European Monetary Union (Hansard, 26 November 2002)

§ Lord Blaker
asked Her Majesty's Government:
Whether the five economic tests for entry into the euro include the exchange rate for sterling at which the United Kingdom would enter.

§ Lord McIntosh of Haringey
My Lords, on 6th September the Treasury sent to the Treasury Committee of the House of Commons a paper that made it clear that the preliminary and technical work, which will be published alongside the assessment of the five tests, will include analysis of the sustainable real exchange rate, which is a key indicator of convergence and of obvious importance to the convergence test and all of the tests.

§ Lord Blaker
My Lords, I am grateful for that reply and I am glad that the Government are showing some interest in the importance of the exchange rate for our possible membership of the euro. Is not the importance of the subject shown by the example of Germany, which is now stuck with a fixed, certain and 631 unsuitable exchange rate apparently for all time? Largely as a result of that, it is no longer the motor of the euro-zone economically but one of the laggards.

§ Lord McIntosh of Haringey
My Lords, it is not appropriate for me to comment on issues of German economic policy. I rather doubt the conclusion that the noble Lord, Lord Blaker, draws from his premise.

§ Lord Lawson of Blaby
My Lords, does the Minister recall that when five years ago—almost to the day—the Chancellor launched the five tests, he also explicitly said that, regardless of the results of the five tests, the Government would contemplate joining only a successful monetary union? Given that, during the four years that have elapsed since the euro, growth in the euro-zone has been considerably lower than that in the United States and in countries in the European Union that are outside the euro-zone, by what criteria will the Government decide whether or not monetary union has been successful?

§ Lord McIntosh of Haringey
My Lords, the noble Lord, Lord Lawson, tempts me to anticipate the conclusions of the analysis of the five tests, and I am certainly not going to do that. The criteria by which the Government will make their judgment at the conclusion of the period will be set out in the publication in which the decision is reached.

§ Lord Sheldon
My Lords, does my noble friend accept that those five tests were set out in 1997—five years ago—against a background of high unemployment and high interest rates? They were understandable then but the situation has changed considerably since then. We now need to look to the really important aspect of entry into the euro mechanism; that is, the value of the pound. If we get the value of the pound wrong, there will be severe constriction on our development and investment for several years.

§ Lord McIntosh of Haringey
My Lords, my noble friend Lord Sheldon is right to draw attention to the fact that, over the past five years, the Chancellor of the Exchequer has been responsible for a remarkably successful macro-economic policy. It is true that the five tests that still apply were drawn up in 1997. However, the conclusions on the five tests will be reached on the basis of the economic situation as we see it in 2002 and 2003. The fact that the wording of the tests was drawn up five years ago is no disadvantage.

§ Lord Taverne
My Lords, as the exchange rate has, for a long period—some 75 years—been a source of major economic and political upheavals and convulsions, and as it is therefore one of the key issues, would it not be sensible for the Government, if they decide to enter, to announce a range of between perhaps 1.25 and 1.45 euros to the pound as a basis for negotiation for entry, which should in itself have a considerable influence on the market?

§ Lord McIntosh of Haringey
My Lords, 75 years is far too short a period for controversy on exchange 632 rates. The noble Lord, Lord Taverne, reminds me of the Oxford college bursar who attacked the college's investment policy on the ground that the past 200 years had been wholly exceptional. I turn to the question whether a series of options on exchange rates should be advanced by the Government. When a decision on the five economic tests is reached, that will be one of the options that the Government will consider.

§ Lord Pearson of Rannoch
My Lords—

Lord Renton
My Lords, will the Government bear in mind the fact that if a country surrenders its own currency, it will lose control of internal inflation and can no longer protect its economy and the standard of living of its people?

§ Lord McIntosh of Haringey
My Lords, I simply disagree; the shared sovereignty that would be involved in accession to European monetary union has a very wide range of advantages and, of course, it has some potential disadvantages. The situation is by no means as simple as the noble Lord, Lord Renton, believes.

§ Lord Lea of Crondall
My Lords, is not the proposition lying behind the question of the noble Lord, Lord Taverne, correct to the extent that the final negotiation on the exchange rate at entry cannot be decided before a referendum because it has to be decided with the deliberation that we are going to enter? Therefore, the referendum has to be conducted on the basis that there will have to be negotiation afterwards about the exchange rate.

§ Lord McIntosh of Haringey
My Lords, that is why the exchange rate is not a sixth test and why I was so cautious in my response to the original Question of the noble Lord, Lord Blaker.

§ Lord Saatchi
My Lords, during our debate on the economy last week in response to the Queen's Speech, the noble Lord, Lord Sheldon, said that the exchange rate was not simply a sixth test. I believe that he described it as the "supreme test". In the same debate, the noble Lord, Lord Layard, said that the exchange rate would be determined by a political decision. Does the Minister agree with either of them?

§ Lord McIntosh of Haringey
My Lords, my noble friends are always wise in economic management and judgment and I agree with much of what they say.

§ Lord Pearson of Rannoch
My Lords, does the Minister agree that it is frankly dishonest of the Government to set economic tests for what is clearly a constitutional project? On the off-chance that he does not agree with that, will he at least agree, since no single currency area can hold together for long without a mechanism for fiscal transfers from rich to poor zones within the area, that one of the economic tests must be a realistic calculation of the additional tax 633 which the United Kingdom, as one of the euro-zone's richest areas, would have to pay in order to support the poorer zones for the area?

§ Lord McIntosh of Haringey
My Lords, the questions raised by the noble Lord, Lord Pearson, are always such a complex inter-related structure of misunderstanding of economic and political issues that it is very difficult to know where to strike. But I start and finish by saying that of course there are constitutional implications. We have always said so, and I have just made that clear by talking about pooled sovereignty.