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Lord Haslam: My Lords, we are getting into a debate, but the important point is that we should discuss the issues with them. We have a good record on the issues but we have no voice with the other countries; we are so confrontational with them that we cannot persuade them of what we should do. It is our strength that we have a good record and should try to instill it into them, but their receiving mechanism is switched off.

Lord Mackay of Ardbrecknish: My Lords, I hope that it is not switched off. Recent comments which I have read by leaders of German business suggest that they know well that what we say in regard to costs is correct. I should have thought that BMW's investment in this country and the coming of Siemens to the north east is an indication that some German businessmen are voting with their feet.

Perhaps we may leave that for the moment and return to the Select Committee's report. First, perhaps I may say to the committee on behalf of my right honourable friend the Chancellor that we are sorry that the Chancellor's reply was only received today. He attended the Council of Finance Ministers on Monday, the

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council went on much longer than was expected and we wished to give the committee the most up-to-date position. ECOFIN continued until late on Monday night. To add to complications, the Treasury was shut for most of yesterday with a fire. I apologise to the noble Lord, Lord Barnett, and his committee for the lateness of the letter from my right honourable friend the Chancellor.

Much of the discussion at ECOFIN was about defining "exceptional and temporary". There is little doubt about that and I hope that your Lordships will accept that in the circumstances I have described, with the meeting going on rather long and the fire in the Treasury, those "exceptional and temporary" conditions will excuse the delay in replying.

I turn to the committee's report. Yesterday, when I repeated the Chancellor's Statement, we stressed that EMU will affect the United Kingdom whether or not we choose to participate. It is therefore essential that we consider thoroughly the practical issues. They include the three latest proposals that are the subject of the second report of the committee: the stability pact, ERM2 and the legal framework for the euro. The report is a valuable contribution to the debate.

We firmly support the six propositions made previously by the committee, repeated in the report and by the noble Lord, Lord Barnett, in his speech. Specifically, we agree on the importance of sustainable convergence and budgetary discipline in all EU member states. We welcome the committee's emphasis on the importance of protecting one of the main benefits of EU membership for the UK, the single market. The Government share the committee's view that exchange rate stability is important in making the single market work and that sustainable convergence is the critical condition for exchange rate stability. Those propositions have underscored much of the Government's position towards the three proposals addressed by the committee and before your Lordships today.

On the stability pact, the Government welcome the committee's conclusions. They agree on the importance of budgetary discipline and sustainable convergence. The committee correctly identifies the conflict inherent in finding a level of fines which strikes the right balance between "effective deterrence and credibility". Its solution to this--to stress again the importance of countries not joining EMU until their economies have achieved sustainable convergence--is the right one. Whether or not the UK chooses to join a single currency, it is in our interest that EMU is a strong and sustainable currency union. The system of sanctions, including fines, should be set at a level to work as effective credible deterrents. Of course, the best deterrent is one that is never actually used.

Perhaps I may say to my noble friend Lord Tebbit in regard to the fines, there is a long procedure leading up to the fines. It is laid out in Article 104c. I shall not go through all the detail, but it is there, with a number of steps before we get to the end point of fines. So it is not a situation where all of a sudden we leap from a country reporting that it has excessive deficits to it being fined. There is a long procedure between the two events. The hope is that, as with every good deterrent, it will never

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need to be used. Undoubtedly, however, such is the importance of convergence that it would be foolish to have a system which did not have as its ultimate backstop some kind of deterrent effect.

The Statement made by my right honourable friend the Chancellor in another place and repeated here by myself has, I hope, helped to clarify what aspects of the stability pact and related convergence procedures will apply to the ins and outs respectively. It is, however, perhaps worth my while repeating the key points now.

The stability pact proposals relating to excessive deficits are based on Article 104c. If the UK opts out, it will be under no obligation to avoid excessive deficits. It will not be subject to sanctions or fines as a result of running deficits although, of course, the Government would want in any case to avoid excessive public borrowing. If we were to participate, the obligations and the possibility of sanctions would apply to us. But we would have a strong interest in ensuring that all participants in the euro behaved responsibly, to avoid forcing up interest rates in the single currency area as a whole.

Separately, the proposals presented to the committee contained an indication that there would be additional procedures under the article of the treaty concerning the broad economic guidelines--Article 103, which would apply to the outs. The broad economic guidelines already exist. The expected additional proposals will be procedural. They will require all member states to provide convergence programmes. That is, explanations of their economic policies.

We already do that voluntarily by bringing them to the House annually when we have a short debate. The only obligations that would be possible would be procedural ones to produce that programme. I wish to say to my noble friend Lord Pearson of Rannoch that Article 103, on which he questioned me, allows the Council to make procedural rules for multilateral surveillance. It is under that article that the Commission proposes that all member states should be required to submit stability or convergence programmes relating to the consistency between their economic policies and the broad economic guidelines. We are happy for member states to be required to submit convergence programmes. They already do it; we have done it over a number of years. I cannot recall whether my noble friend has taken part in some of our debates on the report, but we have had them, I have led them three times. Perhaps I may attempt to put my noble friend's mind at ease. If the Council finds that convergence programmes are failing to meet the broad economic guidelines, the worst that can happen is for it to make non-binding recommendations, that is, so far as the outs are concerned.

My noble friend also asked me--and now is the moment to answer the point--about Article 102a. That applies to the UK whether we are in or out. Common sense argues that all members of the single market should take account of the Community as a whole when running their economies. Single markets work better with a degree of co-ordination in certain economic policies, in particular sound public finance and low

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inflation. We want other member states to run their economies in those ways. It is good for our own economy. Your Lordships will recall that only last week I mentioned that 60 per cent. of our exports and imports are with the European Union. Therefore, it is absolutely important that the economy of the whole of Europe is run sensibly and in the best interests of each member state.

Perhaps I can say to my noble friend and to my noble friend Lord Tebbit that I do not see any prospect of a member state being taken to the European Court of Justice for failing to honour its obligations under that article, unless it were to do something deliberately to destabilise the single market and the Community as a whole. The circumstances in which the European Court would be asked to adjudicate are so extreme that I do not believe any sensible government, including any government of this country and certainly not a Conservative government, would place itself in a position in which they could be accused of trying to destabilise the single market.

Lord Tebbit: My Lords, perhaps I may interrupt my noble friend. I am very interested in what he just said. He accepted that there is a locus for the Court to intervene in some circumstances, which he describes as "extreme". Is he telling me that it is the view of the Government that the Court would have a locus to intervene and rule upon the conduct of a member state?

Lord Mackay of Ardbrecknish: My Lords, I am trying to give my noble friend a fairly straightforward answer and not attempting to pretend that in extremis there may not be a position where it is possible. But I do not think my noble friend ever envisages that we should get into that extreme position where we could be accused of wanting to destabilise the whole system. Perhaps my noble friend might want to destabilise the whole system but I do not believe that he would, because that would destabilise our economy as well. I know that there is nothing that my noble friend would want less than to destabilise our own economy. I hope that I have made that position clear.

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