§ 8. Mr. Squire
To ask the Chancellor of the Exchequer what effect the entry of Spain has had on her Majesty's Government's policy on membership of the European monetary system.
§ Mr. Squire
In our mutual enthusiasm for joining the exchange rate mechanism, does my right hon. Friend agree that Spain has an inflation rate of nearly 7 per cent. at present and will he confirm that those countries that are within the exchange rate mechanism and have not yet abolished capital controls will possibly face major pressures on their interest rates when they finally do so?
§ Mr. Lawson
Of course, it is very important that all membr countries of the European Community abolish exchange controls in line with the directive which was agreed last year, and as my hon. Friend will know, most of the countries have to do that by 1 July 1990, including in particular France and Italy. It will be certainly a matter—as I told the Select Committee when I appeared before it on this subject—of very great interest to see how EMS fares after this abolition of exchange controls has taken place. I believe—and the Governor of the Bank of England stated when he gave evidence his belief—that the EMS would successfully survive that. It may be that some modifications will be required, but the EMS will successfully survive the removal of exchange controls by France, Italy and others. We shall have to see. The proof of the pudding will be in the eating.
§ Mr. Robert Sheldon
Whatever fears we may justifiably have about the future economic policy of this country in the event of our joining the exchange rate mechanism, is the Chancellor aware that the greatest fear is that we may enter at too high a rate?
§ Mr. Lawson
I realise that the Opposition are always in favour of devaluation. I know that they have a policy which is in some way similar to ours, concerning the exchange rate mechanism, but in one particular respect, totally different. They too wish to join the exchange rate mechanism of the EMS and they too believe that there are one or two conditions precedent, but their conditions are to secure the most inflationary environment they can, by devaluation of sterling first, and a change in the arrangements of the EMS to ensure that there is an inflationary climate throughout Europe. That is something which we wholly reject.
§ Mr. Butterfill
Does my right hon. Friend agree that to suggest that we should have to have a withholding tax as the price for the abolition of exchange controls displays an extraordinary lack of confidence in the operation of a free market? Will he confirm that he will resist that ridiculous proposal?
§ M. Lawson
I can confirm not only that I will resist this proposal, which would be totally harmful, I can confirm that I have been resisting it, and so successfully that there are now a large number of other countries that are resisting it. I am absolutely confident that no such European Community withholding tax will ever come into place.