HC Deb 27 March 1990 vol 170 cc365-75

2 am

Mr. Hugh Dykes (Harrow, East)

That we can move from transport in London to the European monetary system in one fell swoop, in the blink of an eyelid, is another indication of how this original parliamentary institution deals with so many subjects on the Adjournment. I am grateful for the opportunity to raise the very important matter of the future of this country in the exchange rate mechanism of the European monetary system, but I am especially grateful to my hon. Friend the Economic Secretary to the Treasury for appearing at this late—or early—hour to respond to points made by myself and, perhaps, by other hon. Members. All Treasury Ministers are known to have an excessive workload during the day, and they work in the evenings as well—and now the early morning, too. At this late hour I shall try to be brief, despite the fact that this is a very important area of policy.

As the debate has ebbed and flowed, in this House—the mother of Parliaments—in the European Parliament and in other institutions of the European Community, this area of policy has been in the news. It has been dealt with in a very major way in the British press. I am thinking in particular of the excellent contributions of the Financial Times. As in so many other areas of enlightened policy, that excellent newspaper is a most enthusiastic exponent of our immediate, or very early, accession to the exchange rate mechanism, and of the theory that yesterday would have been even better. I think that I am right in saying that.

I assume that that is more or less the policy of Her Majesty's Government, including my hon. Friend the Economic Secretary and his colleagues in the Treasury. Indeed, the Chancellor gave a notable and interesting interview on television on Sunday, in which he emphasised that the rate of inflation was the crucial factor in the timing of our joining the exchange rate mechanism. I do not remember his exact words, but I think that the implication was "as soon as possible". He sounded enthusiastic, although he uttered a word of caution about our inflation rate differential.

That is obviously a problem, so much so that after the television interview the press and, I think, hon. Members, perhaps from all parties, took it as being the primordial condition and assumed that other questions concerning our formal joining of the EMS had faded into the background. That is my understanding of what I heard. I hope that it is not a wild exaggeration and that it does not indicate a misunderstanding of the realities of a complicated debate.

In this country, however, the debate seems to have become unnecessarily complicated. Certain people seem to be agonising about when we should take this step. I was very struck by the words of the former Chancellor of the Exchequer, my right hon. Friend the Member for Blaby (Mr. Lawson), when he referred to this matter on Monday, the last day of the Budget debate. His comments attracted considerable attention. Referring to the Chancellor's broadcast the previous day, he said: Again, my right hon. Friend, in his Budget statement and again in his broadcast yesterday"— that was on Sunday— very firmly restated the Government's commitment to sterling joining the exchange rate mechanism of the EMS. But my concern is that the timetable which is envisaged by the Government might be somewhat too leisurely for the circumstances in which we find ourselves. In my judgement, it is a pity that we did not join some time ago, but we did not, and that is that. But now we really cannot afford to take the risks involved in a leisurely timetable. It may be that we should initially join within the framework of the wider bands before subsequently moving to the narrower bands, but the whole of the Goverment's commitment against inflation is potentially at risk. There is an exposed flank, and that is why I could favour the early entry of sterling, as I said, possibly initially with the wider bands, into the exchange rate mechanism of the EMS".— [Official Report, 26 March 1990; Vol. 170, c. 62.] There was much more in that vein from other hon. Members in the debate.

When the decision will be made and what is the reason for further delay are now the central concerns. The matter came up again at Question Time yesterday when the other elements in the policy for delay were raised, whether justified or not—the creation of greater competition in the Community and the need for the residual capital controls to be removed, matters which have to be taken care of before Britain can join the ERM.

A few weeks ago an additional condition was interposed in this increasingly complex and somewhat bewildering debate—the processing of, and perhaps even the conclusion of, German monetary union and reunification of the two parts of Germany before we could proceed further. That seems subsequently to have lapsed, and now there seems to be a suggestion that that may not be such a difficult condition after all.

I am grateful to Mr. Speaker and the authorities of the House for allowing me to initiate this debate, the purpose of which is to try to elucidate from my hon. Friend the Economic Secretary precisely the point we have now reached. There is confusion among our partners and friends in the Community, as we see from the foreign newspapers and the utterances of representatives of the Commission in Brussels and members of the European Parliament, and from the bewilderment in Britain too, about what we are about.

I do not think that there is much debate now about the modalities and the attractions of the EMS. We are, after all, part members of it. We share in the reserve sharing system, and so on, and the implication is that we shall join fully as soon as possible. We know what has been done and launched under the Delors report with the central bank governors, and so on, all at the specific request of previous European Councils and summits and the Council of Ministers, not something that was launched by the Commission as a malevolent, perverse exercise of its own with nobody asking for it. If I remember rightly, Delors was enjoined, with his colleagues, to produce a detailed blueprint—those are the words used in the request for that complex and impressive examination. Yet when that was produced by Mr. Delors, whom some denounce as a dangerous Marxist—on further examination that proves to be untrue; he is a distinguished high functionary of the French public service and now an equally distinguished and important servant and President of the Commission—he was castigated in some quarters for producing such a detailed report, as though that were an unwarranted intrusion into the sovereignty and national financial affairs of the member states. But that does not seem to have caused any problem in the other member states, and I think particularly of Spain, with its enthusiasm for most aspects of the Community and its decision to go in on the basis of an inflation rate similar to ours.

The questions in Britain remain: what is our policy, why the delay, and are we locked into delay for its own sake? Ominously, we have increasing illustrations of the danger of high interest rates adding to the prevailing rate of inflation rather than reducing it, and so the danger is that we are locked into a policy because we have said that high interest rates are our only policy of control. We cannot get out of that. We are waiting for something else to turn up, or for the inflation rate to come down, but perhaps it will not, because other forces are keeping it up. That is also a primordial condition of the delay which causes further excessive delay in our joining the exchange rate mechanism.

Mr. Nigel Spearing (Newham, South)

Does the hon. Gentleman agree that there are three areas of debate: first, on principle; secondly, on conditions; and, thirdly, on timing? Does he also agree that there has not been much debate on the principle? May I draw his attention to the speech by my hon. Friend the Member for Newham, North-East (Mr. Leighton) yesterday? He took a diametrically opposed view to that of the right hon. Member for Blaby (Mr. Lawson), the former Chancellor of the Exchequer. Does the hon. Gentleman wish to comment on anything that my hon. Friend the Member for Newham, North-East said about principle? I thought that my hon. Friend made a powerful case for the economic principle.

Mr. Dykes

I do not agree, because I think that the principle has been thoroughly and fundamentally debated at all stages.

Mr. Spearing

Not in this House.

Mr. Dykes

Yes, very much so, through every stage of its parliamentary consideration, within the institutions of the Community, in the inter-governmental relationship with other member Governments of the Community since the Stuttgart declaration of March 1983, throughout the statements made in the House, the subsequent debates, and throughout the lengthy and elaborate process of the Single European Act. Although the single market is the first item in the list of items in the Single European Act, it is not the only one. According to juridical examination of the seven items, they are all equal, and economic and monetary union is one of them. That was ratified by the House as an addition to the treaty.

There is no question of any gaps or subterfuge by the Government or anyone else, nor any question of lack of debate in this place about all these matters. The principle seems to be greeted with enormous and almost universal enthusiasm in the House and outside, although that is somewhat precluded by the hon. Member for Newham, South (Mr. Spearing), who is the Chairman of the Scrutiny Committee and one of the last hon. Members to remain unenthusiastic about our membership of the European Community. We know that, and we respect his scholarship, research and study of such matters, but we think that he is out of date and has been overtaken by events. Most people in the Labour party also now think that, because they too have changed, whether for genuine or artificial reasons, or for a mixture of both.

When one studies what has happened under the exchange rate mechanism—and, predictably, one would expect the Delors report to be enthusiastic about it—one realises how well it has worked. It has also worked for the weaker members of the Community. I remember some of the British newspapers—the Daily Express and the Sunday Express used to go berserk about this subject but they have calmed down a bit now—said that Italy could not possibly stay in the European monetary system because the Italians could not organise things, which is most offensive. It is not true either. Italy is a rather well-run country, and we ought to learn more about it as it could give us some good advice about how to do things here. They said that the lire was too weak. But not a bit of it—we have seen what has happened.

I shall quote from page 2 of the Delors report—and the House will recognise his natural enthusiasm; after all, he and his committee made all these proposals and suggestions. It says: Within the framework of the EMS the participants in the exchange rate mechanism have succeeded in creating a zone of increasing monetary stability at the same time as gradually relaxing capital controls. The exchange rate constraints"— which are what we are talking about when we mention anti-inflation discipline and all the rest of it, and it is a pity that we are not right in there, as 100 per cent. members— has greatly helped those participating countries with relatively high rates of inflation in gearing their policies, notably monetary policy, to the objective of price stability, thereby laying the foundations for both a downward convergence of inflation rates and the attainment of a high degree of exchange rate stability. This, in turn, has helped moderate cost increases in many countries, and has led to an improvement in overall economic performance. Moreover, reduced uncertainty regarding exchange rate developments and the fact that the parities of the participating currencies have not been allowed to depart significantly from what is appropriate in the light of economic fundamentals have protected intra-European trade from excessive exchange rate volatility.

I think that I am right in saying that a few years ago Holland too had a high rate of inflation. According to various learned articles in the Dutch papers—and ours—it was caused by huge social costs. I hope that the Whip, my hon. Friend the Member for Loughborough (Mr. Dorrell), with his knowledge of Holland, will confirm that inflation there is now running at 1.5 or 2 per cent. Perhaps there is a lesson for us in that.

When I read out the passage from the Delors report, I did not hear anyone say that it was an exaggerated, hysterical description of an unsuccessful system. If we accept it, it underscores the view expressed by the former Chancellor on Monday—that is is a tragedy that we did not join the exchange rate mechanism long ago. I still do not know why we decided to establish some of the Madrid conditions.

I support the Government's view that there should be reasonable primary conditions for our entry, if they appear rational; but, when I look back on all the ebb and flow of subsequent developments, I wonder whether that is so. By joining, would we not have avoided, at least partly, our present high interest rates and ominously high inflation? We seem to be stuck in a corner; we continue to say, for some curious chemical reason—I should love to be able to work it out rationally—that there is still no good reason for joining a mechanism that has been so enormously, tangibly and incontrovertibly successful for all European member states, including the weaker and newer ones such as Spain.

Surely, given the enthusiasm of those countries, we should follow their example as soon as possible, despite our mistake of having delayed unnecessarily so far. I look forward to hearing my hon. Friend the Economic Secretary reassure us—and, indeed, add to an already spectacular career—by getting carried away and announcing a putative future date on which we can join the ERM with no further delay. I am sure that, in his heart of hearts, he too regards the present position as unsatisfactory and frustrating, and would like to make his name by lending it to what we would call the Ryder declaration.

2.16 am
Mr. Chris Smith (Islington, South and Finsbury)

I begin by congratulating the hon. Member for Harrow, East (Mr. Dykes), not only on his success in securing a slot for such an important debate—albeit in the early hours of the morning—but on his recent persistence in raising the issue. He has already intervened in the Budget debate, and this afternoon he asked the Prime Minister a question which produced an extremely interesting response. He also chose exactly the right time of day—I was able to travel to Nottingham to deliver a speech to the Royal Economic Society earlier this evening about this very issue.

I am not surprised that the hon. Gentleman should describe the confusion that he felt— and thought that the world felt—about the current stance of the British Government, each of whose members seems to tell a slightly different tale. First, the Chancellor himself said clearly in his Budget speech: Our commitment to do so"— that is, to take sterling into the exchange rate mechanism— was set out at Madrid. It remains firm"— and then the qualifying phraseology comes in: and the conditions for entry remain unchanged."—[Official Report, 20 March 1990; Vol. 169, c. 1013.] That may seem clear enough, but in a television interview at the weekend the Chancellor seemed to become rather more positive about British entry than he had been in the cold, formal Budget statement. After the Chancellor's more enthusiastic references in his television interview, however, the Prime Minister seemed today to be distancing herself, yet again, from a firm commitment to British entry.

There was a new version of the royal "we" in the Prime Minister's answer. I think that I quote her correctly as saying, "In my first decade as Prime Minister I was unable to enter the exchange rate mechanism." Identification of the Prime Minister with the rest of the world by the use of the word "we" is one thing. Identification of the Prime Minister in her own person with the currency of this country is something else. However, it was clear from what she said that she regards the conditions that she laid down at Madrid as being, as yet, unfulfilled and that she is reiterating them with ever greater ferocity.

What are those conditions? The first is that the rate of inflation must come down. The Government have never specified what the rate of inflation must be before they believe it right to join the exchange rate mechanism. They have said that inflation will increase over the next few months, that it will reach a plateau of around 7 per cent. for the rest of the year and that if their predictions turn out for once to be correct, inflation will fall to around 5 per cent.—but it will still be above the European average—in the next financial year. However, the Government have not said at what point on that scale, if at all, they would regard it as right for Britain to join the exchange rate mechanism.

Secondly, there is the free movement of capital condition. I was surprised when the Prime Minister laid such stress upon that condition this afternoon. The Prime Minister regards the French as the principal perpetrators of evil in that respect, but considerable progress has been made in the past few months in the rest of the European Economic Community and especially by the French. The condition relative to free movement of capital has been almost fully met, yet it was again trotted out by the Prime Minister as the principal condition that she thought had not been met.

Behind those two stated conditions, relating to inflation and to the free movement of capital, there is perhaps another, which the Prime Minister is reported in the press as having stated privately though not in public—the fear that unification of the two German states, leading to German currency union, will have an impact in the short term on the deutschmark and will thus create a strain on the existing exchange rate mechanism. We know from press reports that that fear may have been in her mind but nowhere has she stated it.

I hope that the Economic Secretary will say at what point, in terms of inflation, the Government believe that it would be right to join the exchange rate mechanism. I hope that he will also say whether the Government believe that progress on the free movement of capital has gone far enough and that that condition has been met. I hope, too, that he will make clear where precisely the Government stand in relation to the convergence of the deutschmark and the ostmark in terms of its impact on the exchange rate mechanism.

It seems clear that the conditions being reiterated and amplified by the Prime Minister at every stage of the debate have either been fulfilled or are incapable of fulfilment in the terms in which the right hon. Lady states them. The only logical and practical conclusion to draw is that she has decided that she does not want sterling to enter the exchange rate mechanism at any foreseeable stage.

By contrast, the position of the Opposition is clear. We wish to commence discussions for the entry of sterling into the ERM immediately. We have said that clearly and we shall continue to urge the Government to undertake it. We would wish four principles to form the content of the negotiation and discussion. They are, as clearly stated, entry at the right rate, adequate swap arrangements between the central banks to ensure protection against speculation, policies for growth agreed between the countries of the European Community and a proper regional policy to ensure that imbalances between different countries can be remedied. Those are matters which any sensible Government contemplating entry of the currency into a fixed exchange rate mechanism would wish to discuss in an amicable fashion with our European colleagues.

Mr. A. J. Beith (Berwick-upon-Tweed)

I have agreed with every word the hon. Gentleman uttered until his last statement, and perhaps I could even agree with that. I detect a change of emphasis of the kind that he was trying to analyse in the Government when he said that he was looking for policies for growth as one of the conditions. Is this the end of the reflationary condition? Is it no longer a condition of Labour's now welcome support for the ERM that it should become an engine of reflation rather than an institution designed to prevent inflation?

Mr. Smith

An argument to which I shall be coming for entry into the ERM is that it provides a counter-inflationary discipline. I would draw a distinction between an economic mechanism that is counter-inflationary and one that is deflationary. Entry into the ERM assists in acting as a counter-inflationary discipline on the internal economy. In association with that, however, we would wish to ensure that balanced growth—growth can be unbalanced and bring problems—policies are adopted in common across the whole of Europe. One must ensure that in seeking to achieve counter-inflationary pressure one is not simultaneously achieving deflationary pressure. That danger exists unless at the same time there are common policies for balanced growth.

We do not regard the principles that we have adumbrated and that we wish to see as part of the discussion with our European colleagues as obstacles we are placing in the way of membership. We regard them as prudent items for friendly discussion. In our discussions so far, Governments and colleagues in EC countries have readily agreed with our objectives.

The benefits of exchange rate mechanism membership are clear. First, there is the benefit of stability for industry in having an exchange rate on which it can plan. The verdict of industry itself is clear. An interesting poll was reported in Financial Weekly in January. The magazine took a poll of chief executives, finance directors and executives responsible for the financial strategy of companies with a total market value of £152 billion, which represented 32.5 per cent. of the market capitalisation of the whole British-quoted sector. The report of the poll continues: Their verdict was an almost unanimous 'yes' to joining the ERM, with 97.2 per cent. by market capitalisation, and 91.8 per cent. by the number of companies questioned, in favour. It is staggering that there should be such unanimous support within British industry for British participation in the exchange rate mechanism.

That view is confirmed in private discussion after private discussion that I have had with people responsible for running companies in Britain and there is, of course, overwhelming support from the other side of British industry by the Trades Union Congress. That must show that there is a clear view coming from British industry in support of membership.

Mr. Jim Lester (Broxtowe)

Industry wishes to take advantage of the single market, which is the declared policy of the Government. It is not logical to believe that one cannot take part in a single market unless there is some relationship between currencies. It is impossible to plan, design and take advantage unless one knows what the exchange rate will be for a considerable period.

Mr. Smith

The hon. Gentleman is right. I draw his attention to my recent conversation with one of the directors of BP, whom I asked whether, as a director of one of Britain's premier companies, he would prefer a low exchange rate or a stable exchange rate. He said unequivocally that he would prefer to have a stable exchange rate—a view which is shared across British industry by firms large and small.

Mr. Spearing

Everyone would agree that stability in exchange rates is an aid to trade and industry, but does my hon. Friend agree that in the last resort the exchange rate is an expression of the relative strengths of different economies as expressed in the value of their own currencies? If the economy of a country is, alas, for any combination of reasons not so strong as it should be and perhaps getting weaker, is there not a risk that, whatever the form of mechanism devised, there must eventually be some break point equivalent to the old-style devaluation with all its traumas and disadvantages?

Mr. Smith

My hon. Friend, who enjoys considerable respect in the House for his sterling work as Chairman of the Select Committee on European Legislation. is an assiduous follower of our discussions on this and related issues. I confess, however, that I do not entirely agree with the point that he has raised because I believe that it ignores a number of factors. First, within the existing exchange rate mechanism, especially if we go in as the former Chancellor, the right hon. Member for Blaby (Mr. Lawson), wishes—on broad bands rather than narrow bands at the start—there is a capacity for adjustment. Only if we got to an eventual grid-locked exchange rate mechanism, which in effect would land us in the realm of a common currency, would it become impossible to alter between exchange rates.

Perhaps more important than that, the relative weakness or strength of different currencies has more to do with confidence and credibility than with any particular pragmatic, identifiable economic factors. The linking of a particular currency with a basket of other currencies can engender an enormous amount of confidence and credibility which would not otherwise be there. I draw my hon. Friend's attention, for example, to what has happened with some of the smaller currencies in the world that have been tied explicitly to other currencies. The most obvious examples are the Hong Kong dollar, which is explicitly tied to the United States dollar, and the Austrian schilling, which is explicitly tied to the deutschmark. In all such cases, very considerable economic benefit has been derived from the confidence which the linkage has generated in the economy concerned.

Of course, sterling is in a different league and we have to make a judgment about the impact of sterling's entry into a much wider currency accumulation such as the exchange rate mechanism. It is our judgment that the entry of sterling into the ERM would be sufficiently economically beneficial to outweigh the potential disadvantage of yielding up the ability automatically, independently and unilaterally to devalue.

Mr. Dykes

Is it not the accurate reflection of the supreme attraction of so doing that the system has, above all, helped the weaker, deficit-oriented members coming into it and remaining in it—that would include Britain if we joined now with a somewhat uncomfortable deficit—rather than the main strong currency, the deutschmark in Germany, and the other strong one? It has been particularly beneficial to the weaker ones, which have become stronger as a result of full membership.

Mr. Smith

The hon. Member is right, because the tendency within the exchange rate mechanism, especially in recent years as the number of fluctuations within the mechanism has decreased, has been for the weaker currencies and economies to be strengthened by membership rather than for the stronger currencies and economies to be weakened. That, obviously, is one of the major reasons why we believe that Britain would benefit. I note the implication in what the hon. Gentleman has just said that our economy would indeed count as one of the weaker economies in the exchange rate mechanism. That is a point that we have been urging the Government to accept and admit, but we seem to be having little success with those on the Treasury Bench.

The benefits of ERM are these. First, it would create stability for industry. Secondly, it would strengthen protection against speculation. The ability that membership of the exchange rate mechanism gives for one central bank to wrap the strength of other central banks around its efforts to protect its own currency is extremely important. It is not without its burdens as well as its benefits, but it is none the less useful. Thirdly, as I mentioned in response to the hon. Member for Berwick-upon-Tweed (Mr. Beith), the exchange rate mechanism would provide the surest anchor against inflation that we could seek.

Fourthly, and perhaps most important, membership of the ERM would formalise the position that we have in any case, whereby our economic sovereignty is to some extent circumscribed by the actions of other countries and currencies. It cannot have escaped anyone's notice that when the Bundesbank put up its interest rates at the beginning of October last year, our interest rates had to follow within two hours of that decision.

The reality is that the global economy is far more inter-dependent than it was 10, 20 or 50 years ago, and that reality should be recognised within the structures in which we play a part. ERM membership would give us a seat at the table and enable us to participate in the important decisions from which we are excluded but which have an inevitable impact on our economy.

The exchange rate mechanism offers no panacea for our economic problems, nor would it give us an instant solution to our inflation problem, our balance of payments difficulties or the high interest rate policy upon which the Government are so dependent. Nevertheless, it offers considerable economic benefits of stability, strength, protection against speculation and participation in crucial economic decisions and it would impose a discipline within the internal economy. In our view, the benefits of exchange rate mechanism membership and participation would enormously outweigh the burden which that discipline would impose.

There is a real danger that if the Government delay too long in making the necessary approaches for Britain to join the ERM, we shall be left outside the club while it develops, changes and progresses into a different shape, leaving us totally isolated on the sidelines and removing any of the potential benefits which increasing economic co-operation across Europe can and must offer to the British economy.

2.44 am
The Economic Secretary to the Treasury (Mr. Richard Ryder)

I thank my hon. Friend the Member for Harrow, East (Mr. Dykes) for his kind words at the outset of his speech. As to the enticing words at the end, I must resist any temptation to make a Ryder declaration tonight. I assure him that no dikes will be broken. I also congratulate my hon. Friend on initiating the debate. As the hon. Member for Islington, South and Finsbury (Mr. Smith) said, it is appropriate that he should have done so, in view of his long-standing and consistent interest in the issue, the most recent example of which we heard at Prime Minister's Question Time earlier today.

There has been some speculation in the past few days about the timing of the United Kingdom's entry into the exchange rate mechanism. Let me make this very clear. It is not a question of whether sterling will join; it is simply a question of when. The Government believe that, in the right context, membership will be helpful to us, but the context must be right.

As the House knows, the Prime Minister set out the conditions for our entry clearly when she returned from Madrid last June. She said then that we will join the ERM when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community and real progress has been made towards completion of the single market, and when there is freedom of financial services and strengthened competition policy. Those conditions still stand—and my right hon. Friend the Chancellor of the Exchequer reaffirmed them only last week in his Budget speech. We shall not join the mechanism until they have been met.

The hon. Member for Islington, South and Finsbury and my hon. Friend the Member for Harrow, East raised the question whether German monetary union would have any bearing on the timing of our entry into the ERM. The Germans have not yet taken any decisions on the details of monetary union between east and west, much less announced them, but I am sure that the German authorities are well aware of the need to manage the operation in a way that does not lead to higher inflation or disrupt the markets or the ERM. Therefore, the latest developments in Germany should not affect sterling's entry, so our conditions remain unchanged. They have not altered one iota.

Mr. Dykes

Can my hon. Friend add that the Government do not intend to add any additional conditions to our joining the ERM as time goes on?

Mr. Ryder

The conditions were set out clearly at Madrid. Those conditions still stand, and once they have been met, they will enable us to enter the ERM.

Since June, the Community has advanced in a number of the areas that the Prime Minister listed after Madrid. All those countries required to abolish their exchange controls by 1 July 1990 under the 1988 capital liberalisation directive have now done so, apart from Italy. France lifted its remaining controls on 1 January, while Belgium and Luxembourg announced the end of their two-tier exchange market earlier this month, well ahead of the 1992 deadline they had been set. Italy is reported to be aiming to remove all its controls by May. Progress has also been made on competition policy and on liberalisation of financial services. But further important decisions still need to be taken. For example, as yet only 60 per cent. of the measures contained in the original White Paper on the single market have been agreed at Community level. In the financial services area, the draft investment services directive is still under discussion and the associated capital adequacy directive has not yet been adopted by the Commission. Above all, we need to make more progress in reducing inflation here at home.

Against that background, it would be foolish to attempt to make any precise prediction about the timing of sterling's entry. However, my hon. Friend the Member for Harrow, East will be well aware that one of the elements in the so-called stage 1 measures recommended by the Delors committee in its report on economic and monetary union was that all Community currencies should be included in the exchange rate mechanism and that the same rules should apply to each. The Government have fully endorsed that section of the committee's report, so there can be no doubt that sterling will enter the mechanism during stage 1, which begins on 1 July this year.

As my right hon. Friend the Chancellor told the House yesterday in the last speech in the Budget debate, progress is being made towards entry, and join we will, once the conditions that the Prime Minister set out at Madrid have been met.

Mr. Beith

As the Minister is aware, I cannot make my own speech because I have a debate later. I merely wanted to inquire whether the Chancellor's forecast of much slower progress in bringing down inflation will lead to a long delay in entry or a recognition that membership might assist us in defeating inflation.

Mr. Ryder

By a happy chance, I happen to have a transcript with me of what my right hon. Friend the Chancellor of the Exchequer said. The hon. Gentleman seems to be referring to the interview that the Chancellor gave on the television at the weekend. My right hon. Friend was asked by Jonathan Dimbleby about the ERM and whether the reduction in inflation to 5 per cent. or thereabouts would constitute, for you, a substantial reduction? My right hon. Friend replied: Well, it is a large reduction. I think it.… the really important question is not of itself the reduction of our inflation but the fact that our inflation rate and the inflation rate of our European partners should be proximate. If their inflation rate was all about the same as ours at the moment, then the conditions effectively would probably be met. It is the proximation of our inflation rate to theirs that is the most important factor. That gives the hon. Gentleman the reply that he sought.

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