§ Mr. Roy Jenkins (Glasgow, Hillhead)
I beg to move,That this House urges the Government to bring the United Kingdom into the Exchange Rate Mechanism of the European Monetary System forthwith.
The European monetary system, which this motion calls upon the Government to join forthwith, will be seven years old in a couple of months time. It was the most recent major initiative taken by the European Community and it was put into place remarkably quickly, partly because it did not involve a great series of interlocking individual decisions and therefore did not fall foul of any unanimity rules or even the need for a qualified majority.
I tried to relaunch the idea of a monetary route forward in a speech in Florence in the autumn of 1977. The European Council after that, in December, showed polite interest, but to say that there was any great sense of urgency or serious intent at that stage would be an exaggeration. The whole thing changed dramatically in the late winter and early spring. For most of its life the EMS has had to contend with the dollar being too high. Paradoxically, that changed because of the temporarily collapsing dollar in the early months of 1978. I vividly remember the occasion when I went to Bonn and Helmut Schmidt told me that he had changed his mind and he thought it was essential to go forward straightaway. He believed that he could get it on board as soon as the French legislative elections, due that year, as this year, were out of the way. So it happened.
The scheme was unveiled at the Copenhagen European Council that spring and was in place exactly a year later. I do not think there is serious doubt about its limited but substantial success for the participating countries. It has established the fact that it is a lasting entity, despite the fact that the buffeting waves of a violently fluctuating dollar, in particular, have been much greater than anybody expected when the scheme was being put into place. The EMS has survived well.
There have been many changes of central rates affecting nearly all the currencies in varying degrees but they have been carried through remarkably speedily and smoothly. That is a dramatic contrast to the delayed and traumatic devaluation under the otherwise admirable Bretton Woods system. Those changes have gone through with remarkable speed. When the Foreign Secretary held the post of Chancellor of the Exchequer he presided over a number of meetings of the Economic Monetary Council which put them through. That is an extraordinary example of presiding from outside over a thing which was working extremely well internally.
Some of the changes have not been such as to render the system nugatory. The Italians asked specially for a wider margin of 6 per cent. either way for the lira compared with the margin of 2.25 per cent. for the other participating currencies. When the Italian lira moved sharply last July, that was the first move for three years. The idea that there has been constant instability and change is certainly not true.
980 The fairly recent International Monetary Fund study calculates that the EMS has taken about 30 per cent. off the fluctuations between the participating currencies that would have occurred otherwise. That has been extremely valuable, particularly in view of how much Europe has been plagued by currency fluctuations within the Community, especially in the mid-1970s. This is one of the things that set my mind moving in this direction in 1977. Europe had been doing well throughout the 1960s and the early 1970s compared with America or Japan, but in the mid-1970s it suddenly started to do much worse. I was convinced that one of the major reasons was that the 1960s and early 1970s were a time of relative currency stability in the world, whereas the late 1970s were a time of violent currency and exchange rate fluctuations. That was internal, in Europe—outwith Japan and the United States. There was a considerable effect, but it was external to those countries.
In addition, there has been a remarkable recent development in the past couple of years in the private use of the ecu, paradoxically, perhaps, more than in the public use of the ecu. It is now a major borrowing and lending currency.
Therefore, there is no question but that the system which, by our own choice, we are outside, is successful. I think that all the participants value it and other potential participants are eager to join it. For instance, Senor Gonzalez told me just before he came into the Community that he believed that he could bring forward by a year the date of Spanish adherence to the EMS, and he would regard that as very desirable from the point of view of full Spanish membership of the Community and influence within the Community. We might well take a little notice of that point.
How was it that we did not join at the beginning? Three countries had doubts, although at slightly different stages. Italy and Ireland went away from the last European Council leaving serious doubts as to whether they would join. Then they took their courage in both hands and cam:, in. I am sure that neither of them has regretted that decision at all. Why not us? I heard the reasons given by two successive Governments. Indeed, they are engraved on my mind. I remember that in November 1978 I went to see the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan), and he assured me that, in principle, he would like the Labour Government to bring Britain into full participation in the exchange rate mechanism. However, he added, "I am extremely worried at being locked in at too high a rate, which would inhibit our ability to deal with unemployment." Almost exactly six months later I went to see the right hon. Lady who still presides over the Government, and she assured me that in principle she was extremely anxious for Britain to be a full participant, but, she said, "I am extremely worried about being locked in at too low a rate, which would inhibit our ability to deal with inflation." So we did not join. As a matter of fact, all the participating countries had lower unemployment and lower inflation than we did in the two years that followed.
Therefore, it is difficult to believe that such fears—no doubt legitimate—as well as an endemic offshore mentality were not at work in both those Governments. That worked still more strongly than the reasons given. It was careless and sad that we should have repeated for the third time the mistake of joining late. We did so with the European Coal and Steel Community in 1951 and the 981 European Community in 1957. If one is joining an organisation it is sensible, if possible, to be there at the beginning because one can influence the organisation's shape. It is better to do that than to stand aside for the third time, never learning the lesson, and saying that the shape does not fit, when one has not been there to influence its creation.
§ Mr. Douglas Hogg (Grantham)
Will the right hon. Gentleman comment on the point that the volatility of sterling, because it is an oil currency, makes membership of the EMS more difficult for this country than for the non-oil economies?
§ Mr. Jenkins
That will make British membership more difficult for the European monetary system rather than for this country. In a way, we are lucky that it has been, and is still, willing to have a more volatile currency in full membership. We want to try to control the volatility of sterling as much as we can.
In view of the fear of the right hon. Member for Cardiff, South and Penarth—[Interruption.]—what happened to sterling subsequently—(Interruption.]—
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
Order. If the hon. member for Bolsover (Mr. Skinner) wants to intervene in the debate, he should come into the Chamber.
§ Mr. Jenkins
Following the fear of the right hon. Member for Cardiff, South and Penarth that he would be locked in at too high a rate, what happened was that, with us outside the EMS, sterling appreciated beyond the wildest fears of anybody in 1978–79. Over two years it rose from $1.60 to $2.40. The result was that our competitive index worsened by 60 per cent., on the scale measured by the IMF. The result of that was the destruction of one fifth of our manufacturing industry and the associated increase in unemployment.
Nobody should suggest that membership of the EMS would have obviated all that. However, I believe that it would have reduced it substantially. It is a great mistake to believe that any monetary scheme or monetary mechanism can or perhaps should resist the long-term swell of the currency ocean. It can substantially take the top off the waves, particularly when, as happens too often, exchange rates are reacting not to differing levels of inflation, not to differing rates of productivity growth, not to trade imbalances, but much more to changes of sentiments or capital flows. The monetary system can do a great deal to cut the top off such waves.
That was very much the case in 1980. Everybody knew that rate could not be sustained. It was just a question of when it came down. If we had been in the EMS, the bubble would have been pricked much more quickly, and the damage to our industry and employment would have been much more limited. We would have avoided much of the ridiculous parabola in the sky of sterling going up from $1.60 to $2.40 and then coming down within 18 months back to $1.60, and, for a short period, down to $1.07.
§ Mr. Nigel Spearing (Newham, South)
I should like to take the right hon. Gentleman back to some of the possible disadvantages he mentioned in relation to my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan). Is it not a fact that the EMS is 982 much more than a smoothing insurance mechanism? Are there not potential disadvantages in a Government's requirements in respect of a general economic policy to maintain parities? Is not the ruling mechanism—that of the central banks—likely to create difficulties for any member Government which they might not have if it were not a member of the system, bearing in mind particularly the strength of the Bundesbank and of the market?
§ Mr. Jenkins
I hear the hon. Gentleman and his colleagues, but I think that the hon. Gentleman has himself complained about how British economic policy has developed over the past seven years. He has complained that we have had by far the highest unemployment rate in years. I do not understand how his dedicated, dogmatic anti-Europeanism can lead him to say that he would rather have what has happened outside the EMS than operate on a co-operative basis. In my view, we would have been able to avoid a significant part of the sterling fluctuation. That would have given us a substantial and healthier base for our economy.
I have been dealing in detail largely with the past. I shall now consider the position today. Although it would be better to enter the exchange rate mechanism at any time than never to enter it at all, there are obviously some times when it would be much better to enter. This is a very good time because there is a particular conjunction between the sterling-dollar rate and the sterling-deutschmark rate. Those are the two factors of primary importance at which people have been looking in seeking the most favourable juncture.
Last February, 11 months ago, there was a good occasion. The right hon. Member for Guildford (Mr. Howell) noted that in his interesting publication, which I read carefully. That opportunity was allowed to slip away, but now there is another good occasion. The pound is approximately 3.33 deutschmarks, down from 3.75 a month ago — a devaluation of more than 11 per cent. against a major European currency.
I believe that most of the decreases in oil prices may have occurred. The price was $30 a barrel in November. The price is moving, but let us assume that it settles down somewhere between $17 and $20 a barrel. We will have a very uncertain market, but at least the really substantial move has probably occurred.
Sentiment in the oil markets is very uncertain, and the price is likely to fluctuate with every rumour about what Saudi Arabia is going to do, or about the date of the next OPEC meeting. The problem is how to tame the impact of the short-term changes in sentiment without hopelessly disrupting the domestic economy.
Outside, interest rates are almost the Government's only weapon. If we were fully in the EMS, support from our partners would provide an alternative means to manage short-term fluctuations. We would have a much better chance of living through a period of see-sawing expectations without disruptive alterations to either exchange or interest rates.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
I am following the right hon. Gentleman's argument with great interest. He talked about interest rates and the damage that fluctuation of the pound has done to manufacturing industry. The right hon. Gentleman knows Birmingham almost as well as I do, so he realises the effects. Control of the EMS would not rest on good will, 983 which does not exist between central banks—only logic does. Because of what has happened to the pound as a result of the influence of the petrocurrency, and because of the present interest rates structure, would not interest rates be 2 to 3 per cent. higher now if we had been in the EMS? Would that not be more dangerous for us than the present system?
§ Mr. Jenkins
I think that interest rates would be lower if we were in the EMS. I would not say that interest rates would in all circumstances be lower in the EMS, but I would say at the present time in my view—one can only express one's own view—interest rates would be lower, and the immediate prospect would be one of lower rather than higher interest rates.
§ Mr. Tony Blair (Sedgefield)
The motion says that we should forthwith join the exchange rate mechanism. Suppose we had joined in October or November last year and the best rate we could have achieved was 3.60 or perhaps 3.50 deutschmarks to the pound. Considering the pressure on the pound last week, is it not the case that we would have been raising interest rates?
§ Mr. Jenkins
I am saying that we are now at the best juncture we have reached for some time. There have been other good ones. I would not have joined last October. I would have joined last February—
§ Mr. Jenkins
I said it is better to get in, rather than never to get in. Over the past seven years we have become like lift dwellers in a department store. We have gone into the lift, and it has gone up and down past every floor. The attendant has called out, "Soft furnishings, hard furnishings, sports goods, toys" and we have said "No, we want none of those." We always want to move on to the next floor. Lifts are very useful objects, but they are not suitable for permanent living. If one is always to say that there is never the perfect opportunity and thus try to get out before it is suitable, it would be more advantageous to get out on the floor that suits one, rather than on the floor that does not suit one. I would not stay in the lift indefinitely, and that is what the policy of the Government is about.
Apart from the short-term fluctuating position, there is also the medium and long-term position, and without the oil price shocks of recent weeks we would anyway have been in for a rough landing as our oil surplus runs down. What I am saying is that our huge surplus of oil will certainly be given to Russia, and it seems to me that we greatly want the assistance, if we can have it, of our other European partners to try and make that landing smoother. Be in no doubt that having reserves 10 times ours, which are those that are at the disposal of the EMS, is a considerable benefit. We are lucky that they still want us in.
Why do they? I think the reason bears upon another more general reason. They want us in more because of the importance of the City of London as a financial centre, rather than because of the importance of sterling as a currency. It is not nearly as important as the deutschmark.
It is greatly in the interests of every trading country and every economy to make sense of the world monetary system. Be in no doubt, with the fluctuations that we have had recently — and I am in favour of changes in 984 currency rates which reflect realities in the performance of different economies—nobody is suggesting that we can or should resist the violent changes which make the free-floating rate the enemy of international trade, of international investment flows, and bring into being the grave danger of creating protectionist forces to a strong degree with currencies such as the dollar, which are forced up and kept at artificial lengths for some time. I do not think we can possibly put Bretton Woods back on its pedestal again, but we can create a tripod of greater stability, and if we are to do that, it manifestly has to be on the basis of the dollar, the yen, and the ecu as the currency of the European system.
As long as Britain is outside the mechanism, the European leg of the tripod will be hobbled by the absence of the City of London more than by the absence of sterling. It is as though New York and Chicago were outside the dollar area. That is why Britain is still welcome in the exchange rate mechanism. It is also an additional reason why we should be in favour of entering it. Enlightened self-interest is our motive for getting some sense and stability back into the international monetary system.
I am convinced that so long as Britain remains outside the ERM—outside the only major Community initiative in the past 10 years— and so long as she manifestly repeats the old habit of 1951 and 1957, we shall inevitably diminish our influence on other matters concerning the European Community. Spain noticed that fact as soon as she entered the EEC. She said, "We want to have full influence and we must be a fully participating member." It is curious that somehow we cannot see that.
On direct and indirect grounds, the case is strong. The moment is as good a one as we are likely to get. I urge the Chancellor to overcome what I fear has now become the Prime Minister's prejudice and, in accordance with what is now a substantial balance of informed opinion, to get on with it.
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
The right hon. Member for Glasgow, Hillhead (Mr. Jenkins) has made, as is his custom, an elegant speech. He was a distinguished President of the European Commission. He has always been an eloquent advocate of the cause of Europeanism.
It is important to put the question of our membership of the exchange rate mechanism of the European monetary system into its proper perspective. It is not a question of our being for or against the development of the European Community. The Government's commitment to constructive membership of the European Community is beyond dispute. The fact that we have remained outside the exchange rate mechanism of the EMS casts no doubt on our European commitment. On the other side of the coin, it is right to point out, too, that, contrary to the assertions from time to time of some of those on the Opposition Benches, membership of the exchange rate mechanism would not lock us into some irrevocable commitment to full economic and monetary union. The truth is more complex, yet more prosaic. The ERM is a fixed, but adjustable, exchange rate system on Bretton Woods lines intended to promote greater economic convergence between its participants, particularly on inflation.
The Government's position on membership has been clear throughout. We would be ready to join the ERM as and when we judge the conditions are right for us to do so. 985 I recognise that the right hon. Member for Hillhead believes that those conditions are right today. That is his judgment. However, he will recognise that many factors affecting sterling need to be weighed carefully. The Government have to take account of the fact that, unlike all other ERM currencies except the deutschmark, sterling is a widely held and internationally traded currency. It is, furthermore, a currency subject to different and often opposite strains from those that affect the other currencies currently in the system. We have seen evidence of these conflicting pressures in exchange market movements in recent weeks. The House does not need me to explain that conditions in the exchange markets have been, even by their standards, remarkably turbulent of late.
In recent weeks, the major influence on sterling has been the weakening of the oil price. To some extent, this is a problem of perception. Even before the latest movements in the market, oil accounted for only 5 per cent. or 6 per cent. of our national income and less than 8 per cent. of all our exports. It accounts for only 0.5 per cent. of all our employment and only 5 per cent. of capital investment, despite the massive capital investments required to develop the major fields in the North sea. Those who operate in the markets, as many commentators are increasingly coming to note, often have an exaggerated perception of the importance of oil to the United Kingdom. That is something with which we have to live. It came as no surprise that a fall in the price of oil on the scale we have seen in the past three or four weeks, when the price has fallen by around 30 per cent., should have had some impact on sterling. I would like to think that the markets have already begun to take a more balanced view, but these realities can take time to gain hold.
The other major factor in the exchange markets recently has, of course, been the decline of the dollar and its differential impact on other currencies. Since the Plaza agreement, the yen has appreciated by nearly 19 per cent. against the dollar, the deutschmark by about 16 per cent. and sterling by 22.5 per cent.; so the decline in the value of the dollar has given rise to substantial adjustments between the exchange rates of other currencies.
It is against this background that we must judge the question of membership of the exchange rate mechanism of the EMS. We must recognise in so doing that for sterling to join the ERM would bring about a significant change in the operation of the system itself. At present, the deutschmark plays a dominant and central role. The addition of sterling, another widely held and traded international currency, would undoubtedly introduce an element of bi-polarity into the system with which it has not yet had to cope. It may be that it could do so, but it is a question that must give us pause. We should note that the currencies of the other two major countries in the mechanism—the French franc and Italian lira—are both protected by a variety of exchange controls.
I need hardly say to the House that we have no intention whatsoever of restoring the exchange controls which my right hon. and learned Friend the Foreign and Commonwealth Secretary removed in 1979 when he was Chancellor of the Exchequer. Such controls inevitably hinder the development of financial markets. Indeed, it is interesting to note, following a point made by the right hon. Member for Hillhead, that London is one of the 986 leaders in the ecu market even though the United Kingdom does not participate in the exchange rate mechanism of the EMS.
The question for the United Kingdom is, therefore, in a number of respects rather different from that which other menber states have faced. The common element, which is insufficiently understood by many alliance Members, is that for our European partners the exchange rate mechanism is not seen as a soft option to be adopted as an alibi. There is no disputing the view of our partners that the ERM can be a helpful and effective anti-inflationary discipline. Indeed, it has by and large worked successfully for those countries participating, particularly since 1983.
The vital question is not so much membership itself as the resolve with which responsible financial policies are pursued. It is on this point that we must have doubts about the attitude of the right hon. Member for Hillhead and his party. They are very keen to join international organisations. They want us to join the exchange rate mechanism. Indeed, the hon. Member for Stockton, South (Mr. Wrigglesworth) was using language at Prime Minister's Question Time yesterday that suggested they also wanted us to join OPEC.
In spite of that apparent enthusiasm for the exchange rate mechanism, it is clear that they would not be joining it in the same spirit as our other European partners. The other European countries have submitted to the discipline it imposed, and had significant success in reducing their inflation rates. Yet the Social Democratic party has revealed that this is not its intention at all. Its autumn statement published last year — a rare example of precision by a party that usually likes to leave its intentions as vague as possible—explained how it would manage the economy. It showed that the Social Democratic party expected, if its policies were implemented, inflation to rise to 7.5 per cent. in 1987. That makes it clear that the Social Democratic party regards the ERM not as a discipline against inflation but as a cover for its own inflationary public spending plans. As such a cover, of course, it would not work.
This Government may not have joined the exchange rate mechanism, but we have remained firmly committed to the principles of financial discipline which underly it. We have chosen a different route to success against inflation, but one which has been equally effective. The average rate of inflation during this Parliament has been just over 5 per cent., which compares with an average of over 15 per cent. for the Labour Government of the 1970s. The prospect this year is for continued falls. We expect inflation to be below 4 per cent. in 1986. This inflation record has been accompanied by a remarkable turnround in our growth rate, especially when compared with that of our European partners. For a decade from 1973 to 1982 we were consistently at the bottom of the European growth league. In 1983 we grew faster than any of our major European partners, we would have done so again in 1984 were it not for Mr. Scargill's strike, and every indication is that in 1985 we shall once again be the fastest growing major European nation.
§ Mr. Douglas Hogg
My hon. Friend has told us that the Government are not opposed in principle to joining the EMS and that we shall do so when the time is right. Will my hon. Friend tell us what the conjunction of circumstances will be which will suggest to him when the time is right?
§ Mr. Stewart
I am not going to offer my hon. Friend or the House a check list of circumstances because, as we have seen in recent weeks and days, circumstances of many kinds can change unpredictably and at short notice. The balance of judgment has to be made in the conditions of the time.
§ Sir Russell Johnston (Inverness, Nairn and Lochaber)
The hon. Gentleman has said that we in the alliance have perhaps misunderstood certain consequences of joining the exchange rate mechanism. Can the hon. Gentleman say succinctly—he has not yet done so—what disadvantages would affect this country if we joined?
§ Mr. Stewart
Greater fluctuations in the market in relation to sterling, to which I have already alluded, do create difficulties in operating any financial or monetary system. That is a point to which the hon. Gentleman's right hon. Friend the Member for Hillhead drew attention. One has to take these questions into account. There are arguments both ways on this matter and one must take a balanced judgment.
The record of success which this Government have had, without being a member of the ERM amply demonstrates that it is commitment to sound finance and lower inflation which is the key to economic prosperity, rather than the fact of holding a club menbership card in the exchange rate mechanism.
The judgment the Government have to make in relation to the exchange rate mechanism is not, as I emphasised at the outset, one of being for or against Europe. Nor is it one of being for or against international co-operation on exchange rates. Our participation in the Plaza agreement along with other major European countries, as well as the United States and Japan, amply demonstrates such cooperation. It is rather whether, bearing in mind the practical problems, membership of the exchange rate mechanism would provide a more effective and safer means of achieving our economic objectives than the strategy the Government have followed for the last six years. Membership of the exchange rate mechanism is not a panacea, nor is it the only option. There are no magic guarantees that it would reduce inflation by itself. Membership would be successful only if monetary and fiscal policies were appropriately firm.
§ Mr. Beaumont-Dark
I agree with the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) that this is an interesting and important debate. We have talked about whether we should join the ERM or the EMS. However, one of the great problems that we face in this part of the western world is that interest rates are at such high levels — higher than any level in the history of western Europe. America should co-operate and should cease sucking in vast sums of money because it is unwilling to balance its books — there is a $200 billion deficit. Unless we get the co-operation of the United States, whether we join the EMS or any other system, we and Europe as a whole face problems never faced before. We are all pulled down because of the United States' unwillingness to get its own books and ship in the right order.
§ Mr. Stewart
I do not think I should be drawn into a disquisition on the United States fiscal and monetary policy. I certainly accept the point that the large 988 imbalances in the domestic economy and trade account of the United States have created conditions which have caused turbulence to the rest of the world.
The United States Administration addressed themselves to these problems more realistically in 1985—the Plaza meeting was evidence of that. The new attitude of Secretary Baker at the annual meeting of the World Bank and the International Monetary Fund shows that there has been an important shift in American perception of its domestic economy and the international implications of its policies. However, this does not remove the need for each country to deal with its own financial circumstances according to its own policies.
§ Mr. John Browne (Winchester)
My hon. Friend has just mentioned that the United States now has a more international perspective on these matters. Does my hon. Friend agree that the reason for this debate is that early in the 1970s the United States broke the gold exchange window and agreed with other western countries to move into an era of floating exchange rates? Membership of the EMS is not the critical issue but the restoration of fixed interest rates based on convertibility of at least one currency—
§ Mr. Browne
It used to be the gold exchange standard. The EMS is founded on a floating base. If we choose a fixed exchange rate—which is much more important—it must be done with at least one currency that can be converted into gold at a price to be agreed. Can my hon. Friend persuade the Americans that this is an urgent problem? Would my hon. Friend urge this factor, given the Americans' new international perspective?
§ Mr. Stewart
I am not sure that I follow my hon. Friend's analysis and argument. However, the era of floating exchange rates was not a perverse decision taken out of the blue in the 1970s. It was the consequence of increasing instability between a number of major economies under which the old system, under any circumstances, could not be maintained. That is a different cause. Ten years or more later, we are still grappling with the consequences. The major changes in commodity prices —of which oil is the main one—were bound up with this.
The Government have always said that they recognised the advantages that the exchange rate mechanism could offer in the way of providing a framework of financial discipline. It is not the only possible framework, as we have fully demonstrated, but, combined with the appropriate political commitment, it can indeed provide a method of reducing inflation. The considerations which I have discussed this afternoon suggest that, at present, sterling's participation in the mechanism would not, on balance, be of benefit, although it is a question which is kept under continuous review.
§ 6.9 pm
§ Mr. Tony Blair (Sedgefield)
The question whether the United Kingdom should join the EMS is not an ideological argument but a practical one. Although the present level of the exchange rate makes the argument for joining stronger than it has been for some time, the balance of advantage still lies against our joining.
One reason for saying that is that we think that insufficient attention has been paid to the obligations of 989 membership of the EMS. We should treat with extreme caution claims about the stability which membership would bring to our currency. The EMS is essentially a means to an end and for it to succeed there must be a clear and common area of agreement between members on economic policy and objectives. We are not convinced that policy objectives that are currently pursued in the EMS converge sufficiently with those which we would want to be pursued domestically.
The first thing that we should do when discussing the EMS is to debunk some of the mythology surrounding it. There is a risk of it being seen not as a palliative, which is what it would be at best, but as a panacea that can cure the problems of instability in the exchange rate. It is important that our choice is informed and not a careless embrace of anything with the word "European" in it.
We should start by examining what the EMS is. It is a club that can yield benefits to the participants, but only at the expense of certain obligations. The stability arises not by natural process but by the agreement of the members to keep their exchange rates within agreed boundaries. It is essentially a statement of intent to act individually or collectively to ensure that the value of currencies is maintained within agreed margins of a set of bilateral central rates.
Three types of action can be taken. It can be done collectively through mutual support from the pool of reserves—it can also be taken under various short-term financing facilities—it can be taken through members intervening individually and it can be taken through the use of interest rates. France virtually controls its exchange rate by the use of interest rates. The latter two methods of control might be chosen by countries outside the EMS, but they are methods of obligation within it.
The proponents of the EMS say that those obligations are worth carrying because of the stability that will accrue to our currency. Stability can be long-term or short-term. I do not believe that there is compelling evidence that long-term stability has been brought to the exchange rates of currencies in the EMS. The long-term stability will to a considerable extent be contingent upon policy convergence. Such stability as there has been would equally have occurred if the exchange rates had been outside the EMS.
It is worth remembering that, when we talk about the medium term, because there are several realignments in the EMS, it is still possible to get considerable variations in the exchange rate. It is worth examining the two major realignments of the past few years—that of the French franc in March 1983, and that of the Italian lira in July 1985. When the French franc came under sustained speculative pressure in March 1983, there was a realignment, but it occurred as a result of the French agreeing much tighter budgetary fiscal measures. We can disagree about whether that was right or wrong, but it is important to emphasise that it was part of a package.
§ Mr. David Howell (Guildford)
Has the hon. Gentleman understood that, whatever might be the arguments for or against membership of the EMS, currencies that are in it and that are exposed to speculative pressure have the support of the entire monetary authority system of the member countries? That is why the speculators were seen off against the French franc in 990 March 1983 and why the devaluation was relatively controlled. I do not think that the hon. Gentleman has quite grasped that point.
§ Mr. Blair
With respect, I have grasped it. I said that one of the courses of action available to members of the EMS was collective action from the pool of reserves. France effectively keeps its median line against the deutschmark through the use of interest rates, so the pool of reserves alone is not sufficient to ensure against currency speculation. More important is the fact that the realignment, took place in conjunction with other policy measures. Exactly the same thing happened when the Italian lira was subjected to an 8 per cent. devaluation in July 1985. The price for the realignment was considerable other measures demanded of the Italian Government.
The two lessons to be learnt from those examples are, first, that realignment can occur, but only when combined with other policy packages — that means yielding up some freedom of action in the EMS — and, secondly, that, although short-term fluctuations in currency might be smoothed out by membership of the EMS, some companies say that that short-term risk can be borne by covering oneself in the forward market whereas a much greater risk, to which one is subjected in the EMS, is realignment where volatility can be intense, sudden and unpredictable.
The only compelling argument in favour of membership of the EMS is that it provides a hedge or some certainty against short-term instability in the currency. There has been considerable short-term instability in Britain during the past few years. I accept that there is a strong argument to the effect that being in the EMS might cut such speculative pressure, but I would put qualifications even on that claim. There is no clear evidence, for example, that day-to-day volatility of exchange rates damages trade flows. There have been numerous attempts to find such evidence, but it has not been found.
§ Mr. Blair
I shall deal with its stance shortly.
The level at which we fix the exchange rate is obviously extremely important, and there is still tremendous disagreement about what its level should be. The most important qualification on our ability in the EMS even to withstand short-term pressures is that Britain has a petrocurrency. With great respect to the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), he has not dealt fully with the consequences of that provision.
The first consequence is that the EMS is essentially a deutschmark bloc. It could be said that we would be putting Herr Pöhl of the Bundesbank in 11 Downing street. He might be preferable to the present incumbent, but we should yield our freedom of action. With regard to Britain as an oil exporter, cheaper oil for Germany would put up the deutschmark. If there is a drop in oil prices, cheaper oil prices mean that the deutschmark lifts and, conversely, that the pound is subject to downward pressure. That tension would be built into the system once sterling joined the EMS.
Perhaps most important of all is that we do not prevent speculation as a result of oil price fears by joining the EMS. Much of the clamour for joining the EMS during the past few months results from people thinking that the 991 exchange rate crisis in January last year and the flutters of the past few weeks would be cured by joining the EMS. That is quite definitely not so.
The alliance says that we should go into the EMS forthwith. It said that we should go into the EMS forthwith last year. It has been saying that we should join the EMS forthwith for years. If we had joined the EMS last year, the best rate that we could have got in against the deutschmark was DM 3.60 or DM 3.50. Many suggest that we would not have been able to negotiate such a rate. The current rate is DM 3.33. When the oil price exerted pressure on the pound last week, the Government, as a member of the EMS, would have been shoving up interest rates and I guarantee that if interest rates had gone up last week, we would have had an alliance motion criticising the Government for raising interest rates. They cannot have it both ways. Penalties are involved and those penalties should be clearly understood.
The problems is not merely the lack of a guarantee that we will not have interest rate crisis of that type. I would go further than that. If the price of oil falls, it is rational that our exchange rate should be allowed to fall, because the price of a major export item is falling. That difficulty, which faces Britain because of its petrocurrency status, does not fit into the circumstances of the other nations in the EMS.
Contrary to what has been said, criticisms of the Government's interest rate policy could be made irrespective of membership of the EMS. January 1985 is the obvious example. The Government appeared to be giving the lie to the market that they would not intervene to prop up the exchange rate. Currency speculators had a one-way bet against our currency. The exchange rate plummeted and the Government had to compensate for that initial period of inaction by jacking up interest rates by 4 per cent. The Government can be legitimately criticised for not cutting rates last summer. They had the opportunity to cut them and their starting base would have been that much less.
When we consider the Government's policy during the past week, we cannot criticise them for not being in the EMS and also for allowing the exchange rate to slide. In many ways is is easier to understand the case for the Government, rather than the Opposition parties, wanting us to join the EMS. Joining the EMS implies a fiscal and monetary policy convergence. The fiscal and monetary polices of the German Bundesbank are tight. One would have thought that the alliance, which proposes a fiscally expansive policy, would be the last party to want to join the EMS. There is a clear argument for the Government wanting to join the EMS.
The argument for the EMS is much stronger if there is an agreement, or the prospect of an agreement, on the fundamentals of macro-economic policy between the member countries. The exchange rate is important, but it is a residuary, not a fundamental. If we join the EMS, it is much better to be certain of the agreed, common policy objectives between the member countries. In relation to the importance of international monetary stability, the initiatives of the Group of Five are of greater significance than what has happened within the EMS. The G5 initiative that forced down the dollar was more important than what was happening in the EMS. The G5 countries criticised Germany for pursuing too tight a fiscal policy, but that is the fiscal policy with which we would be aligning ourselves if we were to join the EMS.
992 Whether it be the EMS or the G5, acronyms are no substitute for analysis of Britain's economy and its problems. The central and fundamental problem is how to prepare for post-oil Britain. Flutters of speculation against our exchange rate are warning signals. We either build up our manufacturing industry to generate the wealth that we shall need when oil production declines, or we face a poor and unstable future. No amount of juggling at the margin will eliminate the central dilemma. The Labour party, and only the Labour party, has the political will and economic sense to address the dilemma.
§ Mr. David Howell (Guildford)
I hope that the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) will not be too disappointed that this subject does not have the same magnetic, attractive power to fill the Benches as some of the subjects that we discussed last week. However, the issue is important and I hazard the view that the subjects for discussion today will be more influential in deciding the political future and the political outcome of the general election than many of the subjects with which the House has preoccupied itself in recent weeks.
The alliance has given us a good opportunity to consider crucial issues. I agree with the hon. Member for Sedgefield (Mr. Blair) that perhaps the motion itself is rather marginal, but we have been given the opportunity to consider central issues for politics and the future of Britain.
I wish to take that opportunity in a way of which the right hon. Member for Hillhead may not approve. I wish to consider the events of the past few days. My right hon. Friend the Chancellor of the Exchequer and the monetary authorities should be warmly congratulated on the way in which they have succeeded in managing a tricky passage in international monetary affairs. They were right to allow the exchange rate predominantly to take the strain during recent weeks rather than giving in to the panic cries for further hikes in interest rates. That would have been a great mistake.
Oil production will come off the peak during the next decade and oil prices will go down, so it is a natural longterm adjustment for the exchange rate to move more favourably for our exporters against the deutschmark and possibly the dollar. It would be absurd to try to counteract that effect. The Chancellor of the Exchequer has made several penetrating speeches looking forward to the era when we are no longer such a major oil exporter, and describing how the adjustment will work.
It would be wrong in the short term to let gyrations in the oil markets overwhelm our domestic policy priorities. We are not an oil-producing nation in the same sense as OPEC members. Oil is only a small fraction of our GNP and a small fraction of our exports. We have discussed sterling as a petrocurrency. That may have been the perception, but it is not a petrocurrency. It is wrong to allow our domestic policies and priorities to be fazed by the oscillations in the oil market. Those will be violent because we have a very market-like market for oil and there is none of the orderliness that existed when the American giants controlled the oil markets before 1973. The prices will swing violently.
It would also have been absurd to take the long-term and desperate action to shore up the pound in the face of oil market gyration, because the oil price will rise again in a week or two. OPEC members are now doing what they 993 said they would. They believed that they could bring Britain into talks if they lifted the lid off Saudi production and allowed it to rise a few million barrels. The oil price would then fall and Britain would realise where its interests lay.
That was the openly declared threat, but it is based on an entirely wrong perception. Britain will not talk to OPEC. Even if it did, little would be achieved. It would be a bad mistake for Britain to become involved in bilateral talks with OPEC now. I was surprised when the hon. Member for Stockton, South (Mr. Wrigglesworth), at Prime Minister's Question Time yesterday suggested that we should have talks with OPEC about the price of oil. It is not only in the long-term interest of Britain to have lower oil prices.
Even if we had talks and the Government were in control of North sea oil production—which they are not, because the Goverment do not control production levels —talks would not do any good. Suppose Britain and the Norwegians could get together in the North sea and knock 300,000 barrels off the oil price. That would make no difference, because the world is glutted with oil. The OPEC leaders have at least been frank. They say that they are not interested in figures, but in gestures. They want a gesture, which would be pointless in terms of oil market stability. Their desire for a gesture has more to do with the internal politics of OPEC and their own sensibilities. So we could be dragged into a pointless set of discussions and we should be forced to influence oil production in the North sea and change unnecessarily the entire basis upon which North sea impetus has been achieved.
It is worth reflecting that if oil prices go down to $15, as Sheikh Yamani says, and there is then a perception that they will rise again, to about $20, as they almost certainly will, a great many oil companies will try, if they can, to slow oil production from their platforms. One does not need to be a Government to reach that decision, one just needs to be an oil company. In addition, I believe that it is correct to say that North sea oil production will peak this year and may come off the top. So if OPEC watches the figures, it will see lower North sea oil production anyway and take that as a gesture, without any need for talks, bilateral agreements or Britain being drawn into the OPEC morass.
There is one case where there might be a need for talks. If the oil price goes through the floor, Mexico and Nigeria default, Venezuela goes bankrupt and the world's banking system needs shoring up because of non-performing energy loans, then we should indeed need talks. They would not just be talks with Saudi Arabia or OPEC and Britain but among all the leading financial countries, oil producers and oil consumers to contain and co-ordinate action against a world financial crisis. Those are not the talks for which the Saudis are calling. They are not the talks for which the hon. Member for Stockton, South was calling yesterday — which would be pointless and hopeless. They would be part of "gesture" politics which would gain us nothing and lose us a great deal.
That is the background against which the British Government's policy has been steady and correct in recent weeks. I welcome that fact.
We must consider what the next move is and whether full membership of the exchange rate mechanism has a part to play in it. We must recognise that we need to wait 994 for the oil market to calm down. I believe that oil prices will increase in a week or two, not least because the other, non-Saudi, OPEC members are emitting cries of agony at seeing their revenues disappear. Their market share is not increasing and their budgets are all in a rough condition. We must wait. The motion is, in a sense, premature.
If we can join the exchange rate mechanism at a deutschmark rate of about 3.40 — a little higher than now—that would be a sensible and rather limited step. I am not one of those who believe that we should move towards the more fanciful idea of monetary union. I am not arguing for that. There is a limited package which would be sensible from the point of view of this country's economic objectives and financial goals—for Britain to join the exchange rate mechanism, for the French and the Italians to do away with their exchange controls and for the Germans to recognise the need for a greater use of the ecu. That would provide a more stable environment in which we could then operate.
Hon. Members have asked about the oil side of things. I have conceded that that is at present a difficulty, but we should not exaggerate it. Although it is on a much smaller scale, the guilder is in the European exchange rate mechanism. Oil and gas production form a much higher proportion of Dutch GNP than oil and gas production do as a proportion of British GNP. Holland is much more of a petro-country in that sense than we are. However, that has not produced all sorts of unthinkable and insuperable problems for the guilder. The Dutch have managed perfectly well. Oil is a problem, but not an insuperable one.
It would be putting the matter much too high to say that joining the exchange rate mechanism would be a major advance, but I believe that it would help. The hon. Member for Sedgefield said that we would have had to raise interest rates. If, in the coming months, we were in the exchange rate mechanism, the downward pressures on the exchange rate and the upward pressure on interest rates would be somewhat modified. Pressure would not be avoided. He is correct, but it could be somewhat modified. We should be in a loose harness and the international market would have a little more understanding of where we stood on our exchange rate policy. Joining the European exchange rate mechanism would not obviate the need to have to resort to interest rate and exchange rate movements and possible realignments from time to time. I am not suggesting that.
There is also a larger stage on which those matters must be judged and even more important issues may need to be resolved. Joining the exchange rate mechanism might be relevant to our local problems in Europe, but the real issues are the ones that the Group of Five has tried to address. That group is interested in international interest rates disarmament and having greater exchange rate stability worldwide between the dollar bloc and the European bloc — whether it is deutschmark-sterling or just the deutschmark bloc—and the yen bloc.
If I had heard the right hon. Member for Hillhead speak more on those aspects and air some thoughts on the way in which those three blocs could integrate more closely so that we might have exchange rate bands between the yen, the dollar and the deutschmark-sterling bloc which would allow rather more orderliness than we have had over the past two or three years, I should have been rather more attracted to his proposition that, within that, we should join the exchange rate mechanism. 995 In sum, therefore, we have been correct to avoid the huge hike in interest rates for which some people were calling. We should not let oil price oscillations overwhelm us. We should not speak to OPEC countries about trying to rig oil prices in a way unfavourable to all industrialised countries. We should let matters calm down before addressing the issue of the exchange rate mechanism and the way in which any developments there would fit into larger plans for a more orderly world pattern of exchange rates as between the three major blocs, as G5 has been discussing.
§ Mr. Ian Wrigglesworth (Stockton, South)
I am somewhat surprised that the right hon. Member for Guildford (Mr. Howell) came to the conclusions that he did about my remarks on the desirability of closer cooperation between the yen bloc, the United States bloc and the European bloc. That type of co-operation, which G5 has been able to bring about and which I am sure all Members of the House will support and welcome, would be much easier and much more effective if the European bloc to which he referred was more effective in running its activities than it is at present.
A broad concensus has developed in this country, which extends to Conservative Members across a wide spectrum of industry and the City, that a move by this country to join the exchange rate mechanism of the European monetary system would help with the development of that system and make it more effective. It would make it more possible for the United States, Japan and Europe to co-operate with monetary and exchange rate matters. I am surprised that the right hon. Gentleman came to a rather unclear conclusion on taking a further step and going into the exchange rate mechanism.
One of the things that depresses me about the comments of the hon. Member for Sedgefield (Mr. Blair) and others is that they seek to pursue a chimera of national sovereignty, as if we could control affairs in this country's economy on our own, with no regard to what was happening in other parts of the world.
The implication of what has been said by those who oppose the proposal contained in the motion is that when we can somehow remain outside the EMS or discussions with others, whether with OPEC on a managed fall in oil prices or with our partners on the other side of the Atlantic, and insulate ourselves against being buffeted by world economic events. All recent evidence is that we cannot do that.
§ Mr. Blair
Let me reassure the hon. Gentleman. I made no such claim. Obviously we cannot protect ourselves from all the buffets of the world economy, but, with respect, he is suggesting that we should join the EMS forthwith. He must say how he could pursue alliance fiscal policy within the constraints of the EMS and a particular German fiscal policy.
§ Mr Wrigglesworth
The hon. Gentleman must tell the House whether he would prefer to submit himself to constraints imposed by the IMF, as former Labour Chancellors of the Exchequer have done when they have had to go cap in hand to it, or whether he would prefer to work in co-operation with our partners in Europe, and create greater stability regarding inflation, exchange and interest rates, and not have to go cap in hand to the IMF. 996 It is surely better to work with our partners in Europe to achieve co-operation, as we are doing in other spheres. That will mean giving away some of our sovereignty for the benefits that accrue, but the benefits from joining the exchange rate mechanism outweigh any disadvantage from giving up a limited amount of sovereignty and submitting ourselves to the disciplines of full membership of the EMS.
Many people believe that those disciplines would be wholly advantageous to us, not only because the Government would have to ensure that the wild fluctuations that occur do not take place, but because the markets would have greater confidence in our position, knowing that we have accepted the constraints necessary for being a member of the EMS and that we have the support of the system in withstanding the pressures which force fluctuations in exchange and interest rates.
In recent years, the operation of the EMS has involved a considerable convergence of economies, and of success in getting greater conversion, especially of inflation and interest rates. There have been fewer realignments and stronger reserves. In 1985, the average inflation differential was 2.2 per cent., compared with 6 per cent. in 1980. Interest rate differentials have narrowed to 4 per cent. since the last major realignment in 1983. Ironing out fluctuations in that way would be enormously beneficial to the United Kingdom. That is why the Confederation of British Industry, the Institute of Directors, the Governor of the Bank of England, and a variety of other organisations and individuals advocate that we should join.
The Economic Secretary and the right hon. Member for Guildford (Mr. Howell) believe that the influence of the oil sector on the economy is exaggerated. It may have been somewhat exaggerated, but hon. Members will surely realise that it is not the scale of its impact—the 6 per cent. — but its effect on the margins. It affects our balance of payments, and the revenue going to the Exchequer. The contribution to our balance of payments and the revenues going to the Exchequer from oil may not be large in relation to the total, but they are of fundamental importance on the margins.
Nothing demonstrates that more clearly than the way in which the freedom of the Chancellor of the Exchequer on fiscal adjustment and his ability to cut taxes has been limited. Only recently he said that that was a major item in his forthcoming Budget, but the important contribution from the oil sector is not coming. Therefore, it is of importance in that respect. It is of even greater importance for our balance of payments. The oil sector of the economy will put pressures of that sort on our exchange rate, and it is an important factor, which the market is right to take into account.
I join the right hon. Gentleman in congratulating the Bank of England and the Treasury on intervening to resist the pressures of the past week. It is a pity that they have not done so on many past occasions when the money market was looking for a lead from the Bank of England, but was not getting it. On many occasions we could have resisted the pressure for higher interest rates, if the bank had given a clear lead and the Treasury had allowed it to do so. I welcome the new policy of the Bank of England and the Treasury, of intervening in the money markets to keep interest rates down. However, they would be better 997 able to do that if we were members of the exchange rate mechanism of the EMS, and had its support in resisting those pressures. The pressures will not go away.
Considering the present levels of exchange rates, it would be particularly appropriate to join. At present the index is standing at 74. The deutschmark rate stands at 3.33 and the dollar at 1.39. At various times in the past Ministers have argued that we should not join because of the dollar or the deutschmark, but surely the truth is that the Government are unwilling to give up what they see as their control over our economic affairs. I wish that they, and particularly the Prime Minister, would admit that.
That sounds a grand nationalistic thing to be doing, and the hon. Member for Sedgefield made much of it, but it has not done much good recently. It has not prevented our manufacturing industry from being hit for six by the exchange and interest rate policies that the Government have pursued. That is hardly evidence that staying outside the EMS since 1979, and particularly between 1979 and 1981, has been good for manufacturing industry. If the hon. Gentleman has a solution to that problem while remaining outside the EMS, and believes that his policy on interest rates, and particularly exchange rates, can resist those pressures and not put further impediments in the way of manufacturing industry, he is living in cloud cuckoo land.
I hope that the House will see the wisdom of our suggestion, as many organisations have. We wish to seek greater international co-operation. The world of trade and commerce, especially the money markets, is becoming increasingly international, partly for technological reasons. It is vital that the political institutions of the world keep up with the rapid pace of development of the international financial markets, and of the international trading, business and industrial world. We do not have the mechanisms to cope with much of what is going on in the world economy today. Our membership of the EMS would provide us with greater control and influence over those events, to the benefit of trade and industry throughout the world.
The one message that I constantly receive from all manufacturing industry, from talking to individual firms or their representatives at the CBI and Institute of Directors, is not that they are terrified about a particular exchange rate or interest rate level, but that they need stability and certainty so that they can plan. That is what the exchange rate mechanism and membership of the EMS would give us, and for that reason we hope that the House will support the motion.
§ Mr. Richard Ryder (Mid-Norfolk)
I have listened catefully to the hon. Member for Stockton, South (Mr. Wrigglesworth), and if I did not have a view on the European monetary system I would not be able to form many conclusions from doing so.
The debate has understandably been dominated by the arguments about whether we should enter the EMS. We would be deluding ourselves if we believed that problems with high interest rates and volatile exchange markets could be overcome simply by joining the EMS. That is because the dollar is still the chief international currency 998 and it is its effect on the remainder of the world economy that has a much greater impact upon interest rates and exchange rates than anything else.
We should be considering two main factors in detail. First, we must ensure the continuing success of the G5, and, secondly—here I agree with my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) who is not in this place—that we must try to persuade the Americans to ensure that all decisions taken in Washington on the future of their domestic economy are reached only after the closest consideration of the consequences which those policies have upon the global economy as well as their own.
The Plaza initiative, to which many hon. Members have referred, has been only a partial success. My hon. Friend the Economic Secretary has said that the yen and the deutschmark have risen by about 17 or 18 per cent. against the dollar since the Plaza initiative. The meeting of G5 in London only two weeks ago reaffirmed an intention to try to ensure that the American dollar did not rise again. After this meeting there was some anxiety about interest rates, a feeling that perhaps orchestrated action could have been taken to bring them down.
Some people overlook the fact that it is much easier for Governments to intervene in exchange markets than it is for them to co-ordinate cuts in international interest rates.
The dilemma facing G5 is that interest rates low enough to provide healthy economic stimulation may not be high enough to contain inflation. Solving that dilemma is a key issue facing every western nation including our own. The solution cannot be found by the British Government alone; the Americans must take the right decisions about their domestic economy.
The United States problem, the huge budget deficit to which many hon. Members have referred, is fuelled by a tax system that subsidises borrowing by making interest expenses tax deductible. That results in high United States interest rates and they cause many of the difficulties we are debating. As we know, high interest rates attract foreign capital and lead to a high dollar. The risk of world recovery faltering and creating protectionism outweighs the immediate prospect of a surge in inflation because the world is awash with gluts. There is high unemployment, an oil glut and a grain glut, and commodity prices are falling.
Now is the moment for the international economic community to take decisions that will bring down interest rates. If carried too far, interest rate cuts, I accept, could rekindle inflation, so we must look for modest cuts in interest rates in America. Interest rate cuts there are vital for Britain and for other countries in the western world. As guardians of the major global currency, the Americans have an enormous responsibility to the rest of us. But if the global economy does not prosper, nor do American farmers, steelworkers and car workers.
The realisation of that fact has led to a new and refreshing view in Washington of exchange and interest rates. The new view in Washington is leading the United States towards tightening its fiscal policy at the same time as having a much easier monetary policy. That is confirmed in recent speeches by Paul Volcker and many of the people who surround him, whether they be traditional Keynesians or supply-siders.
If Britain wants firmer, stabler exchange rates and lower interest rates, a way for the Government to achieve that end is to maintain their pressure unilaterally, through 999 G5, and by any other means possible on the American Administration to adopt a looser monetary policy and a tighter fiscal policy. The consequences of that approach may be that British businesses and home owners will gain from lower interest rates.
I may be in favour of Britain joining the EMS, but I cannot go as far as the alliance and say that if Britain enters the EMS it will make all the difference the alliance claims. But less volatile exchange rates and lower interest rates can be brought about by continual efforts in the United States to produce a tighter fiscal policy and a looser monetary policy.
§ Mr. John Maples (Lewisham, West)
One of the reasons usually paraded in arguments for joining the EMS is that the use of domestic interest rates here to protect the currency would not be so necessary. Another argument introduced by my hon. Friend the Member for Mid-Norfolk (Mr. Ryder) is that our interest rates are effectively jerked around on the end of American interest rates and the American deficit.
I suggest that there are some domestic factors in the reasons why our interest rates are so high. It may be that we can do something about that and stop the damage that high interest rates cause to productive investment by discouraging it. Perhaps we can take some action on the domestic front without looking at the international ramifications. Interest rates in any economy must surely be dictated by the relationship of the demand for credit and the supply of savings available. An economy with consistent double digit interest rates is a fair indication that the demand for credit is excessive in relation to the supply of savings.
The bank lending figures—credit expansion figures—for the United Kingdom are deeply worrying. Bank lending is increasing at about 16 per cent. a year. That is considerably faster than GDP and inflation. An interesting contrast is that in West Germany domestic credit expansion is running at about 3.7 per cent. If we compare other figures in the two countries, we will find that West Germany is doing rather better than us.
Of that credit expansion, a disproportionate amount goes to financial institutions, property, house purchase and consumer credit, and nothing like enough of it goes into productive investment. One of the reasons for that is that consumer credit and the credit that goes to financial institutions and into property purchase and short-term investment deals is not very sensitive to interest rates.
Consumer credit is almost insensitive to interest rates, but it is sensitive to income flow and whether or not people can afford the weekly or monthly payments. The fact that people are prepared to borrow on their credit cards at 33 per cent. interest is evidence of that insensitivity to interest rates. Long-term productive investment decisions are sensitive to interest rates. Bank lending is growing far too fast, and that is one of the factors that is creating the high interest rates in Britain.
One looks behind that for another reason why bank lending is growing so fast and why it is resulting in high interest rates. Not long ago we had moderate interest rates in single figures for a long time. Then in the mid-1970s we started to get double digit interest rates. A variety of reasons were paraded for that. Most of them proved to be unpersuasive, such as the public sector borrowing requirement being responsible for driving up interest rates.
1000 I find it difficult to be persuaded that marginal differences in the PSBR in the context of all the credit creation that goes on will have much effect. At one time there were arguments about inflationary expectations. I think one can now measure those expectations fairly accurately because there is an index-linked security market.
One factor, though not the only one, has been the rapid deregulation of credit markets and the banking system. The old banking system was a rationing system; bank managers said no. It was extremely difficult to borrow money. Credit was rationed effectively by a limited and small banking system saying no to people who wanted to borrow. But that has changed. Deregulation has resulted in banks operating in an entirely different way. They actively and aggressively sell credit. There can seldom have been a time when it has been easier to borrow money.
Banks lend and immediately create an asset and a liability on the balance sheet. So long as banks keep their capital ratio intact, which they seem to be able to do fairly easily, they can increase credit creation all by themselves. Some money leaks out of the system and they have to borrow that back on the inter-bank market. That is how interest rates are driven up by the deregulation of banking.
We now have a system in which credit is rationed only by interest rates. Therefore, there is bound to be a dangerous excess of credit. Because a large number of people at the borrowing end of the series of transactions are not influenced by interest rates, as is the case with consumers and short-term investment deals, the people who are sensitive to high interest rates are being jerked around at the end of that series of transactions. The problem will get worse. The big bang in the City will result in a revolution in corporate lending. The growth in the number of foreign banks operating in the United Kingdom is not likely to stop. Building societies seem to be turning themselves into banks and credit organisations. That will magnify the problem
This is only hypothesis, but high interest rates have been obvious in the United Kingdom and the United States where the deregulation of the banking system has gone furthest. One does not see the same phenomenon in other countries such as West Germany and Japan. I am not in any way against deregulation of financial markets. The benefits that it has brought to London as an international centre are enormous, and I would not want to see us going back, but it would be a terrible mistake if we did not appreciate that one of the consequences has been the excessive creation of credit, with resulting high interest rates.
We should try to see whether we can do something. Inflation and high interest rates affect productive investment decisions. That is where we want the nation's savings to go, and not into consumer credit, which is financing the import of consumer electronic goods.
We should consider carefully whether we need a credit policy that would be a little stricter in limiting consumer credit expansion and the kind of lending that is done to finance short-term property and securities dealings. In the past we have had such mechanisms as high deposits for hire purchase arrangements, and larger repayments on credit card bills. It is ridiculous that the minimum repayment on a credit card bill should be just about 2 per cent. of the total. It would be easy to introduce minor regulatory rules which would make consumer lending less popular. If we do not do something like that, high interest 1001 rates driven by that kind of lending will persist and will adversely affect both inflation and the productive investment decisions that we make.
§ 7.4 pm
§ Mr. John Browne (Winchester)
This is a most important debate and I am only sorry that the subject will not have a longer airing. In the 1970s we began an era, of which this era is a continuation, of massive inflation on a historic basis, with double digit figures in almost all developed countries. There was massive volatility in the price of major commodities, such as oil, as has been mentioned in the debate. There was also a massive rise in the level of international debt and massive speculation and volatility in exchange rates, so much so that the London market and most of the other currency exchange markets reckon that 85 per cent. of the business is speculation and only 15 per cent. relates to real trade transactions.
When this era began in the early 1970s, the dollar gold exchange standard was unilaterally broken by the United States. If it had not been for that, would it have been possible for the developed western world to pay the high oil prices?
The second event of major significance in the early 1970s was that the United Kingdom unilaterally floated sterling. It was followed by other major countries. So the era of floating exchange rates of no real numeraire began. Massive abuses started, resulting in huge volatility in commodity prices, huge inflation and huge speculation on foreign exchange markets.
Now we have an era of competitive trade. We have a trade war that should concern us all deeply. There are moves in the United States to protect its trade. That is very dangerous, particularly for a country such as ours that depends so much on its earnings from international trade. Despite the existence of the General Agreement on Tariffs and Trade and the apparent system of free trade agreements that pervades the world, there is a trade war under the table. It is done surreptitously, by the competitive devaluation of currencies. That is the real danger. For any of us to believe in free trade when at the same time we have floating exchange rates is to believe in pure fantasy.
The problem is serious and urgent. Right hon. and hon. Gentlemen have said what a good thing it is to have common policies. In many areas of trade finance, such as the Export Credits Guarantee Department, on the surface there seems to be an agreement on a norm. When we examine it, in countries like France interest rates are subsidised so that French companies can borrow deutschmarks at 7 per cent., lend them on to finance trade to Russia at 7.8 per cent., the Russian maximum; the exchange rate is guaranteed to that company by the Government. It is all done under the table. So French companies become very competitive in trade between western Europe and the Soviet Union.
The root cause of all the problems is a lack of integrity in international money. The Government have reestablished integrity in our domestic money by reducing inflation to historically low levels, now getting towards 3.25 per cent. The Government must now urge the reestablishment of international monetary integrity by seeking the restoration of a gold exchange standard for the United States dollar.
1002 Hon. Members have ridiculed what I said in an intervention; they have said that we cannot go back to the gold standard. The gold standard has four gradations. I would be the last to urge that we should go back to the full gold standard. That would be catastrophic to today's economy. But it is essential that the most lenient of the gold standards, the gold exchange standard which existed until the 1970s, is restored.
The Government should, first of all, move to a restoration of fixed exchange rates and not go to the halfway house, what I see as a gimmick, the EMS, because the EMS is not really a group of fixed exchange rates, but a bunch of floating exchange rates, floating without any real integrity in the value of the money, still allowing commodity prices to rise in terms of a bunch of EMS currencies. So I understand the arguments of the hon. Member for Stockton, South (Mr. Wrigglesworth) who spoke for the alliance and indeed the hon. Member for Sedgefield (Mr. Blair) who spoke for the Opposition; but I believe that the EMS is a gimmick and that we should not be fobbed off with it.
I urge my hon. Friend to take on board the fact that this is a very urgent problem and a very serious one in terms of world trade, on which we all depend. Now that the United States is adopting a much less insular approach to international monetary affairs, will the Minister urge it to restore the convertibility of the United States dollar on the gold exchange standard and to move towards an era of fixed exchange rates? The Government have been very successful at home in restoring monetary integrity. Will they now turn their attention to restoring international monetary integrity?
§ Mr. Richard Wainwright (Colne Valley)
The contributions to this much foreshortened debate have shown that the specific motion moved by my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) has been of service to the House and, I hope, to many outside. It has provoked some interesting responses from the Front Benches. I do not think that I am alone in detecting in both Front Bench speeches a whiff of the lecture room or of the tutorial rather than a facing up to the grim conditions of the foreign exchanges and all the consequences of severe misalignments and continuous volatility for our trade, about which the hon. Member for Winchester (Mr. Browne) has just spoken eloquently. The whiff of the tutorial extended also to the reflective speech of the right hon. Member for Guildford (Mr. Howell).
Let us be quite clear: in choosing this specific motion this afternoon, the alliance was not indulging in some sort of academic exercise. We are concerned, as I am sure Members on both sides of the House are, at the chaos in parts of the foreign exchanges and at the very severe consequences for our own trade, both export and import, and that of many other important industrial countries.
The Economic Secretary gave us a lecture, to which we have become accustomed in the past six years, on the bipolarity which British membership of the exchange rate mechanism would introduce, along with the deutschmark. He said that this bi-polarity must give us pause—those were his words. The Government have been pausing for six and a half years or, to use the much more graphic illustration of my right hon. Friend, have been moving up and down in the lift, resolutely refusing to get out at any floor. 1003 I must ask the Economic Secretary whether, on reflection, he thinks that it is good enough to tell the House that there is this well-known problem of bi-polarity which still gives the Government pause. I hope that when he replies, necessarily briefly, he will say what, for the Government, would constitute the right time and the right conditions for Britain to enter the exchage rate mechanism. The Government cultivate a liberal air of saying that they do not exclude it, that their minds are open and so on; but they have never at any time defined the conditions under which they think that it would be right to join the exchange rate mechanism. The Economic Secretary owes that reply to the House this evening.
The hon. Gentleman also said that there was no doubt about the Government's European commitment, and that staying out of the ERM did not cast any doubt on that. Here is the Community with apparently strong British Government support, trying to create a truly free trade area in the Community, with a genuinely free flow of goods and services across the frontiers inside the Community. How can that become a reality if a leading member of the Community persists in reserving to itself alone the right to clip its coinage, while the rest of the Community play according to the rules? Our European commitment is damaged by this vague and unsatisfactory attitude to the exchange rate mechanism.
The hon. Member for Sedgefield (Mr. Blair), who began by carefully preserving the possibility of the Labour party's coming to terms with some kind of European monetary system, nevertheless failed to appreciate or to acknowledge that the strength of the whole of the EMS and its exchange rate mechanism is substantially greater than the sum of its parts. The confidence that the EMS generates and bestows on each of the currencies involved is greatly enhanced by the fact that it is a corporate body with what is now an established record of sucess, and with large currency reserves.
Again, he showed the defeatist attitude which also affects the Government, that in any discussions with the Bundesbank, which, of course, would have to become very close and continuous once we joined, in any such confrontation, we would be bound to lose out at every turn. It would not be so much a dialogue as being underneath a steamroller. There is no justification for that attitude. Over the years, the Bundesbank has taken a civilised attitude, and there is no reason to suppose that we cannot keep our end up in negotiations with the Federal Republic.
The right hon. Member for Guildford (Mr. Howell) may have been justified in congratulating the Bank of England on its success so far in avoiding a further rise in interest rates, but he did nothing to dispel the widespread public and acknowledged confusion about the aims of the Government's exchange rate policies. The Government are at last admitting—they had it dragged out of them—that they have an exchange rate policy, but they refuse to tell us what the policy is or how they intend to carry it out.
A further trend in the debate which I should like briefly to mention is to try to set up—
§ Mr. Wainwright
I am sorry, but I am pressed for time.
—to try to set up G5 meetings, which I am sure are welcome on both sides of the House, as in some way an 1004 alternative to British membership of the exchange rate mechanism. G5 is nothing of the sort. The two things are not mutually exclusive. Some would say that full British membership of the EMS would enhance the opportunities of G5. I could not understand the speeches which tried to create that exclusivity, especially the interesting speech of the hon. Member for Mid-Norfolk (Mr. Ryder).
We are in great danger of being landed with not only very high interest rates—even if they go no higher—and the phenomenally high real interest rate, which is a great burden on our industry, costing British business, according to the CBI, about £250 million a year for every one point by which interest rates advance, but, in addition to that burden, having a rapidly falling sterling exchange rate as well. It is the twin danger which threatens us. It seems to us that an explanation of current Government policy by the Chancellor of the Exchequer is long overdue. Such an explanation must take into the account the fact that the British Government alone — and equally the Government of the Federal Republic alone or the French Government alone—cannot properly take on the forces of global foreign exchange speculation.
Our reserves are far too small. At the end of last year our published reserves were even smaller than those of Switzerland and our own economic strength in general is too slight to take on this massive worldwide speculation with the huge flows of investment money which now threaten the order of the foreign exchanges.
It is only within a wider framework of currency support that we can hope to get rid of at any rate some of the gross misalignments which are such a hindrance to trade and to get rid of some of the volatility which is particularly inimical to British exports.
We hope that this curtain raiser of a debate will be only the first of discussions in the House on how an urgent situation—much more urgent than either Front-Bench spokesman implied this afternoon — can be tackled resolutely so that our hard-pressed traders may have a chance.
§ Mr. Ian Stewart
With the leave of the House I should like to add a few words at the conclusion of the debate. I do not want to be accused by the hon. Member for Colne Valley (Mr. Wainwright) or anybody else of lecturing the House, let alone of doing so twice in one evening, and I shall endeavour not to open myself to that criticism.
Let me take one point by example. I referred to bipolarity. That is a strange word but one with important meaning. If sterling was in the exchange rate mechanism of the EMS there would be two major international trading currencies within it, which would be a change from the present system. I referred to this partly because it was a point only fleetingly touched on by the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) and it is a practical consideration. I do so also to show that one needs to take into account a wide number of practical considerations relating to the operation of domestic monetary system and international monetary markets.
I need not apologise for raising the issue, nor at this hour should I repeat the statement of the Government's stance on the matter which I made in my opening remarks. All I would say is that in response to the intervention of my hon. Friend the Member for Grantham (Mr. Hogg) I said something about the impossibility of setting out in advance some sort of shopping list — I do not know 1005 whether he was still using the metaphor of being in a lift in a store. But to go into a store with a shopping list, regardless of what might be found on the different floors, is a rather confusing exercise.
§ Mr. Wainwright
Is it good enough for the Government, year after year now for six and a half years, to be saying that there may come a time when we should join but that this is not the right time? Should not the Government by now tell us what, broadly speaking, would constitute the right time and conditions for British membership?
§ Mr. Stewart
I am sure that the hon. Gentleman would like a cut and dried list of factors and the relative weight to put on them. That is not the way in which we approach the matter. We have said—I have tried to explain why this afternoon—that a number of different matters have to be taken into account and it is impossible to set out in advance the way in which those would have to interact in order to make a decision to enter the exchange rate mechanism. I am sorry to disappoint the hon. Gentleman but that is the position. That is a perfectly reasonable position for a responsible Government to take in this difficult matter.
The debate has done a number of valuable things. It has given us a useful insight into the thinking of the Opposition. I commend the hon. Member for Sedgefield (Mr. Blair) on his vigorous contribution to the debate. But the debate has also shown that there are strong countervailing arguments on this difficult question. The very fact that views have been so different from various speakers, regardless of from which side of the House they have spoken, shows that underneath the arguments there are real considerations of difficulty which work in opposite directions. It is because of that that it is not and would not be a simple decision.
One of the main questions has been about the convergence of economic policies and on that I am glad to say that there has been considerable progress. Our success in reducing inflation and bringing it closer to the rate of our partners in the EEC has been an important advance and was not present five or six years ago.
Equally, difficulties remain. There are difficulties with the dollar problem. My hon. Friend the Member for Mid-Norfolk (Mr. Ryder) drew attention to the questions which those raised for domestic American policy. But more particularly — this has been a trend throughout the debate—the position of oil and oil prices in relation to money markets generally and sterling in particular, particularly against the background of what has happened in the past week or two in the market, are central considerations. I commend the remarks of my right hon. Friend the Member for Guildford (Mr. Howell), which will repay study.
The conjunction of the oil factor with the international position of sterling as a much more widely traded and widely held currency than any other of the European countries apart from the deutschmark creates different circumstances for sterling as distinct from the currencies of other member states that have been called in aid of various arguments this evening.
The right hon. Member for Hillhead referred to Britain's semi-offshore status in relation to the EEC—
§ Mr. Stewart
I got part of the phrase right.
It is not a question of that sort of mentality. The right hon. Gentleman also referred to the last great European initiative of the Community. That was the last in time and therefore it was a pity that we could not follow it. Those are not the sort of arguments that should guide us in considering a question such as this. I hope that there will be an opening of the internal market of the EC—an area in which the United Kingdom has been one of the prime movers. But, again, that is not a matter which should be considered for symbolic reasons or as a gesture. Like every other question of this kind, the decision should be taken on its merits. It is a complex financial question with practical arguments on both sides and that is the spirit in which the Government regard it.
§ Question put:—
§ The House divided: Ayes 22, Noes 397.1008
|Division No. 55]||[7.29 pm|
|Ashdown, Paddy||Maclennan, Robert|
|Beith, A. J.||Meadowcroft, Michael|
|Bruce, Malcolm||Meyer, Sir Anthony|
|Carlile, Alexander (Montg'y)||Owen, Rt Hon Dr David|
|Freud, Clement||Penhaligon, David|
|Hancock, Michael||Steel, Rt Hon David|
|Howells, Geraint||Wainwright, R.|
|Hughes, Simon (Southwark)||Wallace, James|
|Jenkins, Rt Hon Roy (Hillh'd)||Wrigglesworth, Ian|
|Johnston, Sir Russell|
|Kennedy, Charles||Tellers for the Ayes:|
|Kirkwood, Archy||Mr. David Alton and|
|Livsey, Richard||Mr. John Cartwright.|
|Adams, Allen (Paisley N)||Bryan, Sir Paul|
|Aitken, Jonathan||Buchan, Norman|
|Alison, Rt Hon Michael||Buchanan-Smith, Rt Hon A.|
|Ancram, Michael||Buck, Sir Antony|
|Arnold, Tom||Budgen, Nick|
|Ashby, David||Bulmer, Esmond|
|Atkins, Rt Hon Sir H.||Burt, Alistair|
|Atkins, Robert (South Ribble)||Butcher, John|
|Atkinson, N. (Tottenham)||Butler, Rt Hon Sir Adam|
|Baker, Rt Hon K. (Mole Vall'y)||Callaghan, Jim (Heyw'd & M)|
|Baker, Nicholas (Dorset N)||Campbell-Savours, Dale|
|Baldry, Tony||Carlisle, John (Luton N)|
|Banks, Robert (Harrogate)||Carttiss, Michael|
|Banks, Tony (Newham NW)||Channon, Rt Hon Paul|
|Barnett, Guy||Chapman, Sydney|
|Beaumont-Dark, Anthony||Chope, Christopher|
|Beckett, Mrs Margaret||Churchill, W. S.|
|Bell, Stuart||Clark, Dr David (S Shields)|
|Bellingham, Henry||Clark, Sir W. (Croydon S)|
|Bendall, Vivian||Clarke, Rt Hon K. (Rushcliffe)|
|Benn, Rt Hon Tony||Clarke, Thomas|
|Bennett, A. (Dent'n & Red'sh)||Clay, Robert|
|Best, Keith||Clegg, Sir Walter|
|Bevan, David Gilroy||Cockeram, Eric|
|Biffen, Rt Hon John||Cocks, Rt Hon M. (Bristol S)|
|Blackburn, John||Cohen, Harry|
|Blair, Anthony||Conway, Derek|
|Body, Sir Richard||Cook, Frank (Stockton North)|
|Bonsor, Sir Nicholas||Cook, Robin F. (Livingston)|
|Boscawen, Hon Robert||Coombs, Simon|
|Bottomley, Mrs Virginia||Cope, John|
|Boyes, Roland||Corbett, Robin|
|Braine, Rt Hon Sir Bernard||Corbyn, Jeremy|
|Brandon-Bravo, Martin||Cormack, Patrick|
|Bright, Graham||Couchman, James|
|Brittan, Rt Hon Leon||Craigen, J. M.|
|Brown, Gordon (D'f'mline E)||Cranborne, Viscount|
|Brown, Hugh D. (Provan)||Critchley, Julian|
|Brown, M. (Brigg & Cl'thpes)||Crouch, David|
|Brown, N. (N'c'tle-u-Tyne E)||Crowther, Stan|
|Browne, John||Cunliffe, Lawrence|
|Currie, Mrs Edwina||Henderson, Barry|
|Davies, Ronald (Caerphilly)||Heseltine, Rt Hon Michael|
|Davis, Terry (B'ham, H'ge H'l)||Hickmet, Richard|
|Deakins, Eric||Hind, Kenneth|
|Dewar, Donald||Hirst, Michael|
|Dixon, Donald||Hogg, N. (C'nauld & Kilsyth)|
|Dormand, Jack||Holland, Sir Philip (Gedling)|
|Dorrell, Stephen||Holt, Richard|
|Douglas, Dick||Home Robertson, John|
|Douglas-Hamilton, Lord J.||Howard, Michael|
|Dubs, Alfred||Howarth, Alan (Stratf'd-on-A)|
|du Cann, Rt Hon Sir Edward||Howell, Rt Hon D. (G'ldford)|
|Dunn, Robert||Howell, Ralph (Norfolk. N)|
|Dunwoody, Hon Mrs G.||Hoyle, Douglas|
|Durant, Tony||Hubbard-Miles, Peter|
|Eadie, Alex||Hughes, Dr Mark (Durham)|
|Eastham, Ken||Hughes, Robert (Aberdeen N)|
|Ewing, Harry||Hughes, Roy (Newport East)|
|Eyre, Sir Reginald||Hughes, Sean (Knowsley S)|
|Fairbairn, Nicholas||Hunt, David (Wirral W)|
|Farr, Sir John||Hunt, John (Ravensbourne)|
|Favell, Anthony||Hunter, Andrew|
|Fenner, Mrs Peggy||Jenkin, Rt Hon Patrick|
|Field, Frank (Birkenhead)||John, Brynmor|
|Fields, T. (L'pool Broad Gn)||Jones, Barry (Alyn & Deeside)|
|Fisher, Mark||Jones, Gwilym (Cardiff N)|
|Flannery, Martin||Jones, Robert (Herts W)|
|Fletcher, Alexander||Kellett-Bowman, Mrs Elaine|
|Fookes, Miss Janet||Kershaw, Sir Anthony|
|Foot, Rt Hon Michael||Key, Robert|
|Forman, Nigel||King, Roger (B'ham N'field)|
|Forrester, John||King, Rt Hon Tom|
|Forsyth, Michael (Stirling)||Knight, Greg (Derby N)|
|Forth, Eric||Lang, Ian|
|Foster, Derek||Latham, Michael|
|Foulkes, George||Lawler, Geoffrey|
|Fowler, Rt Hon Norman||Lawson, Rt Hon Nigel|
|Fox, Marcus||Leadbitter, Ted|
|Franks, Cecil||Lee, John (Pendle)|
|Fraser, J. (Norwood)||Leigh, Edward (Gainsbor'gh)|
|Fraser, Peter (Angus East)||Leighton, Ronald|
|Freeman, Roger||Lester, Jim|
|Fry, Peter||Lewis, Sir Kenneth (Stamf'd)|
|Gale, Roger||Lightbown, David|
|Galley, Roy||Lilley, Peter|
|Gardiner, George (Reigate)||Litherland, Robert|
|Gardner, Sir Edward (Fylde)||Lloyd, Peter (Fareham)|
|Garel-Jones, Tristan||Lloyd, Tony (Stretford)|
|George, Bruce||Lofthouse, Geoffrey|
|Gilbert, Rt Hon Dr John||Lord, Michael|
|Glyn, Dr Alan||Loyden, Edward|
|Godman, Dr Norman||Lyell, Nicholas|
|Gorst, John||McCurley, Mrs Anna|
|Gould, Bryan||McDonald, Dr Oonagh|
|Gow, Ian||Macfarlane, Neil|
|Gower, Sir Raymond||MacGregor, Rt Hon John|
|Greenway, Harry||McKay, Allen (Penistone)|
|Gregory, Conal||MacKay, Andrew (Berkshire)|
|Griffiths, Sir Eldon||MacKay, John (Argyll & Bute)|
|Griffiths, Peter (Portsm'th N)||McKelvey, William|
|Grist, Ian||Maclean, David John|
|Ground, Patrick||McNair-Wilson, M. (N'bury)|
|Gummer, Rt Hon John S||McNair-Wilson, P. (New F'st)|
|Hamilton, James (M'well N)||McNamara, Kevin|
|Hamilton, Neil (Tatton)||McQuarrie, Albert|
|Hampson, Dr Keith||McTaggart, Robert|
|Hanley, Jeremy||McWilliam, John|
|Hannam, John||Major, John|
|Hargreaves, Kenneth||Malins, Humfrey|
|Harris, David||Maples, John|
|Harrison, Rt Hon Walter||Marek, Dr John|
|Harvey, Robert||Marland, Paul|
|Hawkins, C. (High Peak)||Marshall, David (Shettleston)|
|Hayes, J.||Marshall, Michael (Arundel)|
|Hayhoe, Rt Hon Barney||Martin, Michael|
|Haynes, Frank||Mason, Rt Hon Roy|
|Hayward, Robert||Mather, Carol|
|Heathcoat-Amory, David||Maxton, John|
|Heddle, John||Maxwell-Hyslop, Robin|
|Heffer, Eric S.||Mayhew, Sir Patrick|
|Maynard, Miss Joan||Skeet, Sir Trevor|
|Mellor, David||Skinner, Dennis|
|Merchant, Piers||Smith, Rt Hon J. (M'ds E)|
|Michie, William||Smith, Tim (Beaconsfield)|
|Mikardo, Ian||Soames, Hon Nicholas|
|Miller, Hal (B'grove)||Soley, Clive|
|Mills, Iain (Meriden)||Spearing, Nigel|
|Mills, Sir Peter (West Devon)||Speed, Keith|
|Mitchell, Austin (G't Grimsby)||Speller, Tony|
|Mitchell, David (Hants NW)||Spence, John|
|Moate, Roger||Spencer, Derek|
|Montgomery, Sir Fergus||Spicer, Jim (Dorset W)|
|Morris, Rt Hon A. (W'shawe)||Squire, Robin|
|Morrison, Hon P. (Chester)||Stanbrook, Ivor|
|Moynihan, Hon C.||Stanley, Rt Hon John|
|Mudd, David||Steen, Anthony|
|Neale, Gerrard||Stern, Michael|
|Nellist, David||Stevens, Lewis (Nuneaton)|
|Neubert, Michael||Stewart, Allan (Eastwood)|
|Nicholls, Patrick||Stewart, Andrew (Sherwood)|
|Norris, Steven||Stewart, Rt Hon D. (W Isles)|
|O'Neill, Martin||Stradling Thomas, Sir John|
|Onslow, Cranley||Sumberg, David|
|Oppenheim, Phillip||Tapsell, Sir Peter|
|Osborn, Sir John||Taylor, John (Solihull)|
|Page, Richard (Herts SW)||Tebbit, Rt Hon Norman|
|Park, George||Temple-Morris, Peter|
|Parkinson, Rt Hon Cecil||Terlezki, Stefan|
|Parris, Matthew||Thatcher, Rt Hon Mrs M|
|Patchett, Terry||Thomas, Dafydd (Merioneth)|
|Patten, Christopher (Bath)||Thomas, Rt Hon Peter|
|Pawsey, James||Thomas, Dr R. (Carmarthen)|
|Peacock, Mrs Elizabeth||Thompson, Donald (Calder V)|
|Pendry, Tom||Thompson, Patrick (N'ich N)|
|Percival, Rt Hon Sir Ian||Thorne, Neil (Ilford S)|
|Pike, Peter||Thorne, Stan (Preston)|
|Pollock, Alexander||Thornton, Malcolm|
|Portillo, Michael||Thurnham, Peter|
|Powell, Raymond (Ogmore)||Tinn, James|
|Powell, William (Corby)||Townend, John (Bridlington)|
|Powley, John||Townsend, Cyril D. (B'heath)|
|Prentice, Rt Hon Reg||Tracey, Richard|
|Prescott, John||Trotter, Neville|
|Proctor, K. Harvey||Twinn, Dr Ian|
|Radice, Giles||Viggers, Peter|
|Raffan, Keith||Waddington, David|
|Randall, Stuart||Wakeham, Rt Hon John|
|Rathbone, Tim||Waldegrave, Hon William|
|Rees, Rt Hon M. (Leeds S)||Walden, George|
|Rhodes James, Robert||Walker, Bill (T'side N)|
|Richardson, Ms Jo||Waller, Gary|
|Ridley, Rt Hon Nicholas||Wardell, Gareth (Gower)|
|Ridsdale, Sir Julian||Wardle, C. (Bexhill)|
|Rifkind, Rt Hon Malcolm||Wareing, Robert|
|Roberts, Ernest (Hackney N)||Warren, Kenneth|
|Roberts, Wyn (Conwy)||Watson, John|
|Robertson, George||Watts, John|
|Robinson, G. (Coventry NW)||Weetch, Ken|
|Robinson, Mark (N'port W)||Wells, Bowen (Hertford)|
|Roe, Mrs Marion||Wheeler, John|
|Rooker, J. W.||White, James|
|Rossi, Sir Hugh||Whitney, Raymond|
|Rost, Peter||Wiggin, Jerry|
|Rowe, Andrew||Wigley, Dafydd|
|Rumbold, Mrs Angela||Williams, Rt Hon A.|
|Ryder, Richard||Wilson, Gordon|
|Sackville, Hon Thomas||Winnick, David|
|Sainsbury, Hon Timothy||Winterton, Mrs Ann|
|Sayeed, Jonathan||Winterton, Nicholas|
|Shaw, Sir Michael (Scarb')||Wolfson, Mark|
|Sheerman, Barry||Wood, Timothy|
|Sheldon, Rt Hon R.||Woodcock, Michael|
|Shelton, William (Streatham)||Yeo, Tim|
|Shepherd, Colin (Hereford)||Young, David (Bolton SE)|
|Shersby, Michael||Younger, Rt Hon George|
|Shore, Rt Hon Peter|
|Short, Ms Clare (Ladywood)||Tellers for the Noes:|
|Silkin, Rt Hon J.||Mr. Mark Lennox-Boyd and|
|Silvester, Fred||Mr. Francis Maude|
§ Question accordingly negatived.