Previous Section Back to Table of Contents Lords Hansard Home Page

Lord Barnett: That is optimistic!

Lord Cockfield: My Lords, the noble Lord thinks that I am unduly optimistic, but then, after all, hope springs eternal, even in this field.

Let me start with a preliminary point which has been touched on and which I believe is important. The committee has recognised that most of the "outs" will in fact be what are commonly called "pre-ins"; that is, chaps who want to come in and are doing everything they can to meet the requirements of membership. In the early stages, where that is so the attitude of the "ins" is likely to be benevolent. Under the doctrine of solidarity, they will go to considerable lengths to smooth the path of the "outs"; but if finally the "outs" are reduced to a small core, and if that core consists primarily of those who refused to join on political grounds--the limiting case of course would be that of the UK standing out on its own--the attitude is likely to change. That poses a real threat to this country. But, so far as I can see, nowhere is it dealt with in the report.

The committee is entirely right in considering that what happens to the single market is of paramount importance. That point has been made by a number of noble Lords this evening. The committee says, quite correctly, that discrimination between the "ins" and the "outs" would be illegal, but it recognises the risk of covert discrimination.

But there is another and, I suspect, even more important risk here. It is well illustrated by the case of TARGET, to which the committee refers in the penultimate paragraph of the report. TARGET, of course, is an EMU issue, not a single market issue, but it illustrates the point that I want to make. TARGET is the inter-banks payment system which will be set up to deal with Euro payments. The dispute centres essentially upon overnight risk, and what facilities the Bank of England may be permitted to make available. If at the end of the day the EMI, or its successor the ECB, refuses to allow the Bank of England to provide the facilities it wants to provide, and in the way that it wants to do it, we shall no doubt allege discrimination.

The ECB would no doubt claim that it was doing no more than protecting the integrity of its monetary policy as it was required to do under the terms of the treaty. Interestingly enough, the Financial Times on Monday 22nd July seemed also to take that view. I have little doubt that the Court of Justice would support the ECB on that issue. The matter may yet be settled by negotiation. I hope that it would be, but I cite the case to illustrate the kind of problem which will arise in the single market as well as elsewhere.

In much the same way, there will be substantial problems affecting the CAP. Here again the committee does not appear to touch on the matter, let alone suggest answers. There will be problems also in relation to the regional funds--a matter of real significance to the UK as this country is a major beneficiary. There will be

24 Jul 1996 : Column 1444

problems in relation to state aid; in relation to competition policy; in relation to cross-border trade in taxable goods; and in the field of the taxation of enterprises--a matter which is now just beginning to come on the agenda.

It is impossible in a speech of this kind to spell out those points in detail. The move to set up a new exchange rate mechanism is, in part, an attempt to address those problems, but, with the wide bands proposed, its effectiveness so far as that is concerned will be limited. The UK proposes to stand out from any new ERM anyway.

Many of the problems that I have mentioned exist at present, but they will be greatly exacerbated by the division of the Union into "ins" and "outs". The longer that division lasts, the worse the problem will become. The fewer the "outs" compared with the "ins", the less likely is it that solutions acceptable to the "outs" will be found.

I should like to touch briefly upon the question of competitive devaluation, about which concerns have been expressed. The committee seemed to dismiss those concerns as ill-founded. It is true that taking a long-term view devaluation is self-defeating--that, indeed, I have argued in your Lordships' House on many an occasion--but that has not stopped countries resorting to it. This country is a prime offender. I know that we claim we are now reformed characters, but whenever I find a sinner of long standing saying that he is a reformed character it always reminds me of the alcoholic's lament in the Rubaiyat of Omar Khayyam:

    "Indeed, indeed, repentance oft I swore, but was I sober when I swore?"

Leaving that on one side, the country pressing the point is France. Its criticism has been directed at Italy, not at this country. With open frontiers you can gain a large, if temporary, advantage, particularly in relation to agricultural produce, if you undervalue your currency. It is that that the French were trying to stop the Italians doing.

Finally, one of the significant advantages of the single currency is that it greatly simplifies the operation of the Union itself. It reduces the opportunities for manipulation and fraud. While I would anticipate a honeymoon period during which the "ins" will do everything possible to help the "outs", that will not last, and the more the "outs" are reduced to a small core, consisting of those who cannot or will not join, the more the costs arising from the continued existence of fluctuating currencies outside the single currency will be passed on to the people with those floating currencies.

I fear that this is a somewhat critical speech, but my reason quite simply is that if the worst comes to the worst and we opt out of the single currency, we must at least have thought through the problems in depth, and be ready and prepared to deal with them.

7.8 p.m.

Lord Grenfell: My Lords, may I add my own words of congratulation to the noble Lord, Lord Sheppard of Didgemere, on his authoritative maiden speech. He may have felt himself to be a sheep as he stood up, but in

24 Jul 1996 : Column 1445

the course of delivering his speech he shed his sheep's clothing to reveal the lion that we know is underneath. We look forward to hearing him on many future occasions.

I am grateful to my noble friend Lord Barnett for so excellently introducing the debate on this report, and I congratulate him and the committee on what I consider to be the outstanding quality of the report. It is balanced and highly readable. As the noble and learned Lord, Lord Howe of Aberavon, said, it is full of wise and compelling advice. There is a pressing need for such a report at this time. I hope that it will be made widely available, in some appropriate format, outside your Lordships' House. It is critical that EMU be explained objectively to the British public if there is to be a meaningful national debate on the pros and cons of being in or out, or, if out, whether we are "pre-in" or out for good.

I ask your Lordships to forgive me if briefly I introduce a small new element into the debate. Regrettably, if not irresponsibly, the Government appear to have privatised by default the presentation of EMU to the general public, a dereliction of duty that has left it largely to a few powerful tabloids to flood the public mind with a distorted, prejudiced, fear-mongering interpretation of what EMU is all about, a travesty of a right to know, aided and abetted by a motley band of Little Englanders.

If the Government believe that possession of an opt-out clause excuses them from informing the public what it is they may want to opt out of, I must beg to differ very strongly. There is a responsibility to inform, whether the clause is eventually evoked or not, and we are less than two years away from the spring of 1998 when the first EMU entrants will be identified. Even the introduction of decimalisation into this country some 25 years ago was preceded by a four-year explanatory campaign.

If a new government decide to opt in, they will have a perilously short period to run a massive popular campaign on so complex an issue. Without prejudice to the eventual decision, the public need the basic facts and they need them now. It is encouraging that bodies such as the TIC, the CB and the Bank of England, to mention but three, are taking on the responsibility of informing those who most immediately need to know what the implications of "in" and "out" are going to be and what they need to do now to prepare for either eventuality. But meanwhile, despite the grassroots efforts of organisations such at the European Movement, the mass of the broad public remains deprived of the most basic, objective facts. And yet it is they who will eventually be called upon to make one of the most momentous decisions for this country in this century.

I shall dwell no longer on that point because I wish to turn to the substance of the report. I add only that ignorance and the exercise of democratic rights make poor partners. The committee's opinion, as expressed in the report, strikes me as mostly very convincing, and there is neither time nor need for me to enumerate my point-by-point agreement with its various conclusions. I prefer instead to address three points in the report

24 Jul 1996 : Column 1446

about which I have some reservations, and I hope to put them in the same constructive spirit that permeates this very even-handed document.

First, I am convinced that the political momentum in continental Europe to proceed with EMU on 1st January 1999, as indeed the committee sensed in its informal contacts with French and German officials, is growing and a decision to delay is looking less and less tempting. A growing interest on the part of our European partners in the flexibility written into the treaty in Article 109J and its protocols on the matter of convergence criteria suggests that, under the circumstances, this may be a legitimate and politically more sensible alternative to delay. I share the view of those for whom the dangers to EMU's future inherent in delay loom larger now than the risk of a possibly slower build-up of confidence in the Euro if the criteria are applied with a little less than absolute strictness.

The report even-handedly records some of the arguments for delay, or at least the acceptability of delay. Reasons for not delaying which have been offered by witnesses have also been fairly recorded in the report. I would add one other. I believe that delay will be dangerous, because history has too many times proved electorates ultimately right when governments have said that they need a little more time to get something right before a launch and the electorate has seen in this the first signs that the launch will never take place. Whether such doubts would be justified in the case of EMU is rather beside the point. Where there are doubts there will be lack of support, and that can prove fatal to the project.

It can be argued, as the report justly notes, that a loosening of the convergence criteria would confirm the fears of the many German citizens who already believe that they would be giving up the deutschmark for a weaker Euro. I do not disagree that their fears could be thus exacerbated--and to some extent already have been--but I still believe that the greater danger to the project lies in the doubts, not least in the markets, created by delay. If one looks at where the financial markets expect short-term interest rates to go in France and Germany, the two key EMU states, and also at what the markets are telling us about long-term interests rates in these countries, one can only come to the conclusion that the markets have already decided that EMU is going ahead and on schedule.

The difficulties that Chancellor Kohl's austerity package has been facing in Germany's SPD-controlled Upper House might tempt Euro-sceptics to conclude in the spirit of schadenfreude that Germany is now bound to miss the fiscal deficit convergence targets and that EMU is therefore a non-starter in 1999.

I believe that that is a dangerous assumption to make and we should hesitate before drawing such a conclusion. If the German Government fail to push through the entire 50 billion deutschmark package of public expenditure cuts, which are deemed essential by any test and not just as a means of bringing the fiscal deficit down to 3 per cent. of GDP, would not a flexible application of the convergence criteria look even more appealing to a government for whom the

24 Jul 1996 : Column 1447

1st January 1999 starting date appears to be as sacrosanct in Bonn as it is in Paris? In short, I would not count on Germany's fiscal deficit problem scuppering the EMU timetable.

That should certainly be applied to France too. We should take good note of the fact that the French Government--like all French governments, a champion of the nation state--are nonetheless deeply committed to monetary union. As the noble Lord, Lord Ashburton, said, that may be an act of faith, but this is not some aberrant rejection of Cartesian logic, still less a case of schizophrenia on the part of the French. It results from what has been a profound analysis of the monetary union project in the light of what is best for France domestically and for its position in Europe.

For my second point I come to the question of how EMU will affect unemployment. In paragraph 117 the report states:

    "On balance, we think that EMU, of itself, is neither deflationary nor likely to reduce unemployment: its effect will depend on whether the ECB achieves price stability and whether national governments achieve a high level of employment as, in our view, is required by the Treaty".
I feel that this wording sells the employment-creating potential of the single currency rather short, or at least undervalues the directness of the linkage, particularly in the case of the United Kingdom. Its potential for reducing unemployment is, or at least should be, one of its biggest selling points and without it the "outs" will be deprived of an important potential benefit.

There seems to be a strengthening consensus that convergence criteria are not in themselves deflationary and that the cuts in government borrowing required of EMU members will reduce real interest rates. In addition to what is noted in the report, the Public Policy Research Institute in a study published at the end of May sees the possibility of a 1 per cent. cut in government borrowing bringing real interest rates down by 0.3 per cent., leading to the creation of a million jobs in the UK within a decade of EMU membership. Christopher Johnson, the United Kingdom adviser to the Association of Monetary Union in Europe, sees the possibility of even deeper falls in interest rates raising growth in our economy to 2.5 per cent., 2.75 per cent. or even 3 per cent., with the actual rate going higher as spare capacity is brought into use. Under these conditions, he says, it should be possible to reduce the unemployment level to around 6 per cent. On that basis, it would seem that the link between a single currency, with its attendant disciplines, and levels of employment is rather more direct than the report allows.

My third and final point relates to trade. I have a slight difficulty with paragraph 123 of the report which states with reference to the UK as an "out" that:

    "We can see no compelling reason why its extra-EU trade should be affected, positively or negatively, except in so far as the United Kingdom's general competitiveness will be affected by the economic and political fortunes of the 'ins'".
It is the "in so far as" which is the real point. The wording seems to suggest that the jury is still out on whether Britain can maintain, let alone improve, its competitiveness as an "out". Perhaps the jury is still out for some. But I feel that the risk of a fall-off in inward

24 Jul 1996 : Column 1448

investment if we stay out of EMU is very real indeed. And fall-off in a country where inward investment has, according to the CBI, provided 700,000 jobs since 1979 would translate into a noticeably negative impact on our global competitiveness as we struggle with the social costs of a return to rising unemployment. Therefore, on that point I find the report rather too serene.

As at the outset of my remarks, perhaps I may urge once more that all the facts about EMU should be put on the nation's table now and not at the last moment, so that the debate is truly an informed one. It will not be easy because these are complex issues. But I am certain that those who, like myself, would wish to see Britain as a full member of a well-run European monetary union must press the case vigorously, as does the report, for the maximum British influence to be brought to bear on the design of stage three, as many noble Lords have already said, and for our own technical preparations for EMU to go ahead whether we are to go in or stay out.

The Chancellor's memorandum to your Lordships' Select Committee once again reminds us that the Government cannot make the decision on EMU as a number of factors are still unclear. So be it, although similar factors have not deterred many of our European partners from reaching a decision, at least in principle.

Above all, let no British Government abdicate responsibility by saying that they cannot make up their mind and will therefore act on the basis of what the people think. The Government must lead.

Finally, I am certain that if we are to convince sceptical British public opinion that British participation in a well-run EMU is very much in their interests, we must convince them of the great benefits to be gained from the single market and the benefits which have been gained already from our participation in the single market. If convinced of that, I am sure that people will come to understand that if one of the core purposes of the single currency is to ensure the success and sustainability of that market, it is in their interests and that of Britain to embrace it.

7.22 p.m.

Lord Boardman: My Lords, I had been disturbed by the lack of debate in any depth on this very important subject. But recently the issue has come to life and we now have a growing interest in the key decision as to whether or not we should join a single market. I hope that the report of the Select Committee will provide a good basis from which many judgments can be formed from the debate.

I congratulate the noble Lord, Lord Barnett, on his chairmanship of the committee. We produced an unanimous report on a fairly divisive subject with some fairly divisive characters on the committee. It is a great credit to him that he brought us all together with that result. I am sure that he would be the first to acknowledge that had we expressed any judgment on the implications of various matters, the divisions might have been more prominent.

First, I wish to indicate how little is known generally about what is likely to happen. The noble Lord, Lord Grenfell, said, with some confidence, which

24 Jul 1996 : Column 1449

countries will take part in this. However, I wonder whether we are right to make that assumption and whether this will take place at all. There are wise voices who are expressing considerable doubts about that. The Germans and the French say that it must happen on a certain date or not at all. But I do not think that we should jump to those assumptions or to the assumption that we shall be in it. The noble Lord, Lord Jenkins of Hillhead, referred to Belgium joining the EMU. Belgium certainly does not observe the criteria. It is important to know whether, when the terms of entry are decided, they will be fixed on the criteria or whether there will be a glorious fudge. That will have a massive effect upon the credibility of the scheme if it goes forward.

Secondly, we have an option to decide. That has not been mentioned today. Even if the Government were of the view today--as, indeed, I may be--that it is most unlikely that we shall want to join, at any rate initially, I ask why we should want to close that option which was negotiated brilliantly by the Prime Minister. For goodness sake, we should keep open that option until all the material facts are known. Whoever closes an option which is free and gives one the choice to wait and hear what is developing before making a decision?

The option gives to us, while we still have it, the right to be in, participate in and be involved in the preparations for EMU. That is very important, whether we are in or out. I believe that it would be absolute madness to throw away that option.

The media have been having a delightful field day on this subject for a long time now. They have been playing the supporters against the sceptics. They have been taking leading names and misquoting or quoting them. They have had great fun. But I urge a responsible media to think again about their approach. I believe that they should be analysing all the material which is available. They should be devoting their best brains to writing about this matter and educating the public on the issues which arise. They should not merely be playing A versus B. There is so much that they can and should be doing and, in their historic role, would have been doing.

Perhaps I should try to point the media in the right direction. There are two major issues upon which they should be concentrating. The first issue is the cost of staying out; and the second issue is the price of going in. Those are the issues which should be studied rather than what the Chancellor of the Exchequer, or John Redwood, or even Tony Blair said. I cannot in fact remember Tony Blair saying anything. The media should not be taking sound bites from those people but should be looking at the real issues.

The first of those issues is the cost of staying out. We have heard a lot about that in this debate. We have heard about the risk of discrimination. Although that will be illegal, there is no doubt that there will be covert discrimination. It will be difficult to prove and the available remedies will be slow. The European Court is not always entirely sympathetic to those who wish to stand out against the Community. Any exclusion from

24 Jul 1996 : Column 1450

the single currency or limitation on our entry in any way would be very costly for this country and we must not allow this to happen.

Our position as regards world trade should not be affected provided that we remain as competitive, lively and entrepreneurial in trading with America and the Far East and so on as we are at present. How much I welcomed what the noble Lord, Lord Sheppard, said on that in his excellent maiden speech. I believe that we can and will retain our status in world trade whether we are in or out.

The next subject at which to look is internal investment. Shall we lose the investment coming into this country, investment which has been coming in on a massive scale for years past? Shall we lose that if we are an "out"? The indications are that we shall not lose it. Korean investment and so on has been coming in and continues to come in at a time when it must be known that we are a very doubtful starter for EMU. Therefore, although we should be alert on those matters, I do not believe that the situation will necessarily be as serious as some predict.

There have been doubting voices about how the City will be affected. Most experienced voices--the Governor of the Bank of England and many other leaders of the City--believe that the City can and will prosper, although we should be mindful of the point which my noble friend Lord Cockfield made about TARGET. That is a very important point indeed and I am sure that the City is well aware of it.

I suggest that it would be irresponsible for any of us to underrate the very real risks that industry and commerce may suffer in this country if we stay out. They will be there. I believe that they will be there for us to overcome, if we stay out.

I turn now to the other side of the coin which has hardly been mentioned in today's debate; namely, the price of going in. Indeed, there has hardly been any reference to that. Perhaps I may lead in that respect by adopting some words used by the noble Lord, Lord Jenkins of Hillhead, in his evidence to the committee. I should add that I have told the noble Lord that I shall be quoting his words. In answer to Question 297 he said:

    "I would not for a moment try to pretend that it does not move us down the road towards a more united Europe, towards if you like, political union, and obviously this is one of the attractions of it for quite a lot of people".
That is a very fair comment. If we decide to go in, we must be aware that such experienced voices as that of the noble Lord believe that it will lead us to political union.

Next, I should like to repeat what the President of the Bundesbank said, as reported on page 340 of the evidence. He stated that,

    "for EMU to be credible, it must be followed by fiscal union".
Moreover, my noble friend Lord Lawson of Blaby confirms in answer to Question 445 that he says in his book that,

    "the inspiration of the EMU is not economic but political".

24 Jul 1996 : Column 1451

Indeed, on page 126 of the evidence, Professor Congdon said that,

    "you cannot have monetary union without political union".
I should point out to the House that I picked such quotes at random last night; indeed, there were many more that I could have chosen.

Sir Peter Middleton, who was formerly the Permanent Secretary to the Treasury and who is now chairman of one of the leading banks in the City, said in answer to Question 600:

    "I think the two [fiscal and monetary policy] go hand in hand in any individual country's economic policy".
In answer to Question 204, my noble friend Lord Tebbit said that,

    "there cannot be more than one finance minister for any one currency".
So it went on. As I said, I could have picked many more examples and, indeed, noble Lords reading the evidence will find that to be true. Therefore, according to those quotations, the cost of going in will lead us into an inevitable political and fiscal union with those who we are joining in the EMU.

Sir Leon Brittan, who is of course a Commissioner, also gave evidence. When that proposition was put to him his very partially contrary view was not very convincing. Indeed, noble Lords who read his answer to Question 685 will see what I mean. So the issue remains: is it in our long-term national interest to bear the cost of staying out? Noble Lords have referred to that cost, and there is no doubt that there would be costs involved if we stay out. Is it in our long-term interests to bear those costs or, alternatively, to pay the price of going into a market where our long-term fiscal and political integrity may well be subjugated to the control of others? In that respect, I draw on some of the quotations to which I referred earlier.

I have a view today--but I believe that it would be very foolish to close any option without waiting to see what develops. We have another year or two before the whole matter is firmly closed, and there could be many developments in the meantime. However, neither of the choices will give us a free run. There is the possibility of substantial economic cost if we stay out; but there would be a very substantial political cost if we go in. Those are the areas which I believe must be fully debated, not just in this House and the other place but also widely throughout the country. I believe that the Select Committee has provided so much high-class and experienced evidence that that should indeed help us.

7.34 p.m.

Lord Dahrendorf: My Lords, like other speakers, I had the pleasure and the benefit of serving on Sub-Committee A which prepared the report now before the House. Again, like other speakers, I should like to congratulate the noble Lord, Lord Sheppard of Didgemere, on his outstanding maiden speech. I believe that the committee would have benefited from his presence, and especially from the views that he expressed tonight.

24 Jul 1996 : Column 1452

Serving on the committee meant for all of us that we enjoyed the experience and came to love our chairman the noble Lord, Lord Barnett. However, one must not make a mistake in that respect. Behind the noble Lord's gentle smile there lies a hard taskmaster who took us to this unanimous conclusion. He was so much of a hard taskmaster that 10 of the 12 members of the committee felt that they had to use the freedom of your Lordships' Chamber in order to escape from the constraints of such a well-chaired committee. Indeed, I am no exception.

I have mentioned other members of the committee. In doing so, I am conscious that I have to part company with some in your Lordships' House whose judgment I respect and in some cases whose friendship I value. However, I do so cheerfully and in the spirit of being prepared to be persuaded that I am wrong in my views.

It is widely recognised that a monetary union in Europe is as much a political as an economic objective. The main protagonists of EMU have always argued in terms of the "ever-closer union", and both proponents and opponents have pointed to the political consequences of a European central bank, a common monetary policy, the sharing of reserves and the actions needed to defend the stability of the Euro. Permit me therefore to comment on the political significance of an EMU of "ins" and "outs" for Europe, and, indeed, on ever-closer co-operation of the countries of Europe, which I strongly support. It is precisely because I support such co-operation that I am profoundly concerned not about EMU as such but about the prospect of the divisions which it will create.

EMU as presently conceived means that Europe will be divided in the name of unity. It will either set the process of rallying around common interests back for a long time or it will create an inner core which arrogates to itself the name of Europe and leaves the rest in a state of dependence or exclusion.

Four sets of "outs" deserve consideration. The first consists of those who by choice are not part of the European Union, though they would naturally belong, above all, Norway and Switzerland. The Swiss franc is one of Europe's strong currencies. It is also the first victim of EMU. Already many Germans have transferred their savings to Swiss banks, despite low (and soon probably negative) interest rates, in order to escape the risks of monetary union. That has pushed the Swiss franc up to a level which threatens to damage indigenous industry and Swiss business generally. Incidentally, the same could happen to others who are out, even to sterling, especially during the precarious transition period in which the Euro is half there and half not.

The second set of "outs" consists of those countries which are members of the EU and want to move forward to ever-closer union but may be deemed ineligible by the self-chosen few. Greece is likely to be among them, although the former Finance Minister (and EU Commissioner) Palleocrassas has told your Lordships' committee that Greece wants to meet the criteria. Portugal will probably be out, and so will Spain, despite the efforts of the new Spanish Government and those of their predecessor.

24 Jul 1996 : Column 1453

Then there is Italy, one of the original members of the EEC and a consistent supporter of European integration, with a strong economy and a serious policy of bringing public expenditure, as well as inflation, under control. The noble Lord, Lord Roll, with whom I share a great love of Italy and respect for the country, has already spoken of this. When the Italian commissioner, Mario Monti, hinted recently that Italy may not be in at the creation, he caused consternation in Rome, although he merely reflected what everyone says in Brussels. Rumour has it that Belgium will be forgiven its sins of public debt because it would be awkward to keep the seat of Europe's institutions out, but Italy's participation would make it difficult for some governments to persuade their electorates that the Euro will actually be as stable as the German mark. If such rumours turn into facts, this would be an odd way to promote European co-operation.

It is said, of course, that those who do not join EMU on day one can do so soon after or at any time later. That is fine so far as it goes, but it may not go very far for at least three reasons. The first is that, unlike a customs union which others can join in stages, monetary union marks a qualitative jump which requires all-or-nothing decisions from latecomers. Secondly, there is the fact that the "ins" will try to impose strict disciplines on the "outs", and those who see themselves as "pre-ins" may find it hard to resist such disciplines. France, in particular--it has already been mentioned--still smarting from Italy's last devaluation, insists on a tough ERM 2, at any rate for the "pre-ins". This, however, will rob the "pre-ins" of the most important adjustment mechanism which they have in order to comply with the criteria for membership. In the absence of massive transfers, what are they to do but allow their currencies to float downward? An ERM 2 makes future membership less rather than more likely.

The third reason for scepticism with regard to the openness of the early EMU is that the project is bound to be precarious for quite a long time. The Euro has no track record; nor does that unique construction, the central bank, which, contrary to other "independent" central banks, is removed from any democratic context. Moreover, the first members of EMU will have suppressed contingent liabilities which are bound to affect deficits and thus stability within the next decade. Just think of German pensions, my Lords. Thus the probability must be high that "pre-ins" will have a long and painful wait.

So will a third set of "outs" which we have already shamefully neglected: the new democracies of east central Europe. The report before your Lordships' House makes only a passing reference to enlargement. It rightly endorses the Chancellor's view that,

    "EMU and enlargement should each be treated on its merits";
and it also emphasises the warning by one of the Chancellor's distinguished predecessors, my noble friend Lord Jenkins of Hillhead, that failure to proceed with EMU may block progress with enlargement. But what if a partial EMU does take place? Surely it is clear that, with the possible exception of the Czech Republic,

24 Jul 1996 : Column 1454

none of the east central European countries could become a part of EMU for some considerable time. They would remain in the outer circle, having been in the waiting-room for a long time already. The European Union may have failed in Yugoslavia, though there must be doubt whether it was ever equipped to intervene effectively as a union; but the Union has most definitely failed in the task of using its treaty-based instruments for offering the post-communist democracies of Europe a lifeline of support for freedom and prosperity. EMU will turn this failure into a deliberate policy. Can anyone be surprised that a growing number of Polish, Hungarian and Czech politicians look to other horizons, notably to NATO, for support?

Then, fourthly and finally, there may well be some voluntary "outs". So far as concerns 1999, I agree with others that Denmark, still referendum-scarred, is probably one, and the United Kingdom another. I have heard it said that one or two others may not be too unhappy about not meeting the convergence criteria in time. The UK is likely to follow policies which would keep it as close to the Euro as it is today to the stable currencies of continental Europe without necessarily being dogmatic about the highly arbitrary "Maastricht criteria". In that sense, the door to membership of EMU--if indeed it happens and if it survives the first three years--would remain open, although a reminder is necessary that joining it would not be a unilateral decision but a process of negotiation and agreement.

However, my final point is a different one. EMU will split Europe because it will be a partial EMU, an EMU of "ins" and "outs". Those of us who are concerned about this split will have to make every effort to hold together a Europe which deserves the name. The single market is a part of this Europe; and it certainly needs defending. The "habit of co-operation", as Andrew Shonfield called it in his 1972 Reith Lectures with the appropriate title, "Europe--Journey to an Unknown Destination", is another achievement worth preserving. Settling disputes is easier between those who have established and proven relationships, with much give and take over time. Enlargement remains high on the agenda of the creation of the real Europe. There are other goals. I for one find more merit in the attempt to integrate the European Convention on Human Rights into Community law than in merging the EU and the Western European Union.

EMU is troubling to supporters of European union precisely because it is an EMU of "ins" and "outs". If some core countries cannot be prevented from embarking on this divisive course, others will have to champion the cause of Europe in areas of common interest. This might well be a purpose which takes the United Kingdom out of its present largely defensive policy towards Europe and into the lead for a new Europe of active co-operation.

7.48 p.m.

Lord Stoddart of Swindon: My Lords, first, I should declare an interest, although it is not a financial interest, as chairman of the Campaign for an Independent Britain. I suppose that that makes me one of the Little Englanders to which my noble friend Lord Grenfell--he is just

24 Jul 1996 : Column 1455

leaving the Chamber--referred. However, sitting as I do on this side of the House, I am not too concerned about that since I understand that the term "little Englander" was used as a term of abuse against those, usually on the Left, who were opposed to British imperialism. The noble Lord also asked for a debate on the issue. Perhaps I may say that the Campaign for an Independent Britain has just published a new pamphlet entitled, There is an alternative: Britain's relationships with the European Union, and I commend it to all noble Lords.

I wish to congratulate the Select Committee on its report. The chairman and its members have put in a good deal of hard work; and I sincerely hope that the report will be of some help in the debate on EMU and a single currency. I am sure it will, we have had a good debate so far today.

Before I proceed, perhaps I may correct a remark made by the noble and learned Lord, Lord Howe of Aberavon. He is not in his place, for the reason he explained. During his speech he referred to 66 per cent. of our trade being done with the EU. He used the figure in support of his arguments. I refer him to the table on page 333 of evidence from Economic Trends 1995. It shows that total trade, including visibles and invisibles, was 46.6 per cent. not 66 per cent. Even if visibles alone were taken--and that would be absurd since services, invisibles, are increasing--they constitute only 55 per cent. So the figure of 66 per cent. does not hold water.

It is perhaps a useful coincidence that we should have this debate the day after the resignation of Mr. David Heathcoat-Amory, the former Paymaster General. There is a man who has been at the heart of Europe both as a Minister for Europe in the Foreign Office and as a Treasury Minister. Having been there, he does not like what he sees. In his resignation letter he refers to the relentless drive to political union. He is also convinced that joining a single currency would be disastrous, both politically and economically. That comes from a man who has been at the heart of Europe. Of course he is right. The drive towards a country called Europe is relentless and the demand for the completion of EMU and a single currency becomes more strident every day, particularly from France, Germany and the institutions of the European Union itself.

Demand is not based on any reasoned economic case but on blind political opportunism and ambition. Two witnesses--the noble Lord, Lord Kingsdown, and Mr. Gavyn Davies--said that they were unaware of anything like economic and monetary union ever having been achieved previously in monetary history. So what is being proposed is a leap in the dark. There is no precedent for it. So EMU and a single currency is a leap in the dark. Let us not forget it.

But despite that proposed leap into the dark and the unknown--which is most likely to lead at best nowhere and at worst to chaos and confusion--the siren voices of the pro-Europeans, the Europhiliacs if you like, urge us onward and onward, although the end product is either obscured or deliberately concealed, as so much of the argument has been deliberately concealed since about 1962. Noble Lords do not need to believe me, they should merely ask the BBC to allow them to watch the excellent programme called "The Poisoned Chalice".

24 Jul 1996 : Column 1456

The Europeanists, aided by the querulous whimperings of those who are afraid of retaliation if we do not bend to the will of the people who believe in economic and monetary union, lack confidence in Britain's ability to make it in the so-called global economy. They ignore the fact that smaller countries, including Switzerland and Norway in Europe, do extremely well and that our ability to take full advantage of the burgeoning global market is constrained by our membership of the EU, not assisted by it.

At least the Governor of the Bank of England, in his evidence, had some confidence in Britain. He at least is prepared to concede that this country can survive and prosper in the harsh competitive world, provided we have confidence in ourselves and apply sound economic and monetary policies.

What is being proposed--economic and monetary union and a single currency--is not some kind of souped-up ERM. That was an unmitigated disaster. Everybody agrees with that now, even those who urged us into it. It caused the worst recession since the 1930s and lost at least 600,000 jobs. Britain left the ERM in ignominy and defeat and the baleful effects are still being experienced by our economy.

But of course the single currency is quite another thing. It is the abolition of the pound and of our own currency. It is irrevocable. It says so in the treaty. It is not a pilot scheme. Once you are in, there is no way out. Make no mistake about it, the treaty says that it is irrevocable. The treaty is right. Our reserves to begin with will be handed over to other control than the Bank of England. Any major country leaving a single currency or attempting to leave would cause chaos, not only in Europe but worldwide. So once we have lost the pound, we cannot get it back.

We are told that the single market will collapse without a single currency. I do not believe that to be true as a matter of fact, but I say that any benefits from the single market will not be worth giving up our currency and our reserves, our power over monetary policy and eventually, I fear, over fiscal policy as well.

On the economic front, the gains from a single currency would have to be absolutely overwhelming for us to give up our currency. Even to contemplate giving up our currency, they would have to be overwhelming, and with that, we would have to give up control over our own economy. But the report shows no evidence at all of overwhelming gain to the United Kingdom's economy. Indeed, the report is very critical about any possible gains, as those who have read it will agree. So on economic grounds alone, it would be criminally foolhardy to take such a leap in the dark. The Government and the Opposition should say now that they will not take such a leap.

But even on the most optimistic basis, with complete convergence, could it work? Again let me quote from the report and the evidence of Sir Peter Middleton on page 25 that there are,

    "only three ways of allowing regions to adjust: 'You can adjust by government transfers, by letting your exchange rate move, or by moving businesses and people'".

24 Jul 1996 : Column 1457

Let us look at those three. First, government transfers of any great note are ruled out. We are told--and the report refers to it--that there is no possibility of those huge transfers being made. Germany wants to cut its net contribution. It is demanding a cut in its net contribution. So apparently the differences cannot be evened out by fiscal transfers.

What about letting the exchange rate take the strain? That is ruled out as well, because individual regions will not be able to set their own exchange rate; it will be set centrally. So there is no means of correcting economic differences in that way.

Then there is the question of moving businesses and people. People are reluctant to move from Manchester to Birmingham, let alone from anywhere in Spain, for instance, to London. Those policies are not possible. There are not enough banks to transfer the people who would need to be transferred if we are to correct economic differences that way.

If none of those adjustments is to be made to secure regional balances, what happens as poor regions become poorer and greater numbers join the dole queue? Will there be joint action? Will there be marches? Indeed, will there be revolution? Certainly in parts of the Union there are sometimes volatile situations which could lead to great difficulty. This is a political matter. It is not an economic matter at all. In the words of Herr Kohl, Herr Lammars and Herr Brok, it is a proposition to create a country called Europe. It is a dream that they have which I believe will inevitably turn to a nightmare. Every new policy is a further ratchet to that country called Europe.

As I say, some people believe in the concept of a country called Europe. I doubt whether there is anybody in this Chamber who believes in that concept. That is where economic and monetary union and a single currency are leading. I sincerely hope, as I said, that not only the Government, but the Opposition and all people who believe that this country should have self-government by its own elected representatives and its own elected government will resist any further moves towards a single currency, EMU and further European integration.

8.3 p.m.

Baroness O'Cathain: My Lords, I am most grateful to our chairman for handling such an emotive issue through many meetings with aplomb. I know that everyone else has said that, but the fact that we have a unanimous report is a tribute to his painstaking approach. He remained calm at every turn, and kept us all in order. "Masterly" was the word that I had written down, but it was used by the noble Lord, Lord Roll. I must also add that the experience of serving on the committee was tremendously enjoyable. It has been a great privilege to be a member. It was a singularly interesting assignment to consider the likely effect on the UK of the terms of reference of this investigation.

As has been said many times, the general level of knowledge in relation to EMU is abysmal. This report will help repair that deficiency. It should be required

24 Jul 1996 : Column 1458

reading for anybody involved in the economic and political life of this country. Indeed, I support the wish of the noble Lord, Lord Grenfell, that the report should have a very wide circulation outside this House. More heat than light has been generated on this subject, particularly during the past 36 hours or so. The report casts much light on the subject and should lead to an informed debate, not only in this Chamber.

The EMU issue is an ever-changing scene. What was current in May this year when we finished our investigation is not necessarily current now. I venture to suggest that if some of the witnesses who were before us in the months leading up to May gave more evidence now, they would present many new angles. The situation is truly dynamic. To that end it is quite right that we should infer from the recommendation that this is such an important issue that it should be understood and kept "front of mind" but not necessarily at the top of ill-informed speculation.

I wholeheartedly endorse the words in paragraph 111 to the effect that,

    "this report can be no more than a contribution to a fast-moving debate on issues on which the EU's detailed plans and the public's view of them are continuing to evolve".
That underlines the validity of the position taken by my right honourable friend the Prime Minister in refusing to move from holding the opt-out until the situation is a lot clearer. Any other stance would be foolhardy.

This report is remarkable in the balance it achieved between the choice of witnesses. That is a characteristic of House of Lords Select Committees. As a member of the committee I found my knowledge base expanding by the day (not directly in proportion to the mound of paper that was generated!). Close examination of the evidence will almost certainly aid one to arrive at conclusions, whatever one's prejudices.

My close attention to the words, both verbal and written, of the witnesses helped me to hone my views of the relationship between the United Kingdom and other members of the European Union and led to firmer views as to what I feel the United Kingdom should do. I stress that these views are largely from a business stance and are encapsulated in seven points.

First, membership of the European Union has been beneficial to UK business. One has only to examine the inward investment record which has resulted in so many jobs being created. In the past 12 months, for example, 48,000 new jobs have arisen from some 477 projects. We very often forget that the United Kingdom accounts for some 38 per cent. of all inward investment in the European Union.

Secondly, the single market has been particularly successful in what it has achieved so far. From the point of view of UK business it has effected a sea-change in the focus of our exporters. I cannot envisage any contemporary tabloid newspaper carrying a banner headline: "Fog in Channel, Continent cut off".

Thirdly, the convergence criteria are just the sort of targets that any responsible government should set (or, at least four out of the five are; namely, inflation rates, long-term interest rates, budget deficits and public debt ratios. I am not so sure about membership of the ERM

24 Jul 1996 : Column 1459

for two years in advance of membership of EMU). These criteria are similar to those that any successful business would want to follow. The question must be asked: Would these criteria be achievable and sustainable if the United Kingdom continued to exercise the opt-out?

Fourthly, in the oft-repeated words (but none the worse for that), the United Kingdom must be seen to play its part at the centre of Europe. As an aside, I do believe that the influence of the UK in the corridors of Brussels is much greater than is either realised or acknowledged. Perhaps we should be more "up front" in praising the achievements of the EU and less ready to reach for the megaphone when things go somewhat haywire.

Fifthly, in all our relationships with the EU, let us continue to work on the areas of consensus and sort out the differences. Surely we must work to make Europe work for all. I was very heartened by the words of the noble Lord, Lord Dahrendorf, who introduced into the debate the subject of enlargement. The report makes only passing reference to it; but we had many a long discussion about it. All members of the committee were unanimous in believing that it is extremely important. It caused us great concern that we might perhaps not be able to manage both membership of the economic and monetary union and enlargement of the European Union.

Sixthly, the whole EMU issue is so very complex that I find it difficult to accept that a referendum question could be formulated that would give rise to any meaningful response from the public. The public does not have, nor do I think it really wants, the facts of the pros and cons--the argument about the "ins" and "outs", for example. Playing my personal game of limited market research on the subject among people who would consider themselves to be well-informed, I find huge ignorance of what EMU is all about. Even the initials are more often than not misinterpreted as European monetary union rather than economic and monetary union, and one must not fall into the trap of asking such people to describe the difference between monetary and fiscal policy. As an economist by training I fear I have to admit that we economists have done precious little to explain such issues in understandable terms. That further underlines the need for more information about the issues, which is what this report does.

The Government will need all the skills of Merlin the magician in forming the question to be asked in a referendum. Having lived for the lesser part of my life in a country where referenda were quite common, I came to accept, probably cynically, that referenda were undertaken in the same manner as business employs management consultants: you know what to do but you would like someone else to take the stick for suggesting it. If, politically, a referendum is seen to be necessary, then so be it, but let us not fool ourselves that we shall get a proper steer from the electorate from the use of such a device. On a purely personal note, the use of a referendum smacks of a lack of decisiveness.

Seventhly, we cannot possibly withdraw from the EU now. Frankly, our younger generation would not stand for it. I have been looking at the young people up there

24 Jul 1996 : Column 1460

in the Gallery today, and I am constantly struck by the ease with which today's young people relate to the peoples and situations in other member states. There has been enormous benefit to the wider education of very many of our youth through Erasmus projects, courses taken abroad as part of a normal degree course at our universities, and work experience gained in other member states. All of this would have been quite extraordinary when I was at university; all of it is accepted as normal by contemporary youth; all of it builds up links and understanding which are invaluable to the businesses in which these young people will work; all of it is as a direct result of membership of the EU and is just one more, but seldom mentioned, reason why we cannot possibly withdraw now.

Business does, however, have concerns. There are two fundamental concerns, both of which need addressing. The first of these centres on the uncertainty surrounding the chant, "Will we, won't we join the EMU?". The lack of certainty leads to difficulty in forward planning and I know that investment decisions are being scaled down or delayed during this period of uncertainty. There is a strong body of UK business which does not believe that EMU will ever happen. The attention of that group should be drawn to the statement in paragraph 111 of the report, namely, and I quote:

    "EMU is not a whim or a fashion that will pass."

An equally strong body of business opinion does believe that EMU will come about, but that body of business opinion is probably too busy keeping its eye on the ball in the highly competitive world of international trade to spend much time taking positive action to meet the future challenges.

That observation leads me on neatly to the second major concern of business, namely, cost. The cost involved in the preparation of computer and other systems has not been mentioned before. Very little so far has been written or said about the serious cost implications of reaching the millennium, and I am not talking about the celebrations in the year 2000 or 2001, whichever is regarded as appropriate.

Computers are the mainstay of practically all social and economic activity now. When computers were first programmed in this century, and ever since, it was considered correct to allow just two digits for the entry of a year. For example, 1963 appears as 63; 1996 as 96, etc. So far so good. If today some computer wishes to make a calculation of when a pension should be paid the date of birth will be subtracted from 96, so a person born in 1931 will appear in the workings of the computer as 96 minus 31, i.e. 65. Come 2003 a person born in 1938 will appear in the workings of the computer as 03--the year only ever having two digits--minus 38, and the answer will be minus 65. This must all seem cuckoo to your Lordships, but it is very serious.

Only this morning we heard why the recent Ariane 5 rocket exploded. The computers, which had been adequate for Ariane 4, were fed more digits than could cope with the demands of Ariane 5, and this led to the spectacular explosion.

The cost of changing all the computers in the business of food retailing alone to cope with the millennium is estimated to be in the region of £300 million, and if that

24 Jul 1996 : Column 1461

is translated into total UK business the figure could be approaching £8 billion. Such a level of "dead cost"--cost incurred without any additional benefit--will almost certainly lead to company failures.

The real point is that if the changeover to a single currency is added to this confusion at the same time the costs could be astronomical, and utter chaos would almost certainly result.

I do not want to indulge in scaremongering, but in taking note of this report we must also decide to take heed of the likely cost implications of the introduction of the single currency and perhaps consider the possibility of getting a consensus to postpone the European-wide introduction of the single currency until the effects of the millennium changes are absorbed.

I should like to make a suggestion arising from what I have just described. My noble friend Lord Haslam as a member of the committee, continually pressed for more witnesses from industry and business. We were greatly assisted by those we did examine but perhaps in future Select Committee deliberations greater emphasis should be placed on making sure that the voice of industry and commerce is more strongly represented. Our knowledge of the likely implications of EMU membership on the banking sector is good because we had a lot of witnesses, but we should not forget that it is the makers of things and the providers of services who create the wealth for our economic well-being.

I return to the reference in paragraph 111 concerning the evolving nature of the fast-moving debate on the issues of EMU. There is a danger that when one looks at something under the microscope, as we did in the course of this investigation, one can become myopic. It takes time to adjust to the surrounding world and realise that it is not only in the EU amphitheatre that things are changing. The Asian tiger, as my noble friend Lord Sheppard of Didgemere mentioned in his excellent maiden speech, is not exactly standing still. There is a constant pattern of change in the economic, monetary, fiscal and business fields, all developing apace, yet all having an interlocking effect on each other.

We should also remember that the economic giants of today are not necessarily likely to be the economic giants of, say, thirty or forty years hence, and the whole issue of EMU must be considered in the context of long term planning and not just in planning the next 18 months.

Since we completed our investigations I have been concerned to read of a study undertaken by the economic adviser to Lloyds Bank on the pensions position in developed countries in the next few decades. It appears that due to a combination of ageing populations and "pay as you go" pension schemes the majority of developed countries will suffer major public finance crises during the next fifty years. The study shows that in Germany and France indebtedness as a percentage of GDP is likely to be over 100 per cent. above the Maastricht limit of 60 per cent. Many smaller countries would be hit in a similar way. Incidentally, the UK can take comfort from the fact that it is an exception

24 Jul 1996 : Column 1462

to this doom-laden prophecy, partly because of the relatively low future elderly dependency ratios and also due to the relative generosity and wide coverage of other countries' public pension systems. This underlines the fact that although some countries appear to be in the economic ascendancy just now that can change, and we must mark that.

Nothing stands still forever. This report emphasises that point. We must keep aware of, and participate in, the future of the European Union if we are not to be left behind. I endorse this report completely.

8.18 p.m.

Lord St. John of Bletso: My Lords, I had intended to talk today about the cost implications of EMU, but after listening to the eloquent presentation of the noble Baroness, Lady O'Cathain, with all her personal commercial experience, particularly her experience as a non-executive director of Tesco, I decided to scrap all that.

At the outset I should like to congratulate the noble Lord, Lord Sheppard of Didgemere, on a fine maiden speech, an authoritative maiden speech, and a maiden speech which gave us all the wisdom of his vast experience in commerce. I agree entirely with the noble Lord, Lord Dahrendorf, when he said that it is a pity that we could not have had the noble Lord, Lord Sheppard of Didgemere, with us on the sub-committee.

I was enormously privileged to have been able to be part of the committee, and I should like to express my appreciation and my admiration for the manner in which the noble Lord, Lord Barnett, chaired the sub-committee. I have no hesitation in saying that on such a complicated, highly divisive and far-reaching subject the noble Lord steered a masterly tack to achieve completion of the report.

I used the word "divisive". I was somewhat amused when the noble Lord, Lord Haskel, said that the Labour Party was united in its views on Europe. I looked at the noble Lords, Lord Bruce of Donington and Lord Stoddart. I thought that it was a debatable comment and I noticed a few shakes of the head when it was made.

As arguably the most junior member of the sub-committee with little experience or expertise on European Union affairs and with City experience as a consultant in one of the largest investment banks, I approached this inquiry with an open mind. I did, however, have a number of strong reservations. With such an impressive array of witnesses giving evidence to the committee, all with compelling and in many cases differing arguments for and against joining EMU, I found myself swinging like a pendulum from side to side, wondering whether the opportunities of joining European Monetary Union were, in the words of the noble Lord, Lord Stoddart, "a dream" for the ultimate completion of the single market or a potential "nightmare" if it did not succeed.

I have certain reservations about EMU but I am totally in favour of the single market, more specifically in favour of dropping trade barriers and achieving free trade. I believe that we, in the United Kingdom have

24 Jul 1996 : Column 1463

made considerable advances in our economic and competitive attractiveness through deregulation and privatisation and that we have, in fact, done much more than many of our partners in Europe. That point was well made by the noble Lord, Lord Sheppard.

There is a compelling argument that the rationale for achieving economic and monetary union is more politically motivated than based on sound economic logic. The drive to EMU is in sharp contrast to Asia, which is achieving economic integration without, as one economist in the City recently put it, "needing to put a huge political roof on its economic house". It must be remembered that the concept of EMU was devised at a time when economic conditions in Europe were very different from those which prevail today. That was before German reunification and when the European economies were growing healthily; there was no serious problem with budget deficits and the ERM was functioning smoothly.

Sir Leon Brittan, addressing the Federal Trust Conference in November last year on the subject "How to make EMU work" commented:

    "Europe now needs a single currency, if it is to reach its full economic potential."
We need to ask ourselves four very simple questions. Are we currently able to operate efficiently in the single market as it is at the moment? Can a single market be completed without a single currency? Finally, on the two points raised by the noble Lord, Lord Boardman: what is the cost of staying out and what is the price of staying in?

My simple argument is that there needs to be adequate and more extensive public debate on this extremely important, irreversible and far-reaching issue. I do not believe that it would be prudent to rush into trying to join in the set timetable by 1st January 1999.

I totally support the objective of achieving exchange rate stability in Europe. To that end, I support a strict interpretation of the convergence criteria. As the report concludes (in paragraph 128):

    "the achievement of sustainable convergence is the critical condition for exchange rate stability".

Any fudge would show that the move to proceed with EMU by the timetable set, is more of a political move than one based on sound economic policy. After the debacles in 1992 preceding our departure from the exchange rate mechanisms, it is no wonder that in evidence the Treasury was somewhat sanguine about the idea of joining ERM 2. However, the report continues (in paragraph 130):

    "If the United Kingdom decides to stay out of ERM2, and to remain out of the Social Chapter, it is likely to be viewed by other Member States as having chosen deliberately to limit its involvement in the future development of the EU".
Clearly there are many political and informal risks, if we opt not to join the group of "ins".

Many noble Lords have spoken today about the possibility of discrimination, but this is specifically not allowed under the Treaty of Rome. If there is discrimination, it will more than likely be in an informal manner. As Sir Michael Butler explained:

24 Jul 1996 : Column 1464

    "We could find ourselves in a position where our power to influence decisions, not only on EMU but on other issues, would be much diminished".

Several of those who gave evidence, and several noble Lords today, have mentioned that the "inner club" would strive to deal with many other important issues wider than pure monetary policy. Certainly, I found it alarming that many of the witnesses believed that the United Kingdom had already lost influence in the European Union.

But whatever choice the United Kingdom takes, the market--and here I refer to direct inward investment into the United Kingdom--investors will need to be convinced that, in the words of the report, we are:

    "set on a path of exchange rate stability and not currency depreciation".
One of the main criticisms against EMU by leading economists in the City is obviously the concern that by joining the so-called "inner club", the UK will be giving up its control over monetary policy and with it, the flexibility to handle its own domestic monetary affairs, as well as giving up its currency reserves. There is the natural concern that the European central bank will take some time to build monetary policy credibility. Until such time as that credibility is established, in all likelihood there will be a substantial risk premium attached to the Euro and Euro-denominated debt.

My other concern is that it is questionable that the ERM has made the single market operate more effectively. I have not heard any evidence to suggest that non-ERM members have failed to make the most of the single market by virtue of not being members of the ERM. There is a commonly held view that, if we were to opt into EMU, we should have lower interest rates in the United Kingdom. I fear that that is a pipe dream. Certainly it cannot be guaranteed.

Another concern, which many may argue is unjustified, is that by opting into EMU we may be swamped with excessive legislation. As a lawyer by training, I have always been committed to more deregulation. It is a view shared by the noble and learned Lord, Lord Hailsham. I fully support the recommendation in paragraph 145 that:

    "opportunity should also be taken to examine the case for making the Bank of England operationally independent, within a statutory framework, if the United Kingdom decides to stay out of EMU".

As for the City--even though my noble friend Lord Roll of Ipsden may not agree with me--as long as we continue to pursue sound fiscal and monetary policies consistent with low inflation, I do not believe it will be affected in any major way, whether or not we are part of EMU. Clearly, however, the City will need to make the technical preparations for EMU whether or not the United Kingdom eventually signs to join.

Finally, of course, there is the concern as to how EMU will affect unemployment. As it appears that Germany and France will be the major players in the "inner-club" it is worth noting that they both have unreformed labour markets, with German unemployment as high as it was when the Berlin Wall fell. However, over the past few years most European countries have managed to reduce their unemployment by between 5 and 10 per cent. I refer to a typical

24 Jul 1996 : Column 1465

example in the motor industry where the hourly labour cost of a qualified motor mechanic in Germany is 45 deutschmarks. The same qualified motor mechanic in the United Kingdom would earn approximately 21 deutschmarks. To give an example from the Far East, in Indonesia the rate would be a mere 5 deutschmarks. I believe that no amount of growth and no social pacts will stop increased unemployment in EMU core countries.

I am afraid I have been far too general in my comments in this extensive debate. It is worrying that several of the leading economists believe that there is a 60 per cent. chance that EMU will not occur on time, and an even higher chance that it will blow up if it does. In the words of the report at paragraph 131:

    "If EMU goes badly wrong, and breaks up, there will be exchange rate instability and a serious risk to the continuance of the Single Market".

However, if, as many predict, it does work well for the "ins", there will obviously be much more incentive for the "outs" to apply to join. I hope, and I am sure, that no hasty decisions will be taken by Her Majesty's Government without full reflection of the pros and cons of this important, far-reaching and possibly irreversible move.

8.32 p.m.

Lord Renfrew of Kaimsthorn: My Lords, the noble Lord, Lord Barnett, has done us a great service by chairing your Lordship's sub-committee which has produced this report. I certainly consider it a great privilege to have served on the committee and to have come to appreciate that these are indeed complex and uncertain matters. It might be said that never has a subject given rise to such a considerable range of perceptions. It is about perceptions that I wish to speak principally this evening.

First, it astounded me that this report on this delicate and important matter received such minimal attention from the national press. Yet every pronouncement by dissident or Eurosceptic Back-Benchers is treated as an important news item. It is indeed extraordinary that there seem to be two debates going on in this country: one hyper-politicised, trivialised, based on preconceptions, expressed in sound bites and slogans, and another, more measured, more thoughtful, such as we have heard this evening, and no doubt with a wider divergence of views but in some senses more realistic.

I have to say that I think there is somewhere a failure of leadership in our national system in that I fear that the true debate is going on in the tabloid press and the debate weighing up the issues, as we have been doing this evening, is largely ignored. This country risks misjudging a series of crucially important decisions through slipshod political manoeuvring, through pandering to populist xenophobia, and through the misleading use of worn-out cliches with which we are all familiar--remarks about national sovereignty--usually without troubling to define such terms.

It is clear that EMU is likely to go ahead, probably in 1999, and, as a number of noble Lords have said, France and Germany will either meet the Maastricht

24 Jul 1996 : Column 1466

convergence criteria or otherwise achieve agreement at the Council of Ministers that they have come close enough. Reference has been made several times to the paradoxical case of Belgium which is not going to meet the criteria but will be deemed to meet the criteria. They will take with them Austria and the Benelux countries, as we have heard. The noble Lord, Lord Grenfell, was right in pointing out that the strict criteria may not be met but will be deemed to be met. My noble friend Lord Boardman used the word "fudge" and I think he may be right.

There is nothing much that we can do about that and, I was going to say that there was little point in debating it, until I heard the very interesting speech of the noble Lord, Lord Dahrendorf. In a way I wish we had asked him to give evidence to the committee on which he sat and asked him for those observations which I found interesting. At the same time, if EMU is likely to go ahead (which I believe to be the case), his analysis, although perceptive, does not necessarily advance us in the question as to what our own response should be.

It is clear that this country too will come within striking distance of meeting the convergence criteria. If Belgium can get in on an interpretation of the convergence criteria, there is not much doubt that the UK too could get in if it wanted to and if it was supported at the Council of Ministers. The decision, probably in 1997, could be our decision and the Prime Minister at Maastricht achieved a brilliant success in leaving that decision to us. We are in the unique position--perhaps along with Denmark--of being able ourselves to decide the matter. Clearly there is absolutely no benefit to anyone in throwing out that freedom of decision.

Remember, my Lords, if I may invite you to do so, that if Britain were to decide to remain out in 1999, surely we would wish to retain flexibility of action for the future. Otherwise, this issue could all too easily become a re-run of Britain's disastrous failure to enter the Common Market when we wished to do so. If we were to rule out now any option for entering in the next Parliament, how do we then retain an option for a future date? I believe that the Eurosceptics are leading Britain up a blind alley, pretty much the same blind alley as gave General de Gaulle the opportunity to veto Britain's entry into the Common Market.

My right honourable friend who, until two days ago, was Paymaster General, published only yesterday a pamphlet entitled Why the United Kingdom Must Say No. I must say I am constantly impressed at the publicity skills of the right wing of the party of which I am a member. I have to say that for the Bruges Group to commission this pamphlet from my right honourable friend, then to give him time to write it, and for the Bruges Group to publish this pamphlet, all in 24 hours was a remarkable feat indeed. In that pamphlet he conjures up the spectre of "a huge federal European budget" which would be required. Our committee, in the evidence which was taken and published, makes clear that there are very few who would hold that view and there are indeed safeguards against it.

24 Jul 1996 : Column 1467

Sitting on your Lordships sub-committee, I was impressed by the highly contradictory nature of the opinions offered in evidence, as the noble Lord, Lord Ashburton, has also pointed out. My noble friend Lord Boardman's doubts on EMU, for instance, were supported by a number of witnesses from the City who emphasised Britain's role as a global financial centre as opposed to a European financial centre. I was considerably impressed that there was a clear sentiment in the City--not a unanimous sentiment but a legitimate view--that the City could manage well enough without, thank you. On the other hand, my noble friend Lord Haslam was consistently keen that we should hear the views of industrialists. When we did so we found them in general concerned about the disadvantages for Britain of being "out" and above all of being a voluntary "out". I think this is related to the point which my noble friend Lord Sheppard made in his admirable maiden speech this afternoon.

On any reading of the evidence it is clear that this is not just a monetary question and indeed not primarily a monetary question. There are, of course, purely economic arguments in favour of joining, but the decision Britain will have to make in due course is whether we still want to be an effective part of Europe and of a Europe of nation states. I think we should remind ourselves of that phrase "L'Europe des patries" which was a favourite phrase of General de Gaulle. I do not think that the suggestion that the French are now seeking a unified Europe of a completely different kind is warranted.

We must ask whether, by being an "in" we shall be able to ensure that the Europe which emerges corresponds to the vision which we have and which my right honourable friend the Prime Minister has a number of times set out. He said yesterday that it is still important that Britain's voice be heard in the negotiations until they are concluded. While I agree with that, I detect a slightly defensive note in the term, "until they are concluded". Moreover, I am concerned at the extraordinary circumstance that when Britain's policy in this matter is enunciated by the Prime Minister, by the Deputy Prime Minister, by the Foreign Secretary and by the Chancellor of the Exchequer, it is still portrayed in the press as a minority view and those not insignificant figures in our public life are regarded as a beleaguered minority. I find that extraordinary. We must make no mistake; it is clear from what we have heard that if we are "out" and voluntarily "out", and if we choose to stay "out", there will be no favours towards Britain.

Much consideration was given in our report as to the likely sentiments on the part of the "ins" towards Britain if we are a voluntary "out". It is of course the "ins" who will be the inner group shaping the future of Europe. The relevant paragraph of the report is 139 and my noble and learned friend Lord Howe made the same point much more effectively in his extremely interesting speech. There is perhaps hope that goodwill might prevail towards us--a voluntary "out"--on the part of the "ins", but not a few witnesses took the view that an underlying competitiveness or even hostility might prevail.

24 Jul 1996 : Column 1468

Those views were enunciated and the report took its shape in the month of May and was published on 11th June. Since then we have had that upsurge of xenophobia which accompanied Euro '96. It is not irrelevant to quote the tabloid press at that time because the view of the nation is sometimes reflected and sometimes shaped by the tabloid press. The same prejudices apply, though it may be that the nation in general understands football better than it understands the intricacies of monetary union.

Since that time also we have had the policy of non-co-operation--mercifully short-lived--during the early BSE confusion. Like others who have spoken I was embarrassed by the policy of non-co-operation and I am sure it has left a significant legacy. Who today could count on the goodwill which is anticipated in the report published on 11th June? As my noble friend Lady O'Cathain, was saying, times move on; we are in a dynamic environment. Well, times have moved on and we cannot count on such goodwill.

The message of the report is that these are complex issues. If the EMU happens on time, it is not entirely clear that Britain would be wise to stay "out". But what is clear is that we should be concerned today at the limited impact of our report. The noble Lord, Lord Grenfell, was saying that it should be widely circulated. We have done our best, but I do not think that it has had much impact.

First, we should probably be concerned at the limited impact that this debate will have. I found it a most profitable debate, but I am not sure how widely the profit will be experienced. Secondly, we should be deeply concerned at the level of discussion on this topic in the national press. The wrong issues are being addressed. We shall be told once again, "the pound in your pocket will be a Euro" and that will be sufficient to garner negative votes towards the enterprise. Thirdly, and most significantly, we should be concerned at the level at which these topics are being treated in our two main political parties. I know that there is apparently more unanimity among the Liberal Democrats, but that may only be because I am not so aware of their deliberations.

We should be deeply concerned at the trivialising level at which this subject has been treated by our political parties. It is pretty certain that, if and when we come to make the decision, we will probably not make it for the right reasons and it is possible that we shall not make the right decision. The lesson from the report--it is a good one--is that the decision will not be guided on the principles enunciated in the report and your Lordships should be extremely concerned.

8.45 p.m.

Lord Desai: My Lords, I am the tenth member of the sub-committee to speak this afternoon. When the noble Baroness, Lady Williams, speaks, all but two of the members of the committee will have spoken. Let me therefore repeat in a different way what other members have said. Our chairman was excellent. He was good and firm at keeping in control what was not a very orderly mob. All I can say is that I recommend to the

24 Jul 1996 : Column 1469

Minister that if his right honourable friend needs someone to chair the Cabinet and keep its members under control, I offer the services of my noble friend.

The problem we have is that there is a fine balance between the arguments for and against. The economic case has never been strong one way or the other. There are all sorts of probabilities which can be attached to it and many of them have been mentioned this evening. We can mention factors like illegal discrimination. We can exaggerate its probability and its impact or we can downplay it: inward investment; the City's position; how important the markets are. As people go for or against, they put probabilities on the arguments. It may seem as though all hell will break loose or tremendous benefits will be achieved by either going in or not going in.

It is difficult for me as a professional economist--I shall turn to my personal views in a moment--to believe that there is a substantial balance of advantage either way. The industrialists, as we have heard, would very much like to be in. The City is divided: some people think it can manage without and others believe it to be important. On the other hand, among economists there is a substantial difference of opinion. I can recall when the debate was taking place in 1972 and someone took a survey of professional economists in the UK. They were almost exactly divided down the middle as to the advantages and disadvantages of going in.

I do not believe that, no matter how much more information we collect, on technical economic grounds there will be an overwhelming case for one side as against the other. As many people have said, there are many important political issues to consider. Again, to those political issues we must attach probabilities to various outcomes. Because the whole programme of a single currency is a political programme, we have to judge the issue in a political way.

Is it to our advantage to be into this programme, judging the probabilities of its success and so forth; or is it perfectly feasible to stay out of the monetary union but accept the European Union; or to go out altogether, as my noble friend Lord Stoddart said? He had a strong argument for going out of the European Union altogether, but we are discussing a narrower issue.

My personal position was for a long time strongly that of a Europhile, if not a Eurofanatic. I believed that a single currency should happen. Indeed, I would not only have waited for convergence but I would have had a "big bang" solution and taken the convergence costs later. But I always thought that a single currency was feasible only in a federal context. We need a powerful fiscal instrument centrally administered if we are to have a single currency. Bankers are paid to be deflationists; that is their job. Bankers will always tell you that if you do anything there will be inflation.

It would have made a great deal of sense if the centralising dynamic of the European Union had continued, as appeared likely, when Jacques Delors drew up his plans. Since then two things have happened. As noble Lords have pointed out, when the plans were drawn up the European economies were doing much

24 Jul 1996 : Column 1470

better. All the fiscal numbers were good and the growth rate was fine. There was also a push towards centralisation. In the past five years the European economies have had many fiscal problems, including the recession. Whereas in 1992, nine out of 15 countries qualified for all the criteria of Maastricht, today about three qualify.

The European economic situation has deteriorated and at the same time the federalising programme has lost steam. I believe that happened at Edinburgh, which more or less stopped the federalising programme in its tracks. The Delors plan of running a Euro-Keynsian employment scheme by borrowing from the European Investment Bank and having trans-European networks and so forth was stopped. I believe that if you have a weak centre with a very limited budget and a single currency, there are problems. Unlike many other noble Lords, I do not fear that a federal budget will rise. I wish it would. If it does not, we shall not have the transfer capabilities which are required to correct for the loss of one instrument that a country has, which is fiscal policy sovereignty.

One of the important political judgments to make is whether the federalising dynamic will resume itself. If it is not going to do so, one has to hold back and ask, "What will be the set of instruments that people may have for correcting the problem of distortion?". Many of my fellow economists talk about "an optimum currency area" and ask, "Do you believe that the European Union is an optimum currency area?". I do not believe that there are any such areas at all. The United Kingdom is not a optimum currency area. We have a great deal of regional unemployment. Italy is not an optimum currency area.

Countries compensate partially for distortion through regional aid or various other policies. Therefore, unemployment remains unequal across regions. There is also unequal income across regions, but that is mitigated slightly by people being part of the same political entity and maybe there will be compensation.

Currently, the European budget is 1.2 per cent. of the European GDP. If it were to reach about 3 or 4 per cent., that might just about do it. But I do not know that that is likely. I do not know whether it is likely that the European Commission, ECOFIN or the Council will be able to undertake investment projects which will tackle the very serious problem of unemployment.

My position, even before I come to the question of the UK, is whether it is even a good idea for the European Union itself to go down this path just because it was written down 10 years ago. I was deeply impressed by the speech of the noble Lord, Lord Dahrendorf. His European credentials are entirely beyond doubt. He said that the partial EMU project is likely to be destructive of the European programme rather than constructive. One should consider the list of "ins" and "not-ins". Apart from the UK and Denmark, the "pre-ins", including Ireland, are the poorer countries. They are the countries which are relying on a lot of transfers. The "eager-ins", if I may call them that, are the richer countries.

24 Jul 1996 : Column 1471

There has already been an official proposition made by the head of the European Monetary Institute that the "ins" should act en bloc in ECOFIN and thereby set the conditions for the "pre -ins" or the potential entrants. There is the suggestion of the stability pact, which is not part of the Maastricht Treaty. That can be imposed by the "ins" on the "pre-ins", which would be a rich nations club making further obstacles for those who are likely to be hurt.

I began to have my doubts when the convergence conditions were put out. It has been pointed out for a long time that the Maastricht conditions do not take care of the cyclical fluctuations against a 3 per cent. deficit. The convergence conditions are proving extremely costly for the countries which want to join and which are likely to do so. For the likely "ins", such as Germany, France and Italy, the biggest problem is that to fulfil the convergence conditions there has been a great deal of unemployment. The remarkable thing is that, given all the talk of solidarity and co-operation, it should have been possible for these countries to come together and arrange a convergence package which would have minimised the unemployment cost for each other, but that has not happened. So the European co-operation that one relies on has gone away and the costs of convergence are very large.

That is where my reservations start. However, those people who believe that staying out and having monetary sovereignty is a great prize have to remember that we have not used it very well. Indeed, monetary policy in this country has been a disaster. If devaluation had done anybody any good, we would have been very prosperous by now because we have done nothing but devalue since 1973, except for the brief episode in 1980 when we had the overvaluation of sterling. We have continually devalued. Every time we have had a problem we have devalued. That has not raised the long-term growth rate of the country by even one-quarter of 1 per cent. Devaluation has definitely brought the sterling value down from 11 Deutschmarks to 2.36 or whatever it is today. Although people think of the ERM episode as a great horror, when this country was in the fixed exchange rate system of Bretton Woods we had our best growth record.

There are other reasons for that. There is a great tendency, when faced with the problem of competitiveness and structural change, not to take the path of structural change but that of monetary ease. Although the past three years since our exit from the ERM has been almost a miraculously good episode, as is the fact that the Chancellor and the Governor of the Bank of England find some sort of agreement on monetary policy, the people are not convinced that the United Kingdom will not once again resort to perpetual devaluation.

The proof is that currently we are paying one to one-and-a-half percentage points extra in interest rates on the long-dated gilt. That means that there is a cost both to the Budget, because it takes more to finance a deficit, and also to businessmen. Therefore, the one argument for going into the scheme would be that, if the Euro were to prove to be a stable currency, the United Kingdom policy-makers would turn their

24 Jul 1996 : Column 1472

attention to real structural changes which are required to make the economy competitive and not go for the soft option of devaluing early and often, as we have been doing. If one looks at the history of the devaluation that has been undertaken since the breakdown of Bretton Woods, this country has had an abysmal economic performance.

I conclude where I started. At the moment there is probably a political balance between postponing the decision and saying that we are interested in participating and will not give up our option of joining but will wait and see what happens to the Euro. It may not be as good a currency as the deutschmark. At the same time, we should make quite sure that the modicum of monetary discipline that we have acquired is not lost. Whether or not the ERM or the Euro dictates it, it is in our interests to forgo laxity in monetary discipline, certainly in a globalising world. Therefore, while I do not favour entering the Euro immediately as I would have done five years ago, I would not back any of the wild devaluation schemes that are often put forward.

9.1 p.m.

Lord Hamilton of Dalzell: My Lords, I very much welcome the report of the Select Committee. I am one of those noble Lords who frequently ask questions in this House about the single currency only to be told that the question is hypothetical. Of course, the reason for saying that it was hypothetical was that it was thought to be superfluous because of the opt-out. But an option always represents indecision. I cannot see how you can ever make up your mind about anything without hypothesising. I have enjoyed the hypothesising in which we have indulged this evening.

The terms of reference given to the Select Committee were economic. I agree with the noble Lord, Lord Desai, that the matter is very evenly balanced and that there are strong opinions on both sides. However, I agree far more with my noble friend Lord Boardman, who says that what we ought to consider is the political price of being in. This is a political question which will not go away.

I strongly believe that we are discussing one of the most important decisions that this country has had to make in its modern peacetime history. The same can be said of all nations which decide to join the single currency. We are being hurried into this decision by the Germans for political reasons. I liked the comments of Sir David Scholey in his evidence to the Select Committee. He said that this process was like building an arch from the keystone down.

In addition, Professor Issing of the Bundesbank has delivered a number of warnings about trying to force monetary union before the states have reached a situation in which they are prepared to join together in a single government. It has never worked before, and I do not believe that in the end it will work this time. I cannot see how those who adopt the single currency can be doing anything other than entering an association with each other which involves the acceptance of unlimited liability for one another's liabilities and debts. It is impossible for any country which uses the single

24 Jul 1996 : Column 1473

currency to have its currency collapse unilaterally regardless of the irresponsibility of its government. In his evidence to the Select Committee my noble friend Lord Lawson issued a warning to the effect that this was more inclined to lead to irresponsibility because of the safeguard that nothing could happen to one's currency. In this regard, it is prudent when considering unlimited liability to look at the possible downside as well as the upside.

Therefore, the work that is being done on the stability pact is of prime importance. No member of the single currency could be allowed to imperil the hard-earned reserves of other states. We have the views of Herr Waigel on how it should work. The penalty for budgetary waywardness should be higher interest rates and perhaps fines for those countries that offend. The Select Committee has agreed that this solution is unacceptable to it, but I doubt whether the Germans will settle for very much less. Short of assuming total budgetary control, which is the more likely outcome, it does not seem possible that such a system can be avoided.

My right honourable friend the Chancellor of the Exchequer has emphasised that the level and composition of taxation and expenditure should remain matters to be decided by member states. This view was also expressed in the evidence of Sir Leon Brittan. What would be the result if a high-spending, high-taxing country found itself in a vicious downward spiral of falling taxation due to recession, or to what is referred to as an asymmetrical shock? The central bank would be bound to move to defend the assets of the other nations. One would then have the situation where a country in trouble would find itself forced by the pressures placed upon it to take measures which it did not wish to take.

I can hear the proponents of this theory saying that all of this is very wholesome economic stuff. But what about the electorate? This is the essence of the political problem of monetary union. A number of countries, notably France, agreed the Treaty of Maastricht by the narrowest of margins. Substantial numbers of people throughout Europe have never agreed to this process, and the same may well apply to us if the idea is ever dealt with here in a referendum.

I should like to illustrate the point with the following analogy. The narrow channel of economic rectitude has on either side of it a minefield of political mines waiting to explode under the government of any ship in the convoy which strays from the course. The actions of the central bank will have the effect of destabilising governments at exactly the moment when the going is toughest for them. It means that on occasions governments will be in office but will not have power over the prime responsibility of managing their economies to the satisfaction of their electorates. If this country decided to be in, the intrusions of the central bank could make it impossible for the government to deliver their electoral manifesto. As a result, Members of Parliament might have to acclimatise themselves to shorter periods in office than those to which they have become accustomed. For that reason, far from

24 Jul 1996 : Column 1474

introducing stability in Europe and reducing the chance of war--a point that has often been made by the noble Lord, Lord Jenkins--monetary union would tend to destabilise the relative political calm that the countries of Europe have enjoyed since the war. If we joined it would threaten the stability provided by our well-tried and tested democracy over the centuries.

Therefore, in examining the evidence given to the committee, we should not confine ourselves to considering only what the best choice might be for the country's or City's financial balance sheet. The evidence given to the committee is, in any case, ambivalent on that subject. We should be asking ourselves whether we should ever respond to a request to put a financial price on our ancient democracy which has bent with the political wind for centuries and kept us free from revolution. Is there a price which your Lordships would care to put on that, or is it beyond price? I believe that it is.

9.8 p.m.

Lord Monson: My Lords, I very much agree with what the noble Lord, Lord Hamilton, has just said, and in particular the last part of his speech. I hope that the noble Lord, Lord Barnett, will not think me discourteous if I touch only tangentially upon the excellent report over which he presided and which of course I read when it came out, because there are other aspects of monetary union which have not yet been referred to.

First, I shall refer briefly to the condemnation by the noble Lord, Lord Renfrew, of Her Majesty's Government in connection with their non-cooperation over the BSE crisis. He may have forgotten that in their time France, Italy and Spain have all indulged in non-cooperation policies. Indeed, the Spanish went so far as to veto the entry of new states into the EU until they--that is, the Spanish--were given more money. Few people resent or condemn those countries now and, curiously enough, few condemned them at the time. I do not see why Her Majesty's Government should have been singled out for particular opprobrium.

I do not need to remind your Lordships that the UK is the only oil-producing country in the EU and that we export twice as much to the USA as does any other EU country. Those two facts alone should prompt us to regard with the gravest suspicion any suggestion that we should irrevocably lock ourselves into a monetary union dominated by countries with different resources, orientations and priorities from our own.

EMU would not only be disadvantageous to the UK but also, albeit to a slightly lesser extent, to most other EU countries. Contrary to what Euro-enthusiasts may imagine, most of us in the sceptic camp wish our Continental cousins well, for emotional and sentimental reasons every bit as much as hard-headed, pragmatic ones.

I shall try, first, to dispose of the transaction costs argument arising from the deplorable attempt to rip off the noble Lord, Lord Jenkins of Hillhead, about which he told us and which I am glad had a happy ending. If he were here, I should tell him that there are many ways

24 Jul 1996 : Column 1475

of limiting one's transaction costs to less than 1 per cent. of the amount transferred, but there is not time to go into that now.

To opt for EMU merely on the grounds of lower transaction costs is like voting for Mussolini because he promised to make the trains run on time. Both low transaction costs and punctual trains are highly desirable things in themselves, but both are essentially trivial compared to the main issues at stake.

I turn now to one of the main issues: 18 months ago the Evening Standard ran an extensive article entitled "New Europeans", featuring a number of youngish Britons who are living on the Continent and doing very well out of the single market. One of them, a Mr. Paul Hooper, attributed the success of his pan-European architectural practice to the fact that slumps hit different European countries at different times so that there is always work available somewhere; in other words, if business is poor in Denmark, one can always find something to do in Holland; if Spain is going through a difficult patch, Italy may turn up trumps; and so forth.

However, once EMU is in place those escape routes will dry up. There will be no more nipping to the country next-door to avoid a recession. A single European currency will mean a single European business cycle, and Mr. Hooper, and tens of thousands like him, will be out of luck.

There is another potential consequence which has not so far been mentioned. It is not unduly cynical to point out that all democratic governments the world over try to massage their economies so as to be able to loosen the purse strings in the year or nine months before the next general election so as to create the famous "feel good factor". Once the general election is safely out of the way--assuming that there is a working majority--the brakes are slammed on and then is the time for the inevitable retrenchment and the painful measures which all countries need to take every so often. Those are taken soon after the election in the hope and expectation that by the time the next election comes round the electorate will have forgotten all about the hard times.

Once EMU is in place the chances of any one country being able to stimulate a feel-good factor at the right moment from its point of view is almost nil, except by a lucky coincidence. Imagine for a moment that we have moved on six-and-a-half years to the beginning of the year 2003. General elections are due in the United Kingdom, the Republic of Ireland, Portugal, Italy, Greece and Sweden some time in 2005 or early in 2006. However, by an unlikely, but theoretically possible, coincidence general elections in the other 9 countries are all due earlier during 2004. In theory, of course, the European Central Bank will be Olympian, impartial, detached and immune to all blandishments--the Maastricht Treaty says as much. In practice we know differently, remembering well how the supposedly Olympian, impartial, detached Bundesbank had its arm twisted by Chancellor Kohl at the time of German reunification. Against its better judgment, the Bundesbank was forced to accept an artificial and unreal exchange rate for the Ost mark, vis-a-vis the Deutschmark.

24 Jul 1996 : Column 1476

It is hard to see in practice France, Germany, Spain and so forth not doing the same behind the scenes and persuading the Bank to trim interest rates towards the end of that year (2003), thereby inducing a feel-good factor across the Community which would be enough to secure the re-election of the incumbent governments in France, Germany, Spain, the Benelux countries, Denmark, Austria and Finland. However, the inevitable monetary brakes will have to be slammed on shortly afterwards at the end of the year, thereby ensuring that the governments of the United Kingdom, Ireland, Italy, Sweden and so forth are toppled at those counties' elections which are due in 2005 or 2006. They will not have been able to trim interest rates nor increase their budget deficits over 3 per cent. of GDP--if the Bundesbank has its way it will be reduced to 1 per cent. of GDP--which would have allowed a certain fiscal relaxation which cannot now take place.

Member states will then rapidly get the message that everything possible must be done to harmonise general election dates right across the Community in so far as their respective constitutions can allow. Assuming that the latter can be stretched so as to permit a common fixed term, ultimately you are likely to end up with all general elections being held in the same week of the same month of the same year. The British will probably maintain their eccentric preference for a Thursday polling day while the Continentals will stick to Sundays. But that will not make much difference.

What then? Will not people soon think, "What is the point of 17 separate elections simultaneously for 17 separate legislatures, none of which retain many residual powers"? Why not be realistic and have one election for one massive legislature from which can be chosen one administration presiding over an entity which might well be "christened", if that word has not fallen foul of the political correctness lobby, the USE?

Some of your Lordships, though not the noble Lord, Lord Stoddart, and others, may consider that a somewhat fanciful scenario. However, we should not forget that not long ago an experienced Conservative MEP was gleefully--he is a great Euro-enthusiast--predicting a single European Army and Air Force by 2020. Of course, being a frequent visitor to Brussels and Strasbourg, he knew much more about what was going on in the heads of the zealots in those cities than do most of us here.

It may be conceded, on reflection, that the picture which I have conjured up is one possible logical medium or long-term consequence of EMU, against which everyone throughout Europe, not only in this country, who values the Gaullist concept of a Europe of nation states should be on their guard.

9.18 p.m.

Lord Harding of Petherton: My Lords, it is not only the Conservative Party which is divided and confused by EMU--the whole country is. The division cuts across parties, generations, the sexes and, dare one say it, class. Within the two main political parties that division has been seen today in this Chamber. The Labour Party is just as divided as the Conservative Party, but that is not

24 Jul 1996 : Column 1477

so apparent to the electorate as the Labour Party is in opposition. It appears that the Liberal Democrats are wholly in favour of EMU.

Across the generations, the young tend to be more in favour of EMU than their elders. On the whole, women are virulently against it, as they are anything to do with the European Union. Middle England, which is a horrible term--I never know quite what it means but it certainly does not mean anyone living in the Midlands, although some media commentators appear to imply that it might--is said to be absolutely against it.

Therefore, I was delighted that Sub-Committee A of the European Communities Committee of this House inquired into the matter of an EMU of "ins" and "outs". The evidence and report have clarified many of the questions which have been clouded by emotion, patriotism and even xenophobia and the syndrome of not upsetting our partners in the European Union.

As other noble Lords have done, I wish to commend the noble Lord, Lord Barnett, and his committee on an excellent report. There is no one better qualified in this House than the noble Lord to be chairman of the committee. He asked questions of high powered witnesses which tried to get behind the rhetoric, evasions and prejudices so that it was possible to see the reality of the issues upon which Parliament and the public will have to decide in a referendum in the next few years if the government of the time recommend that we should join.

I turn now to the party political angle of EMU, in particular within my own party. I do not believe, as many of my Conservative friends do, that by ruling out our entry into a single currency in the next Parliament we shall win the next general election. The public are not complete idiots, as some politicians seem to assume. The electorate will know that such an announcement by the Prime Minister would be a cosmetic exercise in deception. Even if the Cabinet and a majority of Conservative MPs could be persuaded that it was an election winner, which I am certain they would not be at this stage of the European negotiations, it would be seen to be, as indeed it would be, a completely cosmetic exercise in deception.

It is extraordinary to believe that if we all say the same thing, even though many of us do not agree, the majority of the electorate will put their cross against the name of their Conservative candidate. At the risk of making enemies, I should say that it beggars belief that some politicians and Conservative journalists can be so naive. We Conservatives will win the next election on our record in government and on the excellent economic conditions which have been created by my noble friend Lady Thatcher and my right honourable friend John Major and not by using that sort of gimmick. I am sorry if I have gone away slightly from our excellent discussions on EMU and its implications.

It would be disastrous for this country and, indeed, for the European Union if our participation in EMU, of whatever sort, should be ruled out during the next Parliament by either of the main political parties. None of our European partners would listen to us at all in the

24 Jul 1996 : Column 1478

negotiations and discussions to set up how EMU would work. The very valuable work which the Governor of the Bank of England and Mr. John Townend have been and are still doing in Frankfurt in working parties of all kinds would go by the board.

Mr. George made it very clear in his evidence to the committee (on page 27) how valuable is their advice and how the other central bankers are listening and willing to take that advice. I am not in favour of joining EMU, in any event at the start. Having read the report of the committee and a great deal of the evidence, I do not think that it is necessary at all for the single market, as other noble Lords have said before. The transaction cost savings which are cited by some as the most important reason for joining would be comparatively small. Again, that has been said by other noble Lords. There is very little, if any, danger of barriers to trade being erected against us if we do not join. Such barriers would be completely illegal under the single market treaty, let alone GATT and World Trade Organisation agreements. The only tangible advantage, it seems to me, would be the transparency of prices within the EMU-participating countries. Those can also be exaggerated: only consumers travelling for short periods between this country and other participating countries on the Continent would benefit. Manufacturers which export must be very well aware now--and, indeed, will be in the future--of the figures dependent on the exchange rates at the time, so I suggest that that factor would be comparatively small.

The only major disadvantage in our not joining would be political. As my noble friend Lord Lawson put it very clearly in his evidence, the whole motivation for EMU is political. We will have to persuade our European partners who participate that it is not in our interests to devalue the pound against the Euro. We will also have to persuade the financial markets. That can only be done by continuing the Government's policy of keeping inflation very low. That is within the power of the Government.

The disadvantages of our joining EMU are plain to see, at least to begin with. We would be joining an untried system. As has been said by other noble Lords, a single currency set up between independent nation states has never been tried before. The analogy with the United States of America is completely false. There you have a central Federal Government, with democratic institutions which work and are respected by all Americans; you have a people 99 per cent. of whom speak the same language and share the same culture; you have a tradition of labour mobility, which, apart from a few building workers and others, is non-existent between Britain and the Continent.

There would be a real danger in our belonging to EMU, as, indeed, there would be for any country which joined; that is what economists call, "asymmetric shocks"; for example, the collapse in the demand for an important product or products in one country. That could happen over a period of time, as was the case with shipbuilding in this country and with other industries in which demand was fading. They are best handled by interest rates and exchange rates moving. That would not be possible within EMU, where the European

24 Jul 1996 : Column 1479

Central Bank will be in sole charge of interest rates. That may cause a great increase in unemployment and in business failures in one country or another.

I am doubtful whether EMU--even a small one or one restricted to include France, Germany and the Benelux countries--will occur in 1999. I simply do not believe it. I believe that the Bundesbank will insist on the strict criteria of the Maastricht Treaty. If the Bundesbank finds that the criteria have not been met, I do not believe that the German Parliament will be able to agree. Whatever Herr Kohl and his government say, I simply do not believe that it will happen in any event in 1999. I may be proved wrong but I would almost put a bet on it.

In conclusion, I am not in favour of our joining EMU, at least when it starts, even if the start is delayed. I am, however, against ruling ourselves out of joining. My noble friend Lord Boardman put that point very well. Most importantly, we must ensure that we can influence how EMU is to be set up. That will affect our position whether we are in or out, and, indeed affect the whole cohesion of the European Union. We may in future years see it in our best interests to join EMU if it is working well.

9.29 p.m.

Lord Leigh: My Lords, I must crave your Lordships' indulgence in that I was not present in the Chamber at the beginning of the debate. However, I have very strong feelings about the common market which, I am sure, will not be popular with the Conservative Party. Nevertheless, I believe in those feelings as, indeed, do many of my fellow countrymen. Probably I should not be sitting on this side of the House, as I am right of the Conservative Party; but where should I sit? I am not a Cross-Bencher because I am too right for them.

Noble Lords' parents and ancestors, together with mine, fought two world wars this century to free Europe from the oppression of Germany. I know that my ancestors, and quite probably some of your Lordships' ancestors, would be shocked at the path that the present day Conservative Party is taking. Many of our fellow countrymen gave their lives in the two world wars so that we would be free and not live under the thumb of Germany. Germany, having failed twice, is now trying to gain what it failed to achieve in two world wars by the back door entry through the common market: supremacy over the rest of Europe. I can assure noble Lords that partnership does not come into it. Germany wants supremacy. Why should we surrender all that our ancestors achieved in preventing Germany over-running us just to appease a few politicians?

I am not a political creature; nor am I an economist. I do not know the monetary "ins" and "outs" or benefits. But why cannot we drop Germany, which only wants to rule us, and the Benelux countries (as I believe they are called), which have to agree with Germany or else? I leave the "or else" to your Lordships' imagination.

Surely we would be better trading with China which, as a nation, is an emerging giant. We could also trade profitably, or more profitably if we tried harder, with

24 Jul 1996 : Column 1480

the other eastern nations. I am sure that we could influence the stability of the Middle East if we increased our trade in that region.

I was brought up under Winston Churchill, and Anthony Eden was our local Member of Parliament in our constituency of Warwick, Leamington and Kenilworth. Like those two eminent politicians, I shall not succumb without a fight.

I leave your Lordships with this thought, borrowed from our late head forester's widow, who greeted her husband on his return from a night out drinking with the words, "Are you a man or a mouse?".

9.31 p.m.

Baroness Williams of Crosby: My Lords, first let me admit immediately to being a mouse--but a mouse that can roar, I believe is the right description. I was about to say that this has been an excellent debate and reflected the fact that in your Lordships' House we usually deal with rational argument. I shall stick to that statement on the basis of the majority of those who have spoken.

I wish also to pay tribute--with, I believe, every other member of that committee who is in the Chamber at the end of the debate--to my noble friend Lord Barnett. I probably know him better than most. I know that he is the highest quality of iron in the deepest level of velvet glove because I knew him as Chief Secretary. Therefore, I know a strong man when I meet one and I am not a bit surprised that he was able to steer this ship to the harbour that he had probably thought of at the very beginning. I congratulate him on the excellent way in which he chaired the committee.

I wish, too, to join in the many tributes paid to our maiden speaker Lord Sheppard. I believe that the noble Lord, Lord Sheppard, the noble Lord, Lord Renfrew, and the noble Baroness, Lady O'Cathain, reflected an extremely important factor in the debate: that whether or not we like it, we now live in a globalised economy. We live in a world where almost all the barriers to trade have been swept away, at least so far as concerns the developed world. We live in a world where we have to get used to the idea that the concept of national sovereignty has changed a good deal. We cannot determine how the tides will flow--whether they are the tides of money or of geographical ebbs and flows. The truth of the matter is that since the larger number of constraints on capital movements were raised in the 1980s, every single developed country is in the same position. It has to persuade the market of the orthodoxy and common sense of the financial policies that it follows. That is a very tough discipline indeed.

I congratulate those who have made this point. I believe that it could be made more widely in the debate in this country because, alas, it is not fully understood, as the noble Lord, Lord Renfrew, pointed out. I somewhat disagree with the criticism made by the noble Lord, Lord Cockfield, of the fact that the committee considered who might or might not be members of the future European Monetary Union. It seems to me highly relevant to the committee's discussions and conclusions that we thought deeply

24 Jul 1996 : Column 1481

about who might or might not join. The reason for that was that the number and weight of potential members would to some extent influence the effect they could have on this country. If the membership were to be small and insignificant and if the weight of numbers were on the other side, the impact on this country of a decision would be less than if a substantial number of members--especially the economically stronger members--of the European Union decided to embark on European Monetary Union. Despite the usual excellence of his speech, I thought that the noble Lord, Lord Cockfield, was being hard on the members of the committee and the noble Lord, Lord Barnett.

I believe that in 1999 European Monetary Union will go ahead. I agree with those like the noble Lords, Lord Ashburton and Lord Renfrew, who said that the reasons for it will not be purely economic. They will not. In substantial part they will be political. I do not find that shocking; unlike the noble Lord, Lord Leigh, I find it extremely encouraging that Germany is now anxious to work with its European partners and does not seek military domination of Europe. Germany has consistently attempted to follow its ambitions and goals within the framework of Europe--not, as Thomas Mann famously said, a German Europe but a European Germany.

Those like myself and others in the House who have been part of an attempt to create a new kind of Germany with strongly democratic roots since the Second World War ended recognise that Germany is a much changed country today. It is important that we in this country pay tribute to that fact. It is no good pretending that Germany is still a country of storm-troopers and so on. To do so is to return Germany to the most dangerous aspects of its history and not recognise the serious, sincere and, I believe, successful attempt that Germany has made to be a model democracy. I emphasise that last phrase.

Germany will enter the European Monetary Union to a great extent not because of its wishes but because of those of France. As noble Lords know, the Bundesbank is not enthusiastic about European Monetary Union; it never has been. But voices in favour of European Monetary Union which go back to the Werner report of 1970, the Padoa-Schioppa report of 1987 and the Delors committee report of 1989 are not new voices. It has been part of the aims of the European Community almost from the beginning. As my noble friend Lord Jenkins of Hillhead said, it is not something that suddenly came down the track at Maastricht. It was a part of the concept of the European Community long before it became the European Union. The reason is simple. I am not saying whether France is right or not, but it is important to put the fact on the record that, unlike us, France has always believed that it would exercise more influence as part of a European structure than it would as the weaker member of an intergovernmental structure. It read into that the lesson of what happened when the French franc was almost broken at the time of the ERM breakdown in 1990.

24 Jul 1996 : Column 1482

I wish to make two more points. Some of the issues raised by the noble Lord, Lord Desai, and my noble friend Lord Dahrendorf are ones which we should take on board in a House like ours which can discuss them seriously and rationally. As the noble Lord, Lord Desai, said, some of the implications of the convergence criteria could be deflationary, even seriously deflationary. I agree that there is a case for saying that there should be some budgetary counterweights in order to offset the effects on an individual country if they are serious. That point needs to be considered, especially in the case of new members. I agree with the noble Lord, Lord Dahrendorf, that the new members from eastern Europe are important. I believe that one of the most important roles Britain could fulfil if it decided to enter the European Monetary Union in 1999, as I still hope that it will, would be precisely to pave the way for the new member states of central and eastern Europe to join also within a reasonably short period. That would mean throwing our weight as a country behind a monetary policy that was able to encompass their needs as well as the needs of the original member states.

I conclude with a comment on the debate in this country. I find that debate profoundly frightening. The level at which we have conducted the debate on this next great step in European integration, whichever side we may be on, is no credit whatsoever to this country. In the Eurobarometer Report of 31st May this year (only just over a month ago) 82 per cent. of the British people said that they wanted a referendum; 12 per cent. said they did not; 61 per cent. of the British people said they either knew nothing or very little about the European Union. So the very people who wanted a referendum freely admitted that they knew nothing about it. It is not the case, with great respect, as one noble Lord said, that there is a strong majority of the British people against the European Union. The figures are approximately 36 per cent. for, 26 per cent. against and then the key figure, the 27 per cent. who say to the Eurobarometer that they do not know--the implication being that they do not know because they do not know enough.

Our tabloid newspapers have a very great deal to answer for. When one of them declares war on Germany across the whole front of its paper, with pictures of helmets and old pictures drawn from the Second World War, and when another declares that it is going to pay out money to those who are most effective at knocking the Dutch out of the sea, one begins to wonder at what level we expect to conduct one of the most important debates of our existence.

The politicians, including all of us, have not adequately given a lead towards rationality. I wish that one or two noble Lords who have used strongly emotional arguments had been here to take part in this debate. We need to make it clear that in the next few months we must get this debate back on a more serious, balanced and sensible basis. We owe that to our own people. We owe it to our partners in Europe. We owe it not least to the future of this country.

9.42 p.m.

Lord Eatwell: My Lords, it has been made abundantly clear in the course of this debate that we are

24 Jul 1996 : Column 1483

all enormously indebted to the noble Lord, Lord Barnett, and to his committee for their valuable report. Among other things, it has given us the opportunity to hear the interesting maiden speech of the noble Lord, Lord Sheppard of Didgemere.

What distinguishes the report is its practicality. It does not argue the labyrinthine rights and wrongs of monetary union--a subject which has tempted some noble Lords this evening. Instead, it confronts the issues facing this country should a single currency be formed among some of the European Union countries whether or not this country is part of that monetary union. It is exactly that kind of careful, practical consideration that has been notable by its absence in the approach taken by Her Majesty's Government to the question of monetary union. There was nothing of any practical consequence in the Chancellor of the Exchequer's thin little memorandum which he presented to the committee. There was no response to the issue so carefully and judiciously spelt out in the report of the lack of preparation for monetary union whether in finance or industry. The Chancellor of the Exchequer, in his evidence to the committee, simply declared that he "did not know", and apparently did not care, to what extent preparations were being co-ordinated in finance and industry.

Why are the Government not taking steps to ensure that British companies are prepared to deal with the single currency whether Britain is in or out? Have the Government taken any heed of the recent warnings by IBM that there will be major deficiencies in data processing which cannot be made up in the time available and that those deficiencies will jeopardise the integrity of the banking system? That point was elaborated by the noble Baroness, Lady O'Cathain.

What is the Minister's reaction to the report in the Financial Times of the 18th July that British banks are the least well prepared of any of the banks in the Union, and that only a little over a half of British banks say that their information technology systems can deal with the EMU timetable?

The committee's report, and the published volume of evidence, contain increasingly desperate pleas from all sides of industry and finance for the Government to take a lead in co-ordinating the preparations for EMU, and yet the report tells us:

    "the Government has indicated that it is not willing to take the lead".

I suppose that is hardly a surprise. The Government are not prepared to show leadership on anything. I can only assume that the Government's paralysis on such essentially practical, non-controversial issues is a function of its internal strife over all relations concerning the European Union.

Yet these matters are entirely independent of whether Britain is in or out of EMU, and entirely independent of whether the noble Lords opposite are supporters of the Chancellor of the Exchequer, or supporters of the Secretary of State for Defence or supporters of the Home Secretary, or any of the other faction leaders in the Cabinet.

24 Jul 1996 : Column 1484

The debate and the report are about the factors that will affect this country's well-being, whatever one's individual views on monetary union might be. In these circumstances, I believe that that policy should be guided by two practical propositions, which I believe would be accepted on all sides of the argument.

First, whether Britain adopts the single currency or not, it is of the utmost importance to this country's economic well being that EMU should be a success. In the past 18 months we have seen just how damaging is the impact on the British economy of a recession in France and Germany. Stagnation in the European economy, our biggest market place, has produced stagnation in British exports, a large slow-down in UK growth and, as the inevitable counterpart, a sharp deterioration of the public finances.

That has been but a passing breeze compared to the storm which would be unleashed upon the British economy, whether inside or outside the single currency, should a monetary union be formed and then collapse. That is why it is vital that those who have this country's interests at heart should do everything they can to ensure that, should there be a monetary union, it is a success.

My second proposition is that whether Britain adopts the single currency or not, it is imperative that all necessary preparations are made now to ensure that this country is ready to take full advantage of all the benefits that may flow from EMU, and equally is well equipped to avoid or, if necessary, to deal with the disadvantages and any disruption which may occur.

Should Britain not join, these preparations must include the establishment of a firm groundwork for cooperation between the "ins" and the "outs", which will prevent, or at least discourage any discrimination against the "outs". That ground work must include the total avoidance of all rhetoric that suggests that the "outs" are intent on securing a competitive advantage over members of the monetary union. For example, whatever the rights and wrongs of the social chapter, the Government's persistent boast that its policy on the social chapter is designed to steal a competitive advantage over European partners, is doing nothing but harm. It causes maximum offence and provides ammunition for those who would discriminate against Britain, overtly or covertly.

The report makes clear that there exists a common means of achieving both the goal of a successful monetary union and the goal of a successful relationship between the "ins" and the "outs". It is that there should be a degree of what we might call camaraderie between the "ins" and the "outs". All members of the Union should be involved in a common mutually supportive enterprise.

A point which has not been made this evening is that Britain will hold the presidency of the European Union in the first half of 1988, when many of the vital operational decisions must be made. So the British Government will be peculiarly well placed to sustain Britain's national interests by establishing that atmosphere of mutual support, by helping to ensure the success of EMU, and by ensuring that Britain's interests

24 Jul 1996 : Column 1485

are protected, whether in or out. That will not be an easy task. What will be needed will be strong and clear political leadership.

It is political leadership that is needed because the problems which the European Union is facing, and will face if the single currency is created, are, I believe, essentially political. The problems do not stem from predominantly narrow technical economic issues. One of the most significant dangers that we face is pretending that they do. Indeed, one of the greatest vices of the European Union has been to pretend that political issues are purely technical and accordingly to abrogate those decisions to technicians, whether those technicians be officials in Brussels or the governors of central banks.

Political issues are issues which require judgment. They are issues which are not fixed in aspic, but develop and change as history rolls along, with its usual tendency to throw up surprises. Rules which may be perfectly appropriate for one time and place can, in other circumstances, become codified folly. Let me take a relevant example: the gold standard served this country well in the 19th century; the Conservative Party's decision to return to gold in 1926 was an unmitigated disaster, plunging Britain into recession.

Rules can be very important but they must be appropriate rules and what is appropriate requires judgment. There is no such thing as invariant sound economic policy relevant at all times and in all circumstances. The greatest failing in the entire history of monetary union in Europe is the way in which rules have been substituted for political judgment.

First, there are the so-called convergence rules built into the Maastricht Treaty. Of greatest significance are the debt and deficit requirements. Those are totally arbitrary goals. The debt goal was fixed at just what happened to be the average debt ratio among the major Community members at the time. That is how it was determined. The deficit goal is derived mathematically from that debt goal. There is no other rationale. Yet in the name of those requirements, most of the European Union seems today to be locked into a frenzy of competitive deflation, each round of which makes the deficits worse, not better. Yet with a little common sense and political judgment, it would be recognised that it is the recession which is causing the deficits to rise and that debt and deficit rules which are appropriate in a boom are damaging in a slump. But no lessons seem to have been learned from this episode. Indeed, Herr Waigel wants to tighten the fiscal rules within the monetary union.

All the nonsense about debt rules is made possible because of that other fashionable obsession, the total independence of the European central bank, charged with the pursuit of price stability by monetary means alone. Ideally, monetary and fiscal policy need to be managed jointly. So, even if monetary policy alone could deliver price stability, which is a very dubious proposition, making monetary policy the exclusive responsibility of an independent central bank would be highly inefficient.

Attempts to justify that by reference to the much vaunted independence of the Bundesbank are unconvincing. Not only does the Bundesbank's charter

24 Jul 1996 : Column 1486

demand that it supports the economic policies of the elected authorities, but also it faces the political legitimacy of an elected federal government. There is no such political authority in the design of monetary union. The proposed European central bank would operate in a political vacuum. It would face no political authority and there would be no identifiable policy-making body for it to support.

That political vacuum is being filled by rules: the Maastricht rules, the Waigel rules--rules which are the negation of a creative, flexible economic policy. That is a point made by the noble Lord, Lord Boardman, and it has also been made by the noble Lord, Lord Lawson of Blaby. They both argued that a successful monetary union requires a political authority--I think they are right--and that this must involve a political union, in which respect I think they are wrong. A less radical political solution is possible which is compatible with the development of a Europe of nation states.

The Labour Party has persistently argued that the Council of Economic and Finance Ministers (ECOFIN) should be developed into a permanently sitting established body, the political counterpart of the central European bank, charged both with surveillance and co-ordination of fiscal policies throughout the Union and with monitoring the inter-relationship between monetary and fiscal policy. The members of ECOFIN are not officials but elected politicians, responsible to national parliaments and accordingly will be sensitive to the impact of monetary and fiscal policy on national well-being.

The virtue of this approach is that not only does it reintroduce judgment into economic policy exactly where judgment is needed; it also provides a common forum in which the "ins" and "outs" can reconcile their economic policies and devise common reactions to changing circumstances. Something of this sort seems to have been proposed in the report in the form of a Fiscal Stability Council, mentioned in paragraph 135. But there is no need to create a new body. ECOFIN exists already and is already charged by treaty with the management of the European exchange rate.

My noble friend Lord Bruce seems to have failed to notice that there is indeed democratic control over external monetary policy written into the Treaty. Given the fact that the "outs" have a role in the general council of the central bank, the development of ECOFIN would in the manner proposed complete a seamless structure of policy making between the "ins" and the "outs", providing the "outs" with the potential of the priceless bonus of enhanced policy credibility. This would be particularly true in the circumstances in which a country, say for example Britain, meets roughly all the various criteria for monetary union but decides not to join. In those circumstances the markets will inevitably believe that the "outside" country is intent on devaluation. Arguments for an independent monetary policy are meaningless other than in the presence of exchange rate uncertainty. But then monetary independence is bought at a price--the price of higher interest rates. Although it would be unlikely to eliminate the interest premium entirely, positive, even enthusiastic, participation in the co-ordination of fiscal

24 Jul 1996 : Column 1487

and monetary policy through ECOFIN and through the general council of the bank would increase credibility and bring British influence to bear on policy formation throughout the Union.

Of course there are a number of aspects of discrimination which cannot be avoided. A successful monetary union will inevitably be a magnet for investment and for the location of financial activities. It is highly improbable, as was mentioned by Lord Cockfield, that British institutions could be members of TARGET as is hoped by members of Lord Barnett's committee. As the noble Lord mentioned, the Financial Times leader argued this point on Monday. It is also inevitable that a successful monetary union will tend predominantly to pursue its own interests in the economic and monetary fora of the world, however closely other Union members attempt to align themselves with it. The Euro, even if it is only the currency of six or seven member states, will be one of the world's great currencies. Indeed, on current calculations more world trade will be invoiced in Euros than will be invoiced in dollars. Those who manage the Euro will foster the interests of that currency, whether or not those interests are in accord with the needs of the "outs".

The report makes abundantly clear that the Government should be taking steps now to mitigate any and all of the harmful effects which might arise should Britain decide not to join a single currency. The Government should be taking steps now to ensure that British finance and industry are well prepared for a single currency, whether we are in or whether we are out.

I look forward to hearing what the Minister has to say. Exactly how do the Government propose to fulfil the responsibilities of the spring 1998 presidency which must manage the creation of a European single currency? Of course the Minister may feel that he is under no obligation to make any proposals, knowing, as he must do, that the party opposite will not be in office in the spring of 1998.

9.58 p.m.

Lord Mackay of Ardbrecknish: My Lords, we certainly have had an interesting debate. I felt a great deal of sympathy with my noble friend Lord Cockfield's suggestion that the noble Lord, Lord Barnett, in introducing it had asked me a lot of questions which in fact his committee ought to have made some attempt at answering. It certainly has been a privilege to listen to this debate; it has been hugely interesting. I am not going to be tempted to follow in the footsteps of the noble Lord, Lord Eatwell. I shall try to answer as far as I can the various points that have been made in the debate and not indulge in any political knockabout. I have had my ration of that this week, and some of your Lordships will perhaps agree with me on that.

It has been a privilege to listen to this debate, and in particular to my noble friend Lord Sheppard in his maiden speech. He did not seem to me to be very much of a sheep. That is especially true when one realises the extent of his career. He seems to have done a great deal

24 Jul 1996 : Column 1488

of leading. Indeed, I felt that he made some interesting points, and I underlined two of his questions. He said that it was not so much a question of whether Britain could compete in Europe but whether Europe could compete in the world. He asked whether the EMU would help our competitive and unemployment position.

My noble friend also made a point to encourage us. He said that British business was doing quite well in Europe. I suspect that he used that expression as an understatement and that we are actually doing pretty well in Europe. He said that we are out in front in many entrepreneurial ways. The noble Lord, Lord Bruce of Donington, in his tribute to my noble friend, said quite rightly that it was nice to hear somebody being positive and cheerful and seeing things that we could applaud in what we were doing. I am sure that we all look forward to my noble friend's contributions in the future.

The noble Lord, Lord Bruce of Donington, always takes part in these debates. I envy the certainty of some noble Lords. I envy the certainty of the noble Lords, Lord Stoddart and Lord Bruce; I envy the certainty of the noble Lord, Lord Jenkins of Hillhead, and I envy the certainty of the noble Lord, Lord Grenfell. However, all that happens when I listen to the noble Lords, Lord Bruce and Lord Stoddart, is that the pro-European in me comes out. When I listen to the noble Lords, Lord Grenfell and Lord Jenkins, the anti-European in me comes out. But at least when I listen to them I can do so in balance and not just from one side rather than another.

The noble Lord, Lord Jenkins, sometimes paints a most dismal picture of our country, quite in contrast to the speech of my noble friend Lord Sheppard. He paints us somehow as poor supplicants in this great European experiment--Johnny-come-latelies. If we are poor supplicants, I wonder why we are the second biggest contributor to the European budget. That does not make us poor supplicants. I would hope that if it comes to a referendum on this issue--and the noble Lord, Lord Jenkins, wants the "pros" to win--he will moderate some of his expressions in order to persuade some of our fellow countrymen that they should vote "yes".

Two really interesting speeches were those of the noble Lords, Lord Dahrendorf and Lord Desai. The noble Lord, Lord Dahrendorf is dedicatedly pro-European. He clearly told us how profoundly worried he was about what the EMU could do, if it was not handled sensitively and carefully, with four different categories of "outs"--not just the "outs" that may include ourselves if we wish to stay out with Denmark; not just the "outs" of Spain, Italy and Portugal, who may not meet the convergence criteria; but the other "outs" of Europe, those of east and central Europe, and the "outs" of Switzerland and Norway.

Now I come to the noble Lord, Lord Desai. It has been an interesting debate in that I am the fourth speaker of a group of working Life Peers who came to the House in May and June of 1991--my noble friends Lord Renfrew and Lady O'Cathain, the noble Lord, Lord Desai, and myself. Far be it from me to say, but I shall, that it was quite a reasonable vintage for working Life Peers.

24 Jul 1996 : Column 1489

The noble Lord, Lord Desai, laid out the fact that there were considerable differences of views. He mentioned that business was not uniform in its view; neither was commerce, the City or professional economists like himself. Indeed, he is correct about that. The Treasury's six wise men are divided on these lines: two for, two against and two sitting on the fence.

The third economist to speak was the noble Lord, Lord Eatwell. I was interested to hear his dissertation on the demerits of an independent central bank. I found that extremely interesting, as I did his use of ECOFIN as a kind of elected counterweight to that central bank. I thought for a moment that he was going to say that the policy we have developed in this country whereby my right honourable friend the Chancellor and the Governor of the Bank of England meet once a month to decide these weighty matters and their minutes are published a few weeks later, was a good idea; but clearly he could not go quite that far.

In the debate this evening we have had an excellent opportunity to listen to the various aspects of what is a hugely important subject not only for our country but also for Europe. Economic and monetary union will affect us whether we go in or not. It does not matter whether we are in EMU or not. That is why the report of the Select Committee is such a valuable contribution to this debate.

I believe that we are in an enviable position in the single currency in that, thanks to the opt-out that my noble friend Lord Boardman mentioned, and which my right honourable friend the Prime Minister negotiated at Maastricht, we have the opportunity to decide for ourselves whether or not to take part. That decision will be taken, as I have said on a number of occasions from this Dispatch Box, on one basis only and that is in the national interests of the United Kingdom and the balance of advantage for our long-term success. My noble friend Lord Renfrew of Kaimsthorn underlined the fact that that seemed to him to be the right way to decide this issue. Indeed, I go further. Despite the pessimism of the noble Baroness, Lady Williams, it is right that an issue as important as this is settled in a referendum, for a number of reasons. Above all, as I have mentioned before, it is mainly that if we do not take the peoples of Europe with us, and not only the people of Britain, into this enterprise it will fail. I believe that one of the problems throughout the Community is that we are not taking the people with us even as far as we have gone. It is all very well for people to say that--

Next Section Back to Table of Contents Lords Hansard Home Page