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Euro and the Dollar

8.48 p.m.

Lord Pearson of Rannoch rose to ask Her Majesty's Government what is the comparative significance of the euro and the United States dollar to the United Kingdom economy.

The noble Lord said: My Lords, I start by expressing my gratitude to noble Lords who are to speak in this debate on what may appear to be a fairly dense subject. I am particularly grateful that the noble Lord, Lord McIntosh, is to reply for the Government because I share the great respect in which the noble Lord is held by all sides of the House. He is enormously admired for the volume, variety and complexity of the issues which he handles, and for the courteous, efficient and even humorous way in which he does so. But even the noble Lord is human, I think, and so on rare occasions—on very rare occasions—two of which I shall mention this evening, he can only be as accurate as the brief he has been given. And of course, he speaks for the Government, who view our membership of the European Union as an unquestionably good thing and who want to sign us up to European economic and monetary union just as soon as they can deceive the people into voting for it in a referendum.

So my purpose in bringing this Question before your Lordships this evening is to dispel two items of Europhile propaganda which lie at the heart of the question as to whether or not the United Kingdom should join EMU and which have a considerable bearing on whether or not we need to stay in the European Union at all. Those two Euro-myths are, first, that the euro is more significant to our economy than the US dollar, and, secondly, that some 60 per cent of our trade takes place with the euro-zone. This second Euro-myth has even been improved by Ministers for Europe and others to become,

The effect of this propaganda is vastly to exaggerate the importance of the euro to our economy as a whole, and to belittle our trading relationship with the United States of America. The intention of those who peddle

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it is obviously to implant in the British people the fear that to leave the European Union would be economic suicide, and that they cannot afford to live for much longer without the euro either.

Let me start with the first proposition, that the euro is more significant to our economy than the US dollar. At first sight this is so unlikely that one wonders how the Europhiles dare to put it forward, but they do with monotonous regularity. I regret to say that the noble Lord, Lord McIntosh, is guilty of having done so in your Lordships' House at least twice in the past year, although, as I have indicated, I am sure he did so in good faith personally. For instance, on the 26th February last year, the noble Lord, Lord Kilclooney, suggested that the sterling-dollar exchange rate was more important to us than the sterling-euro rate because the UK trades more in dollars than in euros and because we do a greater percentage of our trade in dollars than does the euro-zone. To this eminently sensible and accurate suggestion, I fear that the noble Lord, Lord McIntosh, replied as follows:

    "My Lords, the Bank of England basket of currencies and exchange rates calculated on that basis shows that the euro is more significant than either the dollar or the yen and represents more than half of our trade. I am therefore afraid that the noble Lord is not correct in his initial premise".—[Official Report, 26/2/02; col. 1315.]

I fear that the noble Lord did it again two days later on 28th February 2002 when I suggested that he had got it wrong on 26th February and that in fact some 60 per cent of our foreign trade was transacted in dollars. At this the noble Lord stuck to his guns, or rather his brief, and informed the House:

    "As for the euro's share in our overseas transactions, it comprises 65 per cent of the Bank of England sterling exchange rate index, whereas the US dollar comprises only 16.5 per cent of the index".—[Official Report, 28/2/02; col. 1527.]

The trouble is, as I tried to point out to the House later on in the same Starred Question, at col. 1529, that the Bank of England's exchange rate index is an entirely useless tool if we want to unearth the truth about the relative importance to our economy of the euro and the dollar. This is because that index excludes services and investment income, and covers only exports of manufactured goods, which amount to well under half of all UK exports. It also uses geographical breakdowns of trade which ignore actual currency usage; it excludes large areas of the world in which UK trade is significant; and it relies on data which are over 10 years old, from 1989 to 1991. So I trust we can forget the Bank of England's sterling exchange rate index for the purpose of this debate.

I am sure there are other ways of measuring the importance to our economy of the euro and the dollar, but I put a pretty authoritative one in front of your Lordships tonight. That is to be found in the Government's own publication, The United Kingdom Balance of Payments, known colloquially as the "Pink Book". There we find, for instance, the Government's figures on UK exporters' usage of the dollar and the euro as a currency of invoicing. The "Pink Book" tells us that for the year 2000—and I gather 2001 is not much different—UK exports amounted to some 413 billion. That figure includes exports not only of

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manufactured goods, but of services as well, together with investment income and transfers. So it is a total export figure, which I trust noble Lords will agree is what we ought to be talking about, not just exports of manufactured goods, important as they may be.

Of that 413 billion, some 142 billion, or 35 per cent, was invoiced in dollars, and only 91 billion, or 22 per cent, was invoiced in euros. The remaining 180 billion, or 44 per cent, was invoiced in other currencies, the overwhelming majority of which was of course in sterling. So on this basis dollar usage by British exporters was at least 1.6 times euro usage, which leads one easily to the conclusion that the dollar was at least 50 per cent more significant than the euro to the British economy.

I turn to the second Euro-myth which I wish to demolish tonight. This is that some 60 per cent of our trade takes place with the EU, or that 60 per cent of our trade depends upon our membership of the European Union. Here again, the purpose of the propaganda appears to be to frighten people into thinking that that trade and the 3 million or so jobs that support it might somehow be lost if we left the EU and/or will be put at risk if we do not join EMU. That is such obvious nonsense that I trust that I do not need to waste your Lordships' time by exposing it as such. The trade would go on, and so would the jobs.

Any noble Lord who doubts that does not have to believe a confirmed Eurosceptic such as me. Instead, he can read the report by the National Institute of Economic and Social Research—not at all a Eurosceptic organisation—published in February 2000 and entitled, A Continent Cut Off? The Macro-economic Impact of British Withdrawal from the European Union. Or he could read the report of August 2000 to the US Congress by the International Trade Commission, perhaps the most prestigious economic think-tank in the world.

So whatever is the percentage of our trade with the EU and however many jobs support it, none of it would be lost if we leave the EU or do not join the currency. But what is that percentage? The difficulty is that when Europhiles say that 60 per cent of our trade takes place with the EU, they really mean that 60 per cent of our exports of manufactured goods go to other EU countries. In this context, the word "trade" has come to mean "exports of manufactured goods". Of course, that is grossly deceptive. If we were to join EMU, that would affect the whole of our economy, which is already affected by all the debilitating regulations that pour forth from the corrupt octopus in Brussels.

So we must consider the question from the standpoint of the whole of our economy. If we use the word "trade" in this context, it must mean all of our trade, not just less than half of our exports. The only honest question therefore becomes: what proportion of the whole of our economy is involved in trade with the EU? If we stand back to consider the whole of our economy, we begin to get the true picture. That is that about 80 per cent of our economic activity takes place right here in the United Kingdom, in the British

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domestic economy; only 20 per cent goes in exports at all. Of that 20 per cent, less than half—or less than 10 per cent of the whole—goes to the EU.

I am not an economist and I do not pretend that even the experts find it easy to measure an economy or to agree precisely what proportion goes where. For instance, there are at least three accepted ways to measure the export of goods and services. They are: as a proportion of total consumption; as a proportion of gross domestic product; and as a proportion of what is known as final demand. According to Government figures from the Office for National Statistics, exports of goods and services to the EU amount to only 5.3 per cent of total consumption; 12.3 per cent of GDP; and 9.6 per cent of final demand. Of those, the ONS selects the latter measure, final demand, to show the relative weights of various sectors of the economy, so it is surely reasonable that we should do likewise and take rather less than 10 per cent as the proportion of our economy that goes in exports of goods and services to the European Union.

So the big picture, the true picture, is that rather less than 10 per cent of British activity is involved in exporting to the EU. None of that will be lost if we do not join EMU, or even if we leave the EU altogether.

Given the complexity of the subject, I propose to place two one-page briefing notes from Global Britain in the Library, in case any noble Lord wants to relish further the supporting detail for what I have said. I must of course declare an interest as one of the founders of Global Britain, together with the noble Lords, Lord Harris of High Cross and Lord Stoddart of Swindon, who I am delighted to see in their places. I must also place on record my gratitude to the noble Lord, Lord McIntosh, who, after our exchanges last February, encouraged dialogue between Treasury and Bank of England officials and the Director of Global Britain, Ian Milne, and of the British Management Data Foundation, Tony Cowgill, who also advises me.

The briefing notes that I shall place in the Library are No. 21, entitled Exposure of the UK Economy to the Dollar and the Euro, and No. 22, entitled 90% of the British Economy is not Involved in Exports to the EU. I trust that they may help to inform public debate as the convention in Brussels moves to its momentous conclusions and as we approach the next and perhaps final intergovernmental conference. In the meantime, I hope that we shall hear no more of the claim that the euro is more important to us than the dollar, or that 60 per cent of our total trade is in any way associated with our membership of the European Union.

I end with only one question to the noble Lord, Lord McIntosh. If less than 10 per cent of our economy is involved in trade with the EU, and if even that—or a somewhat larger figure—will not be lost if we do not join EMU, why do we even contemplate giving up 100 per cent of our currency to Brussels and Frankfurt? I repeat my thanks to other noble Lords who are to speak, especially at this late hour, and look forward to hearing their contributions.

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9 p.m.

Lord Cobbold: My Lords, the answer to the Question on the Order Paper of the noble Lord, Lord Pearson, depends on which way we are looking. If we look backwards in time, it is obvious that the US dollar has been of unique importance to the United Kingdom economy. I agree with the noble Lord, Lord Pearson, on that.

With the demise of sterling under the burden of financing the last war, the dollar became the world's principal trading and reserve currency. Commodities became priced and traded in dollars, and the Bretton Woods arrangements confirmed the global supremacy of the dollar. With the UK economy's dependence on foreign trade, managing the relationship between sterling and the dollar has been of critical importance to successive British governments over the past 50 years.

If, on the other hand, we look forward in time, we have to consider two scenarios. The first is one in which the UK remains outside the euro. In those circumstances, the importance of the euro to the UK economy is likely to grow in significance from—I agree with the noble Lord, Lord Pearson—a lowish base at present and may well come in time to rival that of the dollar. It is likely to involve a delicate balancing act between the two.

If, however, sterling does become part of the euro, then the answer to the Question of the noble Lord, Lord Pearson, is simple: the dollar will undoubtedly be the most significant currency relationship for the euro-land economy, as it is already.

But the Question of the noble Lord, Lord Pearson, is not really about currency relationships but about creating arguments as to why we should not join the euro. The noble Lord's views on Europe are well known to your Lordships and we have heard them again today. I do not share them. I am one of those who have long supported the European adventure and Britain's full participation in it. I believe in the desirability of building a genuine single market in Europe. I do not believe that a genuine single market can be achieved without a single currency. Britain should be part of it, although the timing of our entry is critical and it may be best left until the current political and economic uncertainties are somewhat reduced.

The potential benefits to the UK economy of joining the euro are much more than simply giving transparency to pricing differentials across the Union and the convenience of common notes and coins saving conversion costs and currency risks. A more macro economic benefit is the reduced exposure of the whole economy to exchange rate fluctuations. At present, about 40 per cent of UK GDP is in foreign trade, compared with around 14 per cent for euro-land as a whole and around 11 per cent for the United States. Foreign trade is thus less important in the euro-land economy and the economy is less exposed to external trends. The domestic economy becomes paramount, as it is already in the United States for that reason.

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In Europe we are creating a domestic market of 350 million, rising to 500 million, people. This represents a massive pool of savings available for the financing of enterprise and, particularly, of research and development, all this contributing to the availability of cheap capital resources. The euro could also come to rival the dollar as an international reserve currency, providing euro-land with still further resources.

A single, seamless market in financial services, which we certainly have not yet created, means that private and institutional investors and pension funds would have a much wider choice of equity and fixed interest investment, free of exchange risk, from which to choose.

I believe that these are all fairly substantial potential benefits. But there are, of course, risks. I do not wish to deny that. Such a linking of currencies between nations has not been attempted before. But, in my view, the risks are worth taking.

We learnt from bitter experience in this country in the last century that printing money is a great temptation to politicians. We learnt that competitive currency devaluation is no recipe for economic salvation. Britain within the euro would mean four world currencies—the euro, the dollar, the yen and probably the Chinese renminbi. Capital flows would increasingly dominate the rates of exchange between the four blocs and might well cause unwanted distortions and volatility.

Therefore, if, as we all hope, the euro experiment proves to be a success, I believe that later in this century we may see moves to create a single world currency. It is late at night, my Lords, so this may be just a dream.

9.5 p.m.

Baroness Cox: My Lords, I rise with considerable timidity to contribute to the debate on this important subject, which was opened by my noble friend Lord Pearson with characteristically well informed and powerful argumentation.

One reason that I speak with such timidity is that this is the first time that I have participated in a debate in your Lordships' House on the European Union. I was prompted to do so because I have listened to or read many of the previous debates on this subject, which has such momentous significance, and have become increasingly concerned. One of the reasons for this concern has been the asymmetry between the detailed and compelling evidence and arguments put forward again and again by those who may be designated Euro-sceptics, such as the noble Lords, Lord Stoddart of Swindon and Lord Bruce of Donington, and my noble friends Lord Willoughby de Broke and Lord Pearson of Rannoch.

By contrast, the responses of Her Majesty's Government and their Euro-enthusiast supporters have often seemed less convincing. They have at times seemed deficient in their lack of detailed counter-argument and evidence. What is worse, argument has at times been replaced by derision, leading me to suspect that the Euro-sceptics have the stronger case.

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This has prompted me to do some homework, and my concerns have developed into a tentative commitment to the Euro-sceptic position. My contribution is therefore my first test of the validity of my perception, and I shall listen with deep interest to the Minister's reply to the points raised by my noble friend and perhaps to my own exploratory contribution.

I begin with an historical perspective and parallel. It is generally accepted that Britain's return to a fixed exchange rate system in 1925 was disastrous. The fixed rate system in question was, of course, the gold standard. The locking-in of the pound to the currencies of Britain's major trading partners and competitors led ineluctably to the general strike of 1926, then to severe unemployment and its attendant hardships. Only when Britain left the gold standard in 1931 did her economy recover.

The story of that disastrous decision has been well told by the late Lord Jenkins of Hillhead in his magisterial biography of Churchill. In 1925, Churchill was Chancellor and Norman was Governor of the Bank of England. This is how Roy Jenkins told the story:

    "Nearly all the bien-pensant sources of advice were unanimous that it was Britain's interest and duty to return to the Gold Standard . . . Churchill's minutes were masterpieces of pungent questioning whereas the replies took refuge in a misty higher wisdom . . . The direct replies to the Churchill minutes . . . were splendid examples of substituting superior wisdom for rational argument . . . Norman, the great Governor, was even more sublimely bland. In the opinion of 'educated and reasonable men' he wrote, 'there was no alternative to a return to Gold . . . if not the Chancellor will be abused by the instructed and posterity'".

Churchill lost the battle, as we know. Roy Jenkins went on:

    "The momentum of conventional wisdom swept his support away . . . the whole story was a remarkable example of a strong not a weak minister nonetheless reluctantly succumbing . . . to the near unanimous, near irresistible flow of establishment opinion . . . [and] the ability of such a near unanimous concentration of advice to be wrong . . . as a result there was committed what is commonly regarded as the greatest mistake of that Baldwin government".

The parallels with the present are obvious. Lord Jenkins was not only a distinguished Chancellor, he was a supporter of all things European. I cite the phrase about,

    "the ability of such a near unanimous concentration of advice to be wrong",

because it may hold lessons for the present debate about Britain's membership of the European Union.

I shall leave discussion of the current short-term economics of Britain and the euro to colleagues far better qualified than I am. My focus is the longer term: the next 50 years. It is no use just looking at present-day economics, vital as they are, because joining the euro, as the Treasury quite rightly keeps on reminding us, is for all eternity. The decision we may be about to take must be the right one: not just for the next five months or five years, but also for the next 50 years at least.

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What is the prognosis for the next 50 years? The European Commission has just hazarded a guess in its review of the EU economy in 2002 which came out just before Christmas. It predicts that by 2050 the current 15 EU members states' share of world output will have shrunk by 44 per cent, from their present 18 per cent to 10 per cent.

Meanwhile, the United States' share of world output will increase from 23 per cent today to 26 per cent in 2050. One of the reasons for this projected divergence between the EU and the United States is the sharply contrasting demographic paths which each is predicted to follow. I shall cite projections produced by the United Nations Population Division, as they are probably as impartial and bias-free as any. Perhaps I may highlight some examples of the implications of projected demographic changes drawn from the Global Britain Briefing Note No. 18, entitled Demographic Change 2000–2050.

The projected EU 15 over-60s population in 2050 is 53 per cent higher than today. However, the projected working-age population of the EU 15 in 2050 is 28 per cent lower overall than today—a loss equivalent to the combined working populations of nine existing EU members: Austria, Belgium, Denmark, Finland, Greece, Luxembourg, Portugal, Spain and Sweden.

Enlargement to include the 10 nominated first wave countries would exacerbate the overall percentage decline in working-age population. The position of other potential European candidates for accession—for example, Bulgaria, Romania or Ukraine—is even worse.

The economic and social implications of such projected demographic changes are far-reaching and disturbing. Time permits me only to highlight a few examples. First, at the geo-strategic level, the United States of America will become even more powerful than it is today, economically, militarily, politically and culturally. Europe and the EU will decline relatively, economically, militarily, politically and culturally.

Secondly, at the geo-economic level, growth in GDP, market size and equity returns will occur outside Europe whereas the EU single market will be a shrinking market, unattractive to foreign investors.

Thirdly, at the EU level, even with enlargement, the tax base will shrink; tax rates and debt will have to increase. Shrinking and ageing populations mean more demand for healthcare and pensions, with fewer people to provide them. Most EU member states will see falling demand for houses, schools, factories and shops, with falling asset values and investment. This will affect the financial and equity markets on which pension provision depends. Sharply diverging demographics within the EU will make EU-wide one size fits all policies even more inappropriate in many spheres—monetary, tax, labour market, agricultural, asylum, immigration, environmental and so on.

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In conclusion, the demography-induced fiscal and budgetary implications of joining EMU, and indeed of staying in the European Union at all, will grow even more alarming. Therefore, it follows, I believe, that no matter what the short-term economics of joining the euro may be, searching questions must be asked about the wisdom of this country tying its fortunes to a grouping—the EU—whose future looks so problematic. The Prime Minister says that our destiny is Europe, but the last three centuries tell a different story. From looking at the evidence, I can only conclude that our interests are more global now than at any time in our long history and it is far from self-evident that those interests point to ever-growing, greater integration with Continental Europe.

Does the Minister disagree with, or can he disprove, any of the figures I have presented; or does he disagree with the implications of those figures I have identified? I welcome any reassurances he can give which will assuage my concerns—concerns which opinion polls show are now shared by a growing number of people throughout this country.

9.15 p.m.

Lord Stoddart of Swindon: My Lords, first, I welcome the maiden speech of the noble Baroness, Lady Cox, on the subject of Europe. We all listened to it with great interest and respect. It was knowledgeable and to the point. I sincerely hope that in the future we shall hear a great deal more from her on the subject. Secondly, I thank the noble Lord, Lord Pearson, for raising the issue and the manner in which he did so. Again, his speech was full of knowledge, statistics and good sound common sense. I support his praise for the noble Lord, Lord McIntosh. The noble Lord is the rock on which the Government in this House stand. I do not know what they would do without him. He is so versatile. He can be tough; he can also be soft; and he is always polite. We are indeed grateful to him for the enormous work he puts into everything he does in this House.

I should like to pick up on one or two points raised by the noble Lord, Lord Pearson. The first relates to trade and jobs. It is repeated time and again by government spokesmen that 3 million jobs will be at risk if we do not do this or that, if we do not go into the euro and if we do not become further integrated into Europe. They are trying to frighten the people of this country into believing that they could lose 3 million jobs if we do not join the euro and scrap the pound. Of course, it is a nonsensical argument. It simply is not true. If 3 million jobs are at stake in this country, more than 3 million jobs are at stake throughout the other countries of the European Union. Those countries are just as dependent on their exports to us as we are to them. If all exports and imports stop, they would be at the losing end because they export more to us than we export to them. So the idea put abroad that our trade with Europe will cease simply and solely because we will not scrap the pound or do everything the Europeans want us to do simply does not make sense.

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Indeed, our adverse balance of trade with the EU runs at about 4 billion per annum. If one translates that into jobs on a value added basis of, let us say, 15,000 per capita that means that we are 300,000 jobs in deficit. In other words, if we were not in the EU, we might very well have more jobs rather than fewer. I wish the Government would stop using this ridiculous argument. It has been used before. It was used during the only referendum held on whether we should join a Common Market, not a European Union. Again, it was bruited abroad that to save our jobs in the car industry, or any other industry, we must join the Common Market. Of course, that has not happened—it has not worked, as we all know.

I remember Harold Macmillan saying that the reason why we had to join the Common Market was that British industry should feel the chill wind of competition. British industry—he referred to the manufacturing industry—has indeed received the chill wind of competition. Manufacturing industry has reduced from 32 per cent of GDP in 1972 to 18 per cent, and employs fewer than 4 million people. That is the result of what happened, so let us hear no more about the 3 million lost jobs.

As the noble Lord, Lord Pearson, remarked, only 12 per cent of our GDP is involved in exports to Europe. That is why small businesses are not in favour of scrapping the pound. They fear what will happen if we scrap our pound, and scrap our control of our economy, and give them over to a bunch of bureaucrats in the European Central Bank and elsewhere in Europe.

The overall balance of payments deficit is sustained to a large degree by inward direct investment. Again, allowing for the Netherlands distortion, the largest part of that inward direct investment comes not from the EU but from the United States and Canada, which provide 58 per cent. The rest of the world, outside the EU, provides 17 per cent. Only 25 per cent comes from the EU.

If one considers the UK's investment in other countries, one finds the same thing. The United States and Canada receive 35 per cent of our investment overseas, the rest of the world 43 per cent, and the EU only 22 per cent. As the noble Lord, Lord Cobbold, said, our trade with the rest of the world is very important and large—but it is with the world, not simply with the European Union.

I should claim an interest as one of the founder members of Global Britain. Like the noble Lord, Lord Pearson, I shall put one of our briefing notes, giving details of inward direct investment, into the House Library.

We do not have to peer into the future to know what could happen if we were foolish enough to give up our currency and go for the euro. We have only to look at Germany, which once had the strongest and most vibrant economy in Europe. What is happening to Germany now? It is on the verge of recession. Production has increased by only 0.2 per cent, which means that Germany will go into recession very shortly. But Germany can do little about it because it

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does not have control of its own currency. Things are going to get worse because of that. Just at the very moment when Germany needs a bit of a devaluation and just at the time when it needs its currency to reduce in value, it is going up in value. That will hurt Germany very much indeed because it depends very much on its exports and, of course, it will be more difficult to export because of the rising value of the euro which is the only currency it now has. That is an example of what could happen in this country if we lost control of our monetary policy, which would eventually lead to the loss of our fiscal policy as well. As I say, Germany needs an increase in the value of its currency, which is now the euro, like a hole in the head.

Finally, it has surely now become clear that scrapping the pound is not only about economics and finance but about the creation of a European superstate dominated by the great duumvirate, France and Germany, who have made their intentions very, very, very clear only this month. It really is time for the Government to re-examine their policy of "me tooism" and make a start by recognising that scrapping the pound means scrapping the UK's monetary and fiscal independence and would put our very existence as a nation at risk. It really is time not to mess about with the euro but to say no to it.

9.27 p.m.

Lord Selsdon: My Lords, my noble friend Lord Pearson casts his Rannoch fly over deep waters of the lochs of Europe again and again. We must admire his persistence. Unlike many people, he is no turncoat.

I must begin my latest address on the European subject by reminding noble Lords opposite of the lengthy period of time when the Labour Party refused to send anyone to the European Parliament and was totally anti-European until the moment when it felt that there was a political benefit to be gained from Europe. At the time of the referendum I believe that the theme that was cast around was, "Britain in Europe: it is our business to be there". Those of us who were involved in trade and the financing of trade rather wished that the government had kept out of things because we could trade anywhere. We had all the mechanisms necessary and all we wanted was political stability.

I take your Lordships back to those days long ago when we had exchange control and the dollar premium and when we ourselves were perhaps the best in the world at calculating all that. That wonderful department in the Bank of England headed by Miss Hiscoth suddenly one day disappeared from view. All we looked for were stable currencies. We found that one of the biggest problems was sterling itself because sterling had become a reserve currency, possibly unwittingly and unwillingly in the post-Empire days. We found ourselves in conflict with the dollar while we were—as the noble Lord, Lord Cobbold, pointed out—still paying not for one world war but for two. We found ourselves stretched and pushed and we could not understand the movements of the eurodollar. That was due to the introduction of

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interest equalisation tax in the United States which led to a pool of dollars being kept abroad to finance other people's trade.

Sterling in general had been used to finance a large chunk of trade world-wide, but as our world role fell back, and the instability of sterling became so desperate, fewer and fewer people used sterling for trade finance. Now we come to that strange thing, the ecu. When I was on the Council of Europe I used to support Sir Brandon Rhys Williams in his desire to introduce the europa. Your Lordships will recall that in Henry VII's or Henry VIII's time there was the first golden ecu of the sun and the ecu dore for financing trade. When we came to the re-introduction of the ecu, it was felt that it had certain political overtones. My colleagues in the banking world advised certain senior British officials. We proposed the introduction of the parallel ecu, which could be used for financing trade and the reserve currency against which other countries could set their benchmarks, including ourselves.

The policy of noble Lords opposite and of their Government is most confusing. Not one of the five tests which they would like to apply could work at the present time. We live in troubled times. We look at what may happen to people's savings, the stock market, and currency fluctuations. I recall as a young boy often being lectured by my great uncle, Stafford Cripps, who had the awful job of devaluing sterling for the first time. The currencies of the world would always find a level against each other against which people could calculate. It would be 1:1, 1:2 or 1:3. As noble Lords know well, the dollar is now one dollar to one euro. The relationship between the kilometre and the mile is exactly the same; a euro is two-thirds of a pound. These currency movements often stabilise and that is where we are at the moment.

I remind the noble Lord, Lord Stoddart of Swindon, of that most interesting time when we were on a committee together studying what would happen when oil ran out. I believe it was Select Committee B. We asked that if manufacturing industry disappeared, what was going to replace it. Someone said that if there were service industries, probably we would have to service someone else's manufactures. The fact is that today we do not manufacture anything. We assemble, or as some people have been known to say, we down-size and out-source and we put things together. We service and we service, and often we do not say please and thank you. Our manufacturing base has gone. We have shifted from having for nearly 100 years a surplus income from manufactures to having our first deficit. That deficit grows and grows.

To say that we should concentrate on linking our currency to one within the continent of Europe is strange at the moment. The noble Lord, Lord McIntosh, will recall something he said some time ago. What happens when one tries to bring currencies together and not all parts of the economy come together? There are underlying pressures that do not emerge at first; they emerge later.

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The pressures we face with are that most of the continent of Europe has already spent substantial amounts on infrastructure. They have roads and railways which work; they have hospitals and schools. We have fallen so far behind on capital investment for infrastructure that it would have a major impact if we tried to link our currency too closely to others at this time.

Another matter is the wonderful word "arbitrage" which only emerged when there were differences between currencies or prices. Our currency was no longer linked to gold so the Bank of England sold all the gold it possibly could. Now we find that the value of gold has shot up at an almost incredible rate. Had we retained it we would have been better off. No one believed that we would return to gold because we believed that there would be stabilisation within stock markets and that currencies would remain stable.

We also forgot that as different taxation demands, which are not harmonised, emerged within countries, so it became cheaper for every country to buy in a foreign currency particularly if they could do it gris or noir without being accused of speaking French. It is not a good idea to buy certain agricultural machinery in one country when you can buy it cheaper in another. We know the argument about motor cars.

These differences in prices are rising all the time and now also apply to food. This is due to pressures of differential levels of taxation, the burden placed on employment or to the restriction on wages and the requirement to create better benefits and shorter working weeks. The differences between the countries are greater than they have ever been. My old friend Sir Basil de Ferranti worked hard on the question of non-tariff barriers. We have so many of them at the moment, which is unbelievable, but very few are legal.

What do governments do? They seek to govern by rules and regulations and it is those regulations themselves which are now starting to throttle large chunks of our own commercial sector, which in general is extremely honest.

I find it very interesting at this moment, and of particular importance, that the wild boar shooting season came to an end yesterday, I believe. The wild boar has suddenly become rather intelligent and does not get shot so often, so there has been a lower puntering of wild boar this year than ever before on the continent of Europe. Yet there are more and more of them.

What most people deem important to them is their way of life. I carry ecus and use ecus. There is no problem about a British company invoicing in ecus, dollars or anything else. It only needs a little calculator, which people can buy and have no worries. What concerns people is that, if we are in a scene with the potential of war, we do not have stability, and instability breeds fear. It is also a happy hunting ground for the noble Lord, Lord Pearson. If he keeps promoting his ideas, he will find a time when he will be

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absolutely right and a time when he will be absolutely wrong. For the moment, I conclude that no one is absolutely right. It is a time to sit back, watch, think and wait and see what happens.

9.36 p.m.

Lord Harris of High Cross: My Lords, if noble Lords will consult their stopwatches, I undertake to speak well short of the three minutes that I am informed are permitted in this gap.

I was driven to take part with one purpose only, which was to underline something that the noble Baroness, Lady Cox, said in quoting the late Lord Jenkins's quite excellent biography of Winston Churchill. He recounts that in 1925 the great man, against his own judgment and yielding to the predominant expert opinion, restored the pound to its pre-1914 value. I think that I recall from student days that that was 4.866 recurring dollars. Among the results, as she said, were the general strike, record unemployment and so on, which were not relieved until 1931, when a so-called coalition government devalued the pound from that level to something a shade over four dollars to the pound.

The trouble with the euro is that the initially fixed rate is, as the noble Baroness said, for ever. The possibility of a later adjustment to meet changing circumstances is completely ruled out. When we contemplate joining, it is no consolation to me to think that the Germans in particular, and also the unhappy Irish, are now themselves suffering from a false rate of exchange between their natural currency—in Germany's case the mark—and the euro. They cannot change that rate of exchange and it dooms Germany, at least for the foreseeable future, to unemployment, retarded growth and all the other associated miseries. I believe that that logic reinforces the lesson that the noble Lord, Lord Pearson, has raised tonight.

9.38 p.m.

Lord Taverne: My Lords, I would like to follow the noble Lord, Lord Selsdon, in his almost philosophical journey through our monetary and trade history, but I want to concentrate on the two main points raised by the noble Lord, Lord Pearson. I think that we are all grateful to him for raising the issues because he makes us think about fundamentals. The only snag is that I had some difficulty in following part of his argument.

Let us start with the background of our trade in goods and services. I shall take the figures from the Pink Book as I have them for 2001, which show that our exports to the Euro 12 were 50 per cent of our trade, with 3 per cent added for Sweden and Denmark. That makes the total for the EU 53 per cent. In comparison, the United States was 17 per cent, so we start with the proposition that our trade with the rest of the European Union is at least three times as much as that with the United States. The others are divided in different places.

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This matter is important because the impact of a single trade area is considerable, especially if it is fortified by a single currency. The single currency means that trade is increased. For example, it is interesting that when there is no single currency, as between Canada and the United States, the average Canadian province trades 20 times as much with another Canadian province which is equidistant and about the same size as it does with one of the states of the United States because there is not the same currency. If one compares that with the figures for the European Union, one finds, for example—I take my figures from Eurostat—that in 2001, France's trade with other EU countries was more than 30 per cent and that the same was true of Germany, whose figure was 32 per cent. In both cases, the amount of trade has increased since the euro was introduced. In the case of the United Kingdom, our share of trade with other EU countries as a proportion of GDP has slightly declined since the euro was introduced, from 23.2 per cent to 22.8 per cent. Trade tends to be increased in a single currency area.

Despite the vagaries from time to time in currencies, there seems little doubt that if one is a member of a single currency, there is greater stability of the currency itself. For example, in the years between 1985 and 2003, taking the value in 1990 as 100, the pound was as high as 110 in 1985 but by 1995 it had gone right down to 88; now it is back to 110 again. If we had been in a single currency at the time, figures show that the variation would have been very much less. In 1985, we would have been at the ratio of 88, for example, to the deutschmark and the same relation to the deutschmark would have been 92 today; however, the period between 1991 and 1998 would have been 100. Inside a single currency area, it is likely that the pound would have been much more stable.

The noble Lord, Lord Pearson, referred to the fact that more of our trade is invoiced in dollars than in euros. The figures that I take from Customs and Excise show that about 44 per cent of trade is invoiced in domestic currency, 32 per cent in dollars and 20 per cent in euros. The noble Lord, Lord Pearson, draws from that the conclusion that therefore the dollar matters more. That appears to be the most elementary error. The question is about the stability of the domestic currency in relation to its customers. If I sell in pounds—or, for that matter, in euros or dollars—the question is: what will the goods be worth when I get paid? That is particularly important in the case of long-term deliveries.

The issue at stake is: what is the relationship and the exchange rate stability in terms of our currency and our top customers? There is no doubt that the biggest currency, whichever currency it is financed in, is that of the European Union. Dollar invoicing is irrelevant from that point of view. The point is: what is the stability relationship between our currency and our most important customers? The euro is now the currency of our most important customers. Floating has not had the advantages that the noble Baroness, Lady Cox, suggested. The deutschmark has varied

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from 3.32 deutschmarks to the pound in 1989, down to 2.22 in 1995, back again to 3.30 and now it is again dropping.

Another real question is: what do outsiders think? What is the view of those who invest in Britain? The Japanese do not invest in Britain in order to export to the United States; they invest in Britain in order to export to Europe. Sales in Britain are relatively limited. American investors do not invest in the UK in order to export to the United States; they invest in the UK as a base for Europe. The same applies to German and French investment in the UK.

The United Kingdom may have certain special advantages, but if currency relations put them at a disadvantage because of instability, that investment will decline. It takes time; these things do not happen overnight. But the effect of our exclusion from the eurozone is becoming apparent. To take Eurostat figures, in the period 1997–98 when the euro effectively began, foreign direct investment in the United Kingdom as a share of the total investment in the European Union was 52 per cent. In the period 1999–2001 it dropped to 24 per cent. In 2001, foreign direct investment in the Netherlands was higher than in the United Kingdom.

There are also signs of UK firms relocating outside the United Kingdom. The Japanese have made it clear that if we do not join the euro there will be no more investment in the United Kingdom.

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