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Lord Thomas of Swynnerton: My Lords, before the noble Lord sits down, would he like to re-examine his usage of the expression XSpanish practices" in relation

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to some English practices? Does he not think that, given our friendship with Spain, the phrase should be entirely removed from the vocabulary of a Liberal Democrat?

Lord Newby: My Lords, I hope that before very long it will be an outdated concept and that, therefore, there will be no need to use such vocabulary.

7.54 p.m.

Lord Saatchi: My Lords, I thank the noble Lord, Lord Taverne, for introducing the debate. I feel sorry for those who are attending musical or sporting events. They have missed out on an interesting debate and, as the noble Lord said, one that is of immense importance—Xfriendly" though it may be.

The noble Lord made some important points and he tackled head-on some issues that one usually hears dealt with in more opaque terms. For example, he talked about the amount of devaluation that would be required in order to meet a sustainable exchange rate. He talked about tax harmonisation and about unfunded pensions. These are all highly sensitive issues which are normally ducked or swept under the carpet. I admire the straightforwardness that the noble Lords, Lord Taverne and Lord Newby, bring to the debate. We shall soon be able to contrast that with the Treasury's approach, which I fear will be slightly less certain and clear.

The noble Lord, Lord Thomas, apart from his gentle rebuke of the noble Lord, Lord Newby, rebuked myself and the Minister for the endless mind-changing of our parties over the years and the extraordinary Xtransformations" that we have gone through. The Minister does not need me to defend him, but perhaps I may remind the noble Lord, Lord Thomas, of Keynes's injunction when accused of mind-changing:

XWhen circumstances change, I change my mind. What do you do?".

It seems to me that we are not debating whether the euro is good or bad but, in the terms of the Motion, whether there are wider considerations or whether, as the noble Lord, Lord Cobbold, said, the economic tests are indeed a sufficient test. In other words, we are examining whether economic tests are an appropriate way to assess the question.

I want to put forward the view that they are not. The word Xtest" suggests a spurious objectivity which is beyond the reach of economics. Economics is not a science. It is not susceptible to scientific measurement; nor do the phenomena that it tests occur in a laboratory. Scientists have always dreamed of the illumination of the whole of knowledge by systematic computation. But it has not worked out quite like that. Instead, we find that it is an inconvenient and stubborn fact that, outside Newton's universe where physical laws do govern reality, the world is conditioned by perception. Perception is conditioned by the distorting factors of society, genetics, class, upbringing and the conscious or unconscious interests of the perceiver.

The modern authority for that rather sceptical view is the noble and learned Lord the Leader of the House, who reminded me last week that Xperception is not

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reality". He is right. All of us know that the sensations produced by the same object can vary with the circumstances. Lukewarm water will seem hot to a cold hand and it will seem cold to a hot hand. Colours look very different under a microscope. Even the sun in the heavens is seen by us only as it was eight minutes previously. It seems that once we describe what we perceive in terms of what we feel or believe—once we express opinions or beliefs or attempt to offer explanations, descriptions or forecasts—error, doubt and uncertainty come to the fore. It is not like hydrogen plus oxygen equalling H2O.

The appeal by the noble Lord, Lord Taverne, was essentially a warning. It was an appeal to the fear that we shall Xmiss out". The noble Lord, Lord Thomas, said much the same. He said that we should be pressing our noses on the window of the ballroom in perpetuity. The noble Lord, Lord Taverne, was warning us, as was the noble Lord, Lord Newby, that if two parts hydrogen do not quickly mix with one part oxygen, we shall have no water and we shall die of thirst. It was a warning that bad things will happen: foreign investment will fall, trade will decline and jobs will be lost.

These are not scientific observations; they are forecasts and predictions. That being the case, economic tests cannot help. That is made clear by the Treasury's paper on preliminary and technical work to prepare for the assessment. It makes the job appear far more scientific than it is. The language is of rational methods: of observation, experiment and verification.

The Treasury document sets out a wide range of sub-topics for analysis, such as trade and investment linkages, the behaviour of housing markets, sectoral output and monetary transmission. But none of those is relevant because, as the editor of the FT says,

XThese interesting questions might occupy a dozen doctoral students for as many years without greatly increasing the sum of human certainty".

The objects under study are different in their nature. Hydrogen and oxygen are not the same in France as they are in Britain. For example, Britain is the only EU country besides Denmark that exports more oil than it imports. So the way in which a change in the oil price affects Britain is not the same as the way in which it affects, say, Germany.

Likewise, Britain has a much smaller stock of unfunded pension liabilities than the rest of Europe. The noble Lord, Lord Taverne, said that that was not a cause for concern. Perhaps it is not, but the difference is still there. More money is invested in UK pension funds—I believe that it is over #800 billion—than in all the pension funds in the rest of the EU put together. That is a significant difference.

Similarly, British firms and households are more sensitive to interest rate changes than euro-zone countries because of a higher level of home ownership and a larger proportion of variable rate mortgages. As regards the prescription of the noble Lord, Lord Taverne, for around a 15 per cent devaluation of the pound in order to achieve a sustainable rate for entry into the euro, I am sure he is aware that on some

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forecasts that would lead to a 1\5 per cent increase in UK inflation; that the Bank of England would then have to raise interest rates; that that might itself raise the level of the pound; and that the matter is not quite so easily resolved as simply to say that that is the right rate, announce it and the market will adjust to it. That would create its own problems, as I am sure the noble Lord is aware.

I hope that I can rest my case on these vital differences between the objects that are under study and these tests with the Chancellor himself, for it is he, is it not, who tells us, as he would see it, because of his own skill rather than the legacy that he inherited—but we shall not debate that—that, for whatever reason, Britain is in a completely different position from that of other countries in Europe. We see that in headlines in newspapers and in economic forecasters' documents every day. We are forecasting 2\5 per cent growth in the next few years as compared with near recession in Germany.

I am afraid that the closest science seems to come to economics is the chaos theory of mathematics, the most potent symbol of which is the butterfly that flaps its wings over the Amazon rainforest and sets off an electrical storm over Chicago. But the next time it flaps its wings nothing happens. The Chancellor's five tests are so far from being scientific that any scientist would blush for him. Economics has not yet found its Newton. Even if it had, these tests are testing the wrong thing. It is rather like the scientists who measured sheep's brains rather than cows' brains when studying BSE.

I believe that the noble Lord, Lord Taverne, said that the matter we are discussing is Xabove all a matter of politics". That is why the Select Committee of your Lordships' House under the noble Lord, Lord Tomlinson, was right to look at other matters—I refer to the Xwider considerations" in the Motion—that is, whether or not the euro would,

Xincrease the pressure for closer political union".

Noble Lords will remember that its excellent report concluded in the last paragraph that,

XThe will to create the euro was political".

The public know, as does Sir Eddie George, that,

Xmonetary union is fundamentally a political rather than an economic issue".

So, too, does the editor of the Financial Times, who says,

XUltimately the question will turn on broader political arguments".

Therefore, the question I put to your Lordships' House is: why do we not have five tests of that? Is it because the Government do not like it when the president of the Bundesbank says,

XA single currency does not require a single government but a single government will follow"?

Or is it because the Government do not like it when the governor of the Bank of France explains that we must have monetary union because,

XIt is the essential precondition of political union"?

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But when the leaders of France and Germany pressed their citizens to join the euro it was not on the basis of economic tests; in fact, it was not on economic grounds. Do noble Lords remember Chancellor Kohl's famous Louvain speech in which he echoed Hamlet's words:

XI have something in me dangerous, which let thy wiseness fear"?

I am told by my German friends that that was what led the German people to give up what they consider their heimat, or homeland; that is, to give up the mark.

Do noble Lords remember hearing President Mitterrand declare that,

XNationalism is war"?

My French friends tell me that that is what led the French people to give up the franc, as they would lose that war to America unless they joined forces with others.

So why are we alone in being told that economics is all? Why cannot we have five tests of sovereignty, which the noble Lord, Lord Thomas of Swynnerton, rather brilliantly defined, or shared sovereignty, as the Prime Minister puts it? I think that we could have five tests of sovereignty. I should like to put them forward.

First, are we ready for a new culture, that of a continent of humanist values, of the Magna Carta, of the Bill of Rights, of the French Revolution, of the fall of the Berlin Wall? Secondly, do we see Europe as a power in its own right; a power which will have a leading role in the new order of the planet; a power which resolutely mounts campaigns; a power which wants to encompass globalisation; a Europe with greater say in external affairs, security and defence?

Thirdly, do we accept that the single currency is a cornerstone for the harmonisation of the economic, financial and tax environment? Fourthly, do we know who does what? Is there a clear distinction between the exclusive competence of the Union, the competence of the member states and the competence shared between the Union and the member states? Is the role of the national parliaments to be that of a third legislating institution alongside the European Council and Parliament? Fifthly, who will be in charge? Do we plan to encourage the creation of real European political parties and a European political area by creating a European electoral district for the election of a party of European Members of Parliament? Will we make provision for the direct election of the president of the European Commission or the European Council? Do we want to make the qualified majority vote for the adoption of legislation more general?

Noble Lords may imagine that those five tests I have just described arise from the fevered imaginings of paranoid Conservative Eurosceptics. In fact, they are taken verbatim from the Laeken declaration of the EU of 23rd November 2001—last week. They are considered the vital issues for the future of the Union. Only in Britain do our Government have such a low opinion of the intelligence of the public that we are asked to restrict our deliberations to economics alone.

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I close with the following thought. I for one am sad to find the great Labour Party sidestepping these great issues and returning to the materialist determinism of Karl Marx in which economics determines politics. I find it depressing to see Labour reduced to the view that money is all. Was that what the new Jerusalem was all about? Sidney and Beatrice Webb would turn in their grave.

8.8 p.m.

Lord McIntosh of Haringey: My Lords, I shall make a boring speech. It may well be a long boring speech. It certainly will be if I am interrupted. However, I have no alternative on these occasions; I have to take this opportunity to address the issues and to explain the rationale behind our policy on economic and monetary union. That is my duty.

The Government's policy on membership of the single currency remains as set out by the Chancellor of the Exchequer in October 1997 and restated by the Prime Minister in February 1999. In principle, the Government are in favour of UK membership of EMU; in practice, the economic conditions must be right. The Government believe that, given the right economic conditions, a successful single currency within a single European market would be of benefit to Europe and to Britain.

The determining factor underpinning any government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. If it is, there is no constitutional bar to British membership of EMU. The five economic tests set out by the Chancellor of the Exchequer will define whether a clear and unambiguous case can be made.

Here I must pause for a moment. Although there has been considerable support in the speeches tonight for the principles of what I have been saying, I was taken aback by the noble Lord, Lord Taverne, saying that somehow, in the end, it would be the Chancellor's prerogative. We have made it clear that that is not the case. Clearly, having made the assessment on the basis of the five economic tests, the Treasury will recommend to government what the conclusion should be. Government will then take a collective decision. It will be put to a vote in Parliament and then to a referendum of the British people. How that can be described as the prerogative of one man escapes me.

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