Question after statement on Economic and Monetary Union

- Monday, 27th October 1997

 

Rt Hon Peter Lilley MP

The Chancellor of the Exchequer (Mr. Gordon Brown): With permission, Madam Speaker, I want to make a statement on economic and monetary union.

 

Since the end of the second world war, Britain has faced no question more important and more contentious than that of our relationship with Europe. Divisions within Governments of both parties, and hence indecision, have made British policy towards Europe over many years inconsistent and unclear. The economic consequences of those weaknesses have been a loss of international initiative and influence, recurrent instability and continuing questioning of our long-term economic direction.

 

To break with this legacy and to establish clear national purpose, which has eluded us for decades, economic leadership is essential, and Britain must now make the difficult decisions on Europe, however hard.

 

The decision on a single currency is probably the most important question that this country is likely to face in our generation. Yet until now, there has been no detailed examination by Government of the practical economic issues of EMU and no proper preparation for a decision, because no previous Government could agree on whether they supported it in principle, nor whether there was an overriding constitutional objection on grounds of sovereignty; nor whether, even if a single currency worked and worked well, the Government would wish to be part of it. Forms of words like, "keeping the option open"—while no preparations were ever made to render that option practicable—have similarly served as a pretext for postponing the hard choices.

 

Now is the time to make these hard choices and set a long-term direction for our economic future in Europe. So I shall deal in turn with the question of principle of economic monetary union, the constitutional implications and the economic tests that have to be met. In each area, I shall set down the Government's policy.

 

When we came into government, I asked the Treasury to carry out an assessment of the economic tests that have to be met. Accompanying my statement is a detailed and comprehensive Treasury assessment, which I am publishing today, copies of which are available in the Vote Office.

 

I start with the question of principle. The potential benefits for Britain of a successful single currency are obvious in terms of trade, transparency of costs and currency stability. Of course, I stress that it must be soundly based. It must succeed. But if it works economically, it is, in our view, worth doing. So in principle, a successful single currency within a single European market would be of benefit to Europe and Britain. Secondly, it must be clearly recognised that to share a common monetary policy with other states represents a major pooling of economic sovereignty.

 

There are those who argue that this should be a constitutional bar to British participation in a single currency, regardless of the economic benefits that it could bring to the people of this country. In other words, they would rule out a single currency in principle, even if it were in the best economic interests of the country.

 

This is an understandable objection, and one argued from principle, but in our view it is wrong. If a single currency would be good for British jobs, British business and future prosperity, it is right in principle to join. The constitutional issue is a factor in the decision, but it is not an overriding one. Rather, it signifies that, in order for monetary union to be right for Britain, the economic benefit should be clear and unambiguous.

 

I therefore conclude on the question of principle that if, in the end, the single currency is successful and the economic case is clear and unambiguous, the Government believe that Britain should be part of it.

 

There is a third issue of principle—the consent of the British people. Because of the magnitude of the decision, we believe, again as a matter of principle, that, whenever the decision to enter is taken by Government, it should be put to a referendum of the British people. Whenever this issue arises, under this Government there will be a referendum. Government, Parliament and the people must all agree.

 

We conclude that the determining factor as to whether Britain joins a single currency is the national economic interest, and whether the economic case for doing so is clear and unambiguous.

 

I turn now to the Treasury's detailed assessment of the five economic tests that define whether a clear and unambiguous case can be made. These tests are, first, whether there can be sustainable convergence between Britain and the economies of a single currency; secondly, whether there is sufficient flexibility to cope with economic change; thirdly, the effect on investment; fourthly, the impact on our financial services generally; and fifthly, whether it is good for employment.

 

Of these, the first and most critical is convergence: can we be confident that the United Kingdom business cycle has converged with that of other European countries, so that the British economy can have stability and prosperity within a common European monetary policy? That convergence must be capable of being sustained and likely to be sustained. In other words, we must demonstrate a settled period of convergence.

 

Currently, Britain's business cycle is out of line with those of our European partners. British interest rates are 7 per cent.—the level set by the Bank of England in order to achieve the inflation target—but in Germany and France, interest rates are close to 3 per cent. Across the continent, because business cycles are more coincident, short-term interest rates have been converging for some time.

 

This divergence of economic cycles is in part a reflection of historic structural differences between the United Kingdom and other European economies, in particular the pattern of our trade and North sea oil. These differences are becoming less distinct as trade with the rest of Europe grows and the single market deepens. However, divergence is also a legacy of Britain's past susceptibility to boom and bust—the damaging boom of the late 1980s, the severe recession of the early 1990s and the previous Government's failure to raise interest rates early enough in the current economic cycle.

 

Since coming into office, the Government have introduced long-term measures to ensure that we are capable of maintaining stability, by giving operational responsibility to the Bank of England for interest rates and by implementing our deficit reduction plan for public borrowing.

 

We will need a period of stability with continuing toughness on inflation and public borrowing. The Treasury's assessment is that, at present, the UK's economic cycle is not convergent with our European partners, and that this divergence could continue for some time. To demonstrate sustainable convergence will take a period of years.

 

To be successful in a monetary union, countries will need even more flexibility to adjust to change and to unexpected economic events once the ability of countries to vary their interest rates and their exchange rates has gone, and the euro and a single European interest rate are in place. Flexibility may be particularly important for the United Kingdom if there is any risk that our business cycle has not fully converged with those of other European countries.

 

The Treasury assessment on the second test—flexibility—is that, in Britain, persistent long-term unemployment and lack of skills, and in some areas lack of competition, point to the need for more flexibility to adapt to change and to meet the new challenges of adjustment. The Government have begun to implement a programme for investing in education and training, helping people from welfare to work and improving the workings of our markets.

 

Of course, other European countries need to tackle unemployment and inflexibility to make sure that Europe as a whole is able to withstand any shocks that arise. The Government will continue to argue that employability, flexibility and stronger competition policies must be a top priority so that monetary union can be successful.

 

The third test is investment: whether joining monetary union would create better conditions for businesses to make long-term decisions to invest in Britain. The Treasury assessment is that, above all, business needs long-term economic stability and a well-functioning European single market. It concludes that membership of a successful single currency would help us to create the conditions for higher and more productive investment in Britain. The worst case for investment would be for Britain to enter EMU without proper preparations and without sufficient convergence, with all the uncertainty that that would entail.

 

The fourth test asks what impact membership of the single currency would have on our financial services industry. EMU will affect that industry more profoundly and more immediately than any other sectors of the economy. The Treasury's assessment is that we can now be confident that the industry has the potential to thrive whether the United Kingdom is in or out of EMU, so long as it is properly prepared. However, the benefits of new opportunities from a single currency could be easier to tap from within the euro zone, and that could help the City of London to strengthen its position as the leading financial centre in Europe.

 

For millions of people, the most practical question is whether membership of a successful single currency would be good for prosperity, and particularly for jobs. The Treasury's assessment is that our measures to create employment and for welfare state reform must accompany any move to a single currency.

 

Ultimately, we conclude that whether a single currency is good for jobs in practice comes back to the question of sustainable convergence. A successful single currency would provide far greater trade and business in Europe. The Treasury assessment is that, in vital areas, the economy is not yet ready for entry, and that much remains to be done. The previous policy of keeping options open without actively making preparations has left parts of the economy unprepared. Our overall assessment is that Britain needs both a period of preparation and a settled period of sustainable convergence—and both require stability.

 

Applying those five economic tests leads the Government to the following clear conclusions. British membership of a single currency in 1999 could not meet the tests, and therefore is not in the country's economic interests. There is no proper convergence between the British economy and other European economies now, and to try to join now would be to accept a monetary policy that would suit other European economies but not our own. We will therefore be notifying our European partners, in accordance with the Maastricht treaty, that we will not seek membership of the single currency on 1 January 1999.

 

The issue then arises as to the period after 1 January 1999. We could simply leave the options open as before, but with no clear direction either way for the rest of the Parliament. That would be politically easy, but it would be wrong. There would be instability and perpetual speculation about "in or out", "sooner or later", that would cause difficulties in the financial markets and for business and industry. It would make it harder to prepare for the possibility of a single currency because every step in preparation every time the issue was discussed would feed fresh bouts of speculation.

 

It must be in the country's interests to have a stable framework within which to plan. We are fortified in this because, on the economic tests that we have set out, the practical difficulties of joining a single currency in this Parliament all point to the same conclusion.

 

There is no need, legally, formally or politically, to renounce our option to join for the period between 1 January 1999 and the end of the Parliament—nor would it be sensible to do so. There is no requirement to do so under the treaty, and, what is more, no Government can ever predict every set of economic circumstances that might arise. What we can, and what we should, do is to state a clear view about the practicability of joining monetary union during that period.

 

In applying our economic tests, two things are clear: there is no realistic prospect of our having demonstrated before the end of this Parliament that we have achieved convergence that is sustainable and settled rather than transitory; and Government have only just begun to put in place the necessary preparations that would allow us to do so. Other countries have for some years been making detailed preparations for a single currency. For all the reasons given, we have not.

 

Therefore, barring some fundamental or unforeseen change in economic circumstances, making a decision to join during this Parliament is not realistic. It is therefore sensible for business and the country to plan on the basis that, in this Parliament, we do not propose to enter a single currency.

 

There are those who urge us to seek consent in principle through a referendum now or soon, with a view to entry some time later. Any serious gap between the referendum and the actual entry date would undermine the conclusions of the referendum. Because the essential decision is economic, it can be taken only at a time when the Government and the people can judge that sustainable convergence has been established. So, in our view, the interval between the decision to join and our joining must not be unduly protracted.

 

I have said that, if a single currency works and is successful, Britain should join it. We should therefore begin now to prepare ourselves so that, should we meet the economic tests, we can make a decision to join a successful single currency early in the next Parliament. At present, with no preparation, that is not a practical option. We must put ourselves in a position where Britain can exercise genuine choice.

 

The questions of preparation are immense—practical questions for business as well as for Government. For example, euro notes and coins will be circulating across Europe from 1 January 2002. Some companies, such as Marks and Spencer, have already decided to accept euros in Britain; others will want advice on what is best for them.

 

Because both the Government and business must prepare intensively during the next few years, we will commence work on the detailed transition arrangements for the possible introduction of the euro in Britain, including notes and coins, should we wish to enter. We will step up the work on what business should do now to prepare for the introduction of the euro in 1999, whether we are in or out. We will work with business on what Government must do to prepare for EMU should we decide to join in the next Parliament.

 

To help with essential preparations, I have invited the Governor of the Bank of England and Sir Colin Marshall, president of the Confederation of British Industry, to join me and the President of the Board of Trade in leading a standing committee on preparations for EMU. I am pleased to say that they have agreed. I am also inviting the president of the Association of British Chambers of Commerce to join us.

 

I can also announce that, from January, a series of regional and sectoral conferences on preparations for monetary union will be held. In addition, my right hon. Friend the Prime Minister has today decided to extend Lord Simon's Treasury responsibilities to include European business preparations in this Government, covering the long-term planning of the new standing committee.

 

In addition to those practical preparations, there are reforms we can make that are right in themselves in the national economic interest, and will help us to meet the five economic tests. We will promote greater flexibility in the UK economy and in Europe through the "getting Europe to work" initiative. We will introduce new competition legislation that draws on the best of European and wider international policy and practice, as well as continuing to negotiate to secure the best interests of our financial sector and for the opening up of the single market in financial services. We will set as one of the key objectives of our European presidency completion of the European single market.

 

In my Mansion House speech, I said that, if we succeeded in strengthening the ability of the British economy to sustain growth without inflation, and if international conditions permitted, I would hope to lower the inflation target. So we will monitor our inflation target, and will do so in the light of the European central bank. We will ensure that our fiscal rules and our deficit reduction plan continue to be consistent with the terms of the stability pact, thus underlining our commitment to avoid an excessive deficit under article 104c of the treaty and supporting greater co-ordination in ECOFIN. In Britain's interests, we need to keep inflation low and public borrowing firmly under control.

 

The single currency will affect Britain, in or out. It is in the British national interest for it to work. Vital decisions will be made during our European presidency in the first half of next year. We will use our position constructively and supportively, and we will play a full part in ensuring that the single currency's launch is successful—something that is in Britain's interests as well as in Europe's interests.

 

To sum up, we believe that, in principle, British membership of a successful single currency would be beneficial to Britain and Europe; the key factor is whether the economic benefits of joining for business and industry are clear and unambiguous. If they are, there is no constitutional bar to British membership of EMU.

 

Applying the economic tests, it is not in this country's interest to join in the first wave of EMU starting on 1 January 1999, and, barring some fundamental and unforeseen change in economic circumstances, making a decision in this Parliament to join is not realistic. To give ourselves a genuine choice in the future, it is essential that Government and business prepare intensively during this Parliament so that Britain will be in a position to join a single currency, should we wish to, early in the next Parliament.

 

On Europe, the time of indecision is over. The period for practical preparation has begun. Today we begin to build a new consensus—modern and outward looking—for a country that throughout its history has looked outward to the world. We are the first British Government to declare for the principle of monetary union, the first to state that there is no overriding constitutional bar to membership, the first to make clear and unambiguous economic benefit to this country the decisive test, the first to offer our strong and constructive support to our European partners to create more employment and more prosperity.

 

The policy that I have outlined will bring stability to business, direction to our economy and long-term purpose to our country. It is the right policy for Britain in Europe. More important, it is the right policy for the future of Britain. I commend it to the House.

 

Mr. Peter Lilley (Hitchin and Harpenden): Does the Chancellor accept that his statement today was forced out of him by the confused, contradictory and improper briefings by his own office in recent weeks—briefings that have displayed contempt for the House, which should have been told first; contempt for financial probity by releasing to selected journalists market-sensitive information that caused turmoil in financial markets; and contempt for the truth, since the briefings, which we must assume he authorised, are shown, at least in part, to have been false? Would the Chancellor like to take this opportunity to apologise to the House and to the savers and pensioners whose investments have been put at risk by the cavalier way in which he has treated them?

 

I shall deal briefly with the confusion—the Chancellor's private office assured me today that he would deal with this in his statement, but he did not—that led up to the statement. Who was the "unnamed Government Minister" quoted on 26 September in a Financial Times story which said that the Government would make a declaration shortly on UK entry soon after the EMU launch", which caused the biggest movement in financial markets in recent times? Who was he? Has the right hon. Gentleman inquired? Does he know?

 

Why did the Chancellor allow a false market to persist for some three weeks before effectively repudiating that story? Does he realise that, if any private individual did that, they would be guilty of a very serious offence? Is the Chancellor aware—[Interruption.] Is the Chancellor aware of anything? [Interruption.]

 

Madam Speaker: Order. The Chancellor was heard. We have just been listening to a very crucial statement, a very serious statement. I hope that the House will deal with it as such.

 

Mr. Lilley: Is the Chancellor aware that I have just received a letter from the chairman of the Securities and Investments Board saying that he will look into some of the matters that I have raised, but that he cannot investigate the main allegation, because where allegations of market misconduct are of a criminal nature, they will not fall naturally for the SIB to pursue"? Will the Chancellor and his staff co-operate with any inquiry by the market authorities or by the Treasury Select Committee?

 

Was not the confusion caused by the Financial Times story, amplified by the diverging statements that the Chancellor and his press officer gave to The Times on 18 October? Can the Chancellor tell the House whether he authorised his press secretary to give certain newspapers—not to mention the denizens of the Red Lion—information which should have been given to Parliament, and which was highly market-sensitive? Did he authorise that? Will he tell the House, yes or no? Can he now say whether he authorised the briefing by his press secretary?

 

If the Chancellor refuses to say that he authorised the briefing—if he dissociates himself from Mr. Whelan's announcement—surely Mr. Whelan should resign. If, however, the Chancellor accepts responsibility for the release of market-sensitive information, can he tell the House of any Treasury Minister who has released such information to a journalist and has subsequently remained in office?

 

It was that briefing that precipitated today's statement. The question is, was the policy forced to fit the briefing, or did the briefing reflect what was already settled Government policy?

 

Did the Foreign Secretary know before that briefing that this was Government policy? Did the President of the Board of Trade know that it was policy? Clearly not. We know that the Deputy Prime Minister had no idea that it was Government policy; we are pretty certain that the Secretary of State for Health did not know, when he appeared on television to defend it. Was the Prime Minister himself fully aware of what his Chancellor intended to release? [Interruption.] I think that the Prime Minister is telling the Chancellor that his position is unassailable.

 

The fact is that the dither, dodge and denial of the past three weeks have been a rollercoaster ride on the stock market that has wiped billions of pounds from pensioners' savings. Is that what the Chancellor meant when he said that his priority was ensuring a "period of stability" in the financial markets? Can he now give the House a cast-iron assurance that, in future, the release of all market-sensitive information of this kind will be carried out by democratically accountable Ministers in the House, not by unelected spin doctors in secret briefings?

 

Now we turn to the substance of this belated statement—[Interruption.] I understand that Labour Members are embarrassed by the confusion and ambiguity of their previous briefings. The fact is, however, that, although we were promised an unambiguous and totally clear statement, even today's statement by the Chancellor allows the possibility of entry during the current Parliament, in the light of what the Chancellor calls a possible unexpected or "unforeseen change in … circumstances". Can he give us examples of circumstances that might cause him to change his mind? [Laughter.] Can he tell us the type of thing of which he is thinking? Is it not the case—[Interruption.]

 

Madam Speaker: Order. I would be obliged if the House would now come to order.

 

Mr. Lilley: Is it not the case that we now know when we probably will not enter the single currency, but do not know when, if ever, we will be ready to enter the single currency?

 

In essence, the Chancellor's policy remains that we will join when the time is right, but that it will probably not be during this Parliament. Does that move him forward? Is he not trying to have it both ways—trying to please those who do not want us to enter, including his friends in the Murdoch press, while declaring a commitment in principle to entry?

 

The Chancellor said that he will prepare the country and industry for entry, but there is nothing in his statement about one condition of entry that is laid down in the treaty: the two years' membership of the exchange rate mechanism. Why is there no mention of that? Is he saying that we will not abide by, or that he has sought a waiver of, that condition? If so, why is he afraid of Britain paddling in the shallow end, when he is prepared later to dive in the deep end of EMU?

 

Is the Chancellor planning in the next few years to apply for money from the European Union's propaganda fund to persuade the British people to abandon the pound? Has he already asked for such money? If he does so, does he intend that all sides of the argument should receive finance? Would it not be odd for the Government to accept European money given that they seek to ban foreign donations to political parties?

 

Is the Chancellor asking British industry to prepare now for entry at an unknown and unforeseeable date? Where does that leave small businesses: should they invest at this stage in cash registers and accounting systems to deal with the single currency?

 

The Chancellor said that he has five tests. The truth is that none of those tests is objective, measurable and capable of independent assessment. Does not the fact that the ERM would have passed all his five tests show that they are not a very effective measure?

 

Does the Chancellor not realise that this is the most momentous decision that this country will take? It is more significant than joining the ERM, than going back on to the gold standard in 1925 or than joining the Bretton Woods system: they all had an exit door, whereas the single currency is intended to be permanent and irrevocable. We must be convinced that it is good for Britain not just at a moment of time, but for all future time; that it will be beneficial not just in good times, but in bad times; and that it will benefit not only some companies, but the whole country.

 

The Chancellor's first test is the business cycle. He is right to say that our cycle is out of line with the rest of the Community. Surely he realises that it has been getting further out of step, and there is no reason to suppose that it will move back in step in the short term.

 

The Chancellor says that he wants more flexibility of labour markets. Why, by signing up to the social chapter, have we handed over to countries with inflexible labour markets the power to set our rules? Does he agree that France and Italy are moving towards less flexible labour markets, as they insist on legalising a 35-hour week and imposing that on their companies?

 

Financial services are an important part of our industry. Why does not the Chancellor refer to the danger mentioned in previous Treasury documents that membership of a single currency would mean centralisation of regulation of financial markets, which would deprive us of the flexible regulation that has enabled the City to become a pre-eminent financial centre not just in Europe but in the world?

 

The greatest weakness of the tests that the Chancellor has laid down is the absence of any political or constitutional test. He cannot wipe aside—as he tried to do in his preamble—the constitutional issue as if this matter merely concerned monetary policy. The key issue is whether entry into the single currency requires centralisation of taxation and of borrowing powers. Will there be the power at the centre to transfer resources from prosperous countries to those that are handicapped by joining the single currency?

 

Does the right hon. Gentleman not recognise that, to most of our continental partners, this is not primarily, or to some extent even at all, an economic venture, but a political venture? Does he not recognise that, up to now, there has never been a currency without a Government to run it, or a Government worthy of the name without a currency to run? The attempt to establish a single currency in Europe without a Government to run it is intended by many to be temporary, not permanent.

 

Why does not the right hon. Gentleman tell us where the Government stand on that pre-eminent issue? Does he want to see, will he connive in, will he agree to, the centralisation of political power over tax, borrowing and the transfer of resources to other countries in the single currency area? Until he answers that question, we cannot accept that it is right to sign up in principle to a single currency.

 

Mr. Brown: I shall answer the substantive points one by one. It is remarkable that the shadow Chancellor of the Conservative party, which has been talking about this issue for 18 years, can come to the House, even after his session in Eastbourne last week, to draw conclusions, and not be able to tell us where the party stands on the issue of principle. Where does it stand not as to whether there are constitutional implications but as to whether there is a constitutional bar to membership? It cannot say whether the economic tests will be decisive, and the shadow Chancellor now tells us that he even opposes preparations for a single currency. [HON. MEMBERS: "Answer his questions."' I have to ask him these questions.

 

I have to ask the Conservative party these questions. Does it support the principle of a single currency? We do. The Conservative party cannot say, because it is divided. Does it believe that there is a constitutional bar to membership of a single currency? Some say yes, some say no. They cannot agree.

 

Do Conservatives believe that economic tests should be decisive in this matter? The shadow Chancellor could not tell us, but Conservatives must tell us what they believe. Equally, do they believe that sustainable convergence, once achieved, is a means by which we could move forward to a single currency? On each of those issues of principle, it was striking that the shadow Chancellor was absolutely silent: he did not address them.

 

I come to the shadow Chancellor's specific questions. He asked about what he called stock market movements in relation to statements. I shall read to him the letter that was sent to him by the Governor of the Bank of England. It states: Neither the Government nor its agent … benefited in any way from the recent movements in the gilt market … The movement you highlight—sterling's rise on Friday 17 October … was in our assessment unrelated to the interview that the Chancellor published in the Times the next day. When he was reading the letter from the SIB, the right hon. Gentleman might have told us exactly what was in it—that there has been no notification of the determination of an infringement whatever. The shadow Chancellor would do better to withdraw his allegations.

 

I come now to specific questions. It is not our intention to join the ERM. There are no additional powers related to taxation in relation to the single currency; and, of course, on taxation matters there is the British veto. The shadow Chancellor asked in what circumstances we would change our view. I said precisely in my statement that they were unforeseen circumstances, which means that they cannot be foreseen. On the question of convergence, I made it absolutely clear—as I think the shadow Chancellor will acknowledge—that I was not talking about convergence at one point in time as being the decisive test for a single currency. I was talking about a sustained and durable period of convergence—a settled period of convergence—which in our view would be necessary.

 

It comes back to this one question. We say that, if the economic benefits are clear and unambiguous, in the national interest, we should join, if the public are prepared to support it. The shadow Chancellor cannot say whether, even if the economic benefits to the country were compelling in terms of jobs, industry and commerce—even if it were proven to him that those economic benefits were compelling—he would be prepared to recommend joining. In other words, whether it be for reasons of division, dogma or anti-Europeanism on the part of the Conservative party, the national interest would come second to sorting out its internal problems.

 

The leader of the Conservative party reflects those problems. He said at one stage that it would not join the single currency on principle. Then he said that it would not join for 30 or 40 years. Then he said that it would not join for five years. Then he said that it would not join for the foreseeable circumstances. Now he says from Eastbourne that it will not join for two Parliaments. That is a recipe whereby there will be no Conservative Government for five years, for 10 years, for 40 years, for all the foreseeable circumstances.

 

 

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