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Lord Harrison: My Lords, before the noble Lord sits down, will he reiterate his point about criticising "widely divergent" economic activity? I thought that was the mark of a dynamic market, not a failure of a market.

Lord Howell of Guildford: My Lords, I think that the noble Lord has missed the point. What the OECD is worried about—it was its remark, not mine—is that the German economy is doing extremely badly and the French economy is in a coma, whereas Ireland is booming ahead. Some of the new accession countries are doing extremely well. Italy is in a desperate state. Their requirements in terms of monetary and fiscal balance and, indeed, in terms of interest rates have diverged enormously. That puts an intolerable strain on a system that has only one interest rate. That is the point it is trying to make.

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Lord McKenzie of Luton: My Lords, I start by thanking the noble Lord, Lord Dykes, for initiating this debate and wish him, like other noble Lords, a speedy recovery. I thank the noble Lord, Lord Roper, for stepping in at short notice and so expertly. I also thank all noble Lords who have participated in today's debate. As others have said, it rounds off a week in which Europe has been at the centre of our deliberations.
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I should particularly like to congratulate my noble friend Lady McDonagh on her excellent maiden speech. Her impressive career of course encompasses, as she pointed out, a very successful period in one of the UK's toughest assignments—as General Secretary of the party that we share. I have no doubt that her skill and experience in that and in other fields will be brought to bear in our work in the future. I look forward to that.

This has been an interesting and useful debate. A number of important points have been raised. The Motion asks the House to call attention to current trends and developments in the euro. By virtue of this debate and the issues covered by noble Lords, we have indeed given due attention to the subject matter in question.

We have had a full range of views—those clearly in favour, those clearly against and one or two perhaps in the middle. At the heart of our debate must be the analysis that Europe's and the euro-area's low growth and current economic performance stem from structural policy weaknesses. Those challenges were referred to by a number of noble Lords—the noble Lords, Lord Biffen and Lord Taverne, and my noble friend Lady McDonagh. The noble Lord, Lord Howell, made the interesting point that we are making the same kind of analysis; we may not draw the same conclusions in all respects.

The right policy response is therefore the pursuit of structural reform to promote employment, raise productivity and increase flexibility in labour, product and capital markets. That flexibility should be pursued alongside fairness to create opportunity for all in a globalised economy.

Economic and monetary union (EMU) puts an additional premium on structural economic flexibility, since to be successful in monetary union countries need even more flexibility to adjust to change and to unexpected economic events in the absence of monetary policy levers at the national level.

Alongside EMU, global economic change and the challenges of ageing populations underline even more the importance of rising to the reform challenge and enhancing economic flexibility and adaptability. We are part of a rapidly changing global economy. To improve its economic performance relative to the US and match the recent growth rates of other successful developed economies such as Canada and Australia, Europe must take urgent action to promote employment, raise productivity and increase flexibility in labour, product and capital markets.

The noble Lord, Lord Biffen, quoted the noble Lord, Lord Lawson, on the need for a pause, which he hoped would be extended. I put to him that the issues that global economic challenges bring mean that that pause cannot be too long. We need to act now. We need to get that debate under way and we need to get action under way.

The Lisbon programme of economic reform has been refocused by EU leaders on promoting growth and employment. Those are the areas in which Europe
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most needs to succeed in order to preserve fairness and compete in a global economy that puts a premium on skills, innovation and flexibility.

In summing up, I turn to some of the detail of the issues that have been raised. The Government's policy on UK membership of the single currency was set out by the Chancellor in his Statement to Parliament in October 1997. It remains unchanged. In principle, the Government are in favour of UK membership; in practice, the economic conditions must be right. I do not believe that that can reasonably be interpreted as staying well clear.

My noble friend Lord Harrison highlighted benefits of price transparency; elimination of exchange risks; and the single market and its benefit to consumers. The macro case was made by my noble friend Lord Peston and referred to by the noble Lord, Lord Taverne.

The determining factor underpinning any government decision on UK membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. The Chancellor's Statement to the House of Commons on 9 June 2003 on UK membership of the European single currency set out a reform agenda of concrete and practical steps to address the policy requirements identified by the June 2003 assessment. Budget 2005 reports on progress include the introduction in December 2003 of a symmetric inflation target as measured by the consumer prices index—CPI inflation has been within one percentage point of its target since its inception; reforms to address both supply and demand in the housing market through implementing a programme of change to increase supply and responsiveness of the housing market, as recommended in the Barker review, and action taken in response to the Miles review on the mortgage market; reforms at national, regional and local level to enhance the flexibility of labour, capital and product markets in the UK.

Those reforms are right for the British economy in any event. They will also assist the process of achieving sustainable and durable convergence and the flexibility necessary for Britain to succeed sustainably within the euro-area. Although the Government do not propose a euro assessment to be initiated at the time of Budget 2005, the Treasury will again review the situation at Budget time next year, as required by the Chancellor's June 2003 Statement.

The Government also continue to pursue the objective of a European stability and growth pact that takes into account the economic cycle, debt sustainability and public investment. Greater focus on reducing debt and maintaining low debt, with the flexibility for low debt countries such as the UK to invest in provision of public services, has our strong support.

Several noble Lords commented on the state of the stability and growth pact. The noble Lord, Lord Roper, commented that he thought that concerns about its application and suggestions that larger states were ignoring it were at the heart of the Netherlands' referendum outcome. The noble Lord, Lord Rees-Mogg, said that it was critical and not operating in practice. The noble Lord Taverne also referred to it.
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We need to put it in context. Obviously the Government would not comment on the fiscal position of any particular member state, but to suggest that the pact is dead is incorrect. The treaty remains unchanged; the 3 per cent and 60 per cent debt reference values remain unchanged. As the ECOFIN agreement states, the Council and Commission are resolved to preserve and uphold the reference values of 3 per cent and 60 per cent of GDP as the anchors of the monitoring of the development of the budgetary situation. As set out in the treaty, if a member state's deficit rises above 3 per cent the Council will assess whether an excessive deficit exists based on relevant factors. That remains unchanged. I can tell the House that nine member states, including three euro-area countries and six new member states, are currently at different stages of the excessive deficit procedure.

At present, although some member states are performing relatively well, as a whole Europe is losing ground in comparison with key developed economies and unemployment remains high. Why is that? Since 1996, annual average growth in GDP per capita in the euro-area has averaged about ½ per cent less than in the US. In 2004, real GDP growth in the euro-area was less than half that in the US. Stronger growth in non-euro-area countries—Sweden, the UK and the new member states—boosted growth for the EU 25 as a whole to about 2½ per cent in 2004, compared to 4½ per cent in the US. As a whole, Europe's growth rate still lags behind those of its main competitors.

As a result of that persistent gap, the gap in living standards between the US and the EU 15 has widened back to above 30 per cent. Growth accounting analysis suggests that Europe's labour market performance explains around two-thirds of Europe's gap in living standards with the US; the remaining third can be attributed to Europe's lower productivity levels.

Increased employment is the best route to social cohesion. Despite recent efforts to boost employment and marked success in some member states, especially in raising female employment, inactivity rates remain high, with about 93 million inactive people of working age across the EU 25. The employment rate of older workers remains especially low and well below that of major competitors such as the USA and Japan.

Moreover, at around 9 per cent, Europe's unemployment rate is considerably higher than that in the US and Japan, leaving 19.5 million people unemployed. In 2004, unemployment rates averaged close to 10 per cent in Germany, 9 per cent in France and 8 per cent in Italy. Much of that was due to long-term unemployment, reflecting labour market rigidities. Nearly 50 per cent of the unemployed in Germany and nearly 60 per cent in Italy are out of work for more than a year, compared with less than 10 per cent in the US and Canada. That reverses a long-standing European strength.

Raising productivity levels will also be crucial for Europe to improve its long-term economic performance and living standards. Europe underperforms the US in terms of both output per hour and output per worker, and the gap has been widening since the mid-1990s,
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reversing the trend of catch-up with US productivity levels during the three decades following the Second World War.

Recent analysis suggests that the underlying causes are largely structural, reflecting a failure to boost services productivity; the relatively small size of the EU's ICT-producing sector; and the EU's larger share of low-productivity non-ICT-using or ICT-producing manufacturing industry. That points to a clear need for further action to promote the key drivers of productivity: increasing product market competition; enhancing the EU's frameworks for innovation and enterprise; and upgrading the skills of both existing workers and new entrants to the labour market so that they can exploit the opportunities of new technology.

In its May 2003 review of monetary policy strategy, the European Central Bank stated that it would aim to maintain inflation close to 2 per cent in the medium term. To date, euro-zone inflation has remained near, and in recent years above, 2 per cent and deflationary risks have not materialised.

The ECB framework is very young and continues to evolve. The operation of monetary policy needs to be seen as an evolving process in which both the ECB and markets are learning. Since it took control of monetary policy, the ECB has made several changes, including the biennial publication of staff macro-economic projections and moving to monthly rather than fortnightly decisions on interest rates. Inflation and output have been relatively stable in recent years, with output fluctuating less in the recent downturn than it did in the 1990s. My noble friend Lord Peston made that point.

Noble Lords raised several points about the ECB. My noble friend Lord Harrison probed the mandate of the ECB. As he rightly identified, its primary objective is to maintain price stability but, without prejudice to that objective, it should support the general economic policies of the Community. His point was that greater emphasis ought to be placed on that. I agree.

My noble friend Lord Peston referred to secrecy, and certainly it should not be an insuperable issue to publish even the minutes on an anonymous basis. The issue of a symmetric target for inflation is also important.

The advent of EMU is itself a driver for pursuing structural reform and enhancing economic flexibility, especially in the euro-area. To be successful in monetary union, countries need even more flexibility to adjust to change and to unexpected economic events, once their ability to vary their interest rates and exchange rates has gone and the euro and the single European interest rate are in place. There is the need to tackle unemployment and inflexibility to make sure that Europe as a whole is able to withstand any shocks that arise.

EMU membership therefore puts an additional premium on ongoing reform of EU labour, product and capital markets. In this context, the Government will continue to argue that employability, flexibility and stronger competition policies must be a top priority, so that EMU can be sustained. It is important to enhance the flexibility and dynamism of the European economy
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and build on the achievements to date, if the full benefits of EMU are to be realised. That will be particularly important as EMU expands to take in the new member states that joined the EU in 2004.

Several noble Lords entered into the debate about whether monetary could go successfully only hand in hand with political union. The noble Lord, Lord Roper, referred to the factors that would need to be in place if that were not to be the case, as did the noble Lords, Lord Taverne and Lord Howell of Guildford. The noble Lord, Lord Rees-Mogg, probed the point in his contribution. Our position is that they need not go hand in hand, but fiscal and monetary discipline is extremely important in the absence of those processes. The noble Lord, Lord Taverne, said that political union was dead; I think that is right.

Alongside EMU, global economic change further underlines the importance of rising to the reform and flexibility challenge. The global economy is undergoing dramatic change, brought about by rapid technological change and the falling costs of communication; by the increasing ease with which goods and services can be subdivided and traded between countries and continents; and by the market reforms in large emerging economies such as China and India that enable them to seize the opportunities that come from closer integration into the global economy.

Europe must act to tackle persistent low growth and to realise the full benefits of globalisation. Some policies that proved successful in the era of post-war catch-up are no longer appropriate in a global environment that demands greater flexibility and competition. Europe must equip its workers with the skills necessary to embrace globalisation. My noble friend Lord Peston addressed that point. To improve its economic performance relative to the US and match the recent growth rates of other successful developed economies, Europe must take urgent action to promote employment, raise productivity and increase flexibility in labour, product and capital markets.

For a full analysis of the economic challenges facing Europe and how we can best respond to them, I refer noble Lords to the Treasury paper published alongside Budget 2005 entitled Long-term global economic challenges and opportunities for Europe.

Europe and the euro-area must therefore adapt to the changing balance of global economic activity and the rise of fast-growing emerging economies to realise the full benefits of economic and monetary union. In her maiden speech, my noble friend Lady McDonagh stressed the need for change. The 2005 spring European Council agreed a renewed focus on jobs and growth, following the mid-term review of the Lisbon agenda. The Government fully support those conclusions. The opportunities offered by globalisation should not be missed. Through the reforms to which I referred, the EU can capitalize on the growing interdependence of the global economy and stimulate growth and employment within its borders.
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Our aim is a Europe that looks outwards rather than inwards and advances the pace of structural reform to meet the challenges of globalisation. The UK aims to work closely with its European partners to achieve that aim during its presidency of the EU. My noble friend Lord Peston made the point that, if we were not in the euro, we would lose influence; I believe that we gain influence if we are making the arguments and talking about modernising Europe, as the Prime Minister did this morning in his powerful speech to the Parliament.

Key to the success of the EU economy will be a risk-based approach to the enforcement and implementation of regulation. A risk-based approach including competitiveness testing, simplification of existing legislation and alternatives to regulation will minimise the burden of regulation on business. The noble Lord, Lord Biffen, touched on the impact of regulation and, I think, prayed in aid Harold Wilson for the point that he was making. The concept of a risk-based approach to the enforcement and implementation of regulation is designed to attack that issue.

Member states should take urgent action on labour market reform; further regulatory reform; steps to create a dynamic and competitive single market; knowledge and innovation and enterprise for growth; and on the importance of external openness to trade and investment as a driver of growth and productivity. Member states should set out how they aim to deliver those objectives in their Lisbon national reform programmes later this year. The issue of whether a single market is a correct aspiration was raised by the noble Lord, Lord Biffen. My noble friend Lady McDonagh talked about how a single market was not inconsistent with social justice and how economic prosperity and social justice could go hand in hand.

Although some member states are performing relatively well, as a whole, Europe is losing ground in comparison with key developed economies, and unemployment remains high. In 2004, real GDP growth in the euro-area was less than half that in the US. The underlying factors contributing to Europe's low growth and economic performance stem from structural policy weaknesses, and therefore the right policy response is the pursuit of structural reform.

EMU and global economic changes respectively place an additional premium on flexibility in order to adjust to change and to unexpected economic events and to compete effectively in the global economy. Against that background, the Government have set out an agenda for European economic reform for the UK presidency of the European Union. It is by addressing that reform agenda that the main economic challenges can be dealt with.

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