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Lord McIntosh of Haringey: My Lords, I concede it to be my duty to respond to what the noble Lord, Lord Saatchi, said, not what he did not say. I say to my noble friend Lord Clinton-Davis that what the noble Lord, Lord Saatchi, did not say is still ringing in my ears. He did not express a view about British membership of the European Union. He was very wise as it is clear that that issue is still very much alive in the Conservative Party. The less that is said from the Front Benches on that matter, the better it will be for the unity of the Conservative Party.

As regards the understanding of other member states of our position, I believe that we are making very substantial progress in that area. In more recent discussions, for example on the stability and growth pact, what the Chancellor has called the prudent interpretation—in other words, the interpretation which takes account of debt sustainability, of the economic cycle and of the need for public investment—is gaining ground among other European member states. The same is true, although perhaps to a lesser extent, of the European Central Bank where windows of opportunity, if I may put it that way, seem to be opening. We have a considerable interest in the matter despite our lack of formal membership of the euro-zone.

Lord Hannay of Chiswick: My Lords, I thank the noble Lord for repeating the Statement made by the Chancellor of the Exchequer in another place. Many aspects of it are indeed welcome. I refer to the measures announced with respect to the inflation target, the housing market and others. But does the noble Lord agree that those are all measures which ought to have been taken many years ago? They ought to have been taken by the previous government when they committed themselves in the Treaty of Maastricht to the target of entering EMU at the latest in 1999. They are very valuable and necessary measures to take but starting taking them in 2003 is a trifle late. Nevertheless they are welcome.

Will the noble Lord clarify one point? I cannot believe that the Chancellor of the Exchequer, as the Statement seemed to suggest, seriously believed that the question on the examination paper was whether we should enter the euro now. He has already stated on many occasions that even if we took a decision today

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to move ahead, we would not enter for another two-and-a-half or three years. That is a crucial point because whenever the Chancellor rises to his feet to say that the moment has now come to put the matter to a referendum, we shall be two-and-a-half or three years away from the moment at which we enter EMU. That has considerable implications for how sure one can be of the events that will occur during that period.

I ask a further question about clarity and lack of ambiguity. I must confess, having listened to the Chancellor's Statement, that I believe he has given an entirely new definition to the words "clarity and lack of ambiguity". I felt that he could just as easily have said at the end of the Statement: "I am therefore recommending to the House that we should join economic and monetary union in three years' time". Perhaps that matter can be clarified. Will the noble Lord also say what are the totally British special considerations which mean that we alone in the European Union have to have five extra tests above those laid down in Maastricht? Is it suggested for one minute that the other members of the European Union are not interested in the stability of their economies? They took the decision on the basis of the criteria in Maastricht, which the Chancellor has very reasonably recognised that we, too, fulfil. Why is Britain so different? What makes it necessary for us to erect the hurdles and then trip up as we try to cross them?

Finally, what do the Government have in mind about reforming the European Central Bank? Have they not considered that such reform might be achieved slightly more easily if a British central banker were sitting in that bank? I make a small plea that we are not told at the end of the day that a little mouse called publishing the minutes of the monthly meetings is the said reform.

Lord McIntosh of Haringey: No, my Lords, publishing the minutes of the monthly meetings would not be adequate evidence of reform of the European Central Bank. The noble Lord's analysis of the position of the bank has a lot of truth in it. In terms of the reforms that we have made over the past six years, particularly in the conduct of monetary policy, the way in which the transparency of decision-making in the Monetary Policy Committee has been enshrined in UK legislation shows very clearly the contrast with the European Central Bank.

That brings me back to the first point made by the noble Lord, Lord Hannay, which was his question as to why we are starting only now, in 2003. We are not starting only now; we have transformed the conduct of monetary policy in this country. We have only to look at the facts about the British economy to see why it is legitimate for the Chancellor to claim that we have the highest level of growth, the lowest interest rates and the highest levels of employment for many years.

I talked earlier about entering from a position of strength. The Government's conduct of the economy over the past six years has given us a position of strength from which it is possible to move on to the specific and very powerful next step, which is that the

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Prime Minister and the Chancellor of the Exchequer will together go out to the people of this country and put the case for Europe and for British membership of European monetary union.

I do not agree that the five tests are in addition to those of Maastricht. We set them out to pretty universal agreement in 1997. When we talk about convergence—the first test—we ask the question explicitly: are business cycles and economic structures compatible so that we and others can live comfortably with euro interest rates on a permanent basis? I do not know whether other states took that into account when they made their decision about joining the third stage of monetary union but, if they did not, they were very foolish.

Lord Pearson of Rannoch: My Lords, surely the answer to the noble Lord, Lord Hannay, is that only in the United Kingdom do we pretend that EMU is an economic project. Therefore, we set five tests that are entirely bogus for a project that is really designed to hold the mega-state together.

Be that as it may, does the Minister agree that if we look at successful single currency areas elsewhere, they all possess three essential qualities largely absent from EMU? They enjoy common language, mobility of labour and, above all, a federal budget. Surely the Government agree that all those other areas have the ability to move money from rich to poor zones—south to north in the United Kingdom, north to south in Italy, west to east in Germany—as with the federal budget in the United States.

If there are to be any further tests as to whether we should join EMU, should not the cost of the absence of those three essential ingredients be estimated? Or are the Government telling us that they are so in love with the European dream that they are happy for the United Kingdom to end up making massive contributions to the EU budget? If so, surely they should be good enough to give us some idea of the costs. Are not those three ingredients the essential tests for the future?

Lord McIntosh of Haringey: My Lords, I recommend that the noble Lord, Lord Pearson, read the documentation about optimal currency areas, particularly Professor Mundell's question-and-answer evidence, which is contained in the volume of EMU papers on the views of academics. I do not think that he will find the same opinion about the fundamental characteristics of monetary unions.

In particular, I am puzzled by the noble Lord's view that, in order to have monetary union, one has to have a huge federal budget. That was certainly not the characteristic of the monetary union that took place in the United States in 1792—far from it. There was virtually no federal budget at that time, and the states undertook almost all aspects of the budget. A characteristic of the United States' monetary union was an increase in the federal budget. The Government's position is that there will not be an increase in the federal budget of the European Union. That position has been confirmed in budgets for the

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project period and, so far as I am aware, there is no pressure from either this country or any other for substantial increases in the federal budget.

Lord Stoddart of Swindon: My Lords—

Lord Layard: My Lords, what plans do the Government have to campaign in support of membership of the euro? So far, we have had the chicken-and-egg problem that we could not have a campaign for public support because there was not going to be a referendum and could not have a referendum because there was not public support. We are now poised to break through that problem with this magnificent Statement, which I tremendously welcome, but what will be the follow-up?

Lord McIntosh of Haringey: My Lords, all that I can say to that is, "Watch this space". The Prime Minister and the Chancellor of the Exchequer will be making significant statements on the issue very shortly.

Earl Russell: My Lords, will the Minister join me in admiring the noble Lord, Lord Saatchi, for the simplicity with which he can view some of the questions? He is convinced that we are dealing with the creation a big country called Europe. I do not think that he is right but, supposing he were, is there any merit in the view that it ought not to be taken for granted without empirical observation that that is necessarily a bad thing? After all, the kingdom of Sussex was once a sovereign state. I hope that I may presume that it is not Conservative policy that it should have remained so.

Does the Minister also agree that one effect of a supranational umbrella, as of the Holy Roman Empire, is that it makes the survival of small nations a very great deal easier? The prime example is the Grand Duchy of Luxembourg. Will he further remind the noble Lord, Lord Pearson of Rannoch, that one of the most outstanding examples of a successful currency union is the British pound?

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