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European Monetary Union
4.6 p.m.
Lord McIntosh of Haringey: My Lords, with the leave of the House, I will now repeat a Statement which has been made by my right honourable friend the Chancellor of the Exchequer on European Monetary Union.
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"Since the end of the Second World War Britain has faced no question more important and more contentious than that of our relationship with Europe.
"Divisions within governments of both parties, and hence indecision, have made British policy towards Europe, over many years, inconsistent and unclear.
"The economic consequences of these weaknesses have been a loss of international initiative and influence, recurrent instability and continuing questioning of our long-term economic direction.
"To break with this legacy, and to establish clear national purpose, which has eluded us for decades, economic leadership is essential, and Britain must now make the difficult decisions on Europe, however hard.
"The decision on a single currency is probably the most important this country is likely to face in our generation. Yet until now, there has been no detailed examination by government of the practical economic issues of EMU. There has been no proper preparation for a decision, because no previous government could agree on whether they supported it in principle, nor whether there was an overriding constitutional objection on grounds of sovereignty or not; nor whether, even if a single currency worked and worked well, the government would wish to be part of it. Forms of words like "keeping the option open"--while no preparations were ever made to render the option practicable--have similarly served as a pretext for postponing the hard choices.
"Now is the time to make these hard choices and set a long-term direction for our economic future in Europe.
"So I will deal, in turn, with the question of principle, the constitutional implications of EMU, and the economic tests that have to be met. In each area, I will set down the Government's policy.
"When we came into Government I asked the Treasury to carry out an assessment of the economic tests that have to be met. Accompanying my Statement is this comprehensive and detailed Treasury assessment which I am publishing today, copies of which are available in the Vote Office.
"I start with the question of principle. First, the potential benefits for Britain of a successful single currency are obvious: in terms of trade, transparency of costs and currency stability. Of course, I stress it must be soundly based. It must succeed. But if it works economically, it is, in our view, worth doing.
"So in principle, a successful single currency within a single European market would be of benefit to Europe and to Britain.
"Secondly, it must be clearly recognised that to share a common monetary policy with other states does represent a major pooling of economic sovereignty.
"There are those who argue that this should be a constitutional bar to British participation in a single currency, regardless of the economic benefits it could bring to the people of this country.
"In other words, they would rule out a single currency in principle, even if it were in the best economic interests of the country.
"That is an understandable objection and one argued from principle. But in our view it is wrong. If
- a single currency would be good for British jobs, business and future prosperity, it is right, in principle, to join.
"The constitutional issue is a factor in the decision, but it is not an over-riding one; rather it signifies that in order for monetary union to be right for Britain the economic benefit should be clear and unambiguous.
"So I conclude on this question of principle: if, in the end, a single currency is successful, and the economic case is clear and unambiguous, then the Government believe Britain should be part of it.
"There is a third issue of principle--the consent of the British people. Because of the magnitude of the decision, we believe--again, as a matter of principle--that whenever the decision to enter is taken by government, it should be put to a referendum of the British people. So whenever this issue arises, under this Government there will be a referendum. Government, Parliament and the people must all agree.
"So we conclude that the determining factor as to whether Britain joins a single currency is the national economic interest and whether the economic case for doing so is clear and unambiguous.
"I now turn to the Treasury's detailed assessment of the five economic tests that define whether a clear and unambiguous case can be made. These are, first, whether there can be sustainable convergence between Britain and the economies of a single currency; secondly, whether there is sufficient flexibility to cope with economic change; thirdly, the effect on investment; fourthly, the impact on our financial services industry; and fifthly, whether it is good for employment.
"Of these, the first and most critical is convergence: can we be confident that the UK business cycle has converged with that of other European countries so that the British economy can have stability and prosperity with a common European monetary policy? That convergence must be capable of being sustained and likely to be sustained--in other words, we must demonstrate a settled period of convergence.
"Currently Britain's business cycle is out of line with our European partners. Interest rates here are 7 per cent. This is the level the Bank of England has set in order to achieve our inflation target. But in Germany and France interest rates are close to 3 per cent. Across the continent, because business cycles are more coincident, short-term interest rates have been converging for some time.
"This divergence of economic cycles is, in part, a reflection of historic structural differences between the UK and other European economies, in particular the pattern of our trade and North Sea oil. These differences are becoming less distinct as trade with the rest of Europe grows and the single market deepens.
"But divergence is also a legacy of Britain's past susceptibility to boom and bust: the damaging boom of the late 1980s; the severe recession of the early
- 1990s; and the previous government's failure to raise interest rates early enough in the current economic cycle.
"Since coming into office, the Government have introduced long-term measures to ensure that we are capable of maintaining stability by giving operational responsibility for interest rates to the Bank of England and by implementing our deficit reduction plan for public borrowing.
"We will need a period of stability with continuing toughness on inflation and public borrowing. The Treasury's assessment is that, at present, the UK's economic cycle is not convergent with our European partners and that this divergence could continue for some time. To demonstrate sustainable convergence will take a period of years.
"I turn now to flexibility. To be successful in a monetary union, countries will need even more flexibility to adjust to change and to unexpected economic events once the ability of countries to vary their interest rates and exchange rates has gone and the euro and a single European interest rate are in place. Flexibility may be particularly important for the UK if there is any risk that our business cycle has not fully converged with those of the other EMU members.
"The Treasury assessment of the second test is that, in Britain, persistent long-term unemployment and lack of skills--and in some areas lack of competition--point to the need for more flexibility to adapt to change and to meet the new challenges of adjustment. The Government have begun to implement a programme for investing in education and training, helping people from welfare into work and improving the workings of our markets.
"Of course, other European countries need to tackle unemployment and inflexibility to make sure Europe as a whole is able to withstand any shocks that arise. The Government will continue to argue that employability, flexibility and stronger competition policies must be a top priority so that monetary union can be successful.
"The third test is investment: whether joining EMU would create better conditions for businesses to make long-term decisions to invest in Britain. The Treasury assessment is that, above all, business needs long-term economic stability and a well-functioning European single market. It concludes that membership of a successful single currency would help us to create the conditions for higher and more productive investment in Britain.
"But the worst case for investment would be for Britain to enter EMU without proper preparations and without sufficient convergence and with all the uncertainty that would entail.
"The fourth test asks what impact membership of the single currency would have on our financial services industry. EMU will affect that industry more profoundly and more immediately than any other sectors of the economy.
"The Treasury's assessment is that we can now be confident that the industry has the potential to thrive whether the UK is in or out of EMU, so long as it is properly prepared. But the benefits of new opportunities from a single currency could, however, be easier to tap from within the euro zone. This could help the City of London to strengthen its position as the leading financial centre in Europe.
"The fifth test relates to employment. For millions of people, the most practical question is whether membership of a successful single currency would be good for prosperity and jobs. The Treasury assessment is that our employment-creating measures, and welfare state reform, must accompany any move to a single currency. Ultimately, we conclude that whether a single currency is good for jobs in practice comes back to sustainable convergence. A successful single currency would provide far greater trade and business in Europe.
"The Treasury assessment is that in vital areas the economy is not yet ready for entry and that much remains to be done. The previous policy of keeping options open, without actively making preparations, has left parts of the economy unprepared.
"Our overall assessment is that Britain needs both a period for preparation and a settled period of sustainable convergence. Both require stability.
"Applying these five economic tests leads the Government to the following clear conclusions. British membership of a single currency in 1999 could not meet the tests and therefore is not in the country's economic interests. There is no proper convergence between the British and the other European economies now. To try to join now would be to accept a monetary policy which would suit other European economies but not our own. We will therefore be notifying our European partners, in accordance with the Maastricht Treaty, that we will not seek membership of the single currency on 1st January 1999.
"The issue then arises as to the period after 1st January 1999. We could simply leave the options open, as before, but with no clear direction either way for the rest of the Parliament. That would be politically easy but wrong.
"There would be instability, perpetual speculation about 'in or out', 'sooner or later', which would cause difficulties in the financial markets and for business and industry.
"It would make it harder to prepare for the possibility of a single currency because every step in preparation, every time the issue was discussed, would feed fresh bouts of speculation.
"It must be in the country's interest to have a stable framework within which to plan; and we are fortified in this because, on the economic tests we have set out, the practical difficulties of joining a single currency in this Parliament all point to the same conclusion.
"There is no need, legally, formally or politically, to renounce our option to join for the period between 1st January 1999 and the end of the Parliament, nor
- would it be sensible to do so. There is no requirement under the treaty for this. What is more, no government can ever predict every set of economic circumstances that might arise.
"What we can and should do is to state a clear view about the practicability of joining monetary union during this period. Applying our economic tests, two things are clear. There is no realistic prospect of our having demonstrated, before the end of this Parliament, that we have achieved convergence which is sustainable and settled rather than transitory; and the Government have only just begun to put in place the necessary preparations which would allow us to do so. Other countries have for some years been making detailed preparations for a single currency. For all the reasons given, we have not. Therefore, barring some fundamental and unforeseen change in economic circumstances, making a decision during this Parliament to join is not realistic. It is also therefore sensible for business and the country to plan on the basis that, in this Parliament, we do not propose to enter a single currency.
"There are those who urge us to seek consent in principle in a referendum now or soon, but with a view to entering some time later. Any serious gap between the referendum and the actual entry date would undermine the conclusions of the referendum.
"Because the essential decision is economic, it can be taken only at a time when government and then the people can judge that sustainable convergence has been established.
"So, in our view the interval between the decision to join and our joining must not be unduly protracted.
"I have said that if a single currency works and is successful Britain should join it. We should therefore begin now to prepare ourselves so that should we meet the economic tests we can make a decision to join a successful single currency early in the next Parliament. At present, with no preparation it is not a practical option. We must put ourselves in the position for Britain to exercise genuine choice.
"The questions of preparation are immense--practical questions for business, as well as for government. Euro notes and coins will, for example, be circulating across Europe from 1st January 2002. Some companies like Marks and Spencer have already decided to prepare to accept euros in Britain. Others will want advice on what is best for them.
"Because both the Government and business must prepare intensively during the next years, we will commence work on the detailed transition arrangements for the possible introduction of the euro in Britain, including the introduction of notes and coins should we wish to enter; step-up the work on what business should do now to prepare for the introduction of the euro in 1999, whether we are in or out; and work with business on what government must do to prepare for EMU should we decide to join it in the next Parliament.
"To help with essential preparations, I have invited the Governor of the Bank of England and Sir Colin Marshall, the President of the CBI, to join me and the President of the Board of Trade in leading a standing committee on preparations for EMU. I am pleased to say that they have agreed. I am also inviting the President of the Association of British Chambers of Commerce to join us. I can also announce that from January a series of regional and sectoral conferences on preparations for monetary union will be held.
"Also, the Prime Minister has today decided to extend Lord Simon's Treasury responsibilities to include European business preparations in the Government, covering the long-term planning of the new standing committee.
"In addition to these practical preparations, there are reforms we can take which are both right in themselves in the national economic interest and which will help us to meet the five economic tests.
"We will promote greater flexibility in the UK economy and in Europe through our Getting Europe to Work initiative.
"We will be introducing new competition legislation, which draws on the best of European and wider international policy and practice as well as continuing to negotiate to secure the best interests of our financial sector and for opening up the single market in financial services.
"We will set as one of the key objectives of our EU presidency completion of the European single market.
"In my Mansion House speech I said that if we succeed in strengthening the ability of the British economy to sustain growth with low inflation, and if international conditions permit, I would hope to lower the inflation target. So we will monitor our inflation target and do so in the light of the European Central Bank; and we will ensure that our fiscal rules and our deficit reduction plan continue to be consistent with the terms of the stability pact, thus underlining our commitment to avoid an excessive deficit under Article 104c of the Treaty and supporting greater coordination in ECOFIN.
"In Britain's interests we need to keep inflation low and public borrowing firmly under control.
"The single currency will affect Britain, in or out of it. It is in the British national interest for it to work. Vital decisions will be made during our EU presidency in the first half of next year. We will use our position constructively and supportively and we will play a full part in ensuring its launch is successful--something that is in Britain's interests as well as Europe's.
"To sum up, we believe that in principle British membership of a successful single currency would be beneficial to Britain and to Europe. The key factor is whether the economic benefits of joining for business and industry are clear and unambiguous. If they are, there is no constitutional bar to British membership of EMU. Applying the economic tests, it is not in this country's interest to join in the first wave of EMU starting on 1st January 1999 and, barring some
- fundamental and unforeseen change in economic circumstances, making a decision this Parliament to join is not realistic; but in order to give ourselves a genuine choice in the future it is essential that the Government and business prepare intensively during this Parliament, so that Britain will be in a position to join a single currency, should we wish to, early in the next Parliament.
"On Europe, Madam Speaker, the time of indecision is over. The period for practical preparation has begun. Today we begin to build a new consensus--modern and outward looking--for a country that throughout its history has looked outward to the world.
"We are the first British Government to declare for the principle of monetary union; the first to state that there is no overriding constitutional bar to membership; the first to make clear and unambiguous economic benefit to the country the decisive test; and the first to offer their strong and constructive support to our European partners to create more employment and more prosperity.
"The policy I have outlined will bring stability to business, direction to our economy and long-term purpose to our country. It is the right policy for Britain in Europe. More important, it is the right policy for the future of Britain, and I commend it to the House".
4.27 p.m.
Lord Mackay of Ardbrecknish: My Lords, I begin by thanking the noble Lord, Lord McIntosh of Haringey, for repeating the Statement made by the Chancellor of the Exchequer in the other place. Certainly this Statement was needed to clear up the confusion over the Government's policy in relation to the single currency over the past few weeks. Contrary to an assurance given to me on Wednesday when I raised this issue, the noble Lord, Lord McIntosh, has not been asked to clarify the events of the past few weeks or to give any explanation of the confusion at the centre of government.
What is one to deduce from the article in the Financial Times of 26th September by Robert Peston? Does one conclude that it is without foundation? If so, who is the Minister quoted in that article? Indeed, in the article in The Times on 18th October it was quite clear that a Minister was quoted because another of the spin doctors had told him that the Minister quoted in Robert Peston's article was not in the decision-making loop. I believe that is a lovely phrase. If he was not in the decision-making loop they must know who he is. Can noble Lords be informed who was the Minister who made that statement to Robert Peston?
But if Robert Peston's article in the FT of 26th September was false, why did it take three weeks before the Government decided to try to clarify the position? Over those three weeks they watched an entirely false market in both equities and sterling being created in the City. They knew why that was happening and they did nothing to try to rectify it.
Further, the Statement gives no explanation as to why on the afternoon before Robert Peston's article appeared the value of sterling began to decline markedly. Equally mysteriously, on the 17th October, the day before the Chancellor gave the interview to The Times, the value of sterling began to rise from the start of trading to the end of it. Perhaps the spin doctors were at work. It is not just that we ought to be told; it is absolutely incumbent on the Government that they tell us what is going on.
I believe that it took the noble Lord about 19 minutes to repeat the Statement. It contained a good deal of lovely language. If that flowery language was stripped away it could perhaps be best summed up by the rather briefer words that I have used; namely, that the matter should be judged on whether or not it is good for Britain. That seems to me a far quicker explanation without all the flowery language. If that is, indeed, what the Government now believe--in other words, they agree with the previous government's policy--I welcome that. I am not entirely sure that I should not read the flowery language more carefully, and I shall come to some of it.
We were assured by the noble Lord, Lord Williams of Mostyn, who was brought in to help the Treasury team last week, that when it came to the referendum question on the single currency there would be a triple lock. I read carefully, and listened carefully, to the words of the noble Lord, Lord McIntosh of Haringey. I presume that the triple lock will be for this Parliament; the next Parliament; for any Parliament; it will not be just for this Parliament. I can assure the noble Lord that my party's pledge of a referendum, which was mocked by the Labour Party when we made it, and then, of course, like so much else in the past two years, adopted, is for whenever a Conservative government decide to go in. Is the lock just for this Parliament or will it feature in the party opposite's manifesto at the next election? That is a question to which we should like to know the answer.
On the issue of the period of convergence and the convergence of the economic cycles, which is one of the important tests, I wonder how long the settled period is. One part of the document talks about developing sustainable convergence and that that will take a period of years. The single currency will not be up and running among those who join in 1999 until 2002. How many years after 2002? That is important. If the Government want to have stability, they should explain what they mean by that sustainable convergence.
My worry, although the phrase "a period of years" reduces it, is that as we are out of "sync", which I gather is the expression in the trade cycle, we shall find, in two, three or four years' time, as we go into a labour recession, that our statistics meet those of a European revival. Therefore, for a week or two, a month or two, or whatever, there will be convergence, but a different convergence. It is the convergence of two buses passing for a brief moment whose journeys are in opposite directions. I hope that the Government mean "a period of years". I want to hear the Minister underline the fact that it will not just be convergence coming about for a
few moments, so to speak, because one is going down and the other is going up, but that it will be genuine convergence.I brought the message of flexible markets to you Lordships many times. Flexible markets in this country have not been helped by the Government signing up to the social chapter. It is not this country that has the problem with flexible markets; it is the problem of our friends in Europe.
The employment test is clearly a bigger problem for our friends in Europe than it is for us. If, when they receive it, noble Lords look at UK membership of the single currency--the assessment document produced by the Treasury--Chart 2.2 shows clearly what we all know. Thanks to the policies of the previous government, this country's unemployment rate has been declining while the unemployment rate of our principal competitors in Europe has been increasing. They have something to learn from what we have been doing. My concern is that in our determination to get alongside them we shall damage the very unemployment reduction that we have all welcomed. I notice that the Government are now welcoming it also.
As to the conclusions on EMU, I notice and welcome the fact that the Government have decided to take advantage of my right honourable friend John Major's opt-out. I find it ironic, given the derision encountered by my right honourable friend when he came back with the opt-out, that the Government are today saying to this House that they are going to use the very opt-out upon which they poured such contempt.
The Statement deals with the question of the rest of the Parliament, and says that simply leaving the options open would not be the right thing to do. I can see that. Then the Government say that,
- "in this Parliament, we do not propose to enter a single currency."
- "barring some fundamental and unforeseen change in economic circumstances, making a decision this Parliament to join is not realistic".
I notice and welcome the fact that the Government are making preparations for the euro. So were we. Indeed my right honourable friend Mr Kenneth Clarke was constantly at meetings doing just that with our European friends. I welcome in particular the expansion in the Treasury of the remit of the noble Lord, Lord Simon. I wonder whether I shall have the pleasure of crossing swords with him across the House when he comes to answer for the Treasury, so relieving the poor overworked Deputy Chief Whip of answering for the Treasury and just about every other department sometimes, it seems to me.
I seriously hope--I am sure that the noble Lord, Lord Simon, is capable of answering for himself and crossing swords with me--that the noble Lord will answer for his Treasury responsibilities and, indeed, for the whole of the Treasury, in particular on the European question. I have to say that, thanks to the noble Lord, Lord Bruce
of Donington, we have two or three little tests in the next week or two which will give the noble Lord, Lord Simon, the opportunity to answer for the Government.I notice, on the question of preparations, that there is nothing about the ERM. Noble Lords will recall that it is laid down in the treaty that a country has to be in the ERM for at least two years prior to entry into the single currency. Does that figure as part of the Government's plans for the future? When might they be doing that? Will that be in this Parliament? Or is it something else that they will leave? Will they leave it to the other side of a referendum?
The peroration for this--I am sure that the pro-Europeans would think it if they listened merely to the peroration--sounded like a clear decision to enter. Yet elsewhere the Statement says that it will be a period of years before a decision can be made. That seems to reflect a fair degree of conflict inside the Government. It is a conflict reflected in the press briefings I mentioned earlier. It sounded a bit like Saint Augustine's, make me chaste, Oh Lord, but not yet. I believe that fear of a referendum and fear of the reaction of the Murdoch press has had a great deal to do with the Statement we have heard today.
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