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Mr. James Plaskitt (Warwick and Leamington): My right hon. Friend will know that in the Treasury Select Committee report that was published in April we highlighted several criticisms of the workings of the monetary policy arrangements in the European Central Bank. I was interested to see that six of those criticisms were reiterated in the policy framework document that was published this morning, so how will my right hon. Friend seek to secure maximum UK influence on ECB reform while we are outside the euro, and does he see convergence on monetary policy management as a precondition of eventual entry?
Mr. Brown: The Government are taking on board and examining very carefully all the points that my hon. Friend makes about the Treasury Committee's report. I applaud the work that he and other members of the Committee have done in identifying the challenges, as well as the benefits, of membership of the euro.
I define sustainable convergence as the ability to converge with the European area—in other words, that we can permanently live with euro interest rates at the same time as being able to advance our objectives of high and stable levels of employment and growth and the funding of our public services. That is why we are looking at putting in place reforms to the housing market, but we are not trying to seek structures in the British housing market that are identical to those in other countries' housing markets. What we are trying to do is to lessen the inflationary pressures that arise from the housing market. So, on convergence, I believe that we can make significant progress during the next period.
We will make proposals to the House on how we can create the flexible economy that is necessary to adjust to whatever stresses and shocks arise, so that we can get what I know my hon. Friend wants to emphasise: the potential benefits of the euro in terms of trade, in investment in the financial services industry as a whole, and, of course, in growth and output.
Mr. Kenneth Clarke (Rushcliffe): I welcome the Chancellor's reassurance that he still fully shares my
views on the single currency—that it is in Britain's interest to join as soon as the economic conditions are right. I did not advocate joining over the past five years because I believed that sterling was, until recently, overvalued.The Chancellor urges us to wait. Am I right that his principal concern over convergence is the housing market, and can he assure us that his studies will not take too long, given that we have the same proportion of owner-occupiers in this country as the average across Europe? We are not the only country with flexible interest rates, and the mortgage market will respond when financial services markets are made universal across the European Union, so we should not wait too long on that account.
As to flexibility, I have already welcomed what the Chancellor said about the end of national pay bargaining in the public sector, but I trust that he is not going to make us wait until he has achieved that, in the teeth of resistance from his own Back Benchers, before taking a final decision. Surely we are already one of the most flexible economies in the European Union, and, unless he is going to erode our tax and regulatory advantages further than he already has, we should be able to withstand shocks of the sort that he described.
How near are we to satisfying the tests? Surely we must be very near. I look forward to Budget day next year, when he and I might at last begin to campaign together in support of the views that we hold in common, but that requires some courage of conviction and some exercise of judgment on his part.
Mr. Brown: I am grateful to the former Chancellor for what he said about the benefits of studies of the housing market and issues of flexibility. I believe that he is a late convert to the importance of the five tests. I welcome the fact that we can reach common ground on the problems that need to be dealt with if we are to secure sustainable convergence and flexibility.
On the housing market, the percentage of owner-occupation is not the issue. As the right hon. and learned Gentleman knows from his own experience—and, let us be honest, as the Conservative party knows to its detriment, from what happened in the late 1980s—the real problem is the inflationary pressures that arise, partly because of the wealth effect of housing and partly because of short-term interest rates, in the housing market and their effect on the whole economy. Those are the matters that we will examine.
I said in my statement that there was a realistic prospect of making significant progress during the next year. When we introduce proposals in October, we will deal with the inflationary problems that arise—and have arisen under all Governments—in the housing market. I would correct the right hon. and learned Gentleman: I talked about a national framework in pay bargaining. As London weighting and other issues relating to London and the south-east have shown recently, there must be a degree of flexibility in view of the different inflationary pressures, particularly from housing, in different parts of the country. I believe that there is currently a willingness to examine those issues, particularly when we have a framework for fairness in
the economy built around the tax credits. We can establish common ground and make significant progress over the next year.
Mr. John Hume (Foyle): Does the Chancellor agree that the logic of a single market is a single currency? What is the meaning of a single market without a single currency? Let us imagine the largest single market in the world competing with us—the United States' single market—and what would happen if one of the states had a different currency. The logic of a single currency for a single market is powerful. Does the Chancellor agree that, since entering the euro, Germany's trade within Europe has increased by 18 per cent., whereas this country's has decreased by 6 per cent.?
Northern Ireland is the one region in the United Kingdom that has a border relationship with the eurozone, and people who live there know the difference that it is making to trade on our side of the border. About 88,000 employees in Northern Ireland are dependent on membership of the European Union, and 155,000 workers in Wales are dependent on it. I am quoting an in-depth study carried out by independent people. All the arguments show that we must join the euro as soon as possible for the benefit of all sections of our people.
Mr. Brown: I am glad to see my hon. Friend back in the House; I hope that his health is recovering. It is always a privilege to listen to him. He raises an important question about Northern Ireland's cross-border issues, which arise because the Republic of Ireland is in the eurozone. We have discussed those issues and tried to deal with the some of the problems, as well as the opportunities, that arise from that. He is right also to draw attention to the jobs that are dependent on our membership of the European Union; one of the failings of the Conservative party is not to recognise that 3 million jobs depend on the trade—imports and exports—that we have with the European Union.
On the individual issues that my hon. Friend raises, we learn from the experience of the United States as both a single market and a single currency. The US has much mobility between the states—more so than in the European Union—but the same issues of flexibility arise, and we will have to deal with them.
I agree with my hon. Friend about the importance of the single market and the benefits and principle of the single currency. The assessment that we have done shows that there are risks as well as benefits, and it is the responsibility of Government to continue to consider how we can solve the structural and cyclical problems. We will report back to the House in the Budget next year.
Sir Michael Spicer (West Worcestershire): Last week, the Prime Minister told me that he did not know what the right rate of exchange was for entry to the euro, because he did not know what the circumstances would be. Since entry into the euro would be for ever, the
circumstances surely do not matter. The Chancellor said today that he knows what the wrong rate is: what is the right rate?
Mr. Brown: The hon. Gentleman can see the studies that we have produced today. One of them is a study by Professor Wren-Lewis, in which he gave his view of what the equilibrium exchange rate is at this point in time. It is the Government's view, as I said in my statement—to which I refer the hon. Gentleman—that it is right to consider the issue just before the point of transition. Governments outside a fixed exchange rate system have never predicted or announced the exchange rates that they favour. The issue will be dealt with just before the point of transition and it would be wholly irresponsible to announce an exchange rate today. Indeed, the hon. Gentleman would not expect me to do so, although I sometimes wonder why he asks all these questions about the detail of joining the single currency, given that he has made it clear that he is against it in principle.
Denzil Davies (Llanelli): As a former Treasury Minister in a Labour Government who, after a rigorous analysis, decided that it was not in the national economic interest to join the ERM, may I congratulate my right hon. Friend on his rigorous assessment of the five tests and the sensible conclusion that he has reached? However, he will remember that in addition to the five tests there was also a question about whether the euro was a successful currency. Given the problems of most of the euro area since the Maastricht treaty was signed, is it his view that the euro is a successful currency?
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