1. Mr. Kelvin Hopkins (Luton, North) (Lab): Whether he has made an assessment of the implications of the depreciation of the US dollar for the British economy; and if he will make a statement. 
The Chancellor of the Exchequer (Mr. Gordon Brown): In the last six months, the dollar has fallen by 6 per cent. against the pound. At the same time, the euro rose by 5 per cent. against the pound. Our objective throughout is stability and the maintenance of economic growth. During our presidency of the G7 and G8 next year, our objective will be that each continent make its contribution to the sustained growth of the world economy.
Mr. Hopkins: Is it not now clear that the Americans are using the dollar exchange rate as an explicit instrument of macro-economic policy? Given that Britain, too, has a substantial and increasing trade deficit, largely with the rest of the European Union, is it not only a matter of time before our Government must adopt an active exchange-rate policy as well?
I thought that my hon. Friend was opposed to a fixed exchange rate, especially given his views on the euro. Exchange rates will, over time, reflect the fundamentals of the economy. Given the volatility that there has been, I think it most important for each continent to consider over the next few months what contribution it can make to sustained growth in the world economy. I shall be meeting the American Administration over the next few days and will urge them to set a clear path showing that the current account and budget deficits can be dealt with. Equally, the European economy must contribute to growth in the world economy as it has not done in recent years. The same applies to the Japanese economy, which must continue its programme of financial sector reform. Given the present condition of the world economy, in which world trade is increasing, we need to see each continent contributing to both stability and growth.
16 Dec 2004 : Column 1774
Richard Ottaway (Croydon, South) (Con): I am encouraged by that last reply. Is not the real implication of the devalued dollargiven that the foreign debts of many countries around the world are in dollarsthe devaluation of those debts, which will have a profound impact on the world economy? Will the Chancellor address that when he talks to his colleagues in the United States?
Mr. Brown: I will certainly mention it when I talk to Mr. Snow, the Treasury Secretary, and Dr. Greenspan, chairman of the Federal Reserve. As policy makers, however, we must decide on the best way forward for the world economy. If we are to maintain the levels of growth achieved this year and see the world economy on a sustained path of growth over the next few years, it is clear to me that the European economy must grow faster. It is also clear to me that the current account and fiscal deficits in the United States must be seen to be addressed, and that in Asia, especially Japan, financial sector reform must be there to show that Japan is on a path towards growth as well.
I do not think that in February we shall return to the sort of discussions we had at Louvre and Plaza in the 1970s. We shall be discussing how greater flexibility and stability in the world economy can make for greater growth.
David Taylor (North-West Leicestershire) (Lab/Co-op): In the mid-1980s, closing the twin fiscal and current account gaps in the United States, which at that stage were running at about 3 per cent. of gross domestic product, was associated with a 30 per cent. fall in the dollar when measured on a trade-weighted basis. Does my right hon. Friend agree that with those two deficits now running at about 5 per cent., the chief economist at the Bank of England was right to flag up further sizeable falls in the dollar recently? What will my right hon. Friend do about that prospect when he talks to the American Administration?
Mr. Brown: There is another factor to be taken into account. The European economy has been growing at half the rate of the American economy for about 10 years. If we are to have balance in the world economy, we shall need more growth out of Europe. Whether in terms of interest rates or of structural reform, the whole European area economy will have to grow faster. We are not in the position in which we found ourselves in the mid and late 1980s. We have low inflation both in Britain and in the world economy and we will not make the mistakes made by the last Conservative Government.
Mr. Oliver Letwin (West Dorset) (Con): The Chancellor is obviously right to favour floating exchange ratesI think that there is agreement on that throughout the Housebut one point was not made clear in his reply to the hon. Member for Luton, North (Mr. Hopkins). Does he think that the depreciation of the dollar has been a major factor in the record trade deficits that the United Kingdom now has?
Of course the depreciation of the dollar is a factor affecting not just the British economy but economies around the world, but policy makers must
16 Dec 2004 : Column 1775
deal with the real world as we find it. What we must think about over the next few months is how we can sustain the stability of the world economy and at the same time have the fastest growth possible, so that instead of the downturn of the past few years we enjoy a period of sustained growth. I am suggesting that each continent must recognise its responsibilities. Rather than looking at some academic analysis of what might have happened, we must look at what can happen. Each continent must say, "Here are the contributions that we can make to the continuing growth of the world economy." I should have thought there was common ground between us on that.
Mr. Letwin: I still did not hear the right hon. Gentleman explain the reason for the UK's record trade deficit. What about foreign direct investment in this country? Does he think that the depreciation of the dollar is mainly responsible for foreign direct investment dropping to a quarter of its level five years ago?
Mr. Brown: The right hon. Gentleman wishes again to talk down the British economy, but he should recognise that we are the premier country in Europe benefiting from foreign direct investment, particularly from Asia. The pre-Budget report shows not only that exports have grown substantially this year, but that they will continue to grow next year at a fast rate, and we are in a position to benefit from the rise in world trade. Regardless of the right hon. Gentleman's speculation about the impact of the dollar, trade from Britain to the rest of the world is rising, exports are rising and they ought to continue to rise. I want Britain to benefit from increased world trade. Again, I would have expected that to be common ground between us.
Mr. Letwin: The Chancellor does not need to worry about speculation. In 1999, foreign direct investment into this country was £54 billion; last year, it was £12 billion, which is about a quarter of the former figure. He surely has to recognise that the depreciation of the dollar or any other external factor is not the main reason for our record trade deficit, or for the fact that foreign direct investment has dropped to a quarter of its earlier level. The main reason is the excessive regulation that he has been imposing and the tax that he has been levying to pay for his wasteful spending.
Mr. Brown: I do not think that the shadow Chancellor lives in the real world. There has been a world downturn, every country in the advanced industrialised world has suffered a loss of foreign direct investment, and the huge pressures of globalisation are hitting every economy as more and more manufacturing work is done in the far east. These are factors common to every industrial economy. The question then is: how well is Britain doing? The answer is that Britain is growing, Britain is creating jobs, Britain has low inflation and Britain has low interest rates. We do not want to go back to the situation described by the shadow deregulation Minister:
"Fifteen per cent. interest rates, sky-high mortgage arrears, negative equity, bankruptcies, entrepreneurs giving up the ghost on private-run companies . . . I don't think there was a family in the country that didn't experience at least one of those anguishes. A lot of my neighbours lost their houses".