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Lord Barnett: My Lords, he looks as if he will not confirm that. I shall let him have a few minutes to
reconsider and then perhaps he will confirm the position. In the circumstances, as the provisions and procedures of ERM2--as I said--are in line with government policies--and I thought in line with opposition policies--it would be right for the government of the day to consider (even if we are an out) whether we should not join ERM2, especially if there is a 15 per cent. broad band, which would make it easy for any member state to join, even the UK. I note that my noble friend nods at this point.I now turn to the euro which is referred to at page 21 of our report. The Government's views are set out clearly on pages 14 to 16. I have a letter from the Chancellor and I wish to quote what he said about the legal framework for the euro. I am trying to save the Minister some time later by dealing with everything now. It is worth quoting the Chancellor's letter in which he states he is pleased that the committee recognises,
- "the importance of adopting some of this framework under Article 235. The Government has supported the use of this legal base and favours the adoption of the regulation as soon as possible in the interests of giving markets greater legal certainty about the euro, especially concerning contract continuity and the rules for conversion and rounding".
- "It also means that this legislation, which is of great importance to the United Kingdom's financial sector, will apply unambiguously within the United Kingdom whether or not we adopt the single currency".
- "I agree that there has been some confusion concerning the application of the draft regulation under Article 109l(4)".
The Chancellor refers to Article 109l(4) and its application to the United Kingdom. He states:
- "It is our clear view that Article 109l(4) regulation cannot apply to the UK if we do not participate in the single currency".
- "Paragraph 5 of the United Kingdom Protocol specifically disapplies Article 109l(4) from the United Kingdom in this context. I have secured at ECOFIN this week amendments to the regulation to make clear that its application is subject to the United Kingdom Protocol".
To sum up, it seems to me that the Chancellor has clarified the issues. He clarified the issues in his Statement on Monday, 25th November. That was a difficult day on which to do so as it just preceded the Budget. As regards the main issue of whether we should join economic and monetary union at all, yesterday the Prime Minister confirmed, without any possible doubt, that the policy of the Government is to leave options open, not just now but right through until a general election.
I express the hope that the Minister, and indeed the Government, will not allow themselves to be bullied by either the Daily Telegraph or the Times, or even some of the smiling Euro-sceptics that I see in front of me now. We heard a Statement the day before the Budget, and a further Statement by the Chancellor following his attendance at ECOFIN. He confirmed--this barely needed any confirmation--that fines would not be imposed on the outs. In another place Norman Lamont said that he had been present at Maastricht with the Prime Minister, and was quite clear that there would be no fines. I hope at least that is clear and there will be no further attempt by some noble Lords and others in another place to try to twist the arm of the Prime Minister. Perhaps his arm is easily twisted, but the fact is he has made the position crystal clear. I was happy to read what he had to say.
At page 22 of our report we referred to EMI. We asked that it should not operate behind closed doors, although we recognised that some confidential matters would need to be discussed behind closed doors. We hoped to be kept informed about that. The Chancellor stated that he hoped the public release of the report would ensure that the problem had been eased.
Although I have referred to my next point en passant as it were, we are not really talking about whether we should or should not join EMU. I made my position clear in a recent debate when I said that with some reservations I would generally prefer to be in, provided always there is an effective and workable in. In the meanwhile it is in the UK's best interest to maintain the Maastricht convergence criteria, and not just by one-off creative accountancy arrangements. I hope that your Lordships will note with approval--the words "with approval" do not appear on the Order Paper--the Motion standing in my name.
Moved, That this House take note of the report of the European Communities Committee on Preparations for EMU (2nd Report, HL Paper 18).--(Lord Barnett.)
3.27 p.m.
Lord Howe of Aberavon: My Lords, it will not have escaped the attention of your Lordships that there is a tendency in debates on this subject to self-repetition. Indeed, the cast has a familiar look about it. One feels that one has only to ask for the usual suspects to be rounded up, and here we all are. However, some points are so good that they deserve to be made more than once. Certainly I congratulate the noble Lords, Lord Barnett and Lord Tordoff, and the Committee on their continuing engagement with this subject, and on their continuing ability to shed light rather than heat upon these difficult issues.
I wish to echo what I believe the noble Lord, Lord Barnett, said in congratulating the Chancellor of the Exchequer who, quite aside from the task of introducing an autumn Budget, is engaged almost daily within the European Union in trying to shape the economic world in which Britain will have to live, whether "in" or "out". Even if we are to be "out"--that is a question yet to be decided--there are, as the report points out, important
achievements already to his credit. There is no question of fines under the stability pact applying to the "outs". There is no question of any compulsion to join ERM2. As the noble Lord, Lord Barnett, has pointed out, this next point has not yet been achieved but it is important. If the United Kingdom decides later to join EMU, and at that time meets the test of exchange rate stability, it is important that there should be no difficulty over non-membership of ERM2 for the preceding two years. I echo the words of the noble Lord when I say that to insist upon that would be to strain at a gnat.A further point of importance on which the Chancellor is still working is that there should be no discrimination within the single market against the "outs". There is a need for continued vigilance on that front, and there always will be. It is hard enough for the Chancellor to achieve success in this continuing series of engagements with our European partners. In that context it is intolerable that he should at the same time be repeatedly obliged to do battle on the home front as well; and to do battle sometimes against those who doubt, distort, or deny some achievements that are, in his word, already "copper-bottomed", as the noble Lord pointed out. He has had to do battle sometimes against those who, rather worse, seek to undermine his credibility, the credibility of this country and thus our effectiveness as a nation in the main debate by seeking to oblige us here and now to rule out membership of EMU either for good or for some shorter specified period.
I join the noble Lord, Lord Barnett, in welcoming most warmly the fact that the Prime Minister and the Deputy Prime Minister have already repeatedly, rightly and recently, ruled out such self-exclusion from a debate that is of crucial importance to Britain's future. Like the noble Lord, Lord Barnett, I hope that we shall have no more challenges of that kind, seeking to dislodge them from a position of such crucial importance. To those in my own party who claim to be anxious to secure such change of position, and the re-election of the Government, I say this. I, too, wish to see the Government re-elected. But to force the Prime Minister and the Chancellor out of their present position is no way to go about re-election. If the challenge is offered as a means of uniting the Conservative Party, that, too, could not be further from the truth.
The central argument can and should be advanced further than that. British interests in the debate extend far beyond trying to shape EMU--an institution to which we might even choose not to belong. Those interests extend to much wider aspects of the Union. We forget that at our peril. The shape of the Union can and does affect us even more in the years ahead. Beyond EMU, our wider influence is or should be important for our own future. The Prime Minister sees that clearly--or at least he did when he spoke in Bonn five years ago. He said:
- "That is where we belong, at the very heart of Europe, working with our partners in building the future".
About two weeks ago I attended the Sixth Annual European Banking Conference in Frankfurt. There were 800 people present plus 200 journalists; four Finance Ministers; and four or five central bank governors. Chancellor Kohl spoke for just short of an hour and answered questions for half as long again. It was organised by the three Frankfurt-based European banks--Commerz, Deutsche and Dresdner--and, of course, the Bundesbank. However, in the cast of that great conference, to the regret of the organisers, no Briton appeared. It was said to me by our German hosts that to have that kind of debate without British participation was like gin and tonic without the tonic. However, they were quite ready to accept my correction that it was more like gin and tonic without the gin. I believe that the City of London discounts the importance of the impact of such events taking place outside this country at its peril.
There was a greater tragedy even than that. All those who spoke--Finance Ministers from every other country--were addressing themselves to an agenda which was essentially British. It was an agenda to which Members on all sides of this House--the noble Lords, Lord Callaghan, Lord Jenkins, Lord Barnett and Lord Healey, not to mention my noble friends Lord Cockfield, Lord Tugendhat and Lord Lawson and the noble Baroness, Lady Thatcher--have helped to shape. In the context of EMU, they were addressing themselves to the agenda of which the noble Lord reminded us a few moments ago: the need for sound public finance and low inflation; and for monetary and fiscal discipline, if I may cite the report. There is, too, the need for market flexibility--noble Lords opposite have played a smaller part in that--above all in labour markets, and my noble friend Lord Tebbit has played his notable part in helping us to achieve that.
That is all part of the agenda which we should be commending to our partners in the European Union. The real sadness is that at Frankfurt on that day they were singing from our hymn sheet and only the conductor was not present to join in the proceedings. I fear that that is symptomatic of Britain's position in the wider debate on which we are engaged. If we continue in this degree of self-abstention, we risk achieving by default the Norwegian position, about which some Norwegians were complaining earlier this week. A growing chorus from that country finds itself bound by the rules of the European Union but increasingly unable to influence those rules as they would wish. Britain must remain engaged in this debate--and effectively engaged, as we should be, in a leading role--not just at Dublin or Amsterdam, but through the months ahead.
I do not underrate the difficulties of achieving EMU. There are many features about the path towards it which I, like many other noble Lords, would have designed differently. But the prize of exchange rate stability is one of enormous value. As the report rightly points out, it is crucially important to the maintenance of the benefits of the single market. How can it be anything else? Almost three-fifths of our total trade is conducted within the Union. Our trade with the Federal Republic of Germany equals that with the United States and Japan. Our trade with Sweden equals that with the whole
of Latin America. Our trade with Ireland equals that with Canada, Australia, New Zealand and South Africa. How can we underrate the importance of the value of achieving exchange rate stability? Of course it will be difficult but we should be foolish indeed to reject it outright. We are invited to do so, in the first place because it would violate our economic independence. But have we such a great record of achievement with that independence? The value of the pound against the deutschmark has shrunk from DM12 at one time to just over DM2.50 today. As my noble friend Lord Cockfield has often pointed out, the interest rate differential is a measure of the extent to which markets expect us--alas!--to misuse our independence.We are invited to conclude that joining this organisation would violate our political independence--destroy the very nation itself. But why should we alone have the lack of confidence to reach that conclusion when other great nations, France, Germany, Spain and so on, are ready to accept it and use it constructively? Ironically (it is a small point) the Republic of Ireland, a nation not unknown for its nationalistic determination, achieved independence from the United Kingdom in the 1920s after years of conflict. Yet it accepted membership of monetary union with the United Kingdom until it joined the exchange rate mechanism. The Irish example may not be one for us to follow, but it shows that there is no intrinsic incompatibility in designing special solutions.
Of course such a system of economic discipline would be unmanageable, as the committee points out, if the United Kingdom were unable to achieve that fiscal and budgetary discipline which the committee rightly sees as,
- "necessary for all member states of the European Union".
- "some system which effectively deters fiscal irresponsibility".
Many questions still have to be addressed about the path towards economic and monetary union, whether or not it is to be achieved. It is impossible to address them all. But for this country to be other than closely engaged in a continent-wide debate would indeed be, in the words of the Prime Minister, "a dereliction of responsibility" which would be unthinkable and disastrous. We all owe a debt of gratitude to the noble Lord, Lord Barnett, and his colleagues for doing so much to steer us away from that disastrous course.
3.39 p.m.
Lord Ezra: My Lords, we are indebted to the noble Lord, Lord Barnett, and his colleagues for the short, but
important report that is before the House today and for the effective manner in which the noble Lord introduced it. This debate takes place against the background that it is UK policy--as reaffirmed yesterday by the Prime Minister, the Deputy Prime Minister and the Chancellor of the Exchequer, as the noble Lord, Lord Barnett, and the noble and learned Lord, Lord Howe, said--to remain actively engaged in the deliberations leading to the single currency even though we have not, as yet, decided whether or not to join it and will not do so until we know the facts at that time.Like the two noble Lords who spoke, I believe that it is vital that we remain actively engaged in those discussions. As the noble and learned Lord, Lord Howe, pointed out, the single market represents more than half of our world trade. The establishment of a single currency, if it comes about, is bound to affect how it develops. Therefore it is in our interest to see that a single currency is brought about in the most auspicious circumstances.
Secondly, there is the importance of the City of London as a financial centre. Whether the United Kingdom is or is not in a single currency, if the City wishes to maintain its position as a world leader in financial affairs, it is bound to deal in very large measure with that currency. Therefore it has a main interest in seeing that it is brought about in the best circumstances. Knowing the financial expertise of the noble Lord, Lord Bruce of Donington, I hope that he will agree with that.
But there is a third reason why we should remain positively involved in these deliberations. It is that the Government have affirmed--and indeed I believe this must be the policy of all other parties--that we have to aim for price stability and sound finance on a long-term basis. That is the underlying objective of the single currency as propounded by those who are in favour of it. So in order to achieve our objectives it is important for us to make sure that our trading partners in Europe also aim in that direction.
The question that we should examine today against that background relates therefore to the benefit that we could derive specifically from continuing to be involved in these discussions. I should like to refer to the documents mentioned in the report. I begin with the stability pact.
Although it has been made clear that the pact in general, and in particular what is described as the excessive deficit procedure--in other words, the fines--would not apply to the UK so long as the derogation is maintained, the concept underlying the pact is of considerable importance to us. There is an obvious risk that countries which aim to enter the single currency quickly, and which therefore achieve the criteria, could do so on a short-term basis and, having entered, relax their discipline. It is very important that we ensure that that does not occur. Therefore we need to support the concepts behind the stability pact.
What is remarkable is that, in the past year and a half, the endeavours of our partners in the European Union to achieve the criteria required for joining the single
currency have led to their pursuing very positive financial and economic policies. In particular, there has been a remarkable convergence of currencies during that period. I have just attended a lunch addressed by the governor of the Bank of France, M. Trichet. He told us without any doubt in his mind that whether or not there had been an objective to achieve the single currency, the policy in France would have been what it is now. His aim as governor of an independent central bank is to achieve a level of inflation that is below 2 per cent. At the present time it is 1.8 per cent. and compares somewhat favourably with our own level. He is fully in support of the other objectives that France has to pursue in order to qualify for the single currency. France would be aiming to reduce its budgetary deficits; it would be aiming to achieve the other criteria in any event. An important by-product of the single currency concept has been that, perhaps for the first time in living memory, a large number of Western European countries have reinforced their efforts to achieve economic and financial probity. We should not disregard that fact.Another issue referred to in the Select Committee's report is ERM 2; namely, the exchange rate mechanism which it is proposed will apply to those countries which for whatever reason did not join the single currency at the due date. However, it has been made clear, particularly at the insistence of the United Kingdom, that it would be a voluntary arrangement; there is nothing mandatory about it.
What is interesting is the proposal that the arrangement would be of a very flexible nature compared with present ERM arrangements. For example, there would be wide fluctuation margins, and there would be provision for intervention support and realignment in order to make it realistic. That would undoubtedly help to maintain currency stability throughout the EU, even if some countries were outside the single currency. I should have thought that we ought entirely to support such an arrangement and that, even if we decided that we did not want to enter ERM 2, our own policies would lead us into a position in which our currency would be capable of being within it if we so decided. In other words, it must be in our interest to have currency stability within our main trading area.
The reinforced convergence procedure is another subject referred to in the Select Committee's report. It should present no difficulties for us. As was pointed out when we dealt with the Statements issued in the past few days, the United Kingdom is already submitting reports on this subject based on our budgetary objectives. The Red Book which we debated recently contains all the evidence that is required for that purpose. We need to make sure that we make clear to our friends in Europe that our objectives with regard to inflation, budgetary deficits and overall indebtedness are in line with securing the best results for our trading relationships and for economic stability. Therefore I very much hope that we shall continue to participate in submitting the reports and in listening to any views that might be expressed in relation to our report, and be able to comment on the reports of other nations.
The fourth issue referred to in the report of the Select Committee is the legal framework for the use of the Euro. As we heard yesterday in the Statement read to the House by the noble Lord, Lord Mackay of Ardbrecknish, that was the specific issue dealt with at the ECOFIN meeting. Here again we have a vital interest. As a major financial centre we shall have to deal with the Euro whether we are in or out. It is essential that we know what are the legal considerations in relation to that currency and that we should have a say in that matter. Paragraph 26 on page 16 of the Select Committee's report makes it clear that the Government have already been able to play a positive role in the development of this legal framework. They have stressed the need for the:
- "legal framework to be practical; to be adopted sufficiently in advance to give those who will be affected a secure basis on which to plan; and to ensure that there is no uncertainty about the contractual effect of the introduction of the euro".
So, having carefully considered the documents put to us in the Select Committee's report, I conclude that it is right and indeed essential that we should remain actively involved in the deliberations leading up to the possible establishment of a single currency. In this vital issue, the European Union must act as an entity and not be split by "ins" and "outs". I believe that the role of the UK is vital in achieving that objective. If we were not there and participating, the rift could develop. I believe that we are helping to prevent it.
I therefore join the noble Lord, Lord Barnett, and the noble and learned Lord, Lord Howe, in hoping that the Government will persevere with their present stated and confirmed policy that we shall ensure that we continue to take an active part and a positive role in the deliberations, in the firm knowledge that, whether or not we eventually participate in the single currency, our vital interests are involved.
3.52 p.m.
Lord Owen: My Lords, we are all indebted to the members of the Select Committee for their invaluable report. I do not believe that anyone participating in the debate or concerned about the best interests of the Government, the country and above all the growth and development of the European Union can doubt that a country like ours, with its history and particularly the importance of the City of London, can stand aside from this debate. Were the euro to be introduced, it would be a significant currency with which the City of London would be heavily engaged from the moment of its inception. So it is not an abstraction; it is of central importance.
I have not spoken in these debates before, but I asked to speak because it is important that in the debate on monetary union and, perhaps more important, the debate on the treaty that is being formulated at this moment and that will come up for decision in the early summer of next year, there are people who hold, as I do, a strong and longstanding commitment to European unity, whether in the shape initially of the Common Market,
then in the European Community or now in the European Union. Nothing shakes me from that conviction that Britain should be a member and should continue to play a role as a full member. However, I am not convinced by anything I have seen that on the present timetable Britain should be a member of the European Monetary Union.I hold that view for political as well as economic reasons. It is important that, because one has a different view of how the European Union might develop, we should not find ourselves labelled as "Eurosceptics". I am not a Eurosceptic. I have fought--sometimes at considerable political risk--for Britain's membership of the European Union. I refuse the label of "Eurosceptic" because I do not find myself convinced, on economic and political grounds, of the case for monetary union.
I come back to the question of how Britain has handled the issue in the past. I remember the debates in 1978 of the then Labour Government on whether we should join the European monetary system. Eventually we decided that we would join the system, pay our money and take the ecu, but we would not join the exchange rate mechanism. I remember how much that was criticised as to how damaging it would be if Britain were not on the train or if we had not jumped on the boat--all those different transport metaphors that are constantly used about membership of the European Union. I felt at the time that it was not the right moment to join the ERM.
In the early to middle 1980s, I became convinced that there was a strong case for joining the ERM. I regret that we did not join at that time. But I must say that experience of governments of a number of different complexions around the European Union has demonstrated that politicians seem to believe that, if they are committed to a flexible exchange rate system, they nevertheless have to interpret it as a fixed exchange rate system. The greatest weakness of the ERM, as we saw to our disadvantage in this country, was that the political leaders clung to a fixed parity within the ERM, even though it was a flexible system and even though there was an overriding case for adjustment.
There seems to be a political belief that we can change the market forces by merely signing up to a monetary system. Having failed over the ERM, there is now this strong urge to control and tame the system within a monetary union. I believe that it would be possible to have a monetary union, if all members of the union subscribed to being members of a single country and the disciplines of a single country, both in its economic and fiscal policies as well as its monetary policy. What is extraordinarily difficult is to have a monetary union of any number of countries, let alone ones which are not on a convergent economic path.
Also, we have to understand that the pressure behind a monetary union is not solely but predominantly from people who have a clear vision of how the European Union should develop. They see nothing wrong with it steadily developing into a country called "Europe". They envisage it as a united states of Europe. They do not mind the analogy of how the United States of America developed. They seem to think that somehow
the countries of Europe can be joined together as the states of the union. They think that this is a noble ideal which, in many respects, it is.It is perfectly possible to disagree with this vision of European unity and yet respect those people who hold it. By and large, that has been the position over a number of decades of the Liberal Party. It is to their credit that they have held that view, as do the Liberal Democrats now. But it is quite wrong to believe that it is the only model on which Europe was founded. One only has to look at the various statements that have been made on numerous occasions--not least by the noble and learned Lord, Lord Howe--that at the various stages when we have guided the people of this country towards European unity, many of us in highly prominent positions at the time have categorically made it clear to the British people that that model of inexorable movement towards a single country is not the model to which Britain signed up.
We should be quite clear. It is no good turning on people and saying: "Somehow, you have lost faith in European unity, you are a Eurosceptic because you say that this particular model is one which you do not wish to see the British people endorse".
I believe that it is of great advantage that both the Conservative and the Labour Parties are committed to a referendum on monetary union. That is right and proper. We are now embarked on a situation where no major constitutional change will take place in our membership of the European Union without the endorsement of the people. In retrospect, it was a mistake that the Maastricht Treaty was not put to the British people, as it was in France and some other countries. In that way, we can have a more rational debate, safe in the knowledge that this will not be smuggled through on a narrow parliamentary majority. It will not be possible to have the conspiracies of the past, to say one thing to the public and act in another way in private. All of us will have to argue this through and win support for our different views.
Whether or not one makes up one's mind about monetary union today, tomorrow, in the spring or in the early summer is, frankly, a matter of high politics to some extent. But there is one thing which argues for not at this stage taking a decision on monetary union; namely, that there will be another series of hard decisions to be taken when the Heads of Government meet in Amsterdam. We shall come under very strong pressure to accept a flexibility clause, which I think has been called "enhanced co-operation", in which those who want further political union can have it without unanimity; we would abandon the veto and allow people to choose a course of greater political union if there were some form of qualified majority.
Personally, I profoundly hope that, whoever forms the Government of this country by then, that clause is decisively rejected by the British Government and the British people. I am in favour of the cautious development of a European unity of different speeds. But I do not think it solves our problems merely to say each time that we come to a difficult decision, "You go your way and we shall go ours". Very soon, if we allow
that to happen, it will be either a union not worth joining or a union inexorably heading towards a single European country.There has to be a much greater degree of self-confidence in the way in which the British Government and people approach this subject. We shall be listened to with respect in Europe, even if we are in a minority of one, so long as it is believed that we are committed to the underlying principle of European unity and so long as they sense that we are not trying to wreck the European Union from within. And that is the problem. You keep bad company so often if you raise a question-mark over some of the courses of future European unity. If you are profoundly doubtful about the case for going into monetary union on the Maastricht timetable, you risk being lumped in with a group of people who have a long record of hostility to membership of the European Community and who somehow believe that there is something alien in the concept of from time to time consciously deciding that you will not exercise national sovereignty in a particular area of policy, whether it is economic, foreign or political policy.
I personally hold the view that there is one absolute threshold across which this country must never pass if it wishes to stop becoming a member of a single European country; and that is majority voting on foreign and defence policy. We came perilously close to it in the early negotiations over the Maastricht Treaty and it was believed that somehow you could have majority voting on some issues. Fortunately, we were saved. There cannot be majority voting unless there is first unanimity. I recommend that no government should ever allow that majority voting clause to be invoked and always to block it.
But I want to have an agreed common foreign and defence policy, if it is possible. During the three years in which I tried to serve the European Union in the former Yugoslavia, I was impressed by the seriousness with which the Foreign Ministers are building a consensus on foreign and defence policy. I have always taken great comfort from the fact that NATO worked very effectively without any voting system. I have always been profoundly suspicious of those bureaucrats who long to solve the problems--the untidiness of democracy--by insisting on majority voting. To me it is very suspect. It seems to be a short cut to the problems of consensus. So on foreign and defence policy I believe that there is an absolute threshold which we should never cross. We should never give up the right in the last analysis to hold out alone on an issue which we believe to be of fundamental importance.
I could imagine circumstances under which I could be convinced that it was in British interests to join European monetary union. As I said, one cannot look at the balance-sheet of the United Kingdom without recognising the importance of the City of London, of invisibles and of that part of the economy. It is possible to envisage that were a euro to take off without British involvement in the first place it would establish itself as one of the major currencies alongside the yen and dollar, and that there would be the start of a process of a movement of funds and institutions away from London
towards Frankfurt or Paris. I personally do not think that is inevitable by any means. The City of London is an immensely adaptable institution. But under those circumstances, I feel that any government would be bound to say that it is more important to safeguard our economic heritage and pay a political price which we would prefer not to. So I am not in a box on monetary union by saying "never". I say "never" about changing on foreign and defence policy voting but I do not say "never" to a European monetary union.But I invoke a great measure of caution on the handling of these questions, as much as to say that we shall be unpopular in Europe through 1997. That is inevitable. We shall have to say no to some of the cherished dreams of quite a few countries. In forming that judgment, we shall probably have to put up with some things that we do not particularly like. It may be on the social contract or the Schengen countries or in a number of other areas. In the spirit of a genuine attempt to create and continue the momentum of European unity, we shall have to make some compromises with what we might consider to be the desirable in order to end up with the achievable.
I personally have seen nothing which convinces me that we should join European monetary union. I hope that we will approach this debate with less feeling of pessimism and of being ashamed of being put into that position. We have a wholly honourable and I believe consistent view of how Europe should develop.
It may well be that the euro will fail. Nobody but a fool can be in any doubt but that the German view of monetary union is to put monetary stability as "the" priority. The French see monetary stability as "a" factor. One of the reasons that the French are keen on monetary union is that they want to exercise the political control of the Bundesbank that the politicians in Bonn, in their judgment, have failed to exercise. To pretend that Paris and Bonn approach the creation of monetary union with the same viewpoint is absurd. There are very real differences.
One argument too for staying one's hand and not finally declaring a decision on monetary union is that maybe the timetable of Maastricht will slip. In the nature of things, if that timetable slips, maybe the concept will slip as well. If so, I for one would be extremely pleased for I see no great virtue in monetary union. I see great problems ahead for us. I see a shape of Europe which I dislike. I see even the prospect of a breakup of the monetary union, which would have very profound adverse political and economic consequences not just for the partners who are involved in the union when it broke but for the whole European Union and indeed for the world economy.
So I state only that to be cautious is not to be Eurosceptic. To be clear about a vision of the Europe that we joined is not to be "anti" the concept of the Europe that we joined: that of a greater and progressive European unity formed largely of a consensus between member states working for a common good. I believe that monetary union at this stage in our history would be ill advised. I hope that, whichever government formulate that decision next year, if they come to that
conclusion--as I believe they will, or if not, I believe that the British people will insist that we do not enter--let us do it in a spirit of self-confidence and not in a spirit that wants to break up the European Union or retract our membership.4.10 p.m.
Lord Peston: My Lords, my first pleasant task in speaking for the Opposition Front Bench is to thank my noble friend for introducing this debate. Although we are debating a report on the preparations for EMU, we are also debating in the background the earlier report, An EMU of "Ins" and "Outs". They are both excellent. The latter report will be the locus classicus for all further discussion on monetary union.
I start what I fear will turn out to be an excessively long speech with some general comments. In doing so I concentrate on economic aspects. I am not so naive as to believe that politics are irrelevant or that decisions can or should be taken on purely economic grounds. Certainly, it is a great pity that a debate on what is one of the most momentous questions to confront our country should be blurred because of the impending general election and the Government's lack of a solid majority until then. But there is nothing any of your Lordships can do about that except to concentrate on the merits of the case where we do have a contribution to make.
My second point is that, in relation to economics, there are at least two sides to the question. I am convinced that nothing here is clear cut and any decision must be based on the balance of advantage and disadvantage. We have the usual, no doubt boring, situation of, "On the one hand this and on the other hand that". Those who see the matter in stronger terms, whether they are for or against monetary union, simply do not understand the problems. As your Lordships will see, I believe that, subject to the fulfilment of certain conditions, the balance for our country is in favour. But I can easily understand others with the same information and theory coming to the opposite conclusion. There is nothing intellectually disreputable in coming out on balance against EMU and I hope noble Lords will agree that, equally, there is nothing disreputable in coming out in favour. What is unreasonable is to take the position that there are no valid arguments on the other side, whichever the other side turns out to be and that there are either only costs and no benefits or only benefits and no costs.
Actually, I go further and say that everything is even more complex because we are inevitably, in the nature of things, unable fully to examine every contingency and predict the future with no fear of error. Quite the contrary; the future is highly uncertain and every decision is perilous. Whichever decision we take, whichever way we go, could easily turn out to be erroneous. All things being equal, I believe that the risk will be worth taking. But it is a risk and I can respect other noble Lords who say that, after full analysis, the risk is too great. What I find unbearable, and tedious for that matter, are the zealots who see everything in black and white; who say that there is no question but that we should join or no question but that we should not.
My third general point relates to the nature of the decision itself. There is the simple question of whether or not in principle monetary union is a good thing. More relevant is whether it is a good thing in present circumstances. By "good thing" we all agree that we mean the interests of the United Kingdom. More complicated is the question of whether, if EMU is actually going ahead--even if we wished that were not so--we would then find the balance of advantage in favour of joining. Related to that is the problem of timing. If there is to be an EMU, the central question is whether or not we should be in it from the beginning. And if there is to be an EMU and we do not join in the first instance, how will that affect policy making in this country?
I hope--I follow other noble Lords and certainly the noble Lord, Lord Owen, in this--that it is not necessary for me to say that my answers to the question are predicated on the assumption that we shall remain full members of the European Union. I go further. I still retain the hope that we will return to the centre of decision making in the European Union and cease our present stance of sniping from the periphery. I appreciate that many noble Lords will regard me as naive. The reason for that is because they believe that much of the debate on EMU is really about the UK's future in the European Union. That is not the case for me.
Having said that, there is another set of distinctions to be made. One point of view--mine and that of many of my colleagues and, indeed, many of the Tory Party opposite, not least the Chancellor of the Exchequer--is of the form, "I am in favour of EMU if", and then one lays down a set of conditions. Another point of view is, "I am not in favour of EMU unless", and one lays down another set of conditions. Some of my colleagues, and certainly some on the other side of your Lordships' House hold the latter view. The third and unique view is, "I do not know whether I am in favour or against", and that seems to be the position held by the Prime Minister.
One problem we face as outsiders is that, I presume, the Chancellor is negotiating on and contributing to the preparations for EMU within the framework of one philosophy, so to speak, while the Prime Minister is proceeding apparently on a different philosophy. I do not know whether or not that puzzles our fellow members of the European Union, but it certainly leaves me bewildered.
The sub-committee originally addressed the question of whether EMU had a deflationary bias. I am certain that if the sole objective of policy is anti-inflation, there must be a deflationary, high unemployment bias. There is no possibility of it being otherwise. But I am equally certain that that does not have to be the case. We are here concerned with the overall stance of macro-economic policy, its composition between monetary and fiscal elements and its impact in both the long and short term. To lay down one of my conditions, if full employment is an explicit objective of the European Union, an independent central bank operating monetary policy does not imply a necessary
contractionary bias. But note the "if". Let me also remind your Lordships--a point I may return to--of your Lordships' longstanding opinion that the European Central Bank must be subject to democratic scrutiny, a problem which remains unsolved.On the stability pact and so-called sanctions, the fundamental distinction must be between whether any excessive budget deficit is transitory or permanent. I echo the Chancellor of the Exchequer's Statement yesterday that it is that which leads to the difficulty of defining an exception and temporary deficit for the purpose of Article 104c. At the one extreme, a large deficit for a month but suitably annualised, would not be regarded as too high. At the other, a possibly smaller deficit, persisting over the cycle, would be too high and might attract penalties if it were not dealt with. The problem is whether we can find something sensible in between.
An important aspect of the stability pact which is related to this is the cause of the deficit. Much of the discussion in Council seems to be based on the assumption that a country's deficit will have been the result of that country's actions. Clearly, that could sometimes happen, but not always. A fiscal deficit could arise--if your Lordships forgive the parlance--from external demand shocks lowering GDP and consequent tax revenues. Rational policy would then imply a rise in the deficit, not an immediate reduction. More powerfully still--something which no one seems willing to face up to--the deficit could arise from excessive contractionary behaviour on the part of another EMU member. If one powerful member ran a policy aimed at excessive fiscal surplus, that would lead to the deterioration of the fiscal positions of other members. To avoid that--here we come to my second precondition--we need co-operative fiscal policy and must see fiscal prudence, which I strongly support, as a two-sided phenomenon.
I must say that the example given by Mr. O'Donnell in his evidence to the sub-committee did not fill me with confidence. His example of a special case was an earthquake. We do not have many earthquakes. He did not even agree that an oil shock, which we have experienced, would count as a special case. What concerns me more, apart from the normal downturn of the business cycle--let me say to anybody who talks about the upturn and how well we are doing, that 200 years has told us that the downturn will come, independent of government--is the kind of shock typified by the serious industrial action seen in France recently. That is the kind of problem that will have to be faced.
In the fascinating session that Mr. O'Donnell gave to the sub-committee I was interested in the relevant criteria. He referred to low inflation, and we all mouth the words "sound public finances". He referred to negative growth, by which I believe he means negative rates of change of GDP in real terms. Unless I missed them, there were no references to unemployment or employment in his criteria. There were also no references--this, again, is central to EMU--to the different real positions and prospects of individual members. I, for one, cannot regard that as satisfactory
either. The ultimate test of all economic arrangements, not least the stability pact, must lie on the real side, and must apply to all those affected. If EMU is desirable, it is desirable not for its own sake; it is desirable because it might make people better off. That is the whole point of it.One aspect of the subject to which the report refers and which has been mentioned is all the technicalities involving the introduction of the euro--the re-writing of contracts, the so-called rounding problem, and so on. I found it fascinating that, depending on the way one rounds and into how many significant figures, firms in the City will either make a fortune, as one multiplies these significant figures by billions, or massive losses. It had not occurred to me until I read the noble Lord's report; it is an interesting problem. Those problems have to be solved. The noble Lord, Lord Tordoff, wrote to the Chancellor about them. All I can say about that is that at some stage your Lordships should return to those problems and consider them in the detail they deserve.
If EMU succeeds, increasingly contracts of all kinds and in all countries, "ins" or "outs", will be written in euros. Those who prefer us not to join and who then clothe themselves in the flag of preserving the pound sterling, to mix a metaphor, may find they are chasing a mirage, to mix the metaphor further. Despite certain remarks coming from the Bank of England and distinguished figures such as the noble Lord, Lord Lawson, I am unconvinced that our financial institutions will cope easily with their work in future or prosper as part of a "little sterling area".
The Government have said categorically that they will not join ERM2. For a government who rarely make a categoric statement these days, that is in itself a remarkable statement. The Minister has said repeatedly--he has been echoed by my noble friend and by the noble and learned Lord, Lord Howe--that in some sense or other the Maastricht Treaty referring to membership of the ERM for two years does not apply. I do not understand that--I have said so several times--but I have to accept that if my noble friend says it does not apply, if the noble and learned Lord, Lord Howe, says it and if the Minister on the best advice says it, it must be right, and one day I shall understand it. As I said yesterday, I thought a treaty was a treaty.
However, it is worth reflecting further on the Government's position. They do not know whether they will join EMU but they do know that they will not be part of ERM2. They certainly say they might exercise the opt-out. If they did, the United Kingdom would not be part of any formal monetary system. Moreover, I note that the Treasury claims not to be pursuing an exchange rate policy. Noble Lords may care to reflect carefully on what that will mean for the future value of sterling. In those circumstances--namely, opted out, not part of ERM2 and not pursuing an exchange rate policy--will it not always be subject to speculative attack; sometimes buying, sometimes selling but certainly fluctuating? That will be so whether or not--this is where I disagree with the Treasury--we pursue broadly prudent economic and financial policies, the reason being that we shall be the obvious currency to speculate in--there
will be virtually no others to speculate in. That cannot be in the interests of producers in this country or of our financial institutions.That point takes me back to the Chancellor's strategy in connection with preparations for EMU, and the Prime Minister's, for that matter too. Following the threats made after the recent row on the health and safety directive, I am not sure whether we are actively pursuing a policy of non-co-operation. Perhaps the Minister will enlighten us on that when he comes to reply. Even without that we have a problem of logic. If we are considering the stability programme, is it obvious--the Minister seems to think it is--that we would adopt the same position whether or not we were proposing to join EMU and whether or not we shall be founder members? The Chancellor seems to be saying--it was echoed yesterday and last week by the Minister--that as we want EMU to succeed, no matter what, our approach to the stability programme does not depend on our eventual decision to join. That is not quite clear to me. If we were not going to join, I would be fairly relaxed about how tight and unyielding the stability pact will be and how tough and easily activated will be the system of fines. I regard what Mr. Waigel originally proposed as so absurd that if we were not to join I would simply lean back and laugh. But since I hope we will be able to find conditions under which we can join, I would be looking for a more sensible and less rule based stability pact, which responds to circumstances. Judging from the evidence received by the sub-committee, that is the Treasury's position. However, that means that we really are negotiating and it means that the Chancellor's position must be that we really would like to join if it were possible. It means logically that we would like there not to be a delay if that were possible. I am not saying one could say that without the "if that were possible" or without the conditions being met, but that is the only way it can make sense. Otherwise the evidence given by the Treasury and the Chancellor does not make sense. Incidentally, can the Minister say whether the Chancellor has changed his mind on financial penalties? In his evidence to the sub-committee he appeared to be against the introduction of new sanctions. That is quoted in the report. Has the Chancellor now changed his mind on that?
I can conclude very simply. Our policy stance--we all agree on this--must be to take EMU seriously. In negotiating the preparations we must not miss the bus again. In other words, we must participate with a view to trying to obtain an outcome which enables us to say it is the correct decision to join. I do not assert with confidence that we can achieve that, but it is the objective. What we must avoid is a debacle similar to those of the past, in connection, for example, with the CAP; namely, that we eventually find ourselves obliged to join--in this case, EMU--with a structure and an operating mechanism we do not care for.
To give him credit--I wish to be as supportive as I can--that appears to be the Chancellor's strategic position. Given that he does not seem to be short of friends who hope he fails, for my part I have to say I hope he succeeds. I was alarmed by the Statement yesterday, on which I remarked, that it looks as if things
are going rather slowly. I also remain concerned by the lack of speed in developing a European Union full employment policy.We are some distance still from meeting the conditions we require, but I have to say, with all honesty and sincerity, that I still hope that the outcome will be in a form which will allow my own right honourable friend one day next year to recommend EMU to the nation.
4.28 p.m.
Lord Tebbit: My Lords, I rise today not only with my usual diffidence but with some difficulty as I have a nerve trapped in my back. If I twitch and shuffle during other noble Lords' speeches, or even occasionally leave the Chamber, I hope I will be forgiven and it will not be taken as necessarily a token of disagreement. Indeed, I have managed to sit quite firmly in my place so far and enjoyed some most interesting speeches.
I always enjoy hearing sinners come to repentance. I always enjoy hearing former members of Labour Administrations announce their support for price stability and fiscal responsibility. It is a very, very nice thing to have them on board after all these years. I was particularly interested in the speech of the noble Lord, Lord Owen. I hope he will not feel that I am pressing bad company upon him if I say that I agreed with very much of what he said. I enjoyed, too, the touching account of the noble Lord, Lord Ezra, of the French bankers' determination to reduce their deficit and behave properly regardless of any considerations of entry into monetary union.
Fiddling the national accounts by borrowing money from the pension fund of Air France is, I take it, the normal way that bankers behave in France to that end. I have to be convinced that they would be doing that were it not for this effort to straitjacket themselves into monetary union. Of course I enjoyed, as always, the speech of the noble Lord, Lord Peston, although I thought he was still a little dodgy on price stability, and as always he showed up that there is a divide between those who think that a strong currency is a cause of a strong economy and those who think that a strong currency can only derive from a strong economy.
We are of course grateful to the members of the sub-committee and particularly to the noble Lord, Lord Barnett, for bringing us this report, which enables us to carry out our duty of scrutiny of these documents to the satisfaction of all concerned. I was very pleased to read the assurance by the Chancellor recently that he had secured agreement that Article 109l(4) of the Treaty of Maastricht relating to financial penalties should not apply to the United Kingdom unless we move to the third stage of monetary union, and that membership of ERM2 for those outside monetary union will be voluntary. Of course, as we know, they sometimes have ways of making you volunteer, but at least the Chancellor's Statement was broadly helpful.
Nevertheless, I think there is cause for concern. During the summer my noble friend Lord McColl kindly sent me a copy of the speech that the Prime Minister
made at Goldsmiths Hall--the guild, by the way, and not the Jimmy--on 19th June. My right honourable friend made some extremely interesting points in that speech. I find what he said on the working time directive particularly clear and unambiguous. He said:
- "Let me give you a current example. At Maastricht, I agreed an opt-out from the Social Chapter, because its provisions would have reversed much of the employment and social legislation we have pursued in recent years."
- "That was agreed by our partners. But we are now faced with proposals to use the Health and Safety provisions of the Treaty to introduce measures, such as the Working Time Directive, that undermine the intention of our opt-out. That is something I cannot accept".
- "And our power of veto means we cannot be forced where we do not want to go".
Under those circumstances, I think we should be cautious about guarantees which are given by our partners. This is exactly what I and others predicted in the debates on the Maastricht Treaty. We said this was what would happen, for while there is a provision within the treaty--whether it is for social legislation, monetary union or whatever--no opt-out clause is a sufficient guarantee that that provision will not be pushed sooner or later upon us. Surely if we cannot rely upon the integrity of our partners, nor upon the fairness of the Court--and that is the import of what the Prime Minister said on the matter of the working time directive--how can we rely upon their fairness or the integrity of the Court in matters far more serious concerning monetary union? We have to remember that there is no appeal from the decision of the Court; there is no provision for judicial review; and there is no provision for this once sovereign Parliament to change the law once it has been made by the Court.
Article 109m provides that the exchange rate policy of the "outs" is a matter of common interest. I would have thought that is well enough for the Court to get its foot in the door at some subsequent stage were we to be an "out" and the European currency union to have gone ahead. So bluntly the only sort of opt-out guarantee I am now prepared to accept is a treaty amendment which states firmly and clearly that the Court would have no jurisdiction over this country concerning monetary union, the management of sterling and the fiscal monetary or economic policy of this country, regardless of what any other treaty provision might say or what the Council or Parliament may decree, unless it is with our agreement.
That may sound a little extreme. My noble friend Lord Shaw nods, but it is no more than what the Chancellor says that he has already had guaranteed to
him. So if, in the view of our partners, that guarantee is already there, surely they would be willing to put it in the same terms as I have done, and reassure all of us in this country that they mean what they say and they could be held to their word.Let me now turn to the issue of the United Kingdom opt-out or, more properly, the opt-in to monetary union. I enjoyed the speech of the noble Lord, Lord Owen, and indeed that of my noble and learned friend Lord Howe, but I do not think that this is the day to rehearse the arguments over the desirability of opting in or opting out. However, we should realise the scale of such a decision were we to decide to enter. In the words of the Chancellor's Statement to the other place on 25th November, which was repeated in this House:
- "unless we join stage 3 of economic and monetary union, we shall retain, as now, control of domestic economic policy."--[Official Report, Commons, 25/11/96; col. 21.]
I would ask your Lordships to reflect upon the meaning of those words: unless we join we shall retain control. Only one interpretation can be put upon that: that if we did join, we would no longer have control of our domestic economic policy. I know there are many of your Lordships and many Members of another place, together with many bankers, journalists and other influential people, who do not believe that the people of this country are sufficiently grown up to have control of the economic policy of this country. They do not believe in the democratic process. They think that that right should be taken from the people of this country and handed to someone else.
Forget who the someone else is; forget whether one has a prejudice against bankers in Frankfurt as opposed to bankers in New York or in the City of London: the proposition is that the British people should not have that power because in the past they have at times abused it. I just wonder whether people who take that view have any attachment to the concept of responsibility and democracy. I have to warn them that it does conflict with what I regard as one of the absolute laws of politics and society: that if responsibility is placed firmly on the shoulders of people, they will in general behave in a responsible way. If the responsibility is taken away from them, they become literally irresponsible, and that is one of the dangers of monetary union.
The idea that we would have a government and a parliament with no control over domestic economic policy is, I think, interesting. It would make our Parliament sound like one of Mr. Blair's English regional assemblies, and one would wonder what his purpose was if we had other regional assemblies. After all, we could all go to assemblies much closer to home without so much bother of travelling and all those other things, and we would have the same degree of power. I am sure that, in answering the debate, my noble friend will rule out such uncertainty on behalf of the Government just as the Government have rubbished those of us who have since been proved right over the Social Chapter.
However, I should be grateful if my noble friend the Minister can answer one or two questions about the path on which we have been set towards monetary union. First, will he agree that, since the Government are
genuinely willing to consider entry into monetary union once the final details are known, it has already been decided by Ministers, including the Prime Minister, that there are no objections in principle to, as the Chancellor put it,
- "relinquishing control of domestic economic policy"?
Secondly, can he and I come to a better understanding of the meaning of Article 109j of the treaty? For ease of reference that is on page 28--for those of us who are regular performers in the cast of usual suspects we will all be familiar with it--and is the section which requires nations expecting to enter into the currency union to have been members of the ERM for at least two years without devaluing. I shall read it because it is important. The third indented paragraph of Article 109j(i)1 states,
- "the observance of the normal fluctuation margins provided for by the exchange rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State".
That is what the treaty says. I understand from things which my noble friend has said in the past, when answering questions about this matter, that the Government take the view that since the narrow band of the ERM was abolished, that provision of the treaty can be ignored. Indeed, it is the view of the noble Lord, Lord Barnett, and of my noble and learned friend Lord Howe. Are treaties to be dealt with in that way? If it is the view of the member states that it should be disregarded, would it not be appropriate to amend the treaty to say so? If we do not set out to do that, I believe that we shall be giving a gilt-edged invitation card to the Court to agree with us that it is not what the treaty says that matters; it is what people thought they were agreeing to when they were writing the treaty or what they subsequently wished they had agreed to, as circumstances change. That would be a dangerous thing indeed, for the Court is always tempted to take the view that what is written in the treaty does not count; it is what the Court interprets as the intention of those who signed the treaty that counts.
The next point that I would like to make to my noble friend and on which I hope he can enlighten me, is the impact of Article 108. It is the provision which requires all member states who are intending to enter into the currency arrangements to provide for independence of their central bank. The treaty requires that that should be done by the time the ESCB is formed. Can my noble friend tell me when he expects that to be because it will give us some idea of when that legislation will have to be brought before this House in order to preserve the Government's opt-in? If we do not comply with the provisions of Stage 2 of monetary union, it is difficult to see how we can be regarded as a credible candidate for Stage 3.
I end by saying that I most certainly support the proposals for a stability pact, although the agreed need for it does not say much for the foresight of those who drafted the Maastricht Treaty. It is certainly needed all the more now since we have seen the extent of the fiddling and fudging which is going on to enable countries to claim that they are qualified to enter. There
are countries with enormous national debts hanging over them. They are now saying, "As we are now making some progress from 160 per cent. of GDP to perhaps 158 per cent. of GDP, we qualify, don't we?". If that sort of thing goes on, what is certain is that the Germans will realise that they are going to be asked to substitute for their mark something which will have a record far closer to that of the lira or, dare I say it, sterling.I would also like to know how my noble friend believes that the treaty will operate. If a country is judged to be in serious deficit and is fined, will that not increase its deficit? What will it be expected to do, perhaps in a period of deep recession--increase taxation or cut welfare spending in order to pay the fine that was imposed? The noble Lord, Lord Barnett, says that that will never happen and that the whole beauty of the stability pact is that it will gain its credibility from the knowledge that it will be totally impossible to use its provisions. I recollect that the nuclear doctrine, which somewhat paralleled that view of the concept of the stability pact, was known by the title of "mutually assured destruction"--MAD for short. That is perhaps not an inappropriate title for this venture.
4.46 p.m.
Lord Wallace of Saltaire: My Lords, we are now, as so often in European debates, discussing two different levels of the question--first is the immediate issue on how we shall make progress towards economic and monetary union work; and, secondly, in the background, as always, our national identity; whether we trust foreigners; what we think about those across the Channel and all those other demons which come up from below the surface whenever the European question is raised.
I welcome this brief report. I found the evidence given for it and the letters exchanged extremely interesting and useful. I hope that we can all agree that if monetary union goes ahead, Britain will be directly affected in our most fundamental interests. I hope that we shall also agree that Britain on its own cannot stop monetary union going ahead. I hope we can agree that it is therefore very much in the active national interests of this country to take part in shaping the form which monetary union will take and that the Chancellor of the Exchequer is absolutely right, therefore, to be playing as active a role as he is doing, together with a number of his officials, in the negotiations.
We are not the central power in Europe, neither are we, sadly, the richest country in Europe. We therefore have to seek common ground with our partners. Europe is a continuous multilateral negotiation in which good arguments, well presented and without too much underlying prejudice, can win friends and influence other governments. That is precisely what the Chancellor is attempting to do and I wish him good speed.
It seems to me that in principle successful monetary union is in Britain's interests. My party is convinced of that, not because we believe in any of the theories which the noble Lord, Lord Owen, has suggested we do about
a United States of Europe. As he spoke, I was trying to think which government, currently a member of the European Union, is actively committed to that pipedream. I can think of none, but it is always something that people drag up when they wish to produce a straw man against which to argue.Monetary union is in Britain's interests provided it takes place on a viable basis; that the stability pact is not overly rigid; that growth and employment as well as price stability are among the aims to be pursued; and that there is proper co-ordination of national economic and fiscal policies as well as simply of monetary policy. That requires further considerable negotiation. We must think clearly how the Council of Finance Ministers will play a role alongside the central bank in managing a European economy that has already become a great deal more integrated, and will become further integrated if and when we move towards a common currency. All the evidence of the past six months is that it is more likely than not that we will move towards a single currency than seemed to be the case six months ago. The debate that we are holding should take place on the basis that we expect monetary union to go ahead and that Britain will therefore be faced with the choice of whether to join or to stay out for the time being.
Others have different interests. I agree with the noble Lord, Lord Owen, that there is not a solid Franco-German front. There are a number of issues on which British interests coincide with those of the French rather than the Germans and others on which the British interests coincide more with German interests than French ones. That is the way in which multilateral negotiations must take place. What I most regret in the tone of the speeches of the noble Lords, Lord Owen and Lord Tebbit, is the suggestion that multilateral negotiations consist of the English--who are right--telling the others--who are wrong--what must be agreed, and waiting for them to accept our opinion. It is a little like the old-fashioned Englishman who, when foreigners did not understand him, merely shouted louder. We have to understand the nature of the process in which we are engaged.
On a personal note, having been involved in coalition negotiations as part of the Alliance, all of us had doubts whether the noble Lord, Lord Owen, understood that give and take in multilateral negotiations required the parties to search for common ground rather than state their position and wait for the others to accept it. That is the different style of approach in Europe.
I also note from the evidence given and the letters exchanged that the current policy of Her Majesty's Government fits the aims that are being pursued in the stability pact and in monetary union, and that they are committed to sound public finance, price stability and zero structural budget deficit. I am glad to hear that the British Government are committed to zero structural budget deficits. I did not know that that was entirely reflected in the Budget just presented; but it is good to know that that is the long term aid. Given that, to say that we intend to fulfil all of the conditions of membership is a non sequitur and to shadow the European currency as closely as we can but that for reasons of parliamentary sovereignty we must stay out.
That takes us back to the arguments of the mid-1950s and in the early 1960s. I hear echoes of the words of Reginald Maudling in the European Free Trade Area negotiations in lecturing Professor Hallstein on why the Germans did not understand the principles of free trade, speaking a little more slowly because he believed that the poor Germans did not fully understand the way of the world.Furthermore, the debate on monetary union pushes other governments in the right direction. At last it has forced the Italian Government to face up to their large structural budget deficit and enabled them to tackle it. It has also forced that government and others to push for more flexible labour markets. They are exactly the matters to which the British Government are committed to achieving in the European Union. I am glad that it is having that effect.
Here we are a few months before an election. It is important that before an election a government should resist pre-judging a question that a future government of a different character may wish to take. I welcome the determination of the Chancellor of the Exchequer not to foreclose the issue before the election deadline of May 1997. I very much regret the partisan and hysterical nature of the debate that is now taking place in the Right-wing press.
I turn briefly to the wider context of the debate. This debate takes place in the context of a set of much wider issues. I have just spent two weeks in a number of different European capitals. That reinforced my depressed view that Britain's standing across the European continent had gone down considerably in the past six months. There are many who would be very happy to see Britain outside the European Union. The damage to Britain's standing on the Continent as a result of its posturing on BSE--I refer to the Dutch and Danish Governments in particular but also to the French and German Governments--was considerable. It is of no use the British insisting that when they are right and all the others are wrong they must stand by their principles. We should do our best to avoid getting into that position.
In the wider context there are parallel negotiations. After all, we are in the middle of an intergovernmental conference. The proposal referred to in the report for a stability council that consists only of those Finance Ministers who are taking part in monetary union is the beginning of a move to establish a two-level Europe in which a core group will take the decisions and outsiders, with Britain as the principal outsider, will be sidelined more and more. Flexibility is now being used in other European capitals as a code for sidelining the British. That is partly our fault. The British were extremely fond of the word "flexibility". The Prime Minister referred to that two or three years ago. In the version of enhanced co-operation it is now being used against us. It is very much against Britain's interest to be left out of a more flexible Europe. Therefore, we need to consider carefully how to pursue the negotiations to ensure that our interests in being part of that core group are maximised.
Alongside that, over the next two years vital negotiations must take place over the future of the Community budget and the budget package to be negotiated in 1997-98. There are ongoing consultations and negotiations about the reform of the agricultural policy. We also face enlargement both of the European Union and the North Atlantic Treaty Organisation. There is a very heavily loaded agenda in which the British need to play a constructive and active part. Those are our underlying foreign policy interests. What we are debating this afternoon is one important detailed part of the pursuit of those foreign policy interests which affects our economy, the City of London and the shape of the whole European economy. I very much hope that we will continue to play as active a part as the Chancellor of the Exchequer insists upon and not give way to those in the Government who would like to pull him back.
4.58 p.m.
Lord Grenfell: My Lords, as a member of Sub-Committee A, which was charged with the preparation of the report, I begin by saying what a pleasure it was to work under the skilful chairmanship of my noble friend Lord Barnett and to work with colleagues on a very interesting topic. I have not been on that sub-committee long enough to have acquired a copper bottom. That may be a physical impossibility when one is being kept on one's toes by the noble Lord, Lord Barnett. It was a most interesting experience.
In this debate we appear to have strayed a little from the fairly narrow focus of the report which looked at three particular stages on the way to monetary union and the problems that needed to be solved. I make no excuses for straying a little to comment on a couple of matters to which the noble Lord, Lord Tebbit, referred. I see that he has been wise enough to escape retribution for these matters. I believe that one goes far too far and undermines the whole debate on economic and monetary union in bringing up the old canard that Britain is surrendering its right to manage its economy. That is simply not the case, as I am sure the majority of noble Lords here will agree. No one is telling us by how much we should tax and how much we should spend. All that is being said is that if we do not tax very high we cannot be profligate in our spending. That is something to which any sensible administration would adhere as a basic principle of managing the economy. So I hope we can dismiss that kind of argument as only confusing, particularly to the British public who one day will have to make up their minds in a referendum on whether or not we should go into economic and monetary union. If they have been led to believe that kind of nonsense, then it will be difficult for them to come to a rational decision, and they are likely to say no for all the wrong reasons.
Perhaps I may also make just a brief comment on the interesting speech of the noble Lord, Lord Owen. Like the noble Lord, Lord Wallace of Saltaire, I find it hard to discover concrete evidence of the growth of the sentiment in Europe--if it ever existed, outside possibly the Commission where some enthusiasts still talk about
it in such terms--that what we are embarked upon is a model which will lead us inexorably towards a united states of Europe or a single European country.I live in France. I happen to reside just behind the National Assembly, which gives me the opportunity to converse every now and then with politicians in France. Even more importantly I have the chance to converse with ordinary people. I also travel a great deal in Germany. In neither country have I come across any burning desire to hurry along the road towards a federal Europe. Chancellor Kohl himself has roundly denounced the idea, saying that is not what he is after. I believe him. I can assure your Lordships that France, which has always been a country with a strong nationalist spirit, shows no signs, to me at least, of wanting to head down that road.
I want to comment upon just two of the issues we discussed within the committee and which are reflected in the report; namely, the stability pact and ERM2. The Statement made yesterday by the Chancellor of the Exchequer in another place, and repeated in your Lordships' House, was a Statement--I only read it because I am afraid that I was not here yesterday--which I felt should have dispelled many of the doubts remaining in the minds of noble Lords and Members of another place with regard to those issues. I hope that that is so because I thought the Chancellor managed to achieve some good understandings in Brussels that should bring peace of mind to people in this country on issues upon which they have so far been doubtful.
I shall not rehearse the points because my noble friend Lord Barnett has already done so. I merely say that I hope that we are now able to move forward in the debate on monetary and economic union, having disposed of some of the doubts, to some of the issues that will be important and for which solutions will have to be found in the months to come.
I cannot say that I rejoice in the fact that, despite the addition of another meeting of ECOFIN on 12th December, immediately before the Council meeting, there is now talk of there being no final agreement on binding legislation before the Amsterdam Council summit in June 1997, with possibly even slippage to the Luxembourg meeting in December 1997. For one thing, continuing delay cannot but diminish the confidence of the markets in the expectation that EMU will go ahead on 1st January 1999, as I hope it will. But if it must take that long to ensure that we get it right, then we shall just have to be patient and wait until it is right. In any case, as many noble Lords, particularly the noble and learned Lord, Lord Howe, have said, we have to stay at the heart of those discussions all the way to the end.
On the stability pact, we have all been aware of how difficult it is to reach agreement on that difficult problem. The Select Committee's letter to the Chancellor reflects support in the committee for measures which work to maintain fiscal discipline but equally the importance we attach to a government's right to fiscal flexibility during a recession, consistent with maintaining stability.
The sticking point is clearly the definition of "exceptional and temporary circumstances" in which sanctions may or may not apply. It is just as well that Herr Waigel, who originally insisted on defining it as a 2 per cent. drop in output in four consecutive years, has now revised the figure downwards to 1.5 per cent. That is a move in the right direction. He is now much closer to the sensible compromise put forward by the chairman of the Monetary Committee, Sir Nigel Wicks, which would apply excessive deficit procedures when output has dropped between 0.5 per cent. and 1 per cent.; in other words, when there is a mild recession and an excessive deficit cannot be justified. Between 1 per cent. and 2 per cent. there is a grey area within which it would be left to Ministers' judgment to decide what to do; and at 2 per cent. there is obviously a severe recession. I hope that agreement can be reached on that point because it is a sensible one. The proposal put forward by Sir Nigel is an excellent example of what the UK can do by staying at the centre of the debate.
In an editorial in the Financial Times today, some sensible words were written. I have not always agreed with the Financial Times on EMU. It has had its ups and downs, its ins and outs. It has been a little hard to track its thinking. Depending upon which page one reads and upon which day one reads it, one can have some difficulty in unearthing what it is trying to tell us; but today I thought that it put forward a sensible suggestion. It said that Germany's partners were right to insist upon a more generous definition of "exceptional circumstances". The leader went on to say:
- "It would be far better to keep initially to a narrow EMU, while permitting automatic fiscal stabilisers to work, than move swiftly to a broader EMU without such fiscal flexibility".
In other words, there is the suggestion of a quid pro quo. It is important that the EU and its members get this one right, not least because lack of agreement is putting a great strain on Franco-German relations, which I regret. There is also a severe debate going on within those two countries. One has only to read the letter of Helmut Schmidt to Herr Tietmeyer of the Bundesbank to see what a division of opinion exists there. One had only to listen to the extraordinary debate in the National Assembly a few days ago when former President Giscard laid it on the line to the Juppe Government and President Chirac about the relationship of the franc to the dollar and the mark.
We understand from all of that that there are severe tensions within those two important countries. It is important therefore that we should try to get the business of fiscal discipline right in the stability pact. Germany argues for a strong stability pact because of fears that stability will be threatened by entrance in the first wave of countries that are, frankly, unlikely to be able to sustain the convergence, as the noble Lord, Lord Ezra, pointed out. They have a point there. But here may also lie the key to the agreement. If it is made crystal clear now that the first wave of entrants will be limited to those countries which have achieved the convergence criteria and are deemed likely to sustain them, the need for so draconian a stability pact as Germany is currently
calling for will be much diminished. It will of course be a big disappointment for some countries--for example, Italy, an original signatory to the Treaty of Rome--if such strict application of the rules for bringing countries into EMU is agreed. As the treaty states, there is room for a certain amount of divergence from its exact terms and conditions. But if we want to avoid a very, very, very difficult fight with Germany over the stability pact we need to reach agreement that we must be pretty tough on the admittance of countries into the first wave.Having said that, I wish to add a corollary. If one takes that course one must find a means of taking the stigma out of entering the EMU later. One of the unfortunate characteristics of the current debate is that somehow countries have been led to believe that there is something almost dishonourable in not making it in the first round. I do not refer to the United Kingdom because it almost certainly could go in in the first wave, and I wish that it would. But as regards those countries on less sure ground, with less strong economies and currencies, we must avoid using the kind of language of disparagement when talking about their efforts to become a part of economic and monetary union. That only encourages the feeling building up in those countries that there is something very bad for the status of the country if it fails to enter in the first wave. In our treatment and handling of such countries, we must ensure that entry in the second wave or later is in no sense dishonourable. It is a sensible course to take, which will help to secure the kind of stability within the euro zone that we are all looking for.
Finally, I wish to say a few words on ERM2. I have not yet heard a cogent argument why Britain should not enter ERM2 if it has met the conditions for doing so. Our committee was told by Treasury representatives that low inflation and sound public finances will deliver exchange rate stability. I have no reason to doubt that; I believe that we can all agree on that. But why is there such reluctance even to consider entry into the exchange rate mechanism, ERM2, when the time comes? Is it because of unhappy memories of Black Wednesday? Is it because there was a realisation that we went in at the wrong rate, at the wrong time and for the wrong reasons and eventually had to leave? I do not know the answer. All I am saying is that I have not yet heard a cogent reason why we should not enter ERM2 when the time comes.
As my noble friend Lord Barnett and others hinted, it is extremely important that we should not jeopardise Britain's chances of going into EMU if, in the worst of circumstances, it was later decided that we should have been in the ERM before entering EMU. It seems a small price to pay to ensure that we do not have to face such disappointment and rejection at the last moment. It would be like shooting ourselves in the foot, and it is not necessary.
Once again, I thank the noble Lord, Lord Barnett, for so ably leading us in our discussions in the committee and for so persuasively putting our findings before your Lordships' House. I hope that it has greatly clarified the issues for your Lordships and that now we are able to go forward and pay attention to some of the other major issues that will be before us in the months to come.
5.15 p.m.
Lord St. John of Bletso: My Lords, there is a commonly held view that it is politicians not central bankers who will have the final word on which countries qualify for the EMU.
With so much hype and speculation ahead of Stage 3 in 1999, it is only right and proper that there be full parliamentary debate on all the issues in preparation for the EMU, whether or not we decide (should we qualify) to join or remain out.
To this end, I am delighted that the noble Lord, Lord Barnett, has moved today's debate and that it is at the start of business rather than, in his words, "at the fag end of the day". Like the noble Lord, Lord Grenfell, it has been an enormous privilege for me to be a member of the noble Lord's sub-committee. I should also add that it has been an enormous learning curve for me and an experience which I would have hoped that others could have shared, to enlighten themselves on the complexities of the European monetary union debate, particularly having listened to so many compelling arguments for and against.
It was heartening when Mr. O'Donnell, is his opening submissions to our committee, referred to our earlier report on An EMU of "Ins" and "Outs" which we published in June this year, as:
- "generating rather more light than heat".
Apart from my membership of the noble Lord's sub-committee, I should declare an interest as a consultant to one of the investment banks in the City.
Regardless of whether or not we opt to join the single currency, I fully support the Chancellor in his efforts to influence the formulation of the preparatory measures for EMU and fully support the contents of the letter dated 27th November from the noble Lord, Lord Tordoff, to the Chancellor giving our findings. As most of the minutiae of the legalities of the key issues have already been covered by previous speakers, I shall not repeat the arguments and shall try to keep my speech brief.
It is vital for the credibility and future of the European Union that monetary stability of the whole Union be safeguarded. The EMI was absolutely right when it argued that neither one-off measures before 1999, nor the promise of a fiscal stability pact thereafter, was a substitute for decisive action now to rein in public borrowing by many would-be EMU members.
If member states were seen to be fudging the convergence criteria or, in the words of the noble Lord, Lord Barnett, using wheezes, to qualify for Stage 3, it would make the whole process a mockery. As many commentators have warned, a single currency built on weak foundations would defeat its own purposes. The durability and credibility of monetary union will certainly depend on the sustainability of economic convergence. The proposed stability pact among the participants in the EMU backed up by effective punitive sanctions has, in my opinion, to be the most prudent long-term strategy.
I am also fully in favour of the European Monetary Institute's proposal for a new voluntary exchange rate mechanism in Stage 3 linking the "ins" with the "outs". However, I cannot help but feel that if we had joined the exchange rate mechanism with a weak rather than, as we had at the time, a strong sterling, the Government's rather sanguine views of the exchange rate mechanism may have been rather different from those that they hold today.
There is no denying that exchange rate fluctuations would be disruptive to trade in the single market. Those who point out that any member state wishing to join EMU must have been in the ERM for at least two years--a point which several noble Lords have made today--should note the recent comments of Mr. Quinn, the Irish Finance Minister, in his capacity in relation to the Presidency, when he appeared before the sub-committee of the European Parliament in June. He said:
- "We are deliberately trying to ensure that a country that meets all the convergence criteria would not be penalised by the formal and legal requirements of the ERM".
Of course a major concern, should we decide not to join the core group of "ins", would be the possibility that we might lose our influence in European matters. The noble Lord, Lord Wallace of Saltaire, referred to our being increasingly sidelined. That may be so, but it should not be forgotten that we are still net contributors to the European budget and, for that reason, I do not believe that we would be sidelined. I hope that, in the words of the noble and learned Lord, Lord Howe, we would still remain the gin in the gin and tonic in European debates.
Of course, time is not on our side and there are increasing calls for the Government to "cop in" or "opt out" or take a more decisive line. It is certainly important for business in Britain to know sooner rather than later whether it will have to face the costs of transition. The Bank of England published an extremely detailed report on 16th September headed:
- "Practical issues arising from the introduction of the Euro".
A number of investment banks in the City are addressing the practical implications of a single currency post-1999. As an exercise I made 15 calls to financial institutions yesterday. Only four of them admitted that they were doing anything about properly preparing themselves for a potential single currency. That is a concern which needs to be addressed increasingly, not just by the Bank of England, but all other interested parties.
The EMI recommends that governments engage in a campaign of public information as an essential prerequisite for the successful introduction of the euro.
In my social contacts with business colleagues and friends, I have questioned their views on a single currency. I have been rather startled to find how few even know what are the convergence criteria. Instead of all the hype and sensationalism, I hope that the real issues will be debated increasingly over the forthcoming months.In conclusion, regardless of whether or not we decide to opt in or cop out of Stage 3 or even adopt a wait and see policy, I feel that it is important that we play a constructive role in the negotiations on the final preparations for EMU. I agree with the words of the Governor of the Bank of England, who said:
- "It is our objective to arrive at arrangements which are sensible not just for the United Kingdom but also for the future of the European system".
5.25 p.m.
Lord Shaw of Northstead: My Lords, when I was in the European Parliament a number of years ago as a nominated Member, of the reports which I studied from time to time emanating from outside the European Parliament, none was more important than the reports which we received from the European Communities Committee of this House. I found them impressive, knowledgeable and worthy of study by everybody, not just those in the European Parliament. While I was there, I was in a humble position as rapporteur of one or two things and the noble Lord, Lord Barnett, was in a much more exalted position on the Council, and even there, we came across each other from time to time.
When I came to this House--and such an honour it was--I found myself making my maiden speech on a report of that committee. It so happened that the noble Lord, Lord Barnett, spoke after me and made some kindly remarks, as is customary, and I hope that they were sincere as well. I now have the privilege of being on the committee and I am very proud to be there under the leadership of the noble Lord.
The noble Lord and others have gone through matters extremely fully, but there is so much more which is still to be decided. I believe that the lengthening of the negotiating process cannot but be helpful. I am very glad to agree with the six propositions which were set out in the earlier report and which have been listed by the noble Lord, Lord Barnett.
Clearly, there must be convergence; clearly it is no use having that too quickly; and clearly financial discipline must be maintained. To that end I believe that much hard work remains to be done. Flexibility will be needed and the most difficult judgment to make will be as to when financial discipline breaks down and excessive deficits become apparent. Too great a severity will mean member states trying to pull out, which will not be helpful in the least. We must ensure that the conditions made for the member countries which enter EMU are not only right at the time of entry but show every sign of continuing to be right in the future.
The longer EMU works without recourse to sanctions, the more likely is its permanent success. Countries working the system satisfactorily over a period are more likely to respond to the discipline placed upon them by
their membership. I refer to the words of Mr. Gus O'Donnell from the Treasury who told us that the whole procedure of fines is designed to ensure that the fines are not paid. I believe that by that he meant that the fine situation will never be reached or certainly never reached if at all possible.Countries which have been used to working successfully within EMU will realise its value and will discipline themselves appropriately. But should there be excessive deficits in the early stages, then countries may be tempted to pursue courses which would make the situation worse rather than better. Therefore, the need for discipline hangs over everything that we are discussing today. The longer the negotiations take place, the better chance there is of succeeding and achieving long-term results.
I now turn to the message that we received yesterday from my right honourable friend the Chancellor of the Exchequer. He brought to us a message which was quite clear. He said he anticipated,
- "that no final agreement on any binding legislation on economic and monetary union is likely before, at the earliest, the planned European Council meeting in Amsterdam in June next year".--[Official Report, Commons, 3/12/96; col. 797.]
I believe that sudden solutions have their dangers. My noble friend Lord Tebbit commented on the fact--I am not saying that he criticised me--that I smiled at something he said. The fact is he is voicing many opinions and worries that other people are voicing. He voices them better than most and more vigorously than most. Nonetheless it is good that these doubts and worries are aired and considered if we are to achieve long term success in fostering and bringing forward EMU. It is no good bringing it forward quickly and then suddenly finding afterwards that it will not be a success. EMU can only come about by an acceptable convergence of the joining countries. It may seem a distant prospect from the subject we are discussing, but when two spaceships dock in space there has to be careful preparation and co-operation. Speeds and systems must be co-ordinated and convergence--that is the important word--must come naturally and carefully if a long-term unity is to be achieved between those ships.
In my opinion, entry into EMU will be no easier than the docking of spaceships. It has to happen naturally, firmly and with all the dangers and difficulties fully explained and examined, and solutions found to them. The longer timescale for negotiation is also welcome for another reason. Not only will it give a greater opportunity for the negotiators themselves to study all the problems involved, but it will give greater time for those outside the mainstream political debate to understand how they will be affected by EMU and the disciplines it will demand. Those in business and the general public are themselves beginning to sound cautionary words which should not be ignored. It has already been mentioned that a former President of France has been making comments that deserve
examination and study. The Dresdner Bank was mentioned earlier today. The chairman of the Dresdner Bank has said that it would make us look bad indeed should EMU fail to start and run smoothly.I am not trying to repudiate the possibility of a successful EMU but I am saying that it will be a slower job than many people hoped it would be.
I believe it is vital to the interests of ourselves and the EU that this country should be greatly involved in the negotiations that lie ahead. I am grateful for the fact that once again my right honourable friend the Prime Minister has spelt out the Government's position. The Prime Minister has been consistent in the position that he has taken for the past 18 months. However, it upsets me that there are those in this country--I believe them to be a minority; some of them, unfortunately, contribute to well-known newspapers--who are continually trying to make it appear that he is shifting his position. I always look back to the speech that he made on 1st March 1995 in a debate on the Community in which he clearly spelt out the position that he held, and the position that he would continue to hold. The Prime Minister stated:
- "I believe that it is in our own national and economic interests to keep open the option of going into a single currency--[Interruption.]--and equally to keep open the option of deciding that it will not be in our national interest to go in ... I make no apologies now, nor will I in future, for deciding as an act of policy, in the interests of the country, that we should not make such a decision without the facts at our disposal to know the right answer".--[Official Report, Commons, 1/3/95; col.1069.]
I took the trouble to read that passage once again this morning to remind myself of what he said. There is much else in that speech that is well worth re-reading. I hope that we shall continue on that course and that we in the committee shall be allowed to consider the many problems that will face the Council. I hope that we can bring our own opinion and advice to bear on those problems, in so far as we can give it.
5.36 p.m.
Lord Haskel: My Lords, I, too, congratulate my noble friend Lord Barnett and his committee who prepared the report that we are debating today. It is an important report because, as many noble Lords have pointed out,
- "Europe is the UK's biggest market and accounts for 60 per cent. of our exports. It is therefore important to the UK that the details of the new arrangements are sensible".
The practical preparations of business are an essential part of these sensible arrangements because the single market is now our home market. Yet, debate on EMU tends to be treated by some as an issue which is largely separate from the single market. This is because the Government accept the single market as a fact of life, but not EMU. They are reluctant to face up to the connection between the two. The economic arguments
for and against EMU are complex and have been well rehearsed this afternoon by my noble friend Lord Peston and many others. However, from a business point of view, EMU and the single market cannot be separated. They are closely intertwined because one cannot have a fully successful single market with floating exchange rates within it. Not only does that inhibit the development of the single market, but it also inhibits the opening of the market to those outside--both those who want to trade with Europe and those who want to join the single market. The internal floating exchange rates are a barrier to trade and expansion. Therefore, whether we are in or out, the euro and EMU will come to our most important market, and we have to be ready.This debate is about preparing for EMU. My concern is that we should be making adequate preparations now; otherwise our businesses will suffer. Many noble Lords will remember the energetic preparations for the single market. For two years businesses were deluged with exhortations from the DTI to prepare for the single market in 1991. Business and industry were given practical advice on how to prepare. Trade associations gave advice to their own sectors of industry about the preparations. The noble Lord, Lord Young of Graffham, and his team at the DTI, were rarely away from radio, television and public meetings exhorting us to prepare for the single market. We were warned that if we did not make proper preparations, competitors from the Continent would come here and steal our customers. Business responded and, as a result, many companies now have branches, subsidiaries, customers, suppliers, representatives, agents, warehouses, distributors and business partners throughout Europe. They will all have their attitudes to EMU and the euro and we shall have to comply with them. So we shall all be affected.
But the DTI has largely abdicated its responsibility for preparing British business and industry for the change. It has dropped the reins because it is not sure in which direction to go. Certainly the CBI has a travelling road show and chambers of commerce are making presentations for their members. As the noble Lord, Lord St. John of Bletso, told us, the Bank of England is doing what it can to prepare the financial community, but there is nothing like the enthusiasm and energy which was shown to be necessary for preparing for the single market.
As a result, we shall all lose out. Certainly our best companies will be well prepared. It is the long tail of mediocre businesses that need the exhortation and encouragement. It will be too little, too late and too dangerous to rely on the cascading down effect to the suppliers, and the suppliers' suppliers of goods and services to our good companies.
Of course our large companies will adjust to the euro. They will issue price lists and sales literature incorporating it. Many may decide to trade in the euro, as my noble friend Lord Peston suggested, to avoid the risks in currency exchange. Many of our customers may insist on trading in euros. This will affect everyone trading directly or indirectly with most countries in the single market.
I join the noble Lord, Lord St. John of Bletso, in saying that the DTI should be actively encouraging companies to participate because we can be sure of two things. First, the coming of the euro will stimulate business in those areas where it is adopted, and our companies need to be where the action is. No businessman wants to be on the fringes. Secondly, our competitors in Europe are preparing even if we are not, and that can only be to our disadvantage.
Another important reason for business to be prepared is to anticipate the changing value of assets in the EMU area. At present, changes in asset value--plant, machinery, stock or buildings--are absorbed by the floating currencies. But with the single currency the position will be as it is in the United States where these assets fluctuate in value according to the rise and fall in the economies of different regions. Business will have to cope with that.
What if we stay out of EMU and there is a two-tier system? Many companies may still find it easier to trade in euros if a major part of their business is in the EMU area. After all, it will be easier to deal in one euro rather than a fluctuating £0.83. Also, if there is a dispute on a business contract involving the euro, the dispute may have to be determined by English law. This has to be sorted out now.
This is the third debate in your Lordships' House in which I have urged the Government to give business and industry every encouragement to make practical preparations for EMU. Perhaps I am one of the usual suspects, referred to by the noble and learned Lord, Lord Howe. Our business within the single market is too important. Business needs to be looking outwards at its markets, not inwards at divisions in the Conservative Party. The Minister is a Latin scholar; he is not here at present. Perhaps I may suggest that in large letters above his desk he writes the old Latin phrase which comes from the Roman army: fallere praeparare praeparare fallere--to fail to prepare is to prepare to fail.
5.45 p.m.
Lord Hooson: My Lords, as the noble Lord, Lord Haskel, spoke, I could not but think of the fact that we and the Government rightly pride ourselves on inward investment into this country from outside the European Community by businesses whose headquarters have been established here largely because we are an English speaking area. However, there are two English speaking countries within the British Isles: the Republic of Ireland and the United Kingdom. An American business friend recently put to me the conundrum that will face those companies with headquarters in this country. With the Republic of Ireland only 100 miles away, if it is within the European monetary system and we are outside it the temptation to move headquarters will be considerable.
As always, the report of the Select Committee on European Communities provides the basis for a valuable and informed debate. I believe that such a committee is one of the best justifications for the existence of this House. We owe a great debt to the committee over the years, as does the whole of the European Community. It enables us to make a sensible assessment of the steps
so far taken to achieve the goal of an EMS in place by the turn of the century. It also affords us an insight into the attitude of the Government in negotiations. That seems sensible from the point of view of the Chancellor of the Exchequer given the great internal pressures upon him.But the UK's influence in Europe has always been fatally weakened by the uncertainty in the minds of other Europeans as to the direction from which we are coming. Are we in the Union to prevent real progress rather than to facilitate it? Mercifully, I do not think so under this Chancellor of the Exchequer. Are we trying to use our present membership to prevent further progress towards a united Europe in the vain hope of achieving a free trade area on the lines of the old EFTA? That is still a dream for some people; it simply will not happen.
In the meantime the posturing by various Ministers of a severely divided Government undermines the legitimate influence of the UK on many European issues, including this subject. I have been chairman of an international company which had outlets in all the European countries. I now chair a board which is partly French and partly British. Nearly everyone agrees with the criticism that there is too much interference on detail from Brussels. But they are afraid that this country's legitimate criticism is a cloak for trying to destroy the very basis of the common market. We lose influence by our divided approach.
The motivation for a united Europe, and intermediate steps such as the setting up of the EMU, is entirely political. We should firmly say this. It could not have been more eloquently or simply put than in a brief intervention at Question Time by the noble Lord, Lord Campbell of Alloway, with whom I do not always agree. He said:
- "Is my noble friend aware that the real and essential benefit of the European Union cannot be measured in terms of cost but is the freeing of the soil of Europe from the miseries of another war?".--[Official Report, 28.11.96; col. 378.]
- "Fortunately, there is a way for Kohl and Chirac to avoid this nasty dilemma while the market gods are still smiling on them. They should forge ahead by declaring a mini-EMU between France and
- Germany and not risk devastating their economies in a fruitless attempt to hit an arbitrary deficit target agreed to five years ago. But getting there would require them, first, to admit the twin truths that deficits will be above Maastricht targets and that monetary union is primarily a political tool to cement the postwar peace and, second, to make those truths all but irrelevant by taking a patented Helmut Kohl bold leap forward".
There is a great deal of work to be done in order to achieve the kind of cross-continental control that would be implied by a European currency. In the United States of America, for example, the Federal Bank has control. It is a huge continent. In New England, for example, in the late 1980s there was a depression; at the same time there was a boom in California. Three or four years later there was a depression in California and a relative boom in New England. The mechanisms to which the Americans looked in order to provide solutions to the problem were automatic adjustments in taxation on the one hand--they looked to adjustments in federal tax and state tax--and to mobility of labour on the other. In the Californian depression, 1.2 million people left for adjoining states and the population was thus reduced by that number.
We must appreciate that within the European banking system we should not have the automatically built in adjustments that the Americans have perfected over the years; nor have we the tradition of mobility of labour within Europe, for a variety of reasons. Europe is a much older civilisation; there are linguistic problems; there are great social bonds between the land and the people within Europe. A great deal of work will be required to achieve a satisfactory system within Europe. Therefore we should appreciate (even a Euro-enthusiast like myself) the acute problems facing participation within or outside the EMS. But it is still going to happen.
The benefits of a central bank, free of political manipulation in relation to policy, will be great--even if uncomfortable for politicians. The USA, Germany, and, in the last decade, New Zealand, Canada and, over a much longer period, Switzerland demonstrated through their low inflation figures the influence of a central bank not manipulated by politicians.
Incidentally, the issue of the magazine, the American Banker, for 20th November 1996 contains an article by Mr. Steven Marjanovic entitled "Single European Currency Could Cost Banks $5 billion". That is based apparently on an estimate of the cost to the banks of cutting in half prices for cross-border transactions within eight years. He states:
- "If the forecast is dire for banks, it is part of what proponents of European monetary unification want: less restrictive and costly trade across the European Union and a stronger, more united economic front for competing globally".
The political importance of successfully launching the EMS is very great, even though the problems are formidable. However, social cohesion seems eventually more important than slavish adherence to the targets agreed at Maastricht five years ago.
I seem to remember that in the 1930s there were great dangers which we have since analysed in rigidly pursuing the economic orthodoxy of the day and abdicating our power to use our common sense and judgment. If we see, in France particularly and in Germany, in the next year or two great social unrest it may well be that Chancellor Kohl and President Chirac will be very tempted to take action on the lines that I indicated earlier.
In the end there is bound to be a two-phase entry into the EMS. It is very important to find a formula that makes that at least acceptable socially, as is implied, to the Mediterranean countries. I hope that we can make the first phase. At the moment, assuming the normal Maastricht criteria, it seems possible but not probable that this country will be there. I believe that we should make an enormous effort to achieve that. Politically the benefits will be enormous. I also believe that on a purely financial basis the pluses just outweigh the minuses.
5.58 p.m.
Lord Beloff: My Lords, given the number and distinction of the speakers taking part in this debate, many noble Lords may wonder why someone with so little competence in the monetary field should have put his name down to speak. For that reason I begin with a quotation from someone whose expertise can scarcely be doubted.
In a speech advocating progress towards economic and monetary union, Dr. Helmut Schlesinger, the former president of the Bundesbank no less, said:
- "We Europeans should not allow the path of unification started by Monnet, Schuman, De Gasperi and Adenauer, to be obstructed through an unjustified reactivation of vulgar nationalistic feelings".
That is denied by some. Indeed, the Conservative Party is sometimes accused by noble Lords opposite of being divided, but there is clearly a huge division on the matter between the noble Lord, Lord Hooson, and the noble Lord, Lord Wallace of Saltaire. The noble Lord, Lord Wallace took some time in his speech to say that he found no evidence of any desire to create a united states of Europe when he went abroad. I do not know what he does when he goes abroad. Does he read the
newspapers? Does he listen to the political speeches? After all, if we take Germany alone--and here I rely on the admirable service provided by the German Embassy in London--speech after speech, document after document from Chancellor Kohl, members of his party and officials states "We must complete the process of creating a united states of Europe". Chancellor Kohl said that he regards that as the great and final justification of his career in politics. That seems to have escaped the noble Lord, Lord Wallace, but it was picked up by the noble Lord, Lord Hooson. Perhaps the latter's ears are better attuned.I say that because it is directly relevant to what we are here to discuss: namely, the thorough and interesting report by the noble Lord, Lord Barnett, and his committee. If I am right in thinking that the objective is political and not economic, then it is quite understandable that decisions would be made to go ahead with the project, whatever the state of the so-called convergence criteria. The noble Lord, Lord Barnett, in the Treasury in this country, was no doubt able to fight a battle against fudge. No such battle is being fought in the capitals of continental Europe. It is clear that if it is politically possible, if there is no social upheaval in France or Germany, a decision will be made to go ahead with a number of countries whose convergence, even in the limited sense in which that phrase is used in the Maastricht Treaty, will not be attained.
Therefore, my feelings about the committee's report is: is it not rather sad that all that energy and ingenuity were spent in exploring the stability pact, the intermediate stages, ERM2, when all that is beside the point because the decision will not be made in the light of any of those considerations? I feel rather like a medieval student confronted with a set of theologians directing his attention to the question of how many angels could dance on the point of a needle. It is interesting, but it is not relevant to daily life. Does the noble Lord wish to comment?
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