Broad Economic Policy Guidelines

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Dr. Palmer: I am grateful to the hon. Gentleman for giving way again. I congratulate him on his prescience in market movements and on his doubtless having become a multi-millionaire in short-selling information technology stocks earlier this year. Based on the arguments that he has advanced for other countries, would he favour a separate currency for Ruislip-Northwood?

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Mr. Wilkinson: I shall continue with my speech.

What about America de Sud? Chile wisely decided not to become a member, but its associate membership has helped it to balance its trade rather well, as it is not focused entirely on Latin America. If Chile had pursued the policies of its neighbour Argentina and pegged its peso to the dollar, Chile would now be bust. As it is, Chile is very resilient; it is prospering, and even at this time of world economic decline its private pension funds are still manifesting growth. Those are interesting facts. Also interesting is the fact that Chile, with a number of other smaller polities such as New Zealand, Hong Kong, Singapore and Switzerland, is in the Heritage Foundation list of the ten freest countries in the world—and by and large those countries have the best economic performance.

I believe that the Government should concentrate on enhancing tax competition. We should do everything in our power to ensure the lowest tax regimes in Britain if not in the global economy. That is how we should encourage growth and stimulate job creation. It would lead to greater entrepreneurship in the economy. We should not pursue the statist, corporatist, high-spending policies that are largely followed on the continent. The debate has been an interesting exercise and a fascinating insight into the thinking, such as it is, of the European Commission, but I hope that the Government do not follow it too far.

12.23 pm

Mr. Hopkins: May I say what a pleasure it is, Miss Widdecombe, to serve under your chairmanship? You may not recall it, but my maiden speech four or five years ago followed your wonderful speech in the hunting debate. Your contribution was a veritable tour de force, with which I wholly agreed. My modest speech provided an interesting introduction to speaking in the Chamber. It is a pleasure to be debating the economy once again with my hon. Friend the Economic Secretary. I genuinely enjoy these debates.

Much has been said about budget deficits in the European Union, but it is a shame that we should be debating an historic document that no longer relates to current circumstances. It would be much more interesting if we could debate the next report sooner after its publication. We are into a new era. Serious difficulties are arising for the European Union and its economic strategy, which is exhibited by the fact that budget deficits are increasing. The constraints of the stability and growth pact are being tested and will be tested further.

A recent article draws attention to the national economic and social research forecasts of budget deficits until 2004. It suggests that the global deficit for the EU will increase from about 0.5 per cent. of GDP to

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1.25 per cent. of GDP—a significant increase—and that some countries are already ''surfing close to the limits''. I am not concerned about that because I think that the limits are too low. In periods of world recession, such as that which we are entering, it is right for governments to run substantial deficits in order to reflate their economies. Consider the periods of recession in wartime, when governments borrow enormous sums of money. America is a classic example. It had the strongest economy in the world. Straight after the second world war it borrowed for years as though there were no tomorrow and created an enormously strong economy on the basis of that borrowing. That is interesting, but I shall not dwell on it now.

We are on the verge of a fairly serious world recession. There is much speculation as to whether or not we shall escape it. The European Union is looking into a possible black hole, and we must address that. Nothing will create more scepticism about the EU than if it fails economically and its citizens see not only their jobs disappear but their living standards severely damaged. There is already a degree of scepticism in Italy, as we have seen. That could increase. Ireland is fortunate in that it entered the eurozone with a substantial cut in interest rates and its currency was relatively undervalued, which means that it has a booming economy; its inflation is slightly higher than that of other countries, but not seriously so. That proves my point that when interest rates are reduced and public spending is increased, with the right exchange rates, there can be a booming economy. It is embarrassing that there is a small economy near to us, peripheral to Europe, that is doing well because it entered with beneficial macro-economic conditions. Other countries might not have that advantage.

If we look ahead a year or two, we might see some countries in the eurozone suffering difficulties. A small country like Ireland, which represents 1 per cent. of the EU population, is not significant. However, a large economy, say Germany, represents a much larger proportion of the population and the economy of the EU. If it gets into serious trouble, its citizens may want to reflate and spend more public money, but they will come up against the growth and stability pact limits. They will not be permitted to cut interest rates because those are not determined by the German Government. What will they do? If that economy agrees to stay within the constraints of the EU's economic arrangements, it will go into recession and will drag the rest of the EU down with it. That will then be a serious matter. We can deal with small economies having problems; a big economy having a problem like that is a major issue. We must look seriously at how we should move forward and escape from what I regard as fiscal anorexia arising from the current pact and economic arrangements.

European growth is too low, and European unemployment is still too high. Britain, being outside the eurozone, must provide some intelligent input into the debate about the future of European economic policy.

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I will speak briefly about the serious issue of the liberalisation of the railways. I hope that it will be left to flap in the wind and that no one will take it seriously. I recently went on a railway visit to France with the House of Commons all-party railway group. We met French railway engineers from SNCF, who did not take liberalisation seriously. They could see the problems occurring in Britain. French railways are light years ahead of our railways. They are state owned and, at this stage at least, they form an integrated, whole system. That is the way forward. While we were there, we discussed PPP. The engineers said that when people in France referred to PPP, they meant public, public, public. I have strong sympathies with SNCF on that point.

There are serious economic problems for the future in Europe. I am sorry that the hon. Member for Ruislip-Northwood has left the Room because he said that we needed more tax competition and lower public spending. It is interesting that some of the countries with the highest taxes—Scandinavian countries such as Denmark and Sweden—and the highest levels of public spending are also the most successful economies in Europe. Many people in Europe would give their eye teeth for the public services and living standards in those countries. Europe would do well to imitate what has traditionally been done in those, dare I say, social democratic countries of northern Europe, and follow the way in which they have managed their economies. Some of them do not have the advantages of oil or other natural resources. They live by their wits and the added value that they create in their countries through manufacturing and services. We should follow those examples, rather than the deflationist examples set by countries in the eurozone, exemplified at their most extreme in Commission publications.

Europe must listen more to its citizens. We want lower unemployment and more jobs. To achieve that, we need expansionist policies, not deflation. The Commission and European Union are obsessed with the past and with inflation. I hesitate to say that inflation is absolutely dead, but it is no longer a serious issue. Indeed, I suggest that some of the targets set for inflation are too low. If one has a low target for inflation, one may move towards the situation in Japan, where citizens anticipate reductions in prices and therefore defer purchases, which reinforces deflation. With a little inflation, there is always the knowledge that it is probably better to buy now rather than next year because prices will be higher next year. A little inflation is the oil that helps the economy to run. If one becomes too obsessed with reducing inflation to extremely low levels, one can fall into the Japanese trap.

The difference between inflation of 2.5 per cent., 3 per cent. or 3.5 per cent. is insignificant, especially when exchange rates are fluctuating by vast amounts—30 per cent. in the case of the euro. Clearly, high inflation such as occurred in the 1970s is serious, but minor changes are not. We could set a target in Europe or in the UK that is somewhat higher than the present target and it would do no damage to our economy. The important thing is to ensure that

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demand and employment are sustained and that growth and investment continue. Those issues require serious consideration.

12.34 pm

Paul Farrelly: I am sorry that the hon. Member for Ruislip-Northwood has left the Room because I wanted to congratulate him on the fistful of euros that he had in his hand during the debate— I see that he has now reappeared. Those euros are the first that I have seen since Parliament reconvened. However, sadly, it seems from his remarks that his mind is obviously not as open to Europe as his wallet is.

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Prepared 9 January 2002