HC Deb 10 June 1971 vol 818 cc1235-44
The Prime Minister (Mr. Edward Heath)

I should like, Mr. Speaker, to answer more fully Question No. 1 put to me by the hon. Member for Norwood (Mr. John Fraser).

As the right hon. Gentleman the Leader of the Opposition and I both publicly recognised when our rôles were reversed, sterling is not an issue in the negotiations but is a matter to be discussed in the context of the negotiations. So when it was raised by the Six earlier in the year we readily agreed to discuss it.

At The Hague in December, 1969, the Community declared its intention of moving towards economic and monetary union. That raises understandable and proper questions, put to us in good faith, about the adjustments, that might be required for a currency in an enlarged Community which had an appreciable rôle as an international reserve currency.

We have said three things to the Community. We have said that as members of the enlarged Community we would play our full part in the progress owards economic and monetary union. That was confirmed in my talk with President Pompidou and in my statement to the House. We have said that we are prepared to envisage a gradual and orderly run-down of official sterling balances after our accession. We have said that after accession we would discuss measures by which a progressive alignment of the external characterisics of sterling with those of other Community currencies might be achieved.

Both of these developments would be viewed in the context of progress towards economic and monetary union. But let me make absolutely clear that we have given no undertakings as to how fast or by what means these developments could or should be brought about. These would be matters for discussion after our entry, when we should be a full member of the Community with all the rights of a member. As I emphasised at the Press conference following my meeting with President Pompidou and in the statement to the House, both President Pompidou and myself agreed that no country's vital interests could be over-ruled by other members. We have made clear the three conditions which any proposal for reducing the official sterling balances would have to satisfy: notably, of course, the protection of the interests of balance holders and the avoidance of unacceptable burdens on our balance of payments.

Progress towards economic and monetary union and the future of sterling in an enlarged Community do involve enormously complex problems. It has to be considered, for example, what alternative asset would be generally acceptable for sterling holders, what arrangements would be needed for holders to acquire such an asset, and what form and maturity of corresponding liability might be undertaken by us. These are not matters to which the Community has clear and agreed answers. They would need a great deal of discussion, both within the enlarged Community and with others concerned. It would be impossible to settle these problems in the context of these negotiations. It is an advantage to us, not a weakness, that they are now left for discussion after our accession, when we should contribute as members of the enlarged Community to the processes of discussion and decision-making.

Two things have happened in our discussions with the Six, and my right hon. and learned Friend was asked a supplementary question about this matter yesterday. First, the Six have become clearer about the size and complexity of the problems to be dealt with in this area. Secondly, they have accepted that, if we become members of the Community, we shall be ready to discuss the whole subject in a fully Community spirit, without preconceptions or prejudices about how to deal with the problems. That is why we are not asked for and have not entered into any specific undertakings or commitments on methods or timetables, and that is why my right hon. and learned Friend's statement of our position has been accepted as disposing of the whole question in the context of the negotiations.

Mr. John Fraser

Could the Prime Minister say whether he discussed with President Pompidou the run-down of sterling balances and the alignment of sterling with the currencies of other European countries? If so, why did he not tell the House that fact when he made his statement on 24th May? He made very little reference at all to sterling in that statement. Secondly, although no agreement has been reached with the Europeans about the method of rundown, have the Government any ideas to put into the pool of thinking? Clearly, they must have some ideas about how sterling balances could be run down. When will these be made known to the House?

The Prime Minister

In regard to my discussions with President Pompidou, I have covered these matters in the statement which I have just made. When I made my original statement to the House, I made reference to our common view about the movement towards economic and currency co-ordination and integration. That dealt with that particular problem. In regard to discussing ways and means by which these steps could be taken, we have not yet concluded negotiations. No decision has yet been taken on becoming a member of the Community. If a decision were to be taken, the Basle Agreements, which are in process of being renewed, cover this matter until the autumn of 1973. I suggest to the hon. Gentleman that for us unilaterally now to make an announcement as to what means might be used to deal with the situation then would be completely inappropriate.

Mr. Roy Jenkins

Will the Prime Minister accept that in view of the un- necessarily unsatisfactory outcome of the exchanges yesterday the House welcomes the fact that the right hon. Gentleman has made this statement today? Will he also accept that while I personally welcome the progress that he has made with the French on this matter, this is a more complex matter than some French sources have been prepared to accept in the recent past and that there could be a danger that if the rundown were done in a precipitate way it could be an unacceptable burden on our balance of payments, with damaging consequences for our economy, and could amount to a limitation of world liquidity? At the same time, many people will accept that the dollar is not in a position to bear additional reserve burdens at present.

Therefore, a constructive approach to the solution of these matters must be adopted. It may be a European reserve currency, or it may be more suitable that some new world reserve asset should be created. I am inclined to the latter possibility myself. Will the Prime Minister make it clear that he is approaching these matters in a constructive way and that he will not accept any approach involving an intolerable burden on our balance of payments such as that involved in a detailed rundown year by year of our paying off sterling balances, which are not debts in the normal sense? Will he therefore accept these various points of view and approach it in this way?

The Prime Minister

Yes, Sir. I assure the right hon. Gentleman that our only desire is to approach this in a constructive way. He as well as anyone in this House understands the complexities of this matter. As for the points that the right hon. Gentleman has made so forcefully about the balance of payments, this is precisely the reason why the safeguards were made. We have to recognise that earlier in the discussion of this in Brussels points of view were put forward which were not acceptable to us. They perhaps revealed a lack of understanding of the complexity of a reserve currency. These misunderstandings have now been disposed of, and the House will appreciate that the point of view that we put forward has been accepted. After the last Luxembourg meeting, the Ministers who spoke there, including the French Minister, expressed their approval of this arrangement.

As for the constructive approach, there are problems within the Community. There is the franc zone. There is also the fact that more and more Governments are now coming to hold the mark as a backing for their own currencies. This only increases the complexities, apart from the relationship with the dollar. That is why it is not possible to deal with this further in these discussions. All the members are agreed about this, and it will require very hard work and a very constructive approach if the enlarged Community is brought about.

Sir D. Walker-Smith

May I ask my right hon. Friend two questions? First, I am sure that he appreciates that his agreement with President Pompidou does not bind the Community as to its future conduct. Will he, therefore, initiate proposals for the appropriate amendment of the Treaty in regard to its institutional arrangements, or a formal supplementary agreement to safeguard our position? Secondly, in view of the international importance of sterling, will my right hon. Friend ensure that we do not proceed faster and farther than is compatible with our duty to our friends in the non-European world and the interests of world trade as a whole?

The Prime Minister

Yes, Sir. The third point which was made in this discussion was that it must not interfere with the process of achieving international monetary stability. I think that that answers my right hon. and learned Friend.

On my right hon and learned Friend's first point, as I understand it, he is not referring specifically to monetary matters but to the general institutions of the Community. In general, it was because President Pompidou and I recognised that we could not reach decisions about these matters which were the concern of the negotiations as a whole that we said quite specifically in the communiqué that these would have to be settled in Brussels by the Six and the countries applying for membership.

On the question of institutions, my right hon. and learned Friend's point is covered in the Luxembourg agreement between the Six. We discussed in Paris whether or not we accepted the Luxembourg agreement. I told President Pompidou that we did and that we believed that the other members of an enlarged Community should not override what any member believed to be in its own vital national interest. That coincides with the French point of view, and I think that that deals with my right hon. and learned Friend's point. The Six have not found it necessary to say that there should be an amendment to the Treaty of Rome. They agreed the Luxembourg document, and this, therefore, is adhered to by all the Six.

Mr. Thorpe

While recognising the complexity of this subject and, likewise, the legal obligations that we have towards depositors, is the Prime Minister aware that there are people who regard the reserve rôle of sterling as a British virility symbol, while others regard it as a positive impediment to our economic growth since the war and that the phasing out of sterling and the fact that the strength of our economy was less dependent on the state of digestion of the Ruler of Kuwait and other major sterling depositors would be a step in the right direction?

The Prime Minister

The right hon. Gentleman himself recognises that for many years this has been an extremely controversial subject. There is a long history as background to the sterling area. The nature of the official deposits and the way in which they have changed in the last 25 years is not a subject into which I would wish to enter today.

We were concerned with the future. If we are to become a member of the enlarged Community and it moves towards financial co-ordination, then how are the problems of the sterling area and official deposits, as well as existing problems of the Community, to be dealt with? We tried to be constructive in the way in which we put forward these points, and they have now been accepted as such by the Community.

Sir H. Legge-Bourke

Is my right hon. Friend aware that his statement is greatly appreciated by both sides of the House, in view of the clarification it has made to what was said yesterday?

Will my right hon. Friend consider conferring with the Chancellor to see whether we could have a White Paper setting out all the studies which have been made by the six members of the E.E.C. over the years, especially those conducted by Professor Triffin, of Columbia University, on behalf of the Six dealing with the common currency which may be essential if the customs union involved in the E.E.C. is to endure? Customs unions usually require common currencies? However, the fact that a common currency is brought about does not necessarily mean that political federation must follow.

The Prime Minister

I agree with my hon. Friend's last point. It is possible to have a common currency in an area without necessarily having a federal system. At this point, what we are considering is the co-ordination of currencies. The Community has not got to the point of considering a common currency.

The Werner Report has been published. As for the other documents to which my hon. Friend refers, I will ask my right hon. Friends the Chancellor of the Duchy of Lancaster and the Chancellor of the Exchequer to inquire from the Community whether they are being published and, if not, whether it is possible to publish them and in what form they might be presented to the House. We shall also consider whether they should appear in the full White Paper which will be presented to the House when the negotiations have reached an appropriate stage.

Mr. Duffy

Despite what the Prime Minister says about the desirability of postponing serious discussion on the sterling balances until later, which many people doubtless will accept, does not the Prime Minister think that, in view of the historic nature of the commitment to scale down sterling balances and to preserve the semblance of a bargaining position for later, he should provide some evidence now of preliminary thinking about the implications of a possible timetable and also any institutional arrangements which might be involved in the funding of the balances?

The Prime Minister

It is too early for the Government to put forward proposals of that kind. Governments can only put forward proposals which they wish to carry through. A variety of measures can be used to bring about the coordination of currency in an enlarged Community, but it can only be done with the agreement of the other members, in the same way as it would only be possible to do it in an enlarged Community with our agreement. There is a considerable time ahead during which various proposals can be examined. When the time comes for discussions within the Community, we can examine any proposals which the members have to put forward, but there will still be those who have official sterling reserves, as well as other friendly countries outside the enlarged Community, who will have to be consulted, and whose voices will have to be listened to.

Mr. Tapsell

Would my right hon. Friend the Prime Minister agree that the most important of the three conditions which he agreed with President Pompidou must necessarily be the maintenance of international monetary stability? Is it not a fact that if that is to be achieved any rundown in sterling balances will have to be carried out gradually, with the full agreement of the sterling countries; and must also be linked in its timetable to the movement towards a European monetary union?

The Prime Minister

That is exactly what we have said it will be, a gradual and orderly movement. The Six, who have themselves individually suffered recently from very rapid and large monetary movements, have no desire to cause greater instability in the international monetary system. What they wish to do is to bring about closer coordination in Europe to try to reduce that instability, and it would be against their own interests, as well as against ours as a member of the enlarged Community, to endanger that process.

Mr. Harold Wilson

I thank the right hon. Gentleman for his statement and the general line of his reply to my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins). Will the right hon. Gentleman confirm the impression which many of us have gained from his statement that there is no commitment, either specific or implied, to involve a rundown of the sterling balances over a future period, and that we still have to discuss the method? As my right hon. Friend said, if there were to be the creation of a new international currency, and not the transfer of a debt, this would not place a burden on our balance of payments. Is the right hon. Gentleman aware that if it were to involve the commitment to a burden on our balance of payments, this could lead to deflation, unemployment, and all the things which the whole House wants to avoid?

Second, as the right hon. Gentleman has no doubt read, as many of us have, the French Press—it is mainly Le Monde, but not entirely—will he confirm that the statements made in that Press, obviously on hard briefing from the French Government, about specific commitment are entirely without foundation?

Third, will the right hon. Gentleman answer the question that was put to him yesterday, which I am sure he can answer, about whether there has been any commitment, implied or specific, about access——

Mr. Jeffrey Archer

Too long, like the right hon. Gentleman's memoirs.

Mr. Wilson

This might affect the future of this country for 20 years, and the House is entitled to answers. Will the right hon. Gentleman say whether there is any implied commitment about access by Commonwealth countries to the London market?

The Prime Minister

The question of the harmonisation of capital movements in an enlarged Community is still under discussion. In the existing Community there are different arangements for capital movements between the present members, and we cannot be asked to do more than the Community is doing itself. What we have said is that as the Community moves towards greater monetary co-ordination obviously this will be a matter which will have to be dealt with, but it will have to be dealt with by members of the enlarged Community. There has been no commitment. The matter is still under discussion.

As to a commitment in respect of sterling, as I said in my statement, and I repeat it now, this will be a gradual and orderly rundown if and when we become a member of the enlarged Community. No undertaking has been given about the method to be used, or the time phasing on which this should be done, and therefore the rate at which it should be done, for the reason that it must not be done in a way which would at any time put a burden on the balance of payments.

Mr. Harold Wilson

The right hon. Gentleman has not answered my question about access to the capital market.

The Prime Minister

The whole question of capital movements between members of the enlarged Community is still under discussion. At the moment within the Community there are different arrangements between countries. There is not freedom of movement, and we cannot be asked to do more than they do.

Mr. Harold Wilson

I beg the right hon. Gentleman's pardon on that matter.