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Noble Lords: No!

Lord Marsh: But pleasantly so! That view is the idea that the political will has an enormous benefit, helps things along and will solve the problem. If political will were sufficient to have a major economic impact on nations' histories there would be no unemployment in Europe. All governments want to solve those problems but do not manage to do so.

This is a group of nations, some of which have stubbornly pursued policies which have been the direct cause of high unemployment and political instability. Their constant pursuit of protection of their national interest is perfectly open. We are asked to believe that the magic of the single currency alone will transform their traditional behaviour overnight, because unless that happens the central bank cannot succeed. It is bad enough for any independent central bank to have to deal with a difficult relationship with its government; the idea of a central bank which has to deal with 10, 12 or 20 governments makes independence crucial. Each of those governments will have their different interests.

The intention was that the central bank should be independent. The noble Lord has a rather cavalier view about its independence, but it is set out quite clearly in paragraph 10:

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Under Article 109 that was applied particularly to the appointment of the president--the most powerful man in the entire system. It is very clear:

    "Under Article 109a of the Treaty, the President, the Vice-President and the other members of the Executive Board of the ECB shall be appointed by common accord of the Governments of the Member States ... Their term of office shall be eight years".
Not "may", not "probably a good idea", but "shall". That is the theory. We were able in the course of the inquiry to see how it works in practice.

At the bottom of that page there is a fascinating note in the report, in the smallest type I have ever seen:

    "The appointment of Wim Duisenberg for eight years although there is also an understanding that he will voluntarily retire early. This arrangement appears to conform to the text of the Treaty if not the spirit".
I was fascinated by that. What did he actually say about this amazingly important thing? We know what happened. There were two candidates. The treaty is absolutely clear that one thing and one thing alone should be the basis of the choice of the appropriate candidate: the ability to do the job. The treaty is clear beyond peradventure that no national government should seek to attack, change or influence that. The treaty is clear that it is for a period of eight years. It is not picked out of the air because in so far as anybody has the faintest idea of what an economic cycle is-- "it is probably around six, seven, eight years or so". All that is absolutely clear. Then a second candidate emerged. There was a strong argument and the promoters--the French Government and nobody else--had one perfectly clear view: it was for the pride of France that he must become president.

How do you cope with that? We thought we were lucky because we had a British Prime Minister chairing the meeting, but this farce took place over one weekend, and he agreed. It was said that he be appointed for eight years but he would serve for only four years; after that, the French candidate would take over. Subsequently, however, he changed his mind and said he could not commit himself to resigning. At the moment it is absolutely clear, again beyond peradventure, that the president of the central bank will serve eight years--except that it may possibly be four and, if it is four, he will probably be succeeded by the French candidate, who might see out the end of that term and do another four years, or it might be eight years. In fact nobody has the faintest idea what will happen to the most important element in the appointments made.

Perhaps I may quote from an exchange between the noble Lord, Lord Shaw, and Dr. Duisenberg which took place before the fateful weekend. The noble Lord asked him (at paragraph 216) what would happen in regard to a second candidate:

    "is it important in those early years as to which country the President comes from?".
The answer from Dr. Duisenberg was:

    "Yes, and the answer to it is no, because the President and every single member of the Executive Board has to comply with certain qualifications specified in the Treaty, but nationality is not one of them, not one of the qualifications, so that in a sense I regard as not of importance".

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Later he was asked a further question. The noble Lord, Lord Shaw, asked:

    "On the question of the Presidency, which I appreciate you are not likely to give us an answer to, ... can I just press you",
and mentions the matter of the split presidency. The idea was already around then. Dr. Duisenberg said:

    ""It is an idea and if the proposal were to appoint me on the condition, which is not in the Treaty, that I would accept this to be only for a limited period, I would not accept that appointment".
What changed his mind? It was political pressure alone--and it was not the French this time; it was the chairman and the other governments.

The noble Lord, Lord Barnett, made a comment that I shall remember for many a long day. He said that if there has to be a common view, it means that there has to be compromise. I understand the noble Lord's point, and I am not surprised by it. However, if that is a part--and all the evidence of the past history of the Commission demonstrates that that is how it is done--then there cannot be a successful central bank; if is open formally to pressures from each of its members. On that basis, since hearing the noble Lord the doubts that I had when I came into the debate are much harder now than they were.

6.2 p.m.

Lord Grenfell: My Lords, at this late stage I shall try to be brief. Perhaps I may begin by warmly congratulating my noble friend Lord Barnett on having once again exercised his legendary skills in taking us through a long and complicated inquiry. As always, it was a great privilege to be associated with him and fellow committee members in this endeavour. I add my thanks to those who greatly supported us, in particular our specialist adviser, Professor Charlie Bean, and to John Goddard and later Dr. Philippa Tudor in their roles as Clerks to our committee.

We are discussing the report more than four-and-a-half months after its publication, as my noble friend Lord St. John of Bletso pointed out. I agree with noble Lords who said that the delay in tabling this debate may be fortunate in that it gives us a chance to review the early months of operation of the European Central Bank.

The report before your Lordships provides a useful framework within which to examine some of the issues that have preoccupied the European Central Bank during the four-and-a-half months of its existence. I make no apology for going into some of the nuts and bolts. At this stage it is worth examining what has happened since the report was written. Perhaps noble Lords will forgive me if I do not go too deeply into the text.

Given the time constraints, I wish to focus on only four issues: first, the search for a monetary policy strategy; secondly, the difficult matter of the convergence of interest rates; thirdly, the response to asymmetric shocks; and last but not least, accountability and transparency.

The first issue I wish to touch on is the still unresolved question of choosing a monetary policy strategy, which is at the top of the agenda at today's meeting in Frankfurt of the Governing Council of the

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ECB. It might come close to solving this problem today. At the time when we concluded our inquiry, it looked as though the Governing Council would opt for a mix of monetary targeting and direct inflation targeting on a trial and error basis, with the monetarist approach dominating. The odds still seem to be on the ECB following the Bundesbank's practice of adopting monetary aggregates, probably M3, as a useful anchor--not that Europe-wide M3 data are easy to capture--and also, like the Bundesbank, taking other factors into consideration in setting the interest rate, in this case most importantly an implicit inflation forecast.

Dr. Duisenberg told us that once the Governing Council had been established, the choice of a strategy could be quickly made and implemented because all the instruments for monetary policy had already been prepared within the EMI. In the event, the assumption that the strategy could be put in place by the Governing Council by September this year proved far too optimistic. The competing claims of monetary targeting and inflation targeting are still being debated.

The argument for inflation targeting seems to me the stronger and should replace monetary targeting as the dominant element in some form of hybrid strategy. Witness after witness confirmed that while the quality of the monetary data would determine whether monetary targeting would work as an ECB policy instrument, there were no really good quality statistics for the European money supply. Further, nobody really knows how stable money demand will prove to be in the Eurozone, and as Wim Duisenberg has acknowledged, the transition from national currencies to the euro could itself distort demand.

A formal or informal inflation target will be badly needed to reinforce any monetary targeting. Inflation targets offer the great benefit of transparency, but they are a relatively new invention. They have no great track record; therefore we cannot assume at this stage that it is to be a sure winner in the context of economic and monetary union. With regard to the problem of data, doggedly raised by the noble Lord, Lord St. John of Bletso, throughout the inquiry, I am pleased to hear that late last month the Eurostat announced that it will henceforth publish a single Eurozone inflation figure much earlier each month to assist the ECB's policy-making. That is a major step forward. It can refer to individual country statistics later.

Here in Britain, since 1992, we have done pretty well with inflation targeting. However, I am inclined to think that a target for the Eurozone should not be set as rigidly as it is here in the directives of my right honourable friend the Chancellor of the Exchequer, even given the let-out in the case of shocks and disturbances. For the Eurozone a target range seems to me to be more appropriate. Here I part company from the view advanced by the noble Lord, Lord Burns, in his authoritative maiden speech. I believe that we should examine the experience of New Zealand, for example. The governor of New Zealand's Reserve Bank, who has given a zero to 3 per cent. target range for inflation-- am not saying that 3 per cent. is appropriate for the

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Eurozone--sees targeting a range as the better way to go, provided, and I quote:

    "we take our responsibility to keep inflation above zero as seriously as we take it to keep it below three per cent.".
Because of the possibility of statistical error, a zero at the bottom of the range could risk an unwitting dip into deflation so it may be that a 1 to 2½ per cent. range would be a safer target for the Eurozone.

This brings me to the second issue. With only 80 days to go before the Eurozone has a single interest rate set by the ECB, convergence towards a central rate and where that single rate will eventually be set are burning issues. As your Lordships know, there are still major disparities in Eurozone member short-term rates. If rates are to converge around the 3.3 per cent. Franco-German level, which is approximately where the ECB is considered likely to set the rate, some countries still have a long way to go. Spain's recent cut brought its benchmark rate down to 3.75 per cent. and last Friday Portugal and Ireland brought theirs down to 4 per cent. and 5.7 per cent. respectively.

With the Dublin authorities justly fearful of stoking up inflation in an overheated economy, convergence for them will be a fine balancing act, as the noble Lord, Lord Renton, mentioned. One must hope that they make it. One must also hope that Italy, where short-term rates are still above 5 per cent., will not, because of the political crisis, be too long delayed in managing to cut its rates.

The IMF is forecasting average European GDP growth at 2.8 per cent. in 1999. Major international banks have been cutting their forecasts to between 2.3 and 2.5 per cent. That, taken together with cuts in inflation forecasts, seems to me to make it a near certainty that the ECB will set the rate lower than was being forecast only a matter of months ago. It was encouraging to hear Wim Duisenberg recently dismissing as groundless rumours that the bank would endorse a high interest rate policy. A persistent concern has been that the bank would want to prove its anti-inflation credentials by erring on the side of higher rates. I do not think it can afford to do so now and I do not believe it will do so. But how far should it go in the opposite direction? The Deutsche Bank is saying that the ECB may cut rates down to 2.75 per cent. in two goes during the first six months of 1999. That seems a little optimistic to me. Will the dollar continue its slide against European currencies? Will there be a downturn in the Eurozone severe enough to warrant such a cut? We shall just have to wait and see.

The problem of severe economic downturns brings me to my third point, a question that has exercised us a great deal in the course of our inquiry. How will the European system of central banks deal with asymmetric, rather than global shocks? Again and again we were reminded, especially at the EMI and at the Bundesbank, of the limited role of monetary policy and of the national responsibility to provide the flexibility, especially in labour markets, to deal with structural problems and asymmetric shocks. For example, since unemployment problems in the larger European economies were

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basically structural, they could not, as Dr. Duisenberg and Hans Tietmeyer among others insisted, be solved by monetary measures.

None of us disagreed with them. Nor would I personally disagree in theory with the point emphasised by the governor of the Banque de France, Jean-Claude Trichet. It was this: in the absence of automatic transfers of the kind that a federal budget system can provide in the United States, a Eurozone country respecting the commitment demanded by the stability and growth pact to move, over a few years, to budget balance or near or into surplus has room to manoeuvre when a shock hits. It can, in Jean-Claude Trichet's phrase,

    "use its own breathing space".

I can accept that in theory; I am not so sure that I can be comfortable about what may be the practice. We raised with many, if not all, of our witnesses the question of whether the ESCB would not eventually need some kind of counter-cyclical fund to help particular countries or regions cope with short-term strains. Most dismissed that or any significant degree of budget centralisation to allow for that type of fiscal transfer as likely to be politically unacceptable. Only the CBI and the TUC witnesses seemed to feel that there was a serious need to see whether institutional mechanisms could be devised to achieve transfers between countries which are above and below trend growth, which, being reversible, would not constitute a net addition to flows and would therefore be politically more acceptable.

I understand that the president of the Central Bank of Austria has recently said that he and fellow governors of the ECB would have to consider in the next few months the instruments needed to deal with asymmetric shocks. He sees the possibility of dealing with it through the disposal of liquidity and suggests that the ECB could give national central banks the authority to raise or lower liquidity levels.

Whatever might or might not be a workable and politically acceptable instrument or mechanism, it seems to me that the case for fiscal transfers must be more positively examined by the ECB than hitherto. I am not suggesting that we go back to the Macdougall Report of the 1970s, with its call for a significant degree of centralisation of budgetary power as a sine qua non for the proper functioning of a monetary union. I am thinking more of a pooled fund on which countries below the growth trend can draw, repaying as they move back above the trend.

I come finally to the ECB's accountability and transparency. One hears much talk of a democratic deficit in light of the ECB's design as the most independent central bank ever created. I subscribe entirely to the view of Herr Regling of the German Finance Ministry that there is prima facie no such democratic deficit since the ECB's independence was written into a treaty ratified by national governments. I agree also with him and Sir Nigel Wicks that the requirements for the ECB to produce reports and appear before the European Parliament and its relevant

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committees will ensure accountability. I agree also with my right honourable friend the Chancellor of the Exchequer that the strengthening of the European Parliament's role, which was mentioned forcefully by the noble Lord, Lord Tomlinson, and the noble Baroness, Lady Crawley, in their impressive maiden speeches, need in no way diminish interest or scrutiny at the national parliamentary level.

At the risk of hearing cries from some noble Lords of, "He would say that, wouldn't he", perhaps I may close by offering your Lordships two short quotes on accountability from an article which Dr. Otmar Issing, the ECB's chief economist, contributed this summer to the Financial Times. The first quote was:

    "The ECB will, from the outset, give absolute priority to the fulfilment of its obligation to be fully accountable to the public".
The second was:

    "'Personalisation' of the internal debate can only be detrimental to the decision-making process and public perception. What is important is that the main arguments which have led the ECB to take a certain policy decision are explained to the public convincingly".
I endorse those views.

The European Central Bank has already taken important decisions in preparation for 1st January 1999--many more than I have had time to mention. The minimum reserves is one that comes to mind; wider access to the target settlements system is another. There are other major questions not yet answered which will have to be dealt with. For the European system of central banks, and the ECB at its core, the first years will be very testing and maybe the first year, 1999, the most testing of all. Launching EMU in the troubled waters of a global financial crisis is not what many foresaw, let alone wanted. In that context, the ECB may have come rather too slowly to full acceptance of the kind of impact that this crisis might have on the euro zone. But it seems now to be fully aware. We shall see how well it copes from 1st January onwards.

On the basis of what we learnt in our inquiry, which was a great deal, and what is set out in this report before your Lordships' House, I for one am reasonably confident that it will work well. It has a good constitution, an expert and experienced leader, a strong executive board, a technically excellent staff and some of the world's most competent central bankers on its governing council. I certainly wish it well.

6.17 p.m.

Lord Montague of Oxford: My Lords, my contribution will turn to something the Government might examine at the present time rather than choosing this moment to follow the course of many previous speakers.

As an industrialist, I must say that those who talk as though we have had a glorious era with our economy have very short memories. I am a stop-go creature. We have had a terrible economic time throughout my life; we have had a terrible economic time since I have been an industrialist. There has always been a golden moment. We may yet once more be coming to the end of another of those golden moments. We were told that if only we could behave as the Tigers did in Asia, all

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would be wonderful. That is not being argued any more. Now we have the capital destruction that faces us. We do not know its size; we know that the casino bankers have lost a fortune. We are about to start monitoring it. We say we will not regulate it. But what is the point of looking at it if you do not do something about it if, when you examine it, you do not like it? Who knows where we are going?

Before I turn to my contribution, I wish to thank the noble Lord, Lord Barnett, and his committee. I think they have done a wonderful job and those who criticised them were being very unfair. If we look at the way they handled their witnesses, they got all the information out of them. That is the art of a good chairman and a good committee.

I also congratulate the three maiden speakers on wonderful speeches. They each contributed important elements to our debate, and I am sure that we are very impressed by what they said.

While I am in a congratulatory mood I would also like to congratulate the previous Prime Minister, John Major, because I believe it was a great achievement to put us in a position which enables us to watch a single currency as it takes place and then to take our decision. I believe that that was very wise. Bearing in mind what I have said already about the uncertainties that exist in the world at all times, and which certainly exist at present, I hope that the referendum will not come too soon so that we get a decent opportunity to take a look. I am not saying whether it should occur during a particular parliament or during a particular period of time. But let us have time to assess what will be in the interests of our people.

As I asked earlier, what might we be usefully doing at the present time? I believe that the Government and all of us might be thinking of a very important area of our economy which is different from that of other economies in Europe and certainly in America; namely, our housing market. As we know, it is controlled by mortgage interest rates, which are shortly to be set by the central bank. It would have a tremendous effect on our economy because of the way our mortgages are structured at the present time. We mostly have variable mortgages. In America more than 80 per cent. of mortgages are at a fixed interest rate and not subject to variation in the bank and interest rates. More than 70 per cent. are on 30-year fixed interest rate mortgages, some 12 per cent. are at 15-year fixed rate. That has proved very beneficial to the American people because as the interest rates decline they are able to refinance these term borrowings at a lower rate. They have to pay for this and that is not improper. But all the time they are able to protect themselves.

We have heard from the noble Lord, Lord Shore--and I agree with him--that in the short term we are likely to experience a period of deflation. I believe that is so. But we do not know for how long. We know that all these things are cyclical. There will be a period of deflation, which will not go on for ever. There will then be another period of inflation. I suggest that we choose this moment to see what we can do to protect our people

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from the effect of all this on what they pay for their mortgages. We need to draw their attention to these matters. We need to train and educate the people.

I have two specific suggestions. First, I believe that it is quite improper that there should be redemption penalties placed on variable rate home loans. Three years ago, in Ireland, these redemptions were banned under their consumer credit Act. I believe that we should look carefully to see whether we might do the same thing. The second point to remember is that when we want to influence people to do something we do not hesitate to use our tax system. Perhaps I may remind noble Lords of two areas in which we do that. We have a different tax rate for leaded and unleaded petrol. We do exactly the same thing as regards capital gains tax. We produce various Tessas; we are about to produce another incentive so that people will save, bearing in mind that if they do so in a certain fashion they will not have to pay capital gains tax.

I turn to the relief that people receive on mortgage interest rates. We could use that as a selective instrument. There is no reason why we should not say that the mortgage interest tax relief should relate solely to fixed interest rate mortgages. Both of these propositions have to be examined thoughtfully by specialists in those areas, which I do not pretend to be. I believe that it is timely and important that while we watch and wait before deciding what it would be wise for us to do, we take this moment to look at that very important area in our own economy, which is rather exceptional as I have explained; namely, the way in which we arrange our home loans and mortgages.

6.25 p.m.

Lord Hussey of North Bradley: My Lords, the question we have been asked to answer is whether the European bank will work. Unlike most of my colleagues, I am neither a banker nor a politician. So I will not weary noble Lords with my views on political or economic issues. I will leave that to others who, like me, have been honoured to serve on this committee under the urbane, effective and sometimes stern chairmanship, of the noble Lord, Lord Barnett.

The creation of a European Central Bank integrates the economies of 11 different states. It is a gigantic experiment affecting the livelihood, incomes and standards of life of millions of people across 11 countries with different languages, different traditions, histories and characters. It is a bold concept based on one bank, one coinage and one interest rate, which may cause much greater problems for some countries than others. I see this issue as an outsider simply wondering whether or not it will work.

I have spent most of my life managing various media companies. I doubt whether many of your Lordships will regard the media world as an outstanding repository of good management practice, but at least it has taught me some principles which govern the introduction of major reforms. First, there needs to be a clear and undisputed agreement on the objective. Secondly, there should be an equally clear agreement on how that objective is to be achieved. Thirdly, it has to be decided

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who has the ultimate authority to make decisions. Finally, there must be a general acceptance that the objective is right and desirable and that the method employed is likely to achieve it--that is, acceptance by the people affected. Any doubts about the objective, the method and the authority are bound to lead to misunderstandings, arguments and possible failure.

As regards the ECB, it is not absolutely clear that there is an undisputed view as to how the bank should operate. For example, how rigorously should a Bundesbank-type policy be followed or whether a certain flexibility might ease the strain. A decision has been reached about the president, but not without an embarrassing disagreement and a patched up compromise. That is hardly the clear understanding and acceptance for which we might have hoped.

It is fairly clear where the ultimate responsibility lies. It is with the board of the central bank under its president, six people and, alongside them, the ESCB with 11 national governors of 11 national banks. They are the servants of the Community and they are not there to represent the interests of their countries. But there are also the following groups, which are all connected, all of whom have a major interest in the operation of the bank. There is the Council of Ministers, ECOFIN, Euro-X, the Stability Council and the European Parliament. They must not seek to influence members of the decision-making body. I find it rather hard to believe that they will not at times press their countries' views. Can the governors of national banks really sit at the top table and not do so? Over the presidency, Mr. Chirac said:

    "I represent my nation and would expect others to do the same"--
hardly the essence of the Community spirit.

The president of the bank will report quarterly to a European Parliament which appears increasingly anxious to listen, to comment, to criticise--and possibly even to influence appointments. I do not think your Lordships would expect the Governor of the Bank of England not to report back to Parliament, and what about all the other people reporting back to all the other parliaments?

They are the elected representatives of the people. The governors of the ECB are not elected. It is not a democratic body. That does not make it wrong, but just different. It seems to me that there is a doubt about the rigour with which the stability pact will be applied on a wide range of people who may comment on and possibly try to interfere with policy. There will be no shortage of cooks to stir this bank's broth.

Now look at the other side of the equation: the punters, if we may so describe the inhabitants of Europe. Everyone we have seen emphasised the same points, and it is a great compliment to our excellent and skilled chairman that most of the important figures in this enterprise have been willing to spare the time to come

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and meet your Lordships' committee. The Chancellor told us that for the general public to understand the ECB, transparency in its decision making would be the key. Herr Teitmeyer said:

    "The first task is of establishing credible independence."
Paul Volcker said:

    "The central bank cannot survive unless it commands universal public support".

All agree that it is absolutely critical that from the start the bank enjoys the confidence of the population. We have asked them how they expect to achieve that and I cannot say that we have had a very satisfactory answer. The best we are told is that there will be a massive publicity campaign and many speeches explaining the virtues of the bank and the benefits it will bring with it. The ECB will be long on advisors, but I fear it may fall short on accountability and transparency.

The critical issue is to build up confidence as quickly as possible from the start. The secret of the Bundesbank's success was that the German people believed in it. They had confidence in it and that enabled it to be so successful. All the countries have made tremendous efforts to reach the Maastricht criteria, even if in some cases the umpire was looking in the other direction at the right moment. But can they stand the different pace and pain of what will follow? The Commission is committed to the reform of the structural funds and of CAP. If some are going to get more, others will get less. This will create further difficulties among countries with divergent economies and different fiscal policies.

A European bank dependent on a firm monetary policy has to satisfy millions of people with a "one size fits all" monetary policy--people, incidentally, who are most concerned with unemployment and interest rates. We have asked what will be the position if unemployment continues to rise, and interest rates with them. It is always wise to have plan B. Supposing in one country the strains become considerable and one political party decides to reflate and go for an electoral platform based on a democratic rejection of the unelected ECB, and then wins the election. "What happens then?" we asked. "That is a very difficult question", came the reply.

By normal managerial standards, the ECB is a very complicated set-up, described by one commentator as a gigantic and irreversible gamble; but the political will that has driven the Community has been astonishing in the strength and determination exercised by distinguished bankers and politicians intellectually and emotionally committed to its success. The risks are obvious and I do not need to outline them further; but I agree with the noble Lord, Lord Dahrendorf, that, as far as I am concerned, the jury is still out.

There have to be doubts about whose authority is paramount, about a universally accepted objective, a complex structure and the people's confidence. But it will be disastrous for the Commission if the bank fails, and we all hope earnestly that it will not. In the end great events are moulded not by structural theories and managerial charts, but by the determination and insight

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of the leaders and their ability to command the confidence of those they lead. I agree with the words of Commissioner Silgui:

    "I think it will work. I hope it will work. It depends on the people's will and the Ministers' political will"--
to which I would add "and a bit of good luck to get away to a good start".

6.35 p.m.

Lord Peston: My Lords, I wish, like other noble Lords, to congratulate my noble friend and his committee. They have produced a report that will be valuable to students of the subject, to policy makers and, I am absolutely certain, to the economic historians of the future. As an innocent bystander in most of this debate, I intervene with some trepidation. However, I wish to make a few comments on part 4 of the report of the Commission.

I start with paragraph 100, in which essentially the question emerges: how far can a government operate its own monetary policy? The answer to that in elementary economic terms in the short run is that possibly it can set short-term interest rates, even in the presence of international capital mobility. But in the long run its scope is severely limited and there may be no scope at all. In this country monetary independence--and here I echo my noble friend Lord Montague--has meant the ability to have a higher inflation rate than the world average, to have a chronic tendency for sterling to be devalued and a need to pay a risk premium on international borrowing. That is what we get from our much-vaunted monetary independence and our much-loved pound sterling.

The report itself refers to stability, growth and employment. I have to say that I stick to my Keynesian views and I would rather have seen a formulation in stronger terms, referring to maximum growth and full employment. Low inflation is helpful to those ends as long as it is not the sole objective of policy. In my view, the greatest catastrophe--this applies not just to economic matters but to social matters that have been referred to--and the great betrayal occurred in the late 1970s when the advanced industrial economies abandoned full employment and chose inflation as their policy objective. That was the mistake and those who were then surprised at the emergence of inequality, poverty and social disaffection were actually the people who had achieved them. Why were they surprised?

In that connection I have to say that I support independence for the Bank of England and for the Monetary Policy Committee. But again I have to say how much I agree with my noble friend Lord Barnett. He and I said that the objective set down--most economists do not know this--in statute, as a matter of law, is inflation. The noble Lord, Lord Barnett, and I, tried very hard to ask for an even wider remit, but we were rejected. What worries me and what intrigues me is how few people know that the inflation objective is actually a matter of law and if for one minute any member of the Monetary Policy Committee were to say "I am interested in wider matters and I think we should go for that", I am not sure whether to do so would be a criminal offence, but they would certainly be breaking

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the law. My noble friend Lord Bruce of Donington referred to disagreements among economists. What concerns me is how many economists, including monetary ones, do not have the faintest idea about what is written in statute in this country concerning the behaviour of the Bank of England. What applies to us today appears to apply also to the European Central Bank. In paragraph 105 of the report the Select Committee states:

    "we see the need for the ECB to be closely informed about the real economy and sensitive",
and so on. I agree with that. However, I am not convinced that the ECB can take such matters into account given the way that it is set up. I should like to know a little more about that.

Perhaps I may digress slightly and take this opportunity (as a well-known creep) to congratulate my right honourable friend the Chancellor of the Exchequer. Let us assume that the world is heading for a recession, which I define as an increase in output which is less than the economy's underlying growth rate. It is fairly certain that we are heading for recession given the definition of most economists (if I may dare use that expression)--or even heading for a depression, which economists define as a fall in output. In such a situation a sensible policy stance is monetary ease on the one hand and a fiscal policy involving a deficit on the other. Excessive attention to inflation at such a time is foolish. To cut public expenditure and raise taxes in those circumstances is sheer madness. If noble Lords believe that in that regard I am an extremist I quote the words of Professor Buiter. He cannot possibly be regarded as an extremist because he is a member of the Monetary Policy Committee. He writes that in so far as there is recession or depression connected with falling demand,

    "By acting as a lender of first resort in such circumstances the government can use its unparalleled access to the international capital markets to substitute public borrowing for private borrowing, using the proceeds to sustain activity either through increases in expenditure or cuts in taxes".
I believe that to be entirely correct, and I am delighted that my right honourable friend the Chancellor of the Exchequer shares that view.

Deficits in a slump are compatible with balance over the cycle which was a point that Keynes always had in mind. He did not know about the so-called golden rule. I am less convinced of the theoretical validity of it than some of my colleagues. But deficits in the slump are also compatible over the cycle with the golden rule, so there is no problem in that respect. I believe that macro-economic policy is compatible with the stability pact as long as the matter is approached flexibly. The report has some immensely interesting points to make in this area. In particular, in paragraph 129 it states:

    "Turning to the management of fiscal balances and the operation of the stability pact, it is to be hoped"--
the committee adopts a marvellous form of words--

    "that a powerful combination of intellectual conviction and perceived self-interest over the medium term will lead to a workable combination of national fiscal policies across the euro zone".
I very much hope so.

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I believe that my noble friend Lord Grenfell and the noble Lord, Lord St. John of Bletso, referred to asymmetric shocks. It is fairly obvious that if there are asymmetric shocks an asymmetric response is required. Monetary policy is not an asymmetric response. The response to asymmetric shocks is two-fold. On the one hand, I believe that the market can do some of the job; on the other hand, a set of fiscal interventions of the kind described is required. One hopes that that will happen in Europe.

Following one theme that has been raised which is not central to the report, my right honourable friend on his own can do little or nothing about the foolhardy behaviour of commercial banks worldwide. They have lent money with a degree of profligacy that takes the breath away. They have gone for short-term profit without regard to the risk involved and then have the nerve to expect the IMF or the world's central banks to bail them out because of fears of global financial catastrophe and a return to the depression of the early 1930s.

As our recession strengthens, small businessmen go to the same banks for external credit and accommodation to tide them over until the next upswing. One wonders what the response will be. If recent history is anything to go by they will be turned down for lack of collateral as usually happens. One can hardly criticise small businessmen and women in this country if consequentially they feel bitter and believe that it is much better to go bankrupt for a few million than for a few thousand.

As to exchange rates, the committee raises a matter of enormous importance. The committee says that by definition flexibility will end as between the individual members of EMU because that is what EMU is about. But that does not exist internally in the United States. However, the fundamental question posed by the committee--I do not criticise the Select Committee for not answering it--is what is acceptable or even desirable about exchange rates between the great trading blocs. The committee draws our attention to problems that may arise--I hope that we can return to this matter at some other time--if essentially the dollar, yen and euro float. I can envisage a worldwide catastrophe or at least instability flowing from that flotation on such an enormous scale--much worse than anything that we have ever experienced. That is a subject on which I congratulate the committee on guiding us in future.

I turn to paragraph 131. My noble friend Lord Shore referred to the real dangers of fiscal profligacy. I agree with my noble friend. At present I do not see a danger to the world of fiscal profligacy; nor do I see a major danger of inflation. That does not mean that we should not be prudent as regards fiscal policies or that structural reforms are not highly desirable. However, they are desirable in their own right. Their desirability does not arise because of EMU or anything of that kind. We want market systems to work better; in other words, structural reforms in particular are not a substitute for sound fiscal and monetary policy which is interventionist in the short term.

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The question is whether the European Central Bank will work. The answer given by most noble Lords is that it will. That is also my answer. Dealing with the pure economic theory of a single currency, my view has always been that the arguments for and against are finely balanced. In my judgment--I emphasise "judgment" because I do not believe that either economic theory or econometric modelling techniques are sufficiently advanced to decide the matter--the case for the single currency is stronger than the case against. But I have always respected those who on serious grounds take the opposing view, but that is no longer the question. It is all past history because EMU is going ahead. To echo the words of my noble friend Lord Barnett, in those circumstances it would have been best if this country had joined at the beginning for the reason that we would then have been part of those who made it work. My good friend the noble Lord, Lord Marsh, made an excellent speech but I was dismayed by his view, which is held elsewhere, that we could opt out to wait and see. I do not want to opt out. If we are to do this I want the leaders of our country to be there to make sure that it works, not to take the usual course and moan about it, wait, join later and then complain that we do not like the way that it is working because we were never there to do it and no one suggested that we should be one of the leading figures to run it and so on. I believe that the decisive mistake in one sense has already been made. We are not there now.

But I believe that we must join sooner rather than later. To hibernate and say that we shall wait for a decade before taking a view on the matter would be immensely damaging for the economic and financial future of this country, apart from being completely preposterous in a parliamentary democracy. I believe that even waiting until after the next general election is less than satisfactory. On simple practical self-interest grounds, the sooner we join and show economic leadership in Europe the better.

6.50 p.m.

The Earl of Dartmouth: My Lords, first I take this opportunity to congratulate the Select Committee on the exemplary work which has been carried out on the report on the European Central Bank. It is yet another example of the huge reserves of knowledge and expertise which by virtue of being present in the House are available to the nation. I note that at least three full professors of economics have spoken in the debate. So as a mere MBA, albeit from Harvard, I shall ask for their special tolerance and indulgence, as well as the tolerance and indulgence of the whole House, which has always been forthcoming.

Many excellent speeches have already been made, but I intend to focus on one vitally important aspect of the operation of the new European Central Bank: its total independence. The noble Lord, Lord Dahrendorf, pointed to it earlier. That total independence is made clear in the Select Committee's report. I draw the attention of the House to the evidence of Mr. Martin Wolf, economic commentator to the Financial Times, who describes the European Central Bank as,

    "the most independent central bank there has ever been".

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I also draw noble Lords' attention to the section which quotes Article 107 of the Maastricht Treaty--it is important--which states that,

    "members shall neither seek nor take instructions from any government of a member state".

One of the key arguments put forward by those who advocate joining the euro is that our economic influence would be thereby enhanced. We heard that argument earlier from the noble Lord, Lord Peston. I note that he is fascinated by my remarks which currently address his speech. We also heard it from the noble Baroness, Lady Williams. The argument goes that if we join the euro our national voice would help determine the monetary policy of the euro. In fact, as the Select Committee has so ably demonstrated--I draw the attention of the noble Lord, Lord Peston, to the precise section of the report--nothing could be further from the truth. The nominated representatives of the governing body of the European Central Bank are expressly forbidden by the Maastricht Treaty to take instructions. The mantra of "influence, influence, influence", chanted by many people who should know better, has no basis in fact.

In reality were Britain ill-advised enough to join the euro there would be an immediate question mark on our membership of the G7. On every past form the probability is that we would succumb to pressure from our continental partners to leave the G7. It is thus very hard to see how joining the euro would do anything other than significantly diminish our influence.

I address the point made with some eloquence by the noble Baroness, Lady Williams of Crosby. We may now be a second level decision maker but on joining the euro, and in all probability being forced to abandon the G7, we would in all likelihood become a third level decision maker.

The absolute independence to which I alluded earlier--it is enshrined by treaty--of the European Central Bank is particularly important because of the principles on which the ECB intends to operate. I wish to draw the attention of noble Lords to an article published by a member of the ECB's executive board in the Financial Times on 22nd September, subsequent to the publication of the report. It was quoted earlier in the debate by the noble Lord, Lord Grenfell, who I see is not in his place. The author, Otma Issing, writes:

    "National considerations must not play a role with the ECB, even when conditions in one country differ markedly from the 'Euro area average'".
Thus, in case we needed any further reminding, the intention of the ECB has been made all too clear. The ECB will address the huge problem of achieving the correct interest rate, however correctness is defined, for the separate economies within the eurozone by simply ignoring entirely the very real differences in growth rates, employment levels and prosperity--I could go on--between those eurozone economies. That should be a clear warning for Britain. Our economy is markedly different from eurozone economies, especially in structure, cycle and trading patterns, and the way in which the housing market works, so ably spelt out by the noble Lord, Lord Montague; and it is markedly different from the economies of the first wave countries.

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The proud insensitivity of the ECB to national needs is bad enough; but there is a further and more worrying concern. It is clear from the report and the same Financial Times article that,

    "the primary objective (of the ECB) will be price stability in the euro area as a whole".
The noble Lord, Lord Dahrendorf, made the point earlier. This overriding emphasis on price stability is very serious for all the first wave euro countries and, indeed, given the importance of the eurozone, for the rest of us.

I wish to restate what I said in an earlier debate that was even more sparsely attended than this debate. It is in our national interest for the eurozone to work. However, the major economic problem potentially facing the world is not roaring price inflation but deflation and its uglier sister, endemic long-term unemployment. That long-term unemployment is particularly severe in the first wave euro countries. That is why it is bizarre that people who purport to be Keynesians should be in favour of that construction.

The shock waves from the Far East and especially the destruction of banking liquidity in Japan mean that it is at least even money that the world is entering an era with at least one of the characteristics of the 1930s; namely, long-term deflation. As the noble Lord, Lord Shore, pointed out earlier, that view is also held by the Chancellor, President Clinton and the Finance Ministers of the G7. In the context of the new deflationary environment, the European central bankers are uncannily like those army generals who are able only to fight the last war but one. If we allow ourselves to be led by those people, Britain will become not so much a nation of lions led by donkeys as lions led by blinkered mules.

What I have said is, of course, open to the objection that the Bank of England, too, has been given narrow objectives relating only to price stability similar to those laid down for the European Central Bank. In that context, I wish to applaud the amendment proposed on a previous occasion by the noble Lord, Lord Barnett, seconded by the noble Lord, Lord Peston. In effect, the amendment aimed to widen the Bank of England's objectives to encompass the well-being of the entire British economy. However, notwithstanding its narrow remit, the Bank of England has to take into account--and only take into account--the needs of the British economy. The mere fact that the British interest rates are currently at a very different level from interest rates on continental Europe--I agree that they should be lower--demonstrates that we can have our own monetary policy. Indeed, we are running our own monetary policy at present.

Before I conclude, and in the context of what has been said in the debate, I have to say that I find it completely baffling that many Keynesians and trade union leaders are strongly in favour of entering the euro and hence having British interest rates decided by the European Central Bank. Unfortunately, everything we know would seem to confirm that the European Central Bank in Frankfurt will be far less interested in manufacturing and employment in Britain than is the case when interest rate levels are decided in London.

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In conclusion, and rapidly, I would like very sincerely to congratulate Members of the Select Committee on their knowledge, expertise, and, above all, their intellectual honesty. But I also feel that I have to add that the most important problem facing the whole of Europe, not only the first wave eurozone countries, is not the operation of the new central bank or the number of currencies in the eurozone, but the lack of competitiveness, which was touched on by the noble Lord, Lord Dahrendorf, and the number of unemployed. It is that crisis, the continuing crisis of the nearly 20 million without work in the euro countries, before we hit a possible world-wide depression which the operation of the new European Central Bank will do nothing to solve and, on the basis of this report, will very likely make much much worse.

7 p.m.

Viscount Hanworth: My Lords, I have hardly any voice worth speaking of, but I hope to recover it in a sentence or two.

The report of the European Communities Select Committee rightly deserves the praise which it has been given and I do not believe that it deserves any of the criticism which I have heard today. It is very readable, which is unusual for such documents. It is both quizzical and sagacious and it opens our eyes to many of the imponderable and undecided issues affecting European monetary union.

The report provides a refreshing contrast to the emotionally-charged Europsceptism of recent years which has been whipped up by the party opposite and which is still being exploited by it for reasons relating largely to its own internal struggles. From time to time, we hear echoes of this frenzy on our own Benches.

The report bears witness to the fact that European monetary union is a reality which will materialise very soon. It now seems certain that Britain will join the monetary union shortly after the next election, when this Government will surely continue in power.

We have witnessed some remarkable developments since the ERM was destroyed by waves of speculation in the international money markets when Norman Lamont was Chancellor of the Exchequer. At the time, many people imagined that this spelt the end of the enterprise of monetary union. In fact, the experience hastened its advent by emphasising the need for European nations to protect themselves against such monetary storms by consolidating their defences.

It might be appropriate to examine some of the supposed costs and disadvantages of our joining the monetary union and to compare these with the costs of remaining outside. We can do so now on the supposition that the union will materialise in a strong and substantial form. This is unquestionable.

One of the supposed costs of our joining is the loss of monetary sovereignty, which is the ability of our own central bank to set interest rates and discount rates at its own discretion and to control the liquidity of the national money supply.

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I would contend that we no longer possess such freedoms; and I believe that most economists share this opinion. We are too exposed to pressures from outside to be able to pursue an independent agenda.

When we pulled out of ERM, which, by his own admission, had Norman Lamont singing in his bath, we were able to cut interest rates at a stroke, which was a great boon; and this did seem to be a persuasive proof of our independence.

The reality was that this opportunity arose from a unique conjuncture in the world economy when the interest rates in Frankfurt were some six percentage points higher than those in New York. In fact, we did not reassert our independence--we simply realigned our policy from a European affiliation to an Atlantic one.

Today, interest rates in Germany are substantially below those in the US and this situation, which is the normal one, can be expected to persist. Our orientation toward the dollar rather than to the euro is bound to impose a burden of higher interest rates.

We should also recognise that our interest rates are higher because sterling is a weak and dependent currency which is bound to offer a premium against the risk of depreciation or devaluation. This is a deadweight loss which is due to our detachment from Europe and our flotation in the choppy and sometimes stormy seas of the international money markets.

There is a real cost in our joining Europe, and this is the loss of our ability to carry out an emergency devaluation in case of a recession or a radical loss of competitiveness. But the chances of our needing this recourse, even in such times, are liable to be greatly reduced by the financial probity of our Government and by the policies of our own Chancellor.

If the devaluation option is to be regarded as an insurance policy we must have regard to the costs of the premiums. Those already include the highest interest rates in the whole of Europe. Tomorrow they may also include another large cost which we certainly cannot afford to pay. This is the loss of foreign direct investment.

France, which will be a first-round member of the monetary union, already attracts a foreign direct investment second only to our own, and if we stay out of the monetary union, France is liable to overhaul us quickly. We know, for example, that Japanese motor manufacturers have recently decided to locate factories in France rather than in Britain for reasons which relate to monetary union.

If we stay out of the union Britain's financial sector will also be at a severe disadvantage. Our excessive dependence on finance, which arose during the Thatcher years, is to my mind, a regrettable feature of modern Britain.

During those years, our export industry was devastated by macro-economic mismanagements. Our position in the league table of economic prosperity sank rapidly and we are now the fifth poorest nation in Europe. Soon, when Ireland overtakes us, we shall be the fourth poorest. Then we shall count ourselves superior in per capita income only to Spain, Greece and Portugal.

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However, our dependence on finance is a reality and, therefore, it represents a genuine national interest which can be pursued effectively only within the context of European banking. A country with such a depleted real economy as our own cannot sustain so large a financial sector.

The hypertrophy of the financial sector has been at the expense of other organs of the economy. In future, it must draw its sustenance from a larger and a healthier body or else it will be the death of us.

European monetary union is going to occur, and it promises to create a strong and robust system. However, the formulae governing the European Central Bank are not ideal. If our negotiators in 1991 had not been so intent on securing our escape clauses and had given more constructive attention to the emerging arrangements we should not be confronted with the present dogmatic prospectus for the Eurobank which is modelled so closely on the German experience.

We should remember that the Bundesbank dates only from 1957; and given that it has been sailing mainly in calm seas, one has reason to doubt whether it has the experience and the wisdom which are so often attributed to it. In fact, it could be argued that the Bundesbank failed its first major test, which was the challenge posed by German reunification.

The European monetary institutions are bound to evolve, and it is vital that Britain's unrivalled experience in financial and monetary matters is brought to bear in this process of evolution.

It seems as though we are heading for a period of uncertainty and even turmoil in the international economy. A consolidated Euroland will be a major factor in favour of stability. It will be so substantial in productive and financial terms that it will not be swamped in the storms blowing from the Pacific, the Atlantic or the Baltic. The capital markets of the currency union will be wide, deep and stable. It is on such calm seas that a small vessel such as our own economy should seek to ply its trade.

Many people fear that monetary union is only a first step toward European integration and that further measures of fiscal integration will follow. What have we to fear from this? Certainly we should have no fear that Britain will be burdened with subventions to other European economies. In consequence of the breathtaking success of Conservative economic policy, we are, as I have already asserted, near the bottom of the league. It is sad but true that Britain would be a beneficiary from any policy of regional redistribution which might arise with the European Union.

7.9 p.m.

Lord Taverne: My Lords, I share the admiration that has been expressed by many speakers for the committee and all its works. In fact, if one looks back at the history of Britain's relationships with the European Community, it might be said that the committee has contributed more than any other activity of our Parliament to the understanding of European issues. I am glad to see the four members of the European Parliament nodding in agreement. The report before us

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is another example of the good work of the committee, which in this field makes it the star of our Parliament. I congratulate the chairman of the committee, the noble Lord, Lord Barnett.

I wish to express my admiration for the maiden speeches that have been made. One often says, as a matter of courtesy, that maiden speeches have been very good, but on this occasion I think that they have been exceptionally good. One can expect from the noble Lord, Lord Burns, a great illumination of the intricate economic problems that we face. I shall refer later to one aspect of the problem of the central bank which he mentioned. It is also enormously to be welcomed that we shall not have a purely Anglo-centric view of the subject but that the experience, eloquence and insights of the two members of the European Parliament who have spoken in the debate will be available to us.

The speech of the noble Lord, Lord Tomlinson, rather contradicted the speech of my noble friend Lord Dahrendorf. When I differ from my noble friend Lord Dahrendorf, which is not often, I do so with the greatest of diffidence, but on this occasion I must say that I have rather more sympathy with the remarks made by the noble Lord, Lord Tomlinson. I do not see that the concentration on stability in the remit of the European Central Bank is necessarily a weakness, or a sign of navel gazing, or that it shows a lack of concern about the creation of jobs. An obsession with stability might well be damaging, but stability does not mean deflation. As the noble Lord, Lord Tomlinson, said, stability can be the basis for better employment policies and other policies which are very much matters for governments and not just matters for the central bank.

I turn to the importance of the report. At the moment the Government's attitude is still one of "Wait and see". Some friendly noises are being made, particularly by the Chancellor of the Exchequer, who clearly believes that membership is desirable in principle. But no decision has yet been taken. We are told, "It depends on economic circumstances". That makes life difficult for businesses because businesses will have to take a decision and a view at least two to three years before entry into the euro by this country. In any event, businesses will be taking a view as to whether the euro will work.

The committee's report is a valuable contribution to the debate because it gives some guidance to business. It is an authoritative report because it suggests that the ECB will work. I believe that businesses would be helped--I very much agree with the remarks of the noble Lord, Lord Peston--if the Government were more committed. Instead of saying, "Let us wait and see. We are quite friendly to the idea", it would be much more helpful if they said, "Yes, we will commit ourselves unless there are special circumstances at the time which prevent us from doing so". It is becoming daily more evident that if the euro and the central bank work, as the committee predict that they will, we cannot afford to stay out.

I turn to some of the doubts. Will the Euroland system break down? Fortunately, we have not heard in the House any suggestion that speculators may somehow or

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other break the euro before it finally becomes legal tender in the year 2002. That is quite impossible because in effect one has one currency although it takes 11 different forms. However, there is still the fear, which was expressed by the noble Lord, Lord Hussey of North Bradley, and, to some extent, by the noble Lord, Lord Ashburton, that some countries might be disposed to jump, that the policies of the European Central Bank will be inappropriate for the special circumstances of the country, that unemployment could follow and then a party could commit itself to leaving the euro and rejecting the central bank and, as the noble Lord, Lord Hussey, suggested, might even win a majority. That cannot be ruled out but the likelihood of it happening must be very small.

The cost of leaving Euroland would be enormous. The complexity would be enormous. A country would not be going back to its former currency because that would have been wiped out and would no longer exist. It would have to adopt a completely new currency. It might be able to do that with regard to domestic debts and mortgages, but how would that country's bonds held overseas be determined? What proportion of the reserves could be clawed back? I believe that such a possibility can be discounted.

I come back to the question faced by the committee. Will EMU work and will it work well? It is not easy to predict. Many obstacles in the face of it working well have been adverted to during the debate. I wish to highlight three problems. The first concerns managing the money supply, which was referred to by the noble Lord, Lord Burns. Not only is it more difficult to manage the money supply for a group of countries than for one country--that is difficult enough--but it will be a problem which the central bank has to face in particularly unstable circumstances. There are likely to be shifting patterns in the way people hold money. Not only will Eurostat data, to which the noble Lord, Lord St. John of Bletso, referred, be uncertain, but the economic indicators as a whole may give a misleading message. In some ways it will be rather like the early 1980s, after financial liberalisation in this country, when a good many monetary policy errors were made because the indicators were uncertain.

There will be uncertainty with regard to how monetary policy will affect prices and output across Euroland. There will be different impacts in different places because of the different financial systems and the different tax structures. That is one good reason why there will be strong pressure for tax harmonisation, certainly in the corporate tax field. A difficult balance may have to be struck. Another good reason for saying we should be there is that the members of Euroland may well harmonise their taxes in ways that work to the disadvantage of the City and this country.

The second problem is co-ordinating monetary policy and fiscal policy. There has to be co-ordination at two levels, which makes it very difficult. First, there has to be success in the major tasks of co-ordinating government policies inside ECOFIN. There is also the

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difficult task of co-ordinating the policy of ECOFIN and the European Central Bank. It is a complex problem that has to be solved.

The third difficulty is the complications arising from the likely rapid increase of the holdings of the euro internationally. As European securities markets become deeper and more liquid, transaction costs will fall and euro assets will become more attractive. At the same time, more and more trade will be financed in euros and there is likely to be a substantial shift over the long term, and indeed probably in the short term, from international holdings of dollars into international holdings of euros. The euro will rapidly become an enormously important currency. Yet the temptation will be to regard the exchange rate as something which can be treated with benign neglect, which is already the attitude of the US administration. If the euro bloc and the dollar bloc treat the exchange rate with benign neglect, one may have a period of great uncertainty and volatility in international markets. That could present a considerable risk. It will call for the closest co-ordination of policy between Europe and the United States.

Formidable problems have to be faced. Not all of them have been dealt with in the report but most of them have and they have been dealt with very effectively. Not surprisingly, I agree with the report's conclusion that it is likely that the central bank will be successful and that EMU will work. It is not as though all things are beautifully managed in other monetary unions, simpler monetary unions. One of the most interesting pieces of evidence was that of Paul Volcker, who pointed out that, as regards the United States, the idea that there is a happy and easy co-ordination of fiscal and monetary policy is a complete illusion. Therefore, the problems are not unique and will not be unique to Euroland. Indeed, if one looks at the management of the monetary union of the United Kingdom, we have one interest rate policy which is totally inappropriate for part of the United Kingdom but must be adopted because it is necessary for another part of the United Kingdom. Those are not new problems. They are more difficult but they are not new.

The other fact which comes strongly from the evidence given to the committee is that there is a greater degree of convergence than one could possibly have expected five years ago. That makes the problems a great deal easier to solve. I am impressed also by the progress being made on structural change. For example, many people refer to the rigidity of wages on the Continent. They have not yet grasped the fact that, whereas only a year or more ago the average wage in east Germany was 90 per cent. of the average wage in west Germany, it is now down to 70 per cent. That is a degree of wage flexibility which would be surprising if it happened in the United Kingdom. There is a great deal more flexibility on the Continent than we sometimes imagine and there is a great deal less flexibility, as Mr. John Monks pointed out in his evidence, in the United Kingdom than we sometimes boast of, particularly as regards the degree of training and the facility of moving from one job to another.

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There is a worry that the one area in which relatively little progress is being made is state pensions. There is still time for reform to take place. Some reform is happening in Germany and a great deal has happened in Italy. There is not yet much sign of reform in France. However, that will be one of the most important parts of structural change which will have to take place.

In the end, I agree entirely with what has been said by many speakers: it is all a question of political will. It is extremely unlikely that the member states of Euroland will say, "Now we are in, we can let rip. We no longer have to follow responsible policies. We do not care if the system collapses. We shall go our own way". Of course they will not do that. They will continue to pursue their determination to make Euroland a success.

One should remember also that the United Kingdom has consistently underestimated the degree of political will which exists among the members of Euroland and, indeed, the degree of pragmatism with which they have pursued their aims. As the noble Lord, Lord Tomlinson, pointed out, we should remember that the sceptics have a very bad track record. They have never understood, because they have not wanted to understand, what is happening on the Continent of Europe. They said that EMU would never happen and they now say that EMU will fail. They were wrong about the first; it is extremely likely that they will be equally wrong about the second.

7.22 p.m.

Lord Mackay of Ardbrecknish: My Lords, I am extremely concerned about this debate. I shall tell your Lordships why. I am the last speaker tomorrow night. I have done a calculation which shows that, if 22 speakers take until half past seven, goodness alone knows how long 50 speakers will take. I shall try to set a good example by being brief.

First, I congratulate the three maiden speakers. They have all brought an interesting and refreshing view to your Lordships' Chamber. The noble Lord, Lord Burns, performed the task of an ex-civil servant and the non-controversial nature of a maiden speech in a quite exemplary fashion. I noticed that he said some nice things about Ken and some nice things about Gordon. That was very evenly balanced.

I am not entirely sure whether the noble Lord, Lord Tomlinson, and the noble Baroness, Lady Crawley, quite managed the same high-wire act of balance and non-controversy. They seemed both to wish to mention some seaside town in the south of England for some obscure reason which I could not quite work out. We enjoyed their contributions and welcome them back home from the European Parliament, a point with which I shall deal later in my contribution.

It took quite some time, in fact until we heard from the noble Lord, Lord Montague of Oxford, before it was pointed out that we can have this debate and contemplate whether or not we should join EMU and, therefore, the European Central Bank thanks to John Major who, in the teeth of opposition from the then Labour Party, negotiated our opt-out. The Labour Party is now happy to use that opt-out, and I pay tribute to it for doing so. That is very sensible. John Major

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negotiated the opt-out because he thought that was in the best interests of the United Kingdom. The noble Lord, Lord Taverne, does not approve of the opt-out. I am used to following the noble Lord. I should explain to the House that my problem in these debates is that, when I listen to the profound Euro-sceptics, they make the hairs on my back crawl and I become quite keen on Europe, and, when I listen to the Euro-fanatics, I go off the idea and would rather listen to some of the more balanced speeches that we have had--and we certainly have had them.

I start by looking at the whole question of monetary policy, what the central bank will do and what its objectives will be with regard to some other aspects of economic policy--employment, fiscal policy and so on.

I am sorry to say to the noble Baroness, Lady Crawley, that I do not believe she will like this quotation because she does not quite realise exactly what the position is. It is a quotation from the report that was drawn to our attention by the noble Lord, Lord Dahrendorf, whose views I usually find myself in fairly close agreement with on this subject; namely, in favour of the European Union but very nervous indeed about what the single currency may do to it. I draw your Lordships' attention to paragraph 58 of the report, which states:

    "Dr. Duisenberg, too, was clear that dealing with problems of high or rising unemployment or of lagging economic growth 'is not and cannot be a primary concern of the monetary authorities'".
That point was drawn to our attention also by the noble Lord, Lord Peston. That is the simple fact of the matter.

The previous paragraph states that:

    "Dr. Gaddum amplified Dr. Tietmeyer's views by making explicit their position that in a monetary union it remained a national responsibility to provide flexibility to deal with structural problems and asymmetric shocks. This would be done partly by means of national fiscal policy but more especially by the flexibilities of the labour and product markets".

Those two paragraphs make it perfectly clear that, just as the Bank of England, by law, is bound to do only one thing and given only one golf club with which to do it, so the European Central Bank is under the same rigidities, if I may call them that.

I cast my eye down the page to paragraph 60, where the report quotes our Chancellor, Mr. Gordon Brown, who said:

    "What I mean is preparing the economy for the future challenges, giving people the skills that are necessary to enable them to get jobs wherever these jobs are, allowing people to make the transition from jobs in older industries to jobs in new industries".

The noble Viscount, Lord Hanworth, may listen to that. I wonder whether the Chancellor would like to tell that to the 150 employees of Light-on; a high-tech new industry in Lanarkshire, who have now lost their jobs; or the 200 in East Kilbride who work for Motorola Ltd.--not exactly an old industry; or the 500 who work for Compaq in Scotland who are also to lose their jobs--not exactly an old industry; or the 600 at National Semi-Conductors at Greenock. I give one example south of the Border and I do not know why I should choose this example but 600 people are to lose their jobs at Fujitsu--not exactly an old industry--in Sedgefield--not unknown to the Prime Minister. There are

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1,000 people to lose their jobs at Viasystems in the Borders. All those people are losing their jobs. They are hardly in old industries. The Chancellor may have to revisit the confidence that he certainly had when he spoke to the committee some months ago.

Therefore, I worry that the European Central Bank will be looking at only one factor and will not be allowed to concern itself with employment aspects and the results of that policy. Therefore, individual countries must find other mechanisms to deal with those issues. One will be in fiscal policy. The noble Lord, Lord Barnett, pointed to the danger of fiscal irresponsibility in member states. The noble Lord, Lord Taverne, makes it clear that he wants tax harmonisation. I noticed that in its evidence, the CBI said that it would not support tax harmonisation. It seems to me that national governments must be left with some tool or other and I should have thought that taxes must be one of the tools with which they should be left if they are to respond to whatever is happening inside their own economies when they can no longer use interest rates.

The other interesting point--this was mentioned by the noble Lord, Lord Grenfell--relates to interstate transfers of cash, as happens in the United States. The simple fact of the matter is that to get an interstate transfer in European terms, one would have to see the European budget increasing or savings somewhere in the current European budget in order to make money available. I certainly have my doubts about the latter, especially when I heard this morning that another £300 million has been dished out by the European Community to help French winegrowers meet competition from abroad. I cannot believe that some of your Lordships would approve of that in any way, shape or form, but I am afraid that it is typical of the way that the system works. It seems to me that that hardly helps with the problems of labour rigidities, regulations and free markets, but there you are. As I am a cynic about reforming the common agricultural policy, I think that it will still pull in a lot of money.

As for increases in the EU budget, I do not think that that will happen either. I advise the noble Viscount, Lord Hanworth, that wherever we may be in the league, we are the biggest contributors to the European budget after the Germans. If it had not been for the rebate negotiated at Fontainebleau by my noble friend Lady Thatcher, we should be even larger contributors to the European budget. Given what we put in, I do not think that we receive much back from Europe.

The noble Lord, Lord Desai, asked Commissioner de Silguy about interstate transfers. I am sorry that the noble Lord is not in his place and participating in this debate. I always find his interventions interesting and enjoyable. Today I have not heard the noble Lord--and that is very unfair. I am sure that the noble Lord must be doing something very important because he is not

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usually backward in giving your Lordships his views on such matters. The noble Lord asked this very question about interstate transfers and increases in the EU budget. Commissioner de Silguy said,

    "No, to put it bluntly",
so there will not be interstate transfers.

As the noble Lord, Lord Marsh, said, there will not be the mobility of labour in Europe that there is in the United States, where people think nothing of moving from New England to California. There is some movement in Europe but nothing of the degree mentioned.

The whole problem of the rigidities that will be placed on the 11 members of the European Central Bank as a result of single interest rates is part and parcel of what we shall have to watch happening over the next few months and perhaps for the next two or three years before we can decide whether it will succeed.

Ireland, Spain, Finland and Portugal appear to have pulled out of the recession earlier than France and Germany. Short-term interest rates in those countries, sometimes referred to as the "peripheral countries", are much higher than in the centre. The noble Lord, Lord Grenfell, mentioned that, although he indicated that interest rates were dropping at the periphery. Interest rates are dropping, but what will happen in Ireland? My noble friend Lord Renton of Mount Harry has not been able to wait until the end of the debate, for which he apologised to me and, I think, to the noble Lord, Lord McIntosh. My noble friend got his timing a bit out as to when the debate might end. He was much more optimistic than I am. He has not been a Member of your Lordships' House long enough for that optimism to have gone long since.

Both the noble Lord, Lord Grenfell, and my noble friend Lord Renton of Mount Harry mentioned Ireland, which has high growth, inflationary dangers and high interest rates. Ireland's interest rates will have to fall. How will it cope with that? It will be interesting and instructive to watch how that comes about and the result for the Irish economy.

I shall go over my self-imposed time limit, but I want to turn to accountability because that is important. There is a difference between accountability and political control. I suspect that the French would like political control. That is why there was the argument over who should be the president of the bank. No one else seems to want that. I think that it would be the worst possible outcome. How can there be political control when there are 11 member states, 11 governments? It is impossible. Accountability is, however, very important.

Dare I say to the noble Lord, Lord Tomlinson, and to the noble Baroness, Lady Crawley, that I do not think that giving evidence to the European Parliament will create great confidence in the central bank among the European population? We may regret that, but it is a simple fact. I do not know about other countries--I think this is true there also--but in this country membership of the European Parliament is very much a second best. If you cannot get elected to the House of Commons, you stand for the European Parliament. If you lose your seat in the House of Commons--this is true of members of all parties--you try to be elected to the European Parliament. I decided that becoming a Member of your Lordships' House was by far

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the best option when I lost my seat. Although the pay and rations are not nearly as good, the company is much more congenial!

I do not think that giving evidence to the European Parliament will bring about a great rise in confidence in the European Cental Bank among the European population. It will be a question of the way in which the central bank projects its decisions to the press and the public and of the clear publication of its decisions. The noble Lord, Lord Burns, mentioned that. He mentioned in particular the "Ken and Eddie Show".

I turn now to paragraph 109, with which I disagree. The committee stated:

    "On one particular manifestation of transparency we see a case for less than the maximum possible openness. We are persuaded, largely by the arguments advanced by Dr. Tietmeyer, that meetings of the Governing Council of the ECB should be followed promptly by publication of decisions taken and of the reasons for those decisions, but that publication should not go so far as to disclose the course of the argument, with its ebb and flow as minds are made up and changed".

There are two problems with that. First, given the people involved--the central bankers of other countries--they will not be able to resist giving some flavour of what they thought at the private meetings--that is, if the meetings are kept private. In my view, it is far better to have complete openness. I am surprised that members of a party which says that it wants open government are prepared to countenance the publication of only partial minutes. That would be the worst of all possible worlds. It would almost be better not to publish anything rather to publish partial minutes. It is important that there are clear and meaningful minutes, with the maximum amount of openness, even if that shows disagreements among members. If the minutes do not show that, I fear that the hints in the corridors of power in the member states will certainly show it.

Several noble Lords have drawn attention to the unsatisfactory way in which the Council of Ministers came to a view about the appointment of Dr. Duisenberg and how oddly that fits with the evidence that he gave. The noble Lord, Lord Marsh, read out exactly what Dr. Duisenberg said to the committee, which does not quite square with giving up after four years.

The other point that I should like to mention briefly--Mr. Volcker mentioned it in his evidence--is the importance of the regional aspect. Your Lordships will remember that I tried to persuade the Government that the Bank of England's Monetary Policy Committee should contain someone who has ever lived or worked outside the magic triangle of Oxford, Cambridge and London. I even had the temerity to suggest that a Scot might serve on it, nominated by the prime minister, premier--or whatever I have to call him--of the new Scottish parliament. I shall call him the "prime minister", although I gather that the Prime Minister of the United Kingdom does not approve of that, but perhaps that is a good reason for doing it. Exactly the same arguments apply to the European Central Bank. It is vital that the people on the periphery feel confident that the members of the European Central Bank understand what is happening on the periphery.

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My next point relates to exchange rates. The noble Lord, Lord Taverne, mentioned that he does not like the idea of benign neglect. I agree. This is particularly important for the United Kingdom. Many countries in Europe will not be too worried about what happens in the outside world because so much of their trade is inside Europe. We are not in that position. We are just as interested in trade with the outside world as in trade with Europe. We shall have to be careful about that.

The last question to which I want to turn is: will it work? The noble Lord, Lord Ashburton, quoted paragraph 72 on the stability pact. To the questions:

    "How will the stability pact work? Will it be accepted? Will it put undue pressures on the conditions in individual countries?",
Professor Goodhart's answer was less than reassuring, as the noble Lord, Lord Barnett--or rather, the writer of the report--rightly pointed out. He said, "We do not know". The stability pact is relevant to the question of, "Will it work?". Commissioner de Silguy gave exactly the same answer. He said:

    "I hope it will work. I am sure it will. All the ingredients are there. It depends on people's will. The Ministers' political will".

I think that there is a huge amount of political will for this on the Continent. Several noble Lords have said that we in this country perhaps underestimate the amount of political will. I do not. I think that there is a huge amount of political will to make the euro and the European Central Bank work. However, especially in a turbulent economic world, a huge amount of political will does not necessarily mean that it will work. From the point of view of the United Kingdom, however, whether we are in or out of the single currency, those other European countries are important nations. They are our partners in the European Union. Therefore, it is important for their economies and for ours, whether we are in or out, that the experiment on which they are all embarking works. But I think that there are some doubts.

7.40 p.m.

Lord McIntosh of Haringey: My Lords, it is not always the case but on this occasion the courtesies are very easy. It is easy for me because I believe that this is an important and fascinating report. The committee has done some sterling work and the amount of authoritative evidence which it has presented is remarkable, almost unprecedented. The debate which it has engendered in your Lordships' House today--which is not always the case--has been consistently well informed, consistently interesting and sometimes even to the point of the subject matter of the committee.

In addition to that--and again it is not always the case--it has provided an opportunity for three quite remarkable maiden speeches. Without distinguishing between them, they were all extremely well informed, fluent and confident. Without too much breaching of the rule of being uncontroversial, all added successfully to the quality of the debate. In all those senses, this was a successful report and a successful debate. I congratulate the noble Lord, Lord Barnett, and his colleagues.

It is even more remarkable when one considers the timetable for the report and the debate. I assume the committee must have been appointed before Christmas in

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order to begin taking evidence at the beginning of January of this year. At the time when the committee was appointed, a great deal of conventional wisdom was that convergence would not be achieved. If it were, by some fluke, achieved, it would be in a way which would be unsustainable and it would explode very rapidly. Therefore, the timetable for achieving the start of the EMU process and the establishment of the ECB in May of this year would not actually come about. That is reflected in some of the evidence and sometimes in some of the questioning. The noble Lord, Lord Ashburton, was not alone in expressing his amazement at the speed.

The committee was sitting while changes were taking place. It was shooting at a moving target, so to speak. It is remarkable that the report is still readable with the degree of credibility that it has. I did not expect my noble friend Lord Shore of Stepney to find it credible.

There is some difficulty about the timing of the debate. It is true that in a sense it is apposite in that there are 80 days to go before the euro is launched. It is also, as my noble friend Lord Shore of Stepney rightly pointed out, being debated at a time of considerable turmoil in global markets and the global economy. We must take that into account in the view that we take.

It is also slightly out of kilter. As we have been reminded, it should have been on the 75th birthday of my noble friend Lord Barnett. We miss that by a day. We congratulate him four-and-a-quarter hours ahead, if we are allowed to do that.

Having said that, should we not consider whether in a real sense the task which the committee set itself--to ask the question "Will it work?"--is trivial? I do not mean that in the literal sense. Literally, as my noble friend Lord Barnett reminded the House, I told the House on 28th July that it would work. If there were any discipline in the House, no further debate would be called for. The committee does not quite say that. It says in its final phrase,

    "we do not expect it to be allowed to fail".
That is a feeble way of saying what I said much more forthrightly. We could have expected more from the committee.

The question "Will it work?" is in a sense trivial, partly because everybody seems to agree that it will work. The real questions--which I cannot debate this evening because I am responding to the debate about the committee's report--are what is the European Central Bank for? Do we want what it is for? If we do want what it is for, how can we help it to achieve that? If we can help it to achieve it, and it does achieve it, how will we benefit by that? Those are the real questions. I can only hint at some of my own views on those issues while confining myself properly, as I have to, to the subject matter of the committee's report.

Of course a single European currency is a huge venture. Anybody who thinks that it has ever been easy must have forgotten that when the United States of America was founded not all of the United States joined in the single currency, the common currency, which was set up at that time. The state of Vermont held out for eight years and had its own currency. I gather that there

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were severe economic problems in Vermont which brought it to heel rather rapidly. I do not know whether there are lessons to be learned from that. I leave it as a question.

It is what the committee's report calls "unchartered" territory. I think it means "uncharted" territory. It will be hugely difficult but, as the noble Lord, Lord Burns, reminded us, all monetary policy issues are difficult and we cannot expect this to be any easier. The more important issue is that the test of a successful single currency is whether it delivers growth and high employment. I cannot say to my noble friend "full employment" because he has not defined exactly what he means by "full employment"--and I am not challenging him to do so.

The two wings of economic policy which lead to this objective of growth and high employment are, as has been said, stability--including, but not confined to, price stability--and the structural reform of Europe's labour, product and capital markets.

The European Central Bank will play a vital role in ensuring the success of EMU. In working to achieve its primary objective of price stability, it will be instrumental in maintaining Europe's platform of economic stability. Low inflation is an essential building block for sustainable long-term growth and employment. We share this objective in the United Kingdom.

To work most effectively, the ECB must be understood by financial markets and the European public. The committee emphasises the need for the ECB to foster transparency in its operations. That was confirmed by the noble Lord, Lord Burns. Somewhat to my surprise, my noble friend Lord Grenfell thought that the degree of transparency which already exists--and I do not know whether he meant the Bundesbank--was sufficient for the purpose. Transparency is a key element in ensuring that the ECB gains the trust of the public. I am comforted in that view by the support of the noble Lord, Lord St John of Bletso, and my noble friend Lord Bruce of Donington, who referred to the need for support from among the general public as well as the financial markets. Ultimately, it will help provide the credibility needed to develop a more effective monetary policy.

The committee also emphasised the importance of accountability. As my noble friend Lady Crawley reminded us in her excellent maiden speech, the ECB and European Parliament must co-operate to ensure that there is proper scrutiny of monetary policy decision-making by a democratically elected authority, while at the same time respecting the necessary independence of the central bank. The framework set out in the treaty, provided it is used effectively, is a sound basis on which to establish this accountability. The ECB must quite properly have independent responsibility for monetary policy in the euro area and operate free from political interference. Indeed, as a number of noble Lords have said, the European Central Bank will be one of the most independent central banks in the world. As the noble Lord, Lord Taverne, said, you could have a central bank which is subordinate to a

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single government but it is difficult to imagine a central bank which is subordinate to the political will of 11 or, we must hope, 15 or more governments. But independence need not mean isolation. The ECB must not be allowed to become remote from those who will be directly affected by its decisions.

Full use must be made of the treaty provisions for ensuring there is a continuous and constructive dialogue between the ECB and ECOFIN. Again, a number of noble Lords--particularly from the Liberal Democrat Benches--referred to this political dimension. The dialogue I have mentioned will be essential to the smooth functioning of monetary union. As agreed at the Cardiff European Council, European leaders are due to meet at the end of this month to examine a range of ways in which European Union institutions and policies can be brought closer to Europe's citizens.

I have said that stability and economic reform are key to the success of the single currency. As I made clear, and as my noble friend Lady Crawley recognised in her, so to speak, throw-away remarks at the beginning of her speech, low and stable inflation is but one element of this. I am not sure that I follow the arguments of my noble friend Lord Barnett--I do not find them outlined so strongly in the report--about fiscal profligacy. Like other noble Lords, I do not see that, as we have come all this way towards conversion and seem to have done it successfully, fiscal profligacy is likely to be on the agenda. However, it is true that continued fiscal discipline, building on the successes of recent years, is essential if the benefits of monetary union are to be realised. The committee recognises in its report the impressive progress made by member states in recent years in reducing deficits in line with the requirements of the treaty.

Indeed, the level of commitment among all member states to maintain fiscal discipline and improve their public finances should not be underestimated. It was demonstrated again recently in the declaration agreed by the Finance Ministers of ECOFIN on 1st May, explaining how the stability and growth pact will be implemented in the important early years of EMU. I am pleased that the committee recognises and supports this level of commitment in its report.

The committee raised the issue of flexibility of national fiscal policies within the stability and growth pact. Fiscal policy will remain the responsibility of member states and their governments in EMU. The stability and growth pact constrains deficit levels, but provided member states pursue sound fiscal policies over the medium term, there should be room for fiscal policy to operate over the cycle. I am not sure that I wish to enter into economic arguments with the economists in the House but it seems to me self-evident that if you are saying that your objective is to have a balance over the cycle, that implies both the possibility of deficit financing and of surplus financing at the appropriate time. I was interested to hear the praise which my noble friend Lord Peston heaped on the Chancellor for his recent statements about the Government's reactions to the changes in forecast GDP over the next year. Those member states with high debt ratios will need to continue their consolidation efforts to ensure they have

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the necessary flexibility. If it is managed prudently, this national fiscal flexibility suggests that there should be no need for a centralised system of fiscal transfers in EMU.

Finally, the committee quite rightly emphasises the important role attaching to structural reform of labour, product and capital markets to make EMU a success. Fully to achieve its potential Europe must now harness the structural reforms needed to ensure its economies become more adaptable and better able to cope with the changing economic circumstances that EMU will bring. Promoting discussion of reform priorities lay at the heart of this Government's agenda throughout the UK presidency of the European Union.

Obviously there are no quick fixes, but progress is being made. The declaration agreed by Finance Ministers in May underlined member states' commitment to economic reform and job creation. At the Cardiff European Council member states reached agreement on four more essential elements: developing the broad economic guidelines to put more emphasis on structural reforms; taking concrete action on employment through implementation of employment action plans; modernising the single market; and promoting entrepreneurship and competitiveness. Although the debate has ranged widely, it is important that we should emphasise that, both as regards the way in which we approach the important global issues which are now to the forefront and the macro-economic issues to which a number of noble Lords have referred, it is for governments, not for the European Central Bank, to take the lead in these matters. That will continue to be the case.

Significant challenges lie ahead to make EMU work and to deliver real growth and employment prospects across the European Union. The European Central Bank as one of the key institutions of the euro area will play a vital role delivering economic stability as a foundation for sustainable long-term growth. But the success of the ECB will depend on how it communicates its decisions. Transparency, accountability and dialogue are the foundations for the credibility on which the effectiveness of monetary policy depends. Of course the member states of the Community must also play their part in supporting and reinforcing the work of the ECB. All member states must respect the commitments they have made to continued fiscal discipline and to the structural reforms needed.

This is the most important, most significant development in the European Union debate. Although Britain is not joining the first wave, it is vital for all of us that EMU is a success. We worked with our EU partners to ensure this was a priority during our recent presidency of the EU and it will continue to be a priority for the Government in the future.

7.57 p.m.

Lord Barnett: My Lords, I shall not speak for long as I know that my noble friend Lady Hilton would not forgive me if I did. First, I must thank our three excellent maiden speakers in the debate today. The noble Lord, Lord Burns, referred to himself as a civil

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servant. That was a somewhat over-modest way to describe a former permanent secretary to the Treasury. I do not think that when I was in the Treasury the permanent secretary would have referred to himself as just a civil servant. The noble Lord tried to be non-controversial and he was. I am sorry about that as I should have liked him to be controversial, even though that is not normally done in a maiden speech. I thank the noble Lord for saying that the report is excellent.

My noble friends Lord Tomlinson and Lady Crawley are both from the European Parliament. My noble friend Lord Tomlinson is an old friend from earlier days in the House of Commons. I well remember our debates in that Chamber. Both my noble friends have given us a good idea of what we can look forward to hearing from them in the future. I congratulate all three maiden speakers on their excellent contributions. Whatever views we may hold, we all look forward to hearing them speak on many occasions in the future.

I thank all other noble Lords who have spoken in the debate for the excellent quality of their speeches, or rather I thank most of them. I am sorry that the noble Lord, Lord Marsh, is not present because I wanted to make one or two comments about his speech. It was kind of him to refer to me as a strong former Chief Secretary to the Treasury, but I could not agree with virtually every other word he said. Therefore, I can hardly say that his speech was of an excellent quality. I have often told the noble Lord, Lord Marsh--as I used to tell the late Lord Wyatt--that he should be sitting on the other side of the Chamber but they cannot find a Bench that is right-wing enough for him! Perhaps the noble Lord, Lord Mackay of Ardbrecknish, will find him one.

If I did not agree with much of what the noble Lord, Lord Marsh, said, I am bound to say that also applies as regards the speeches of my noble friends Lord Shore of Stepney and Lord Bruce of Donington. They will not be too surprised at that. I disagree with virtually every word and I notice how the emotion in their speeches on subjects relating to the EU grows as they continue to speak. When I was in Cabinet with Lord Shore I thought we mostly found ourselves in agreement. I do not believe it would be right for me to bang my head against a brick wall because I doubt if I could convince either my noble friend Lord Bruce of Donington or my noble friend Lord Shore of Stepney of one single word different from what they said, so I leave it at that. I recognise the points they have made and I hope they will forgive me for not taking them up at this hour. In passing, I must say that listening to them one would have thought that for the last 20 years all has been stability and beauty in our economy. That is the kind of economy I cannot recall.

Let me turn briefly to the Opposition Front Benches. The noble Lord, Lord Taverne, and the noble Baroness, Lady Williams, and I have often and usually agreed on the subject of Europe. I appreciate what they said, and what all members of the committee and others who spoke today had to say about the committee's report and about me personally. They were both over-kind and over-generous in their complimentary remarks. I will

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leave aside the contributions of the noble Lord, Lord Taverne, and the noble Baroness, Lady Williams. They were excellent speeches with which I mostly agreed.

The noble Lord, Lord Mackay of Ardbrecknish, thoroughly enjoys his position on the Opposition Front Bench, where I hope he will stay for a very long time. I enjoy listening to him enjoying himself. It is nice to see someone who enjoys that position of Opposition Front Bench spokesman so much. Even when he tries to be party political he does it in the nicest possible way, especially when it is based on a report which was not party political but all-party and unanimous--with one or two variations among the committee members which we have heard today. It is pleasant to hear the noble Lord even when he has nothing serious to say at all, as was his position today.

My noble friend Lord McIntosh of Haringey did not think fiscal profligacy was on the agenda. I hope he is right. I certainly agree with him. Indeed he must not have been listening to what I was saying, which is unusual for him. I said that there was a pressure generally for fiscal discipline and a pressure to make the system work. Despite all our misgivings as a committee, that pressure was there from all our witnesses all the time. I am happy to see that pressure for the making of the European Central Bank and indeed, if I might digress without upsetting my noble friend Lord Shore, the Economic and Monetary Union.

As I said at the outset, not surprisingly the debate went rather wider than the report itself. I beg forgiveness myself for digressing just a little from the main report. The report itself recognises that there are serious risks under which the European Central Bank, and therefore the whole Economic and Monetary Union, could fail. We did not believe as a committee that it would fail. My noble friend Lord McIntosh of Haringey was surprised that we only used the words, "It will not be allowed to fail". I do not understand his surprise. We pointed out the risks. We answered the questions: "Yes, it will work and it will not be allowed to fail". We could not be more explicit than that. I had a little problem, as chairman of the committee, in trying to get them to agree with that report, but generally they all agreed that it will work. My noble friend Lord McIntosh of Haringey did not dispute it tonight, even with the last page of his brief which he read--something he normally does not like to do. He wants to see it work; the Government believe that it will work, and that is the view of the committee.

On Question, Motion agreed to.

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