Ministerial Speech - Economic and Monetary Union

- Thursday, 30th April 1998

 

Rt Hon Peter Lilley MP

Mr. Peter Lilley (Hitchin and Harpenden) rose—

 

Mr. Brown I will give way to the right hon. Gentleman if he will clarify the Conservative party's position on this matter. Is it still the position that the Conservative party would not join a single currency for two Parliaments or for 10 years?

 

Mr. Lilley I am grateful to the right hon. Gentleman for giving way; I will answer his question later.

 

Mr. Brown Why not now?

 

Mr. Lilley Because I am asking a question. The right hon. Gentleman surely realises that I will be called to speak later, if I am fortunate enough to catch your eye, Mr. Deputy Speaker. The right hon. Gentleman was right to say that the treaty requires the Council of Ministers to make a judgment on whether Italy and other countries are approaching at a satisfactory pace the 60 per cent. reference level for debt. I want to know the Government's view on how many years those countries should be allowed to reach that 60 per cent. reference level. What would be considered satisfactory?

 

Mr. Brown The right hon. Gentleman would not answer my question. It is about time that he clarified, for the country, the Conservative party's position. It has been clearly stated that the Conservative party wants to hold back monetary union for two Parliaments or 10 years. As regards Italy, the right hon. Gentleman correctly pointed out that the treaty refers not only to the debt:GDP ratio at a particular point in time but to the sustainability of fiscal criteria and therefore the direction in which that ratio is moving. The Italian debt:GDP ratio has been falling for the past three years—contrary to what the 481 hon. Member for Reigate (Mr. Blunt) suggested. It will fall again next year. The Italian Government have made a commitment that, over the next three years, it will fall by 12 per cent. The right hon. Member for Hitchin and Harpenden should take into account first, that Italian inflation is 1.8 per cent.; secondly, that public borrowing is 2.5 per cent.; thirdly, that Italy has met the necessary long-term interest rate criteria; fourthly, that Italy has met the exchange rate criteria; and, fifthly, that not only has Italy made a commitment significantly to reduce its debt:GDP ratio but, as I shall explain in a minute, Saturday's declaration of Ministers will lock countries into a course of fiscal rectitude that is absolutely essential for the future. I will not take lectures from the Conservative party about fiddling the criteria. When we came to office, we found that the public spending figures had assumed a spend-to-save programme of billions of pounds of savings that did not exist. They had assumed privatisation sales that could never have happened because they had never been planned. They had assumed a trend growth rate that had not been reached over the cycle. The Conservative Government had continually changed the criteria on which they would judge themselves for fiscal rectitude—from a balanced budget to a near-to-balanced budget. We will take no lectures on fiscal rectitude from Conservative Members.

 

Mr. Lilley rose—

 

Mr. Brown As I was saying—[HON. MEMBERS: "Give way.") I will give way to the right hon. Gentleman if he will answer my question. The country has a right to know whether it is still the Conservative party's position that it will not join a single currency for two Parliaments or 10 years. It is a very simple question requiring a very simple answer.

 

Mr. Lilley I am afraid that I did not quite catch the Chancellor's answer to my question. He has to make a legally important decision tomorrow night on whether or not to lift the existing excess deficit procedure from Italy. He can do that only by making a judgment on how many years Italy should be allowed to fulfil the requirement that it should return to the 60 per cent. reference level in a satisfactory time. He must tell the House how many years he would consider satisfactory.

 

Mr. Brown The right hon. Gentleman presents himself as some sort of lawyer interpreting—[Interruption.]

 

Mr. Deputy Speaker Order. I am sorry to interrupt the Chancellor, but this is a serious debate which is not helped by barracking and shouting. It would be better conducted in a quieter mood.

Mr. Brown It is not a requirement of the treaty to reach a particular level within a particular time. The requirement is that, if the debt:GDP ratio is not met at a particular point in time, the direction in which it is moving must be satisfactory.

 

Mr. Lilley And the pace.

 

--- Later ---

 

Mr. Peter Lilley (Hitchin and Harpenden) I beg to move, as an amendment to the motion, at end add: 'but regrets the Government's failure to deliver on the Prime Minister's pledge to the House on 4th June 1997 that "the criteria for monetary union should not be fiddled, fudged or botched in any way", and also the Government's failure during the British Presidency of the European Union to press for a strict interpretation of the Treaty requirements governing the eligibility of member states to join a single European currency, with consequential damage to British manufacturing industry through the perceived weakness of the euro and the resulting strength of sterling.'. This weekend, European Governments will be making decisions that will have momentous consequences for the countries that may join the euro and for the United Kingdom. I shall make a case which I shall state very succinctly at the outset. First, I shall argue that it would clearly be in the UK's interests, even if it does not join, to ensure that the choice of participants and any compromise reached on the Presidency of the European Central Bank are credible and consistent with the treaty's requirements". Those are the words of the Select Committee, and I whole-heartedly endorse them. Secondly, I shall argue that it is our duty, as President of the European Union, to ensure that the criteria are properly obeyed".

 

Mr. Gordon Brown As the right hon. Gentleman is making statements of principle, will he clarify the position of the Conservative party on the single currency? Is it that it will not join for two Parliaments or 10 years? Will he 487 rescind the statement that he made yesterday to Mr. Naughtie on the "Today" programme that that has never been the Conservative party's position?

 

Mr. Lilley The words that I just uttered were those of the Prime Minister, which is perhaps why the Chancellor wanted to avoid them. I agree with the Prime Minister that, during Britain's presidency, the Government should use their influence to ensure that the criteria are properly obeyed.

 

Mr. Brown Will the right hon. Gentleman answer the question?

 

Mr. Lilley I shall answer the Chancellor's question in a moment. Thirdly, I shall argue that the Bundesbank is right to say that additional firm and substantive commitments are needed to ensure that Italy and Belgium achieve sustainable convergence and that the Government should argue, negotiate and, if need be, vote to achieve that end. The Chancellor wants to know our position on Europe. It is very clear. We believe that we should keep the pound in the next Parliament, because the structure and cycle of the British economy differ from those on the continent. Unless and until we have American-style labour mobility, wage flexibility and transfer of resources between states, a one-interest-rate-fits-all monetary policy would be damaging to Britain.

 

Mr. Barry Gardiner (Brent, North) Will the right hon. Gentleman give way?

 

Mr. Lilley No. I am still answering the Chancellor's point. The Treasury Select Committee concluded that, even if the circumstances were to change, it would take at least five years and probably a whole business cycle to determine that. Therefore, it would be absurd to try to pretend that the criteria laid down by the Chancellor could be met, and could be seen to have been met, before the end of the next Parliament. That is why we believe that it is right to keep the pound and that is the logic of the Chancellor's position.

 

Mr. Charles Clarke (Norwich, South) Does the right hon. Gentleman accept that the logic of the position that he has just explained is that, in the next 10 years, there are no circumstances or developments in the relationship between the euro and Britain under which the people of Britain might have the chance to express their judgment and assessment of the issues and weigh up the debate? He has said that there will be no circumstances in which the British people will be able to decide.

 

Mr. Lilley If that is the hon. Gentleman's view of the logic of my position, he is, in effect, saying that it is the logic of the Treasury Select Committee and the Chancellor.

 

Mr. Gordon Brown May we have a straight answer?

 

Mr. Lilley The Chancellor has had a straight answer. He refused to give me a straight answer to my question.

 

Mr. Brown Will the right hon. Gentleman confirm that the position of the Conservative party is not as he set out yesterday on the "Today" programme, when he said to Mr. Jim Naughtie: 10 years is a number picked from the air by you"? Will he confirm that the real position is the one that he stated on 5 October and referred to two Parliaments or 10 years? Will he confirm that that is the true position of the Conservative party and will he apologise for getting it wrong yesterday?

 

Mr. Lilley The two Parliaments, or essentially the next Parliament, is the commitment that we have made, for the reasons that I spelled out. That is a sensible policy. The right hon. Gentleman's own policy is incompatible—

 

Mr. Derek Twigg (Halton) Will the right hon. Gentleman give way?

 

Mr. Lilley No. I must get on and address the issues involved in the debate. There are very good reasons for countries that are not in the European currency to be concerned about the decisions that are being taken this weekend. Decisions about the terms on which members join the euro, who joins and who runs the European central bank are important for Europe and for Britain.

 

Mr. Twigg Will the right hon. Gentleman give way on that point?

 

Mr. Lilley No. I have not yet completed my point, so the hon. Gentleman does not know yet what it is. A soft euro would push the pound even higher, hitting exporters even harder and driving manufacturing into recession. In the long run, an unstable euro—or worse still, a failed euro, would not just be a disaster for member countries; Britain too would be hit by the wash. There are very good reasons for being concerned about the euro even though Britain remains outside, as it will have indirect effects on us. The Chancellor wants to bounce us into a single currency soon after the next election, if he gets the opportunity. A weak and unstable euro would then affect us directly, so he should be even more concerned than we are by the failure to apply the convergence criteria strictly. If he is serious about British entry into economic and monetary union, he is being quite extraordinarily irresponsible in taking such a relaxed view about the application of the criteria.

 

Mr. Gardiner Will the right hon. Gentleman give way?

 

Mr. Lilley No. I should like to make some further progress. Launching the euro is a bold and perilous venture. Virtually everyone has agreed that the less strictly the Maastricht convergence criteria are applied, the greater the risk that the venture will fail. Those criteria were included in the Maastricht treaty precisely to ensure that the euro would be strong and stable. The Government have repeatedly stated that they too believe that the criteria should be rigorously applied. Last July, the Chancellor told the Royal Institute of International Affairs: there should be no fudging of the Maastricht treaty conditions. On that, at least, the Chancellor and the Prime Minister see eye to eye. The Prime Minister told the House: the criteria for monetary union should not be fiddled, fudged or botched in any way. If they are, the answer is not to delay—the answer is not to proceed."—[Official Report, 4 June 1997; Vol. 295, c. 386.] Even the Foreign Secretary has taken time off from winning friends and influencing people around the world to weigh in against fudging. He said: we have no intention of signing up if our final conclusion is that the criteria have been fudged."—[Official Report, 9 June 1997; Vol. 295, c. 803.] We have a right to expect that the Government mean what they say, but we now know that those words were for home consumption. Words may be cheap for the Chancellor, but he is playing fast and loose with British jobs and businesses. Hard-working people are paying the price of his broken pledges. On this most important issue he has let down the British people.

 

Mr. Gardiner While the right hon. Gentleman is talking about cheap words, I remind him of his own words of 8 May 1997, when he said that he thought there was no point in making theological decisions about subsequent Parliaments". Does he recall those words and, almost a year to the day later, has he suddenly converted to a different way of theological thinking?

 

Mr. Lilley The hon. Gentleman should get his quotations first hand, not from Walworth road. He would then realise that I was asked about the Parliament after next. Of course it is sensible for us to have a view about the next general election; we will have to have such a view in our next manifesto. However, I did not think that it was worth while committing myself, theologically or otherwise, to a view about the election after next.

 

Mr. Charles Clarke Will the right hon. Gentleman give way?

Mr. Lilley No, I will not. The hon. Gentleman has already had one go. Britain holds the presidency of the European Union. It is the Government's duty to ensure that the criteria are properly obeyed, yet they are doing nothing and have done nothing during the past four months. They have not uttered a single word of criticism about the Commission's recommendations that all 11 applicants now meet all the criteria. The Commission and the European Monetary Institute reports show that only four of the 15 members of the European Community have passed all the tests and met the strict reference levels in the treaty. Two of those four are Denmark and Britain, which are not even applying to join the single currency. The report shows also that two member states—Belgium and Italy—had levels of debt twice as high as those permitted by the Maastricht treaty. It shows that two countries, including Italy, have not been members of the exchange rate mechanism for the full two years required by the treaty. The report shows also that some countries have needed temporary and spurious devices to get their deficits below the ceiling. The Bundesbank spelled out in its parallel report that the deficit ratio of many member states in 1997 was influenced by measures with a temporary effect. These measures were on such a scale in Italy, for example, at 1 per cent. of GDP that they were instrumental in enabling it to meet the reference value of 3 per cent. of GDP. It would be interesting to hear from the Chancellor whether he thinks that a strict application of the rules would allow Italy to get away with raising a euro-tax and promising to give back 70 per cent. of the proceeds in subsequent years without taking account of that in the figures that it presented to the Commission. We might all like taxes that would end after a few years, but that does not seem to me to be a very strict application of the rules. The Government and the Chancellor have put forward a range of excuses for abandoning their pledge to insist on strict application of the criteria. Their first response was to deny that any real fudging is going on. The Chancellor claimed today that even countries such as Italy and Belgium come within the letter of the rules. There is a get-out clause for countries whose debt exceeds 60 per cent. of gross domestic product if, in the words of the treaty, the ratio is approaching the reference value at a satisfactory pace. Every country signed up to the 60 per cent. target in 1991—seven years ago. Since then, Italy's debt has not decreased; it has increased from 101 per cent. in 1991 to 122 per cent. In the three recent years, to which the Chancellor referred, in which it has declined from its peak, it has done so at an average rate of only 1 per cent. a year. At that rate, it will take six decades to reach the reference level. Is the Chancellor saying that approaching the reference level at a satisfactory pace means allowing Italy 60 years to do so? The good news is that the Italian Government have promised the Commission that they will reduce the ratio in future at a rate of 3 per cent. a year. They will need to achieve that rate year in, year out, without fail, for the next 20 years to reach the 60 per cent. reference level. Does the Chancellor consider that Italy is approaching the reference level at a satisfactory pace?

 

Mr. Gordon Brown Having said that Britain should not join monetary union, the shadow Chancellor now wants no other country to join. He is trying to construct a case for monetary union not to go ahead among 11 countries based on the debt to GDP ratio in Italy. I have pointed out to him—[Horn. MEMBERS: "What about Italy?"] Conservative Members should listen to these facts. First, inflation in Italy is 1.8 per cent., so it has met the criteria that many Conservative Members said that it would never meet. Secondly, long-term interest rates in Italy are now 5.2 per cent., so they have substantially decreased. Thirdly, the public sector borrowing requirement—the Government's financial position—is 2.5 per cent., and the Italian Prime Minister has promised me that it will fall to 2 per cent. Fourthly, the Maastricht 491 criterion was not that debt should be 60 per cent. of GDP, but that it should be 60 per cent. or satisfactorily diminishing.

 

Mr. Shaun Woodward (Witney) On a point of order, Mr. Deputy Speaker. As a new Member of the House, may I ask whether the Chancellor's remarks constitute an intervention?

 

Mr. Deputy Speaker I advise the hon. Gentleman, as a new Member of the House, that that is not a point of order.

 

Mr. Brown The right hon. Member for Hitchin and Harpenden (Mr. Lilley) should realise that, because the primary surplus in Italy is 6 per cent., there is a current account surplus and the savings ratio is 15 per cent., debt will not be accumulated over the next few years; it is falling by 3 per cent. a year. The Italian Prime Minister has said that debt will fall by 12 per cent. over the next three years. Conservative Members should consider another point: the European Parliament today voted on the Commission's recommendations and the British Conservative group refused to support the shadow Chancellor's view.

 

Mr. Lilley It is my understanding that the British Conservatives abstained. One always knows when the Chancellor is in trouble because he goes into auto-rant mode for so long that he hopes that people will have forgotten the issue that he was supposed to be addressing. He has revealed that he still does not have a view on how much time Italy should be allowed to return to the 60 per cent. level. I do not mind what his view is, but he is a member of the Government and he will have to make a decision on that matter tomorrow evening. He should tell the House his position. Twenty years seems a long time for Italy to fulfil that criterion. I know that the Chancellor claims to be a long-termist, but that is carrying long-termism to extremes.

 

Mr. Blunt Does my right hon. Friend agree that what distinguishes debt from inflation and the PSBR is that inflation and PSBR figures can change substantially from one year to the next, but it takes a long time to deal with a huge public sector debt?

 

Mr. Lilley My hon. Friend is absolutely right and much more to the point than the Chancellor could ever be. The Chancellor's next line of defence is to pretend that all the reports that have been published, including that of the European Monetary Institute—on Thursday, the Chancellor even claimed the same of the Bundesbank report—entirely endorse, without qualification, the entry into the euro of all 11 countries. That is not so. The EMI document is fundamentally factual and does not have to express a detailed affirmation of each country's overall standing.

 

Mr. Gordon Brown I did not say that the report endorsed entry of all 11 countries.

 

Mr. Lilley The Chancellor is backing off; he is saying that he did not say such a thing.

 

Mr. Brown rose—

 

Mr. Deputy Speaker Order. Both right hon. Gentlemen must sit down if I am on my feet. If the 492 Chancellor is to make sedentary comments, he cannot necessarily count on them not being challenged by the right hon. Member for Hitchin and Harpenden (Mr. Lilley). Is the shadow Chancellor giving way?

 

Mr. Lilley No, I am not, for the simple reason that the Chancellor spoke for the equivalent of four interventions in his last one. The European Monetary Institute expresses views on the sustainability of the debt position of each member state. This is what it says of Greece, which has been prevented from joining because it fails, among other things, the debt criteria. It has debt of 108 per cent. of its GDP. The report says: Notwithstanding the efforts and the substantial progress made towards improving the current fiscal situation, there must be an ongoing concern as to whether the ratio of Government debt to GDP will"— then it quotes the treaty— 'be sufficiently diminishing and approaching the reference value at a satisfactory pace,' and whether sustainability of the fiscal position has been achieved. That is fair enough; that is a clear rejection of the Greek position. The report uses exactly the same words for Italy; exactly the same words describe the Italian situation. The Chancellor cannot claim that the report endorses the countries that he wishes to enter without further change and fail to acknowledge that the report condemns them in the terms that it condemns Greece. The next line of defence to which the Government resort is to acknowledge that some of the criteria may have been fudged but to claim, as the Prime Minister did at the Dispatch Box the other day, that there is "a range of criteria", with the implication that it is all right to fail one or two as long as all the others are met. The European Monetary Institute does not accept that view. Its report says: the convergence criteria constitute a coherent and integrated package and they must all be satisfied; the treaty lists the criteria on an equal footing and does not suggest a hierarchy".

 

Dr. Stephen Ladyman (South Thanet) Will the right hon. Gentleman give way?

 

Mr. Lilley No, I will not. The criteria are being loosely applied, particularly to Belgium and Italy. That will weaken the euro. The Chancellor can argue until he is blue in the face that that is not so, but the foreign exchange markets give him the lie. They do not agree with him. They believe that a fudged euro will be a soft euro, and the euro will be fudged. That is why they have devalued all 11 currencies that are set to join the euro against those that are staying outside it. If the Chancellor does not believe that that is the reason for the moves on the foreign exchange markets, he should explain to the House what is.

 

Mr. Bill Rammell (Harlow) Will the right hon. Gentleman give way?

 

Mr. Lilley I am afraid that I do not have time to give way to the hon. Gentleman in view of Madam Speaker's request that we try not to go on too long. The Government's final line of defence is to admit that there might be fudging but to say, "Well, we shouldn't do anything about it because we wouldn't achieve very much 493 and we would make ourselves unpopular." That is what the Prime Minister said at the Dispatch Box on 1 April. That is an abnegation of leadership; it is an admission that the Government have no influence. Others in Europe have not been so spineless. The French Interior Minister, Jean-Pierre Chevenement, recently warned that a fudged euro would be like the Titanic sailing full steam ahead towards the pack ice. By the time we see the iceberg, perhaps it will be too late. That is from a member of a Government who are applying to join the institution. The Bundesbank qualified its reluctant agreement to German membership with a warning that Belgium and Italy need to do more to meet the criteria. It said: with regard to the requirement of a sustainable financial position, however, serious concern exists in the case of Belgium and Italy. This could be eliminated if additional, firm, substantive commitments are given. Mr. Waigel, the German Finance Minister, has recently been touring European capitals, trying to persuade member states to sign up to a declaration committing themselves to accelerated debt reduction. The Chancellor revealed that that has finally come to fruition—although he has not put the matter before the House or respected the House by telling us what document he is to sign. Will he confirm that the document has been watered down in three successive drafts, no longer includes any timetable for Italy and Belgium to reduce their debt ratios and is not nearly as strong as the author himself would have liked? The British Government hold the presidency. The British Government should be taking the lead in these matters, not leaving it to France and Germany. The British Government should have been seeking additional, firm, substantive commitments to a timetable of debt reduction. After all, this is the Government who told us that they would take the lead in Europe. This is the Government who told us that they had won influence by signing up to the social chapter and committing Britain to the euro in principle. The sad truth is that they have got nothing in return for those concessions. As this week's edition of The Economist says: Ecofin, the council of Finance Ministers, that the Chancellor chairs, has lately been the EU's most influential body. But Mr. Brown himself is one of its least influential members. The Government have won no influence for their concessions. Apparently, according again to The Economist, the only concession that the Chancellor has got out of his French opposite number is a free ticket to the World cup. Our Prime Minister claims that he is still taking the lead in Europe, but he does not tell his friends in Europe what he told the British people in his party's manifesto which was issued for the general election.

 

Mr. Derek Twigg On that very point, will the right hon. Gentleman give way? 494

 

Mr. Lilley I shall remind the hon. Gentleman that, in the manifesto on which the Prime Minister and he were elected, the Labour party said: What is essential for the success of EMU is genuine convergence among the economies that take part, without any fudging of the rules. Why is the Prime Minister not prepared to say the same thing to our partners in Europe? Apparently, despite his well-known linguistic skills, translating those words into French seems to have been beyond him. He yields to the views of his partners; he has found that he can only pretend to lead if he agrees to follow. His idea of leadership is the same as the Duke of Plaza Toro, who led his army from behind because he found it so much safer. In the end, Britain will gain influence in Europe only if we have the courage of our convictions, if we put forward a clear, coherent and consistent view. That may make us unpopular in the short term, but it will win us respect in the longer run. Almost as important as the convergence criteria is the decision on who should be president of the European central bank. It was rather extraordinary that the Chancellor did not address that today. Unlike our Prime Minister, the French leader has no qualms about being isolated in Europe. The French do not mind being awkward and making themselves unpopular in the pursuit of French objectives. Although all the other member states agreed that Mr. Duisenberg should be president of the European central bank, the French have insisted on reopening the question. They have dug their heels in and demanded that their candidate, Mr. Trichet, should at least share the eight-year term with Mr. Duisenberg. But the Maastricht treaty is quite unambiguous; the chairman's term is set at eight years. That is to give him the necessary independence. To split the term in two would betray the intentions of that treaty. To follow a political fudge on membership criteria with another political fudge on how the bank is run would further undermine confidence in the euro. As president of the EU, the British Government should have ensured that the issue was resolved before now. Above all, they must now prevent a damaging compromise from occurring which betrays the treaty. The Government's failure to take a firm stand on these issues has done great damage. It has undermined confidence in the 11 countries set to join the euro, devaluing their currencies against the pound—which has contributed to the artificial over-valuation of the pound, which has undermined our exports and pushed manufacturing further into recession. The Government may deny that this is happening, but I was in the midlands yesterday, speaking to business men. They had no doubts that manufacturing is already in recession. That may not concern the Government, who do not care a fig about business and jobs, but manufacturers know that the high pound is a key factor. The bottom line is that more and more jobs will be lost in manufacturing as the months go by. Those business men and their employees will want to know why the Government are doing nothing to tackle the problem. What is at stake is not just the economic damage in the short term, or even the dangers of an unstable euro in the long run; it is the integrity of the treaty. It is crucial that treaties, once signed, are adhered to—that member states adhere to the spirit, as well as to 495 the letter, of the law. This country will rue the day it ever allows political expediency to override clear treaty commitments. At the end of the day, it was probably never realistic to expect the Government to take a stand against fudging. After all, the Government are based on fudge. They try to be all things to all people. They pretend that they can stick to our spending limits, yet still spend more on everything. They promise not to raise taxes, and then sneak them in by stealth. They said that they were in favour of joining the euro in principle, but then ruled it out for this Parliament in practice. Above all, they cannot oppose fudging the Maastricht test because they want to fudge their own tests later. That is why I ask the House to support our amendment.

 

Mr. Deputy Speaker Before I call the next speaker, I remind the House that the 10-minutes rule will now apply, and that constraint within that will be for the consideration of other hon. Members. 5.42 pm

 

Mr. Giles Radice (North Durham) I shall be speaking primarily as the Chairman of the Treasury Select Committee, which published a report "The UK and Preparations for Stage Three of Economic and Monetary Union", but I have my own views as chairman of another group, the European Movement. The Select Committee has differing views represented on it, from supporters of early entry, such as myself, to those in implacable opposition such as the hon. Member for Rochford and Southend, East (Sir T. Taylor). On the Select Committee, there is a substantial majority in favour of British membership of EMU but there is a significant minority against. Therefore, in the report there is no discussion of the pros and cons of entry; otherwise, we would have merely produced a majority-minority report. There is no discussion of timing; contrary to the speculative accounts which appeared before the report was published, and contrary to what the right hon. Member for Hitchin and Harpenden (Mr. Lilley) has just said. I advise the right hon. Gentleman to actually read the report. The context of our report is that a big decision will be made this weekend on participation, as my right hon. Friend the Chancellor said. Bilateral conversion rates will be decided and the president of the European central bank selected, which makes it the virtual start of the third stage of the single currency—although it formally begins on 1 January. I agree with my right hon. Friend that substantial progress has been made in achieving the Maastricht criteria by all those who want to participate, as the Governor of the Bank of England told us. That confounds what the pundits said 15 months ago. The figures are now very good. Average inflation across the EU is 1.6 per cent. Average long-term rates are 6.1 per cent. The average budget deficit is 2.4 per cent. This is enormous progress, about which we heard nothing from the right hon. Member for Hitchin and Harpenden. Of course there are weaknesses also, such as debt.

 

Sir Teddy Taylor (Rochford and Southend, East) What about unemployment?

 

Mr. Radice The hon. Gentleman will have to make his own speech. 496 The deficit improvement will have to be sustained. Even so, overall progress has been so impressive that it is not surprising that the Commission will be recommending that the 11 members go ahead with the third stage. This weekend, the Heads of Government will almost certainly agree unanimously—in my view, they are right—that the 11 members should go ahead. The United Kingdom should support that decision—we are, after all, in the role of chair. As a non-participating member, it is inconceivable that we should stop a unanimous view by all other member states. Only non-serious politicians in opposition would suggest otherwise. Whether in or out, the euro will have a significant impact on our economy, and we note that. In the report, the best section is the part on preparation. There is strong support for the Government's policy on preparing the UK to deal with the coming of the euro, even while we are staying out. There is likely to be widespread use of the euro, not just in the City and the wholesale financial markets but in business as a whole—especially in the trading sector. Pilkington told us that it was converting its systems to use the euro because it will help eliminate differences in production costs. ICI told us that euro-liquidity will spread throughout the economy. Siemens told us that the euro would come through the back door. Siemens and British Steel said that they were anxious for UK suppliers to use the euro. Sainsbury and Marks and Spencer will accept euros from 2002. Substantial change will come about, and we ought to realise that. In the report, we backed the idea of a national changeover plan from sterling to euros so that we can proceed more quickly and efficiently once the decision is taken for the UK to join. It would be a guide for businesses now if they knew what was likely to happen later. I move now to the Chancellor's five economic tests. We have qualified already on all the main Maastricht convergence criteria; except the one on the exchange rate, because we have not joined the exchange rate. In his historic statement last October, the Chancellor announced some useful additional criteria for judging if and when Britain should join. He mentioned, in particular, sustainable convergence and flexibility, which the Committee agreed were very important. We should take them into account if Britain is to derive maximum benefit from membership. However, tests are only guides. When we decide to enter, a broader assessment will be required. In particular, we will need a comparative analysis of the costs and benefits not only of participation, but of staying out. That includes political, as well as economic, costs and benefits. The UK's decision will be made on the basis of a political and economic assessment of the balance of national advantage, which will include the Chancellor's five important tests. However, it will be broader than that. One sentence of the report has been wrenched out of context. We said that it will not be possible to judge clearly and unambiguously either the success of EMU or answers to all of the Chancellor's five tests for at least five years. It will remain the case that the UK's decision will have to be made on political and economic assessment of the balance of national advantage. It is always better to read the sentence after the one that has been quoted. In a sense, we are stating the obvious. In hindsight, it might have been more helpful if we had used the words "for some time" rather than the words "five years", 497 although five years from this weekend, which is virtually the start of a single currency, is compatible with the Government's intention to be in a position to join early in the next Parliament. We did not make a judgment about the time of entry; we specifically decided not to take in the issues of principle, otherwise most of us would have said, "We want to join early," and the hon. Member for Rochford and Southend, East would have written a minority report saying that he would never want to join. We did not say that, but we are saying that there are no scientific certainties, either about the success of EMU or about the Chancellor's five tests. Our position will have to be taken on a broad judgment about political and economic advantage for this country. It is my view and the view of many members of the Committee that we shall have to go in sooner rather than later, perhaps sooner than under the Government's current timetable. I predict that, from this weekend, events will move much faster than most people think, and certainly faster than the right hon. Member for Hitchin and Harpenden thinks. Pressures for us to join will build up, especially from business and particularly from those involved in finance and trade, which will increasingly deal in euros. There will be a big incentive to go the whole hog. Exchange rate instability for the pound may arise from the euro, which will be a handicap for British business and for the economy, and British business may miss the opportunities of a single market backed by a single currency. Last but not least are the political consequences of exclusion from EMU and the Euro X problem. The Labour Government have made a good start on their European policy and I agree with their ambition to play a leadership role in Europe, but that will be more difficult if we exclude ourselves, at least for the time being, from Europe's most important project, which will inevitably develop. I agree with my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore), who described economic and monetary union as the most positive political and economic development this century. There will be a broad national and economic interest for us to join as soon as we possibly can. The Government should speed up preparations to join, including informing the British public about EMU and the advantages of joining sooner rather than later. The British people will decide on this momentous question, but we as politicians would fail in our duty if, by putting off the decision for too long, we disadvantaged our citizens and our country.

 

Mr. Deputy Speaker Mr. Taylor.

 

Sir Teddy Taylor rose—

 

Mr. Deputy Speaker Order. I called Mr. Ian Taylor. 5.52 pm

 

Mr. Ian Taylor (Esher and Walton) My hon. Friend the Member for Rochford and Southend, East (Sir T. Taylor) and I are almost identical, not only in our surnames. Therefore, there was a natural misunderstanding. This is a brief, but crucial debate. I shall make a few remarks, and I hope that I do not repeat those made by the hon. Member for North Durham (Mr. Radice), the Chairman of the Treasury Committee, with which I broadly agree. 498 I can endorse the amendment tabled by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), the shadow Chancellor, because, going into this weekend, it is vital that we understand the tensions for those countries that have not absolutely met the Maastricht convergence criteria, which are extremely sound Conservative economic principles that were rightly written into the Maastricht treaty. It is important to understand why such countries might not have conformed absolutely with the criteria, not to frustrate the whole exercise—I am sure that Conservative Members do not want to do that—but to ensure that the venture is a success. I agree with my right hon. Friend the Member for Hitchin and Harpenden, who said recently on the "Today" programme that it is not in the British national interest for the euro to fail. I would go further, and say that it is in the British national interest for it to succeed. If it were to succeed, it is logically in the British national interest that we join. If it is the British national interest that we join, we should join—the sooner the better. The Chancellor could and should make the situation clearer from the British point of view. If he had clarified the timetable and made more precise the plan which would have enabled this country to meet not only the absolute convergence criteria, but the running together of economic cycles, his Budget statement would have given a signal to the Bank of England Monetary Policy Committee, which would probably have taken off the pound some of the pressure that it has been under since he sat down at the end of his Budget statement. Such clarification would also have suggested that Government policy during the rest of this Parliament, at least on the evidence that he has given, is not to join the euro, but to prepare to join. That would have had consequences for the running of the economy in terms of a fiscal balance and a monetary policy that would lead to a further reduction in our long-term interest rates to approximately those on the continent. Our long-term interest rates have fallen to about 6 per cent., but they have further to fall if we are to be ready to join the euro. That is a problem for the manufacturing community. We have a strong pound because it is thought that we are not going to join within a clear timetable. That is a criticism of the Chancellor, and I should welcome early clarification of how the economy is to be run to prepare for what he described in his speech as the probability of our entering monetary union in the early part of the next decade. I want him to be much more precise. That precision is essential in respect of our influence within the monetary union during the period that we are not a member. Our influence would grow if there were a feeling that we would definitely join. Concern has been expressed about what might happen in Italy or in other countries that are still coming to terms with the Maastricht convergence criteria. Other issues, such as liberal markets, the movement of people from one country or from one job market to another and the incidence of fiscal transfers within the stability pact and the European budget, will be crucial to whether the euro succeeds. Theoretically, it is not yet an optimal currency area. It therefore has politically to be made into that, and that will require brave decisions by the leaders of member countries. It is vital that we are part of that decision-making process: we firmly believe that we can contribute to the debate, so we should try to influence it in the direction in which we want it to go. 499 The Chancellor missed the point about Euro X, which is not that it will meet comfortably with those who are not members, but that, by being outside it, we shall not be at the heart of decisions or share the management of the economies of member countries with the management of ours. That issue is about not only national interest, but understanding how the national interest can be improved by working with other countries that are part of the currency zone. There will be a huge impact on this country, which too many hon. Members turn their backs on: 80 per cent. of our home market will have a single currency, virtually from this weekend. To compete with 80 per cent. of our home market, we shall take a currency risk while those countries will not. Many companies will take a consequential decision about where their investments should be if they suspect that our stay outside currency union will be extended beyond a certain period. I want precision in the timetable so that, as Sir Richard Sykes said in his evidence to the Treasury Committee, investment decisions are not affected because people think that our period outside will be prolonged. Many companies that are active in this country are beginning to change their investment decisions, certainly at the margin. I welcome the Chancellor's clarification today—he only touched on the matter briefly, but I think that it was clarification—that the euro will be acceptable in transactions in Britain. I welcome it largely because that is what will happen anyway and it is better that we understand that. Again, I put pressure on the Chancellor. What is his clear policy for preparing Britain's public services to utilise the euro? It is not possible just to say that companies can prepare and file their returns in euros. What transactions will the public services be prepared to do in euros and what preparation has the Inland Revenue made to match the demands of industry during the period when we are out? Those are crucial questions which will face Britain in the near future. The big part of the debate is the public view, which I accept is negative to the euro at the moment, but negative because it now believes that all the costs in relation to the euro would occur if we went in. Yet, in a short time, it will be clearly seen that the political and economic costs of being out are substantial. No Chancellor will ignore the calculation of those costs. They are political costs, not least in the fact that, for example, if we were in a single currency zone, our sensitivity to volatility of currencies would be reduced from the high level at which it is at the moment to a low level, bearing it in mind that 50 per cent. of our trade in goods and services is with the rest of the euro zone. A single currency would obviously benefit British industry. The cost to it of being out will be considerable. It would have a severe effect on our influence on global trade, which is vital if Britain is to continue its high propensity to import and export. It may well be that it will reduce our impact within the now Group of Seven, but it may well, de facto, be the group of three in the not-too-distant future. In addition, we shall have no influence on what will rapidly become the second reserve currency in the world. There are problems in being a reserve currency, but that will be the fact, largely because of the propensity to import and export of the existing euro zone and the fact that debts will be converted into the 500 euro. Those are huge issues. They are not issues which can be debated in the House in less than two hours; they are issues that will be debated in the country. I urge all hon. Members to recognise that we cannot reduce the issue to the simple chant of sovereignty, because there are sovereignty issues which are related to the degree of influence of the British Government, Labour or Conservative. Those are the issues where, ultimately, our influence leads to the improvement in well-being of the British people.;

 

--- Later ---

 

Mrs. Liddell It is perfectly clear from the European Monetary Institute reports published in relation to EMU that we do not have to. Finland and Italy are two cases in point. The exchange rate conditions can be interpreted flexibly. I must point out to the hon. Gentleman, because I know of his interest in these matters, that ERM will become a different beast after the establishment of a single currency zone. I repeat what my right hon. Friend the Chancellor has said time and again: we do not intend to rejoin the ERM.

 

Mr. Lilley Will the hon. Lady confirm that she disagrees with the Treasury Committee report, which says: the Commission and EMI reports indicated that Sweden was not considered to have met the criterion because it had not participated in the ERM at all."? 514 If Sweden is excluded on that ground—otherwise it would have been forced by law to join—why would we be allowed to join, as we did not voluntarily join the ERM?

 

Mrs. Liddell I regret having given way to the right hon. Gentleman. I did so because of his position in the House. He should read the EMI report, because he has quoted selectively. The decision on Sweden relates to the position of its central bank. May I return to the substantive points that hon. Members made in the debate? My hon. Friend the Member for Linlithgow (Mr. Dalyell) asked about the cost of not joining a single currency. That question goes to the heart of this debate. The cost of not joining is being out of sync with the rest of Europe, and cutting ourselves off from the global opportunities that will be available to us, from the removal of transaction costs and from an opportunity to work in concert with our European partners. That is why the Government have said that if it is in Britain's economic interests to join a single currency, we see no barrier to our doing so. However, it would not be right to join in the lifetime of this Parliament, to a large extent because of the position that we inherited from the previous Government. Conservative Members try hard to pretend that the events of last year did not happen, but one of the most illuminating factors that the Government experienced on 2, 3 and 4 May was to see the fudges of the previous Government and the extent to which they were prepared to play politics rather than take into account the nation's interests. The British Government have an opportunity tomorrow, as we have had over the past year, to enable member states to maximise their potential for the benefit of every European citizen. We have won the respect of the other member states, which is particularly important given the shameful behaviour of the previous Government. I am proud that tomorrow and on Saturday I shall see these momentous decisions being taken. I am also proud to be part of a Government who are enabling this country to prepare for entry into EMU and who will decide when it is in Britain's national economic interest to join. I urge the House to support the motion and to wish the Chancellor and the Prime Minister well at the summit over the weekend.

 

Question put, That the amendment be made:—

 

The House divided: Ayes 138, Noes 287.

 

 

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