HC Deb 03 December 1996 vol 286 cc797-813 3.30 pm
The Chancellor of the Exchequer (Mr. Kenneth Clarke)

With permission, I should like to make a statement about the Council of Finance Ministers meeting in Brussels that I attended yesterday.

The Council considered at some length a new lending remit for the European investment bank. We considered and approved a report on employment policy to be submitted jointly by ECOFIN and the Social Affairs Council for consideration at the forthcoming European Council at Dublin. We transacted a number of other items of routine business that I shall report to the House in due course by written answer, in the usual way.

We carried forward political preparations for the anticipated discussion at Dublin of economic and monetary union. Finance Ministers have been charged by the last European Council at Florence with preparing a progress report on preparations for EMU. Progress was made, but no final conclusions were reached, mainly because of outstanding issues that remain to be resolved on the operation of the proposed stability pact and, in particular, on the definition of an exceptional and temporary deficit for the purpose of article 104(c).

I made a constructive contribution to the debate in an effort to achieve the widest possible measure of political agreement in preparation for the summit meeting. I made it clear at the outset of the discussion that my agreement, while in line with Government policy, was subject to a parliamentary reserve and could not commit the Government until parliamentary discussions had been completed. The Irish President of the Council confirmed that my parliamentary reserve would be reported and printed on any document laid before the Dublin Council.

Only two of the texts of the draft regulations that are currently subject to parliamentary scrutiny and were the subject of my statement to the House last Monday featured in the discussions at ECOFIN yesterday. They were the regulations on the legal framework for the euro under article 235 and under article 109(1)4 of the treaty.

There had never been any question of legislative decision on economic and monetary union being taken at yesterday's meeting. The two regulations were considered and drafts will probably be attached to the eventual report to Dublin.

The Council of Finance Ministers is at present agreed that there will be no final agreement on the operation of EMU or the text of any regulations until all the negotiations are completed. ECOFIN and all member states are working on the basis that nothing is agreed until everything is agreed. I anticipate that no final agreement on any binding legislation on economic and monetary union is likely before, at the earliest, the planned European Council meeting in Amsterdam in June next year.

The draft article 235 regulation causes no problems to the British Government as it now stands. We would like to see it progressed as quickly as possible, to give greater legal certainty to existing commercial contracts in English law denominated in ecu or in currencies that might go into the euro.

The article 109(1)(4) regulation might have caused concern in this country as some people might have claimed, mistakenly, that the legislation to be enacted in due course by the member states of the euro zone would be directly applicable to all member states in a way that contradicted the British opt-out. That interpretation would have been incorrect. However, I was able to obtain the agreement of the Council to amendments to article 17 of the draft regulation, and consequential changes to the recitals of the regulations, that make the position clear and beyond doubt on the face of the document. The amendments make the application of the regulation subject to protocol 11 of the treaty. The amendments also make it clear that the protocol stipulates, among other things, that article 109(1)(4) shall not apply to the United Kingdom unless we move to the third stage.

I have also obtained agreement to changes to any text of the report that ECOFIN may eventually submit to the Dublin Council on progress towards EMU. I have obtained clear statements that membership of the proposed ERM 2 for states outside the euro will be voluntary. I have obtained explicit statements that the Council can make only non-binding recommendations under article 103 to member states outside the euro and outside ERM 2 when carrying out surveillance of economic policies.

We have, of course, been committed to economic and monetary co-operation and convergence of economic and monetary policies that have been necessary for the further development of the Community ever since we signed the Single European Act. The present treaty and practice commit us only to seek to ensure that our domestic policies are geared to price stability and sound public finances and to seek to avoid an excessive deficit. No sanctions can be applied to this country for any failure to take effective steps to achieve that unless and until we move to stage 3.

The report will deal with budgetary discipline in stage 3. The draft now states: Euro area Member States will be obliged to submit programmes and will be subject to agreed sanctions for failure to act effectively on excessive deficits. In the surveillance procedure, other Member States will be obliged to submit convergence programmes only. In the excessive deficit procedure, sanctions cannot be applied to them. I shall ensure that such statements remain in any report that may eventually be submitted to the Dublin Council. Such statements are not being challenged by any other member state or the Commission.

The outstanding matters to be resolved relate to the circumstances in which a member of the euro may not be subject to the excessive deficit procedure and possible sanctions if a deficit is only exceptional and temporary.

The preparatory work in ECOFIN is therefore proceeding precisely on the legal and political basis that I and my hon. Friend the Exchequer Secretary and others have frequently described to the House.

Mr. Gordon Brown (Dunfermline, East)

Will the Chancellor confirm that the full two-day debate that the Government promised on Europe will take place, with one day allocated, as previously suggested, to discussing these important economic issues?

Unusually for a statement to the House, particularly the first oral statement by a Chancellor after an ECOFIN meeting, the Chancellor has sought to concentrate on decisions that have not been made or that have been deferred rather than on those that have been made. He says that final political and legislative agreement has not been reached, but also that only two issues are outstanding: the definition of excessive deficits and sanctions on temporary and excessive deficits. Will he confirm that we are right to conclude that there was political agreement yesterday on some very important specifics: not only on the nature and legal status of the euro, but on the nature of the new exchange rate mechanism and on most of the detailed agreements on the stability pact and convergence? I hope that he will give the details of those to the House in these exchanges.

Will the Chancellor assure us that the outstanding questions that he mentioned will not be tied up at the Franco-German summit next Monday without a significant British input, but will remain genuinely open until discussed at the next Finance Ministers meeting next Thursday?

Will the Chancellor confirm that the Government's position yesterday was to raise no objections to the proposals on the euro? On exchange rate policy, will he confirm that while the guarantee that he mentioned confirms that economic advice from the Commission to the outs will not be binding, the Government's position as expressed by him yesterday at the summit is to raise no objection to the more central proposal that the exchange rates of the outs will be monitored and assessed?

Will he confirm that the purpose is that the Commission should ensure that Britain and other countries will avoid real exchange misalignments, and that surveillance on such market-sensitive areas will be published by the Commission? While we already knew that membership of ERM 2 was voluntary, does the Chancellor agree that he accepted a statement yesterday that member states with a derogation could be expected to join the new mechanism?

While the Chancellor has always been right to say that countries outside the euro cannot be fined, and while, as he has announced today, he has added a new stipulation that there be no legal obligation for the outs to avoid excessive deficits—something understood by everyone else in every other country before last week—will he confirm what he has failed to tell us: that the convergence programmes, which are obligatory as per the agreement made yesterday, should be developed along the same lines as stability programmes? Will he confirm that, under that agreement, convergence plans will have to be submitted by Britain every year, that they will form the basis of public comment by the Commission and that Britain then may be rebuked for failure to take necessary action?

Does the Chancellor agree with us that the difference between the Labour party and the Conservative party is that, while we and he can support the principle of monetary union, Labour is able to admit something that the Chancellor must deny for internal reasons: that, whether we join or not, monetary union will have a significant and direct impact on Britain—something that must be taken into account in any decision that we make?

Last Monday, the Chancellor sought to reassure his Back Benchers. Then last Thursday he called on them in a radio interview to come to their senses. Yesterday, in another wobble, the Prime Minister tried to appease them. Today he is trying to correct that statement. Today we have a very unusual statement from a Chancellor concentrating on decisions that have not been made rather than telling us about the decisions that are being made.

Is it not true that, for this Government, with different ministerial briefings on Europe, a day is now a long time in politics, and that we may soon have the "Today" policy, the 1 o'clock news policy, the 6 o'clock news policy and the 9 o'clock news policy? Struggle as the Chancellor does to reconcile his party's interest with the British national interest, it is time for us to insist that the national interest comes first.

Mr. Clarke

I can confirm that there will be a two-day debate. I assume, subject to agreement through the usual channels, that one day will be devoted to economic and monetary union and the other to the intergovernmental conference.

I always report back on ECOFIN meetings, not usually in this form, but by written answer. I am always ready to come here if anyone wishes to hear about ECOFIN meetings. Sometimes, rather bizarre accounts of those meetings appear. I answer parliamentary questions on the subject. I put explanatory memoranda before the Scrutiny Committee. I appear before the Select Committees of both Houses. I do not think that there is any detail of the process that I have not shared with anyone on either side of the House who is seriously interested in listening.

Occasionally, the right hon. Gentleman puts to me points that he appears to have picked up from my speeches. I have lost count of the number of times that I have pointed out that economic and monetary union is of enormous importance to Britain, whether or not we join. It is not a new discovery by the right hon. Gentleman. He knows perfectly well that, as at present we are prospering because we are in the single market and the single market is extremely important to us, it matters to us a great deal how the euro zone works, whether we join it or not. That is why I keep attending the meetings.

It is true that there are only two outstanding issues in the draft report to go forward, but I have made the whole report subject to a parliamentary reserve, as I described. I have already set out the issues in my statement. All the details of any other aspect on which the right hon. Gentleman wishes to press me in these exchanges or elsewhere are in the explanatory memoranda. The ERM 2 mechanism is described. It will be a hub-and-spoke mechanism, as opposed to ERM 1, which works on a different basis. At every stage, it has been clear that membership of ERM 2 is voluntary, and the Prime Minister and I have always made it clear that we cannot foresee circumstances in which Britain will join ERM 2.

It is right that the document states that members with a derogation can be expected to join, but this country is not, strictly speaking, a member with a derogation—we have an opt-out under our separate protocol 11, to which I referred.

Nothing will be decided at the Franco-German summit, any more than anything was finally decided at the Anglo-French summit that I attended, or at the Anglo-German summits that I attend. In fact, any idea that yesterday's meeting involved some sort of Franco-German axis against the rest of the members is a complete illusion. I am glad to say that the 15 Ministers from 15 member countries were all defending their national interests and no such cross-alliances emerged.

It is certainly true that exchange rates will be a matter of common concern. That was established in the treaty—it has been the position for 25 years, since we signed the treaty of Rome. The right hon. Gentleman's sudden and horrid realisation of that aspect of the argument is, I think, a little belated.

As for the submission of convergence programmes, we have been submitting such programmes for at least three years. We have been declared to be in excessive deficit and we have been made subject to non-binding recommendations, along with, I think, 12 other member states, which are all currently in excessive deficits. Those recommendations are not binding—I could walk away saying, "I do not agree with those recommendations, thank you very much." In fact, the recommendations are entirely in line with this Government's policy of getting rid of an excessive deficit and putting the public finances into a healthy state.

That is the position. This is the second statement that I have made in a week and I look forward to debating the subject with the right hon. Gentleman. The reason why these matters are not debated on the Floor more often is that the Opposition have never asked for a Supply day debate on the issue. It is the right hon. Gentleman who runs away from discussing the issue, because it is he who has not had any moments of clarity with his Back Benchers. I look forward to seeing the right hon. Gentleman on the spot, explaining precisely where he agrees with me, where he disagrees with me and what he is going to say about it to some of his own Back Benchers.

Mr. Norman Lamont (Kingston upon Thames)

Is the Chancellor aware that there is total support for the view that the convergence criteria should not be fudged? However, does not that also apply to this country? Will my right hon. and learned Friend confirm that it is a provision in the Maastricht treaty that, in order to qualify for EMU, a country has to join the exchange rate mechanism? Is not that the reason why Italy has rejoined the exchange rate mechanism in the past few days?

If my right hon. and learned Friend thinks that exchange rate stability should be judged post hoc, because the ERM does not really exist, will he confirm that he has taken the Law Officers' opinion on that point? Will he tell us from what central exchange rate the criteria for stability will be judged over the next two years?

Mr. Clarke

At the moment, we have a floating exchange rate, not a central exchange rate. The treaty was drafted at a time when the ERM narrow bands were the normal margins for currency fluctuations. No one has reinterpreted the treaty since those members still in the ERM have been moving within broad bands, and there are differences of opinion about that aspect of the treaty.

If one examines the treaty, one finds that it will eventually be for the Heads of Government in the Council to decide whether the member states comply with the conditions necessary for going ahead with stage 3, which go beyond the convergence criteria and enable them to address wider issues. I certainly agree with my right hon. Friend that it is extremely important that, if and when they move to that decision, they decide to go ahead with membership only in a euro zone of countries that are genuinely convergent, in which the criteria are not fudged in any important respect. Otherwise, I would think that that was, in itself, a reason for insisting that the United Kingdom ought not to join—regardless of other problems that might arise at the time.

It is a question not only of hitting those magic convergence criteria figures for the calendar year 1997, but of countries putting themselves into a position where they will maintain stable fiscal conditions in their economies for the foreseeable future. That matter has still to be judged and it is currently extremely difficult to forecast what our position will be.

Mr. Malcolm Bruce (Gordon)

Will the House take note of the fact that the Opposition's explanation of their obscure position on economic and monetary union took nearly as long as the Chancellor's explanation of the Government's obscure position on economic and monetary union?

Will the Chancellor acknowledge that, as long as the United Kingdom remains a potential or aspirant member of economic and monetary union—which is the Government's position—we shall be bound by convergence criteria that will inevitably be determined by the details of any stability pacts agreed by members of the euro zone? Given his robust defence of the Government's position, which those on these Benches respect and admire, will the right hon. and learned Gentleman also tell the House that he would not stay in a Government who undermined his position by declaring that they would not under any circumstances join economic and monetary union—something which, in any case, is not in the Government's gift to offer?

Mr. Clarke

Unlike the Labour party, the Government not only have a clear position, but restate it rather frequently. We cannot be criticised for the number of occasions on which various members of the Government keep setting out in unequivocal terms what our policy is. We are also pursuing that policy in some detail. I hope that the House's sudden interest in frequent statements on progress will take forward a little the understanding of where we are.

It is certainly true that, within the single market, convergence has always been important. As I said, the Government signed up to all that in the late 1980s—in 1986, I believe—with the Single European Act. If there were unstable conditions throughout the single market, and countries were getting into fiscal problems of one kind or another, or there were wild fluctuations in exchange rates caused by unsuitable fiscal policies, the pattern of trade would be disrupted and every member state would suffer.

We have been submitting convergence programmes. We submit them to the House and they are approved by the House. Then we go through the surveillance procedure and make recommendations that match what we wish to do. We take part in the surveillance procedure of other member states, and urge them to take similar action to get their fiscal policies in order, so that stability in the market can be maintained for all of us.

Mr. John Redwood (Wokingham)

Having agreed to a regulation that will make the euro legal within the European Community, how does the Chancellor propose to make it legal outside the Community? Does he agree that one of the recitals in the proposed regulation serves to undermine the legality of the currency outside Europe, in that it invites people to realise that it has not been made properly legal outside the member states? Does he believe the legal advice in the Community that there would need to be legislation in countries such as America and Japan, to make it legal compulsorily to convert their deutschmarks and ecu into euros?

Mr. Clarke

The European Union can legislate only for the convertibility of the currency inside the Union and the impact on contracts within our jurisdictions. When such a change takes place, other member states may have to address any legal problems arising in those countries, but that is not a matter for the European Union.

I should make it clear that the most important aspect of the regulation on the legal basis of the euro is to ensure continuity of contract. It will not make legal any contract that would otherwise be unlawful; what we seek to avoid is any question of people's trying to frustrate existing contracts by saying that circumstances have changed if the ecu becomes the euro, or if other currencies go into EMU.

I believe that my right hon. Friend, with his knowledge of such matters, will discover that many people in the City of London want us to get on with the regulation, because they want to avoid the litigation and uncertainty that might otherwise result.

Mr. Peter Shore (Bethnal Green and Stepney)

Is the Chancellor aware that, if we had been subjected to the stability pact and its penalties over the past four years, since he became Chancellor, Britain would have had to pay to the European central bank more than £11 billion? Does he consider that such a penalty would be a proper reflection of his incompetence as a Chancellor, or does he think that an £11 billion penalty would be excessive, and that there were circumstances to justify his excess borrowing requirement over the past four years?

Mr. Clarke

We have not finally settled the level of penalties, but I am glad to say that yesterday everybody agreed that we should put a cap on them. We have not yet settled the circumstances in which penalties might arise if there were an economic downturn of an exceptional or temporary nature. In any event, everything will depend on a political decision to be taken by the Council of Ministers, if such a process is put in hand against any member state of the euro that starts to get into fiscal difficulties.

Looking back over the history of deficits in every other country does not help. If we look back over the 1980s, across the whole continent, we see that deficit financing was—

Mr. Nigel Spearing (Newham, South)


Mr. Clarke

We would find that practically every member state might have been subject to penalties, under some of the drafts now being produced.

What is happening is that all member states and all sensible Governments in the world are getting away from heavy deficit financing, and they are having to do so. If one compares this country with the continent, one can see that we are well ahead in getting our deficit properly under control, down to an acceptable level, and moving it towards a balance. We have made all the structural changes in our labour market and elsewhere that other countries, such as France and Germany, are now having to get through to make themselves competitive.

Mr. Ray Whitney (Wycombe)

May I congratulate my right hon. and learned Friend on the constructive way in which he has projected and protected our national interest at the ECOFIN discussions? Will the Chancellor assure the House that, in the months before a decision must be taken about entering into the single currency, be it at Amsterdam in June or subsequently, he and the rest of the Government will make every effort to disperse the fog of misinformation on the single currency that has been deliberately created?

Mr. Clarke

I agree with my hon. Friend. I am grateful for the opportunity to set out the stage that we have reached in a process of work that has been going on for some months. I trust that the more we debate the issue on the Floor of the House, the more the logic of that position will get across to those on both sides of the House, because it matters to us, as my shadow said a few moments ago, whether we eventually exercise our option to join or not. There are arguments on both sides of that option that we shall have to judge when the circumstances have made it the right time to make that judgment.

I have brought back a report on a meeting of ECOFIN of a kind that I previously reported by written answer because no one was interested in having a debate on the Floor of the House. I do not come back here to say that, yesterday, I discovered some dragons and slayed them—there were no dragons. I have, however, got on the front of more documents statements of the obvious truth, acknowledged by other Ministers and by the Commission. The only query that I had at one stage was from another Finance Minister who asked. "Why do we have to make the document longer by putting this into it when it is already obvious what it means?" I have done a bit of that, and I will do more of it.

Mr. Giles Radice (North Durham)

Could the Chancellor tell the House how many countries will qualify under the Maastricht criteria for the single currency when the time comes?

Mr. Clarke

When I produce a Budget statement, I make many economic forecasts, but it is always wise not to add to them. At this stage, I would not like to say whether a sufficient number will qualify by what date. At the moment, a large number of member states expect to go into economic and monetary union before the turn of the century. That prospect exists as a real possibility behind all our discussions.

Mr. John Butterfill (Bournemouth, West)

Will my right hon. and learned Friend confirm that, whether or not the Government decide to join the euro in the first wave, it is vital to this country's interests that the euro should be a successful and robust currency? Does he agree that it is therefore essential that the terms under which the euro is managed are as robust as possible? Does he further agree that it would be entirely undesirable for countries to be able to cheat on the way in and then subsequently cheat on the management of their economies once they were members of that currency?

Mr. Clarke

Those countries are likely to comprise some of our most important customers in the world, and the single market remains our most important market for the export of goods and services. When it does well, we do well; when it does badly, we slow down. It is therefore important that, within a market that we shall share with those countries, whether we join the euro or not, stability and the right conditions are sustained, which lead to the growth of trade and investment. That is the whole basis on which we are taking part in the discussions at the moment. It would be folly to walk away from them.

It is also important to ensure that, when the new arrangements go ahead, and if there is a euro zone, it does not divide the Union in other ways. It is extremely important that the countries that do not join the euro zone are not put into a situation where the procedures make them second-class members, excluded from decision making. I have to say, however, that it is bound to be the case that those who join the euro zone will be the principal movers and shakers of most of the political developments in the Union.

Mr. Tony Benn (Chesterfield)

Did the Chancellor congratulate the French Minister on the constructive role played by the French Government in bringing about a settlement of the lorry drivers' dispute in France, which has led to higher wages, shorter hours, retirement at 55 and higher safety standards? Does he not accept that that is the sort of model for European co-operation that would be welcome across all the European Union?

Mr. Clarke

Employment policy is not a European matter. There is no European Community competence in employment matters, which are entirely a matter for the nation state, and so they should remain; so I certainly do not comment on French industrial disputes.

I know an awful lot of French politicians and business men who agree that France must go through the process of reform and structural change, especially in its labour market, that the British so painfully went through in the 1980s. We are now benefiting from the changes that we have made, in rising employment, falling unemployment and healthy prospects. The French are going through the same process. I do not join the side of those in France who seek to resist it so far as to drive up industrial costs there to an unacceptable level.

Mr. Robert Jackson (Wantage)

Does my right hon. and learned Friend agree that the financial and economic policies that the stability pact is designed to sustain are all policies that a sensible and prudent Conservative Government would in any case wish to pursue?

Mr. Clarke

Yes. Although those convergence programmes impose no binding recommendations on us, the recommendations come to us in a form that any sensible Conservative would say was the basis of a sound fiscal and economic policy. If anything, they are a bit generous. I believe that this country should move towards balance in the medium term and that our aspirations for inflation should be to match, if possible, the best of our competitors in western Europe.

Mr. George Stevenson (Stoke-on-Trent, South)

The Chancellor will know that, of the three proposed regulations—governing the status of the euro, preparation for the use of the euro and the stability pact—two regulations are subject to article 104, which means that we have opt-outs, and the other is subject to article 103, which means that we have not. The Chancellor talked about clarification being contained in the annexe to the report document. Can he confirm that the proposed regulation on the stability pact, and therefore the convergence information, which is under article 103 and therefore not subject to opt-out, will be subject to opt-out?

Mr. Clarke

I had better read the hon. Gentleman's question when it appears in Hansard. I would also invite him to read my statement, which dealt with those attachments. I do not say that disrespectfully. Because of a minor matter of a fire in my Department, I had to write it myself, so I am more familiar with it, but it is not altogether clear until one reads it twice.

We shall attach two draft regulations to the report. They are two of the draft regulations that are currently subject to scrutiny in the House. I have, as set out in the report, had amendments made to article 17 of the regulation under article 109(1)(4), to make it clear that in this country we have no binding consequences from that because of our opt-out from article 109.

I have set out the position as clearly as I can in the statement and the explanatory memorandum. If we stay out, we have to produce convergence programmes, we are subject to surveillance and we can have non-binding recommendations made against us. That has gone on for years. We accepted all that in the Single European Act, when my right hon. Friend Baroness Thatcher was Prime Minister and I was a member of the Government.

If we joined the single European currency, we would have no opt-out from the sanctions, which is why it is so important that the details of that are argued by British Ministers. Yesterday I took a very active part in the debate, because it is important for everyone that we get that right.

Mr. James Couchman (Gillingham)

Further to the question by the right hon. Member for Chesterfield (Mr. Benn), did my right hon. and learned Friend have a chance to discuss with the French Finance Minister what the impact of last week's ruinous settlement will be on that country's eligibility to join EMU? For without France, surely EMU will have to be postponed.

Mr. Clarke

I did not have such an opportunity except conversationally, which obviously I would not report, but I follow events in France with interest and I agree with my hon. Friend that the whole thing will not happen unless France can achieve the convergence criteria.

I agree with those who say that achieving the convergence criteria means putting the interpretation on it that my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) did a moment ago—strict compliance with the convergence criteria, so that the country is likely to be able to sustain a healthy financial position. But it is for the Government of France to address their internal problems and to ensure that, first, they can achieve that standard if they wish to enter EMU, and secondly, they can make themselves competitive with other countries in northern Europe, which they will face on very level terms if they enter economic and monetary union with them.

Mr. Dennis Skinner (Bolsover)

Is the Chancellor aware that one of the reasons why he is here today to speak about ECOFIN, as opposed to providing written answers or attending the Scrutiny Committee, is that 18 members of the Cabinet do not agree with it? My right hon. Friend the Member for Dunfermline, East (Mr. Brown) asked whether the Chancellor still agreed with economic and monetary union, not because my right hon. Friend particularly wanted an answer for himself, but because he wanted the Chancellor to tell the Euro-sceptics on his Back Benches that he is still in the same place as before.

The problem, as the Chancellor knows only too well, is that large numbers of people in Britain know that, to meet the criteria, up to £18 billion-worth of public expenditure would have to be cut, which would mean throwing more people on to the dole. That is why there are strikes in France and other Common Market countries. Workers there are saying, "So far, but no further."

Mr. Clarke

Whether or not I appear before the House is a matter for the usual channels. I am but the servant of the House, and I am always happy to appear before it. I do not regard the shadow Chancellor as a simple inquirer after truth. He may have other motives when he seeks answers to questions.

The path that I have taken in ECOFIN is in pursuit of the Government's policy, clearly restated, accepted collectively by the Cabinet and reiterated by every member of it, as my statements repeatedly make clear.

On the matter of controversy, the hon. Gentleman's description of the consequences of pursuing sound fiscal policies is bizarre. No country can prosper by running up huge public deficits, incurring huge debts in proportion to its gross domestic product and allowing inflation to rise.

Mr. Skinner

You should know.

Mr. Clarke

No, the hon. Gentleman should know. He supported Labour Governments who tried that and should have demonstrated to the rest of the world that it was pure folly.

Mr. Tony Marlow (Northampton, North)

Can my right hon. and learned Friend say whether article 3 of the convergence protocol—the one dealing with ERM—is operative? Are there circumstances in which European institutions can take legal action against the United Kingdom if they perceive that we have devalued in a competitive way?

Mr. Clarke

I ask my hon. Friend to refer me to the particular article in clearer terms, and perhaps to put his question in writing. I shall try to give him a clear reply.

It is not true that if we opt to remain outside the euro zone, we can be made subject to sanctions. We can be made subject to non-binding recommendations under article 103, but as the term implies, we are free to disregard them. Article 189 of the treaty makes it clear that the recommendations are non-binding.

Rev. Martin Smyth (Belfast, South)

In his statement, the Chancellor said that nothing would be agreed until everything was agreed. That expression is usually used to give reassurance. Whom was it intended to reassure? In the discussions in which I was involved several years ago, nothing was agreed and that was the end of the understanding. Those who disagree will walk away, and those who want to move on will keep moving on, until someone gives in. Do the Chancellor's words imply that the majority veto will be given away, or are they intended to reassure a particular group?

Mr. Clarke

I realise that the hon. Gentleman has experience of negotiations on matters of the most fundamental importance, which gave rise to the idea that nothing is agreed until everything is agreed. In less emotively charged but extremely important negotiations such as those in which we are engaged, it is a perfectly sensible rule to apply, so that agreement is steadily produced, with give and take on all sides and everyone reserving the right to revisit the whole if a new issue arises.

However, these negotiations are not proceeding on that basis. No one wishes to get rid of vetoes; the whole process is based on the treaty. No Minister and no one in the Commission seeks to reopen the treaty base or to extend the treaty's provisions. Although everyone reserved their position last night when we finally left the meeting, we were reduced to discussing pretty obscure details of precisely what kind of economic downturn could give rise to a deficit that might be described as excessive and temporary. A great deal of feeling is expressed on the matter and there is a wide divergence of views. However, ultimately it is not likely to destroy the whole process.

Mr. Iain Duncan Smith (Chingford)

In answer to a question from my right hon. Friend the Member for Wokingham (Mr. Redwood) on 25 November, my right hon. and learned Friend gave an undertaking that he would seek copper-bottomed reassurances about the use of article 103 for those who remained out under recital 13. I have listened to my right hon. and learned Friend, but I still cannot see the difference between what he said on 25 November and his comments today. Is not the key to using article 103 the fact that it allows the court to be used at some point for possible infraction proceedings? Is not the best way of copper-bottoming it simply to say, "Let us take recital 13 out of the use of article 103," which would then solve the problem?

Mr. Clarke

Article 103 is concerned solely with the provision of information. In so far as regulations are made under article 103, they are procedural rules. The only way in which they can give rise to sanctions is in the theoretical manner that one can be made subject to infraction proceedings for any non-compliance. However, that has not yet given rise to any fines and it would be rather bizarre to go to infraction proceedings on procedural points. Although people occasionally make statements that imply otherwise, it cannot give rise to any proceedings against a member state for failing to comply with economic surveillance recommendations, for example, because the treaty expressly provides that those recommendations are non-binding.

Recital 13—the regulation to which my hon. Friend referred—did not come up yesterday because the regulation was not addressed. I think that it will come up at a meeting of ECOFIN some time in January or February next year—I am not sure when we shall face it next. As my hon. Friend knows, I do not agree that recital 13 has the effect that some people fear. When we come to it, I shall address it in the way that I addressed the two regulations yesterday and the report that we had, and seek to get on the face of the document clarity as to its meaning. The recital cannot alter the nature of article 103.

Yesterday I had not the slightest difficulty in getting statements made: my colleagues regard them as bald statements of the obvious truth. We are fairly familiar with the treaty, having spent many hours of our lives discussing it together. I shall seek to come back from discussions on that regulation with a statement that makes it clear. Recital 13 will not matter in the slightest once we see the regulation to which it refers: the regulation that will bring up to date the convergence procedures for those who do not go into the euro zone. According to the latest information that I have, that regulation is not even drafted yet and it has certainly not been tabled by the Commission.

Mr. Denzil Davies (Llanelli)

The Chancellor has emphasised the importance that he attaches to convergence, not only on 1 January 1999, but thereafter if there is a euro. Will he confirm that, while the stability pact applies to Government deficits, it does not apply to Government debts? If that is the case, after 1 January 1999 there will be no sanctions to prevent divergence from national debt.

Mr. Clarke

That is not finally settled—some versions include debt and some include deficits only. The argument is that, in setting fiscal policy, the fiscal deficit for each year is most immediately within Government control. If a Government achieve fiscal deficits that are below the rate of growth of GDP, the total stock of debt as a proportion of GDP is bound to come down. The argument for concentrating on deficits is: if one gets the deficit right, the debt problem will be resolved in consequence.

I see the right hon. Gentleman nodding; he is very well informed and expert in such matters. I respect his judgment and I look forward to hearing his views. I am merely explaining the reason why everyone is concentrating on deficits rather than debt at present.

Mr. John Wilkinson (Ruislip-Northwood)

Can my right hon. and learned Friend explain why there is such preoccupation with budget deficits? One understands the treaty commitment and the pursuit of convergence, but has not experience on the continent shown that convergence of itself brings pain and grief—notably high unemployment and recession, especially in France and Spain? As a sovereign independent country, should we not place greater emphasis on other economic criteria, such as levels of employment, investment, competitiveness and technical innovation?

Mr. Clarke

I realise that healthy public finances are not the only thing that matter in economic policy, but they matter quite a lot. Their relevance in this context is that modern states, sovereign nation states, have limited freedom in this area because they are subject to the discipline of today's unregulated markets. If a Government get their fiscal policies wrong, they are rapidly punished by the reaction of the markets. The difficulty if one goes into a single currency or economic and monetary union is that if one member of EMU gets it wrong, all the members are punished by the markets. There is a tendency to weaken the currency or drive up interest rates—not necessarily, but they will tend in that direction—if one of the member states gets into a fiscal problem. That is why there is so much concentration on that subject.

The treaty refers to other matters that should be taken into account. I am not sure that unemployment levels are much of a guide, but flexibility in other respects, including flexibility in the labour market, is highly relevant. If countries agree that they can combine their monetary policies so that shocks that might occur—which previously had been absorbed by changes in the exchange rate or interest rates—have to be absorbed in other ways, one has to be clear that they can be absorbed in a way that does not cause excessive strain.

In the end, countries that go into a single currency will find that the main pressure on them is rapidly to make themselves more competitive with one another, and it will step up the overall pressure on all of them to make themselves more competitive. That will help them to develop their own economies and help them in their competitiveness with the outside world.

Mr. Ieuan Wyn Jones (Ynys Môn)

Can the Chancellor clarify the reply that he gave to his predecessor, the right hon. Member for Kingston upon Thames (Mr. Lamont), about whether it will be necessary to rejoin the ERM? If the Government were ever to recommend to the House that the United Kingdom should join the final stage of EMU, is it his policy that we would not of necessity have to join the ERM first?

Mr. Clarke

I am one who asserts and believes that it is not necessary first to join the ERM. That matter will be resolved, with every other application for membership, if they occur, if in 1998, or whenever, somebody applies for membership of economic and monetary union and has not joined the ERM. The whole matter will then have to be resolved by the European Council or by the Council of the Heads of Government, which will have to see whether the country satisfies the conditions in totality, set out in the treaty.

Mr. Graham Riddick (Colne Valley)

Surely the Maastricht treaty says that countries that wish to participate in the single currency will have to have been within the ERM for two years before joining. If that is so and, as my right hon. and learned Friend said today and also in his letter of 22 November, this country will not rejoin the ERM, surely it means that no Conservative Government can take this country into a single currency. [HON. MEMBERS: "Hear, hear."] If that is indeed the case, let us say so.

Mr. Clarke

I do not think that it is the case. My hon. Friend has got near to the treaty, but he has not used the precise words, which, off the cuff, I cannot guarantee to get precisely right myself. He quotes from the test of exchange rate stability, and one of the tests is about being within the normal range of movement of the exchange rate mechanism. At the time that it was drafted, it referred to the narrow bands, which collapsed at least three years ago, so it is extremely arguable whether it is any longer remotely relevant as a test to decide whether sufficient exchange rate stability has been developed by a member state.

All those matters, and many more, still have to emerge if and when we reach a process whereby member states contemplate going into EMU and this country has to decide whether to exercise its opt-out or opt in. That is some way ahead, and I think that an awful lot of things will happen between now and then to make the position much clearer and to make the position of many other countries much clearer, as well as our own. At the moment, we do not even know which countries might be joining and when, and there are equally important details beyond that to be resolved before we can take a judgment.

Mr. Nigel Spearing (Newham, South)

The Chancellor referred to the procedures of the House. Is it not a fact that, between now and Friday week, he must table a motion on these topics, which, together with any selected amendments, will be taken and voted on forthwith? As there is to be a debate next week on the motion for the Adjournment—presumably for about six hours before 10 o'clock—would it not make good sense to take the forthwith motions and any amendments immediately afterwards? Can the Chancellor persuade his right hon. Friend the Leader of the House to take that step, for the Chancellor's own reputation, for the Government's reputation and for the reputation of the House and its procedures?

Mr. Clarke

As the hon. Gentleman knows, the tabling of business and the procedures of the House are matters for my right hon. Friend the Leader of the House to deal with on the Government's behalf, and are not matters for me. At an appropriate time, we shall table whatever scrutiny motions are necessary. We shall require a parliamentary scrutiny reserve until such time as we have completed the proper processes.

Precisely what is forthcoming at Dublin remains to be seen. I have already made it clear that any definitive legislative action is unlikely to take place before June next year at the earliest. The documents, about which hon. Members were very concerned 10 days ago, are likely to go through further negotiation. The revised form in which they emerge could be liable to further scrutiny. I hope that the hon. Gentleman will allow me to leave such matters to the expertise of my right hon. Friend the Leader of House, who will clarify the position in due course.

Mr. William Cash (Stafford)

Unless my right hon. and learned Friend has found that the textual amendments to which he referred were burnt in the Treasury fire this morning, would he be good enough to allow the House to see them before the debate?

Will he answer the question that he did not answer last Monday, and that the Prime Minister did not answer the following day? I asked for an absolute guarantee that the regulations would be amended to ensure that, on the assumption that we were out of a single currency, and that countries would be fined for having cheated their way into the system or having failed because of incompetence, United Kingdom taxpayers would not, as net contributors, have to pay one way or another for the default of others.

Mr. Clarke

I referred to an amendment to the regulation in paragraph 17 of article 109(1)(4). Because of a variety of circumstances, the only copy that I had to hand this morning was the one that I was carrying in my pocket. The document will eventually be published by the Irish presidency. The draft regulation will then be laid before the House, so that we can all see it.

I also referred to the emerging text of the report that may be put before the Dublin summit if it is agreed by then. At the moment, it is still an emerging report, the text of which has not been finished. I said that I would ensure that my points were included, and I think that I can give that undertaking, because nobody resisted them yesterday. I do not know whether we shall finish the report in time for Dublin. It is for the Irish presidency to decide when the document will come into the public domain.

There is a mountain of paper, and what is published is rapidly overtaken. There is no attempt to hold anything back from the House; it is a matter of keeping pace with events, and with the sometimes vast quantities of paper that the House is given to scrutinise as much as it wishes.

I do not agree with my hon. Friend's description of the penalties procedure. Penalties arise if a country goes into economic and monetary union, incurs an excessive fiscal deficit contrary to its obligations, and then fails to take any effective steps to reduce it. In my opinion, the purpose of the penalties is to act as a deterrent, and to ensure that Governments do not get themselves into that position. That is why we negotiated to have those penalties in the Maastricht treaty.

Mr. Mike Gapes (Ilford, South)

Does the Chancellor agree that if the euro goes ahead and this country stays out, our exporters will face greater uncertainty because of the possibility of continuing transaction costs and of speculation against our currency, and the possibility—or the likelihood—of higher interest rates? Has he noticed how interest rates in Italy and Spain have been falling in expectation of their joining? Can he tell us why our interest rates are not falling?

Mr. Clarke

I agree that those arguments can be made, but if the hon. Gentleman was fair, he would also concede that there might be some downside arguments as well. A great deal depends on how well the project is put together and how it progresses. However, those who are pursuing economic and monetary union believe that they will achieve a strong currency, stable economic conditions and low interest rates, as the hon. Gentleman described. It is certainly the case that we have higher long-term interest rates than most of our competitors because of our history of devaluation and fiscal deficits.

Mr. Nicholas Budgen (Wolverhampton, South-West)

Will my right hon. and learned Friend confirm that the other countries of the European Union regard our floating exchange rate as conferring upon us a grossly unfair advantage? Will he tell us whether he achieved anything in his negotiations this week that will protect us from retribution from the other countries?

Mr. Clarke

If they do regard it as that, I think that they are wrong. We have a floating exchange rate, which my hon. Friend has always been in favour of—and I am in favour of it.

Mr. Budgen


Mr. Clarke

Now, yes; because the attempt to manage it did not work. I concede that to my hon. Friend; we have had this discussion before. The result is that our exchange rate goes up and down. Whether that is an advantage remains a matter of argument. Currently our currency is strengthening very strongly, and many British industries are beginning to worry that we might get too strong. That is a floating exchange rate. I do not think that member states have complete control over those exchange rates in the way that some people imagine. The market—as my hon. Friend would be the first to agree—determines such things.

Mr. Budgen

What about sanctions?

Mr. Clarke

No sanctions would be taken against us; the single market does not lend itself to the imposition of trading penalties on a country that has the misfortune of having its currency weakened excessively. There are simply no ways in which the single market obligations can be undone, and there is no way in which any fiscal transfers can be demanded.

Mr. Ken Purchase (Wolverhampton, North-East)

The hon. Member for Wolverhampton, South-West (Mr. Budgen) does not agree.

Mr. Clarke

My hon. Friend may not agree, but I wish that he would refer me to any fears that anyone is striding forward with such threats to us.

Several hon. Members


Madam Speaker

Thank you. We shall now move on to the next business. No doubt, had questions been asked and answered more briskly, I could have called more hon. Members. I am sure that the House is with me on that.