HC Deb 01 May 1996 vol 276 cc1274-80

Motion made, and Question Proposed, That this House do now adjourn.—[Mr. Conway.]

11.56 pm
Mr. Llew Smith (Blaenau Gwent)

In recent times, we have celebrated the end of apartheid in South Africa, the anniversary of the Chartist struggle in south Wales and the work of the suffragettes in other parts of the country. Those people had many things in common: their bravery, their sense of justice and their recognition of the potential power of the vote. Indeed, their struggles helped to ensure that the millions of people who were disfranchised eventually received the vote.

In the United Kingdom and in other parts of the European Union, we are considering ditching the things that those people fought and sacrificed so much for, merely so that we can become members of a single currency and the economic and monetary union. How will this affect the value of the vote that those people struggled for? The answer is simple: among other things, we shall have to become a member of the European central bank. The European central bankers will be responsible for the major economic decisions, they will be appointed for eight years and, no matter what damage they inflict on us, no one will be able to remove them.

Democratically elected Governments will be helpless if they wish to tackle problems such as unemployment and poverty—the power to do so will no longer be in their hands. If hon. Members doubt this, they should do what the Chancellor of the Exchequer failed to do some time ago—read the Maastricht treaty. In particular, I refer hon. Members to the part of the treaty that states: Community institutions…and Governments of member states undertake not to seek to influence the members of the decision making bodies of the European central bank…in the performance of its tasks. Not only will democratically elected Governments no longer be responsible for the major economic decisions; as that quotation shows, they will not even be able to influence those unelected and unaccountable bankers. While people will still have the right to vote, that vote will be a gesture—a charade—because the parties, peoples and Governments for whom they vote will no longer have powers to rectify the wrongs inflicted on them.

We saw an example of the transfer of powers from democratically elected politicians to unelected and unaccountable bankers some months ago. Then, the Chancellor of the Exchequer overruled the Governor of the Bank of England on interest rate levels; but, if we join the single currency, it will be the Euro-bankers and not the Chancellor of the Exchequer who will make decisions on interests rate levels, the money supply, Government borrowing and, indeed, whether we wish to devalue. As the Maastricht treaty reveals, the Chancellor of the Exchequer will not even be allowed to influence such decisions: if he does, he will be acting illegally. I hope that some hon. Members appreciate the irony of that.

In "A Partnership of Nations" the Government have the audacity to claim that they are trying to prevent the erosion of national parliaments", and they state elsewhere in the same document that they intend to entrench subsidiarity into the Treaty". That is nonsense. Subsidiarity means bringing power closer to the people; it certainly does not mean putting it into the hands of bankers. To agree to that process would be to betray our history of Chartism, and to betray the suffragettes and many other brave people.

Some, while recognising the undemocratic nature of the treaty, still seem to believe that all is not lost, because those bankers could still agree on progressive policies to create jobs and combat poverty. That would be a most unusual type of banker. If anyone is naive enough to believe such a notion, a quick glance at the treaty will reveal that the central bank's objective is not to overcome unemployment. There are 50 clauses and four protocols concerning price stability, but not one clause spells out anything about unemployment.

I am also interested in the position of the Welsh and Scottish nationalists: their pro-single currency, pro-European central bank stance, together with their dream of independence. If that should ever come about—I hope that it will not—they will immediately recognise that it is independence in name only. The most important decisions will be made by that most powerful of all quangos, the European central bank.

My position is straightforward. Not only do I—like the nationalists and others—oppose rule by quango in Wales, Scotland and other parts of the United Kingdom; unlike them, I also oppose such rule by quango from Europe. I want to extend democracy and accountability, rather than destroying them. Nor—this is linked to what I have just said—do I understand those who want to devolve power to a Welsh Assembly or Parliament, while at the same time supporting the centralisation of power in the hands of the European central bank in Frankfurt. The powers of all the quangos in Wales, Scotland and, indeed, the United Kingdom will be not nearly as great as those of that one quango based in Frankfurt.

The European central bank should not be seen in isolation from the single currency and economic and monetary union. What effect will the adoption of a single currency have on policy-making and our economy? Writing in the Sunday Times on 31 December last year, the respected political commentator Peter Kellner had this to say: any country which abandoned its national currency not only loses the right to devalue; it also loses its power over interest rates, money supply and (to some extent) government borrowing…Britain would lose all real control of its economic destiny. With a single currency, changes in interest rates, or the price of oil or food on the world market, will affect different countries in different ways. Yet national governments will lack the means to respond to the different problems that arise. They will have none of the financial levers that finance ministers normally use in order to avert recession or minimise hardship. If, for reasons outside its control a country tied to the euro suddenly becomes less competitive, its government will have little or no power to prevent a sharp rise in unemployment. The European central bank, the single currency and economic and monetary union are all inter-related and dependent on one another, and all lead to a similar end: a society lacking in fairness, democracy and accountability. I find that unacceptable; I want to create a society in which individuals, councils, Parliaments and corporations are more accountable and more democratic. I want to create a society over which people feel they have some control and in which they are not simply victims of the power game. I may be described as old Labour and old-fashioned. If so, all I can say is that I have no intention of changing.

12.7 am

Ms Diane Abbott (Hackney, North and Stoke Newington)

I congratulate my hon. Friend the Member for Blaenau Gwent (Mr. Smith) on obtaining this Adjournment debate. I want to address my remarks to the issue of independent central banks—whether the European central bank or central banks in general.

Economists like to see themselves as pursuing a scientific discipline, but more often than not it seems like a species of faith healing. Every year, economists seize on some new cure-all for the long-term decline of the British economy. In the 1970s, the big issue that economists liked to talk about was the balance of payments. A few years ago, the important remedy for the decline of the British economy was meant to be fixed exchange rates and the exchange rate mechanism. A recurring fashion in recent years has been the fashion for independent central banks. In the context of European monetary union, it would be an independent European central bank.

I want to explode some of the myths about independent central banks—whether about the European central bank or about making our own Bank of England independent. The argument for an independent central bank is that it will be more effective in dealing with inflation—if it were a European central bank, it would be more effective on a Europewide scale. That has been repeated so many times by politicians—both Labour and Government—and by economists, pundits and newspaper columnists that it has taken on the status of fact.

However, there is no statistical or empirical basis for the belief that simply having an independent European central bank, independent of politicians, will have any effect on European inflation levels. In 1994, the Treasury and Civil Service Select Committee, on which I have the honour to serve, considered the role of the Bank of England and issues relating to independence.

Our special adviser, Andrew Wood, said that, even where price stability was a central bank aim, there was only a weak causal connection between central bank independence and low inflation. Another of our advisers said that there was no conclusive statistical evidence of a causal relationship between the status of the central bank and inflation performance. In other words, the main empirical argument for a European central bank that is independent of politicians—that somehow it would help to keep inflation low—has no basis in fact. Yet politicians and pundits, whether in the context of debates about Europe or the Bank of England, continue to pursue that argument.

One may ask, if that argument has no statistical basis, why people have become so fixated on the notion that a European central bank that is independent of politicians would somehow bear down on inflation. I believe that that is simple reverse causality: because the Germans, who have had an independent central bank since the war, have been so successful in keeping down inflation, people think that a European central bank would have the same effect in Europe.

Anyone who has studied the German economy and politics knows, however, that there are all sorts of underlying reasons why German politicians and the German public have been so willing to swallow the policies that keep inflation low. The reverse causality argument—which says that, because the Bundesbank has been so successful, Europe needs a European central bank that is independent of politicians—does not stand up statistically.

Moving away from the facts and figures, the chattering classes and the people who claim to know about economics reiterate constantly the idea that monetary policy is so important that it should be taken away from politicians. They claim that the temptation for politicians to debase the currency should be removed. The argument for central bank independence and for a European central bank has found some favour with those not just on the Government Benches but on my own side.

In that context, I remind the House of evidence given to the Committee by Sir Douglas Wass, who, as some hon. Members will know, is a former permanent secretary to the Treasury. On the question of a European central bank that is independent of politicians, he said: It is not the job of central bankers to judge how far it is right to go in damaging the standard of living of some members of the community, or destroying the jobs of others, in order to bring inflation on to some particular path. These are broad matters as much of social welfare as of economics. The decisions of ministers may not escape criticism; they rarely do. But, that it is and should be their responsibility to make the decisions, seems to us to follow from the nature of the decisions and the way they work". That is the central argument against a European central bank. The statistical case that independent central banks bear down on inflation has yet to be made. The idea that one can extract monetary policy, with all its implications for unemployment, from wider political considerations seems quite wrong; in other words, decisions to do with the exchange rate and monetary policy are too important to be left to bankers—whether they are European central bankers or our own wonderful Eddie George.

I refer once again to Sir Douglas, because I think that, as an ex-permanent secretary to the Treasury, he might know more about the subject than anyone in the House. He said: It seems to us to be fundamentally mischievous for a significant element of the polity affecting these issues to be removed from the domain of a democratically elected and responsible government and handed to that of an appointed and unaccountable central bank". The arguments against an independent central bank—whether it is opposition to a European central bank or in opposition to giving independence to the Bank of England—are clear. There is no factual evidence to suggest that, if we had an independent European central bank tomorrow, it would be able to replicate Europewide the success that the Germans have had until recently in fighting inflation. It would be fundamentally undemocratic to take away from politicians and give to central bankers the important decisions that have such a wide-ranging effect on the whole community.

Like my hon. Friend the Member for Blaenau Gwent, I oppose economic and monetary union under the terms set out in the Maastricht treaty, because I believe that there are democratic issues involved. Even if a British Government—the current Government or a Labour Government—wanted to pursue precisely the same policies that are in the Maastricht criteria, the British electorate should have the chance to elect the people who make those decisions. It is quite wrong for such important leaders of monetary policy to be handed over to central bankers. I am glad to support my hon. Friend in his Adjournment debate.

12.14 am
The Paymaster General (Mr. David HeathcoatAmory)

The hon. Member for Blaenau Gwent (Mr. Smith) has chosen an important subject for his debate. He spoke with great clarity against the concept of a independent European central bank, chiefly on the ground of what he perceived as a lack of democracy.

The functions and powers of the European central bank are defined in the treaty of Rome, as amended—particularly as it was amended at Maastricht—which sets out the phased introduction and the steps on the way to full economic and monetary union in the European Union.

The bank is envisaged as being independent. It would be even more independent than the Bundesbank, which is frequently used as an example of a bank that is free of direct political interference. The object of making it independent is to ensure that it will deliver its primary objective—again as laid out in the treaty—of achieving price stability. One way of doing that is to ensure that political interference, particularly of a short-term nature, is minimised or eliminated altogether.

As the hon. Gentleman pointed out, that stage 3 of the economic and monetary union would entail the transfer of decision making about interest rates and monetary policy from the Bank of England and the Chancellor of the Exchequer to the European central bank. That would be an irreversible transfer of decision making.

The hon. Gentleman referred to the consequences of that. Although he gave a somewhat partial and one-sided view of the difficulties, he touched on important possible consequences and considerations that will have to be debated in the House and the country before we make a decision about that final transfer.

He was right to draw attention to the possibility of differential adjustments and external shocks affecting one part of the single currency zone as against another. In the past, Britain has been affected in different ways from certain continental countries by energy shocks, for example. If our interest rate were laid down by a single European central bank, we would give up national autonomy over interest rates. Therefore, we would be unable to adjust our interest rates to respond to a possible local recession.

The hon. Gentleman did not mention the possibility that labour could migrate out of countries in recession to other parts of the European Union. However, such migration is not a feature of the European Union and realistically would not be an effective short-term adjustment mechanism. Nor did he touch on the possibility that wages and prices would have to adjust to respond to those differences. I know that the hon. Gentleman would not welcome such a possibility because it could mean that wages and prices had to adjust downwards, at least in real terms. Moreover, many developments in EU social, economic and employment policy go in the opposite direction and possibly make the market more rigid and less responsive.

Ms Abbott

The Minister has talked about the possibility of wages and prices adjusting within an EMU-type regime. We found when we entered the ERM and locked exchange rates—having been told that all would be well because wages and prices would adjust—that wages and prices did not adjust, the ERM exploded and we had to leave it rather ignominiously. Given that experience, what makes the Minister think that wages and prices would be any more responsive within EMU and under an independent European central bank?

Mr. Heathcoat-Amory

The hon. Lady is right to point out possible lessons to be learned from the ERM experience, which is why the Government have announced that they have no plans to re-enter such an exchange rate mechanism. But enthusiasts for a single currency point out that, if the possibility of a devaluation is permanently removed, other adjustment mechanisms might have to be found. So wages and prices might have to adjust in a way that does not happen now, while the other escape route is still available.

The other option is to respond to economic developments through expenditure and taxation mechanisms, although they will be somewhat restricted by the prohibition on excessive deficits which becomes binding in stage 3. That leaves only the possibility of large transfer payments between member states, which might require a very large increase in the European budget—an idea not being advanced in any quarter at present.

Mr. Llew Smith

The Minister rightly says that the transfer payments would be very large. Will he be more specific? He seems also to accept my point about the transfer of economic power from elected politicians to appointed and unaccountable bankers. If that happened, and the bankers gained the sort of powers that are written into the treaties, what powers would be left to the Chancellor of the Exchequer and a democratically elected Parliament with which to bring about the changes that the Government of the day thought necessary?

Mr. Heathcoat-Amory

I have to answer two complicated questions in half a minute. Any formal influence is ruled out by the treaty: member states "shall not" directly influence their members of the European central bank. The size of the European budget might have to increase enormously to render the adjustment mechanisms comparable with those available to member states in the form of their tax and expenditure programmes.

In the United States, a very large federal budget acts as a stabilising mechanism. When a state or zone goes into recession, it pays fewer taxes to the federal Government and receives back larger benefit payments. That acts as an automatic stabiliser of some potency. For the European budget to act in that way, the present 1.2 per cent. maximum of gross national product which forms a ceiling to the budget would have to be removed altogether, and there would be a spectacular increase in the size of that budget.

Luckily, my right hon. Friend the Prime Minister secured the opt-out from stage 3, so it will be up to this House and the Government of the day to make the decision.

Unhappily, the Opposition are not enthusiastic about the opt-out. They have agreed in principle to stage 3 and they have not promised that they would hold a referendum, if and when they have an opportunity to recommend stage 3. I call that a severe democratic deficit on the part of those who occupy the Opposition Front Bench, which no doubt the hon. Gentleman and the hon. Lady will take up with the leaders of their party.

Question put and agreed to.

Adjourned accordingly at twenty-four minutes past Twelve midnight.