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Lord Skidelsky: My Lords, I am very grateful to the noble Lord for giving way. As he has mentioned one of his previous publications which deals with the wider issues, does the noble Lord believe that there are any political implications in sterling joining the single currency, or in his view is it purely an economic issue?
Lord Kingsdown: My Lords, I cannot deny that there must be a political element in this, although I see it very much more as an economic matter. That is the basis of my argument this evening, as it always has been.
The UK may or may not join in the foreseeable future, but I believe it would be disgraceful if it transpired that it was in the national interest to join and we were incapable of doing so and could not qualify. Only those who believe that they can say with conviction that the UK will never join, or not for, say, at least 10 years, can argue that preparations are not now necessary given the kind of lead times that the Government's plans show and the experience so far of those who are now full members of EMU.
It is worth contemplating just for a moment what is likely to be ahead of the United Kingdom in terms of the world economic scene five or 10 years from now--indeed, well into the next century. There will be two large single markets almost equal in size: the USA and Euroland. Next in size of economy will be Japan and after that, but in a very different league in terms of size, the United Kingdom. The UK is a country with a long tradition of living by international business and with a currency, albeit small in volume compared with others I have mentioned, that is still quoted and traded in foreign exchange markets.
I believe that the constraints on our macro-economic policy in such a scene will be severe if we are to avoid the attention of those ever-hovering vigilantes--the international foreign exchange markets--whose daily turnover outnumbers the total reserves of the country dozens of times. It will also be a world in which something that has been taken for granted for generations will increasingly change. The Industrial Revolution and the rise of nationalism were roughly simultaneous changes, as a result of which economies are seen in terms of individual countries. But the great international companies whose activities are the driving force of the modern world know no national boundaries. For example, the components of a modern automobile are likely to be manufactured in three or four different
It is argued that we may be able to avoid single currency membership of the large single market of Europe by furthering our special relationship with the United States of America. My assessment of US policy, especially economic and trade policy, is that it is coldly realistic and without sentiment towards what is not directly in US interests and that we cannot rely on special economic sympathy there if we needed it. I recollect only too well the US Treasury Secretary on one occasion concluding a discussion in a G7 (or G5) meeting on the US dollar exchange rate with the simple words:
My feeling is that the more the preparations proceed, the more the public reaction to the possibility of the single currency will become a matter of pragmatic judgment rather than instinctive reluctance towards drastic change--reluctance in which an emotive phrase like "economic sovereignty" is likely to play such a part.
As I have just touched on briefly, sovereignty--independence of action--is nowadays much at the mercy of forces beyond our control. What is not beyond our control is to ensure that a major decision affecting investment, economic progress--quite simply, jobs--is not beyond our capability because we have not prepared for it and cannot qualify. In this context, progress with the changeover plan is essential and I wish the Government well in that respect.
I very much welcome this debate and would like to begin by congratulating my noble friend the Minister both on the outline plan and his presentation of it. The high quality of the outline plan is a reflection of the skill with which he led the Business Advisory Group in its work which provided the Treasury's Euro Preparations Unit with the essential grist for its mill.
It is the settled policy of this Government that the people should be allowed to pick between the two options of entry into a successful single currency or staying out of it. I do not believe that the Official Opposition are against the principle that the people must have the deciding voice in a referendum in the event that the Government recommend entry and Parliament agrees. So I do not understand why they attack this outline national changeover plan as being presented in an intellectual vacuum. Do they reject the Government's logic that if we are to have the option of joining we must prepare? The noble Lord, Lord Skidelsky, asked why we cannot postpone preparations until the people have decided. But, as my right honourable friend the Prime Minister said in his Statement on 23rd February,
That is where the Opposition have got it wrong, and where, in my opinion, the Government have got it right. They have also got it right in recognising that even if the British people were to reject a firm and fully reasoned recommendation that we adopt the single currency, the welfare of our economy and our living standards would depend critically on how well we are able to maintain and conduct our economic trade and financial relations with our eurozone neighbours. Whether or not those against the single currency like it, the euro is with us, and every day more UK businesses are starting to trade in that currency. If, by a negative decision, we find ourselves coping with the consequences of remaining outside, we shall have given ourselves a better chance of making the best of our trade and financial relations with the eurozone by having prepared ourselves for possible entry--the point was made by the noble Lord, Lord Williamson--than by having stuck our heads in the sand in the hope that the whole thing will simply go away, which appears to be the preferred course of action of the official Opposition. If they feel that that is doing a service to Britain, I must most profoundly disagree.
I move now from the general to the particular and address briefly three specific issues. The first concerns the government decision to join--if that is their decision--the first key stage on the "critical path". I cannot dismiss the five economic tests as totally irrelevant, as does my noble friend Lord Barnett. But commentators have been suggesting that the five tests were sufficiently broadly framed to allow some necessary flexibility in judging whether and when they were met. If that were the Government's intention, I welcome it.
The first test--whether the UK economy has achieved sustainable convergence with the eurozone economies--is obviously the most critical. Our economy has been moving measurably closer to that of the eurozone in recent months. No longer growing faster than its long term trend rate, it may not be long before it falls into step with those of the Euro 11. By reducing the eurozone's base interest rate by half a percentage point, the ECB has, of course, put more distance between our rate and theirs. But if the Government maintain their tight fiscal stance, and I pray that they will, there is no reason why the current downward trend towards convergence should not be maintained.
Meanwhile, if the European Central Bank is aiming for an average inflation rate of about 1 per cent., which seems to be the case, an adjustment in our own target, sooner or later, should be in the Government's mind.
A further sign of convergence is the fall in long-term bond yields here to close to German levels, and all those developments suggest that convergence is not a pipe-dream, even taking into account the list of divergences of the noble Lord, Lord Skidelsky. I refer to them as differences rather than divergences. The Government assure us that there will be no need for sterling to shadow the euro for two years before joining, and that they have no intention of doing so anyway, whatever Commissioner Yves-Thibault de Silguy and other commissioners, acting or otherwise, have to say. But this presumably assumes that the Government foresee, without any shadowing, a period of sufficient stability for the pound in relation to the euro to head off any excuse for rejecting our entry into EMU if entry becomes the Government's recommendation to Parliament and the people.
I sincerely hope that the Government's confidence on that point is well founded. The European Central Bank appears to worry less about exchange rates than the Bundesbank did, so the euro could become more volatile against the dollar than the deutschmark was. Because our economic cycle has been better aligned to the US than to Germany, the pound has been more stable against the dollar than against the deutschmark. If the aim now is to bring the pound into a stable relationship with the euro, the greater the markets' belief that we will enter the single currency, the more surely and calmly will sterling move towards the rate at which the markets expect it to lock into the euro. Conversely, if the suspicion in the markets is that we will stay out, then there will surely be a more volatile relationship between sterling and the euro.
If their expectation is, and it seems to be, that Britain will make a positive decision in the course of 2002, and if in the meantime interest rates continue to converge, the markets will most likely hold sterling in a range against the euro in the short term close enough to the rate at which they expect it to go in. Yes, my Lords, I think that the markets will carry huge weight in this big decision.
Expectation is now really the name of the game, and that is why I have always held the view that the earlier the Government can make known their intention to enter the better. At the very least they must demonstrate their determination to take a decision as soon as is practicably possible, for many reasons, not least because the public information programme foreseen in Chapter 8 will not begin until a positive decision has been taken. That worries me as much as it worries my noble friend Lord Peston.
The second of the three issues I want to address is the cost of the changeover. The Official Opposition have been making much of what they see as an unacceptable paucity of pound signs in the outline plan. There are plenty of independent estimates around. The British Retail Consortium reportedly estimates the costs to retailers at between £1.7 billion and £3.5 billion. A Lloyds TSB survey puts the cost to small and medium-sized enterprises at £6 billion, and there are others. But the Government are quite right to reject criticism of their decision to exclude estimates beyond the reference to some tens of millions of pounds that will need to be spent over a number of years to make the information technology systems of the DSS, the Inland Revenue and Customs and Excuse euro-compatible.
I find convincing the Treasury's argument that it is difficult to disentangle costs generated by the transition from those that would have to be undertaken anyway. Further, the CBI has reportedly suggested that cost estimates are likely to be spurious because the real cost is not the cash sum but the cost of financing the spending earlier than would otherwise have been necessary. I find that plausible, too.
My third and final point relates to small and medium-sized enterprises. I take my hat off to my noble friend the Minister on the Front Bench for his huge effort, detailed in Chapter 2 of the outline plan, to raise awareness among SMEs of the implications for them of the euro's launch. It has obviously been very necessary, to judge by the results of the Treasury's EPU's two surveys which suggest a reluctance among many to face up to the challenge. While the second of the two surveys showed a doubling of awareness over six months, still only 13 per cent. had taken any action and that was principally related to information technology. Pricing strategies, marketing and staff training appear to have engaged only 1 per cent. of SMEs. This is serious and I applaud the Government for their determination to help turn this situation around.
However, here, once again, I suspect that expectation is a factor in the SMEs' reluctance to prepare. Doubts that are widespread around the country, encouraged by much of the tabloid press, that the people will approve entry into EMU in a referendum, are hardly an
The outline national changeover plan is, in my opinion, a well conceived, practical and vital step in the right direction. We must not lose sight of the fact that meeting the five economic tests will not alone open the door to our participation in this great European enterprise which is economic and monetary union. Rightly, only the will of the people can ensure that. But only an informed people can make a decision worthy of the great question posed to them. I trust this Government to ensure that that is how it will be.
Lord Newby: My Lords, I join other noble Lords in thanking the Minister for bringing forward a debate on the subject so quickly after publication of the national changeover plan. However, we have had a slightly strange debate because, with the exception of the noble Lord, Lord Hamilton, half of the argument has not been made. Normally, debates on European matters produce strenuous arguments against those put forward by the Government and European supporters. It is a great pity that when many Members of your Lordships' House play a part in public debate on these matters many are too busy to be here today.
As regard the line of the official Opposition, it is surprising that the conclusion of the noble Lord, Lord Skidelsky, is that we cannot yet have a proper debate on the subject. It is impossible to open a newspaper without reading about a debate on the subject and why uniquely the Opposition in this place feels constrained to take part is difficult to understand.
As regards the Government, the great shift is that the "when" word instead of the "if" word is used for the first time in this document. That was qualified on the front page--Members must be careful to use their magnifying glass to see it--but we have reached the position where, on balance, the Government are prepared to accept the principle. My Leader in another place described the plan and the Prime Minister's statement as the Government crossing the Rubicon. If that is the case, there can be few occasions when the analogy has been used to describe such a timorous advance.
However, we welcome the fact that the Government are taking steps at this early stage in order to prepare both the public and private sectors of the economy for the changeover to the euro. We must cross some hurdles before we get to that point; namely, the five economic tests. They play the part which the renegotiations played for the Wilson Government in 1974-75; there must be a pretext to justify something which might be unpopular. Although in this case the pretext is not required to deal with splits within the Labour Party, it is required to deal with splits in public opinion.
Two tests will always be largely subjective. The first is the flexibility to adapt to change and the second is the outlook for employment. Again, casting one's mind back to 1975, Tony Benn claimed that if Britain remained in the EU half-a-million jobs would be lost. That was not borne out by reality but at the time the argument was difficult to refute. Therefore, those two tests will be argued about but will not be capable of conclusive proof.
The final test is on sustainable convergence. I agree with those noble Lords who have said that even though there are differences between the UK's economy and cycle and those of our EU partners, there can never have been a likelihood of the eurozone and UK economies being marked closely convergent. The noble Lord, Lord Grenfell, said that there might be a need for a different inflation target in the UK. The rate of inflation in this country, calculated on the measure used across the eurozone, is not 2.5 per cent. but 1.4 per cent. Therefore, we are very close and already talking about fractions of per cent. There is already a considerable measure of convergence.
The one area where everyone agrees an issue must be resolved relates to the exchange rate. A number of suggestions have been made about how we move from what is generally considered to be too high a rate to one which would be more generally acceptable. On the one hand, we have the noble Lord, Lord Peston, seeking a miracle and on the other hand we have the noble Lord, Lord Grenfell, who has in mind a more benign scenario; that when the markets realise that we shall not be joining the euro there will be a movement in exchange rates towards the level which we and the majority opinion in this country would find more acceptable.
I hope that that is the case, but if it is not it would be difficult for the Government to set and achieve an exchange rate target. Amendments to legislation would be required and in addition to the inherent difficulties in the project that would make it almost impossible to contemplate.
The noble Lord, Lord Cockfield, sees the Machiavellian option as going into the euro when our economy is at the bottom of the cycle and therefore our currency weak. Unfortunately, our economy is at the bottom of the cycle and our currency is strong. Therefore, I am afraid that that will not be the way forward.
I turn to some of the detailed issues which arise with the changeover plan. First, the issue of legislation and the timetable. The noble Baroness the Leader of the House, in response to a question from the Leader of the Opposition when we discussed the changeover plan, said briskly, "Oh, well, you can get legislation through in a quick time and having a four month period between the decision and being able to hold a referendum would be no problem". My limited experience of this place suggests that on matters European and constitutional, if
My suggestion for dealing with the matter, which I hope the Government will accept given that we are preparing, is to have the Bill introduced and passed before the next election. In my view, the most likely time for an election would be the spring of 2001, not 2002--as the noble Lord, Lord Cockfield, suggested. The earliest that notes and coins could be introduced would be February 2004. The changeover plan makes it clear that February and March is the time one would want to do that, so flexibility would be constrained. Even with an election in 2001, one could find that it was not possible to introduce the new currency until February 2005, unless legislation for the referendum were in place earlier. I urge the Government to look at that option.
What cheered me more than anything else was the announcement in the Prime Minister's statement that the Government will spend tens of millions of pounds in preparation. That cheered me up because I cannot believe that this Government, or any other, would contemplate such expenditure unless their heart was in it. I took some satisfaction from that.
The Minister was asked what assumptions had been made in the planning process as to a date by which the money will be spent and Civil Service systems will be ready for the introduction of the euro. I look forward to hearing what he has to say about that.
One thing I will say about the document's description of that process--in response to the noble Lord, Lord Hamilton of Dalzell--is that when it refers on page 46 to euro Ministers it is referring to domestic Ministers rather than euro Ministers from other member states. That is an example of the slight paranoia that can affect this debate--that if something has the word "euro" in front of it, it must be foreign and we must be against it. We are talking about Ministers designated by the Government within each government department to co-ordinate strategy.
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