HC Deb 24 September 1992 vol 212 cc2-116
Madam Speaker

We now come to the motion on United Kingdom economic policy—[Interruption.] Order. I am delighted to note that the House has returned in a good mood. Before we begin, I must announce that I have selected the amendment standing in the name of the right hon. and learned Member the Leader of the Opposition—[Interruption.] Order. These are important announcements.

The House will not be surprised to hear that many of those hon. Members who wish to speak will be disappointed. Therefore, I must put a 10-minute limit on speeches between 6 and 8 pm. However, I make a special plea to those right hon. and hon. Members who speak outside that time to restrict the length of their speeches. We need to hear a variety of opinions in this House and I expect the co-operation of the House in ensuring that that happens.

2.37 pm
The Prime Minister (Mr. John Major)

I beg to move, That this House expresses its support for the economic policy of Her Majesty's Government.

Following the developments in the foreign exchange markets over the past weeks, I thought it right to recall Parliament to debate the present position. The essential conditions for Britain's economic success are low inflation, low taxes, free trade and freedom from excessive state interference. I am happy to reaffirm those principles today. The Government stand for a low-inflation, low-tax economy—and so, I believe, do the British people. That is why, five months ago, they made their choice and we sit here and the Labour party sits on the Opposition Benches.

We joined the exchange rate mechanism in 1990 to help to bring down the rate of inflation in this country. British industry supported us in that decision; indeed, it urged us to join believing that, on balance, it would help to stabilise exchange rates, bring down inflation and bring down interest rates from the high British level, which then applied, to the much lower European levels. Of course, during the period of our membership, interest rates fell from 15 to 10 per cent.

I congratulate industry on its magnificent response in the battle against inflation. I know that it has not been easy, but, against a difficult background, exports have risen to record levels, costs have been controlled and productivity has soared. It was not just industry which supported entry into the ERM—so did commerce, the City, most trade unions, the TUC and the Opposition parties in this House.

The Leader of the Opposition, whom I warmly welcome to his new responsibilities, was consistent in his support of the exchange rate mechanism. When we joined it, the right hon. and learned Gentleman supported us, and agreed. When I announced the exchange rate central figure the right hon. and learned Gentleman was generous enough to agree. When, last week, I said that we needed reforms because of the fault lines that had become apparent, the right hon. and learned Gentleman agreed that reform was needed. I congratulate him on his consistency, even though on this issue the House has been not just a debating Chamber but an echo chamber.

Now, of course, we hear most loudly from those people who were critics of the exchange rate mechanism. They come from all sides and every party. My right hon. Friend Lord Tebbit, I understand, says that the Government were, I think the expression is, "dragged in" by the then Chancellor. Now we all know my right hon. Friend Lord Tebbit. He is an old friend to us all. I admire him as a man of great courage, a fighter, a bruiser. He likes to bite your ankles, even if you are not walking up his pathway. Yet even my right hon. Friend Lord Tebbit lost many battles with my formidable predecessor. Despite this, according to Lord Tebbit, even my formidable predecessor. whose convictions and firmness of purpose are everywhere admired, was somehow dragged into the exchange rate mechanism by her new Chancellor. Ah, yes, I remember it well.

Since we joined the exchange rate mechanism we have brought inflation, which was rising to 11 per cent., down to nearly 3.5 per cent., and falling. That is an achievement for which my right hon. Friend the Chancellor of the Exchequer deserves to be warmly congratulated, so let me do so and let me say this: I take full responsibility for the actions and policies of my Chancellor.

In the exceptional circumstances of last week, we were obliged to suspend our membership of the exchange rate mechanism. In the circumstances, there was no choice. No mechanism could have survived the market's attack on the scale that occurred last Wednesday. One after another—not just sterling—the currencies of Europe came under fire. We need to see that against the background of events world wide: a referendum in France, whose outcome was in doubt, and great economic difficulties in Germany where interest rate levels were at their highest level for a decade. Those strains were increased by a slowdown across Europe and the falling exchange rate of the dollar. That speculative attack turned first to the lira, which was forced to devalue and subsequently to step outside the exchange rate mechanism.

It created havoc beyond the exchange rate mechanism—in the Scandinavian countries, where overnight interest rates in Sweden touched 500 per cent. The market, encouraged by injudicious comments about realignment which should never have been made, then turned on sterling. In such circumstances, there could be only one response: to defend the pound with foreign exchange reserves and then to raise interest rates. That is what we did, but the severity of the attack compelled us to leave the mechanism. Other currencies, too, have come under attack and suffered varying degrees of damage. I do not wish to understate the consequences of this event.

Let me turn first to the exchange rate mechanism itself. I do not see that we could readily return to the mechanism without dealing with the problems that have been thrown up in the past fortnight. These need careful examination and consideration before we can decide whether such a mechanism can be made to work to the benefit of all its members. Some fundamentalists say that it cannot. Other fundamentalists say we should pop straight back in.

Let me say bluntly to the House that I have no intention of being bound to either course without a proper examination of where future British interests lie. My expectation is that co-operation is a better way, if it can be seen to be adequate, and no one should doubt that we will examine carefully whether a reformed mechanism can be made to work. But I do not believe that we shall be able to go back into the mechanism soon, or into the same mechanism that we left last week. My right hon. Friend the Chancellor of the Exchequer has already made our criticisms very clear to other European Finance Ministers, and I will be doing so at the European summit next month.

But inside or outside the exchange rate mechanism, the Government's economic policy must retain the same objectives. Our ambitions to bring inflation down steadily but surely during the lifetime of this Parliament were spelled out in the last Budget, and that remains our strategy. Thus far, our anti-inflation strategy has succeeded more spectacularly than anyone in the Opposition ever believed possible.

Outside the exchange rate mechanism, the conduct of monetary policy cannot, indeed should not, be exactly the same. We must have regard to a range of indicators of monetary conditions to make sure that our objectives on inflation in particular are not at risk. These will include our existing narrow money target, the behaviour of broad money and asset prices and, of course, the exchange rate. Nobody should believe that a floating exchange rate is a free meal, always allowing interest rates to fall to a very low level.

Mr. Alex Salmond (Banff and Buchan)

The Prime Minister spoke about fault lines in the exchange rate mechanism. When did he first discover them? Did his Chancellor, who we now understand is a long-term sceptic of the ERM, ever inform the Prime Minister of his doubts, and if so, when?

The Prime Minister

The speculative attack on sterling was of a size and scale that we have not seen for beyond a quarter of a century. I do not believe that any mechanism would have been able to withstand the size and scale of that. But I believe that there are other areas within the exchange rate mechanism where reform could have made it a more credible instrument for use last week. We shall discuss that with our European partners and others.

Mr. Stuart Bell (Middlesbrough)


The Prime Minister

I shall give way later.

Interest rates elsewhere in Europe have been driven up this summer, particularly by the strains in Germany.

Indeed, in the last 10 days of turbulence in the mechanism, interest rates have risen in Greece, Italy, Sweden and France. In Spain they have not only devalued but have effectively reintroduced exchange controls. Ireland, too, this morning reintroduced exchange controls. Since we stood aside from that turbulence, it has been possible to reduce base rates by a full percentage point this week, and the benefit to business and to home owners will help strengthen economic recovery.

But interest rates alone will not achieve the non-inflationary growth that we need in this country, and that point needs to be understood. That depends even more crucially on keeping firm control of public expenditure. The Government's new system of control will allow money to be directed towards priorities, while we keep strictly within the overall limits laid down for the growth of public expenditure as a whole.

In essence, the Government have set an upper limit to expenditure and will divide resources between priorities in the public expenditure round. That contrasts with the previous system of individual bids that were added up at the end of individual negotiations. It is a fundamentally different system of controlling public expenditure. It is tough and will be tough, but it is necessary and is an important component part of overall economic strategy.

Mr. Stuart Randall (Kingston upon Hull, West)

Will the Prime Minister give the House some idea of the likely time scale for reforming the exchange rate mechanism? Will it be Christmas or in three of four years' time?

The Prime Minister

Reform self-evidently depends on negotiation with all the other members of the mechanism. At this stage, nobody can say how long that will take. As I said a few moments ago, given the turbulence that has existed—not least the money supply figures announced in Germany yesterday—I would not expect our return to any mechanism, and certainly not the same mechanism, to be in the near future. I do not believe that that will be practicable, and I must make that clear.

Mr. Tony Benn (Chesterfield)

The Prime Minister is speaking as President of the European Council, not just as Prime Minister of Great Britain. He has repeatedly told us that his object is that we should be at the heart of Europe. Will he please explain how allowing speculators to determine our currency, German banks to determine our interest rates and French voters to determine the future of the Maastricht treaty puts this country at the heart of Europe? Is it not clear that the British, like the Danish, Irish and French, are entitled to determine what is essentially a political matter, although in a debate dressed up as an economic debate?

The Prime Minister

I will turn directly to the question of Britain's place in Europe in detail in a few moments. On the question of speculation, it is certainly within the memory of the right hon. Gentleman that, whether inside the mechanism or outside, inside the European Community or outside, sterling has been subjected to speculative attacks on many occasions in the past. The exchange rate mechanism offered an extra line of defence, athough not a complete defence; as we have seen, and as we have always known, there could be no total and complete defence.

Sir Teddy Taylor (Southend, East)

To avoid any possible misunderstanding, will the Prime Minister say whether it is the Government's intention to seek to rejoin a fixed exchange rate system?

The Prime Minister

I have explained to the House twice that we shall examine whether a system can be made credible. When we have finished that examination, we shall make our decision.

Mr. Bell

Will the Prime Minister give way?

The Prime Minister

I will give way to the hon. Gentleman, and then I shall make some progress.

Mr. Bell

The Prime Minister is announcing what appears to be a very important and significant change of policy: we are moving away from the external discipline of the exchange rate mechanism and the deutschmark as an anchor to our policy of getting inflation down to an internal discipline. Are we still shadowing the deutschmark, and will there be a wages control policy for public sector employees?

The Prime Minister

I announced to the House—for I think it has a right to know—how we shall conduct economic policy while we are not in the exchange rate mechanism. It is essential that the House is aware of how we shall conduct policy. I have said that we shall examine the practicality of returning to a reformed exchange rate mechanism and make a judgment on whether that is a workable system and then whether to join. We shall certainly undertake those negotiations.

I turn now—

Mr. Nicholas Budgen (Wolverhampton, South-West)

Will my right hon. Friend give way?

Hon. Members

Give way!

Madam Speaker

Order. the Prime Minister has made it clear that he wants to make a little progress.

The Prime Minister

I give way to my hon. Friend.

Mr. Budgen

I am sure that my right hon. Friend will agree that we have been discussing the details and fundamentals of the exchange rate mechanism for very many years in this House. Will he please explain to the House what are the new details that have caught him out so unexpectedly that he requires guidance on them before he can tell the House whether he intends to go back into the mechanism?

The Prime Minister

My hon. Friend has a long-held view that the right thing to do is to let sterling float. I understand that view, but I must remind him that sterling was floating when, in 1981, interest rates rose by 4 per cent. in less than a month, and that it was under a system of floating exchange rates that interest rates rose to 15 per cent. before we were able to bring them down to 10 per cent. within a co-operative mechanism such as the ERM.

The Government's general policy towards Europe must be founded on a concern for our long-term national interests, and I believe that it is time that we turned afresh to face directly the whole question of Europe and our place in the European Community.

There are broadly three schools of thought about our membership of the Community. The first—it is spread thinly across each political party—is that we should leave the Community; that we should never have joined. It is a minority view, often disguised by rhetoric affirming support for the principles of membership while actions speak the opposite. There are people who, in their hearts, would prefer it if we were not in the Community, who trade under false colours and who do not address their arguments to the implications of non-membership for jobs, prosperity and the future.

The second school of thought is that European development is inevitable and goes inexorably in one direction: that sooner or later a centralised Europe is inevitable. Those who take that view are often the direct descendants of those who, 20 years ago, thought that socialism was inevitable, before it became completely discredited around the world.

I do not share the belief in the desirability or inevitability of a centralised Europe. Each country in the Community at times of crisis will inevitably look first to its own national interest; each will pool some of it in the common interest, but none will sacrifice it. Just as the interests of France and Germany will always come first for them, so the interests of Britain must always come first for us. I understand the fears about a centralised Europe, but I think that they are fanciful, for we will not have one.

The third school of thought, the one for which I stand, is quite different. It is that it is in the interests of Britain —our interests, our objectives and our prosperity—for us to be part of the development of our continent. By part, I do not mean a walk-on part; I do not mean simply being a member. I mean playing a leading role in the European Community. I mean helping to determine the direction of policy, building the policies that we want and fighting those that we do not want. We will need to compromise on some matters, but so will every national state in Europe unless we return to tribalism right across the European Community.

This co-operation in Europe demands a wider Europe. It demands the entry of the Scandinavians and the Austrians and, over time, of the east Europeans—those newly democratic states which have every right to look to the Community and the west for a more secure future. This co-operation also requires us to deal with the concerns about the internal development of the European Community. Those concerns exist not only in this country but in every country of the Community.

There are fears throughout Europe that the Community is too centralised, that it is too undemocratic and that the leaders of the Community are seeking to develop it too fast for their national Parliaments and people. The events of recent months have shown that, if Europe is to be built on a sound foundation, we cannot ignore those feelings or brush them aside as a matter of no concern. The good European does not ignore those fears. He seeks to put them right—and that is the policy we pursued up to Maastricht, during Maastricht and after Maastricht.

The Maastricht treaty has become a totem around which those in favour of Europe and those opposed to Europe are now dancing. In truth, it is less important than the pro-Europeans claim and in no way as far-reaching as the sceptics tell us. Many of the things for which the Maastricht treaty has been criticised spring inexorably from the treaty of Rome or the Single European Act.

One of the main criticisms of the Maastricht treaty is the move towards a single currency. The House will recall that I declined to accept that move in the negotiations because I did not believe that Europe would reach the right economic conditions to support a single currency. I have never believed—I have stated it frequently—that Europe would reach the right convergence by the mid-1990s. That is why I refused to commit Britain to a single currency.

In the light of the continuing economic problems throughout Europe and of the currency turmoil of the past week, I must say that I was right and—[Interruption.]

Mr. William Cash (Stafford)


Madam Speaker

Order. A great many of our fellow citizens were keen that the House should be recalled, and they want to hear what the House has to say—as, I believe, do people thousands of miles away. Let us give each and every one of us a proper hearing. the Prime Minister knows exactly who is standing behind him. If he wants to give way, he will do so.

The Prime Minister

I must tell those who have exaggerated ambitions for a single currency that it must now be an ambition postponed. In the Maastricht treaty, we safeguarded our national interest on the single currency. Elsewhere in the treaty, we secured other very important gains for Britain. I remind the House that, early in their presidency, the Dutch presented proposals on foreign policy, defence policy, immigration and justice—all of which would have been undertaken under the treaty of Rome. We rejected that. At Maastricht, we secured provision for co-operation between nation states outside the treaty of Rome, outside the power of initiative of the Commission and outside the jurisdiction of the European Court. Those who claim that Maastricht was a treaty too far should ask themselves, "What was the situation before the Maastricht treaty?"

Another important achievement was the provision restricting the scope for Community action. That provision was put in at our insistence. It reflected our long-standing argument that the Community should take action only where it could do so more effectively than a nation state or more than one member state co-operating voluntarily. We had to fight hard for that provision with the support of some other countries—notably Germany —but it was a break point and we won it. It has since found an echo in public opinion in Denmark, France and right across the Community. Although the Danish people narrowly voted against the Maastricht treaty, the Danish Government have made it clear that that is not necessarily the last word. The Danish Government plan a further referendum.

Mr. D. N. Campbell-Savours (Workington)

Will The Prime Minister give way?

The Prime Minister

I will make some more progress.

If, however, the Danes were unable to go back to the people, or were to lose again in that further referendum, the Maastricht treaty could not proceed. It would not be acceptable for the 11 to go ahead without Denmark, and against the will of the Danish Government and people. That cannot happen, and it will not happen.

The Danish Government will publish a White Paper next month, at the start of a process of consultation. It would not make sense to bring the Maastricht Bill back to the House of Commons before we know clearly what Danish intentions are, and when and how the Danes propose to consult their people again. When those things are known, however, we must examine the Bill further.

Those who assume that the Bill is dead have overlooked two things. First, there is much in it that we want; secondly, with the consent of this House of Commons, I agreed that Bill. I do not believe that it would be proper for a British Prime Minister to agree a treaty, and then come back to the House of Commons and disown it.

In this country, people know that it is in our interests to be in Europe, but they fear that the Community seeks to intervene too intrusively in our national life. They fear that things that have always been dealt with by individual nation states—and should be dealt with by individual nation states—are instead gradually being drawn within the control of the Community. So we need a definition —a settled order—of what is for national action and what is for Community action. We need clear criteria by which Community proposals will be judged. When we are satisfied that such a system has been put in place, and when we are clear that the Danes have a basis on which they can put the treaty back to their electorate, we shall bring the Maastricht Bill back to the House of Commons.

Mr. Campbell-Savours

If the French, the Germans and the Benelux countries decide to forge ahead with a Community based on greater monetary and political co-operation, will the Prime Minister be prepared in any conditions to leave Britain outside that in the Community?

The Prime Minister

There might well be circumstances in which others would make decisions that they believed to be in their national interests; but I have said repeatedly, and agreed under the Maastricht treaty, that any question of a single currency must be determined by the House of Commons at the time when others go ahead, and I stick to that view.

Mr. John Wilkinson (Ruislip-Northwood)

Is my right hon. Friend really telling the House that—notwithstanding the fact that two thirds of the French people did not vote in favour of the ratification of the Maastricht treaty; notwithstanding the fact that, when the question was first put to them, the Danes voted against it; and notwithstanding the fact that my right hon. Friend will not grant the British people a referendum—the House is somehow to proceed with this extraordinary process?

The Prime Minister

We are a parliamentary democracy, and the House is the place in which to consider the Bill—line by line and clause by clause. Other nations may have a tradition of referendums: they may call a referendum, followed by a debate on the whole Bill lasting one or two days, and approve every part of the Bill immediately. That is not our parliamentary tradition, and I do not believe that it would be acceptable to the House of Commons.

As for the second part of my hon. Friend's question, I have made it clear—and I repeat again—that, when the conditions that I have set out are fulfilled—when we have moved forward on subsidiarity, and when the Danes have decided how they will proceed—I will bring back to the House the treaty that I negotiated with the approval of the House: the treaty that was approved at the general election, and on Second Reading some time ago.

Let me repeat that, when we are satisfied that a settled order has been put in place, we will bring the Bill back to the House. That is one of the matters that are to be put in hand at the special meeting of the European Council on Friday 16 October.

Mr. Michael Spicer (Worcestershire, South)

I am most grateful to my right hon. Friend for giving way. He has expressed the view that the House should take the final decision on the Maastricht Bill. Therefore, will he give consideration to allowing a free vote in the House?

The Prime Minister

I believe that my hon. Friend stood at the general election supporting the Conservative manifesto, which indicated that we would bring the Bill before the House. I still support the commitment that I had in that regard in the manifesto. I said that that was one of the matters to be put in hand at the special meeting of the European Council on Friday 16 October. That special meeting will take place at the international conference centre in Birmingham.

That European Council needs to respond to the concerns that people right across Europe have shown about the direction of Community policy, to review what is wrong with the exchange rate mechanism and how the system can be made to work better in future, to consider preparatory work to meet Denmark's concerns and, of course, to give a further impetus to the general agreement on tariffs and trade round. During recent months, our concerns about the Community have been mirrored across Europe. The British agenda is now on the table in every country of the Community.

It is worth reminding ourselves why the Community was built and why we joined it. Its founders wanted lasting peace in western Europe, and they achieved it. But they wanted something more [Interruption.] Yes, what about the economy? The founders wanted to build up economic prospects across Europe on a scale that no previous generation had seen, and they achieved that. They wanted the prosperity of each generation to exceed that of its parents, so that the chances for each generation would be greater and the opportunities more fulfilling. Collectively in Europe, that is what we have achieved, despite the difficulties that presently exist.

Mr. Jimmy Boyce (Rotherham)

On a point of order, Madam Speaker. Given that the debate's title is the United Kingdom's economic policy, could you tell us when the Prime Minister is going to get round to discussing that policy?

Madam Speaker

As I have not seen the Prime Minister's speech, I can only say that the hon. Member for Rotherham (Mr. Boyce) must give the Prime Minister the opportunity to reach that point.

The Prime Minister

Clearly, the hon. Member for Rotherham (Mr. Boyce) does not realise the extent to which our economic well-being depends on our relationship and trade with Europe.

I have never seen our future as being a sour, isolated country off the mainland of continental Europe. That surely cannot be a way for us. Even though some will swallow hard at compromises that may need to be made, they should remember that others in Europe will need to compromise as well. The voice that is raised to say that we should look after only our own interests is the voice of narrow self-interest. Such a voice always has resonance in politics and is almost always wrong. It is a policy more certain to begin with cheers and end in tears than any other policy that has been devised.

I have never understood why some are so fearful of our prospects in Europe—neither do I understand why those who are often most fearful are those who would claim to be most proud to be British. Why, then, with that pride do they assume that we will always lose the arguments in Europe when that has not been the Community's history and will not be the Community's future?

We have the chance to build in our time, in our generation, the sort of Europe for which we have always longed; the sort of Europe that I believe its citizens want; a secure Europe of nation states co-operating freely for the common good; a prosperous Europe, generating new wealth within the biggest free trade area in the world; a free trade Europe in which Brussels is kept off industry's back. Only one Government—this Government—offer industry freedom from state control. Only our policies of low taxation and low inflation will allow the genius of British enterprise to flourish, and only this Government's policies will secure for the British people the prosperity that they deserve in the '90s and which this Government will deliver. I commend the motion to the House.

3.14 pm
Mr. John Smith (Monklands, East)

I beg to move, to leave out from "House" to the end of the Question, and to add instead thereof: condemns the total collapse of the Government's entire economic policy following their humiliating withdrawal of the pound from the European Exchange Rate Mechanism; deplores the Government's failed economic policies which have thrown the United Kingdom economy into a deep and damaging recession which has made it weak and vulnerable to speculative attack; believes that the Government's credibility and claims of economic competence are in tatters; demands the adoption of an economic policy which reduces unemployment and recognises that a strong economy can only be built by consistent investment in manufacturing industry and the infrastructure, by a sustained commitment to an expansion of training, the stimulation of innovation, technology, and regional development and by international cooperation for economic expansion; and firmly opposes cuts in public expenditure which will prolong the recession, increase unemployment, and weaken the United Kingdom's vital public services. It might just be worth recalling that the motion on the Order Paper is that the "House expresses its support" for the Government's economic policies, because we have heard precious little about that from the Prime Minister. I admit that there is a certain vacuity about such a motion. Seldom have I seen on the Order Paper a shorter statement than expresses its support for the economic policy of Her Majesty's Government. Why is that not amplified, defined or explained? For a simple reason. The Government do not know what is their economic policy. That was startlingly clear from the Prime Minister's speech.

The Prime Minister explained the tragi-comic events surrounding our humiliating withdrawal from the ERM, in simple terms. He said that we were scuppered by the speculators. That is all we are to get by way of explanation from the Government. What has happened during the past week or so is not merely an upset for the Government's economic policy, but the complete destruction of what they claimed was a total political and economic strategy—a strategy to which the Prime Minister could not have been more closely committed.

Only a few weeks ago, The Sunday Times carried the story that the Prime Minister had a new vision of the future. It is said that he had revealed to his colleagues and party supporters that his ambition was no less than to see the pound replace the deutschmark as the most stable currency in the European Community. Under the headline, "Major aims to make sterling the best in Europe"—

Mr. Phil Gallie (Ayr)

Does the right hon. and learned Gentleman not concede that it would be an objective of his to make the pound a stronger currency than the deutschmark?

Mr. Smith

The hon. Gentleman will understand the purport of my comments in a minute or two—[HON. MEMBERS: "Answer."]. Any sensible person wants a strong and stable currency in this country, but it comes rich from a party which has just devalued the pound to even mention it in this House.

I return to the story in The Sunday Times headed Major aims to make sterling the best in Europe. Michael Jones and Andy Grice reported that the Prime Minister had embarked on an economic strategy designed to see the British pound replace the German mark as the hardest and most trusty currency in the EC. The response to the plan to topple the deutschmark was mixed. At the time, eyebrows were raised among our recession-weary public. The most generous thought that it was a case of audacity straining the bounds of credulity, while others thought that the Prime Minister had simply taken leave of his senses. An acid comment from Goldman Sachs in its International Bonds and FOREX Bulletin—probably the speculators journal—published on 3 August, said: Assuming The Sunday Times headline of 'Major aims to make sterling the best in Europe' is not some brand of morbid humour that we fail to grasp, it is worthwhile considering whether this is likely to happen. The passage continued: The Prime Minister certainly has his work cut out—much the same as Eddie the Eagle had in attempting to win the gold at the winter olympics. Now, of course, the Prime Minister's words read with a mockingly hollow ring.

On 10 September the right hon. Gentleman took himself to Glasgow to address the Scottish CBI—picking, as usual, hostile audiences as the best place to float his ideas. There, he said that there would be no devaluation and no realignment. As we all know, that policy was wrecked by his decision on black Wednesday, less than one week after the Glasgow declaration, to withdraw from the ERM, as a result of which the pound has now been devalued by more than 13 per cent. So much for the Prime Minister's vainglorious nonsense about the pound easily replacing the deutschmark as the anchor of the ERM.

Those who have studied the Prime Minister's utterances since he became involved in our economic affairs—as Chief Secretary, then as Chancellor, and now as Prime Minister—know only too well that such delusions of grandeur are the norm, not the exception. His words were not just a wild aberration—bad enough though that would be for a head of Government. I believe that such delusions have been his stock in trade since he became involved in the management of our economy.

One of the most notable previous examples occurred when the right hon. Gentleman was Chief Secretary to the Treasury. On Second Reading of the Finance Bill in 1988 —that heady year of so-called Conservative success—he observed: During the 1960s we praised and envied the German economic miracle. In the 1980s the position has been precisely reversed."—[Official Report. 26 April 1988; Vol. 132, c. 214.] To claim that the German economic miracle had been surpassed, and then, in the middle of the recession, to go on to foresee the pound replacing the deutschmark takes a certain detachment from reality of which Walter Mitty himself would have been proud.

The real lesson to be drawn from a comparison between the British and German economies is that, before one can have a strong currency, one needs a strong economy—and that to create a strong economy we need consistent investment, a recognition of the vital importance of manufacturing as the basic wealth creator, a strategy for training, for innovation and technology and for regional development—in short, an industrial strategy.

Mr. Stephen Milligan (Eastleigh)

The right hon. and learned Gentleman talks about detachment from reality. Does he agree that his colleague, the shadow Chancellor, was even more detached from reality when he suggested that the best way to defend the pound was to cut interest rates?

Mr. Smith

The shadow Chancellor has argued week in, week out, and month in, month out for an industrial strategy to put this country into a strong position. It is a great pity that his recommendations were not adopted by the Government.

The comparison with Germany is important, because Germany adopted an industrial strategy. It is a tragedy for Britain that, for the past 13 years, we have been going in the opposite direction. Instead of real achievements, the Government can produce only policy failures garnished with absurd hype and rhetorical fancy.

Mr. Geoffrey Dickens (Littleborough and Saddleworth)

Does the right hon. and learned Gentleman agree that most people expect Germany to be on the slide now? Its economy is in a mess and the Germans are paying too much in subsidy to their coal mining industry. There is nothing wrong with the United Kingdom wanting its currency to be at the top. While the right hon. and learned Gentleman talks this country down, it will be down.

Mr. Smith

If Germany is in such a mess, yet we have been forced to devalue our currency against its currency, what kind of mess is this country in?

Look at the Prime Minister's record of economic prediction. January 1988: Inflation is low and will remain so."—[Official Report, 14 January 1988, Vol. 125, c. 549.] Fact: it doubled in the two years that followed. Prediction, December 1989: The recession is neither likely nor necessary. Fact: we have had the longest recession since the 1930s.

Prediction in June 1991 in The Daily Telegraph: Recovery coming on in weeks". Fact: the economy has ever since been mired in such deep recession. Perhaps the prediction most close to public memory was in the last election: Vote Tory on Thursday and recovery will continue on Friday. Fact: there has been no recovery at all and now we have a devaluation. So much for the Prime Minister's key promise at the election.

Regrettably, that is but one of the promises that have been and will be betrayed as the coming public expenditure cuts—never mentioned at the last general election—rip the Conservative manifesto apart. I have little doubt that there are party workers hard at work already on the excuses; no apologies, no expressions of regret, just excuses and more excuses. We heard a few of them today from the Prime Minister in his typical speech.

In the new situation, the Government propaganda machine clearly faces new challenges. Its principal tasks are to seek to disguise the void in Government policy by pretending that it does not exist and to divert attention from the Government's culpability by seeking to place the blame on others. A good example, I understand, is the note which, according to today's Financial Times, appeared in Minister's boxes on Monday evening headed: ERM. New line to take. I am, of course, not able to say whether the line that we got from the Prime Minister today was the line advised on Monday. After all, it might have changed since then.

But the real problem for the Government in finding a new line to take is the speech given by the Chancellor of the Exchequer to the European Policy Forum on 10 July entitled "Britain and the ERM", which is helpfully reproduced in at least two newspapers today.

The Chancellor expressed his support for the then policy in robust and uncompromising terms but, interestingly, he went on to examine what he described as the alternatives—all the alternatives—to such a policy and mocked every one in turn. He said, Plenty of alternatives are suggested. But in my view they are all illusory or destined to fail. I admit that it might be difficult to know which of those alternatives now is Government policy. After all, according to some newspapers, the Chancellor appears to be on quite a different path from his colleagues in the Government, including the Prime Minister, but whatever that policy is, it must be one of the alternatives that he contemptuously dismissed in his speech.

The Chancellor described the option of leaving the ERM and cutting interest rates as the "cut and run option"—a cut in interest rates and run on the pound. He went on to say: Many who advocate floating exchange know full well what the consequences would be. They intend a devaluation of the pound and they will certainly achieve it. He finally dismissed the option in his conclusion:

We would have given up after less than two years … and we were back to our bad old ways. Well, are we back to our bad old ways, lurching back to the Thatcherite economics which pulverised our economy during the 1980s?

The Chancellor then went on to attack a policy of leaving the exchange rate mechanism and setting interest rates according to domestic monetary targets. Here the Chancellor had what I believe was a genuine flash of insight. He told his audience: We have been here before. In the 1980s we fixed domestic monetary targets, and we attempted to meet them by setting interest rates accordingly. But in practice the money supply figures often provided a poor guide to interest rate policy, particularly in the wake of the financial deregulation. So much for all the Thatcher years—dismissed like that.

Those of us of a generous spirit would be inclined to congratulate the Chancellor on an honest, if unrepentant, reassessment. It is, however, difficult to do so if the former sinner is determined to revert so quickly to the sins of those former years. After all, now, with the benefit of experience, he knows that it is wrong and, after this performance, who can ever believe him in anything he ever subsequently says? In his speech on 10 July, the Chancellor ruled out every alternative that he could envisage. How can any one of them be offered now as convincing Government policy?

In the wake of the destruction of the Government's economic policies, we must ask where we are now. The sad but unavoidable truth is that, instead of reaching the heart of Europe, the Government have succeeded in having Britain relegated to the second division. There are two reasons for that disaster. For years, the Government followed policies that have thrown our economy into a deep and damaging recession, which made it weak and vulnerable—weak and vulnerable, incidentally, to speculators. Faced with a crisis, the Government chaotic mismanagement and sheer incompetence forced them to abandon all that that they stood for in a matter of hours.

Mr. John Marshall (Hendon, South)

Will the right hon. and learned Gentleman tell the House whether he would take Britain back into the exchange rate mechanism?

Mr. Smith

That question was singularly not answered by the Prime Minister in the rather curious answer that he gave. I will answer the hon. Gentleman's question directly. He will not think it unfair if I point out that, when the Prime Minister was asked a roughly similar question, he did not answer it at all. He said that, if a credible exchange rate mechanism could be achieved, he might think about whether or not he would rejoin it. That, as I fairly understand it, is what the Prime Minister said. Let me say what I think. I think that there are advantages in having a system of managed exchange rates. One is that in those circumstances, one is less likely to resort to curbing public expenditure as the anchor or one's economic policy—which is one of the difficulties that we now face.

The circumstances in which we would rejoin the ERM must be judged according to the state of our economy—and that is regrettably weak. The first thing that the Government should do if they are to acquire any option for Britain's economic future is to build up the strong economy that can be the only foundation for our future.

Mr. James Paice (Cambridgeshire, South-East)

I am very grateful to the right hon. and learned Gentleman. Will he tell the House what would be the cost of his recovery package; and what effect that would have on public borrowing and on the currency market?

Mr. Smith

I did not think that point would be pursued by Conservative Members today. After they lost £1 billion in a hopeless attempt to prop up the currency, and with increasing unemployment costing the taxpayer £8,000 for every person unemployed, they have the sauce to ask us the cost of a recovery programme. I ask them: what is the cost of a non-recovery programme? That is what they appear to be committed to.

To return to the events of black Wednesday, a bewildered British public watched those tragi-comic events unfold. First, there was a 2 per cent. increase in interest rates, and then they were up by 5 per cent.—all in the course of a few hours. It all ended in Britain's withdrawal from the ERM. That was not some considered choice or policy but was forced on the Government by their weakness and incompetence.

The British people deserve to be told what went wrong. the Prime Minister had the responsibility to tell Parliament and the public today. We heard what he had to say—a few desultory remarks about economic policy, and a long rambling piece of nonsense about the future of the European Community.

As the Prime Minister was unable or unwilling to tell the House what happened, let us examine the facts. The genesis of the crisis was that Tory election promises of immediate economic recovery following the general election turned out to be totally false. Since April, all the main economic indicators of the real economy have deteriorated. Markets, consumers and industry increasingly lost confidence in the bogus predictions of a recovery that seemed constantly to be postponed.

What did the Government do? Nothing—absolutely nothing. Even as bankruptcies mounted, home repossessions kept rising, and unemployment remorselessly increased, the Government did nothing—absolutely nothing.

The continued weakening of the British economy that I have just described coincided with the predictable pressures on currencies arising from the uncertainties of the French referendum and higher German interest rates. The position called for prompt and decisive action to initiate and co-ordinate a Communitywide response—[Laughter.] So this is a matter for laughter. Those who hold the presidency of the European Community deride a Communitywide response even before they hear what any such response might be. I have come across few such revealing actions. the Prime Minister and the Chancellor of the Exchequer, on this day of all days when they are in the dock, are chuckling.

As I was saying, the position called for prompt and decisive action, for a programme of growth in the Community, for jobs, for investment and for an early reduction in interest rates across the whole of the Community. Britain, holding the presidency of the Community, was uniquely well placed to take such action, as we repeatedly proposed, but it did not.

The Prime Minister

I was chuckling at the right hon. and learned Gentleman's lack of understanding of how matters work in the Community. He seems to think that, when there is a problem, all we have to do is to persuade the remainder of Europe to do whatever is convenient for the United Kingdom. What does he think happens when it is not convenient for the remainder of the Community to do that? It would have been right to persuade the Community of the need for a general downward realignment of interest rates, but if others in the Community would not agree to that, how would the right hon. and learned Gentleman face that reality?

Mr. Smith

I shall come in a moment to the question of a realignment of currencies and interest rates. What is revealing about the Prime Minister's intervention is that he obviously did not even try to persuade the remainder of the Community. As President of the Community, to a large extent he can determine the Community's agenda, yet he did not put on it a programme for recovery involving all Community countries. If there are those who disagree, the right hon. Gentleman should argue with them and persuade them. At the very least, he should try. Instead, at the first hint of disagreement, he leaves the field. There can be few more revealing instances. If the right hon. Gentleman had so wished, he could have told us a great deal more about that, instead of making a rambling speech that had little to do with the issues.

The only action that the Chancellor took throughout the whole period was to announce the borrowing of an additional £7 billion. We used to hear great diatribes from the Conservative party about borrowing. When anyone else borrows money, it is a total economic disaster; when the Conservative party borrows money, somehow it is an economic triumph. However, on this occasion, given the underlying fragility of the British economy that move, not surprisingly, was interpreted by the markets as a further sign of weakness—[Interruption.] It was, so there is no point in the Chancellor shaking his head. We can all read the newspapers, perhaps better than he can. We read them and that is what they said.

As the crisis developed—[Interruption.] I am coming to an important point, to which I hope the Chancellor will listen carefully. As the crisis developed, crucial discussions took place over the weekend of 12–13 September, which resulted in an announcement from Brussels on the Sunday evening that the lira was to be devalued. It was also strongly hinted, not least by British Government sources, that a substantial cut in interest rates would be announced by the Bundesbank. However, when made on the Monday morning, it was the smallest reduction possible. I do not know for certain what happened in meetings and other discussions during that weekend or in the days leading up to it. However, I know that, in the context of the Ecofin declaration in Bath only a week or so previously, it was clear that there would be no realignment of any currency. An outcome that resulted in the devaluation of the lira alone was an open invitation for speculation against another of the weak currencies.

Mrs. Judith Chaplin (Newbury)

My understanding has always been that a Leader of the Opposition does not say anything that jeopardises sterling in the markets—[Interruption.]

Madam Speaker

Order. I want to hear the hon. Lady's intervention.

Mrs. Chaplin

As the right hon. and learned Gentleman called for a slash in interest rates three days before Britain left the ERM, does that mean that tradition has been replaced by opportunism?

Mr. Smith

I was waiting for someone to blame me for the devaluation last week. The hon. Lady has not disappointed me. Of all the charges that could have been laid against me and of all the comment that there has been in recent weeks, the argument that I have been undermining sterling is the most far-fetched that I have ever heard. It just shows that, whatever one says or does not say, some on the Conservative Benches will find it unacceptable. [Interruption.] It seems that there is a new charge: that any criticism of the Government undermines sterling, but sterling has already been undermined by those who are in charge of our affairs.

I return to when the lira was devalued. If the Government knew anything about the markets that they profess to understand and what was likely to follow, what consideration did they give to finding an alternative to a potentially disastrous confrontation, with a speculative market in full flood? There was only one feasible alternative: to have a general realignment so that the markets were not presented with an open invitation to speculate in circumstances in which our defences to their attack were weak. If that had been done, we could have had an orderly realignment, not a rout, a co-operative change, not a crisis. Britain would not have been forced to leave the exchange rate mechanism. We should not have had to use billions of pounds of reserves, which involved damaging real losses, which some have estimated at over £1 billion, and interest rates would have been lower throughout the Community.

What is more, the possibility of considering this option did not appear suddenly and unexpectedly on the Sunday. Widespread reports in the press, both here and abroad, indicated that a number of our European partners were raising the issue of interest rate reductions and having them combined with a currency realignment in the weeks preceding the crisis. The Government must tell us why this option—the multilateral option, the European option, the less inflationary option—was not taken when it was clearly in the national interest.

The Prime Minister

What the right hon. and learned Gentleman has said is extremely important, and I shall answer it. I draw his attention first to the fact that the Italians, who did not devalue, subsequently had to come out of the system as well. More substantively, what the right hon. and learned Gentleman has just pronounced, presumably as Opposition policy, is that, whenever there is a speculative attack on the pound, he would pre-emptively devalue. That is what he has announced. That policy, if it were to be followed, would encourage every speculator on every occasion to attack the pound.

Mr. Smith

What the Prime Minister has just announced is that, if he ever goes back into the exchange rate mechanism, he will never be in favour of any realignment, ever, and he might as well call it a single currency. He must know, as everyone who operates in the exchange rate mechanism knows, that it is a system of semi-fixed and adjustable rates. In the early period of the European monetary system, it was frequently realigned and varied.

The Prime Minister did not answer the question that I put to him: faced with a situation in which the alternative was likely to be that the Government's policy would be scuppered by the speculators, why did they walk blindly on? Why did they not look at an alternative that would have been better for this country, better for our economy and better for our currency? I shall be happy to give way again to the Prime Minister if he wishes to correct me.

The Prime Minister

Neither the right hon. and learned Gentleman nor anyone else can be certain at any moment what the scale of a speculative attack would be. At this precise moment, at least one other European currency is under attack that has decided to do precisely as we have done: that socialist Government have decided to defend their currency with their reserves and to raise interest rates rather than to take the step of devaluing. They have done that because, of course, devaluation is undesirable for all the reasons we set out. We were forced to do it, not because we wished to, not because it was a good option, but because of the inevitability of the size of the speculation —a size that no one, not even the right hon. and learned Gentleman, could ever have foreseen.

Mr. Smith

That is the defence: overwhelmed by unforeseen events, in charge of the bridge when along came a wave and overturned the vessel, the captain pleads not guilty. That is the nature of the Prime Minister's defence. There was an alternative and I should like the Prime Minister to tell us why it was not adopted. There could have been a general realignment of the currencies. The system allows for that and we know that there were requests for that to be considered. the Prime Minister was defeated but he speaks as if he won. He did not win, he lost, and there was an alternative to that humiliating failure.

Sir Peter Tapsell (East Lindsey)


Mr. Smith

I do not know whether the hon. Gentleman is in charge of the Government's economic policy.

Sir Peter Tapsell

Has not the right hon. and learned Gentleman's careful reading of the Goldman Sachs comic persuaded him by now that any discussion within the ERM of a realignment immediately sets off speculation? That is precisely why we should not return to fixed but adjustable rates.

Mr. Smith

The hon. Gentleman does not take account of the fact that such adjustments were made in the past in the very ERM of which he speaks. But they must be made with a little care. I assume that even this Government could manage to make them confidentially, although sometimes I wonder about their capacities. It cannot be argued that it was impossible, which is what the hon. Gentleman says.

In view of the debacle, one would expect at least a word of explanation or apology, but there was not a hint of that in anything said by the Government, whose most noted characteristic is that no one takes responsibility, no one resigns—at least not yet—and no one takes the blame. They are a "not me" Government.

The most ingenious and perhaps the most ironic of the Prime Minister's new excuse were in his first comments after he emerged from his air raid shelter. He told us that the problem was that the markets were irrational. What are we to make of that one? Now that the Prime Minister is possessed of a genuinely new insight, may we invite him to refrain from insisting that these irrational market forces should determine all aspects of our national life? Given the total mismanagement that has been so vividly demonstrated, may we have no more assertions about the Conservative party's unique and expert knowledge of the working of markets?

After all this, we are left with an economy and a society ravaged by recession. There is no more important priority in Britain today than the adoption of a programme for economic recovery. If that is not done, the price will be paid by millions of unemployed. The lesson of recent years as well as of recent weeks is surely clear. We cannot afford to neglect the real economy. I repeat that a strong economy is the only sure foundation for a stable currency. We consistently argued that case before Britain joined the ERM, and we have argued it repeatedly since.

Time after time, we have argued the crucial importance of supply-side policies that would improve our economic performance, raise investment, especially in manufacturing, boost the housing and construction industries, and promote innovation and technology. Perhaps above all, we must enter into a real and sustained commitment to education and training. The result of the Government's policies has been tragically shown by the redundancies announced by British Aerospace and Rolls-Royce.

Ms. Anne Coffey (Stockport)

Does my right hon. and learned Friend agree that, if desperately needed help and support to British Aerospace had been forthcoming over the past few years, we would not be in the present sorry state of affairs? Unless immediate help and support is given to that industry, in the way that other Governments support their industries, we shall have no aerospace industry and no jobs, and the skills of the people in that industry will be lost to the nation for ever.

Mr. Smith

My hon. Friend, whose constituency has taken the brunt of the savage redundancies, speaks well in defence of her constituents. I see that the President of the Board of Trade is sitting a suitable distance from the Chancellor of the Exchequer, but even if he cannot see these events, he can at least hear them. I hope that he will pay some attention to that, because it is a tragic comment on what is happening to Britain that British Aerospace is moving its activities to Taiwan, of all places. That is where a British pride has taken us—a Government who remove our jobs to Taiwan.

The predictable response of the Government when we argue the case for investment, training and regional policy is to say that they have heard it all before—and so they have, but I can tell them that they will hear it again and again until they change their policies.

I know that the Government do not listen to us, but I hope that they might occasionally listen to employers' organisations. On black Wednesday, the Engineering Employers Federation—I hope that the Government will listen to this, because it is from engineering employers, not engineering unions—said: But what is essential now for the UK—irrespective of what happens to the pound —is to formulate an industrial strategy which will promote recovery and sustain economic success. When we use the words "industrial strategy", there is mocking laughter from Conservative Members. I am glad that they are not mocking the engineering employers. The federation continues: After the events of Wednesday 16 September, even the most ardent promoters of unrestrained short-term market forces must be seeking some shelter. It goes on to argue for investment and support for British industry. Those are policies that the Government should consider.

The end of the passage from which I am quoting says: The Government appears to have been paralysed over the past three months by lethargy. Ministers have not been capable of redirecting economic activity towards the manufacturing and infrastructure investment needed for a lasting economic recovery. The engineering employers put it very clearly and concisely. I hope that the President of the Board of Trade and his colleagues will do something about it.

I fear that what we shall get from the Government is not a change of policy, even though by their ineptitude they have caused circumstances to change dramatically, but a new hunt for new excuses, new escape clauses and new ways of wriggling out of broken promises. I have recently come across what I think is a prototype of an excuse that is being market tested. It arises in the context of the Government's policy of privatising the Forestry Commission. A query was put to the Prime Minister by the forestry trades unions and it was answered on the politically significant date of 3 April—the final week of the general election campaign. A letter headed

The Right Hon. John Major, From The Office of: the Prime Minister and Leader of the Conservative Party reads as follows: Dear Mr. Murray, John Major is grateful for your letter of 7th February, regarding any possible privatisation of the Forestry Commission. It is signed by Robert Boscawen.

Subsequently, a story appeared in The Guardianabout correspondence between the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland, which caused a further inquiry to be made to the Prime Minister. The reply sent to Mr. Murray on 27 August said: The Prime Minister has asked me to thank you for your letter of 6th August. I apologise for the delay in replying. I appreciate your concern about 'The Guardian' article quoting correspondence between ministers on the possible privatisation of the Forestry Commission. You may be unaware that the commitment given by the Prime Minister on this matter was drafted incorrectly during the frenzied activity of the general election campaign". [Laughter.] The letter goes on: The correct line is that the Government has no plans at present to privatise the Forestry Commission. It is signed by Miss Lucy Miller, political officer.

So there we have it. What a concoction of weasel words. Provided the background was one of active frenzy, no promise needs to be kept, no commitment honoured. I do not understand how a Prime Minister who gives his word in such an uncompromising and unqualified fashion can thereafter contradict it so spectacularly. There is clearly no more devalued political currency than a Conservative election promise.

In their frenzied re-election campaign, the Conservatives were prepared to say anything and do anything to get re-elected. [HON. MEMBERS: "What about you?"] I fear that there will be no area in which this will be more spectacularly revealed than in the coming cuts in public expenditure. In the weeks and months ahead, pledge after pledge will be betrayed, commitment after commitment dishonoured, as cuts in public expenditure intensify the recession, weaken our infrastructure and erode the quality of our public services. And the price will be paid by the British people—paid in lost jobs, unbuilt homes, Missed opportunities and declining services.

The conclusion that our people are reaching is that they are governed by a Government and Prime Minister fatally flawed by incredibility and incompetence. After all, who was it who dismissed the critics of Government policies as "quack doctors"? Who was it who told the CBI in Glasgow: It is too easy to regard Britain's problems as unique or blame them on the ERM"? Who was it who said that to leave the ERM would be "the inflationary option" and a "betrayal of our future"? Who, in that same speech, said that there was going to be "no devaluation, no realignment"?

This is a Government whose economic policy is in tatters, whose credibility is blown, whose incompetence has been exposed. It will no longer do to blame others and it will no longer do to say that their policies will, given time, come right. They have been in power for the longest continuous period in post-war Britain—[HON. MEMBERS: "Hear, hear!"]—and Tories' assent to that proposition means that they must accept that they are the only architects, the sole constructors, of our present dismal situation.

In the course of a few weeks the one policy with which the Prime Minister was uniquely and personally associated, the contribution to policy of which he appears to have been most proud, has been blown apart, and with it has gone for ever any claim by the Prime Minister or the party that he leads to economic competence. He is the devalued Prime Minister of a devalued Government.

3.57 pm
Sir Edward Heath (Old Bexley and Sidcup)

Our nation is suffering from shock and is much confused, and I believe that it is looking to this House today for clarification of the situation and for a detailed discussion of how our country can move forward in the future.

Like the Prime Minister, I should like to congratulate the Leader of the Opposition on his appointment. This afternoon he has carried out the customary duties of a Leader of the Opposition—rather well, in fact—but now we must turn to serious business.

the Prime Minister reaffirmed that he believes that the Maastricht agreement, ratified by this House, is good for Europe and for Britain. I strongly agree. He has also reaffirmed that he does not exclude a return to the ERM at some future date. I should like to say more about that in a moment. He has also reaffirmed that in no circumstances will he agree to a referendum. In that he is absolutely right. I was glad that the Leader of the Opposition succeeded in carrying at least his national executive committee with him in deciding that there will be no referendum. There is no reason why there should be.

Mr. Dennis Skinner (Bolsover)

We are still working on that.

Sir Edward Heath

I do not think that the hon. Member will have much success.

Mr. Skinner

The right hon. Gentleman should not kid himself.

Sir Edward Heath

It must be noted that, when we had a referendum on Europe—Harold Wilson was overturned and went against his undertaking made at the time of our entry into Europe—those who were most forceful about our having a referendum never accepted its result. What is the point of having a referendum if one is not prepared to accept the decision of the people? There are two right hon. Members on the Opposition Benches who have no claim on a referendum.

Mr. Benn

The right hon. Gentleman is asking us to get the Danes to think again after their referendum. Is it not possible for arguments to continue? Do elections and referendums conclude the matter, particularly when new proposals are made?

Sir Edward Heath

Asking the Danes to think again does not affect our having a referendum. I know that the right hon. Gentleman proposes to introduce a Bill which he hopes will be successful. It will not be, but if it is successful he will have to provide the funds for running a referendum.

I strongly support the Prime Minister on the three major points I have outlined. He has said that there will be a detailed examination of the situation following last week's events. I welcome that, too. I hope that the examination will not be limited to the ERM or to last week's events. I hope that it will cover a much wider range of Government policy which has to be taken into account if we are to restore the economy.

We must not hide the fact that there are bound to be inflationary pressures as a result of a 14 per cent. devaluation. We must warn the country and consumers of them. We have experience of this from several other occasions and it would be foolish to try to deny that there will be inflationary pressures. One can say, therefore, that the task will be greater. Various opportunities that will have to be taken to deal with it must be made more acceptable.

From that point of view, I hope that the Prime Minister's review will go much wider. He is also—rightly —conducting a review for the summit meeting in the middle of October. I ask him to recognise—I am sure he does—that a review of a major item of the Community's life, and its industrial and financial proceedings cannot be done satisfactorily in such a short time. It cannot possibly be done. Nor can satisfactory discussions take place and conclusions be reached in a day's summit. We have suffered far too much from short summits, most of which are taken up with lunch and dinner.

Mr. Skinner

The right hon. Gentleman had a few.

Sir Edward Heath

Yes. I have been trying to lose weight ever since.

The review also requires detailed discussion with the other members of the European Community. I take as an example the faults that are now said to be found in the ERM. Perhaps the Chancellor of the Exchequer will go into rather greater detail about what the faults are. Major members of the Community do not accept that there are faults in the ERM. If this matter is to be discussed at the summit, it will have to be done with great care.

Already, I am afraid, there is in the Community a belief that the British have taken the presidency to run and change the Community. That is giving rise to resentment and counter-reaction to the proposals. It is not the job of the president to run the Community or even to tell the Community what it should do. The Minister who represents Britain speaks for Britain and makes the arguments about what we think should be done. We will not achieve our ends if we overlook the nature of those discussions in the Community.

That brings me to the question of the Danes. At the time, I expressed regret that Britain had stalled its action because of the Danish vote. Other countries did not do that; they went ahead. Ireland produced a large majority in favour of Maastricht. Referendums are part of the life of the Irish: they are constantly calling referendums. We do not do that. Why did we not celebrate the great Irish achievement, and say, "Yes, we will follow the Irish"?

The point about Denmark is this. If, at the summit, the Danes come forward with an answer as to what they propose to do, that will free us to go ahead with our own Bill in the House of Commons. If, on the other hand, the Danes say that they will do nothing until autumn next year—and that is what is coming out of Copenhagen at present—we cannot possibly be bound by that to do nothing, when the other major powers in the Community have already gone ahead. I hope that the Prime Minister will make it plain to the Danes that our consideration of their position is limited.

Also coming out of Copenhagen is what the Danes want. It is said that they want more social service arrangements—more than are contained in the Maastricht treaty—and that they voted against the treaty because they were not going to be given those arrangements. We took the opposite position; we opted out of the social chapter entirely. That explains the Danish vote: the Danes wanted more than they were getting, not less.

It is also said that the Danes want nothing to do with defence. Of course, they are not bound to defence provisions by Maastricht; but let me put a point to them. They expect to receive the best from the Community, and they expect to be defended by it if anything happens. Why, then, are they not prepared to play their part in Community defence? This is a serious point. The Danes ought not to be allowed to influence our timing of a referendum, or our reaction to it.

I understand that the Danish Prime Minister has said that he believes that Brussels should be much more open. What does he mean by that? Does he mean that people should be admitted to the discussions of the Commission, Ministers and Heads of Government? I have never been to Denmark, and I do not know whether the Danish Prime Minister invites visitors to Danish Cabinet meetings, just so that they can listen. Is the British Prime Minister prepared to go along with that? Is he prepared to admit all Cook's tours to Cabinet meetings at No. 10—in addition to the IRA? Those are impossible requests, all of which stem from misunderstanding and misinformation about the way in which the Community and the Commission work.

Last week, a revealing article by a correspondent unknown to me appeared in The Daily Telegraph—not a paper which I usually read, but the article was pointed out to me. It showed the extent to which Whitehall has elaborately decorated the arrangements that emerge from the Commission in Brussels. Do we not blame the Commission all the time? It is the Ministers who make the decisions, but, when they return to their Parliaments, they do not stand up and say, "Yes, I decided this"; they say, "It is that Commission again." That is completely unjustified. It does not achieve our ends, and it ruins a great deal of what is going on in Europe.

I suppose that the question of currency is by far the most important. The Chancellor will tell us what really happened, but it is said that we rushed out of the exchange rate mechanism at the last moment. I do not rely on newspaper reports, but it is said that there was not time or proper consideration for the full support that should have been given to sterling to be organised. The Chancellor can explain all that, but it is what a considerable number of people now believe.

We must ask ourselves why Germany with the mark and France with the franc can work together so closely, while we apparently could not. There must be an explanation. That question goes to the heart of another question: that of our attitude towards, and co-operation with, other Community members. It looks as though the franc is holding—

Mr. Skinner

It is in trouble.

Sir Edward Heath

The hon. Gentleman wants it to be in trouble—he wants trouble everywhere. How the hon. Gentleman can call himself a socialist or be acknowledged by others to be a socialist when he has such hatred of his fellow men and women in other countries, I do not understand.

Mr. Skinner

Unlike the right hon. Gentleman, I have not been taken in by all the bureaucrats in the Common Market. I did not fall for the daft notion that the Common Market treaty would last for ever. I did not ever believe that there would be political and economic union in the Common Market. I believe that the halcyon days of the Common Market and economic growth are over. Some of us have seen treaties before; we have read this country's history. This country has signed a thousand treaties with other nation states in the past 10 centuries. Most of those treaties have finished up in the political dustbin, which is where the unmitigated disaster of a Common Market will finish.

Sir Edward Heath

I must thank the hon. Gentleman for using far more refined language than he did last night on television.

The crux of the matter is that, if there is a flaw. it is not in the ERM, but in the problem of how to cope with speculation of the scale that exists today, which is unchallenged by all the commentators in a modern world with every means of communication at its disposal. That is the crucial question—what is to be the answer? That is the problem to which we must address our minds. Some people will say that we have a long time in which to do so. I am not so sure that we do have such a long time.

Mr. PÖhl, the former head of the Bundesbank, has said today that he believes that there must be a common currency. When a former head of the Bundesbank says that, and we see the possibility of Germany, France and the Benelux countries joining to use a common currency, we must take account of those factors. If such action occurs, it will happen fairly quickly—one cannot delay it. Therefore, I ask my right hon. Friend the Prime Minister to give serious consideration to that possibility. We do not want to be left on one side again.

Mr. Nigel Spearing (Newham, South)

I think that the House understands the importance of speculators who look ahead, but do not the most successful speculators speculate on what appears to be a good chance or a dead cert? If the right hon. Gentleman is right and the only way forward is one currency, does that not mean one economic policy, one Government, one state?

Sir Edward Heath

I gave way to the hon. Gentleman as I always know what he is going to say, and I have the answer for him. The single market will require the development of those aspects—that is plain to everyone. The form that they will take has yet to be examined and decided on. There must be overall control with a single market.

When the former head of the Bundesbank says that he believes that there should be a single currency, one should respect his view. We must move to reduce our differences before we achieve that aim. However, the argument about differences is not borne out by what has happened with the single currency in the United States. Let us consider the different economic powers and standing of different states of the United States, which all get on with one single currency. Let us examine the difference between California and New York state, and some of the smaller southern states. The differences between them are enormous, but they all use one single currency.

Mr. John Marshall

Does my right hon. Friend agree that there is to be a new north American free trade area with three different currencies?

Sir Edward Heath

Yes, but they have not got it together yet. They have not even signed the agreement. I was in Canada last week.

Mr. Skinner

Who paid for it?

Sir Edward Heath

I cannot give that away. It was not an Arab—[Interruption.] I must apologise to the Prime Minister.

Which people are laughing over the free trade area proposals? The Mexicans, of course. They have infinitely lower labour costs, can churn the stuff out, and will spread it over the United States and Canada. Very well, but that is not what we want, and it is not what we had in the European Free Trade Association either.

The only long-term answer—

Mr. Michael Shersby (Uxbridge)

My right hon. Friend has made a very profound statement this afternoon. He says that he believes that one of the answers to the problems that we face is a single currency, one Government and one Community. Can he tell the House over what period of time he believes that that should be brought about, in view of the economic difficulties that we are facing?

Sir Edward Heath

We are one Community now—we have all signed the treaty and the House has approved its signature. That is quite clear.

From 1 January 1993, we shall be one single market. That is clear, and we have supported it completely. The question is how shall we develop after that, and that is through the Maastricht treaty, which the Prime Minister says is good for us and good for Europe. We shall pursue that. On the question of a single market, I believe that the quicker that we get there the better and that it will come more quickly than people think.

I do not want us to be caught out by there being a single market of the original members of the Community. I do not know whether it would include Italy, but it would certainly include France, Germany and the Benelux countries and would be very powerful. If there is to be a single currency, I want us to be in there.

On the Community, it is essential that we explain much more to the people of this country about what has been, is and will be involved in Maastricht. the Prime Minister, the Foreign Secretary and the Chancellor of the Exchequer have spoken consistently and fully about it. I sometimes wish that other members of the Cabinet had been trooping around the country doing so as well and as frequently. One of the problems is that people do not understand.

Consider the referendums that are being held. What is the answer to the French referendum? It was not a referendum on Maastricht. The cities and the business classes all voted for Maastricht and there was a vote against by country areas and farmers. That was a vote not against Maastricht but against their treatment in the Community. Farmers, especially in France, are fed up. Our farmers have lost 30 per cent. of their real standard of living as a result of policies carried out by the Government and confirmed by the House, but our farmers lie low. The French farmers do not; they protest, and the referendum was a means of protesting. It was not concerned with Maastricht.

Now I shall be accused of stirring up the farmers, but I am not doing so. When I first came to the House the president of the National Farmers Union was a major figure. When he made a speech we paid attention to it. I must confess that I do not have a clue who the present president of the NFU is.

That is what has been happening over Maastricht. We must now pay more attention to understanding people's real needs and how we can meet them, and not have people deciding everything, as they cannot do so. In supporting Maastricht, and refusing to allow a referendum, the Prime Minister is absolutely right, and he has my fullest support.

Madam Speaker

Order. Will hon. Members who are leaving do so quietly, so that we can continue with our business?

4.19 pm
Mr. Paddy Ashdown (Yeovil)

It is always a pleasure to follow the right hon. Member for Old Bexley and Sidcup (Sir E. Heath). It is not always easy, but it is always a pleasure. The right hon. Gentleman said things with which I profoundly agree. I shall touch on some of those in my speech, but perhaps his most significant comments, at the start of his speech, were about the right hon. and learned Member for Monklands, East (Mr. Smith). I take great pleasure in welcoming the right hon. and learned Gentleman to his position as Leader of the Opposition. As the right hon. Member for Old Bexley and Sidcup said, the right hon. and learned Gentleman's speech will be regarded by many both inside and outside the House as an excellent speech and an excellent start in his new duties.

As the right hon. and learned Member for Monklands, East said, we are debating a motion which asks us to approve the Government's economic policies. I had rather hoped that we might hear what those were, but the Prime Minister's speech, probably intentionally, gave us no clue. There were one or two pious hopes in that speech, but not one of the actions needed to turn those hopes into reality.

There was a commitment to respond in an ad hoc manner to the conditions of the market, but there was absolutely nothing about what the Government's lodestar or guidelines will be. There was nothing about their exchange rate policy and nothing about how to balance interest rates against the capacity to stimulate future inflation.

We have before us a one-line motion which says nothing—to be precise, no doubt it can be read to mean whatever the various opinions held, not only by Government Back Benchers but within the Cabinet itself, want it to mean. Probably that motion, framed by the Whips, is the only motion which the Conservative party could have tabled for which all Conservative Members will be able to vote tonight. Goodness only knows what it says to the markets out there, which are looking for some kind of guidance or assurance about Government policy. As usual, what comes first is the unity of the Conservative party; what is in the best interests of Britain's economy and of our present economic situation comes second.

What we do know is that last Wednesday the central plank of the Government's economic policy—and of their foreign policy—was obliterated in a single day. All the things that the Prime Minister told us would not happen did happen. In speech after speech, the right hon. Gentleman gave us an absolute assurance that he would not devalue. But he did devalue. In speech after speech he gave us an absolute assurance that his aim was to put this country at the heart of Europe. But last Wednesday he put this country at the periphery of Europe. During the election and afterwards, he gave us undertakings that he had healed relations with our European colleagues, most notably with the Germans. But since last Wednesday, Minister after Minister has been queuing up to blame the Germans in an attempt to shift the blame from themselves.

Whenever something goes wrong under the Conservative Government, why is their first action to blame others instead of taking action to put it right? I have some sympathy with them because this time their traditional targets for blame—the Opposition parties—were no longer available to them. We made it clear that we did not support devaluation. Indeed, the calls for devaluation came from Conservative Members; those voices were from the Prime Minister's own party. One could speculate that, of all that was done last week to destabilise our economy and undermine our pound, the comments of Conservative Members about the need for devaluation must be foremost.

Of course, the Government cannot attack their own, so what they cannot find at home they grub up abroad. They have sought to blame not their bungling, not their mismanagement and past policies, but the present attitude of the Germans. So discreditable an act—an act for which we shall pay a heavy price—is difficult to comprehend.

Perhaps the best way to describe what has happened is to look, as the Prime Minister recommended to one of his hon. Friends, at the Conservative party's manifesto in 1992. It is quite revealing. It says: When the exchange rate mechanism was being created, during the final days of the last Labour Government, the then prime minister decided Britain could not take part. It is easy to see why. The economy was too weak … The Conservatives have changed all that. Well, so they have. So they have.

The Prime Minister's own words—he said them, not me, and we might describe our present condition best in the words that he chose himself—were that devaluation would betray our future and be a route to the second division in Europe. Correct. What he has described he has now done.

After last Wednesday, thanks to the Government's policy, Britain is now condemned to being one of the second-tier economies in Europe, alongside and in the company of Italy, Spain and Portugal. It will take a long time to rebuild and recover our position and it will take a Government with a clear and determined policy in order to do so. I hoped that we would see that today, but I have to tell the Prime Minister that we have seen none of it.

Mr. Stephen Day (Cheadle)

I do not wish to take any hon. Member into the realm of fantasy in this serious debate, but I do not imagine that that would be hard for the right hon. Gentleman. If the right hon. Gentleman had been the Chancellor on that day, bearing in mind what he has told the House, bearing in mind that the Government took great measures to protect their membership of the ERM, bearing in mind that they announced an increase in interest rates, which took great political courage, and bearing in mind that that did not stabilise the pound, what would the right hon. Gentleman have done to protect Britain's membership of the ERM? Would he have raised interest rates even higher than the Government proposed? What effect does he think that that would have had on the economy?

Mr. Ashdown

Our position in the ERM could not have been protected on Wednesday because it was the Government's action long before Wednesday that made that simply indefensible, as I shall seek to show the hon. Gentleman in the next portion of my speech. the Prime Minister's defence before us today was that that was an act, as the hon. Gentleman has just suggested, of pure common sense; an act about which the Government had no option; the Government were, just on Wednesday, overwhelmed by a peculiar and singular event. What nonsense. The fact is that the origins of Wednesday's debacle do not rest in last week.

Mr. Skinner


Mr. Ashdown

It is an interesting experience to have my French corrected by the hon. Gentleman.

The origins of last week's catastrophe lie not in last week but in the underlying weakness of the British economy which has persisted, under Labour and Tory Governments alike, these last 40 years, because we have failed to tackle the real problems of the British economy. They lie in the decision in 1985 not to join the exchange rate mechanism when we could have done at a rate that would have been suitable for Britain and when our joining the ERM at that stage would have prevented the hyperinflated boom of the late 1980s and the deep recession of the early 1990s. They lie in the timing and rate chosen by the Prime Minister himself, personally, in 1990. As Chancellor, he chose the time and the rate, nobody else. He is responsible for that.

Mr. Greg Knight (Lords Commissioner to the Treasury)

What did the Liberal Democrats say in 1990?

Mr. Ashdown

In 1990 we said that we were delighted that we had gone into the exchange rate mechanism, but let me make it clear to the hon. Gentleman that that was the least worst option at the time. When the Prime Minister, then Chancellor, decided to go in, the ERM was 39 months old. I have taken a look at it. Of those months, 30 would have provided better conditions Man the month that the Prime Minister chose to go in.

Mr. Malcolm Bruce (Gordon)

He did it for the Tory party conference.

Mr. Ashdown

Exactly right. We all know why the Prime Minister did it then. He did it because of the Conservative party conference. It had nothing to do with the best interests of Britain; nothing to do with what was right for our economy. It was short-term economic management for the benefit of the Conservative party. That is what has dogged the Government, week in, week out, month in, month out, year in and year out.

It does not end there. The position was progressively weakened by inaction since the election, and compounded by the most desperate complacency during the summer months. The markets were not commenting—as the hon. Member for Cheadle (Mr. Day) half suggested—on the value of the pound in a single day. They were commenting on the weakness of the British economy, in which—directly as a result of Government policy—30 per cent. of our manufacturing base has been destroyed over the past 12 or 13 years. It is the same trend that yesterday produced redundancies at British Aerospace, followed today by further tragic redundancies at Ford and Rolls-Royce.

The markets were commenting not on a short-term phenomenon that arose only last week, but on this country's long-term economic management, and the Government's failure to establish an independent central bank and their short-term economic fumbling and mismanagement last week.

The markets were commenting when they acted last week not on some short-term scenario but on the uncertainties surrounding Britain's long-term intentions—as to whether we will be part of European monetary union or outside it. That led to uncertainties which undermined confidence in sterling, which was reflected in the markets.

Mrs. Angela Browning (Tiverton)

The right hon. Gentleman made allegations about Conservative party conferences. With the benefit of his knowledge of the background to sterling, will he comment on the statement made by the Liberal Democrat economic spokesman, the right hon. Member for Berwick-upon-Tweed (Mr. Beith) last Wednesday, during the course of that party's annual conference, that sterling should move as swiftly as possible to the 2.5 per cent. band?

Mr. Ashdown

The hon. Lady overlooks my right hon. Friend's other two propositions. He suggested that a clear statement be made about our intention to establish an independent central bank, and that we should immediately take steps in that direction. That would have reassured the market. [HON. MEMBERS: "Oh."] That would have reassured the market. If it had been possible to go to the narrow band, that would have had the same effect. Both comments were perfectly reasonable and I fully support them.

Mr. Salmond

I agree with the right hon. Gentleman that the origin of the crisis goes back a long way, but long after it was clear that the parity of sterling against the deutschmark was unsustainable, it was publicly supported by the right hon. Gentleman and by the Labour leader —who now argues for realignment, but did not do so then. There must be a better reason for supporting an unsustainable value for sterling against the deutschmark than that the right hon. Gentleman did not want to take the rap from the Tory Benches.

Mr. Ashdown

The hon. Gentleman again excludes, presumably deliberately, the other points that we made. Of course we said that we ought to seek to hold the value of the pound, but we also said that other steps should be taken to increase the underlying strength of the British economy by beginning to invest and moving towards an independent central bank.

We now pay the price for those long years of Government mismanagement—for the wrong policies and decisions taken at the wrong time. That price is not paid by Government Members or even by Opposition Members, but in the form of more lost jobs, more lost homes and more broken businesses throughout the country. That is the suffering caused by the whole miserable catalogue of Government blunder and mismanagement.

The Government could have taken three actions to avoid the consequences of last Wednesday's debacle. First, they could have established in Britain that which every other modern economy has—an independent central bank that is mandated to maintain and to sustain price stability.

Mr. John Watts (Slough)


Mr. Ashdown

Forgive me, but I have already given way a number of times.

If such a bank had been established, there is no doubt that the confidence created in the market would have enabled the Government to use a larger sum of money to invest in the country's infrastructure—such as transport —and in those other things that the economy will need in the 1990s. Above all, we could have released the controls on capital spending in part if not in full, to enable councils to use the money that they produced from the sale of council houses to stimulate the construction industry and to get building started again in this country.

The Government could also have cleared up the dangerous uncertainty about our long-term intentions in Europe, saying that we would not opt out on monetary union but that we would be part of it. No question mark should hang over that.

Mr. Tony Marlow (Northampton, North)


Mr. Ashdown

I must make progress, but I shall be happy to respond to the hon. Gentleman later.

If the Government had taken those actions, Britain's economic position would have been much stronger and we could perhaps have coped with the circumstances of last week.

That which the Government should have done is what now needs to be done. The Government say that they continue to make fighting inflation the centrepiece of their economic policy. Very well: let them prove it. Let them give independent status to the Bank of England, and mandate it to maintain and to sustain price stability in this country. If the Government will do that, people will begin to believe in their capacity to stick to their undertakings.

The Government say also that they want to strengthen the economy. Let them prove it, by at least sustaining the level of investment in our capital expenditure. I believe that there will be serious cuts in the next review of public expenditure. Let the Government at least give an undertaking that capital expenditure will be sustained, and release the capital sums held for councils, to help stimulate the construction industry.

I fear that the economy is in such a weak state that a fall in interest rates by one or two points will lead not to further spending but—as it did in the United States—to people using the greater amount of money that they have to pay off the mountain of private debt that is now borne in Britain. That happened in the United States, and it is likely to happen here.

Even if there were more private expenditure, it would serve only to create a consumer boom that would suck in more and more imports. To get the economy moving again, it will be necessary to do more than simply reduce interest rates. The Government must take a hand in beginning to stimulate economic activity. If the Government are serious about rebuilding the United Kingdom's position in Europe, let them face up to the challenge posed to this country and to this Parliament by the Maastricht treaty.

We all understand that the treaty has its flaws, but it was never intended to be a destination. It was always meant as a transition point. If the journey stops at Maastricht, progress towards unity in Europe will begin to unravel, with devastating consequences for Europe and for this country.

Government policy, as revealed by the Prime Minister, is that, instead of confronting the challenge of bringing Maastricht before the House and staking their own reputation on getting it ratified, the Government take refuge in delay and dodge. I am surprised that the Labour party seems to have joined the Government in that. We heard from members of both Front Benches today that Britain intends to hide behind the skirts of the Danish Government and of the Danish people.

It strikes me as odd that the Prime Minister was prepared to recommend a firm yes to the French but not to give real advice to the British people about the Maastricht treaty. Shortly after the Danish referendum, the Foreign Secretary told us that the 11 other member states would proceed immediately to ratify. We now hear that Britain must instead wait upon the Danes to decide. Why must we hesitate when almost every other European country finds it possible to proceed? Luxembourg, Ireland, Greece and Italy have all been able to decide without waiting for the Danes, and those countries will shortly be followed by Portugal, Germany and Belgium.

Why is it that Britain and this Parliament cannot face up to that decision and ratify immediately? That shows a vacuum of leadership which is made worse because with the Government's current presidency of the Community they ought to be giving a lead to not only Britain but the wider European community.

Mr. Hugh Dykes (Harrow, East)

Is not the right hon. Gentleman being a little alarmist? If we have only to wait effectively for the preliminary and initial announcements of the Danish Government, Danish political parties and Kobenhavn as to their intentions and how they intend to formulate the questions to be contained in another referendum to the Danish people, there need be no delay in producing our own Maastricht legislation. That can be done well before Christmas.

Mr. Ashdown

Christmas this year? I must disabuse the hon. Gentleman of that notion. I wish that it were the Government's intention, but it is not and we know that. They will not bring the matter before the House until the spring of next year, if not later, for the reasons given by the right hon. Member for Old Bexley and Sidcup.

Mr. Marlow


Mr. Ashdown

If the hon. Gentleman will forgive me, I will not give way, as I am keen to give other right hon. and hon. Members an opportunity to speak.

Why is there such a delay? Why are the Government, apparently aided and abetted by the Opposition, prepared to delay and allow the Danes to decide first? It is not because it is in Britain's interests, but quite simply because it is necessary to hide the divisions in both parties. Britain will pay a real economic price for that. For as long as we do not confront the challenge of Maastricht and we dodge the issue of ratification, for so long will the markets doubt our long-term intentions. For as long as we try to maintain the value of the pound at some given parity—we know not what—so long will the markets require higher levels of interest rates from us in order to do that. For so long it will also cost jobs. While the Front Benches delay and dither, for so long will the voices of the anti-Europeans in both the Conservative and Labour parties grow stronger and stronger and the uncertainties over this country's future become deeper and deeper.

I want to make one final point before I sum up—a point on which the right hon. Member for Old Bexley and Sidcup touched. If there is one lesson to be learned from last week about what we must do in the face of the growing power of the markets and speculators, it is that we can solve the problem only by going into a single currency and not by running away from it. If we really want to be part of a system that can stand on its own feet against the speculation and the raids to which the Prime Minister referred, that is the lesson we must learn.

Mr. William Ross (Londonderry, East)


Mr. Ashdown

I think that I have given way often enough and I must conclude shortly.

That is the lesson, but the Government dodge it and run away from it. There is no refuge for this country outside an exchange rate system that includes our major trading partners. Because of the effects of the Government's economic policy, it will now be very difficult to get back into the system, but we must get back in. The country and the House must face that fact.

There is no refuge in allowing a floating exchange rate policy that enables us to devalue. Freedom to devalue is the freedom to suffer inflation, to have lower growth, to decline while others prosper and to boom and bust, just as we have done for the past 40 years. Given Britain's record, asking for that freedom is like asking for the freedom for a drunk to go back into the pub. This country must begin to face the disciplines that we have just been pushed out of because of the Government's failures last week.

The Chancellor of the Exchequer (Mr. Norman Lamont)

The right hon. Gentleman said earlier that he thought that the rate of 2.95 was too demanding and could not be sustained. Now he is saying that he did not want it devalued. Which is it—or is this just the usual Liberal posturing?

Mr. Ashdown

If the right hon. Gentleman had bothered to listen, he would have heard me say that that rate could not be sustained without other policies to back it, such as those that I have just described. Not for the first time, the Chancellor is being highly selective. After all, it was the Government who chose the rate, not us.

There is no refuge for this country on the periphery of a Europe which is moving faster and faster towards closer unity. The right hon. Member for Old Bexley and Sidcup was right to say that the real danger that faces this country is that the core countries of Europe, France, Germany and the Benelux countries—the countries of the Schengen agreement—will now form a tight core. There will be a second-tier Europe, but we will not even be in that. We will be in the third tier of Europe, the slowest lane of all. Sooner or later this country yet again will have to face a decision about where it wants to be. Sooner or later we will be faced with a choice—are we in or are we out? Sooner or later yet again we will be faced with a choice about whether we will be in or out of a system that we have lost the power to shape and lost the will to be a part of.

That is the sum of what the Government are asking us to vote in favour of tonight. It is a Government economic policy which has led to the stagnation of the British economy, which now threatens growing inflation over the next two or three years and which is fast leading to isolation. Stagnation, inflation, isolation—that is what the Government's policy has delivered to this country. That is what the Government have brought us. That is what, in the light of the Prime Minister's speech, they now offer us. Their fundamental credibility to govern this country has been, even this early in a Parliament, destroyed. They will not be trusted again. Quite frankly, the sooner they go the better. If we can help that process through tonight's vote, we will.

4.45 pm
Mr. John Biffen (Shropshire, North)

When Parliament is recalled in circumstances such as these, there is always a real danger that the entire debate may be dominated by wall-to-wall Privy Councillors. Therefore, I wish to say immediately that I shall speak for only 10 minutes. I hope that the House will excuse me if I take a relatively narrow analysis and proceed with some celerity.

I wish to discuss the evidence that has accrued over recent months of a growing and effective German power. It is quite legitimate to consider that in the context of a debate that purports to be about the Government's economic policy. Indeed, the topic has touched upon my right hon. Friend the Chancellor's every thought during the past few days.

The House might reflect on the European diary of 1977 to 1981 of Lord Jenkins of Hillhead—I introduce him for the benefit of the hon. Member for Bolsover (Mr. Skinner) —in which he made a most effective analysis of the partnership that dominated the European Community: Germany with its growing economic power and sophistication but a very relaxed political role; and France, effectively carrying out the politics. We can now see how much that has changed.

On the whole, I welcome that change. I do not align myself with my right hon. and noble Friend Lord Ridley in taking a dire view of the implications of the revival of German power. Germany has a place in the European sun. The disasters in the inter-war years were as much a consequence of the unhappy Versailles treaty as anything else. I do not identify with those who are fearful and resentful of current German authority. However, I am realistic enough to observe that that fear and resentment exists on a scale that transforms the European position. That was noted with some anguish by some of my hon. Friends in the decision on the combat aircraft a few months ago. However, it was never so much noted as in the conduct of German economic and monetary management in the context of the ERM.

I acknowledge that the reunification of Germany presented the most enormous economic, fiscal and social challenges, and I could not envisage how the much vaunted power of the President of the Bundesbank failed to prevail over political judgments. However, that was the world in which we were living. My right hon. Friend the Chancellor was relaxed in his language, but our right hon. Friend the chairman of the Conservative party was rather more robust in blaming the Bundesbank for a great many of our difficulties in managing our currency within the ERM.

Many hon. Members here today will say exactly how we should have managed our currency in those circumstances, but I shall not join them. I just wish to offer my good wishes to my right hon. Friend and my appreciation of his past struggles.

The House would be well advised to identify where all this will go. It is a matter of value judgment. I believe that unification has proved such a powerful, traumatic force in the national German experience that it is no good going back to the world of Helmut Schmidt and Willi Brandt —an era so affectionately regarded by many in the House as the appropriate guide to the future.

Germany will be increasingly concerned, I believe, with what lies to the east in terms of unification, but she will also want stability on her eastern border and the opportunity of economic influence through investment in that part of the world. Everything that is made available for that purpose is not made available for financial convergence in Spain, Portugal, Italy or Greece. That brings us to the heart of the Maastricht treaty: whether, in fact, it is a prospective reality, whether, in fact, it is rooted in the present or, in any sense, rooted in a likely future.

The crucial role which has been assigned for Germany was assigned by those living in another time who made an analysis of a situation that no longer prevails. Therefore the likelihood of Maastricht being secured is remote. I am sure that it is distressing to some hon. Members that the peasantry should play a role in French decision taking, but one is faced with the position that, even though the whole business community in France voted yes, a very powerful potential political power has been given to those who voted no.

I do not believe that French politics will cheerfully drift back into their previous mould. I do not believe that Giscard has that much of a golden future; it is more that of a golden oldie. Chirac will almost certainly not be controlling the UDR party in France for any length of time. If I am right in my analysis, we shall see powerful political forces operating in major European countries whose purpose will be to carry out economic policies that will frustrate what is in the Maastricht treaty. It is not a treaty that compels Government action. It is a treaty that lays down a course of action which it is assumed that Governments will follow. However, we have now destroyed a great deal of the popular basis of support for those policies and for that treaty. That, it seems to me, is an uncomfortable reality.

I turn to my right hon. Friend on the Treasury Bench and say to him that I did not hide my opposition to the exchange rate mechanism and to Maastricht. However, we are now confronted with a position in which we shall be invited to put on the statute book legislation that has little and lessening relevance. It is that fact which causes speculation. Speculators are not just a lot of yuppies from Essex in their braces. They are people of considerable sophistication. If they see that politicians have committed themselves to courses of action that are wildly improbable, they will draw conclusions that are wholly proper.

May I say, in the presence of the one-time leader of the Conservative party, my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), who coined the phrase "a full-hearted consent" in the context of the European debate, and also to my right hon. Friend the Prime Minister that we have heard from the former leader of the Conservative party that Maastricht is, for him, an integral part of a process to produce one Government, one currency, one state. That, I believe, would lead to its economic provisions being seriously contested and avoided by the member states.

On any count, that treaty is unacceptable. To proceed with it in the House of Commons, knowing that it gives rise to the sort of expectations held by my right hon. Friend the Member for Old Bexley and Sidcup and knowing the uncertainties surrounding the economic considerations, the true course of British statesmanship is to turn to one's neighbours and say, "Up with this we will not put."

4.53 pm
Mr. Peter Shore (Bethnal Green and Stepney)

It is always a pleasure to follow the right hon. Member for Shropshire, North (Mr. Biffen). I am particularly pleased that he drew attention to the relevance and importance of the Maastricht treaty to all that we are discussing today. It hangs like a cloud over our future. It has direct relevance to the debate about the exchange rate mechanism. If it were not for the fact that the ERM is supposed to be the first stage of a three-stage process leading to economic and monetary union under the treaty of Maastricht, it would not, I believe, have had the kind of pressures put upon it that we have seen in the last 10 days.

The other point that I should bring in under this general heading is that it was the French referendum that led to particular uncertainties, for nobody could be certain what the French people were going to say. Is it not remarkable that, when the people of a country are invited to vote, they register a vote that is entirely different from the expectations of the professional politicians, the classe politique which is so Euro-federalist at present?

When the French Chamber of Deputies and Senate met jointly to decide on the treaty of Maastricht, they voted by about 580 to 68 in favour—at least 8:1. When the matter was put to the people of France, it received their consent by a whisker—a 1 per cent. lead. It was the same with the Danes. The Danish political establishment voted for the Maastricht treaty by 125 votes to 25, but when they put it to the people of Denmark we know very well that they rejected it.

Therefore, I well understand why the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) should feel a certain nervousness about the awful prospect of inviting the British people to consider their own future. He has every reason to be nervous. I say both to him and to others that, if the people of Germany are invited or force their way into a referendum, we may get a very different result from what is assumed by their leaders in the classe politique.

Mr. David Winnick (Walsall, North)

Would not the opposition of the British people be even greater if they had heard what the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) said today? He conceded that a single currency would indeed lead to a single state and illustrated the position in the United States as an example of the federal structure that ought to exist among the member states. Does my right hon. Friend believe that there is the slightest support among the British people for such a concept?

Mr. Shore

One of the great things about the right hon. Member for Old Bexley and Sidcup is that in many ways he blows the gaff. He does speak for a minority view in the House and for an even smaller minority view in the country that wills a federal Europe. The right hon. Gentleman wills the destruction of the British state. He wills the transfer of power to a higher body of federal government in Europe—a united states of Europe that would be something like the United States of America. He wants to hand over all the major, crucial powers of government to that body. That is what he is about. That is what so many people fear is the basic reasoning, the basic intention in the treaty of Maastricht, even though the Government have negotiated for themselves an opt-out from the treaty's most dangerous and sinister clauses relating to economic and monetary union.

Anyone who turns his mind seriously to this question must face up to the issue. If we go along that road and if we are driven to economic and monetary union, we shall virtually say goodbye to our own effective control over our economic life and, inevitably, to our effective control over the political destiny of this country. That is the real question. Although the Government have an opt-out, as it were, they have not yet faced up to that question.

Having watched the events of the last two years since we joined the exchange rate mechanism, we very much fear that the Government are doing their utmost to fall in with the requirements of convergence, which would make it possible for them to join the economic and monetary union in 1994. I cannot think of any other rational reason why the Government should have stuck to the ERM parity of DM2.95 for so long, fought so desperately, raised interest rates to 15 per cent., virtually halved our national reserves and borrowed money from abroad, all in order to keep sterling at 2.95 deutschmarks to the pound.

That is extraordinary. the Prime Minister told us that, when we entered the mechanism, many people supported him. They did not even cavil at the exchange rate. I regret to say that some of those hon. Members should have exercised better judgment.

It is two years since we joined the ERM in October 1990, and in that time things have not stood still in the countries of Europe. Some convergence has been achieved in terms of bringing our too high inflation down towards the European average. Great progress has been made there, but that does not necessarily lead to competitiveness which is not only about the rate of inflation but about the efficiency of output. I shall give the Chancellor an example.

In the three years from 1989, the British economy has probably registered an output change of minus 1 per cent. In spite of its problems in bringing together east and west Germany, that country has had an output gain of at least 10 per cent. An economy that has declined over three years is not as competitive as it was in 1989, but in the meantime our principal competitor nation, on which we are basing our exchange rate, has increased its output and competitiveness by a good 10 per cent. Unless there is a miraculous coincidence in which the rate of growth in all EC countries is the same, that is bound to happen. It is not a question of getting the exchange rate right on joining the mechanism. It is bound to be wrong in a few years because of differences in the rates of growth and competitiveness in different countries. I ask the House and the Chancellor to think carefully about that.

the Prime Minister said that we were overcome by a great tidal wave of speculation. That is a fair point, because there was such a great wave, and it affected other currencies as well. But, more importantly, we were forced to lower our exchange rate and to float because it was perceived by virtually all informed opinion that we were no longer competitive. Evidence of that can be found in our current account trade deficit, which is probably the best indicator. Despite nearly 3 million unemployed and the virtual abandonment of industrial investment by almost all firms in Britain and an immense number of company liquidations, we are still running a trade deficit this year of about £1 billion a month.

Britain is in the grip of the worst recession since the 1930s, but we still cannot pay our way. It is inevitable that, when an economy is seen to be performing as badly as ours, foreign opinion among bankers and Governments will be that the currency is out of line. That leads to waves of speculation of the kind that has finally triumphed.

I have a relevant question for the Chancellor. Do the Government think that we would be better off if we had managed, with the 15 per cent. interest rate and the squandering of reserves, to hold the exchange rate at DM2.95? Does the Chancellor think that we are better off now that we have freed ourselves from the ERM and the exchange rate is DM2.45 to DM2.48? I have not looked at the latest figures, but there has been a significant devaluation of 12 to 14 per cent.

Does any hon. Member who is in favour of our membership of the ERM say that we should have remained in the mechanism at the previous rate? Do the Government or anyone else intend rejoining the ERM at a rate of DM2.95 to the pound? If no one proposes that, it looks as if the country may have been done a good turn, because we now have a chance to make industry competitive and begin the process of recovery. We would be foolish not to learn the lesson of what happens to a currency locked into an impossible exchange rate that is bound to attract speculation and pressure. Our exchange rate could be sustained only by interest rates that were so high that they were squeezing the life out of the economy.

We are only in stage 1 of economic and monetary union. If we were back in the ERM and had renounced the pound so that it was impossible to come out or devalue, what would happen? If there were a permanently fixed exchange rate, let alone a common currency, and our costs and prices were not as competitive as those in Germany, it would be just too bad. There would be not 3 million unemployed but 4 million, 5 million, 6 million or more, and British people leaving universities and colleges, after all the good training that my right hon. and learned Friend the Leader of the Opposition is anxious for them to secure, would find jobs not in Britain but on the continent in areas where growth was being sustained.

Mr. Malcolm Bruce

The right hon. Gentleman cannot resist the opportunity to kick the idea of European union while it is down. His opposition is well known. Is he suggesting that sustained devaluation over the years has helped to strengthen the British economy? Was it not the weakness of his party when it was in government that helped to get us into our present mess?

Mr. Shore

It is easy to be emotional about exchange rates, but we must try to be rational about them. Leading people who insist that the index of a country's prosperity or its virtue as a nation should be measured by its exchange rate are quite mad. It is said that Japan and Germany are the two most virtuous countries in the world, but they are not. They are quite efficient countries and they have virtues, but they have immense defects as well.

We should go for a competitive exchange rate that is not out of line or overvalued. That is the only way to secure our prosperity. Of course, there were some post-war devaluations, but since we entered this fixed exchange rate arrangement. unemployment has grown by well over 1 million in the past two years. It is still going up, and nothing will check it.

Mr. Alan Williams (Swansea, West)

Does my right hon. Friend recollect that, when he and I were at the Department of Economic Affairs, the 1967 devaluation was recognised as a platform, not a solution? By 1970, we had turned the deficit into a surplus equivalent to £5 billion at today's rates. We also achieved the highest ever level of manufacturing investment, but those things were all blown away when the Government, led by the right hon. Member for Old Bexley and Sidcup (Mr. Heath), abandoned investment and went for consumer-led growth under the then Chancellor Lord Barber.

Mr. Shore

I recall that, and it is very relevant. I have never believed that devaluation is a policy in itself, but it is a necessary means of achieving not only the opportunity to recover but a balance in the current account, without which long-term measures will not work. That message should be taken on board by all hon. Members.

It is much better for Britain to float than to be locked into a permanent fixed exchange rate, which would destroy the nation. We simply cannot afford to go along that road. If we are to consider rejoining the ERM, as I suspect we shall, we must ensure that the preconditions that the Labour party laid down in its document in late 1989 are met. We said that we had to enter at a competitive rate and must have the power to keep it competitive, and that it must be part of a general policy of expanding growth in the European Community and in trade.

Last, but most important, we must break the link between the ER and the new goal under the Maastricht treaty of entering into full economic and monetary union.

5.10 pm
Mr. John Watts (Slough)

The right hon. Member for Yeovil (Mr. Ashdown) argued that we might have been better able to withstand last week's pressure on sterling if we had had an independent central bank and the House did not have the right to determine whether Britain joins a single currency. He did not describe any measures that were not already available to the Bank of England last week. My right hon. Friend the Chancellor was not reluctant to sanction massive intervention in the markets or substantial increases in interest rates to protect the parity of the pound. There were no other measures that an independent Bank of England could have taken.

The right hon. Member for Yeovil argued that the markets were in some way expressing their doubts about whether Britain intended to stay in the ERM and on course for economic and monetary union. If that is true, what have the markets been commenting on in the past week with regard to the lira and the French franc? Are there doubts about whether France wishes to remain in the ERM or whether it is committed to economic and monetary union? I suggest to the right hon. Gentleman that the markets were commenting on the clear reluctance of the Bundesbank ultimately to be involved in a single currency and on its doubts about whether, with the current policy stance in Germany that is being dictated by domestic concerns—in my view, rightly so—the ERM parities for any of the other currencies were sustainable.

By reaffirming the fundamentals of economic policy, my right hon. Friend the Prime Minister helped to remove some of the obscuring fog that has surrounded the conduct of policy recently, in particular by emphasising the importance of a policy to drive down inflation. The policy that has been pursued since 1988—when interest rates were raised to an appropriate level to counter inflation that has built up from an inappropriately low interest rate policy and when we were following the deutschmark outside the ERM—has brought about a substantial improvement in inflation.

It is a matter of record that I have never been an enthusiast of the exchange rate mechanism. I declined to go through the Lobby to support the motion in the name of my right hon. and noble Friend Baroness Thatcher to approve the Government's decision to enter. None the less, I acknowledge that the first 12 months of our membership helped to reduce interest rates without stoking up inflation. In October 1990, the great imperative was to reduce interest rates because of the growing recession without causing a serious sterling crisis and a run on the pound. That was made possible only by our joining the ERM. As inflation at that time was much higher, the inflationary pressures that would have flowed from a weakened currency would have added to our inflationary difficulties. Therefore, although I have never been an ERM enthusiast, I acknowledge that, during that period, our membership assisted policy, the central aim always having been to get inflation under control.

For about the past eight months, our membership of the ERM has constrained our ability to reduce interest rates in order to stimulate the economy, which has increasingly become the greater imperative. I have found among my constituents a sense of relief that we are no longer bound by our commitment to the ERM.

There has been much crowing from the Opposition—understandably so—about what has been described as a major U-turn in Government economic policy. Opposition Members will not be surprised to learn that I analyse the situation slightly differently. If my right hon. Friend the Chancellor, being aware that the Italian Government intended to devalue the lira, had said, "Let us devalue the pound now," that would have been a U-turn in policy and it would have undermined the credibility of any policy that the Government pursue in the future. But my right hon. Friend did not do that; he stood by the commitment that he, the Prime Minister and the Government have consistently made to seek to maintain our position within the ERM and to take whatever measures are necessary to achieve that objective. Intervention in the markets ultimately did not succeed in steadying the pound and the sanctioning of two rises in interest rates did not succeed in securing stability for the pound.

Those measures were taken against the background of a whispering campaign—whispers in double forte—by the Bundesbank that the pound and other currencies within the system should be devalued. That reinforcement of sentiments already present in the market built up irresistable pressures. I therefore view the decision that my right hon. Friends took not as a U-turn in policy but as a sensible and pragmatic position to adopt. If one is facing a wall, it is not sensible to bang one's head against it; one turns around and finds another way out of the problem.

The Leader of the Opposition seemed to offer a two-part solution to recent events, the first part of which was the oft-rejected Labour package of spending more taxpayers' money and borrowing a great deal more money. [interruption.] Yes, borrowing and spending a great deal more than my right hon. Friend the Chancellor has planned to spend or borrow. Such a policy has been rejected by British people in successive general elections. I hope, without intending any personal malice, that the right hon. Member for Islwyn (Mr. Kinnock) does not have the opportunity, by an appointment to the European Commission, to introduce through the European back door policies that have been rejected twice by the British electorate when put forward by the Labour party under his leadership.

The other part of the Leader of the Opposition's approach is what I would describe as "bier and wurst with the Bundesbank". The argument goes that everything would have been fine if the Governor of the Bank of England and my right hon. Friend the Chancellor had got together with the Germans and asked them nicely if they would agree to a general reduction of interest rates. There should also have been a general realignment of rates within the ERM.

That approach was clearly doomed to failure before anyone even thought of trying it. While it is perfectly fair to be beastly to the Germans and the Bundesbank for a whispering campaign to undermine sterling, it is not valid to criticise German policy by suggesting that Germany adopt policies inappropriate to the needs of its domestic economy and its great need to get on top 'of the inflationary pressures there. It would do nothing to strengthen the economies of the European Community if the motor economy, the German one, took steps that would weaken itself, especially with reference to inflation.

Mr. Boyce

I am a hit confused. the Prime Minister said this afternoon that we will rejoin the ERM once we have discussed the matter. The Germans are not going to be kind to us; we cannot use a reasoned approach; and we certainly do not have the muscle to use a strong approach. Will the hon. Gentleman therefore explain at what stage we will rejoin and what mechanism we will rejoin?

Mr. Watts

When the hon. Gentleman reads the Official Report tomorrow, he will find that my right hon. Friend did not speak in the terms that he has just misquoted. I am about to turn to Britain's future in relation to the ERM, so I ask the hon. Gentleman to be patient.

It would do nothing to improve the position of any other European economy if the German authorities took decisions inappropriate for dealing with the considerable problems facing Germany. By all means let us criticise the Germans, but let us do so for the right reasons—

Mr. Andrew Hargreaves (Birmingham, Hall Green)

Will my hon. Friend agree that that is one of the reasons why the cosy conversation to which the Leader of the Opposition referred, saying that it should have taken place, may well have taken place? Would he further agree that the Germans might have said no, and that the French might have said, "Not until after our referendum"?

Mr. Watts

That is an interesting speculation, but it would not be helpful to speculate further about a conversation that may not have taken place.

As for the future of the ERM, one of its core members, France, has been under great pressure in recent days. Probably the logic of the situation is that the mark should have been revalued against the currencies of all other member countries to avoid this blow up. What my right hon. Friend the Prime Minister said about Britain's future relationship with the ERM was that there need to be substantial modifications to the system before we can contemplate rejoining it. We could certainly not rejoin the system as it stands; and the fault lines to which he has referred were clearly the events of recent weeks.

It was argued before Britain became a member that the reason why we were subjected to such great pressures on the foreign exchange markets was that we were not members of the ERM and that if only we would join, the strength of the mechanism would protect us. The events of the past two weeks have shown that the system could not protect us, the lira, or the peseta, and it remains to be seen whether it can effectively protect the French franc.

It seems to me that the very least necessary modification would be a requirement for a symmetry of obligations on member currencies. There cannot be just a one-way bet. A currency that is under pressure should not bear all the responsibility for maintaining its parity. There should be an equal and symmetrical obligation on a currency that is strengthening against its central rate to take action to deal with that. That is an essential component if there is to be any prospect of this country rejoining the ERM.

Looking ahead to the Delors process, the right hon. Member for Bethnal Green and Stepney (Mr. Shore) reminded us that we have not yet moved towards Delors stage 2, under which there would be a commitment to fixed parities. In the light of the experience of recent weeks it seems to me that the only way fixed parities could be maintained would involve an absolute and unlimited obligation on every central bank to convert unlimited amounts of its currency in exchange for the currency of other member states at the fixed agreed rate. So unless there was an obligation on the Bundesbank to convert unlimited amounts of pounds, lira or francs into deutschmarks, and hence to expand the supply of marks without limit, this stage could not possibly be made to work.

This is why this country is so fortunate that our Prime Minister and Chancellor saw the grave difficulties implicit in the plan that Mr. Delors presented to the Community Heads of Government—the plan for economic and monetary union—and that they obtained for us the right to decide, when other member states believe that the conditions for union have been met, whether or not to take part in that union.

Mr. Derek Enright (Hemsworth)

Will the hon. Gentleman agree that the so-called Delors plan for economic and monetary union was taken forward on the instructions of the Council of Ministers? Can we get that straight once and for all?

Mr. Watts

My recollection is that, in most of these matters, it is the Commission's power to initiate and to determine the agenda that has led us into so many of the problems faced by member states in recent years—problems that have brought discredit on the European Community in the eyes of so many of our constituents. I disagree with the hon. Gentleman; the position is as I have explained it, although I stand to be corrected.

I urge my right hon. Friend the Chancellor not to seek early re-entry into the ERM for sterling, and I urge on our partners the merits of adopting a much more evolutionary approach to economic and monetary union, so that convergence of the economies precedes the creation of new institutions or of a new currency. The lesson that we should learn is that, when economies have become closely integrated, like those of Holland and Germany—there is little in the way of fluctuation between their two currencies —that is a natural process that comes from trade links. We should have a trade-driven Community, and institutions should be created and adapted to meet the requirements of the evolving Community. Bureaucrats or Eurocrats laying down deadlines and creating institutions and then expecting the real world to conform to their master plan cannot succeed.

Several Hon. Members


Mr. Deputy Speaker (Mr. Michael Morris)

Order. I re-emphasise Madam Speaker's plea for concise speeches. The right hon. Member for Shropshire, North (Mr. Biffen) gave a powerful speech in eight minutes—let that be an example to us all.


Dr. Jeremy Bray (Motherwell, South)

My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) made a point echoed from a different geopolitical standpoint by the right hon. Member for Shropshire, North (Mr. Biffen), but the two have been long-standing allies and they are both still wrong. I should like to concentrate on where we go from here, not on the past.

The economy is in such poor shape that a crisis could have occurred at any time. Certainly, the French referendum was the trigger, but the current account deficit is running at 2 per cent. of GDP and rising, unemployment is at 9.9 per cent., public sector borrowing stands at 6.5 per cent. and is rising; and even with renewed growth there is little prospect of getting public borrowing back under control at present levels of taxation and public expenditure. But even that is not the full measure of our plight.

Given the present rates of taxation and public expenditure there seems to be no level or path for the exchange rate which would bring the current account and public borrowing back to an even keel next year, the year after or at any time in the next decade, so devaluation offers no solution.

I did as careful an exercise as I could on the Treasury model, which the right hon. Gentlemen tried to use to support their arguments—they failed. It is a fairly eclectic model. I ran it in comparisons with other macro models. The results were published before the general election. The picture that emerged most strongly from the Treasury model was that there is no path for the exchange rate that brings the economy back into balance. The other models give greater weight to the improvements in exports of manufactures recently, but that improvement does not seem to be being sustained. The volume of exports of manufactures during the past three months is 3 per cent. down on one year ago, whereas the volume of imports of manufactures is 7 per cent. up although total expenditure is so depressed.

If the markets see no improvements coming through in the current account and from the recent fall in the exchange rate within the year or two it takes the J-curve to work, the pound will slide still faster and still fail to find a sustainable path. All this accords with the attrition of industry that we see in our constituencies.

I was content to fight the general election campaign on Labour's platform on the expectation that, as my colleagues opened the books and saw the grimness of the prospects, real weight would have been put behind the measures necessary to improve our technological competitiveness, which is what all Opposition Members have emphasised. Such measures take time to have effect, but if the markets take them seriously—that is a big if—the benefits are felt straight away in increased confidence. The alternatives are either a return to the surgery of incomes policies or severe cuts in public expenditure and increases in taxation—despite the recession.

The Government have not yet launched serious new efforts to improve our technological competitiveness. They believe—on reasonable grounds—that incomes policies would not work, so the prospect is for horrendous expenditure cuts and tax increases. The Government will feel that they could not get away with actual wage cuts, but that is probably what their figuring points to.

The countries whose currencies were under pressure before the pound—Sweden and Italy—have now announced savage cuts in expenditure and huge increases in taxation. In this situation what should Britain do?

Recent events certainly show the vulnerability of the ERM in setting up exchange rate targets against which the speculators can pitch their billions, but the treaty of Maastricht made the ERM only an interim stage towards EMU. Within EMU, there would be no room for attack on national currencies—there would be no national currencies to attack.

The problem of global stability would remain, against the dollar and the yen, but that exists now. Also, there would remain the big political question of how we would manage fiscal and monetary policy within Europe. Here, I would say to my hon. Friends that we are not offered equalisation of income, social benefits, unemployment or growth inside or outside the ERM and EMU. It would be nice if that is what convergence meant. The choice for us is whether we wish to manage our taxation and expenditure within the stable monetary regime of EMU or within the hazards of the international money markets.

For any country to join EMU there has to be convergence of monetary conditions—of inflation and interest rates, and limits on public borrowing—but those constraints have to be faced anyway, whether in the wilds of the international money markets or in the disciplines of the EMU. EMU offers the best environment in which to make the structural changes we must make in the economy.

We should try, first, to ensure that there is an EMU there for us to join at some time. That means Britain's ratifying the treaty of Maastricht, or its equivalent, which I believe the EC will bring forward, without Denmark.

Secondly, the Government should set out honestly the magnitude of the task we face in meeting the EMU conditions and the path they propose we should take in pursuit of them. There are differences between the way the Bundesbank and Germany see the problem of economic management and the Anglo-Saxon tradition of economic analysis. To British economists, German arguments seem crude and unsubtle; to German bankers, British arguments seem weak and indisciplined.

The Treasury has not represented the best of British traditions in recent years, and it is in no position now seriously to criticise the Germans. There needs to be much more serious engagement in technical arguments on the design of policies between finance ministries and central banks. In human terms, perhaps the Bank of England is now in a better position to reopen the dialogue with the Germans and the Community that is the Treasury.

Thirdly, the Government have to abandon their uniquely hostile attitude to industrial policy, to practical support at a serious level and to the structural changes needed to secure Britain's technological competitiveness. I am not sure that the President of the Board of Trade has all the answers, but he should at least be allowed to reopen the debate on industrial policy. The magnitude of the challenge is revealed by the fact that we have to increase our exports of manufactures by some 2 per cent. per year —£2 billion—faster than would occur from simple considerations of price competitiveness and the growth of world trade. That is a huge task and the achievement must be sustained for a decade if we are to preserve anything like our position in the world economy.

With a clear goal and a viable strategy, the Government must explain to the British people and the money markets the case for the short-term policy adjustments they will have to make. They will have to be painfully honest. They cannot expect to be believed unless they are painfully honest. If they are, and although the Opposition would have priorities different from the path the Government will pursue, I hope that we will not oppose such objectives as I have outlined or seek to frustrate their achievement.

5.37 pm
Mr. Terence L. Higgins (Worthing)

I do not think that anyone would argue that my right hon. Friend the Chancellor of the Exchequer has had an easy time in the past two weeks. I have particular sympathy for him as I was the Minister responsible for international monetary affairs when we joined the European currency snake—the precursor of the ERM. I studied the record and noticed that we joined on 1 May and left on 23 June. My right hon. Friend has done a great deal better than we did. We then floated the pound.

It is worth remembering that the Government joined the ERM under the leadership of the former right hon. Member for Finchley. The move was supported by the vast bulk of the Conservative party, by the Opposition and by the Liberal party.

Mr. Bob Cryer (Bradford, South)

It was not supported by this section.

Mr. Higgins

Indeed. It was not supported by all sections of the Opposition.

The rate at which we joined the ERM was not the proper one, although it was, of course, the market rate. Subsequently, there was German reunification and the German Government insisted on a particular exchange rate between the east and west German currencies, contrary to the advice of the Bundesbank. The Bundesbank effectively took its revenge be raising interest rates and we have been suffering ever since.

The Government could not readjust the exchange rate without undermining their declared policy of fighting inflation, so we have gone from month to month in the same situation, It is not so much that the Humpty Dumpty structure of exchange rates that existed when we joined fell off the Berlin wall as that the wall collapsed underneath it.

I feel strongly that, over the past few days, the Chancellor, having declared his policy very clearly, did everything possible to achieve the aims of that policy. It has been suggested that, 10 days ago, there was a good deal of confusion. I believe that anyone who had sat down to deal with the position a day before all that confusion, and all the pressures in the exchange market, would have done exactly what was done by my right hon. Friend. He would have intervened immediately, as far as reasonably possible, and then raised interest rates; he would have threatened to raise them further, and then waited to see what would happen at 4 pm. At that point, he would know whether he had won.

As soon as it was clear that he had not won, it would have been entirely appropriate to move the interest rate in the other direction and to float the pound; it certainly would not have been appropriate to fix another specific rate. I believe that my right hon. Friend did all that he could, in the circumstances, to stick to the policy. Now, however, we must look forward—as, indeed, my right hon. Friend has done—while again stressing the vital importance of the battle against inflation.

The crucial issue is surely the level at which the Government should seek to set interest rates. There is a fundamental balance to be struck. First, we need to set the rates at a level that will result in the pound's settling down at a competitive rate, in relation not only to European currencies but, in particular, to the dollar. The dollar, after all, has been at a very competitive rate: in any previous period, we would have heard complaints about competitive exchange depreciation, beggar-my-neighbour policies and so forth.

My right hon. Friend, then, must bear in mind the need for interest rates that will bring about a competitive exchange rate. Against that, however, he must set interest rates that will enable him to fund the public sector deficit from the non-bank public; otherwise it will not be possible for him to control the money supply, and that must be crucial in the battle against inflation. My right hon. Friend must consider that balance very carefully as the markets gradually settle down. Having said that, I must add that, in that sense, the smaller the public sector borrowing requirement the better. The need for public expenditure control is very important.

Let me now refer to what was a matter of some controversy for the Treasury Select Committee during the previous Parliament. The Government seemed at that stage to change their position. It would not be right to cut public expenditure to compensate for the fall in revenue and the increase in unemployment benefit which have resulted from the recession. The so-called automatic stabilisers should be allowed to work; otherwise we shall deflate too far.

I should add—as the Prime Minister said in his speech —that, while we must seek to control public expenditure, we need to get the priorities right within that public expenditure. It is not just a question of cutting; increases are needed in certain sectors, to ensure—over, say, a year or 18 months—a rise in employment and tax revenues, and a reduction in unemployment benefits. I very much hope that it will be possible to include such positive measures in the autumn statement, in conjunction with an overall control of public expenditure.

It is, of course, always the case that, if a country devalues its currency, the exchange rate will not stick unless deflation takes place as well. I consider that, in the present economic circumstances, the degree of deflation that we already have is probably sufficient to enable the exchange rate to stabilise at a level that is competitive and does not add to inflationary pressures. These are complex and difficult issues, but I believe that the present circumstances do not call—as did all previous devaluations—for a policy of deflation.

When, if at all, should we rejoin the exchange rate mechanism? I assume for the sake of argument that it will still be there tomorrow morning, although that may turn out not to be the case: the Bank is under considerable pressure, and the Spaniards have introduced a fixed rate. We should appraise that question in the light of our experience over the past few days.

My right hon. Friend the Prime Minister referred to fault lines in the system. I think that we face a fundamental difficulty. Criticism has been directed very much at the Germans, but we must distinguish between the German Government and the Bundesbank. The German Government have effectively abdicated authority over many of the most important economic levers with which an economy can be controlled to the Bundesbank, an unelected body which is entirely beyond control. I take no account of the silly little cut in interest rates that it made a few days ago; that, in my view, was intended merely as an insult.

I very much doubt whether it is possible to run an exchange rate mechanism over a broader range of countries than the narrow range of countries around Germany while an independent central bank is operating in Germany. This raises difficult questions. I certainly do not go along with those who argue that we should have an independent central bank here, for the reasons given by my hon. Friend the Member for Slough (Mr. Watts): in my view, the Governor of the Bank of England did everything possible in the circumstances, and could have done no more had he been independent.

Mr. Delors, Mr. Bangemann and others have suggested that the problem arose because we were not operating a single currency. I believe that the argument that we should solve our problems by rushing into a single currency, quite apart from being unworldly, is unbelievably dangerous. If we gave up the present arrangement for all time—long before the introduction of any degree of convergence—in favour of a single currency, parts of the Community would suffer from perpetual unemployment. Moreover, the demand for more and more cash to flow across the exchanges would cause terrible political tensions—al-though I believe that it would never happen in any event. Those tensions would be vastly greater than they would be if we acted in 10, 15 or 20 years' time, when reasonable convergence had taken place.

Finally, let me say something about the Maastricht treaty. Our dilemma is this. From a British point of view, the negotiation at Maastricht was remarkably successful: once the Community had refused to introduce a general opt-out clause to which anyone could subscribe, my right hon. Friend the Chancellor said, "Very well, we will write our own," and that is what we did. Our clause included many measures—on the fiscal control side, for instance —that we would never have secured in a general clause. I consider it highly unlikely that, in a new negotiation, we would ever obtain terms as good as those that we now have.

We should watch carefully to see how matters develop. My right hon. Friend the Prime Minister said that, for the rest, it must be an ambition postponed. Surely, in the light of the events of the past two weeks, the idea that we can actually proceed on the timetable proposed at Maastricht —although, as has been pointed out, we have been excluded from it—must breathe some air of realism, across the Community, into those who have adopted the almost pro-federal approach that has been reflected in some speeches this afternoon.

These are highly complex issues, entirely unsuited to a referendum. The concept of a referendum is, in my view, an alien one, completely incompatible with our system of a representative parliamentary democracy that allows us to consider the issues in depth. If we do that we shall find the right solution, and it will be seen that the way in which the Government have handled their economic affairs in recent days has been wholly appropriate. We shall then be able to continue to pursue an anti-inflation policy, and to get the economy going again.

Mr. Cryer

On a point of order, Mr. Deputy Speaker. I wonder whether you have been notified by the Government of any request for a statement about the resignation of the right hon. and learned Member for Putney (Mr. Mellor).

Mr. Deputy Speaker

I have had no such request from any quarter.

5.49 pm
Mr. Brian Sedgemore (Hackney, South and Shoreditch)

It is a great pleasure to follow the former Chairman of the Treasury Select Committee, although I do not agree with everything, or indeed much, of what he said.

I am interested in the fact that the sounds that we are hearing in the House are different from those that we heard in July. The Conservative party will hereinafter be known as the party of devaluation; the party with policies that are both calculated and designed to create inflation; the party that does not understand the workings of the international monetary markets; the party that is led by a Prime Minister who, on his own admission, has betrayed his country because there is a fault line in his brain. The Labour party will hereinafter be known as the party of monetary responsibility; the party that, when the sterling crisis was at its height, stood to attention and sang "Land of Hope and Glory" before declaring that never again would the pound in our pockets be devalued; the party that, in the pitiless pursuit of political virility, put that before intellectual integrity—perhaps the least valuable currency in politics, even less valuable than the pound.

Today of all days should be a day of penitence in the Chamber on the part of the British political establishment. Their folie de grandeur over the value of the pound has cost the British taxpayer between £500 million and £750 million, perhaps even more. Outside the Chamber there are people who are out of work, people whose homes have been repossessed and people without a future. 'They are asking why the establishment has let them down so badly. They believe that, if politics is to be more than a means of rising in the world, our political leaders must learn from their mistakes. Their message to the Labour Front-Bench team is that, if democracy is to succeed, politics has to be about competing ideas, not elites competing for political power.

It is not often that I agree with international financiers, who every day push about $1,000 billion across the foreign exchanges, sometimes in a speculative frenzy. But I believe that those poisonous vipers who speculated across the exchanges on black Wednesday were right and the politicians were wrong. Sterling's parity against the deutschmark was unsustainable; the right course was devaluation—the word that dare not speak its name. The fault lay not with Germany, Chancellor Kohl or Mr. Schlesinger, the president of the Bundesbank, but with British politicians, British civil servants and the Bank of England—-an institution that claims to bat for Britain, although one would not think so to judge from its role in black Wednesday's debacle.

For at least two people in Great Britain it should be hail glad confident morn never again. I refer to the Chancellor of the Exchequer and Sir Terence Burns, the permanent secretary at the Treasury. Those hapless characters behaved like physicists defying the laws of gravity or mathematicians who, when adding two and two, continually came up with any answer but four. If the Chancellor of the Exchequer has a brilliant mind until he makes it up, no one is better at giving in to his own mistakes than Sir Terence Burns.

Some people are smirking at the Government's plight since black Wednesday, saying that they have no policy on inflation, no policy for recovery. Sanctimony in the expression of unctuous self-satisfaction is not my style, so I would not dream of saying, "I told you so." However, for the record, on 15 June 1990 in the House I argued, using the fundamental exchange rate theory, that Britain should enter the ERM at DM2.60 to the pound. My argument was based on the need for a real exchange rate which, in the medium term, would generate a sustainable account on the balance of payments. Subsequently, and since we joined the ERM, I have tried on four occasions on the Floor of the House to enlighten the Government on the need for devaluation. They took no notice and the result is there for anyone to see.

As the recession tightened, there was another obvious reason for devaluing the pound: the need to reduce interest rates. My argument has always been that devaluation was a useful and necessary step for economic recovery, but a far from sufficient condition for recovery. In current circumstances, it merely helps to provide a macroeconomic framework in which other measures can be made to work. The Labour Front Bench team's policies on housing, employment, training and investment are relevant in that context.

Mr. Winnick

I am grateful to my hon. Friend and share his criticisms of Government policies. However, he might remember that, when he spoke in the debate on the Maastricht Bill in May, he was extremely enthusiastic about the measure, and wondered whether he should vote for it. Does he agree that, if we were in that framework —I hope that we never shall be—we would certainly not have the flexibility that he rightly advocates now?

Mr. Sedgemore

I am one of those old-fashioned, fastidious people who believe that a speech should have a beginning, something like a middle and something like an end. My hon. Friend the Member for Walsall, North (Mr. Winnick) has raised an issue that I shall discuss at the end of my speech—I certainly shall not duck it. My hon. Friend falls into the category of most of those anti-Europeans who are and were opposed to ERM. The mistake they make is that they are drunk on devaluation and believe that one devaluation after another, or a permanently depreciating pound, provides the cure for all our economic ills.

My hon. Friend asked about the future. I believe that we must reject the idea from the plebs of Southend and the nobility of Chingford that we can stop the world and get off, that we can henceforth act in splendid isolation from our European partners, ignore the decisions of the Bundesbank and prepare once again to fight the Germans on the beaches and on the landing grounds. Such Europhobic fantasies are, as the Italian Prime Minister said when rebuking our Chancellor and Prime Minister, for five-year-olds only. Certainly, only a five-year-old could have advanced the idea a fortnight before Armageddon that Britain would have the strongest currency in Europe.

I do not believe that the Government intend to rejoin the ERM this year, next year or the year after that. The Government do not have the slightest intention, whatever happens to the Maastricht Bill, of accepting the main thrust of the treaty. We are about to witness one of the greatest exercises in political hypocrisy ever seen in Britain. Ministers will talk good about Europe, but, in practice and behind the scenes, they will slowly try to unravel the progress made in the past two years. The Government are about to betray Europe, and 'twas ever thus. I imagine that Foreign Office officials are competent enough to carry out that policy as they have been doing for the past 200 years.

The Government have cast aside the ERM and are casting around for old and new fly-by-the-seat-of-the-pants monetarist signals: M0, M1, M2, M3, M4, M5, DCE, house prices, asset prices, PSLI, PSL2 and God knows what other bogus indicators. One might as well try to control the economy by tracking the prices of second-hand lavatory seats. Last week our economy was under the control of financial speculators; this week it is back in the hands of Thatcherite quacks.

At present, the only sensible option open to the Government is to go for a system of managed exchange rates. In the medium term, a new exchange rate system for the Community would involve three substantial changes from the ERM and two changes in Britain's domestic policy. At EC level, three changes are necessary. First, a semi-fixed system of exchange rates cannot be operated as if it were a fixed system. The flexible operation of any system has to allow for devaluations. Secondly, as the Chairman of the Treasury Select Committee said, currency realignments should be more symmetrical. Strong currencies have to be prepared to appreciate just as weak currencies have to be prepared to devalue.

Thirdly, we must create within the international monetary system weapons to enable Governments to take on the speculators. I know that people sneer, but I see no way to achieve that without some new form of exchange controls. We should do what we did when we last introduced exchange controls: send a little man from the Bank of England away for a fortnight and tell him to come back with a new scheme. I am sure that it can be done.

Two changes are required in domestic policy. First, we need to place more reliance on fiscal policy rather than on allowing interest rates to take all the strain. Secondly, domestic credit expansion should be controlled by administrative and other direct interventionist measures, as well as by interest rates.

The ultimate goal should still be the creation of a single European currency. I suspect that Germany, France and a few other countries would go ahead, leaving Britain behind. I suspect that Britain will have to pay both the political and economic price of last week's catastrophe for a long time to come. Let no one forget that that price has been brought to bear through the mistakes of the very political establishment that says that it supports European integration.

Yesterday, the Shadow Cabinet redeemed themselves by backing the idea of a single European currency and warning against the dangers of a referendum. The Government have done nothing to redeem themselves, and I shall happily vote against them in the Lobby tonight.

Several Hon. Members


Mr. Deputy Speaker

Order. I remind hon. Members of the 10-minute rule between 6 o'clock and 8 o'clock.

6 pm

Sir Peter Hordern (Horsham)

I know that the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) will forgive me if I do not follow him, because of the shortage of time.

I thought that the speech by the Leader of the Opposition was brilliant—for a Leader of the Opposition —but it masked the fact that for the past two years his policy has been to shadow the deutschmark at a rate of DM2.95, which has also been the policy of the Liberal party and has certainly been the policy of my right hon. Friends. Now that that policy has come unstuck, a great howl of triumph has emerged from critics of the exchange rate mechanism, who say that one cannot buck the market.

It is worth examining what they mean. Saying that one cannot buck the market is not in itself an economic policy; they really mean that we should return to the days when we tried to run monetary policy by watching carefully the course of M3, M0 and M4—and all those other forms of enjoyment—which caused such great difficulty. That policy was not effective, and because of what was then called the benign neglect of where our currency stood, the pound has fallen. Whenever it has fallen, higher inflation has followed after a suitable lag.

It is not surprising that that is the case, because overseas holders of sterling recognise that the pound is not going to remain strong, and demand an ever higher interest rate for keeping their money in sterling. During the time that the pound floated freely, that has been very damaging.

Many people now think that it is fashionable to have a floating pound. I must remind the House of the time when we had a fixed rate, with the Bretton Woods agreement. At that time—in 1963—there were $2.80 and more than DM II to the pound. Short-term money rates were 2 per cent. and the Government could borrow for 20 years ahead at 5.3 per cent. That is so far beyond the bounds of possibility now that no one can believe it. Yet it was achieved by a fixed exchange rate system with the US dollar.

The thrust of my right hon. Friend the Prime Minister's policy to have a fixed exchange rate within the ERM was absolutely correct from that point of view. It was successful in reducing interest rates from 15 to 10 per cent. and markedly successful in reducing the rate of inflation to its present rate. I was a keen advocate of monetary policy and control many years ago, but I have to admit that it was a failure. For that reason, Baroness Thatcher brought us into the ERM. So sure was she that that was a good step, and as a mark of confidence in the pound, on joining we reduced interest rates by 1 per cent. At that time, there was no talk of bucking the markets.

When we joined the ERM, we thought that we were joining a currency—the deutschmark—which would exhibit its sober and exemplary record of low inflation and low interest rates. No one imagined that the Federal German Government would have an enormous row with the Bundesbank about the cost of East Germany, that the Government would refuse to raise taxes as they should have done, and that the Bundesbank would raise interest rates instead. That has produced a strain on Europe which has been difficult for other currencies, including our own.

I am sure that my right hon. Friend the Chancellor did his best, and I do not believe that he is to be blamed in any way for the holocaust which has swept over the lira, the franc and the peseta, as well as sterling.

The important question now is what is to be done. Some of my right hon. and hon. Friends seem to think that we can reduce interest rates to 5 or 6 per cent. right away, and bother the pound. I read that my right hon. Friend the Chancellor was said to be cheerful after devaluation and even went so far as to sing in his bath. I regard any cheerful Chancellor with the greatest possible suspicion. I remember that Lord Barber was about the most cheerful person that one could ever hope to meet—look what happened to him.. Denis Healey once won a prize in Germany for comedian of the year. Of course, that says more about the Germans than it does about Denis Healey. When I see a Chancellor looking happy and content, I am very cautious.

I hope that my right hon. Friend the Chancellor will take to heart his admirable speech to the European Forum in July, and will be very chary about reducing interest rates. There is no room for any further reduction at the moment. I say that because our monetary policy was tried for an extensive period. People say that we failed to apply it properly and that we should have done it in 1988, instead of reducing interest rates to 7.5 per cent. in that year. It is interesting to note that that year interest rates were quickly increased, to 12 per cent. in August, and by November they were at 13 per cent. The take-off in bank lending did not occur until the following year. It is extraordinarily difficult to run our economy and to control inflation, quite apart from the difficulty of monetary targets. There is a delayed effect and there is also the difficulty of having an impact on the spending public once they have got it into their minds that spending is the thing to do.

I commend my right hon. Friend's remarks to the European Forum. I have taken them to heart and I trust that he will also do so. All that throws considerable doubt on the single currency. That doubt is properly shared by the Government and that is why we have the opt-out. That is a sensible thing to do. If a single currency is to be gained by the terms and conditions set out in the Maastricht treaty, there is no possibility that a single currency will be reached, because all the countries are way above the 3 per cent. limit for deficit for gross domestic product, including Germany. Germany's deficit is rising faster than that of any other country.

Surely we wish to broaden the boundaries of Europe and to take in the countries of eastern Europe as well. I do not see how we can do so with the strict conditions that exist for the single currency. I should prefer to proceed with broadening the bounds of Europe than with achieving a single currency, which would put an impossible straitjacket on any natural development of the European Community. Our posture on the single currency —the opt-in and opt-out arrangements, if we should wish to do so—is entirely right.

The truth is that we cannot isolate ourselves from world markets. We have to have regard to the value of our currency. We cannot afford to let sterling fall too far without causing damaging inflation and job losses. I hope that we may ultimately rejoin the ERM, once the Germans have sorted themselves out and reduced their interest rates. I do not say that with any particular enthusiasm for Europe, but simply as the best long-term method of dealing with inflation and with more than inflation.

It is nearly 30 years since inflation was consistently under control. A whole generation has grown up knowing and expecting nothing else. Property empires and service industries have been built up expecting nothing but inflation. We read about upwards-only rent reviews. What has that done to manufacturing industry, which depends upon stable prices for investment, stock and work in progress?

In the past two years, inflation has been brought right down. Of course there is still some way to go, but for the first time in many years business has had to win new orders by reducing prices and offering better services, not simply by offering more floor space to satisfy swollen spending. That has been a sea change over many years. After all the hardship of the past two years, it would be criminal folly to allow prices to rise again.

That is the key to a successful economic policy, and I trust that we shall stick to it.

6.10 pm
Mr. William Ross (Londonderry, East)

When Charles Haughey, as Prime Minister of the Irish Republic, was confronted by a series of crises, he always described them as grotesque, unbelievable, bizarre and unprecedented. A much more acute mind than mine immediately shortened that description to "GUBU". If that word had found its way into the dictionary, it would have been much over-used last Wednesday, because it is so descriptive, and fits perfectly what was happening in the markets to the Government's whole economic strategy.

We did not simply wake up last Wednesday to find that that situation had been created overnight. Its genesis lay some time in the past, when the Government decided to grant control of United Kingdom's economic life to hands that were not British, and were not responsible to the British people. They did that by fixing the value of the pound in relation to other currencies.

When the Prime Minister ascended the steps of the throne left vacant by his predecessor's departure, those steps were heavily stained with her political blood. Her political assassination and replacement represented more than a change of personalities. They were the outward sign of the triumph of a different policy within the Conservative party.

So far as anyone outside the Conservative party can judge, the previous Prime Minister viewed the concept of monetary union and its inevitable consequence—a federal European super-state—with some misgiving. It was interesting that her predecessor, the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), said today that he believed a single currency to be the natural outcome of the road upon which Europe has set out. That was not clearly said before 1972, and even today it is rarely said by people who are in favour of the economic Community. It is said only by those such as myself who are against the concept.

I wished to ask the right hon. Member for Yeovil (Mr. Ashdown) a question during his speech, but he did not give way to me. If the right hon. Member for Old Bexley and Sidcup, a former Prime Minister, were still here I should ask him the same question. When a single European currency comes into existence, will it float, or will it be fixed to some other currency? I believe that it will float. I do not see how it could operate otherwise. People are really saying that, if an economy is big enough, its currency can float. I do not accept that that idea is necessarily tied to large economies; it is tied essentially to successful economies. In so far as the market value of the currency is a measure of how that economy is doing, we should accept that. Whoever succeeded Margaret Thatcher as the leader of the Conservative party would have been the prisoner of those who brought her down, and would have had to tread a path different from hers. Over the past few years, that is what has happened.

The policy of the Ulster Unionist party on such matters is clear, and was set out in our manifesto. We had hoped that that manifesto would be widely read, but it appears to have escaped the eyes of some—certainly those of the Prime Minister. Whenever the right hon. Gentleman referred to people who agreed with the Government's policy he described them as "the Opposition parties", and said that they all supported the same thing. However, the Unionist manifesto said: Two distinct strands of Treasury affairs have to be recognised and addressed. In the first place, the whole question of control of national finances is central to the exercise of power because without such control no Government can be master in its own house. Ulster Unionists are, therefore, opposed to the concept of European monetary union and a single currency since the inevitable consequence would be the transfer of this most fundamental power of government from the elected representatives of the people of the United Kingdom to an unelected body which cannot be dismissed from office by United Kingdom electors. For the same reason, we oppose the creation of an independent central bank. National Governments should have the courage to exercise responsibly the power conferred by the electorate. Ulster Unionists are committed to the concept of a balanced budget and, in the long term, to the reduction of the national debt. I believe that the Chancellor of the Exchequer will agree that that is not the policy which the Prime Minister suggested had been pursued by all the Opposition parties. We certainly did not and do not accept that it is.

Because that was our policy, I asked the Chancellor after his autumn statement last year whether the increases in public expenditure that he had signalled foreshadowed an abandonment by the Government of the concept of a balanced budget. He replied that he intended to balance the budget over the cycle. I have heard a lot of elaboration on that theme, but I must say that it still does not mean very much without such elaboration. The reality was that, with a fixed exchange rate, the Chancellor's room for manoeuvre was severely restricted. He was back in the position of every Finance Minister who has to wrestle with the attempt to hold a fixed value for a currency which is constantly changing under market pressures.

One more burden that has to be borne by politicians in such a position is that they have to be economical with the truth in any public statements that they make on the subject. They cannot be as open, frank and truthful about the economy and the real value of the currency as they would wish. Like Mr. Helmut Schlesinger, they make comments for public consumption and discuss the truth in private. The Government—any Government, but especially the Prime Minister and the Chancellor of the Exchequer—have to defend their stated position to the last ditch before they change. If they did not fully understand that before, I am sure that the Prime Minister and the Chancellor of the Exchequer now have burnt into their brains that simple truism: "You can't buck the market." The market value of the currency reflects the performance of the whole economy of the nation.

It is strange to me, and to any objective observer, that the party that worships at the altar of the market in relation to every other commodity, whether labour costs, the price of turnips or the price of energy, had to spend £10 billion during the ignominious escapade last Wednesday before finally capitulating to the very market forces that they so respect and applaud in every other sphere. Our Government paid out £10 billion, and the Germans paid out a lot of deutschmarks for pounds that are now worth much less than what was paid for them.

Her Majesty's Opposition and the Liberal Democrats are equally loud in condemnation of the Government. The Ulster Unionists have scant regard for their censure. For years those parties have been demanding that the Government go faster down the slippery slope on which they had already set out.

The world did not end because of the events of the past two weeks, and it will not end. Both the Government and the Opposition are now scrabbling around looking for new policies. The Labour party has apparently gone for "floating and flexible". To me that means that, instead of holding on until the last ditch one goes down the steps as soon as one possibly can. If it does not mean that, no doubt we shall be told what it does mean. I should like to know, because that seems to be the only way in which it can work. A currency either floats and reflects its true value in the market or it drops in large and small steps. Those are the only ways in which the system can operate.

The Government are returning to limits on spending. However, if they have learnt anything from the past two years they will not be regarded as having taken the nation through a defeat. They can accept it as a golden opportunity. Recent events have returned to this Parliament the fundamental power of financial control which was so foolishly and tamely handed away, at a high cost to individuals in this country in terms of homes, jobs and businesses.

There will of course be an autumn statement this year. This time the Chancellor of the Exchequer and the Prime Minister will be free agents as they have never been within the confines of the ERM. They can do something about interest rates—but not too much, because the productive capacity of the nation has been so reduced that we could not produce the goods which a relaxation of monetary policy would allow to be purchased. More imports would be sucked in.

The Government can do something about the projected public service borrowing requirement—but not too much about that either in the short term, because the framework has already been set for next year. I know that the Government will not call that autumn statement a Budget, but the reality is that there will be an autumn Budget, and it will be a long time before we are back in the ERM.

6.19 pm
Mr. Kenneth Baker (Mole Valley)

Some time ago the right hon. Member for Bethnal Green and Stepney (Mr. Shore), in an illuminating aside, said that there was too much passion in exchange rates, and I would agree with him. People invest into exchange rate systems a degree of intensity and passion which is not needed. One should address the problems of exchange rates drained of passion, with a cool realism, and see what is in the best interests of one's country. That is really the job of the Chancellor of the Exchequer whom I therefore congratulate on withdrawing sterling from the ERM last Wednesday. [Interruption.] My right hon. Friend needs a few congratulations. There have not been too many winging around in the course of the past few days.

My right hon. Friend also knows clearly the reservations that I have always had about the strength of fixed parity systems. I expressed them to him when I was in Government and after I left the Government. The advantages of fixed parity systems have been exaggerated this century. One has only to consider the trouble that this country got into by being fixed to the gold standard in the 1920s. That led us into the slump and the then Chancellor of the Exchequer, Winston Churchill, described that experience in a memorable phrase when he said: I wish that finance had not been so proud. In addition, the fixed rate system of Bretton Woods came to an end in the 1960s and collapsed in 1971 when my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was Prime Minister and we welcomed that.

The advantages of the ERM have been exaggerated and they have been made more difficult for our country by the fact that the German economic cycle has not been in tune with the British economic cycle, and vice versa, for about four years. When we shadowed the deutschmark we had in effect to reduce interest rates at a time when we should have been increasing them. In 1990 we entered the system which I argued against at the time but I did not win the argument. We entered at a time which was historically difficult because Chancellor Kohl had made a political, not an economic, decision to pay for the reunification of Germany, not through the German taxpayer but by borrowing. The inevitable consequence of that was higher interest rates just at the time when Europe and Britain needed lower interest rates.

One cannot blame Mr. Schlesinger or the Bundesbank. Their job is to be concerned with the German money supply. They cannot be concerned with jobs in Yorkshire, Surrey or London. Mr. Schlesinger took action to control the German money supply and figures yesterday show that he was probably wise to do so since the German money supply is now increasing and it increases for every franc that is bought.

I hope therefore that the search for a replacement of the ERM will not be too vigorous. I notice that the Prime Minister said that we cannot readily return because there are fault lines. The thing about fault lines is that they are there from the beginning and they are there after the end. The only thing that one can do about fault lines, as any geologist knows, is to wait for an eruption of the earth's surface and then they will be corrected. The search for a system of managed exchange rates is difficult. Such a system is likely to be inherently unstable. The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) put his finger on that, as did other hon. Members. If one wants a stable system one is driven to a single currency, a single monetary policy, a single bank, a single fiscal policy, a single Budget and a single Government. I for one would not want Britain to go down that route.

I hope that on the minutes detailing conditions for re-entry into the ERM which I am sure are winging their way up to the Chancellor from the officials of the Treasury the Chancellor will scribble Kipling's comment: Only the burnt fool's bandaged finger goes wobbling back to the fire This debate has been something of a search for people to put in the pillory—the Chancellor or the Prime Minister. Sir Terry Burns has also been mentioned. I have little sympathy for him because one does not have to be in Government for long to know that the economic pundits and the mandarins of the Treasury are held in high esteem in Whitehall, not least by themselves. Their advice has been not marginally wrong but comprehensively wrong.

They have also failed to forecast the extent and depth of the recession. The Treasury forecast in the future will be given the validity that is accorded to a horoscope. The great Treasury forecasting computer has no more validity than the crystal ball and the gipsy's tent.

I hope that my right hon. Friend will follow the path that he has already mapped out. I welcome the reduction in interest rates. I heard what my hon. Friend the Member for Horsham (Sir P. Hordern) said. We must not abandon an anti-inflation policy. That is important. Floating should not be inflating. I accept that. But in my judgment, with the money supply growth in Britain virtually negative at the moment, there will be scope for further cuts in interest rates. That is certainly what British business needs and it is certainly what British homeowners need. My right hon. Friend now has scope to do that. Therefore, I welcome the road that I think that he will be treading.

It seems irrefutable that last week tore a gaping hole in the Maastricht treaty. The centre of that treaty is economic and monetary union. Clearly, there are hon. Members on both sides of the House who want that to come about. I do not believe that that accords with the real interests of our country. The Danish and French referenda have shown vividly in the past six months that there is a movement across Europe which is not anti-Europe but anti-bureaucratic and against a centralised and bossy Europe. That is what I believe the no votes in France and Denmark were saying and what many people in Britain feel.

The Danes have given us an opportunity to think again about the next step forward. Clearly, there will be significant changes to accommodate the Danes. We heard today from the Prime Minister that we will want to know what those changes are. The House will want to debate those changes. It may well be that we will want some of those changes for our country as well. Why should there be changes for just one country in a Community of Twelve? We shall want to examine that carefully.

Mr. Toby Jessel (Twickenham)

Is my right hon. Friend aware that one of the changes likely to be proposed by the Danes, which was not mentioned by our right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), concerns nationality because the Maastricht treaty contains a provision that anyone who is a national of any of the 12 member states thereby becomes a citizen of the European Union? There is a rising tide in Denmark to be exempted from that, perhaps by way of a protocol.

Mr. Baker

I am grateful to my hon. Friend. That is an important matter; but much more important is what is described by that rather ghastly word subsidiarity. The paragraph in the treaty dealing with that is vague and meaningless, and to the extent that it is interpreted it will be interpreted by the court which is obliged to make decisions in favour of European integration. Therefore, one needs to know exactly what that means. Subsidiarity is not the Commissioners saying what they will leave to us but what we as nation states are prepared to allow the Commissioners to do on our behalf. This centres upon the Commission. The Commission is too powerful.

It is interesting how quiet the Commissioners were in the run-up to the French referendum. They were overcome with modesty. They had no ambitions. But as soon as the referendum was over Commissioner Bangemann went on television and, misquoting Nelson, said, Now is the time for you in Britain to do your duty. He has learnt a little of our history, but we do not need lectures from Mr. Bangemann. He is a federalist. He has admitted that he wants a united government of Europe with him in a prominent position in it. When I was Home Secretary he was the Commissioner who led the campaign against Britain retaining its own immigration controls. Therefore, in the re-examination of Maastricht, we shall have to address the powers of the Commission, and that will be important.

I am clear that Britain will be inextricably linked with Europe in the future as it has been in the past, but Britain's future in Europe is not that envisaged by the Euro-fanatics. I want to see a wider and looser Europe. I want to see a Europe which draws its vitality and strength from the nation states because that will provide the growth and vitality of Europe in the course of the next 10, 20 or 30 years. I want to see Europe not at any price but at the right price. Above all, I do not want a united states of Europe but a united Europe of states.

6.29 pm
Mr. Tony Senn (Chesterfield)

On 18 August, I wrote to Madam Speaker asking for Parliament to be recalled. I must tell the House that this has been a totally unrealistic debate. Why did people want Parliament recalled? I will give three examples. One man telephoned me and said, "I am going to be evicted on 5 September. I have a mortgage and I owe £700 to a finance company. I am paying it off at £120 a month, but I am still to be evicted." I was unsuccessful in getting that action stopped. Am I to tell that constituent that we are squeezing inflation out of the system?

When I was first elected, 25 per cent. of the employment available in Chesterfield was provided by the coal industry. Soon there will not be a pit left. Am I to tell them in Markham, "We are shadowing the deutschmark"? I met an unemployed building worker who is also homeless. What was I to say to him, "We are managing our currency"?

Today, the House has failed to speak for the people that it represents. It has held a second-class, management seminar, addressed by a lot of people who would not even qualify to appear on "Newsnight".

I will not make a political speech, but my own opinion is that this country's problems will be solved in Britain, by us—and only when we have solved them will we be able to have satisfactory relations with other countries. If we want an industry, we must see to it that there is an industry. We do not leave the police, Army and hospitals to market forces; we decide to have them. Agriculture has been sustained that way. No economic magic—devaluation, floating pound, exchange rate mechanism or independent central bank—will guarantee that Britain retains and expands its industrial base.

The real cause of the problem stretches across the House. In the 1980s, most, if not all, of us were persuaded that market forces would provide a prosperous economy. They do not, because one cannot close down Rolls-Royce today and open it tomorrow, any more than one can close down a farm today and reopen it tomorrow. That is the only controversial point that I will make.

This is not an economic debate but a political debate. Longer ago than the 1980s every party—my own was equally involved—reached the conclusion that, because world capital was so powerful, the country must integrate itself deeper and deeper into a structure in Europe, where power was to be moved from the electors of the Parliaments to the European Commissioners and to a Council of Ministers, which makes laws in secret. It must be the only Parliament in the world that meets in secret. The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) asked why the Council of Ministers should meet in public, as though it were a Cabinet—but it is a parliament.

We are rapidly moving towards full European union. I do not use the word "Maastricht" any more, because it does not mean anything to a pensioner who cannot manage on his money. If we ask, "Do you want this country absorbed into a full European union?" people know exactly what we are saying. A referendum does not mean much to people. But if we ask, "Do you think that you have the right to decide before this country is put into a full European union?" the public understand. Let us not use terms such as Maastricht, referendum, or managed exchange rates—let us call a spade a spade. The people have the right to decide the future of this country.

The treaty that was meant to unite Europe has divided every nation, every party in Europe and every party in the House. I have never known anything more divisive. I will not mention the treaty's name because I do not believe in it, any more than I believe in talking about Thatcherism. I can only say that I only represent Chesterfield and Denmark tonight, so I have a bigger constituency. I also represent half of France, so I cannot be described as holding isolated views, or be called a typical little Englander when the Danes agree with me.

To talk of being pro-Europe or anti-Europe is a plain lie. We were born Europeans and will die Europeans. It is a matter of geography. The question is what sort of Europe it will be. Am I anti-British because I do not like the Prime Minister or his policies? Of course not. Is one anti-American because one does not believe that they should have done this or that in Panama? We are discussing our own future and that of Europe. I introduced the Commonwealth of Europe Bill, and when the Maastricht treaty—there, I have said it now—dies, I believe that that Bill will acquire greater relevance.

There are some honest differences. I respect the right hon. Member for Old Bexley and Sidcup for being a committed, passionate federalist. He does not think that the British people have any right to comment on this country's future. One hears talk about the peasants in France. On the BBC the other day, one commentator said, "It has become clear from our analysis that it was the poor and uneducated who voted 'no' in the French referendum." That is only half a minute away from taking the vote from people who are poor and uneducated. I believe that the right hon. Member for Old Bexley and Sidcup would be happy to return to 1832—he has a slight 18th century flavour about him anyway.

There are some federalists in my own party, though they are a little more discreet. They talk about pooling our sovereignty. They do not want to pool their sovereignty with the British electorate, but they are happy to pool it with the Commission. There are also the nationalists. I am not one of them. I would rather die than go on a platform with Mrs. Thatcher, because the woman who abolished the Greater London council is not for me the best advocate for greater devolution of power. Do not ask me to go along with a woman who thinks that foreigners start at Dover

and that some of them have got to Wolverhampton. That is not my idea of Europe. I am a democrat, not a nationalist.

There is the question whether the people had any choice. My right hon. Friend the Member for Islwyn (Mr. Kinnock), the Prime Minister, and the leader of the Liberal Democrats completely agree on this unmentionable treaty. I know from experience that when people really agree with one another, the level of abuse rises to a huge height to conceal the agreement that everyone knows exists. I have seen that happen time and again. The electorate were given no choice. They were told that the treaty would be agreed through parliamentary democracy. We have all been here a year or two and know that the vote on the treaty will be decided by two Johns. Party discipline determines our vote. The BBC asked me today, "Why are all the opponents of the treaty on the Back Benches?" The reason is that if one is on the Front Bench and opposes it, one ends up on the Back Benches—and if one is already on them, one never gets to be a member of the Front Bench.

I have no confidence that the House will reach a decision on the basis of the merits of the treaty. Party loyalty is very strong. I am a good party man in matters of current policy, but do not tell me that the rights of the British people can be handed away on the pretence of parliamentary democracy, when that is done under the discipline of the Whips.

Tomorrow, I am launching a national petition, like the chartists did, because I have no confidence in the House being allowed to reach the judgment in which it believes. If right hon. and hon. Members believed in their decision, that would be one thing. My petition ends with a prayer that the House will ensure that before the Maastricht Treaty, or any modification or amendment of it, is approved by Parliament, or ratified by Her Majesty's Government, the Citizens of the United Kingdom shall be given the right to vote for or against that Treaty in a National Referendum, and that the decision reached in that Referendum be accepted as binding upon the Government and Parliament. I will also present a Bill tomorrow—the Treaty of Maastricht (Referendum) Bill. The long title states that it is a Bill to provide for the holding of a national referendum, and for the procedure for the subsequent decision of the House of Commons, on the question of British ratification of the Treaty of Maastricht before Her Majesty's Government may lawfully adhere to the Treaty on behalf of the (United Kingdom"— and so on. That is all that I can do. Anyone who is listening to this debate or watching it on television will not have any confidence in the House to decide those matters. If there is an outside campaign for a referendum it will sweep the country. It was not for nothing that the chartists and suffragettes struggled for the vote. They did not do that so that the vote could be taken away because business managers and Eurocrats feel that they know better than we do. That is trying to reverse the gain of those who campaigned for the suffrage, and that will not work. I warn the House that if it tries, the next thing that will be undermined will be not the currency but the reputation of this Chamber in which we were all elected to serve.

6.39 pm
Mr. David Howell (Guildford)

After that noncontroversial but very enjoyable speech by the right hon. Member for Chesterfield (Mr. Benn), I want to tell my right hon. Friend the Prime Minister how greatly I welcomed his statement, which confirmed his plan to hold a special European Council on 16 October and to have a profound look at the position in Europe after the French referendum and various other developments.

I understand that the agenda for the conference has three main parts. The first is that there is an obvious need to sort out what, if anything, will bring the Danes back on board. They are signatories to the Maastricht treaty, which cannot live again unless they are persuaded to vote for it —which is entirely a matter for them. The second part of the agenda involves reconsideration of the systems for monetary co-operation in Europe. They have broken down and clearly need reforming.

The third and, perhaps, the most significant part of the agenda is to consider the growth of public concern in Europe since the signing of the treaty and the dramatic events of recent times. We need to examine the whole development of Europe and the fundamental worry whether it is a process of ever-accumulating power at the centre or, as my right hon. Friend rightly said this afternoon it should be, a settled arrangement and a settled sharing of powers between the ancient nation states and the Community institutions.

I shall comment briefly on each of those agenda points. First, what, if anything, will persuade Denmark to support the treaty? None of us yet knows the answer to that, because the Danes have not agreed it among themselves. They are talking about a variety of devices and it will be interesting to see whether they open up the treaty. They are talking about binding supplements, new protocols and other additions to it. It is inevitable that that will have to come before the House. We must wait to discover what comes out of the special European Council, but that matter must be examined. It is clear that some quite fundamental questions have already been raised by the Danes.

Secondly, on monetary co-operation, it is clear that the over-rigid version of the ERM was brittle. However, we must remember that that rigidity was created not by the founding fathers of the European monetary system, but by those who came along in the mid-1980s and said, "This is not enough. We must make it a stepping stone to a full single currency and single monetary union." Those people injected the rigidity into the system, which made it much too brittle and unable to sustain shocks, such as the excessive fall in the dollar and rise in the deutschmark, the cost of unification and a few indiscreet remarks from the Bundesbank. The system blew up. We cannot re-enter it and my right hon. Friend the Prime Minister is right to urge that we think again. It is no good the great policy authorities of Bonn and Paris saying, "It is good; it continues." It is a fundamentally weakened system and we must not rejoin it.

There are those who say, "Let the pound float." As my right hon. Friend the Member for Mole Valley (Mr. Baker) said, we must be careful that floating does not become inflating. It may feel good now because it is the fashion. The economists are switched on to the fashion of floating. They are great lemmings when it comes to fashion. When the chill wind blows, they will wish that there was some sort of ordered system, some sort of harness of co-operation across international currencies. That time will come, as sure as night follows day, and then we will need to think about what sort of co-operation we want. In the meantime, and even when we do have some new system, our monetary and fiscal policies must be very

tough. Indeed, our monetary policy must have a toughness and quality which, under the present arrangements in this country, we cannot provide.

I have one point of agreement—although I am afraid it is the only one—with the rather prolix speech of the right hon. Member for Yeovil (Mr. Ashdown), which is that we need to depoliticise some parts of our monetary policy and so enable them to be run in ways that place emphasis on the monetary factors that concern bankers. The Opposition will cry, "That makes them unaccountable", but too much politics in monetary policy makes it unworkable. If we want a strong pound in any future sort of international system we will have to revise our monetary structures. That day will come. The pure floaters may feel happy and ring bells now, but they may wring their hands later.

Finally, let us consider my right hon. Friend the Prime Minister's fascinating suggestion that we take account of the vast change of mood throughout Europe, not just in this country and in Denmark, but in France, Germany and elsewhere. After the dramas of recent days, my right hon. Friend has set out a new agenda that will carry forward my idea of the European dream, which is not the same as some of the ideas held in Bonn, Paris and Brussels. I urge my right hon. Friend not to be diverted or deflected—and I do not think that he will be—by the flat assertions of Bonn and Paris that we must carry on as before, slap through the Maastricht treaty, go back to the ERM and keep on with the steamroller, the process, the train or whatever. I do not believe that that is the voice of Europe or the line that is good for this country. My right hon. Friend is right to argue for a third way and a new agenda for building the sort of Europe that fits the 21st century and the post-cold war era.

People talk of a two-speed Europe, but it is much exaggerated. There is no guarantee that the deutschmark will always remain the strongest currency. Perhaps for the time being it will and perhaps there will be a zone, but it will not be a Community zone—it will be one of Switzerland, Austria, Belgium, Holland and, perhaps, France on high days and holidays, together with Germany and the deutschmark. That may not last. The franc has problems, as has the German political system. The speed may alter and the runners may not stay the same distance apart. We should not assume that everything will fall into a two-speed Europe.

There is an unfinished European agenda that Maastricht does not address. In pointing out the issues that must be profoundly reconsidered post-referendum, my right hon. Friend is creating opportunities—out of what admittedly is a crisis—and giving a lead in what good Europeans should be doing. The unravelling of the whole of European co-operation would be a disaster, but, as others have said, the attempt to solidify the whole of European co-operation into an over-centralised and over-rigid united states of Europe, failing to take account of the diversity of the nation states, would be an even greater disaster. Even now, that has caused much difficulty that good Europeans, including my right hon. Friend the Prime Minister, must reject. We must move on to a recovery that is in the right direction for Europe.

6.47 pm
Mr. Giles Radice (Durham, North)

The whole House recognises that the Government have suffered a humiliating reversal. They were forced out of the ERM when they said that it was the cornerstone of their policy. Having said that they would never devalue, they have allowed the pound to depreciate by 13 per cent. against the former central rate of the deutschmark. In short, their economic policy is in tatters. Indeed, it was difficult to discover in the Prime Minister's speech whether the Government really have any economic policy. Let us consider the contradictions in what the Government are doing and saying. Having committed themselves to the ERM, they suddenly rediscovered the merits of floating the pound. Having supported the idea of currency stability as the main counter-inflationary discipline, they are now trying to resurrect the old monetary targets—the M-this, the M-that and the M-other. Those are the targets that failed so miserably in the 1980s. So confident are the Government about these targets that they do not propose to tell the world what their tough monetary targets really are. That shows the confusion that they are in.

As for interest rates, a number of hon. Members have asked whether the Government really believe that they can get interest rates down very much further and faster without, at the same time, creating a massive depreciation of the currency, with all the inflationary consequences that that may have. Above all, what is the Government's policy for getting Britain out of recession? The Government have been telling us for more than two years either that we are not in recession or that we are coming out of recession, but we are still in recession. What is the Government's policy for getting Britain out of recession? We did not hear a word about that this afternoon, but that is what my constituents want to know about. They want to know how the Government are going to improve the underlying strength of the economy.

The truth is that the Government are running around the ruins of their policy like headless chickens, not knowing what to do. Their humiliation is made even worse by the fact that their policy defeat, as they know very well in their own minds, is largely of their own making. The most junior speculator in the City knows that the main reason that Britain was forced to devalue and leave the exchange rate mechanism was the weakness of our economy. It is as simple as that.

To continue the chicken metaphor and to quote my right hon. Friend Lord Callaghan, the sky is dark with chickens coming home to roost. The seeds of last week's disaster go back to the policy failures of the 1980s. I remind the House of the record: of the unsustainable Lawson boom that led to the build-up of debt and the property bubble. That was followed by the clobbering of the economy by high interest rates, two years before we even went into the exchange rate mechanism. I believe that it was those high interest rates that were mainly responsible for the collapse of the housing market, the recession, the closing of factories and the rising unemployment.

Finally, when we did join the ERM, as many of us had urged, we joined in the wrong circumstances. As a Back Bencher I said on 15 October 1990 in the House that the Government's decision to join was taken at the wrong time, for the wrong reasons and at the wrong rate. I have been much quoted, but nobody has attributed the quotation to me. That is why I quote myself this evening. It is one thing for a Back Bencher to go around saying that kind of thing, but it is much more difficult for those who sit on the Opposition Front Bench to do that. If they had argued for devaluation, as a few of my hon. Friends have suggested, the Government would have been blaming us for the devaluation, instead of blaming the Bundesbank, as they now are. I think, therefore, that my right hon. and hon. Friends were very wise in the position they have taken.

Once we were inside the ERM, the Government failed to take the appropriate measures to strengthen the economy: measures to restore consumer confidence, measures to tackle unemployment and measures to improve our industrial efficiency. That is why we are still such a weak economy and so easy to speculate against. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, in a most brilliant and devastating speech—we know that it was devastating because no one on the Conservative Benches dared to intervene—the Government showed that they were incompetent even to defend the pound. These people, who are meant to be the masters of our economy, to know how to manage the economy and to understand the markets, did not understand the markets. They failed to defend the pound and we were forced out of the ERM, instead of securing, as would have been far preferable, a managed devaluation inside the ERM.

This week we have heard the Government blame the ERM for what has happened, we have heard a lot this afternoon about the fault lines within the ERM, but this was the ERM which, according to the Government during the election campaign, helped to bring down inflation from over 10 per cent. to under 4 per cent. For a number of years—and for the United Kingdom over the last two years—the ERM has provided much greater currency stability. It has enabled us to bring down interest rates far faster inside the ERM than outside it—at least, until a year ago. Now, all these "floaters" have suddenly emerged, but less us not forget that floating the pound in the 1980s led to wild swings in the currency that were totally unrelated to any underlying competitiveness. It was in those conditions that industry found that it was so very difficult to plan ahead. That is why industry was in favour of Britain's joining the ERM. That is the case for the exchange rate mechanism and for British membership of it. That case still remains.

Of course the ERM has been subject to strains, particularly in the run-up to the French referendum, and of course there is the problem that over the last year German interest rates, for very understandable domestic reasons, have been much higher than is justified by the general economic conditions in the other economies of the European Community. There is also a more general difficulty—people have a point when they raise it—that a system that was originally designed to be fixed but flexible has become more inflexible over the last two or three years, partly because of the desire to move towards a single currency.

But whatever the current strains and whatever the prospects for a single currency, which I certainly still support, the economies of the European Community, particularly the deutschmark bloc and France, are now so interdependent that European decision-makers will want to maintain some kind of fixed currency arrangement. That is the reality, whether we like it or not. Those economies have had far too much experience of the shortcomings of floating currency regimes not to keep on with some kind of ERM. That makes it all the more essential that we should at least keep open the strong option of returning to the ERM as soon as possible, but this time at a more defensible rate.

Instead, the Chancellor gives the impression that to return to the ERM is the last thing he wants to do. According to him, we are going to run a purely British economic policy. That is quite apart from the incredibility of the Chancellor running anything at all, after what has happened during the last two weeks. The rhetoric, which is all very splendid and obviously designed to encourage the Thatcherites inside his party and to strengthen his own position, ignores the fact that we live in a world in which $800 billion are traded on the currency markets every day. It also ignores the fact that our economy is closely linked to other European economies, that two thirds of our trade is now with the continent of Europe and that our main trading partner now is Germany. Therefore, we cannot divorce ourselves from the continent, whether we like it or not. Whether we are inside or outside the ERM, we are closely affected by what happens on the continent of Europe, particularly by what happens in Germany.

It is a question not only of keeping open the option of going back into the ERM but also of being positively involved in the European Community, which brings me finally to the Maastricht process. I have no fear of supporting the Maastricht treaty because I think that it is a good treaty.

Mr. Deputy Speaker (Mr. Geoffrey Lofthouse)


6.57 pm
Rev. Ian Paisley (Antrim, North)

The former Prime Minister, the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), said today that politicians should be out in the country explaining things to the people. I think that the people want to ask the politicians what is happening. The treaty of Rome stated clearly that it could not be by passed or changed without all member states being unanimous. Then there was the ratification of Maastricht. Certain countries ratified it in their Parliaments. Others had to hold a referendum. Denmark said no. The strange thing is that we were told that if France said no the treaty was dead, but if certain other countries say no the treaty is, evidently, very much alive.

I was in the House when my right hon. Friend the Member for Lagan Valley (Mr. Molyneaux) asked the Prime Minister whether he was going to put pressure on Denmark. He said certainly not, but it seems now that the whole of Europe is engaged in putting pressure on those who democratically exercised their right to say no. If they were keeping their own laws, we would not have the controversy that we now have. There is a three-tier system. Some hon. Members say that Germany will go it alone, but if Germany or France or any other member state in the EC is a good member, it will stay and seek to persuade people to take the democratic way.

People ask, "Why are we always told by politicians that Europe is the answer to everything?" When he campaigned in the EC referendum in the United Kingdom the then Prime Minister, the right hon. Member for Old Bexley and Sidcup, said that unemployment problems would be solved when we entered Europe. Can any hon. Member say that they have been solved? The right hon. Member for Old Bexley and Sidcup crusaded for a Europe that is entirely different from the Europe of today. One would not recognise the Europe presented in that referendum.

The right hon. Gentleman said that the people know nothing about it and he made some disparaging remarks about the peasantry of France. I say, "Well done the peasants of France." They are entitled to say no and their votes are just as important as those of wealthy people. Is the vote to be taken away from ordinary people? I know something about Mr. Delors. He is an arrogant man. I have sat with him in committees for 12 years and I know his style. He has said that 80 per cent. of all decisions will be taken in Brussels. Nobody in this country wants Delors, and no Commission, even one containing Leon Brittan, should make decisions for this country. The people of Britain want this Parliament to take their decisions.

We are told that the people cannot be trusted. Why should not the people of this country be allowed to speak in a referendum? Hon. Members who believe in European union and one government in Europe—a single state that goes beyond federalism—should go to the country and say to people, "Do you want this?" The House decided that the people of Northern Ireland should decide their future by referendum but now we are told that referendums are undemocratic, alien and foreign. However, one is kept on the statute book for Northern Ireland and it is there because a former Prime Minister proposed it and carried it through.

We are told that Europe will solve every problem and that trouble in future can be solved by a single market. Our monetary difficulties were to be solved by entering the ERM. The leader of the Liberal Democrat party said in his speech that the answer was full steam ahead for one solid union in Europe, one parliament and one people. In the old days people used to speak about one air force, one navy and one police force. Everybody knows that if that happened there could be no withdrawal. At least we were able to get out of the ERM and float sterling, but a policy such as that proposed by the leader of the Liberal Democrats is similar to the law of the Medes and Persians and is for ever. Why should we be forced or rushed into such a decision?

The people of Europe are beginning to think again about Maastricht. I asked the French ambassador to the United Kingdom whether he thought that France was divided. He said, "Yes, my country is divided 50:50." Mr. Delors has succeeded in dividing his own country. France was the womb of the EC and supplied the grandfathers and the fathers of the Common Market. It is the Common Market establishment, and when almost 50 per cent. of its population say no surely all the other European countries should think again.

We were to have an economic debate today. We have had terrible cuts in Northern Ireland and a Scrooge policy is followed by the Northern Ireland Office. Hospitals are closing, housing estates are not being rehabilitated, jobs are being lost and unemployment is at 15 per cent. Those are the issues that worry the ordinary man in the street, and if the money that was wrongly used to try to stay in the ERM had been invested in our own country it would have made a great difference. It would have provided hospitals, houses and schools and investment in employment. The time has come for the Government to forget about the ERM and to put their house in order. They should tell us their economic policy, because I have not yet heard in the debate what they propose to do. The House has a right to demand that the Government set out their policy.

7.6 pm

Mr. Dafydd Wigley (Caernarfon)

I certainly agree with the last point made by the hon. Member for Antrim, North (Rev. Ian Paisley). The motion seeks support for the Government's economic policy, but that is asking the House to support a pig in a poke when we do not know the shape of the pig or the direction of the poke. We have had no indication of the new economic policy that will replace what everyone in these islands sees as the shambles of last week. We need to know that there will be change in the policy that has led to the present unemployment in Wales, Northern Ireland, Scotland and even in southern England. Social problems arise from economic problems and there is a crying need for a housing programme. We have not been told about a new economic policy and I fail to see how Conservative Members can support the motion.

I do not believe for a moment that last week's difficulties surfaced suddenly. I shall speak about speculators later. It is necessary to have some relationship between the currencies in EC countries, and that will be even more necessary from 1 January when there will be free movement of people, goods and capital. We need structures that will enable that to happen coherently.

We entered the ERM in 1990 at too high a rate. We said that at the time, but there is no kudos to be earned from saying "I told you so". We have been paying the price of too high an entry rate through high interest rates to sustain the currency at that level. That interest rate has caused difficulties for businesses and industry in getting the necessary investment, and it has certainly caused difficulties for people with mortgages.

We must ensure a new parity and, in the light of current inflation, interest rates could be reduced to 8 or even 7 per cent. If that happened, the pound would drift down even further, perhaps to DM 2.40 or $1.55. I hope that that will happen following lower interest rates, and that we can try to renegotiate ourselves into what may be left of the ERM or a replacement regime. I passionately believe that there must be a replacement regime.

A couple of weeks ago the Prime Minister inaugurated a factory in my constituency. That factory is the European headquarters of an international company and, as the Prime Minister heard, it exports 98 per cent. of its products. In the lead, up to the general election the Government made great play of the many international companies that have come to Wales from Japan, Germany and other countries. They have come to sell into the European market, but if we do not have a stable currency and a stable economic policy those companies will be undermined. A stable currency is necessary to build on the job opportunities that such firms provide.

I was saddened by the way in which people were so inclined to blame foreigners for what went wrong last week. It was easy to blame somebody outside. The frightening feature of the coalitions that are opposed to Europe, such as Le Pen in France, is the nasty inward-looking elements who want to turn the clock back. We should be extremely careful to avoid those elements.

Many people have been willing to blame the Bundesbank, but we should recall that last week it spent DM 50 billion on propping up currency, and DM 35 billion on sterling. We must remember the difficulties that Germany has experienced with the integration of East Germany, despite which it has taken in more than 250,000 refugees— far more than we have been prepared to take. Germany may not have behaved in what we regard as the most desirable manner, but it is easy to blame other people when the wrong decisions have been taken in this country.

The Prime Minister said that last week's events occurred because of a massive amount of speculation. If people sold sterling that they did not have on an unprecedented scale to undermine it, when it was known to be weak, and then moved against the franc, which was not known to be weak, in order to make a quick buck, we must take measures to ensure that it never happens again. What sickened my constitutents was watching people shuffling paper and making millions of pounds in the process. There must surely be an argument for some control over speculators and for a windfall tax. In addition, there should be rules to ensure that when there is currency speculation people have currency up front rather than being able to turn the currency around within 14 days or whatever period is necessary. The Government must investigate what happened in the currency markets last week to see whether there was deliberate action to undermine sterling and, if so, whether legislation is adequate to deal with it.

Our economic policy must ensure the regeneration of industry. A strong regional policy is necessary if we are to have fixed parity of exchange rates. Without it, pressure will build up and countries whose economies are not performing well will experience increased unemployment. We need a much stronger regional policy to help not only areas of Wales and other parts of the United Kingdom but Europe.

Next year will herald a new chapter in Europe and we must be ready for it. There must be fresh new thinking on economic policy to ensure full employment and the maximisation of people's potential. If the events of last week have taught people a lesson and have made them look again at new mechanisms and at ways of ensuring that that potential is maximised, perhaps some good has come out of them. But many people have been hurt in the past two years and the Government must now be a little modest and admit that they have made mistakes from which they have learnt and will build a better future.

7.13 pm
Mr. William Cash (Stafford)

For me, the ERM is the Maginot line on the road to Maastricht. It has failed spectacularly and we saw the result the other day with untold damage and anxiety when panic struck the country as interest rates rocketed up. We now have some respite, but the problem is that Maastricht is by no means dead. That troubles me, and no doubt other hon. Members, greatly.

This year's Conservative party manifesto said: Membership of the ERM is now central to our counter-inflation discipline. But the ERM is not a magic wand. We can certainly see that it is not.

Any modified form of the discredited system would simply not work because a series of divergent economies cannot be made to converge. Countries such as Germany on the one hand and Greece and Italy on the other inevitably will not achieve currency parity.

The cohesion fund under the Maastricht treaty is part of the economic policy that lies at the heart of these matters. The result is that, by our own admission, we have neither the money nor the intention to pay the amount of money that Delors is claiming for his financial package —Delors 2. The money is not available, nor is the will to pay it, so what is the rationale for continuing with the Maastricht Bill or for pursuing the dogma of the ERM?

With a number of honourable exceptions, I had not expected to hear such blatant hypocrisy from Opposition Members. They have been up to their eyes in this policy throughout. What we heard from the Liberals and my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was unbelievable. They want a unified state. We cannot afford to rewrite the history books by pretending that what has recently happened did not really happen. We cannot brush it all under the carpet, pretending that it is business as usual.

When the British people reflect on the events of last week they will not find it easy to understand how we can simply continue with Maastricht. I am told that I have a good voting record, but on this occasion, as on the Second Reading of the Maastricht Bill and the confidence motion that was debated in December in the run-up to the general election, I fear that I must abstain—for a good reason. I do not believe for a minute that my constituents or many other people in the country would understand my voting for this motion, given the anti-democratic nature of the Maastricht treaty. In addition, we must remember that we have had no White Paper, for which I have been calling for three years. We have not had a free vote and we have not had a referendum. I heard my right hon. Friend the Member for Old Bexley and Sidcup chattering on about what he would like to see—a unified Europe—but he gave us a White Paper in the 1970s and, as I understand it, there was a free vote in 1972 and a referendum in 1975. I voted to stay in Europe and voted willingly for the Single European Act. I challenge anyone to question my credentials. I believe in European co-operation, but not in a centralising treaty. I have outlined in previous debates and in various publications why I believe that the treaty is a centralising one.

Finally, I want to ask a simple question about the nature of democracy and to quote a passage from a publication known as "German Comments", a passage reprinted there in July of this year from the "Konrad Adenauer Siftung". The article, written after the Danish referendum, said: More and more frequently elections are now distorting themselves into instruments of protests for the voters. Unless Europe soon encounters a new type of voter governing will become even more difficult than it was in the past. That is a pretty remarkable statement and it shows the sort of problem that lies at the heart of so many of our present troubles. The Maastricht legislation and the treaty are riddled with contradictions—masses of them. The treaty is not just a compromise; it is self-contradictory. The only thing that we can do, therefore, is to determine not to have it and not to accept the ERM even in a modified form.

For a long time we have been taken down the wrong route. I said in a debate shortly after the dark days of our leadership election, following some unflattering comments that I had made about a web of deceit woven over the subject of Europe, that I believed that only in the Conservative party would we find the answers to the future of Europe for this country.

I implore my right hon. Friend the Prime Minister to review the decision that appears to have been taken and not to continue with the treaty. I direct that plea to him in all humility.

7.21 pm
Mr. Derek Enright (Hemsworth)

This was not a failure of the exchange rate mechanism; it was a failure of the Government. The ERM is not a policy; it is a tool, a means of arriving at monetary union. Because I am a socialist, I believe that we should still aim for the goal of monetary union. It is because others are not socialists that they do not believe in trying to control and contain Europe's monetary system so as to avoid disgraceful spectacles such as that which occurred last week. As I saw on television when I returned from the French referendum, young men were swilling down champagne to celebrate the fact that they had made £4 million out of selling their currency down the drain—and the Government are largely responsible for creating the climate in which that happens.

The Government cannot seriously object if their Back Benchers accept what they say at face value. The Government went to Maastricht declaring that they would fight the foreigners. the Prime Minister and Chancellor went there describing the bureaucracy in Brussels as awful and saying that they were determined to wrest back power from that bureaucracy. They returned claiming that they had fought bureaucracy and the foreigners, but they should have come back and presented the policies from Maastricht that they accepted and could recommend to the House because they were for the good of the people.

The single market is already in place. In the French referendum the Single European Act, not the treaty of Maastricht, was regularly criticised. If we do not move on to Maastricht and use it we will be left with a grand hypermarket devoid of humanity. The Single European Act, for which various hon. Members have said they voted, presaged Maastricht, and it would be to deny our promises if we did not vote for Maastricht. I am neither for nor against referendums—I would not go to the stake over them—but if we are to hold one we must present it properly. It must include a question on the environment, another on training, another on the powers of the European Parliament and one on the Committee of the Regions. That sort of devolution has not been mentioned in this debate, but it is an important link in the economy and with the European Community.

What sort of Committee of the Regions do our Government intend to have? Most Governments have declared their intention that it should have elected members. Will our members of it be appointed, as they are to hospital trusts? Will we be represented by estate agents or by people who truly represent the regions where real devolution happens?

The right hon. Member for Mole Valley (Mr. Baker) said that he did not want people from Brussels taking jobs from Yorkshire. It is the Government, not the Commission, who have taken jobs from my constituency by their heedless energy policies and by their failure to act together with the rest of the Community to ensure a common energy policy so that we can use our coal into the next century. That is the sort of planning that is needed.

If I were the right hon. Member for Mole Valley, I should be careful about criticising the financial expertise of others. After all, he introduced the poll tax, so it ill behoves him to criticise the judgment of others.

The Government were never going to receive the same defence from the Bundesbank as the French have received, for the simple reason that when the negotiations took place our Government said that they wanted to withdraw —that they were in the ERM and that that was enough for us. They did not want to proceed to EMU; they would save that for a later date and not commit themselves. That was typical of the Government's half-hearted approach not only to the social chapter but to all the other social provisions. That approach has caused a crisis of confidence in the British Government on the part of our continental partners.

I was at the European Parliament on black Wednesday. It did not cause the stir there that it caused here. Following black Wednesday we said that the ERM was gone—finished—because the United Kingdom is now out. Not so. It is clear that France and Germany and the Benelux countries will come together as quickly as possible and will create a single currency. The remarks of the hon. Member for Antrim, North (Rev. Ian Paisley) notwithstanding, these countries will form the core. How quickly then will we be able to catch them up? How soon will we be able to give our country the benefits that flow from a stable currency? We shall be hanging on to the coat tails of the single currency and, far from being independent, our policies will be directed by the fiscal and financial policies that the core countries pursue.

We must put together a series of industrial, fiscal and financial policies with our partners in the Community, but that is not to be done the night before one drops out of the exchange rate mechanism—or even the weekend before. It is a long and complicated haul. There is no easy fix. The Government should pick themselves up and start talking to their European partners. They should put their whole heart into Maastricht and tell our partners that we will go forward with them. And they should accept the social chapter as an earnest of their good intent to co-operate in future.

7.28 pm
Mr. John Townend (Bridlington)

I should like to preface my remarks by expressing my support and sympathy for the Chancellor. He was given a virtually impossible job—to manage the economy in a straitjacket. He had to fix interest rates not at a level appropriate to the British economy but at a level appropriate to the German economy. I was delighted when he took the brave decision to come out of the ERM. If we had stayed in and interest rates had stayed above 10 per cent. for any time, we would have been in danger of the recession turning into a slump. I submit that membership of the ERM has not been beneficial to Britain.

We should look at the facts and compare our economic performance when we had a floating pound with that of the past two or three years. Between 1979 and 1987, when we had a floating pound, the rest of Europe talked about the British economic miracle. Inflation fell from 22 per cent. in 1980 to 3.4 per cent. in 1986. The budget deficit was progressively eliminated and we went into surplus. Trade was mainly in balance. We had economic growth for eight years. Manufacturing productivity rose faster than in any other European country. We had an explosion of enterprise and initiative throughout the country. Thousands of new firms were founded. During that time, the pound declined by no less than 25 per cent. against the deutschmark, but we had no currency crisis and we never heard the word devaluation.

How did we achieve those magnificent results—by following two basic policies. First, we made monetary policy the cornerstone of economic policy and, secondly, we exercised strict control over Government spending and strove to balance the budget. We should compare those golden years with what is happening today. We have a double deficit—a large public sector deficit and a large balance of payments deficit. We have had three years of minus growth. We have soaring unemployment arid tens of thousands of bankruptcies and closures. We got it right and we threw it away. What went wrong? We changed our two basic policies.

The Government repeatedly relaxed their policy on public spending and were regularly interrogated by the Treasury and Civil Service Select Committee on that subject. It does no good to say "I told you so", but year after year in debates on the autumn statement I warned the Government of the dangers of letting public spending rise too quickly. Ministers were unable to resist the pressure groups, the health service and the aid and arts lobbies, and no matter how hard they tried, they could not keep local government spending under control. All the time, the Opposition demanded even higher spending.

We abandoned our monetary policy. Lord Lawson, the architect of our monetary policy when he was Financial Secretary, for some reason, on becoming Chancellor, abandoned that policy and decided that the exchange rate would be the cornerstone. Because the then Prime Minister did not allow him to join the ERM, he shadowed the deutschmark, thus sowing the seeds of his destruction.

The economy was expanding quickly and Lord Lawson reduced interest rates when he should have increased them. In 1988, broad money rose by 20 per cent. Is not it ironic that we abandoned British monetary policy and put in its place Germany's monetary policy dictated by the Bundesbank? That might have been less damaging if Germany had remained a low-inflation, low-interest rate country but, unfortunately, Herr Kohl made a mess of reunification and the Bundesbank retaliated by putting up interest rates. As a result, we were prevented from cutting our interest rates when we were in the depths of a recession. Our membership of the ERM has made the recession six to nine months longer than it need have been. That has been the cost of our membership of the ERM and excessive public spending.

The events of last week were not a defeat just for Government policy. They were a defeat for the collective political leadership of the country. The leaders of the Opposition are equally responsible. I remember sitting on these Benches during the 18 months before the former Prime Minister was pressurised into joining the ERM. Every week, the former Leader of the Opposition demanded that we join, as did the present Leader of the Opposition. The new Leader of the Opposition does not seem to know what his policy is. A few days ago it was to rejoin the ERM almost immediately. Will they never learn that one cannot buck the market? A fixed exchange rate will not work unless the currencies of the EC converge completely, which, as has been said, will not happen.

The main casualty of last week was the ERM. It has failed to deliver. It has been shown that the aim of monetary union and a single currency as set out in the Maastricht treaty is a dead duck. In my view, that makes the treaty a dead duck.

Conservative Members should not regard what has happened as a defeat. We should see it as an opportunity. We should put this experiment behind us and never rejoin the ERM. We should not put British jobs and businesses at risk. We should unite behind the Chancellor to recreate the prosperity of the 1980s.

What must be in our economic package? Our first priority must be to stimulate economic recovery. Now we have a floating exchange rate, the value of the pound need no longer dominate policy. Monetary policy should be brought to the fore once more. We should fix targets for broad and narrow money but, because of the severity of the recession, broad money should be allowed to rise by up to 10 per cent. over the next 12 months. To prevent inflation, monetary growth should be reduced by at least 1 per cent. per annum. Interest rates can now be fixed at a level to suit the British economy. Because of the depth of the recession and the weakness in the growth of money supply, I should have liked interest rates to have been cut by 2 per cent. That would have given a fillip to confidence and taken pressure off the exchange rate at the same time. I think that there will be another 1 per cent. cut soon.

We must take the knife to public sector spending. The public sector deficit—it is approaching £40 billion—is unsustainable. We have to bring the budget back to balance. Reductions in spending should be limited to the revenue side, however painful that might be. The construction industry is in a terrible state and a cut in capital spending would do untold damage to that industry and serious damage to the British economy. None of the sacred cows can be exempt. Overseas aid is paid for by borrowing from foreigners. Spending on health, arts, social services, local government and even benefits should not automatically be increased.

During the recession almost all the pain has been borne by the private sector. Firms have closed and people have lost their jobs. The number of people who have had wage increases is small. Now is the time for the pain to be shared. To get the deficit down, there should be a moratorium on all public sector pay increases for one year. It should affect all employees—doctors, nurses, Members of Parliament, judges, firemen, the police—the lot. I do not think that it is unjustified in the circumstances.

There should be a housing package to help recovery in the housing market. We shall get no recovery in consumer spending until the housing market recovers, as the greatest asset of 70 per cent. of the population is their home.

I ask the Government to approach banks and ask them to relieve the pressure on small and medium-sized businesses. If the pressure is caused by lack of capital, the Governor of the Bank of England should tell them to have a rights issue and recapitalise. The Government should reduce the burden of the state and the EC on industry and advise Customs and Excise, the VAT department and the Inland Revenue to be more amenable to small and medium-sized firms with cash flow problems. We need urgent action on the trade deficit, with which I do not have time to deal.

The City has given its verdict on recent events. There is now a feeling that we are once more in charge of our destiny. For the first time during his tenure of office, the Chancellor has been given an opportunity to run the economy for and in the interests of Britain. The Conservative party was given a new mandate at the general election in May. We must honour that confidence and deliver to the British people in the 1990s the economic miracle that we achieved in the 1980s.

7.38 pm
Mr. Denzil Davies (Llanelli)

In his speech today—and, indeed, before today, outside the House—the Prime Minister has claimed that the exchange rate mechanism has "fault lines". I agree with him. I also agree that something should be done about it, if that is possible.

The question that must be asked—it has already been asked today, but it has not been answered—is "Where on earth has the Prime Minister been all this time? Why has he discovered only now that there are fault lines in the system?" The right hon. Gentleman has been Chief Secretary to the Treasury; he has been Foreign Secretary; he was the Chancellor of the Exchequer who persuaded Mrs. Thatcher, as she then was, to take us into the exchange rate mechanism. Now he is Prime Minister—and now he tells us that the ERM contains fault lines.

Yes, the ERM has fault lines. In my view, it was flawed from the beginning: it acquired some rather bad genes from its immediate ancestor, the snake, which ended up a shambles, and from the Werner report, which made even Jacques Delors sound like a Euro-sceptic. It acquired other bad genes from its immediate parents, Chancellor Schmidt and Giscard d'Estaing—along with the then Mr. Roy Jenkins, who was hovering in the ante-chamber.

In fact, the ERM was not meant to be an economic currency system. It was meant to be political: it was intended, all along, to take the first step along the path to economic and monetary union and, finally, to a federal Europe. That was what the ERM was about when it was conceived by Chancellor Schmidt and Valery Giscard d'Estaing in 1979, When it was launched, some extraordinary claims were made for the system, as is always the case with such European forays. One claim was that it would create a zone of monetary stability in western Europe—I think that that was the phrase. Frankly, it has failed. Even in the period between 1979 and 1990, before the present turmoil began, there were 10 realignments. In truth, they were not realignments but devaluations—devaluations of all the other currencies against the German mark. Over that time, the French franc was devalued against the mark by 45 per cent.

It must be conceded that, from 1987 onwards, there were no more devaluations or realignments; a period of stability ensued. I believe, however, that the real reason for that had nothing to do with the ERM. In the main, it was probably connected with international economic factors —particularly the Louvre agreements, which stabilised the dollar for a long time.

In 1987, the ERM changed from a fixed but adjustable system—rather an inelegant phrase—to a quasi-monetary union system. That happened just after the realignments that took place in January that year, when the present Prime Minister became Chief Secretary to the Treasury.

From 1987 onwards, the Prime Minister was at the heart of our economic policy; yet, apparently, no one told him that there were fault lines in the system, or else he did not spot them.

After 1987, the fault lines widened and deepened. The Single European Act had been signed in 1986; the final realignments had taken place in January 1987; a few months later, the Basle-Nyborg agreement conceded, in effect, that countries could support each other's currencies in the short term. Then, four months after that agreement, a memorandum came from the French Finance Minister, arguing that the European monetary system itself should become a European central bank and a full currency union. Throughout that period, we were moving towards a quasi-monetary union.

At the same time, however, capital and exchange controls were gradually being relaxed. Between 1987 and 1990, country after country took such action; by 1990, no controls remained except for temporary purposes. We were left with an extraordinary system. Greater experts than I sit on the Conservative Benches: I do not know whether an historical precedent exists for a country to operate a fixed exchange rate while having no control over capital movements.

Today, there are sight deposits in British and European banks. Money can be withdrawn and moved around without capital controls, at a moment's notice. I understand that sight deposits in British banks exceed Britain's reserves tenfold, and that the position in France is similar. How on earth can a fixed exchange system be operated, given the ease with which money can now be transferred from one country to another, and the fact that we have no capital controls? I do not believe that we shall return to them: unfortunately, the world has changed, and money can move very quickly. I do not see how we could operate such a system without becoming involved again in the battle that, eventually, we have had to face over the past few weeks.

I do not know why the Prime Minister did not know about the position, but I do not think that the Government should blame the Germans. I do not think that they should blame poor Helmut down in the Bundesbank. I feel rather sorry for Helmut: there he was, coming in every morning, wading through piles of esperanto money—kronas, pesetas, heaps of lire and a few pounds, but not too many; by then Helmut was beginning to learn—and possibly even francs. Meanwhile, at the back of the office, Helmut's lovely deutschmarks had been taken away to buy all that esperanto money.

I do not blame poor Helmut, and I do not think that we should criticise him. Apparently, under the Bundesbank Act, his job is to watch German inflation and to control the money supply, not to worry about the exchange rate; that is a secondary matter. There he was, buying all the flotsam and jetsam of European currencies and paying for it with German marks—putting German marks into the system and pushing up his money supply. Helmut already has problems with the money supply: last week, apparently, his monetary targets were exceeded by 4 per cent., reaching 9 per cent. instead of 5 per cent.

Poor old Helmut. I do not know what he will do. I hope that he does not set fire to all those currencies; we do not want a bunker mentality in the Bundesbank. I repeat—let us not blame Helmut: the system was flawed, because it was designed not for economic purposes but for the political goal of economic and monetary union.

For years I have listened to European debates. Sometimes words are used in a very strange way. Sometimes we are told that things have been done for this reason, or for that reason; treaties are debated, signed and discussed behind closed doors. No one admits what it is all really about. The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) admitted it today for the first time: I do not think that he has ever done so before—at least not since 1972.

Why not tell the British people what it is all about? Why not say, "If political union is thought desirable, let us introduce measures to implement it"? Measures should not be introduced through the back door, by means of financial stratagems that always go wrong in the end.

7.48 pm
Sir Teddy Taylor (Southend, East)

One of the problems of growing old in this place is the fact that many of the exciting new ideas seem to be ideas that have been tried before and have not worked very well. It was clear from the brilliant and entertaining speech of the Leader of the Opposition that Labour was about to embark again on the whole process of the "national plan". I think that older hon. Members realise that that wonderful idea simply brought great benefits to bureaucrats and the hotel and conference industry.

We should not complain, however. This is the first debate on European affairs in which we have seen a ray of hope that we can halt the slide towards an undemocratic single state. I must say that I felt a great deal of sympathy for the Prime Minister; there has been a huge change in Commons opinion. I felt sorry for him, because those who once urged him not to Miss the Euro-boat are now shouting at him, "Do not jump over the Euro-cliff." All the organisations—such as the ridiculous CBI—that urged him to rush into the ERM are now saying that it was a disaster, and the whole business has blown up in his face. I hope that we can at least show a certain sympathy for a Prime Minister who has been faced with a huge change in circumstances and a substantial change in his party.

It is unfortunate that there has been a failure in the debate to appreciate the huge damage done to the United Kingdom and its people by the European Community. The Community is not a great growth enterprise; its share of world trade is decreasing and it has massive unemployment. We have done ourselves a great damage —the ERM is a perfect example. We have deliberately imposed unemployment, misery, housing repossessions and business failures for the sole purpose of maintaining the pound at an artificial level. Where is the logic and common sense in doing that? We have seen the policy explode in our face. What is the point? We are in exactly the same position as we were in September 1931, when we carried out the same exercise. The Government said that inflation was down to minus 7 per cent., but there was massive unemployment and misery—it was a mad policy.

In the same way, the common agricultural policy is doing huge damage to the economy. I wish that Treasury Ministers would start to look at what is happening to British jobs and prices due to that crazy policy. Some £513 million is being spent each month, largely on dumping, destroying and storing food. Nothing is done to stop that. As a consequence, the average family in Britain is paying £17.23 extra per week for food, which is bad for jobs in Britain.

Although we are always told that the cost of membership will go down, this year's membership is costing us about £240 million per month, which means £4 per week for British families. If the Government are worried about the economy, should not they ask what effect European enterprise has on jobs, living standards and trade in Britain? Our trade with Europe has shown not a great profit but a huge deficit. We all know that the rest of the world has suffered due to European protectionism, suffering increases as Europe becomes more protectionist. I hope that, as a result of the debate, the Government will consider the matter and ask whether, on balance, the policy has been terribly bad or terribly good for the British economy. Examination of any of the figures shows that we have suffered greatly.

I hope that the Government will not look for scapegoats or try to kid themselves. I thought that it was sad when the pound was falling. They first blamed the Danes and said that their referendum had caused uncertainty. Then they said that the French referendum was causing uncertainty. When it was pointed out that the franc was not falling but the pound was, they changed their tune and said that the Americans were to blame for the falling pound. They said that the pound's decline was due to the fall in the dollar. When the dollar started to rise, they had to find someone else to blame, and the poor old Germans were the target. They said that German gossip had caused the trouble.

The Government must know that if their country has a trade deficit of about £900 million a month, their expenditure and income are wildly out of balance and they are borrowing like crazy, clever people in the City who engage in speculation will be more interested in those figures than in the gossip from Germany. The same is true of inflation. We are told that the ERM has helped to reduce inflation. Even silly people in charge of Governments can reduce inflation if the price paid is three million unemployed. In addition, inflation throughout the world has been subsequently reduced.

We must stop kidding ourselves about the great British exemptions from the Maastricht treaty. We must consider the facts. The Government seem concerned about our exemption from the social charter. Everyone can see from the facts, figures and papers that the effects of the social charter are being felt through the Single European Act. Signing the social charter will make hardly any difference. The same is true of our exemption from a single currency. If we are to be tied to a single currency in a fixed exchange rate system, the effect on our freedom will be similar to having a Scottish pound note.

I hope that those-who think that subsidiarity is a grand idea will read the relevant clause. They will see that subsidiarity applies only to sectors where the European Community has no competence. I challenge anybody to tell me where the EC does not have competence. I can think of only grammar schools and the council tax. Those who think that the statement of intent is important are kidding themselves.

The House of Commons must agree to a referendum on Maastricht. Not to do so would be a total denial of democracy. Of course, then face the electors who can say, "Yes, that is OK" or "No, we want to change the policy". But it is wholly wrong to hand over a massive amount of sovereignty and freedom without consulting the people to seek their views.

Some people say that Parliament is supreme, but there was no vote on the subject in the general election. Those who think that electors in the general election were voting on Maastricht should consider Southend-on-Sea where there were two Members of Parliament. One Member thought that Maastricht was rubbish and the other thought that it was great. The two results were almost identical. People were not voting on Maastricht. It would be wrong for the Government to go ahead with the treaty.

Where can we go? After the abandonment of Maastricht, for which I hope, the Government should promote a treaty on subsidiarity—a specified list of items that we wish to take back from Europe to the elected member states. That would be a step forward in a different direction.

For the sake of our economy we must come out of the common agricultural policy, which is damaging people —particularly the poor. We sometimes forget that, in a recession, the people who suffer most are the poor—pensioners and those with limited incomes. There is no way that we can improve matters without withdrawing from the CAP.

After the catastrophe of the ERM I hope that the Government will at least say that they are not prepared to return to such a system. Surely it is evident that if someone tries to pretend that money is worth what it is not, distortions will be created elsewhere. The previous splendid Chancellor of the Exchequer joined—unofficially —at the wrong rate in the wrong direction. We had to create artificial prosperity; now we have to create artificial inflation. Surely the huge costs of the collapse of sterling should have taught the Government not to go back into a fixed exchange arrangement.

I have always been in trouble in the House over EC affairs. It is embarrassing to find that, instead of the usual group of half a dozen Members expressing my views, there is an epidemic of them. People are waking up—not because of me or other Conservatives, but because the people of Europe have had their say. Despite the threats from Brussels and warnings that the country would be ruined, the people of Denmark had the courage to say no. French people who had the courage to do the same, despite warnings about the dangers that lay ahead and the threat of starting another war with Germany, have brought about change.

We should realise that the only way that we can defend ourselves against dictatorship and the collapse of democracy is through the people. That is why I hope that the Government will tonight at least say that they will not go back to a fixed exchange rate system. More importantly, we should give our people the same democratic rights as other nations. Unless the Government have the support of the people on the policy that they intend to adopt, the outcome will be horrendous.

7.58 pm
Mr. Alex Salmond (Banff and Buchan)

The hon. Member for Southend, East (Sir T. Taylor) deserves a measure of congratulation. He is right: he has ploughed a relatively lonely furrow on this issue, and now finds himself joined by an epidemic of Conservative Members. That does not make him right; it merely makes him less lonely.

The best prepared text for tonight's debate should be the debate that we had on 23 October 1990 when we debated our entry into the exchange rate mechanism. If we read that debate we see that it left some hon. Members in a relatively strong position to argue tonight and many more in a weak position—that did not stop the latter group arguing.

My biggest surprise was to hear the Prime Minister this afternoon say that the conclusion that he drew from the events of the past eight days was that he was right in the Maastricht negotiations. I do not think that I misquote him when I say that he stated that events of the past eight days had demonstrated that he had been correct. That was the most remarkable statement that I have heard for some time. I can only believe that his speech writer was the same gentleman who briefed the press about the pound replacing the deutschmark as the dominant currency in Europe.

The basic problem in this debate is the one that we argued about two years ago—the difficulty in any exchange system of having a strong and a weak investment currency. When sterling entered the ERM it was not merely another currency revolving around the deutschmark; it was a weak international investment currency —a banana currency, to use the jargon of speculators—and there was bound to be polarity between those two major currencies. That made the positioning of sterling within the exchange rate mechanism crucial. When some of us argued in the debate two years ago that the rate of DM2.95 was unsustainable and was not justified by anything happening within the United Kingdom economy, those arguments were brushed aside by the Government and were described as pessimistic or defeatist.

I agree with the right hon. Member for Bethnal Green and Stepney (Mr. Shore) and the hon. Member for Southend, East on one thing. The underlying feature of the debate is not putting the blame on the Germans or even on those nasty speculators; it is the £12 billion annual deficit in the United Kingdom's balance of payments. When the right hon. Member for Bethnal Green and Stepney argued that, I saw the Chancellor shake his head as if it did not matter that the country was running a £12 billion annual deficit in the trough of a recession. Plenty of Chancellors have been wrong about balance of payments forecasts and plenty have been wrong in their forecasts for economic recovery, but the present Chancellor is the only one that I know of who has simultaneously underestimated the balance of payments deficit and the length of a recession. According to the traditional rule, in the depths of a recession the balance of payments should be substantially in surplus.

We can all be amateur currency forecasters, but it does not take the most remarkable economic genius to realise that if an economy is running a £12 billion annual balance of payments deficit, its currency is probably not competitive with other currencies. The markets were therefore faced with a one-way bet on sterling and as soon as that happened the result was inevitable.

In a clever speech this afternoon the Leader of the Opposition said that he supported a realignment. It is a pity that we did not hear more about that before the crisis last week. He is absolutely right to support realignment within the ERM, which is what the Germans have been advocating for the past six months, but realignment within the ERM is a euphemism for devaluation. It is impossible to be in favour of realignment and against devaluation.

The Leader of the Opposition and the leader of the Liberal party have a point. If they had advocated devaluation, doubtless Tory Back Benchers would have pointed the finger and said that they had undermined confidence in sterling, but last week, the shadow Chancellor would not have been in the ridiculous position of simultaneously arguing for the maintenance of sterling's parity against the deutschmark and for interest rate cuts. The counter argument would have gained credibility and would not have been undermined. It is more important to have a credible argument than to worry about being accused by Tory Back Benchers of being unpatriotic or disloyal.

One of the features of the debate that will cause some amusement—and I hope some interest in Scottish politics—is that during the economic debate in the general election campaign, a few months ago, it was said that if Scotland were independent it would have a plunging currency, unemployment and economic instability. It has all happened, and not with five years of Scottish independence but within five months of a continuation of the Union. If the Chancellor of the Exchequer has done any service to Scottish politics and to the Scottish people it is because he might be the Chancellor who has finally persuaded them that the men in the Treasury do not know what is best for the Scottish economy or about running the United Kingdom economy.

In a blithe and almost a throw-away remark the Chancellor said recently that monetary policy during the past few years has been too tight. He conceded that fact as if it were something that he had known all the time and had now revealed to the unsuspecting nation. What has been the result of that tightness? It has been paid for in tens of thousands of job losses throughout the United Kingdom—1,000 jobs a week in Scotland since the general election. Those people's jobs have been sacrificed and jeopardised to save the face of politicians who treat sterling as some sort of totem pole, to be defended at all costs, as long as it can be defended with other people's chips.

It would be appropriate if someone who was basically in favour of Maastricht and intended to campaign for a yes vote called for a referendum in this debate. I suppose that there is no ultimate argument in principle for referendums and the way in which they are dealt with in the House. Some hon. Members are in favour of a referendum on Europe but against one on Scotland. The Leader of the Opposition is nominally for a referendum in Scotland but against one on Europe. Some hon. Members are against both, which I suppose is quite honourable. I am for a referendum on Europe and on Scotland. We should have that opportunity because the failure to trust and consult the people about the European cause has been one of the things undermining that cause. If I get the chance, I shall vote for Scotland and for Europe in both referendums.

8.5 pm

Mr. Ray Whitney (Wycombe)

If the people of Scotland were listening to the remarks of the hon. Member for Banff and Buchan (Mr. Salmond), or if they read them seeking to find the Scottish National party's economic policy, they will be sorely disappointed. He seems to have said that he shares the general dismay that I and, no doubt, the Government feel about the events that obliged us to leave the ERM and led to the devaluation of the pound. It would be foolish to seek to suggest that this is anything other than a setback for the Government, the Conservative party, and for this country, which is what is of essential importance.

That does not mean that the Government were wrong to try to follow the policy involved in membership of the ERM as the means to create the conditions for steady economic growth in this country while holding inflationary pressures in check. As we all have good reason to know, those inflationary pressures are particularly strong in Britain compared with many of our competitor countries.

We must recognise that the discipline of the ERM was difficult, but that any of the systems on offer must involve discipline and pain if they are to be effective. One of the major reasons for entering the ERM was that the other paths that we had tried—the various Ms and medium-term financial strategy—began to lose their effectiveness, partly because of the sophisticated economic world in which we now live and because of the creation of credit.

One of the causes of the failure of our venture into the ERM was that we entered it too late. We should have adjusted earlier to the pressures of the ERM.

I question whether the much-touted argument that the pound entered at too high a rate was the major reason for the problems. I refer the House to The Economist of 19 September, which said: According to the test of purchasing power, the pound was, by and large, 'correctly' valued at DM2.95, its central rate in the ERM since 1990; and at its ERM floor of DM2.78 it was somewhat undervalued. We can all argue over the value of a currency, and speculators have their own views, but it is too glib and vacuous to suggest that the problem arose because of a highly overvalued pound.

The monetary system was up-ended by two huge pressures, rather like a boat being crushed by two enormous icebergs, the first being the impact of German unification, to which much reference has been made. In saying that, I do not join in the carping about the Germans that I have heard from some of my right hon. and hon. Friends. The Germans have their own national interests to follow. The problem caused by the absorption of East Germany is undoubtedly an issue.

The other iceberg was what was happening in the United States, with the cheap dollar policy. That set up so many pressures that I believe they would have caused problems and broken any system, causing the damage that has been done not only to the pound but to all the other currencies, which has been widely discussed by right hon. and hon. Members.

With regard to the objective criteria governing the level of the pound, a number of misapprehensions are abroad, some of which have been expressed tonight. By many of the normal criteria of the economic strength of the currency, the value of the pound was reasonably set within the ERM.

I shall mention three such criteria. First, we are often told that Government expenditure in Britain is too high, and that that is one of the causes of weakness. No one can be keener than I to go on pressing to reduce Government expenditure, but in terms of the percentage of GDP our Government expenditure is the lowest in the European Community. Secondly, we are told that one of the other major problems is our PSBR requirement—my hon. Friend the Member for Southend, East (Sir T. Taylor)

mentioned that. But, again, expressed as a percentage of GDP, the United Kingdom borrowing requirement now runs at precisely the average of the European Community.

Finally, many Opposition Members have referred to the balance of payments. As a percentage of GDP our balance of payments is precisely at the average EC level. So according to all those criteria the British economy is by no means as badly situated as it has been painted. Certainly the objective situation did not justify what happened last week. None the less, we all know that in the frenzy of the exchange markets, objectivity seems to go out of the window.

What we have to do now is to stay calm and to say as little as possible. We must concentrate on getting the economy back on the track from which it has been disturbed. Our objective now must be to achieve the strong economy with which we all identify and which we all understand. Once we are moving back in that direction the decision can be taken whether to re-enter a European monetary union as it may obtain at that time—in three months, or however many months ahead it may be.

It seems likely that there will be a cohesion of the five, six or seven countries at the centre of Europe into a bloc —and, indeed, into a single currency. If so, when our economy is strong enough I would be doubtful whether it would not be in the British national interest to align ourselves with those countries and join in. The dangers of getting left behind are huge.

My hon. Friend the Member for Southend, East has been splendidly consistent in his demands for Britain's isolation, but he preaches a dangerous doctrine. I believe that the rest of the country understands the danger that Britain may be left behind.

Sir Teddy Taylor

Have a referendum.

Mr. Whitney

I should be happy—we have had one referendum already, and when the people came to understand the problems that would arise if we were left behind an operating single currency, the answer would be very different from the one for which my hon. Friend hopes.

We have heard for many months from some of my hon. Friends about the need for lower interest rates. Now we have them. The three-month inter-bank rate is the most sensible rate to examine. If we set that against inflation we see that, among the seven leading European countries normally credited in the Financial Times, only the Netherlands has a lower real interest rate. Britain has the second lowest real interest rate.

If the panacea of low interest rates is to be realised, now is our chance. That chance must be realised, and we must adhere to what has been advised by many right hon. and hon. Friends, and not return to what we have seen time and again over the past 30 years: following the devaluation of sterling the belt is let out and off goes the inflationary spiral again. We must not let that happen this time. Too many of my hon. Friends seem to ignore that lesson in history, and to believe that simply to float the pound is a recipe for utopia and living happily ever after. In fact, it is a recipe for considerable danger, which we must recognise and avoid.

Finally, I agree with a nostrum long advocated by the Liberal party. I myself have long supported it, too, although I do not attribute to it the over-arching significance that the Liberal party does. That nostrum is to bring about the independence of the Bank of England. It is ironic that that was the first of the nationalisation measures of the Labour Government after the war, and the last move that the Government now seem prepared to contemplate is the reversal of that policy. It is not true, as was suggested by one of my hon. Friends, that had the Bank of England been independent it would have acted differently, and would not have taken the sensible measures adopted by my right hon. Friend the Chancellor. However, an independent Bank of England would have more credibility.

Such a decision was reached by our noble Friend Lord Lawson after he had spent five years as Chancellor of the Exchequer. He advised such a policy in 1988, and in a noteworthy speech made on 31 October 1989 he said: There is … one other way in which anti-inflationary credibility might be enhanced in the eyes of the market and that is why, a year ago, I proposed to my right hon. Friend the Prime Minister a fully worked-out scheme for the independence of the Bank of England. But that would be a buttress; it would not be a substitute".—[Official Report, 31 October 1989; Vol. 159, c. 209.] That, indeed, is true.

I shall certainly vote in support of the Government's economic policy tonight—

Mr. Richard Shepherd (Aldridge-Brownhills)

What is it?

Mr. Whitney

Nothing that I have heard, even from my hon. Friends, let alone from the Opposition, suggests that they have an alternative policy. The policy has to be to continue to bear down on inflation, to keep public spending under control. It will be more difficult to do that outside the ERM than it was within it.

8.18 pm
Mr. Geoffrey Hoon (Ashfield)

I am sorry that my hon. Friend the Member for Durham, North (Mr. Radice) is not in the Chamber, because I wanted to begin my speech by properly acknowledging a quotation. The Government went into the ERM at the wrong time, at the wrong rate and for entirely the wrong reasons. Over and over again we have heard Ministers trying to justify membership of the exchange rate mechanism on the narrow ground of controlling inflation. We have seen Minister after Minister wriggling on that hook of the Government's own making. If the fight against inflation was the primary purpose of the ERM, the Government's attempted explanations might have made some sense. However, the Government's real policy throughout our membership was to use the ERM as an excuse to justify their scorched-earth economics—high rates of interest leading to high rates of unemployment, leading to chronic homelessness.

It is no surprise that the crushing of confidence and the destruction of demand has resulted recently in a reduction in inflation. Healthy British companies have been forced to cut costs and reduce their labour costs in order to remain competitive with companies in countries where the cost of borrowing is significantly less.

Yet even on their central policy of controlling inflation, the Government cannot claim much success for their economic policy. An examination of the increase in consumer prices between 1987 and 1992 across the European Community should make disturbing reading for the Government. In the Netherlands the figure is 11.8 per cent., Belgium 13.7 per cent., Germany 14.9 per cent., Luxembourg 15.9 per cent., France 16.4 per cent., Ireland 16.5 per cent. and Denmark 18.1 per cent. I pause there to suggest that that is an emerging first division. Thereafter comes Italy with 32.4 per cent., Spain 34.2 per cent., and, in a disgraceful 10th place, the United Kingdom with 36.7 per cent.

That is a comment by the markets on the central feature of the Government's economic record—the fight against inflation. Having failed in that fight, it is no particular surprise that the money markets then judge that the pound is over-valued. It is over-valued against those currencies that have inflated less during those five years. Other European countries recognise that the ERM is concerned not solely with the fight against inflation but with providing and promoting stability between competing currencies. Thus again the Conservatives demonstrate how out of touch they are with other European countries.

The creation, or perhaps, more accurately, the restoration of stable exchange rates, is a central objective of Government policy elsewhere in Europe. By acting together to control currency values members of the ERM are seeking to provide a stable and consistent background against which international trade can take place.

Those involved in industry have a difficult enough task running their businesses, improving production processes, inventing new products and seeking new markets without worrying whether currency fluctuations will wipe out their profits in one day's frantic currency trading.

When the pound last floated small companies in my constituency were forced to resort to buying currency as a hedge against changes in exchange rates. Companies find it hard enough to stay in business to provide employment for their employees without their decision-makers spending a disproportionate amount of their time trying to guess at the value of the pound, whether it be tomorrow, next week or next month.

For that reason floating exchange rates are deeply damaging to industry. They are deeply dangerous for a country's economy. Yet again, at least for the forseeable future, a central feature of what passes for Government economic policy today will be embracing the discredited policies of Milton Friedman.

In 1953, Milton Friedman argued in favour of floating exchange rates. He suggested that if the value of a country's currency was allowed to fall, the price of exports would be made more competitive, which would in turn restore equilibrium to the balance of payments and confidence in the currency. But that theory fails entirely to allow for the practice of a Government who have run down our manufacturing capacity, undermined investment and left us ill-equipped to take advantage of any recovery, however remote that might be at present.

Which of our companies, particularly those making high-tech products, will be in a position to expand production after the lay-offs and redundancy have become an everyday item of economic news? They have simply lost the skills that would be required in a recovery.

Against that background the Government have sought to blame speculators, the Germans or anyone else who has come into their sights. Instead of taking the speculators on, they could have maintained our membership of the ERM as part of a general realignment, an offer which was apparently made to the British Government at the Finance Ministers meeting the weekend before last. That offer was churlishly refused. Like the schoolboy losing a football match and taking his ball home, the Chancellor rushed off to Brussels to try to persuade everyone else to stop playing the game. That was supposed to be an act of leadership from the President in office of the Council of Finance Ministers. When the other members of the ERM rightfully refused his request, the Chancellor's and the Government's economic policy was left in shreds.

Floating exchange rates have already led to a substantial devaluation in the value of the pound. That in turn will lead to higher priced imports. That will feed inflation in the economy and that inflation in turn will devalue our currency against those other currencies still in the ERM. That will produce a vicious spiral—deprecia-tion, inflation and further pressure for devaluation.

That is the state of the Government's economic policy today. Having staggered from one bankrupt policy to another, the Government are once again at the mercy of speculators and the money markets. The price for that will be paid by the unemployed and the homeless, by those already struggling to repay mortgages on homes worth less than the outstanding balance of debt, by those who will continue to lose their jobs as the Government drive down the level of economic activity and impose still further expenditure cuts. That is the current state of the Government's economic policy. It is hard to see how a Chancellor who has presided over that can continue in office.

8.25 pm
Sir Peter Tapsell (East Lindsey)

Contrary to the almost universal predictions of the media, this has been a good-humoured debate. But no hon. Member should be in any doubt about the anger with which the British people regard the events of the last fortnight. Precisely because the leaders of the three main parties in Britain have been committed to a policy that has ended in failure and national humiliation, the British people are extremely angry.

I was in Washington attending the meeting of the International Monetary Fund earlier this week, but in the two days that I have been back in this country, everyone to whom I have spoken, from bankers and industrialists to taxi drivers and porters, have all expressed extreme anger and humiliation. The older men have all said to me that this has been the biggest humiliation for Britain since Suez.

There is no doubt in my mind that this has been the biggest economic crisis for 60 years, since we were forced off the gold standard in 1931 for similar reasons, because we had committed our currency to an over-valuation through linking it to the gold standard.

Winston Churchill, in his extreme old age, told me that he regarded his decision to link sterling to the gold standard as the biggest mistake that he had made in his life, bigger even than the Dardenelles, but he said that he did it on the advice of the Governor of the Bank of England, all the leading bankers and experts and financial specialists. They all advised him to link sterling to the gold standard. That contributed to the appalling recession of the 1930s which I am old enough to remember. One of my earliest memories as a boy is of standing in a dole queue with my father. I remember the humiliation that he felt at being in that dole queue.

All my political life I have been intensely opposed to policies which would produce mass unemployment. Do not let us assume that the British people will quickly forgive us for what has happened.

Mr. Radice

Do not include us in your denunciation.

Sir Peter Tapsell

I do, because more than anybody else the present Leader of the Opposition, when he was shadow Chancellor, was continually pressing for us to join the exchange rate mechanism. When we did so, he, along with the Liberal party, pressed us to narrow our band. It is no good either the Labour party or the Liberal party trying to shuffle off responsibility, because they were as fully committed, intellectually, morally and politically, to this disastrous policy as the Government. That is why criticism of the Government today has been so muted and why the right hon. Member for Chesterfield (Mr. Benn) was right when he said that this was an unrealistic debate which had not reflected feeling in the country. It is the job of the House to reflect the feelings of the country. We must ensure that such a thing never happens again.

The extraordinary thing about those events is their inexplicable nature. Everyone who takes a specialist interest in such matters had seen them coming for months. Usually there is some dispute among professional economists over such issues, but I cannot recall an occasion when there was such unanimity among monetarists, Keynesians, the Liverpool school, the Cambridge school, and foreign exchange dealers. Even I came to understand that these events were bound to end in devaluation and national humiliation. That is why I urged the Government in June and July to leave the exchange rate mechanism, float the pound, and cut interest rates to 8 per cent. I said in the House and on television that if we did not do so voluntarily, those actions would be imposed upon us. If we had taken such action in June or July, we would now be looking back on that decision as an act of economic statesmanship. As it is, we must make the best of today's unhappy outcome.

What should we do now? We must not allow the situation to arise again by rejoining the exchange rate mechanism in two or three years' time at a lower level, and recreate the same crisis. The argument whether or not we should have joined the ERM at DM2.95 is irrelevant and purely academic. I did not think that level was wrong at the time, but the point about the currency markets is that they change every hour. If one asked a currency dealer in October 1990 to guess at the appropriate exchange rate between sterling and the deutschmark in October 1992, he would have laughed. Dealers will not anticipate exchange rates 12 hours or even three hours ahead. Foreign exchange markets move every minute of the hour, 24 hours a day. Foreign exchange dealers will not often take even a two-hour view.

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

Does the hon. Gentleman recall the Prime Minister accusing the Leader of the Opposition of being prepared to confront any potential instability in the currency markets by pre-emptive devaluation? Is not the Prime Minister guilty of the same charge, and what is the hon. Gentleman's answer to it?

Sir Peter Tapsell

I am not advocating pre-emptive devaluation, and I did not do so in June and July. It is a big mistake to confuse the floating of sterling with devaluation, as many people have done. They are entirely different. Temporarily—for a few days or even for a few weeks—there may be a floating downwards, but we floated the whole time in the 1980s. At one point sterling was down almost to parity with the dollar, and at another it was worth almost two dollars.

Mr. Richard Shepherd

It went to $2.20.

Sir Peter Tapsell

As my hon. Friend reminds me, it went as high as $2.20. At no stage did anyone call that devaluation. It did not create a crisis, and no one took the view that some national virility symbol was being challenged. We should return to that technique now.

Mr. Radice

Did not industrialists in the hon. Gentleman's constituency tell him then, "We cannot cope with the pound going up and down in that yo-yo fashion. We cannot plan our businesses in that instability"? It was to meet that argument that many industrialists wanted us to join the ERM.

Sir Peter Tapsell

I remember industrialists saying that sterling was too high against the deutschmark, when it went as high as 3.10. That happened because my noble Friend Lord Lawson, who was then Chancellor of the Exchequer, was shadowing the deutschmark. That policy started in 1987, which was when things began to go wrong.

Another aspect of fixed currencies that I dislike is that they tend to devalue the reputations of the statesmen who must operate them. I make no criticism of my right hon. Friends the Prime Minister and the Chancellor for repeatedly saying, in the weeks leading to the floating of the pound, that they would not in any circumstances allow it to float, realign or be devalued. A Prime Minister or a Chancellor has to say that. In the days before James Callaghan devalued in 1967, he was so careful of his honour and personal integrity that he refused categorically to deny that devaluation was coming. He was much criticised for that, because £800 million flowed out of our reserves in the next few days—which was a great deal of money at that time. We should not put Prime Ministers and Chancellors in the position of having to tell the world what they really know are unreliable statements.

We understand the reasons why that must be done, as do foreign exchange dealers and hankers, but the mass of ordinary people in this country do not. When political leaders make impassioned commitments and must then eat their own words a few weeks later, that is demeaning to the entire political process, and undermines the respect in which all constituents hold their Members of Parliament, irrespective of party.

I do not believe that our economic crisis is over because we have now floated the pound. That will take the heat off temporarily, but I have never suggested that floating was a soft option. There will need to be more severe cuts in public expenditure than would otherwise have been the case, and monetary targets must be set that are difficult to achieve. Above all, the Conservative party must rethink its attitude to industrial policy. The preoccupation with monetary solutions to our problems since 1980 is at the root of many of our present difficulties. We tried every kind of monetary target, and they all failed to be effective —and will be likely to fail again, because the deregulation of the financial institutions, abolition of capital exchange controls, and introduction of 24-hour markets using modern equipment such as faxes makes it virtually impossible to measure monetary instruments.

In the years before I retired from stockbroking, my firm had a small department staffed by clever young men who worked full time on inventing new monetary instruments. When they discovered one, they would hawk it around the banks of the world saying, "This is a clever new idea. This will not appear in your returns to your country's central bank for two or three years." It was a jolly good business —but it all helped to make monetarism, as I always thought of it in classical terms, a nonsense. Nevertheless, we will need broad money targets and to make the best of them. Above all, we must attempt to relate our future interest and exchange rates to this country's monetary position and not to those of a foreign country.

That brings me to the point that I wish to make about the Bundesbank. I was critical of it in this House in June and July, but that does not mean that I have a dislike of central bankers. Indeed, many of my best friends are central bankers. I spent 30 years earning my living advising central bankers.

Germany, like all great nations, will not change its personality. It has two great characteristics, which have been clear throughout its history. First, the Germans have an instinctive urge to dominate Europe; and, secondly, they set about that by appointing groups of elites which are not answerable to anybody. Between 1860 and 1945, that élite was the German general staff. Since 1950, following Professor Erhardt's brilliant policies, the élite that has replaced the German general staff has been the German Bundesbank.

It is understandable that the Bundesbank has pursued policies in the German national interest, as it sees it, but it has done so quite ruthlessly and with a total disregard for the effect on the remainder of Europe. No one can tell me that such extremely professional central bankers—and Dr. Schlesinger has been in the Bundesbank for 36 years—did not foresee the inevitable outcome of having interest rates of almost 10 per cent. in Germany when they were at 3 per cent. in the United States. Inevitably, Dr. Schlesinger was driving the remainder of Europe into recession and unemployment. Indeed, the probability is that it was a deliberate policy of the Bundesbank, not revealed to Chancellor Kohl, to smash the ERM of the Twelve and replace it with a much smaller currency unit, of which the Bundesbank would be in total control.

I do not believe that the Bundesbank did anything near as much to support sterling as we had assumed it would under the ERM. As it is going much further in helping the French franc, it is in effect turning the Bank of France into a regional office of the Bundesbank. That is precisely what it intended. We have had sufficient experience of dealing with the Germans over past generations not to try to mislead the British people, who understand the matter very well. The British people are in favour of European economic co-operation, but not of European monetary and political union. As the votes in Denmark and France have shown, the politicians in many European countries have become out of touch with public opinion. It is the job of the leaders of the Conservative party to get back into better touch with British public opinion and—to use the words of my right hon. Friend the Chancellor which I very much welcomed—to pursue a British economic policy from now on.

8.42 pm
Mr. Calum Macdonald (Western Isles)

Perhaps it is because I come from a different political generation that I find it hard even to connect with, far less understand, the sort of outlook and thinking expressed by the hon. Member for East Lindsey (Sir P. Tapsell).

Nobody could underestimate the importance of this debate which, I hope, represents a turning point in the way that we debate economic policy and conduct our economic affairs. The events of last week had all the hallmarks of being a watershed for the conduct of economic policy in the United Kingdom. I hope that those events will lead to a change in policy and direction towards the development of an industrial strategy, such as that outlined by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), based on public investment. That is the only way to achieve the goal of non-inflationary growth, which we all agree must be our target.

Only public investment can tackle the bottlenecks in the supply side of our economy—the inflexibility of the housing market, the shortage of skills and the congestion of the transport system. All those throttle any attempt at growth and simultaneously lead to inflationary pressures in the economy and the collapse of the current account. Those problems must be tackled and only the Government, through public investment, can do that. In short, the medium-term financial strategy must be replaced by a long-term investment strategy. That is common ground among the Opposition parties and it is common ground in the rest of Europe. Only this Government march out of step with the rest of Europe, even in the way that they conduct economic policy.

I do not believe that this industrial strategy can be successfully pursued in isolation from the rest of Europe. The lesson of the socialist Government in France in the early 1980s shows that the narrow, national pursuit of growth, the pursuit of industrial strategy, simply does not work. The socialist Government in France found themselves compelled to work, within the framework of the exchange rate mechanism, in partnership with other countries in Europe in an effort to achieve long-term, steady, non-inflationary growth.

I do not believe that the industrial strategy that everyone on the Opposition side favours and that many in my party, who are opposed to Maastricht and the integration of Europe, favour can be carried out in isolation by one country alone. That is why it is particularly sad that in both the Prime Minister's speech today and the comments during the past week we have seen the Government try to shift the blame for this debacle, this crisis, on to the European institutions, the Community itself, the Commission, the Bundesbank and the ERM. But none of those institutions has been discredited by the events of last week. What has been discredited is not the Community, or the Commission, but the Government in their handling of economic policy and the market, and the way that the market operates—in particular, the ideology that the market is always rational, always right and always operates in the public interest. After the events of last week, nobody can say that again.

The lesson, then, to draw from the debacle of last week is not to abandon all our efforts to control the market but to do precisely the reverse. The markets, the speculators, the profiteers, must be brought under the control of Government, but not just under the control of any individual national Government. That is not possible. They must be brought under the control of Governments acting together in a co-ordinated fashion.

How is that to be done? My hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore) suggested that we need to consider going back to exchange controls of the kind familiar from the past. That may be a stop-gap measure that will have to be taken, but I feel that the era of exchange controls is now gone. Given the vast increase in capital movements around the world and around the markets of Europe, and given also the fact that we have moved away from exchange controls and contraints into an era of free capital movement, I do not believe that we can resurrect these controls credibly. In particular, I do not believe that we can do it in an economy such as that of the United Kingdom where the financial sector looms so large in comparison with economies such as Ireland and Spain that have resorted to these measures.

If national currency controls are no longer an option but we recognise the need to impose some control over the workings of the speculators and the market, the only way to achieve Government control in the interests of the public is through monetary union and a single currency in Europe. For any socialist or social democrat, the logic of monetary union and currency union remains strong—indeed, stronger after the events of last week. If we really want to be free from the one-sided influence of the Bundesbank, we need a new European central bank, of which the Bundesbank would be just one member and in which we can also exercise an influence over policy.

The way to kill currency speculation is by having a single currency. I can understand the political right rejoicing when markets, profiteers and speculators triumph over the public policy of a Government, but I am baffled when people on the left take comfort from such events. Floating exchange rates in a Europe of free capital movements is a speculator's paradise. Semi-fixed rates are certainly better, but in the longer term the only way for Government to beat the speculator is by abolishing him, and that can be done only in the European context by a single currency.

Mr. Winnick

My hon. Friend speaks about a single currency. Does he accept the view of the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), the former Conservative leader, who conceded with enthusiasm that a single currency would mean a single state and that member states in the EMU should be organised on more or less the same federal lines as the states of the United States?

Mr. Macdonald

The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) said that that would lead to a single government. If by that he means only one level of government I would not agree, because there should be a place for different levels, regional and national. But there must also be a place for central, federal government.

There is a need to impose control on the markets and the only way for Governments in Europe to achieve such control is by moving towards currency union. That means that the Maastricht process is still valid and even more alive after last week's debacle. All aspects of the Maastricht process are valid, and not just those parts that deal with economic and monetary union. The logic of monetary union leads to the logic of a social policy, because one cannot be had without the other.

Regional and structural policies are necessary and proposals in the Maastricht treaty should be beefed up. If uncompetitive areas such as the United Kingdom have to dispense with their ability to manipulate the exchange rate, there must be a substitute, and it can only be a mechanism to arrange transfers of cash from the competitive to the less competitive parts of the single currency area.

What is the position after the events of last week and the referendum victory in France? We must face three facts. First, by Christmas every EC country except Britain and Denmark is likely to have ratified the Maastricht process and we shall no longer be able to seek comfort from plucky little Denmark. By that time, Denmark will have had to produce its own solution—either a protocol to clarify certain aspects of the treaty but which does not change it substantially, because the tail certainly cannot be allowed to wag the dog, or a Danish opt-out from sections of the treaty on citizenship, monetary union or common foreign or security policy which the Danes cannot abide.

The second fact that we must face is that the only parties that oppose the continuation of the Maastricht process are those of the extreme right and extreme left —the communists, the National Front in France and the republicans in Germany. All other major political parties on the continent of Europe are still committed to maintaining it.

Why do those extreme parties oppose the Maastricht process? It stretches credibility to think that communists are interested in greater democracy or greater decentralisa-tion in Europe. It stretches credibility to believe that the National Front in France is interested in a more socially harmonious Europe. Those parties are feeding on fear, suspicion and prejudice. We must calm those fears, but we must never give in to prejudice.

The final fact that we must face is that France and Germany are intent on maintaining the process. France and Germany, with the Benelux countries, can move towards monetary union and press on regardless, with or without us. They will do so on monetary union, economic union, on a common foreign and security policy and on social policy. We must be part of that process, or the disaster and humiliation of last week will be as nothing compared with the trauma and impotence to come.

8.55 pm
Mr. Bill Walker (Tayside, North)

I welcome the opportunity to put in a Scottish voice from the Conservative Benches. We must recognise that the United Kingdom Parliament, the monarchy and the United Kingdom's unwritten constitution are the cement that hold together the United Kingdom. Anything that we do to weaken that cement will effectively end the United Kingdom. We should never forget that.

We should remember that the past attempts of British Governments to enter into fixed single-currency arrangements have always ended in tears, and the most recent example is no exception. I agree with other hon. Members that the British people were humiliated last week and will not forget that quickly or readily. [Interruption.] It was the flaws in the system. [Laughter.] It is easy to laugh, but Conservative Members who have never supported fixed exchange-rate systems believe that experience shows that they end in tears. The recent example is a repeat of previous experience.

I support the Government taking tough fiscal policies to contain inflation, and I believe that the policies of the 1980s substantially achieved that with a floating exchange rate. I do not hold my right hon. Friend the Chancellor personally responsible, because he was carrying out policies within the constraints determined by the Government.

I remind my Treasury colleagues that some Conservative Members have been concerned for a long time that we have been taking our eye off the ball—what we can do in this Chamber to improve the United Kingdom's prospects in the real world: not the imaginary or theoretical world but the world of business. I remember saying that to colleagues in 1968 when we were talking about the great European dream. I was managing director of a company that traded at that time. I was supposed to know nothing about it, just as people who trade today are told that we politicians know best.

I sincerely believe that if we hand over more powers to Europe, especially financial powers and eventually political powers, we shall bring forward the demise of what I came into Parliament to defend—the Union, the United Kingdom.

I recognise, as, I am sure, does the Chancellor because he too comes from north of the border, that the Scots' interests are best served in this House. Under our unwritten constitution Members have the right to ask questions and to have them answered here, and that is the citizen's guarantee against malpractice and other problems. That guarantee will not exist if we enter a system in which redress is achieved through the courts where only the wealthy can be certain of having their wrongs righted. We must consider that carefully when thinking about economic matters. We have political control as long as our Chancellor makes the decisions. I welcome his comment that we will now act in Britain's interest. That means that we are back where I have always wanted to be.

I find that I can support the Government's policies tonight, but I warn them that when it comes to Maastricht, what I have said about the Union this evening will remain valid, and they cannot then count on my support.

9 pm

Mr. Gordon Brown (Dunfermline, East)

The motion this evening asks us to support the Government's economic policy. As this debate has already made clear, this is the first time the House has been asked to vote for something that does not exist. If the Government are to carry any conviction with their Back-Bench supporters this evening they must ask us to support not one Government economic policy but two. First, there was last week's policy, which Ministers told us was good for Britain but which is this week, we understand, bad for Britain. Then there is this week's attempt at a policy—one which was once, according to the Prime Minister, a betrayal of Britain but is now supposed to be our salvation.

Small wonder that in the other House tonight, where the Government cannot always command an enthusiastic payroll majority, their Lordships are being asked not to support the motion but only to note it.

We heard today a prime ministerial speech with no information of substance, no explanation, no justification and certainly no apology to the people of this country. So the first thing the Chancellor will have to do this evening is apologise. He should apologise to the millions of home owners who were told that three years of high interest rates were essential to bring us nearer zero inflation and who are about to suffer higher inflation as a result of his new policy. He should apologise to the thousands in business who were told that stability was the essence of the Government's macro-economic policy and who have said, as the CBI has said in the past few days, that the Government have a responsibility urgently to restore certainty to the financial markets. They have said that the absence of clear guidance will further weaken business confidence. They have said, as the president of the CBI has said, that they do not need or want a devaluation of sterling but find that they cannot plan ahead with any real confidence because there is no basic framework within which to do so.

Most of all the Chancellor should apologise to the people whom the Government have made unemployed, thousands of them in the past few days—3,000 at British Aerospace, 1,500 today at Ford, many more this afternoon and many more still this week and this month. These people were told by the Chancellor that their unemploy-ment was a price worth paying to reduce inflation. Now they find that both unemployment and inflation are likely to rise.

Our argument this evening is that the Government have failed and are no longer credible, that they are pursuing policies which are the opposite of promises they made at the election, and that they have failed to correct the underlying weaknesses of the British economy. Let us be absolutely clear about what the Government have done. There have been two full years of recession in which output, investment and employment have fallen faster than in any similar country in the European Community. There have been two full years of recession in which more businesses have gone under than in any other two-year period of British history. It is now five months since the election in which the Government promised a recovery —five months in which unemployment has risen and investment, output, bankruptcies and confidence have continued to worsen. In these five months it has become clear not only that there is no end in sight to the recession but no Government strategy to bring the recession to an end.

At the end of all this—bad enough in itself—failure has been compounded by humiliation. First, the Government have withdrawn us from the European exchange rate mechanism—something they said was a necessary framework and something they said they would never do. Secondly, the Government have abandoned what they called the cornerstone of their anti-inflationary policy—something they said they would never do. Thirdly, the Government have wasted billions of our reserves for an eventual bill of nearly £1 billion that was described by one of the speculators as a once-in-a-lifetime gift. Money that could have built new hospitals and new homes and repaired our schools and infrastructure, money that should have been used for the people of Britain was instead given to the speculators of the world.

Fourthly, the Government have devalued the currency —something they said they would never do—and, even afterwards, interest rates are 9 per cent. It is a humiliation made likely by the weakness of the currency which is itself the product of the weakness of the economy and that is the product of the weakness of this Government.

Our argument is that the Government can blame neither the Germans nor the exchange rate mechanism nor extraordinary events for the scale of what has happened and the abandonment of promises they have so freely given. They have no one to blame but themselves. At every point in this developing and now deepening recession, the Government have made the wrong decisions, and the Prime Minister and the Chancellor have been deeply implicated at every stage from 1988 to 1992. They were wrong, first, when, at the Treasury, they created a consumer credit boom that was unsupported by an industrial policy and created the worsening imports figures, the rise in inflation and the rise in interest rates that led to recession. They were wrong again, but to blame, when they compounded the recession by applying a one-club policy of high interest rates without an underlying plan to improve the real economy. Even in recent days, they have been to blame when they have taken what they themselves call the soft option.

Does the Chancellor deny information that we now have from within the Italian Government that realignment, including a realignment of the British currency, was possible during the events of the past two weeks? Does he deny the statement of a German official quoted in the newspapers of 19 September that, while the Germans were prepared to move and accept realignment, in the event, the others were not ready for it? Does he deny the statement of Mr. PÖhl, the former head of the Bundesbank, that it was a mistake by Governments not to get together last week to agree a broader realignment? As Mr. Pal said, that would have been accompanied by a more significant cut in base interest rates and the whole thing could have been avoided.

Will the Chancellor confirm that it is wrong to say that there was no alternative to the events that unfolded? I hope that he will specifically answer those questions when he replies to the debate.

The Government should admit their mistakes and their failure to tackle the problems of the real economy. Secondly, they should admit that a return to the excesses of monetarism with all the public spending cuts and misery that that would entail would simply be a repetition of the mistakes of the past. Thirdly, they must agree that they should change course and address the problems of the real economy with a national recovery programme. They must introduce a new industry policy and they must call Government Departments together today to formulate an emergency employment programme to remove the fear of unemployment which is paralysing the economy.

The Government should reaffirm their commitment to exchange rate co-ordination and secure European co-operation for a joint programme to expand the European economies. They should take action against speculation by widening the scope for intervention and by increasing the scale of potential intervention to end the situation described yesterday by one speculator who said that not every deal is as easy as making money out of the Bank of England. Does the Chancellor deny that one Bank of England dealer has reputedly been disciplined for admitting that he alone picked up £10 million in profits in one day?

Let us be absolutely clear. The big difference in policy is this. The Government feel that nothing need be done to tackle the underlying weaknesses of the economy; we believe that any membership of the exchange rate mechanism must be accompanied by an industrial policy for Britain.

The Government's argument, as I understand it, is that on Wednesday morning they were swept aside by a tidal wave—something that could not be foreseen—in response to which they did the best they could: although in normal circumstances they would not devalue or waste reserves, on this occasion they had no choice. Our argument is that economies do not weaken in a single morning, and that the Chancellor must explain the origins, the causes and the development of the crisis. He must explain why the British and Italian economies became so weak that they could not withstand the pressures; why nothing came of the Government's boast that, under their management, the British economy was now strong enough to withstand every pressure; why no preparations were made to deal with the crisis—in particular, why the reforms in the ERM that the Chancellor supposedly now seeks were never mentioned before he left it—and why the alternatives that I suggested were not considered, although we know that they were available.

Is it not the case that the basic weakness of the currency was a result of the basic, underlying weakness of the economy? Did not the Prime Minister—who has absented himself from this part of the debate—tell the Treasury and Civil Service Committee on 26 July 1990: It is always extremely undesirable to devalue. In my view, you should follow policies to make sure it does not happen"? What is the Government's policy now—or, rather, what are the Government's policies? Let us recall the Chancellor's words on the steps of the Treasury, spoken in 45 seconds. Those 45 seconds cost the Bank of England millions. We may accuse the right hon. Gentleman of having done too little over the summer, but think of the cost to the country had he spoken for three minutes or even longer!

What did the Chancellor say from the Treasury steps about devaluation? What he said, in 45 seconds, was this: There is going to be no devaluation, no leaving the ERM. We are absolutely committed to the ERM. It is at the centre of our policy. We are going to maintain sterling parity, and we will do whatever is necessary. I hope there is no room for any doubt about that at all. There are seven statements in that, the only speech that the Chancellor made during those hectic weeks of the summer —the "no devaluation in our time" speech, unrivalled and unsurpassed for mis-statements and misjudgments. Everything that he said was consistently wrong. The Chancellor is entirely consistent: we can rely on him always to get it wrong.

Does the Chancellor still agree with what he said in the debate on the economy that took place before the summer? He said then: The idea that we can help the country's economy by depreciating the exchange rate is pure illusion, pure fool's gold. Does he still believe what he told Conservative Newsline on 2 September? He said that devaluation would not help recovery; that it would lead to a collapse in market confidence. Does he still agree with his previous view that if we left the ERM we would see a huge fall in the pound and an explosion in inflation? Does he still agree with what he told Brian Walden a few months ago, when he said that devaluation would he "the most foolish thing"? Does he now reject the statement that he made to the Daily Express in a question-and-answer session? When asked: Are there any circumstances under which you would consider leaving the ERM?", the right hon. Gentleman's answer was No. As I have said, devaluation is fool's gold. Why is it that the policy that the Chancellor thought foolish— the policy that would bring about a collapse in confidence, that was pure illusion and that, in one month, was fool's gold—is good for Britain this month? [HON. MEMBERS: "Answer now."] I may have to give the Chancellor more time in which to complete his answers to the questions that I shall put to him.

Does the right hon. Gentleman agree with what he said before: that many who advocate floating—that is the word that he has been using—know full well what the consequences would be? According to him, They intend a devaluation of the pound, and they would certainly achieve it. Does he agree with what he said about the effects on the currency in the long term? He said: When currencies devalue against the deutschmark, the markets do not expect them to be revalued up again. As I have said, this has never happened. Does he agree that a premium will have to be paid—that is his view—when currencies devalue against the deutschmark? To quote him: Markets expect a further devaluation and demand higher rates. They expect a further devaluation and demand higher —not lower—interest rates in order to compensate for the risk. Does the right hon. Gentleman agree with what he wrote in an academic article only a few months ago, entitled UK Economic Policy—Lessons from History"? It was a learned article in the aptly named "International Economic Insight". He said: Devaluationists have failed to grasp the psychology of markets. If the pound sterling is devalued, those holding sterling assets suffer a highly visible loss. The inevitable consequence is that sterling is marked down as a risky currency to hold and people have to be paid more to hold it. It is tragic that, after all those remarks and turning round his policy absolutely, the Chancellor shows no shame, makes no apology and gives no hint of remorse for damaging the stability of people's lives up and down the country. Does he still believe that the effect of his policy is, as he said in the articles and interviews, higher inflation, further devaluation and higher interest rates than would otherwise be necessary? We are speaking of the man who said, on 10 March, that his Budget was a Budget for recovery. On 31 December last year he said the "recession has technically ended".

There are two possible explanations for the Chancellor's behaviour; the Chancellor can choose between them: he has been seriously wrong for the past two years or he has been seriously wrong for the past two weeks. The Chancellor is inflicting on an economy that he has already left in recession for two years without doing anything about it policies that he thought until a few days ago were bad for Britain, inflationary, made conditions difficult and were liable to involve an interest rate premium for the future. The problem is that his future statements will have no credibility.

What is the Chancellor's position this evening? The Conservatives have a traditional way of managing situations such as that in which the Chancellor finds himself. First, they will cut down his appearances in the media: sightings of him will become rarer and briefer as the Trade Secretary and the Home Secretary begin to take over. Then, the Prime Minister will repeat that the Chancellor is wonderful, marvellous, brilliant and courageous. the Prime Minister will say that the Chancellor is an air raid shelter. I understand that that is the Prime Minister's way of suggesting that the Chancellor is unassailable. Given the problems of repossessions in this crisis, it is just as well that the Prime Minister is not saying that the Chancellor is as safe as houses.

Next, the Chancellor will go to the Conservative party conference and, despite all the efforts—perhaps an interest rate cut to make the Chancellor's speech more acceptable —the ovation will be shorter. Some people will not even stand; some will crouch and some will even remain sitting. Next, another meeting of the 1922 Committee will be called—of course, just to take stock. Everyone knows what happened to Sir Leon Brittan and perhaps to one other person as a result of such a meeting.

Finally, newspapers will be told that the Chancellor has become semi-detached. The Downing street press office will ask newspapers to focus less on the Chancellor's successes, and more on his eccentricities and excesses such as singing in the bath on the road to an announcement that he is about to spend more time with his family. The procedure is well known in the Conservative party. It is not a question now of "whether" but "when".

There is no point in the Chancellor setting monetary targets other than in negotiations with the publishers of his memoirs. There is no point in him worrying about the money supply except if he is negotiating a salary for the City board that he is about to join. There is no point in him thinking about foreign exchange rates unless he is asking about the surcharge on next year's package holiday to Italy. His diary secretary may be planning his appearance in November at the Lord Mayor's banquet, but probably at table 94. All that is left to be done in the changing of' the guard is to book the day for the removal vans from number II and to hand in the keys of his country house at Chevening.

So what has the Chancellor been doing all summer? The only report of his activities in Downing street that I could find in the cuttings that I have so far examined was of the night of 25 June. Was he talking to manufacturers, business men or industrialists? Had he brought back the building societies that he was so keen to talk to before the election? No, the Chancellor was celebrating in style, at the biggest Downing street party for years, perhaps for decades. I understand from a report in the Evening Standard that the highlight of the evening was the honourable Petronella Wyatt, author of the only recent eulogies of the Chancellor, amidst the flamenco dancing, singing a carefully chosen song that the Chancellor wanted to hear, one of the best known marching songs—a German ditty running through Downing street, "Lily Marlene". Perhaps that is what he was singing in his bath the other day, or perhaps it might have been "Deutschmark, Deutschmark uber alles". That is the Chancellor in a summer in which—

Sir Peter Tapsell

Does the hon. Gentleman have any views on economics that he would like to share with us?

Mr. Brown

I spoke more about economics in my first 10 minutes than the Prime Minister in his whole speech.

Let us consider the Prime Minister's role in all this. the Prime Minister took us into the ERM. His new year message to the Conservative party said that one of his greatest achievements was that he had led us into the ERM with success. In the Conservative party election manifesto the Prime Minister said: Membership of the ERM is now central to our counter-inflation discipline. It was the Prime Minister who said: Let me tell you what you need to stay in recession. You need a weaker pound. Let me tell you what you need for a strong recovery. You need stable exchange rates. Will he tell the Conservative party conference next month, as Prime Minister, that the very people who stood and cheered at his success in taking Britain into the ERM in 1990 were wrong and that they should have been sitting instead? Does he still agree with the view that he stated two weeks ago about political and economic pressures? Let me quote the Prime Minister, who said: All my adult life I have seen British Governments driven off their virtuous pursuit of low inflation by market problems or political pressures. All too often in the past the solution was the same—to let the exchange rate go … or later the result was the same—rising property prices, rising wages, rising inflation and a long-term deterioration in Britain's competitiveness. Can the Prime Minister promise that that will not happen now? When it is clear that there was an alternative that should have been explored during the past few weeks, and that I have already set out, I challenge the Prime Minister to tell us why the unilateral devaluation that he considered 10 days ago, when he spoke to the Confederation of British Industry in Scotland, was a "betrayal of our future" is now the right policy for the Government.

Does the Prime Minister still believe that devaluation damages long-term competitiveness? Does he still believe, as he said, that there is no subtler no surer means of overturning the existing basis of our society"? Does he still believe that it is a "soft option"? Does he still believe that the ERM is "the discipline" and "the framework" and that it is a "cold world" outside it?

I challenge him to tell us why the policy that he thought good for Britain one week is now bad for Britain this week. I challenge him to tell us why the policy that he called a "betrayal" one week is now our salvation.

Mr. John Marshall

Earlier this afternoon the Leader of the Opposition refused to say whether he would take us back into the ERM. Can the hon. Gentleman tell us?

Mr. Brown

The difference between the parties has become clear during the debate. The Chancellor cannot even tell us—nor could the Prime Minister—whether they support floating or managed exchange rates. Our policy is for managed exchange rates. What are the policies of the Government? What has happened to zero inflation? What has happened to the boast that Britain was a miracle country, envied by Germany? What has happened to the boast that we would get inflation in Britain below German levels and keep it there? What has happened to the boast mentioned by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) this afternoon —that we would have a currency superior to that of Germany?

Who do the Government blame now? Is it the ERM, which the Prime Minister said a few days ago was not to blame? Is it the Germans, whom two weeks ago, in his speech to the Scottish CBI, he praised as a model to emulate for their anti-inflation record? Or do the Government blame the markets themselves, which the Prime Minister now calls irrational? the Prime Minister's response to the greatest test of the markets is not to uphold his faith in them but to call them irrational. Whoever heard of a seventh-day adventist choosing judgment day to declare himself an atheist? That is what the Prime Minister has done.

The case against the Prime Minister is not simply what he has said—that is now inoperative—but the consequences for the British economy of what he has admitted. Can he now lead our economy in Europe, after everything that he has said, which he has now had to turn on its head? Will there not always be a credibility premium now, which will have to be paid, whether in interest rates or in something else, so long as we have a Prime Minister and a Chancellor who promised that there would be no devaluation and who promised to stick with the ERM but who cannot now guarantee that they will not again change our economic policy completely?

The last time that the Prime Minister spoke in the House about the economy, he said that the real risk of leaving the ERM was that interest rates would rise rather than fall. I wonder whether, over time, the interest rate premium to which he and the Chancellor have drawn attention will have to be paid so long as they are in power.

All this time we have had the worst growth, the fastest rising unemployment and the lowest investment of any country in the EC. We were bottom of the league in Europe two years ago, we were bottom of the league last year, and we are bottom of the league now. Now the answer to the problems seems to be to return to the monetarist targets of the Thatcherite era—M3, M4 and the other monetary targets which the Chancellor himself said a few weeks ago provided a poor guide to interest rate policy". and that he could not remain indifferent to the problem of the exchange rate. All those monetary targets—the right hon. Gentleman is nodding his head. If he is targeting the exchange rate as a means of deciding interest rates, how does he assess it? Is he now shadowing the deutschmark again? How? If he says that he has an exchange rate target, he must explain what he is doing. That is another question that he will have to answer if the House is to be satisfied.

The Chancellor now says that we are not returning to cuts in interest rates, leaving the ERM and using only monetary targets. He says that he will target the exchange rate too. Conservative Members will do well to question him on what that means. After two full years of recession in which total output has fallen significantly, and five months after an election victory in which the Government promised a recovery that never arrived, we are still at the bottom of the league.

Our case is still that the weak currency which arises from a weak economy can be dealt with only by measures taken here in Britain to deal with the fundamental weakness of that economy.

At the election the Government said that they would bring recovery. They did not. They said that they would reduce unemployment through employment action, yet the promised places are 25 per cent. short. The Government guaranteed every school leaver a training place or a job. They have not delivered. They said that most repossessions would stop. Repossessions have continued. During the election campaign the Government prophesied that they could keep all their public spending promises, but they never will. They said that they would never devalue and leave the ERM—and they have done so.

The tragedy is that at this stage it is not the Government who will pay for the problems that they have created. Instead millions of British people will pay, after being hammered by the recession, with another round of public spending cuts.

The Government blame the problems on the ERM. They blame the Germans. They even try to blame my right hon. and learned Friend the Member for Monklands, East. They say that there is a fault line. Indeed there is a fault line in British politics, and it starts in No. 10 Downing street, passes through No. 11 Downing street, takes in every Government Department, and leads inexorably to Conservative central office.

The Government did not stay the course; they did not honour their promises. They did not yield the economic miracle. They have lost all claim to economic competence and credibility.

The Conservative party ran a general election campaign on the slogan "You can't trust Labour" and has shown itself completely unworthy of trust itself. The party that already for years has been the party of unemployment and of poverty is now the party of devaluation; the party which has abandoned the British economy with one hand to the speculators and with the other hand to our competitors so that even the pound is no longer safe in its hands. Ministers who continue to hold responsibilities now cannot command respect. They may hold office for five years, but even after five months they have lost all authority to govern. They have failed the country and they will never be trusted again.

9.30 pm
The Chancellor of the Exchequer (Mr. Norman Lamont)

First, I congratulate the hon. Member for Dunfermline, East (Mr. Brown) on taking up his position as shadow Chancellor. I look forward to debating with him on many occasions in the future.

Parliament has been recalled to discuss the events of the past fortnight. Provided that I can be given a hearing, I want to answer the questions that the hon. Gentleman has asked. I want to describe the background to our decision to leave the ERM and I want to describe how policy will operate in the new environment. Before I do that, it is important to remind ourselves why my noble Friend Baroness Thatcher and my right hon. Friend the Prime Minister took us into the ERM in the first place.

In the 1980s, we brought inflation dramatically down from the catastrophic levels that had prevailed in the 1970s, but that progress was not consolidated. It was not just the Government who were keen to join the ERM; business was particularly attracted because of three advantages that it had seen the ERM bring its competitors in the 1980s—greater exchange rate stability in what had become our major trading zone, the chance to get interest rates down to levels more in line with those faced by our competitors, and, most important, its strong anti-inflationary framework and proven track record.

The ERM had demonstrated that it could deliver lower inflation. It had existed since 1979 and it had delivered for countries such as Holland and France that had not enjoyed low inflation in the past. Even my noble Friend Baroness Thatcher was convinced, at least for a day. There appeared at that time to be a consensus in favour.

Of course, the right hon. and learned Member for Monklands, East (Mr. Smith) was an early supporter of the ERM, whether because he understood it or because he simply wanted to make some difference between his policy and that of the Government of the day who can say. I cannot, and he probably cannot himself.

ERM membership brought considerable benefits to the United Kingdom and nowhere is that more evident than our inflation record. Inflation fell from 11 per cent. in the autumn of 1990 to nearer 3.5 per cent. last month. For the last year, United Kingdom inflation has been below the European average. In sum, we took sterling into the ERM because it was right for Britain, and for almost two years it worked.

But whatever the successes of the ERM in the past, it is clear that in recent weeks it has been under enormous strain. That has arisen because of two unique events. The first was the French referendum which gave the foreign exchange markets something that they had never experienced before—a fixed and definite date against which they could speculate. As the weekend approached, the market became ever more convinced that Sunday would bring with it a major currency realignment. A circumstance more conducive to market instability is difficult to imagine in a market where daily turnover is not, as someone suggested, $1 billion but $1 trillion—a million million dollars.

The more fundamental underlying cause, as some of my hon. Friends said, was the far-reaching consequences of German reunification and the conflict that that engendered between German policy needs and those of most other countries. Reunification has meant higher German interest rates than many countries need to control their inflation. That is not a criticism of Germany but merely a statement of fact.

A further consequence of the position in Germany—as my hon. Friend the Member for East Lindsey (Sir P.Tapsell) said—is that the generally high level of European interest rates led to a considerable appreciation of all European currencies against the dollar. That was quite unrelated to fundamentals, and further intensified recession and deflation in Europe. Until last Monday's cut, as my hon. Friend the Member for East Lindsey also said, German interest rates were at a post-war high. At the same time, American interest rates remained at a 30-year low. That is clearly neither a normal nor a sustainable state of affairs.

That unique set of circumstances not only affected Britain but set off a chain reaction across Europe, starting in the Scandinavian countries. Finland was forced to abandon its link to the ERM, then Sweden was compelled to raise interest rates three times to astonishing levels—75 per cent., 500 per cent., and 700 per cent.—in an increasingly desperate attempt to cling to its ERM link.

Italy was forced to raise interest rates, then to devalue, and finally to leave the system altogether. Contrary to its stated actions, Spain had to devalue and then to reimpose exchange controls. In every case, Finance Ministers found themselves taking the very actions which they hoped to avoid and which they once publicly set themselves against.

Still the storm has not subsided. Only yesterday France had to raise interest rates to 13 per cent., which is the last thing that the French economy, with 3 million unemployed, needs at this moment.

Mr. Nigel Griffiths (Edinburgh, South)

The Chancellor implied that other Finance Ministers hoped to avoid those strategies. There was no mention of hope when the right hon. Gentleman spoke on the steps of the Treasury, when he said for definite that he would not leave the ERM. He said for definite also that he would not devalue—and he has. Who can trust what he says tonight?

Mr. Lamont

I am sorry that I gave way to the hon. Gentleman, but I will deal with his point later.

We always knew that the period leading to the French referendum would be difficult, and we drew up careful plans to protect sterling's position. We took steps to strengthen our foreign exchange resources—an operation which, contrary to the remarks of the Leader of the Opposition, was widely commended in the markets at the time and which led to a significant strengthening of sterling.

In conjunction with our European Community partners, including France, I repeatedly pressed the German authorities on a number of occasions not to go against their own policy in Germany but to ease tensions in the ERM by reducing interest rates. That eventually led to what was admittedly a small cut in German interest rates the weekend before last. The initial impact was helpful. At the beginning of last week, the markets seemed to think that sterling might get through the week without further trouble. Unfortunately, at that critical moment the markets were thrown into renewed turmoil by remarks about the need for sterling devaluation attributed to the president of the Bundesbank, Dr. Schlesinger. Those remarks were never convincingly denied, and they triggered the final, irresistible assault on sterling.

The very next day, the markets opened with sterling right at the bottom of its ERM bands. The House will appreciate that, under the terms of ERM membership, when a currency reaches its floor the country in question is obliged to buy back unlimited amounts of its own currency at that parity. For a currency as widely traded as sterling, that meant that our position became extremely serious. I responded at once by raising interest rates. I raised them again that afternoon. After consulting my right hon. Friend the Prime Minister and senior colleagues, I concluded that Britain's best interests demanded its immediate suspension from the ERM.

I have read much about those events and I have listened to what people have said and to what has been said in today's debate. I can only say that, after all that, on the matter of the events of last week and the week before, I have not heard of anything that might have been done or handled differently that would have produced a different outcome.

Many Opposition Members advocated a concerted interest rate reduction across Europe. That is precisely what I, the French and the Italians sought to achieve, but it could never come about without a significant cut in German interest rates and that was not forthcoming. The right hon. and learned Member for Monklands, East made the accusation this afternoon that the Government could have avoided the suspension of sterling from the ERM if only we had sought a general realignment of European currencies. I think that that is what he said—

Mr. John Smith

indicated assent.

Mr. Lamont

The right hon. and learned Gentleman confirms that. What did he mean? Realignment covers a multitude of sins. At one end of the spectrum there is a unilateral upward revaluation of the deutschmark. He says that he is against devaluation, but I must tell him that a unilateral deutschmark revaluation was simply never available. The Germans never sought it, and while the French, the Dutch and others were not prepared to devalue against the deutschmark, the option that he claimed as his solution did not exist. The only option on the table was a sterling devaluation, perhaps in combination with the Italian lira.

I can hardly believe that the right hon. and learned Gentleman had the cheek to suggest that the way to have avoided a sterling depreciation last Thursday would have been to devalue on Sunday. His suggestion was not only naive; it was extraordinary. He said that it was the obvious solution, but it was not so obvious to his hon. Friend the Member for Dunfermline, East. Just two days before the lira was devalued, he wrote in The Guardian: Our policy is not one of devaluation, nor is it one of revaluation or re-alignment … One of the things the Germans may wish to propose is whether a re-alignment of the currencies will bring interest rates down. There is no guarantee that that would happen and it is not our policy. There seems to be some difference between the hon. Gentleman and the right hon. and learned Gentleman. So much for his case—his remedy to cure the problem was expressly rejected by his shadow Chancellor.

The hon. Member for Dunfermline, East and the right hon. and learned Gentleman made much of what I said in my speech about devaluation about being opposed to devaluation and of my right hon. Friend the Prime Minister's speech to the Scottish CBI. At the time that I made my statements the strains were beginning to appear in the ERM. There was repeated speculation in the press and in the markets that the Government were not wholly committed to the existing parities. My right hon. Friend the Prime Minister and I repeatedly rejected the idea of a devaluation or a withdrawal from the ERM. I believe that we were right to do so. As long as there was the chance to keep sterling in the ERM, I had to reaffirm the agreed policy of the Government, and in the strongest possible terms. To have expressed myself ambiguously or less strongly would have exacerbated the pressures that were building up.

I implemented every measure that I could to defend sterling's position. I backed my words with action and so did my Finance Minister colleagues around Europe, but we faced a unique and ultimately irresistible set of circumstances. History might have been different had we not been subjected to a constant stream of half-leaks and rumours emanating from certain sources. The days immediately prior to the referendum required extraordinarily sensitive handling and for the authorities to take great care in their public statements. That is not what happened and that is a matter for the profoundest regret.

Mr. Beith

Why, then, despite all these efforts, did the markets expect that it would be sterling—not the franc or, of course, the deutschmark, or the Belgians, or the Dutch —that would be vulnerable?

Mr. Lamont

The remarks by the president of the Bundesbank were specifically directed to sterling. I do not want to do a Dr. Schlesinger on the French franc, but it is perfectly apparent from reading newspapers that there is quite a lot of pressure on that currency.

My right hon. Friend the Prime Minister and I have made it clear that a number of important conditions need to be fulfilled before Britain could rejoin the ERM. First, there can be no question of resuming our membership until the current tensions within the foreign exchange markets have subsided. Secondly, I have made it clear to our European partners that we need to have a proper review of the whole way in which the ERM works, the intervention rules, the co-operation procedures and the obligations that it places upon the those currencies at the top and the bottom of the exchange rate mechanism bands. Thirdly, and most fundamentally, as I have already made clear, the root cause of the current turbulence has been the unique event of German reunification. My preference would have been to stay in the system and to see through the problems that this posed, but now that we have left I do not believe that it would be right for me to recommend that sterling should re-enter the ERM unless and until the German economy and ours are more in step and unless and until the Germans are in a position to bring their interest rates down to levels which are more compatible with sustained, non-inflationary growth.

Dr. John Reid (Motherwell, North)

Does the Chancellor not recognise that when he listed the culpable persons, none of whom is, apparently, in the British Government, who were responsible for devaluation, it amounted to a staggering confession of the vulnerability of the British pound? People will ask why, when there are problems over uniting east and west Germany, it is the pound that is hit, why, when the French go to vote, it is the pound that is hit, why, when the German Bundesbank, or members associated with it, give leaks, it is the pound that is hit. How does the Chancellor intend to insulate himself from those developments in Europe, apart from shadowing the rouble?

Mr. Lamont

One quick answer to the hon. Gentleman is that sterling is, of course, a currency which is traded five time as widely as most of the other ERM currencies.

The decision to take the pound out of the ERM was a setback, but it does not and will not make any difference to our determination to bring inflation down to the lowest levels in Europe. Although this was not the outcome I sought, the events of last week have, in some ways, presented us with an opportunity. As a result of the strains I have described, we have over the past months been forced to pursue a policy that was tighter than was required in order to get inflation down in Britain. The Government were prepared to accept that while sterling remained within the ERM, because of the long-term gains that we wanted to get from low inflation, but now that sterling is floating I have been able to take advantage of the greater discretion we now have to make what is a prudent reduction in interest rates and which is wholly appropriate to Britain's own domestic situation.

I know that the 1 per cent. cut that I announced on Tuesday was welcomed by businesses and those with mortgages. It means that British interest rates are now among the lowest in the European Community, but I must emphasise to my hon. Friends that I have been able to make this move only because of the remarkable success we have had over the last two years in reducing inflation. I would have no hesitation in putting up interest rates again if I thought that our inflation objectives were in jeopardy.

I want to make one thing crystal clear. No one should fool themselves that a floating exchange rate regime is a soft or easy option. I do not believe in a weak currency; I do not believe in devaluation; but we will have a British monetary policy tailored to the needs of the British economy. I will not throw away the gains on inflation that we have made over the last two years.

We cannot allow Britain to become an island of high inflation, drifting away from a European zone of price stability. In the early 1980s we showed with a floating regime that it was possible to reduce inflation, as we did from over 20 per cent. to under 5 per cent., while the pound floated. I am determined that we shall achieve that success again.

In setting interest rates over the period ahead I shall be guided by a range of indicators. We shall maintain our current target of 0 to 4 per cent. for narrow money. We shall also follow broad money, and asset prices as well as the exchange rate itself. The hon. Member for Dunfermline, East seems to be astonished that one cannot set interest rates without taking the exchange rate into account. It has nothing to do with targets. It must be taken into account because it is part of the tightness or looseness of monetary policy in the economy, and we shall take account of exchange rates in setting interest rates. We shall also continue with our policy of fully funding the PSBR.

I shall shortly set out in more detail in another speech the precise, more detailed monetary framework that we shall follow. Monetary policy will continue, as before, to be supported by our tight fiscal stance. In this new situation it is all the more important for the Government to stick rigorously to our public spending objectives. The strictest control of public expenditure, including public sector pay, is at the top of my policy agenda. Without tight control of public expenditure, interest rate reductions, such as the one that I announced this week, would not be possible. Rapid growth in Government spending would require high interest rates to finance it and to restrain inflation, and that is the greatest divide between Conservatives and the Labour party.

Neither in the election campaign nor since have the Opposition been able to control their addiction to spending, and that means that they would never have had a hope of cutting interest rates this week or at any stage in the future. Their attitude is to parrot calls for lower interest rates, and they want spending programmes that would send inflation sky high. Let no one be in any doubt: only tight restraint on public spending can assure us of low inflation and low interest rates and only this Government are able and willing to deliver that.

Mr. John Battle (Leeds, West)

Will the Chancellor confirm that, despite a promise a mere five months ago that the Government would commit money to housing and housing associations, money for housing is to be reduced in the present round of cuts by £2 billion? How is that holding to his promises? Is not he reneging on them?

Mr. Lamont

We have recently vastly increased resources to the Housing Corporation.

Mr. Gordon Brown

During the election campaign the Chancellor said that he would hold to all the public spending figures in the various statements, and that was confirmed by the Prime Minister. Can he give an absolute undertaking that that is still the Government's policy?

Mr. Lamont

I have announced the remit for public spending and we are sticking to our published plans for next year. That is crystal clear.

Mr. Gordon Brown


Mr. Lamont

No, I must get on.

I fully understand the difficulties faced by many businesses and families. The Leader of the Opposition said that since the election every economic indicator had declined. Does he not know that manufacturing output increased in both the first and second quarters of this year? Has his hon. Friend the Member for Dunfermline, East, who, no doubt, has to advise him nowadays, not told him that retail sales rose in the second quarter and continued to rise in the latest three months to the highest level for almost two years? Has the right hon. and learned Gentleman not been told that in the second quarter manufacturing investment rose by over 3 per cent. and that business investment was up in the first and second quarters of this year? Most of all, he did not seem to be aware that, in the quarter following the election, non-oil GDP actually rose. Every one of those developments is good news, but, of course, we could not expect to hear about them from the Opposition.

The reaction of the hon. Member for Dunfermline, East to the cut in interest rates to 9 per cent. broke all records for gall. He appeared on television and criticised me for changing interest rates five times in four days. What on earth does he mean? Since he supports the ERM, was it wrong to increase interest rates to defend the ERM? What did he mean by saying that he is committed to the ERM? Would he have caved in at the first sign of trouble or would he have increased rates just once and then caved in? Is he saying that once we had left the ERM it made sense to keep interest rates at 15 per cent? Surely he could have welcomed the reduction in interest rates to 9 per cent.—the lowest level since the summer of 1988.

Only last week, as soon as the Bundesbank announced that German rates would be reduced, the hon. Member for Dunfermline, East was jumping up and down like a dervish, as he seems to be doing now. Even before hearing by how much German rates would be reduced, he rushed to the nearest television studio and called on me to slash interest rates. I received a lot of advice last week, but that was undoubtedly the dumbest that I received.

The hon. Gentleman's position on interest rates lacks any credibility. He spent his first few weeks as shadow Chancellor calling on me to maintain our position on the ERM but to slash interest rates at the same time. As the right hon. Member for Bethnal Green and Stepney (Mr. Shore) wrote in the Evening Standard: I do not reveal any new economic law when I say that this is simplynonsense. The Leader of the Opposition and the hon. Member for Dunfermline, East have tried to maintain that what happened on the foreign exchange markets had something to do with the fundamentals of the British economy, but Britain has a lower rate of inflation than the Community average, has one of the lowest debt-to-GDP ratios in Europe and few European countries have a stronger underlying financial position. Are they seriously saying that what the markets are doing to the French franc is due to fundamentals? Do they think that the 13 per cent. interest rate dictated by the French markets is what the French economy fundamentally requires? Is that their view of markets?

Fortunately, the hon. Member for Dagenham (Mr. Gould) knows better. Only last week he said in The Guardian: It is misleading to say that it is the recession which caused the problem of the pound. If he were here, perhaps the hon. Gentleman could explain that to the Leader of the Opposition.

The hon. Member for Dunfermline, East talks about the need for a long-term strategy for the British economy. We know that his idea of a long-term plan is thinking up tomorrow's soundbite a week in advance.

Mr. Gordon Brown

The Chancellor's case this evening is that there has been no alternative. Will he answer directly and specifically one question that I put to him: was a realignment discussed?

Mr. Lamont

I have answered that question. I have said that a unilateral German—[Interruption.] That is what the word realignment means. The hon. Member for Dunfermline, East shows that he does not know what he is talking about. I cannot disclose confidential discussions. [HON. MEMBERS: "Ah".] The hon. Gentleman is asking me to disclose the position of other countries whose currencies would be affected by that, which shows how little he understands.

Sound money, free enterprise, light regulation and less government are the principles on which we fought the election. Nothing that has happened in recent days changes our commitment to those objectives or the fact that we are the only party that bases its policies on them. We will continue with those policies, which have brought record living standards to this country, the reform of industrial relations, the privatisation programme, which has returned two thirds of nationalised industries to the private sector, and the reform of company taxation, which has given this country the lowest level of corporation tax in the European Community.

Whatever the difficulties of the past week, our determination to achieve our goals remains unshakeable. We have set them for ourselves, we will stick to them, and I ask my right hon. and hon. Friends to support them.

Question put, That the amendment be made:—

The House divided: Ayes 288, Noes 330.

Division No. 72] [10 pm
Abbott, Ms Diane Beckett, Margaret
Adams, Mrs Irene Beith, Rt Hon A. J.
Ainger, Nick Bell, Stuart
Ainsworth, Robert (Cov'try NE) Benn, Rt Hon Tony
Allen, Graham Bennett, Andrew F.
Alton, David Benton, Joe
Anderson, Donald (Swansea E) Bermingham, Gerald
Anderson, Ms Janet (Ros'dale) Berry, Dr. Roger
Armstrong, Hilary Betts, Clive
Ashdown, Rt Hon Paddy Blair, Tony
Ashton, Joe Blunkett, David
Austin-Walker, John Boateng, Paul
Banks, Tony (Newham NW) Boyce, Jimmy
Barnes, Harry Boyes, Roland
Barron, Kevin Bradley, Keith
Battle, John Bray, Dr Jeremy
Bayley, Hugh Brown, Gordon (Dunfermline E)
Brown, N. (N'c'tle upon Tyne E) Griffiths, Win (Bridgend)
Bruce, Malcolm (Gordon) Grocott, Bruce
Burden, Richard Gunnell, John
Byers, Stephen Hain, Peter
Caborn, Richard Hall, Mike
Campbell, Mrs Anne (C'bridge) Hanson, David
Campbell, Menzies (Fife NE) Hardy, Peter
Campbell, Ronald (Blyth V) Harman, Ms Harriet
Campbell-Savours, D. N. Harvey, Nick
Canavan, Dennis Hattersley, Rt Hon Roy
Cann, Jamie Henderson, Doug
Carlile, Alexander (Montgomry) Hendron, Dr Joe
Chisholm, Malcolm Heppell, John
Clapham, Michael Hill, Keith (Streatham)
Clark, Dr David (South Shields) Hinchliffe, David
Clarke, Eric (Midlothian) Hoey, Kate
Clarke, Tom (Monklands W) Hogg, Norman (Cumbernauld)
Clelland, David Home Robertson, John
Clwyd, Mrs Ann Hood, Jimmy
Coffey, Ann Hoon, Geoffrey
Cohen, Harry Howarth, George (Knowsley N)
Connarty, Michael Howells, Dr. Kim (Pontypridd)
Cook, Frank (Stockton N) Hoyle, Doug
Cook, Robin (Livingston) Hughes, Kevin (Doncaster N)
Corbett, Robin Hughes, Robert (Aberdeen N)
Corbyn, Jeremy Hughes, Roy (Newport E)
Corston, Ms Jean Hughes, Simon (Southwark)
Cousins, Jim Hume, John
Cox, Tom Hutton, John
Cryer, Bob Illsley, Eric
Cummings, John Ingram, Adam
Cunliffe, Lawrence Jackson, Glenda (H'stead)
Cunningham, Jim (Covy SE) Jackson, Helen (Shef'ld, H)
Cunningham, Dr John (C'p'l'nd) Jamieson, David
Dafis, Cynog Janner, Greville
Dalyell, Tam Johnston, Sir Russell
Darling, Alistair Jones, Barry (Alyn and D' side)
Davidson, Ian Jones, leuan Wyn (Ynys Môn)
Davies, Bryan (Oldham C'tral) Jones, Jon Owen (Cardiff C)
Davies, Rt Hon Denzil (Llanelli) Jones, Lynne (B'ham S O)
Davies, Ron (Caerphilly) Jones, Martyn (Clwyd, SW)
Davis, Terry (B'ham, H'dge H'l) Jones, Nigel (Cheltenham)
Denham, John Jowell, Tessa
Dewar, Donald Kaufman, Rt Hon Gerald
Dixon, Don Keen, Alan
Dobson, Frank Kennedy, Charles (Ross, C&S)
Donohoe, Brian H. Kennedy, Jane (Lpool Brdgn)
Dowd, Jim Khabra, Piara S.
Dunnachie, Jimmy Kilfoyle, Peter
Eagle, Ms Angela Kinnock, Rt Hon Neil (Islwyn)
Eastham, Ken Kirkwood, Archy
Enright, Derek Leighton, Ron
Etherington, Bill Lestor, Joan (Eccles)
Evans, John (St Helens N) Lewis, Terry
Ewing, Mrs Margaret Litherland, Robert
Fatchett, Derek Livingstone, Ken
Faulds, Andrew Lloyd, Tony (Stretford)
Field, Frank (Birkenhead) Llwyd, Elfyn
Fisher, Mark Loyden, Eddie
Flynn, Paul McAllion, John
Foster, Derek (B'p Auckland) McCartney, Ian
Foster, Don (Bath) Macdonald, Calum
Foulkes, George McFall, John
Fraser, John McGrady, Eddie
Fyfe, Maria McKelvey, William
Galbraith, Sam Mackinlay, Andrew
Galloway, George McMaster, Gordon
Gapes, Mike McNamara, Kevin
Garrett, John McWilliam, John
George, Bruce Madden, Max
Gerrard, Neil Mahon, Alice
Gilbert, Rt Hon Dr John Mallon, Seamus
Godman, Dr Norman A. Mandelson, Peter
Godsiff, Roger Marek, Dr John
Golding, Mrs Llin Marshall, David (Shettleston)
Gordon, Mildred Marshall, Jim (Leicester, S)
Gould, Bryan Martin, Michael J. (Springburn)
Graham, Thomas Martlew, Eric
Grant, Bernie (Tottenham) Maxton, John
Griffiths, Nigel (Edinburgh S) Meacher, Michael
Meale, Alan Sheerman, Barry
Michael, Alun Sheldon, Rt Hon Robert
Michie, Bill (Sheffield Heeley) Shore, Rt Hon Peter
Milburn, Alan Short, Clare
Miller, Andrew Simpson, Alan
Mitchell, Austin (Gt Grimsby) Skinner, Dennis
Moonie, Dr Lewis Smith, Andrew (Oxford E)
Morgan, Rhodri Smith, C. (Isl'ton S & F'sbury)
Morley, Elliot Smith, Rt Hon John (M'kl'ds E)
Morris, Rt Hon A. (Wy'nshawe) Smith, Llew (Blaenau Gwent)
Morris, Estelle (B'ham Yardley) Snape, Peter
Morris, Rt Hon J. (Aberavon) Soley, Clive
Mowlam, Marjorie Spearing, Nigel
Mudie, George Spellar, John
Murphy, Paul Squire, Rachel (Dunfermline W)
O'Brien, Michael (N W'kshire) Steinberg, Gerry
O'Brien, William (Normanton) Stevenson, George
O'Hara, Edward Stott, Roger
Olner, William Strang, Dr. Gavin
O'Neill, Martin Straw, Jack
Orme, Rt Hon Stanley Taylor, Mrs Ann (Dewsbury)
Parry, Robert Taylor, Matthew (Truro)
Patchett, Terry Thompson, Jack (Wansbeck)
Pendry, Tom Tipping, Paddy
Pickthall, Colin Turner, Dennis
Pike, Peter L. Tyler, Paul
Pope, Greg Vaz, Keith
Prentice, Ms Bridget (Lew'm E) Walker, Rt Hon Sir Harold
Prentice, Gordon (Pendle) Wallace, James
Prescott, John Walley, Joan
Primarolo, Dawn Wardell, Gareth (Gower)
Purchase, Ken Wareing, Robert N
Quin, Ms Joyce Watson, Mike
Radice, Giles Welsh, Andrew
Randall, Stuart Wicks, Malcolm
Raynsford, Nick Wigley, Dafydd
Redmond, Martin Williams, Rt Hon Alan (Sw'n W)
Reid, Dr John Williams, Alan W (Carmarthen)
Robertson, George (Hamilton) Wilson, Brian
Robinson, Geoffrey (Co'try NW) Winnick, David
Roche, Ms Barbara Wise, Audrey
Rogers, Allan Worthington, Tony
Rooker, Jeff Wray, Jimmy
Rooney, Terry Wright, Dr Tony
Ross, Ernie (Dundee W) Young, David (Bolton SE)
Rowlands, Ted
Ruddock, Joan Tellers for the Ayes:
Salmond, Alex Mr. Ray Powell and
Sedgemore, Brian Mr. Thomas McAvoy.
Adley, Robert Booth, Hartley
Ainsworth, Peter (East Surrey) Boswell, Tim
Aitken, Jonathan Bottomley, Peter (Eltham)
Alexander, Richard Bottomley, Rt Hon Virginia
Alison, Rt Hon Michael (Selby) Bowden, Andrew
Allason, Rupert (Torbay) Boyson, Rt Hon Sir Rhodes
Amess, David Brandreth, Gyles
Ancram, Michael Brazier, Julian
Arbuthnot, James Bright, Graham
Arnold, Jacques (Gravesham) Brooke, Rt Hon Peter
Arnold, Sir Thomas (Hazel Grv) Brown, M. (Brigg & Cl'thorpes)
Ashby, David Browning, Mrs. Angela
Aspinwall, Jack Bruce, Ian (S Dorset)
Atkins, Robert Budgen, Nicholas
Atkinson, David (Bour'mouth E) Burns, Simon
Atkinson, Peter (Hexham) Burt, Alistair
Baker, Rt Hon K, (Mole Valley) Butcher, John
Baldry, Tony Butler, Peter
Banks, Matthew (Southport) Butterfill, John
Banks, Robert (Harrogate) Carlisle, John (Luton North)
Bates, Michael Carlisle, Kenneth (Lincoln)
Batiste, Spencer Carrington, Matthew
Bellingham, Henry Carttiss, Michael
Bendall, Vivian Cash, William
Beresford, Sir Paul Channon, Rt Hon Paul
Biffen, Rt Hon John Chaplin, Mrs Judith
Blackburn, Dr John G. Chapman, Sydney
Body, Sir Richard Churchill, Mr
Bonsor, Sir Nicholas Clappison, James
Clark, Dr Michael (Rochford) Haselhurst, Alan
Clarke, Rt Hon Kenneth (Ruclif) Hawkins, Nick
Clifton-Brown, Geoffrey Hawksley, Warren
Coe, Sebastian Hayes, Jerry
Colvin, Michael Heald, Oliver
Congdon, David Heath, Rt Hon Sir Edward
Conway, Derek Heathcoat-Amory, David
Coombs, Anthony (Wyre For'st) Hendry, Charles
Coombs, Simon (Swindon) Heseltine, Rt Hon Michael
Cope, Rt Hon Sir John Hicks, Robert
Cormack, Patrick Higgins, Rt Hon Terence L.
Couchman, James Hill, James (Southampton Test)
Cran, James Hogg, Rt Hon Douglas (G'tham)
Critchley, Julian Horam, John
Currie, Mrs Edwina (S D'by'ire) Hordern, Sir Peter
Curry, David (Skipton & Ripon) Howard, Rt Hon Michael
Davies, Quentin (Stamford) Howarth, Alan (Strat'rd-on-A)
Davis, David (Boothferry) Howell, Rt Hon David (G'dford)
Day, Stephen Howell, Ralph (North Norfolk)
Deva, Nirj Joseph Hughes Robert G. (Harrow W)
Devlin, Tim Hunt, Rt Hon David (Wirral W)
Dickens, Geoffrey Hunt, Sir John (Ravensbourne)
Dicks, Terry Hunter, Andrew
Dorrell, Stephen Hurd, Rt Hon Douglas
Douglas-Hamilton, Lord James Jack, Michael
Dover, Den Jackson, Robert (Wantage)
Duncan, Alan Jenkin, Bernard
Duncan-Smith, Iain Jessel, Toby
Dunn, Bob Johnson Smith, Sir Geoffrey
Durant, Sir Anthony Jones, Gwilym (Cardiff N)
Dykes, Hugh Jones, Robert B. (W Hertfdshr)
Eggar, Tim Jopling, Rt Hon Michael
Elletson, Harold Kellett-Bowman, Dame Elaine
Emery, Sir Peter Key, Robert
Evans, David (Welwyn Hatfield) Kilfedder, Sir James
Evans, Jonathan (Brecon) King, Rt Hon Tom
Evans, Nigel (Ribble Valley) Kirkhope, Timothy
Evans, Roger (Monmouth) Knapman, Roger
Evennett, David Knight, Mrs Angela (Erewash)
Faber, David Knight, Greg (Derby N)
Fabricant, Michael Knight, Dame Jill (Bir'm E'st'n)
Fairbairn, Sir Nicholas Knox, David
Fenner, Dame Peggy Kynoch, George (Kincardine)
Field, Barry (Isle of Wight) Lait, Mrs Jacqui
Fishburn, Dudley Lamont, Rt Hon Norman
Forman, Nigel Lang, Rt Hon Ian
Forsyth, Michael (Stirling) Lawrence, Sir Ivan
Forth, Eric Legg, Barry
Fowler, Rt Hon Sir Norman Leigh, Edward
Fox, Dr Liam (Woodspring) Lennox-Boyd, Mark
Fox, Sir Marcus (Shipley) Lester, Jim (Broxtowe)
Freeman, Roger Lidington, David
French, Douglas Lilley, Rt Hon Peter
Fry, Peter Lloyd, Peter (Fareham)
Gale, Roger Lord, Michael
Gallie, Phil Luff, Peter
Gardiner, Sir George Lyell, Rt Hon Sir Nicholas
Garel-Jones, Rt Hon Tristan MacGregor, Rt Hon John
Garnier, Edward MacKay, Andrew
Gill, Christopher Maclean, David
Gillan, Cheryl McLoughlin, Patrick
Goodlad, Rt Hon Alastair McNair-Wilson, Sir Patrick
Goodson-Wickes, Dr Charles Madel, David
Gorman, Mrs Teresa Maitland, Lady Olga
Gorst, John Major, Rt Hon John
Grant, Sir Anthony (Cambs SW) Malone, Gerald
Greenway, Harry (Ealing N) Mans, Keith
Greenway, John (Ryedale) Marland, Paul
Griffiths, Peter (Portsmouth, N) Marlow, Tony
Grylls, Sir Michael Marshall, John (Hendon S)
Gummer, Rt Hon John Selwyn Marshall, Sir Michael (Arundel)
Hague, William Martin, David (Portsmouth S)
Hamilton, Rt Hon Archie (Epsom-Ewell) Mates, Michael
Mawhinney, Dr Brian
Hamilton, Neil (Tatton) Mayhew, Rt Hon Sir Patrick
Hampson, Dr Keith Mellor, Rt Hon David
Hanley, Jeremy Merchant, Piers
Hannam, Sir John Milligan, Stephen
Hargreaves, Andrew Mills, Iain
Harris, David Mitchell, Andrew (Gedling)
Mitchell, Sir David (Hants NW) Spink, Dr Robert
Moate, Roger Spring, Richard
Montgomery, Sir Fergus Sproat, Iain
Moss, Malcolm Squire, Robin (Hornchurch)
Needham, Richard Stanley, Rt Hon Sir John
Nelson, Anthony Steen, Anthony
Neubert, Sir Michael Stephen, Michael
Newton, Rt Hon Tony Stern, Michael
Nicholls, Patrick Stewart, Allan
Nicholson, David (Taunton) Streeter, Gary
Nicholson, Emma (Devon West) Sumberg, David
Norris, Steve Sweeney, Walter
Onslow, Rt Hon Cranley Sykes, John
Oppenheim, Phillip Tapsell, Sir Peter
Ottaway, Richard Taylor, Ian (Esher)
Page, Richard Taylor, John M. (Solihull)
Paice, James Taylor, Sir Teddy (Southend, E)
Patnick, Irvine Temple-Morris, Peter
Patten, Rt Hon John Thomason, Roy
Pattie, Rt Hon Sir Geoffrey Thompson, Patrick (Norwich N)
Pawsey, James Thornton, Sir Malcolm
Peacock, Mrs Elizabeth Thurnham, Peter
Pickles, Eric Townend, John (Bridlington)
Porter, Barry (Wirral S) Townsend, Cyril D. (Bexl'yh'th)
Porter, David (Waveney) Tracey, Richard
Portillo, Rt Hon Michael Tredinnick, David
Powell, William (Corby) Trend, Michael
Rathbone, Tim Trotter, Neville
Redwood, John Twinn, Dr Ian
Renton, Rt Hon Tim Vaughan, Sir Gerard
Richards, Rod Viggers, Peter
Riddick, Graham Waldegrave, Rt Hon William
Rifkind, Rt Hon. Malcolm Walden, George
Robathan, Andrew Walker, Bill (N Tayside)
Roberts, Rt Hon Sir Wyn Waller, Gary
Robertson, Raymond (Ab'd'n S) Ward, John
Robinson, Mark (Somerton) Wardle, Charles (Bexhill)
Roe, Mrs Marion (Broxbourne) Waterson, Nigel
Rowe, Andrew (Mid Kent) Watts, John
Rumbold, Rt Hon Dame Angela Wells, Bowen
Ryder, Rt Hon Richard Wheeler, Sir John
Sackville, Tom Whitney, Ray
Sainsbury, Rt Hon Tim Whittingdale, John
Scott, Rt Hon Nicholas Widdecombe, Ann
Shaw, David (Dover) Wiggin, Jerry
Shaw, Sir Giles (Pudsey) Wilkinson, John
Shephard, Rt Hon Gillian Willetts, David
Shepherd, Colin (Hereford) Wilshire, David
Shepherd, Richard (Aldridge) Winterton, Mrs Ann (Congleton)
Shersby, Michael Winterton, Nicholas (Macc'f'ld)
Sims, Roger Wolfson, Mark
Skeet, Sir Trevor Wood, Timothy
Smith, Sir Dudley (Warwick) Yeo, Tim
Smith, Tim (Beaconsfield) Young, Sir George (Acton)
Soames, Nicholas
Speed, Sir Keith Tellers for the Noes
Spencer, Sir Derek Mr. David Lightbown and
Spicer, Sir James (W Dorset) Mr. Nicholas Baker
Spicer, Michael (S Worcs)

Question accordingly negatived.

Main Question put:—

The House divided: Ayes 322, Noes 296.

Division No. 73] [10.15 pm
Adley, Robert Atkinson, David (Bour'mouth E)
Ainsworth, Peter (East Surrey) Atkinson, Peter (Hexham)
Aitken, Jonathan Baker, Rt Hon K. (Mole Valley)
Alexander, Richard Baldry, Tony
Alison, Rt Hon Michael (Selby) Banks, Matthew (Southport)
Allason, Rupert (Torbay) Banks, Robert (Harrogate)
Amess, David Bates, Michael
Ancram, Michael Batiste, Spencer
Arbuthnot, James Bellingham, Henry
Arnold, Jacques (Gravesham) Bendall, Vivian
Arnold, Sir Thomas (Hazel Grv) Beresford, Sir Paul
Ashby, David Biffen, Rt Hon John
Aspinwall, Jack Blackburn, Dr John G.
Atkins, Robert Body, Sir Richard
Bonsor, Sir Nicholas Gale, Roger
Booth, Hartley Gallie, Phil
Boswell, Tim Gardiner, Sir George
Bottomley, Peter (Eltham) Garel-Jones, Rt Hon Tristan
Bottomley, Rt Hon Virginia Garnier, Edward
Bowden, Andrew Gill, Christopher
Boyson, Rt Hon Sir Rhodes Gillan, Cheryl
Brandreth, Gyles Goodlad, Rt Hon Alastair
Brazier, Julian Goodson-Wickes, Dr Charles
Bright, Graham Gorst, John
Brooke, Rt Hon Peter Grant, Sir Anthony (Cambs SW)
Brown, M. (Brigg & Cl'thorpes) Greenway, Harry (Ealing N)
Browning, Mrs. Angela Greenway, John (Ryedale)
Bruce, Ian (S Dorset) Griffiths, Peter (Portsmouth, N)
Burns, Simon Grylls, Sir Michael
Burt, Alistair Gummer, Rt Hon John Selwyn
Butcher, John Hague, William
Butler, Peter Hamilton, Rt Hon Archie (Epsom-Ewell)
Butterfill, John
Carlisle, Kenneth (Lincoln) Hamilton, Neil (Tatton)
Carrington, Matthew Hampson, Dr Keith
Carttiss, Michael Hanley, Jeremy
Channon, Rt Hon Paul Hannam, Sir John
Chaplin, Mrs Judith Hargreaves, Andrew
Churchill, Mr Harris, David
Clappison, James Haselhurst, Alan
Clark, Dr Michael (Rochford) Hawkins, Nick
Clarke, Rt Hon Kenneth (Ruclif) Hawksley, Warren
Clifton-Brown, Geoffrey Hayes, Jerry
Coe, Sebastian Heald, Oliver
Colvin, Michael Heath, Rt Hon Sir Edward
Congdon, David Heathcoat-Amory, David
Conway, Derek Hendry, Charles
Coombs, Anthony (Wyre For'st) Heseltine, Rt Hon Michael
Coombs, Simon (Swindon) Hicks, Robert
Cope, Rt Hon Sir John Higgins, Rt Hon Terence L.
Cormack, Patrick Hill, James (Southampton Test)
Couchman, James Hogg, Rt Hon Douglas (G'tham)
Cran, James Horam, John
Critchley, Julian Hordern, Sir Peter
Currie, Mrs Edwina (S D'by'ire) Howard, Rt Hon Michael
Curry, David (Skipton & Ripon) Howarth, Alan (Strat'rd-on-A)
Davies, Quentin (Stamford) Howell, Rt Hon David (G'dford)
Davis, David (Boothferry) Howell, Ralph (North Norfolk)
Day, Stephen Hughes Robert G. (Harrow W)
Deva, Nirj Joseph Hunt, Rt Hon David (Wirral W)
Devlin, Tim Hunt, Sir John (Ravensbourne)
Dickens, Geoffrey Hunter, Andrew
Dicks, Terry Hurd, Rt Hon Douglas
Dorrell, Stephen Jack, Michael
Douglas-Hamilton, Lord James Jackson, Robert (Wantage)
Dover, Den Jenkin, Bernard
Duncan, Alan Jessel, Toby
Duncan-Smith, Iain Johnson Smith, Sir Geoffrey
Dunn, Bob Jones, Gwilym (Cardiff N)
Durant, Sir Anthony Jones, Robert B. (W Hertfdshr)
Dykes, Hugh Jopling, Rt Hon Michael
Eggar, Tim Kellett-Bowman, Dame Elaine
Elletson, Harold Key, Robert
Emery, Sir Peter Kilfedder, Sir James
Evans, David (Welwyn Hatfield) King, Rt Hon Tom
Evans, Jonathan (Brecon) Kirkhope, Timothy
Evans, Nigel (Ribble Valley) Knapman, Roger
Evans, Roger (Monmouth) Knight, Mrs Angela (Erewash)
Evennett, David Knight, Greg (Derby N)
Faber, David Knight, Dame Jill (Bir'm E'st'n)
Fabricant, Michael Knox, David
Fairbairn, Sir Nicholas Kynoch, George (Kincardine)
Fenner, Dame Peggy Lait, Mrs Jacqui
Field, Barry (Isle of Wight) Lamont, Rt Hon Norman
Fishburn, Dudley Lang, Rt Hon Ian
Forman, Nigel Lawrence, Sir Ivan
Forsyth, Michael (Stirling) Legg, Barry
Forth, Eric Leigh, Edward
Fowler, Rt Hon Sir Norman Lennox-Boyd, Mark
Fox, Dr Liam (Woodspring) Lester, Jim (Broxtowe)
Fox, Sir Marcus (Shipley) Lidington, David
Freeman, Roger Lightbown, David
French, Douglas Lilley, Rt Hon Peter
Fry, Peter Lloyd, Peter (Fareham)
Lord, Michael Shaw, David (Dover)
Luff, Peter Shaw, Sir Giles (Pudsey)
Lyell, Rt Hon Sir Nicholas Shephard, Rt Hon Gillian
MacGregor, Rt Hon John Shepherd, Colin (Hereford)
MacKay, Andrew Shersby, Michael
Maclean, David Sims, Roger
McLoughlin, Patrick Skeet, Sir Trevor
McNair-Wilson, Sir Patrick Smith, Sir Dudley (Warwick)
Madel, David Smith, Tim (Beaconsfield)
Maitland, Lady Olga Soames, Nicholas
Major, Rt Hon John Speed, Sir Keith
Malone, Gerald Spencer, Sir Derek
Mans, Keith Spicer, Sir James (W Dorset)
Marland, Paul Spicer, Michael (S Worcs)
Marlow, Tony Spink, Dr Robert
Marshall, John (Hendon S) Spring, Richard
Marshall, Sir Michael (Arundel) Sproat, Iain
Martin, David (Portsmouth S) Squire, Robin (Hornchurch)
Mates, Michael Stanley, Rt Hon Sir John
Mawhinney, Dr Brian Steen, Anthony
Mayhew, Rt Hon Sir Patrick Stephen, Michael
Mellor, Rt Hon David Stern, Michael
Merchant, Piers Stewart, Allan
Milligan, Stephen Streeter, Gary
Mills, Iain Sumberg, David
Mitchell, Andrew (Gedling) Sweeney, Walter
Mitchell, Sir David (Hants NW) Sykes, John
Moate, Roger Tapsell, Sir Peter
Montgomery, Sir Fergus Taylor, Ian (Esher)
Moss, Malcolm Taylor, John M. (Solihull)
Needham, Richard Temple-Morris, Peter
Nelson, Anthony Thomason, Roy
Neubert, Sir Michael Thompson, Patrick (Norwich N)
Newton, Rt Hon Tony Thornton, Sir Malcolm
Nicholls, Patrick Thurnham, Peter
Nicholson, David (Taunton) Townend, John (Bridlington)
Nicholson, Emma (Devon West) Townsend, Cyril D. (Bexl'yh'th)
Norris, Steve Tracey, Richard
Onslow, Rt Hon Cranley Tredinnick, David
Oppenheim, Phillip Trend, Michael
Ottaway, Richard Trotter, Neville
Page, Richard Twinn, Dr Ian
Paice, James Vaughan, Sir Gerard
Patnick, Irvine Viggers, Peter
Patten, Rt Hon John Waldegrave, Rt Hon William
Pattie, Rt Hon Sir Geoffrey Walden, George
Pawsey, James Walker, Bill (N Tayside)
Peacock, Mrs Elizabeth Waller, Gary
Pickles, Eric Ward, John
Porter, Barry (Wirral S) Wardle, Charles (Bexhill)
Porter, David (Waveney) Waterson, Nigel
Portillo, Rt Hon Michael Watts, John
Powell, William (Corby) Wells, Bowen
Rathbone, Tim Wheeler, Sir John
Redwood, John Whitney, Ray
Renton, Rt Hon Tim Whittingdale, John
Richards, Rod Widdecombe, Ann
Riddick, Graham Wiggin, Jerry
Rifkind, Rt Hon. Malcolm Wilkinson, John
Robathan, Andrew Willetts, David
Roberts, Rt Hon Sir Wyn Wilshire, David
Robertson, Raymond (Ab'd'n S) Wolfson, Mark
Robinson, Mark (Somerton) Wood, Timothy
Roe, Mrs Marion (Broxbourne) Yeo, Tim
Rowe, Andrew (Mid Kent) Young, Sir George (Acton)
Rumbold, Rt Hon Dame Angela
Ryder, Rt Hon Richard Tellers for the Ayes:
Sackville, Tom Mr. Sydney Chapman and
Sainsbury, Rt Hon Tim Mr. Nicholas Baker.
Scott, Rt Hon Nicholas
Abbott, Ms Diane Armstrong, Hilary
Adams, Mrs Irene Ashdown, Rt Hon Paddy
Ainger, Nick Ashton, Joe
Ainsworth, Robert (Cov'try NE) Austin-Walker, John
Allen, Graham Banks, Tony (Newham NW)
Alton, David Barnes, Harry
Anderson, Donald (Swansea E) Barron, Kevin
Anderson, Ms Janet (Ros'dale) Battle, John
Bayley, Hugh Faulds, Andrew
Beckett, Margaret Field, Frank (Birkenhead)
Beggs, Roy Fisher, Mark
Beith, Rt Hon A. J. Flynn, Paul
Bell, Stuart Forsythe, Clifford (Antrim S)
Benn, Rt Hon Tony Foster, Derek (B'p Auckland)
Bennett, Andrew F. Foster, Don (Bath)
Benton, Joe Foulkes, George
Bermingham, Gerald Fraser, John
Berry, Dr. Roger Fyfe, Maria
Betts, Clive Galbraith, Sam
Blair, Tony Galloway, George
Blunkett, David Gapes, Mike
Boateng, Paul Garrett, John
Boyce, Jimmy George, Bruce
Boyes, Roland Gerrard, Neil
Bradley, Keith Gilbert, Rt Hon Dr John
Bray, Dr Jeremy Godman, Dr Norman A.
Brown, Gordon (Dunfermline E) Godsiff, Roger
Brown, N. (N'c'tle upon Tyne E) Golding, Mrs Llin
Bruce, Malcolm (Gordon) Gordon, Mildred
Burden, Richard Gould, Bryan
Byers, Stephen Graham, Thomas
Caborn, Richard Grant, Bernie (Tottenham)
Campbell, Mrs Anne (C'bridge) Griffiths, Nigel (Edinburgh S)
Campbell, Menzies (Fife NE) Griffiths, Win (Bridgend)
Campbell, Ronnie (Blyth V) Grocott, Bruce
Campbell-Savours, D. N. Gunnell, John
Canavan, Dennis Hain, Peter
Cann, Jamie Hall, Mike
Carlile, Alexander (Montgomry) Hanson, David
Chisholm, Malcolm Hardy, Peter
Clapham, Michael Harman, Ms Harriet
Clark, Dr David (South Shields) Harvey, Nick
Clarke, Eric (Midlothian) Henderson, Doug
Clarke, Tom (Monklands W) Hendron, Dr Joe
Clelland, David Heppell, John
Clwyd, Mrs Ann Hill, Keith (Streatham)
Coffey, Ann Hinchliffe, David
Cohen, Harry Hoey, Kate
Connarty, Michael Hogg, Norman (Cumbernauld)
Cook, Frank (Stockton N) Home Robertson, John
Cook, Robin (Livingston) Hood, Jimmy
Corbett, Robin Hoon, Geoffrey
Corbyn, Jeremy Howarth, George (Knowsley N)
Corston, Ms Jean Howells, Dr. Kim (Pontypridd)
Cousins, Jim Hoyle, Doug
Cox, Tom Hughes, Kevin (Doncaster N)
Cryer, Bob Hughes, Robert (Aberdeen N)
Cummings, John Hughes, Roy (Newport E)
Cunliffe, Lawrence Hughes, Simon (Southwark)
Cunningham, Jim (Covy SE) Hume, John
Cunningham, Dr John (C'p'l'nd) Hutton, John
Dafis, Cynog Ingram, Adam
Dalyell, Tam Jackson, Glenda (H'stead)
Darling, Alistair Jackson, Helen (Shef'ld, H)
Davidson, Ian Jamieson, David
Davies, Bryan (Oldham C'tral) Janner, Greville
Davies, Rt Hon Denzil (Llanelli) Johnston, Sir Russell
Davies, Ron (Caerphilly) Jones, Barry (Alyn and D'side)
Davis, Terry (B'ham, H'dge H'l) Jones, Ieuan Wyn (Ynys Môn)
Denham, John Jones, Jon Owen (Cardiff C)
Dewar, Donald Jones, Lynne (B'ham S O)
Dixon, Don Jones, Martyn (Clwyd, SW)
Dobson, Frank Jones, Nigel (Cheltenham)
Donohoe, Brian H. Jowell, Tessa
Dowd, Jim Kaufman, Rt Hon Gerald
Dunnachie, Jimmy Keen, Alan
Eagle, Ms Angela Kennedy, Charles (Ross, C&S)
Eastham, Ken Kennedy, Jane (Lpool Brdgn)
Enright, Derek Khabra, Piara S.
Etherington, Bill Kilfoyle, Peter
Evans, John (St Helens N) Kinnock, Rt Hon Neil (Islwyn)
Ewing, Mrs Margaret Kirkwood, Archy
Fatchett, Derek Leighton, Ron
Lestor, Joan (Eccles) Radice, Giles
Lewis, Terry Randall, Stuart
Litherland, Robert Raynsford, Nick
Livingstone, Ken Redmond, Martin
Lloyd, Tony (Stretford) Reid, Dr John
Llwyd, Elfyn Robertson, George (Hamilton)
Loyden, Eddie Robinson, Geoffrey (Co'try NW)
McAllion, John Roche, Ms Barbara
McAvoy, Thomas Rogers, Allan
McCartney, Ian Rooker, Jeff
McCrea, Rev William Rooney, Terry
Macdonald, Calum Ross, Ernie (Dundee W)
McFall, John Ross, William (E Londonderry)
McGrady, Eddie Rowlands, Ted
McKelvey, William Ruddock, Joan
Mackinlay, Andrew Salmond, Alex
McMaster, Gordon Sedgemore, Brian
McNamara, Kevin Sheerman, Barry
McWilliam, John Sheldon, Rt Hon Robert
Madden, Max Shore, Rt Hon Peter
Maginnis, Ken Short, Clare
Mahon, Alice Simpson, Alan
Mallon, Seamus Skinner, Dennis
Mandelson, Peter Smith, Andrew (Oxford E)
Marek, Dr John Smith, C. (Isl'ton S & F'sbury)
Marshall, David (Shettleston) Smith, Rt Hon John (M'kl'ds E)
Marshall, Jim (Leicester, S) Smith, Llew (Blaenau Gwent)
Martin, Michael J. (Springburn) Smyth, Rev Martin (Belfast S)
Martlew, Eric Soley, Clive
Maxton, John Spearing, Nigel
Meacher, Michael Spellar, John
Meale, Alan Squire, Rachel (Dunfermline W)
Michael, Alun Steinberg, Gerry
Michie, Bill (Sheffield Heeley) Stevenson, George
Milburn, Alan Stott, Roger
Miller, Andrew Strang, Dr. Gavin
Mitchell, Austin (Gt Grimsby) Straw, Jack
Molyneaux, Rt Hon James Taylor, Mrs Ann (Dewsbury)
Moonie, Dr Lewis Taylor, Rt Hon John D. (Strgfd)
Morgan, Rhodri Taylor, Matthew (Truro)
Morley, Elliot Tipping, Paddy
Morris, Rt Hon A. (Wy'nshawe) Trimble, David
Morris, Estelle (B'ham Yardley) Turner, Dennis
Morris, Rt Hon J. (Aberavon) Tyler, Paul
Mowlam, Marjorie Vaz, Keith
Mudie, George Walker, Rt Hon Sir Harold
Murphy, Paul Wallace, James
O'Brien, Michael (N W'kshire) Walley, Joan
O'Brien, William (Normanton) Warden, Gareth (Gower)
O'Hara, Edward Wareing, Robert N
Olner, William Watson, Mike
O'Neill, Martin Welsh, Andrew
Orme, Rt Hon Stanley Wicks, Malcolm
Paisley, Rev Ian Wigley, Dafydd
Parry, Robert Williams, Rt Hon Alan (Sw'n W)
Patchett, Terry Williams, Alan W (Carmarthen)
Pendry, Tom Wilson, Brian
Pickthall, Colin Winnick, David
Pike, Peter L. Wise, Audrey
Pope, Greg Worthington, Tony
Powell, Ray (Ogmore) Wray, Jimmy
Prentice, Ms Bridget (Lew'm E) Wright, Dr Tony
Prentice, Gordon (Pendle) Young, David (Bolton SE)
Prescott, John
Primarolo, Dawn Tellers for the Noes:
Purchase, Ken Mr. Eric Illsley and
Quin, Ms Joyce Mr. Jack Thompson.

Question accordingly agreed to.


That this House expresses its support for the economic policy of Her Majesty's Government.

The House, having continued to sit to twenty-nine minutes past Ten o'clock, adjourned till tomorrow, pursuant to the Resolution this day.