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4.55 p.m.

Lord Taverne: My Lords, there are many important issues for the British presidency. They have been outlined in a number of notable previous speeches. I listened with particular fascination to the immensely authoritative speech by the noble Lord, Lord Wright of Richmond, in introducing the debate.

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I wish to advert to what must still be the central issue of our presidency; namely, the attitude of the Government to monetary union. It is our attitude to monetary union which will determine the influence we have over the policy of the European Union, over our relations with the United States and indeed events in the Middle East.

I wish to examine three different problems that confront us at the present time. The first is that we are not, and will not be, members of the crucially important so-called Euro X committee, which will almost certainly evolve into a very powerful committee, the kernel, as it were, of the European Union and will have an influence that goes far beyond fiscal matters. We shall be excluded from key decisions on fiscal policy; we shall be faced with decisions taken by that kernel.

But our influence and the effects of exclusion will be mitigated if it is clear what our intentions are, and if we are more ready to commit ourselves to monetary union than we have been so far. In a sense it raises what is perhaps the most fundamental objection to our moving in that direction. The gut objection of the opponents of monetary union in this country is that a move in that direction would inevitably be a move to political union, and that the Euro X committee is a first step in that direction. It is argued that we cannot have a single currency without a political union and without a single government--that we cannot have one without a European superstate.

Factually, that is not so. We have had the example of Ireland, which was a member of a monetary union with Britain and which could remain neutral. However, I leave that point aside. I wish to examine two more basic answers to that first problem.

The European Union is in itself a unique and unprecedented institution. The single market in its present form is a unique phenomenon. Never before has there been a single market with institutions to support it, such as the European Commission and a whole network of regulations to enforce and control competition within that single market, without there having to be a single government.

Similarly, the move towards a single currency is unique, with a strong co-ordination of fiscal policy which need not by any means lead to a single government. There is no reason why an effective co-ordination through the Euro X committee could not be sufficient to co-ordinate fiscal policy to support the policy of the central European bank.

But there is an even more fundamental objection to the argument that this move is inevitable, based on the attitude of member states. There clearly cannot be a European superstate without the consent of all the members in it. France has very much the same objections as we do to the idea of a federal superstate. The French are just as jealous of their national history and independence as we are. If we were members of a monetary union, we, too, would have a power of veto over any further moves towards a superstate.

But perhaps the most interesting objection is the attitude of Germany itself. Of course, one can quote

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Chancellor Kohl and his many statements that he wishes to see a political union and a federal Europe. One can quote speeches by Herr Tietmeyer. But what many of the opponents have not noticed is how German attitudes have changed.

What happened at Amsterdam? One cannot move to a European superstate if the right of veto is retained. What happened at Amsterdam is that the Germans voted against the extension of qualified majority voting on some issues and we supported it--a rather ironic state of affairs. The Germans voted against it because of the pressure of the Lander. In effect, Herr Kohl admitted that the Germans have had to modify their aim of a federal Europe because there was not sufficient support for it.

Let me look at the second obstacle. The obstacle that has been raised particularly by the present Chancellor of the Exchequer is the question of convergence. Our present lack of convergence, the difference in the British economy, should not be overstated, although there is a lot in it. If our aim is clear, if our aim is to join and is declared to be such, we will see the same kind of convergence in this country as has happened in other European states. For example, why do short-term interest rates matter much more in this country than they do elsewhere in the European Union? Because we have had a much higher rate of inflation. Those who have mortgages will sensibly choose variable mortgages, if there is a risk of inflation. Those on the Continent who have seen a record of much lower inflation have gone for long-term fixed mortgages.

We should remember the experience of the Netherlands and Ireland, two countries whose economic cycle has been completely out of whack with those of the rest of Europe. The Netherlands has had a boom for a number of years; Ireland has had an extended boom and a very fast rate of growth. They see no difficulty about linking themselves to a single currency. Indeed, the Netherlands has had 10 years' experience of a fixed currency in relation to the deutschmark and has prospered considerably over the past 10 years.

Let me turn to the third and most serious obstacle, which is the exchange rate. In a way it is odd that this was not mentioned by the Chancellor when he made his Statement on 27th October. My understanding is that we cannot join a monetary union unless for at least two years our exchange rate has been stable in relation to the Euro. The prospect could well be that with our being excluded and our future being uncertain, there will be even more speculation affecting the pound than we have seen so far. It may be possible that we do not technically need to join the ERM. However, my view is that we should join the European exchange rate mechanism as the best form of showing our commitment to the European monetary union, and the best way of reducing the value of the pound and promoting its stability. Preferably we should do so, if we can negotiate it, at the central value of the pound of around 2.60 deutschmarks.

Of course there would be outrage at such a suggestion. Is it not true that our membership of the ERM was a disaster? It is important to slay the myths in our relations with the ERM. The main cause of our

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discomfort is that we joined the ERM at an unsustainably high rate of exchange. Our partners sought to dissuade us, we broke the rules, we disregarded their advice and we paid the penalty.

The second myth is that it was only because we left the ERM that our recovery started. In fact, it had started before we left the ERM.

The third point which needs to be made is that the ERM was always a rather unsatisfactory halfway house without rates being fixed, which made it potentially a paradise for speculators if a currency's level was unsustainable. With the much wider band, it is now a much safer one and it is much more viable now that the final fixing of the currencies has come so close.

If it was clear that we too would join a monetary union and that the level of the pound was sustainable, then joining the ERM would probably be the best way of avoiding the instability of the pound which would be a real threat in the coming years while we were outside the monetary union.

Our influence in the European Union has recovered since the Government changed Britain's stand from what was basically hostility to constructive co-operation. But in the end our influence during the course of our presidency will depend on our attitude to the EMU. For once, I somewhat differ from the noble and learned Lord, Lord Howe of Aberavon, who stressed the fact that we should keep our options open. If we create uncertainty, if we are seen to dither and not to make up our minds, then eventually Mr. Blair will end up in exactly the same position as Mr. Major.

5.5 p.m.

Lord Gillmore of Thamesfield: My Lords, I hope I shall be forgiven for committing what I understand to be a minor breach of convention at this stage in the debate and say what an immense pleasure it has been for me to listen to the maiden speech of the noble Lord, Lord Hurd of Westwell. It was a distinguished and typically perceptive speech and I am pleased to be taking part in the debate with him.

It is also for me something of a novelty. In my previous incarnation our discussions took place in somewhat more private circumstances and on more public occasions my role, as I understood it, was perhaps to be seen but extremely rarely to be heard.

The United Kingdom presidency comes at a critical moment for the future of the Union. For years ahead, economic and monetary union, its institutional underpinning and its practical consequences, including its impact on the vitally important plans for enlargement of the union, will dominate the debate in Europe. Many of our European partners have already demonstrated that, by immense efforts of political will and a readiness to face tough decisions, radical reform is possible. But this process is far from finished. The necessary reform of Europe's labour and product markets, the transformation of the common agricultural policy and of the Union's regional and structural funds, will continue to create economic and, above all, social stresses which will test the fabric of member states.

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But although they are well known, they are not the only dangers. There is in this process of adaptation a risk that the Union will become self-absorbed, wrapped in the complexities and strains of its own internal restructuring. It is here that the United Kingdom has a significant role to play; a role for which, as the noble and learned Lord, Lord Howe, pointed out, it is well equipped. The task is to ensure that self-absorption does not become endemic but that the Union remains open and outward looking and plays its full part in the world. Like the noble Lord, Lord Healey, I therefore also particularly welcome the fact that the second ASEM conference, bringing together the countries of Asia and the Union, will take place during our presidency and under our chairmanship.

It is on that relationship between Europe and Asia that I wish to concentrate for a few moments. There is, I believe, a direct linkage between the Union's developing dialogue with Asia and the process of the Union's own internal reforms. The present crisis in most of Asia's financial markets highlights a range of problems that Asia is far from alone in struggling with.

Much has been written in recent years on the process known as "globalisation", a newish word in the lexicon of international debate. It is undeniable that the integration of capital markets across the world has developed at an astonishing pace. To quote one example, a little over 10 years ago 190 billion US dollars a day passed through the hands of the world's currency traders. By 1995 that figure had risen to 1.2 trillion US dollars. Yet for all the dramatic changes, the integration of capital markets throughout the world has not yet reached the levels that we achieved early in the 20th century. In short, the process is far from completion and the certainty must be that it will continue.

The European Union cannot simply opt out of the management of this secular change. To pick up the words used in the elegant and thoughtful maiden speech of the right reverend Prelate the Bishop of London, inertia will not keep us going. As a matter of enlightened self-interest, the Union must learn to cope and adjust. So too must all of the industrial and financial centres of the world, not least in the countries of Asia. We all face a steep and dangerous curve of learning and adjustment. That process will be extremely painful. There are no simple answers and no right models. It is not a question of there being a European, an American or an Asian solution, let alone one based on European, American or Asian values.

For all their differences, Asia and Europe can learn from each other. There is little doubt, as Asia's crisis has shown, that domestic economic management is all important and that one country's domestic economic management is everybody else's international interest and occasionally everybody else's international nightmare. Transparency, political openness, sound and credible regulation, accountability, integrity and freedom from corruption are the crucial elements. Thus, the good governance of the financial institutions of the state and their sound and efficient regulation is vital.

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What has that to do with the European Union? One of the lessons of GATT--and now the World Trade Organisation--is that free trade and open markets are part of a paradox. Just as deregulation led to the creation of a whole panoply of semi-autonomous regulators, so free trade, for all that it is free, requires a comprehensive body of rules. As a recent article by the chairman of Unilever said,

    "these rules will have to be rigorously invigilated and energetically enforced and, to the distaste of some, this process requires supranational institutions to enforce those rules".

The Union must play its part in the formulation of a sensible and enforceable rules-based system. None of those issues is likely to reach a solution during the presidency of the United Kingdom, but I hope that the Minister will confirm tonight that Her Majesty's Government will seek to use the ASEM conference to place them firmly on the agenda and at the forefront of the Union's preoccupations.

In spite of the fact that the United Kingdom will regrettably not be able to take part in the first wave of economic and monetary union, during their presidency Her Majesty's Government can set a tone and, to some extent, lead the way towards a Union which avoids inward-looking incestuousness and seeks to play its proper role in the world. It is not a question of teaching lessons. Europe has many to learn and much to do to stimulate the openness and transparency of its own financial and product markets. The coming dialogue with its Asian partners offers an important point of departure.

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