other regions in Europe about how they tackle difficulties resulting from low unemployment and high economic activity, of traffic congestion or pressure on infrastructure?

Mr. Hopkins: I agree with my hon. Friend. Does she agree that the European Union would do well to transfer far more resources into regional policy and to enable fiscal transfers between regions of the European Union such that the less prosperous regions can be helped and those that may be overheating can be damped down? The emphasis should be on fiscal transfers rather than market mechanisms.

Jane Griffiths: My hon. Friend is absolutely right. We should not continue with the current situation. In my constituency we import bus drivers from Wales, many of whom are former steelworkers, resulting in pressure on public services. Individuals in my constituency who lose their job are out of work for 10 days, although in other places the length of time is much longer. Such individuals may have to move away from my constituency to find affordable housing.

A key advantage of membership of and active participation in the EU is that it is possible to have certain types of exchanges and examine regional economies in a way that I suspect we are not doing. Will the Minister consider the matter with her hon. Friends and colleagues?

12.11 pm

Mr. Wilkinson: We should have debated the guidelines between the publication of the Commission's original proposals and the endorsement of them, as modified, by the European Council. That is the correct procedure and I hope that the House will follow it in future, although I understand the specific electoral circumstances and the intervention of the summer recess in this case.

I am wholeheartedly against the process whereby we mirror the economic policies pursued in the EU as a whole. That is against the British interest. I do not feel that Treasury time is best served by trips to Brussels, hotel bills, Eurostar and business class air fares, when its attention should be wholly focused on improving the living standards of the British people. That is the task.

I voted against the stability pact, which will, like the whole of the Maastricht process, lead to the creation of a superstate. We are witnessing the economic ingredients of the process of integration towards such a superstate.

Dr. Palmer: Does the hon. Gentleman's vote for instability mean that he is relaxed about other countries in the EU not following the same kind of prudent policy?

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Mr. Wilkinson: It is in the interests of each member country of the EU to pursue policies that best serve the interests of its people. It is as simple as that. If those countries have good effective Governments, they will so do. They will wish to maximise capital flows, trade and movement of people between their respective countries. My hon. Friend the Member for Wycombe (Mr. Goodman) put it well when he said that such an approach to economic management had inherent accountability—a democratic element—that is missing, to a degree, when the driver is the EU Commission in Brussels, over which we have little control.

Mr. Hopkins: I sympathise with the hon. Gentleman's view that the best judge of a nation's economic policies should be the member state's Government because they are accountable to their electorate. Does he not agree that, particularly in the modern world, countries' economic policies cannot exist in isolation from those in the rest of the world? A better way forward would be to encourage the right economic policies in other member states and, indeed, in other nations throughout the world, and I would suggest co-ordinated reflation during the present downturn.

Mr. Wilkinson: There is much wisdom in the hon. Gentleman's proposal. I was suggesting that it would be better for the Treasury to focus on the British economy as a key component of the world economy. The Treasury should consider the global scene; although Europe is a significant part of that, it should not be the overwhelming determinant.

There are two fundamental flaws in the stability pact. One is that it may be adhered to too rigidly, and the Minister referred to that when she lauded Her Majesty's Government for their counter-cyclical spending in this time of economic downturn. As the hon. Member for Luton, North noted, there is much merit in that, but, as the hon. Member for Broxtowe suggested, the stability pact could have an inherent deflationary impetus and constrain public expenditure when it should be relaxed.

If expenditure is relaxed too much, however, and the Italians or the Germans ignore the stability pact, there could be two malign consequences. First, capital flows could be needed to meet the deficit that was run up to fund Italian pension funds, Greek overspending or rebuilding in eastern Germany—those could all drive the process. Secondly, there could be a significant loss of confidence in the European Union's currency, the euro, which might have a significant effect on the international markets. I therefore have my reservations about the stability pact, but I shall not labour them further.

The Commission displayed breathtaking naivety when it failed to recognise, even in the spring, the imminent downturn in the United States and the gravity of the situation. That was O-level stuff. The bubble in information technology stocks was manifestly about to burst, with huge ramifications for the American economy. Only the size of American demand was supporting the global economy, but it

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could not have been maintained much longer. In the event, 11 September made the downturn very much worse.

In addition, the Commission brushed aside the Japanese decline, an economic phenomenon with the gravest consequences for the world economy, and particularly for Asia. The Pacific basin has had the highest growth in the world economy, but the depression in Japan and the fact that the country is on the verge of deflation are matters of grave consequence, which antedated the spring by many months and could have been foreseen then. The defects in the Japanese banking system and its level of exposure had perturbed people for a long time.

The Commission also assumed that European Union countries could escape the worst consequences because of some inherent merit in the way in which we managed our economies. The Federal Republic of Germany is one of the main economies in the world and is dependent on exports. The manufacturing sector has been experiencing a depression for several months, a problem that started long before the Commission did its sums.

Since the documents were produced, we have had the events of 11 September, the Enron bust—the biggest single corporate failure in history—and now the Argentinian default and devaluation. That was the single biggest national default and an event of mammoth proportions for Latin America and perhaps further afield. The Spanish banking system and the nation's economic interests are feeling the consequences of a devaluation of about 30 per cent. We are discussing economic history, and it is not even good history.

Why should we mirror our neighbours? How would it benefit Britain? I shall consider a few areas of the world. Look at the Association of South-East Asian Nations. Would Singapore have prospered if its policies had mirrored those of its bigger neighbour, Indonesia? Certainly not. The fact that Singapore broke away from the Malaysian federation and instituted its own currency and its own system of economic management led the country to prosper in a way that has hardly been emulated anywhere else. Look at east Asia. Would Taiwan have done any better if it had pursued the policies of its bigger continental neighbour, the People's Republic of China? What about Hong Kong? Even after its absorption into the People's Republic, following the hauling down of the British flag, it is still an economic zone pursuing different policies with a different currency, and that is manifestly to the benefit of the people of Hong Kong.

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Prepared 9 January 2002