Economic and Monetary Union

HC Deb 10 July 2003 vol 408 cc1430-65

Question again proposed, That this House do now adjourn.

3.46 pm

Mr. Michael Portillo (Kensington and Chelsea)

During the course of my speech, I shall try not to allude to the Chancellor's five economic tests. The main reason that they were invented was to bamboozle people into believing that the main criteria, on which we should judge the euro were economic criteria, whereas there are, in fact, important political and constitutional matters at stake. As Chancellor Kohl once said, there cannot be political union without monetary union, and vice versa.

I pay tribute to the hon. Member for Yeovil (Mr. Laws) for at least pointing out that political and constitutional factors are at work. It is disappointing that, once again, the Chancellor of the Exchequer failed to admit that such factors are involved. It appears that his principle is that he cannot lose votes by insulting the intelligence of the British people. He not only insults the intelligence of the British people but he insults our European colleagues. There is at work on the continent of Europe a great deal of idealism—people who wish to build a new Europe. They are driven by a wish to avoid the problems that scarred our continent in the 20th century. They believe in creating a country of Europe. We should understand and be respectful of such idealism and should not deny that the euro is a part of that process.

I want to consider some recent political developments. Why did the Prime Minister come back from his leadership of the country in the war against Iraq so full of enthusiasm for the euro? Why did he want to go to the Cabinet as quickly as he could to convince it that it should take the euro to a referendum of the British people at the earliest possible opportunity? The reason was that an important event occurred in January when eight countries signed a letter in which they expressed their support for the United States in the Iraq crisis. However, they did that not only because they were talking about Iraq, but because, more broadly, the eight countries concerned, which included Britain, Spain, Italy and eastern and central European countries, had reached the conclusion that they did not wish to see a Europe in which all the decisions were pre-cooked by France and Germany. They wanted a Europe in which we took more account of the need to be globally competitive, in which we would have more flexible labour markets and in which we would try to have lower rates of taxation. In other words, that is a Europe in which many of its characteristics would be more Anglo-Saxon.

Our Prime Minister saw an opportunity to lead that faction—that large minority or perhaps even small majority—of countries in Europe that wanted Europe to be run differently. He realised that unless he was able to get this country into the euro, he would have no opportunity to offer leadership to that faction. That was what gave him the urgency and why he returned so enthusiastically. Having turned around the opinion polls substantially on Iraq, he believed that the fact that the majority of the people in this country were against entry into the euro would be no impediment to him. With his charm and charisma, he would simply be able to persuade the British people of the need to go into the euro. All that was a few months ago; it looks rather ridiculous a few months later.

The Chancellor of the Exchequer stood in the Prime Minister's way and prevented him from realising his European policy. That policy is now in a state of collapse. Indeed, I would go further and say that during the Iraq war the Prime Minister demonstrated enthusiasm not only for leading the country on Iraq and, subsequently, for the euro, but for a new political radicalism on foundation hospitals, student fees and ways to oppose some of the excesses of trade unionism.

The bursting of the Prime Minister's balloon of European policy by the Chancellor of the Exchequer has led to a more generalised collapse of the Prime Minister's morale. He has abandoned his radicalism on hospitals, education and standing up to the trade unions. He has lost the Health Secretary who was going to implement his policy. The Chancellor's opposition to the Prime Minister on the euro is typical of his more generalised position, and it has left the Government in a thoroughly becalmed situation. However, at least the Prime Minister's actions during the past few months demonstrate that he knows perfectly well that the euro is a political issue.

Without alluding to the bogus five tests, I shall deal briefly with a couple of the economic issues. I do not understand why it was expected that applying a single interest rate to all the economies of Europe could ever be successful. Although convergence tests, which were fairly easy to pass, were applied to the countries that joined the euro at the first stage, it was perfectly obvious that Europe was composed of economies that were at thoroughly different stages of development and had different cycles and characteristics.

The application of a single interest rate to all those economies was a guarantee that the rate would be wrong for most places most of the time—and so it has turned out to be. The interest rate is too low for Ireland, which has inflationary pressures, and too high for Germany, which has severe economic problems, as several hon. Members said. I was amused to hear the hon. Member for Dumbarton (Mr. McFall) quote Professor Moore's comment that those who had been in the euro since the beginning would have experienced greater convergence. Tell that to Ireland and Germany, because any convergence that might have occurred has not saved them from the grave economic damage that the interest rate is doing.

The hon. Member for Yeovil demonstrated extraordinary naivety by clutching at the 0.25 per cent. growth rate that has apparently been offered in the Treasury documents. Why should he believe anything that is published in a Government document? How can the Government precisely put their finger on a figure of 0.25 per cent. growth that is waiting to be grabbed if we join the euro? In any case, does the hon. Gentleman have any idea of the impact over time of applying the wrong interest rate to an economy? It is absolutely devastating, as the 4.3 million unemployed in Germany can attest

Mr. Bryant

The right hon. Gentleman is making the argument that one interest rate cannot possibly fit a variety of economies. Surely the United Kingdom consists of several economies. The interest rate that is established in the United Kingdom might be right for the housing market in the south-east and his constituency but wholly wrong for the manufacturing industry and my constituency.

Mr. Portillo

If the hon. Gentleman understands that—apparently he does—it is a tragedy that he does not understand that the problem will be worse if one interest rate is applied from Dublin to Athens. Whatever the differences between the north and south of England, more substantial differences exist between east and west Europe and north and south Europe. I am pleased that he intervened because I would otherwise have had to make that point in my own time rather than getting a bonus minute from him.

Hon. Members have discussed the growth and stability pact, which was recently subjected to a most intemperate and vituperative attack by a senior Italian politician. I refer, of course, to Signor Prodi's description of the growth and stability pact as stupid. That is all very well, but the pact was a product of deliberation among many of the wise minds of Europe. People thought that it was appropriate and the fact that he simply called it stupid provides us with no grounds on which this country could contemplate going into the euro. The Chancellor of the Exchequer is thus perfectly right that now is not the time to enter the euro, not least because the growth and stability pact is in such a mess. He offers the prospect that an alternative arrangement might be made over a long time to take more account of cycles, and so on, but we do not have such an arrangement now. For this country to dream of going into the euro when the growth and stability pact is attacked by even Europe's most senior political figures is an extraordinarily stupid thing to do.

Mr. Love

To take up the logic of the right hon. Gentleman's argument, if in five years' time the eurozone has high growth rates and low inflation, will he change his mind about joining?

Mr. Portillo

It would certainly give the hon. Gentleman, the Chancellor and the Prime Minister a sporting chance of persuading the British people of their case. The position at the moment, as the Chancellor of the Exchequer wisely advised the Prime Minister, is that the Prime Minister would have to go to the country and say, "Look at Germany. We want a little bit of their 4.3 million unemployed. We want a little bit of their stagnation." I am a practical-minded person and take account of facts as I find them, and it is clear that even the hon. Gentleman would find it difficult to convince his constituents of such an extraordinary and foolish proposition.

Talking of foolish propositions, people still look for stable exchange rates. It makes me laugh because it puts me in mind of Monty Python and the quest for the Holy Grail. What has happened since the invention of the euro? Have we had stable exchange rates? No, of course not. The euro has varied enormously against sterling and the dollar. Many people who are advocates of the euro are not so much worried about whether they have the right exchange rate, but whether they have a strong exchange rate, so they can feel a certain euro machismo. I congratulate them because they have a nice strong exchange rate. That is very good for euro machismo, but desperate for European industry, which is trying to export with a high euro exchange rate.

I am also amused by those people—the hon. Member for Yeovil is a good example—who lament that what went wrong in the past is that we joined the ERM at the wrong rate and say we must avoid that in future. That is a complete misunderstanding of what is involved. Exchange rates in different countries mean that if economies move at different paces and in different cycles, some of the shock of the differentials between one country and another can be absorbed by the exchange rate—it is a shock absorber. If we lock all our exchange rates together into one currency, we lose the shock absorber. The shocks that would otherwise be reflected in a rising or falling currency are reflected in higher inflation, higher unemployment or recession. We have good examples of that within the eurozone. It has nothing to do with the rate at which we go in. What it involves is giving up in the long term—permanently—the ability to have an exchange rate that reflects those varied movements.

Dr. Alan Whitehead (Southampton, Test)

Does the right hon. Gentleman accept that exchange rates, which vary for reasons other than those that he suggests, also provide the shocks and are not the unilateral shock absorber that he describes?

Mr. Portillo

Yes, I accept that. It is why I am pleased that we have an independent Bank of England. I am also pleased that I was the person in the Conservative party in the position of accepting an independent Bank of England as a good thing. It is one thing that has provided us with a little more stability. However, the hon. Gentleman has to understand the context. Even if we were part of the euro, it would continue to oscillate against the dollar and other currencies. Those people who believe that stability is available and can be grabbed as a great boon are economically ignorant.

Mr. Hopkins

rose—

Mr. David

rose—

Mr. Portillo

I want to make progress.

On the political factors, most elections in most countries are held on the subject of economics. I want to stress that to Labour Members. When people vote, they are voting on two different programmes—one that is rather more to the left and one that is rather more to the right—and they make a choice. When people in Ireland go to the polls and want to vote against high inflation, how do they do it? It does not matter whether they vote for Fine Gael, Fianna Fail or the Labour party, because the policy is not made by the Government of Ireland; it is made by the European Central Bank. If people in Germany object to unemployment or being in recession year after year and want to vote against it, it does not matter whether they vote Social Democrat or Christian Democrat, because those parties do not make the policy; it is made by the European Central Bank. Who votes for the European Central Bank? Nobody.

Mr. Laws

And the Bank of England.

Mr. Portillo

I am pleased that somebody has mentioned the Bank of England. I cannot believe that even people in opposition do not understand that the Chancellor of the Exchequer who stands at the Dispatch Box is the man who is responsible for the inflation target in this country. He is responsible to this House for that target and he sub-contracts to the Bank of England the mechanistic task of setting the interest rates that will achieve it. He is responsible to us and we are responsible to the people who elect us, but no such conditions exist in Europe and nobody has any plans to put them in place.

Everybody admits that there is a democratic deficit in Europe, but nobody seems to have any solution to that problem. That is not surprising, because, in order to fill the democratic deficit, there would have to be a European political polity. There would have to be common European political institutions and common specific political values shared between Europeans. On going to the polls year after year, we would have to vote on common points and for common candidates, parties and programmes, and none of those things exists.

The hon. Member for Edmonton (Mr. Love) asked whether I could imagine ever changing my mind about these issues. If all these things changed, we could look at them again, but he will understand that the creation of institutions in Europe that would truly reflect European democracy will not happen overnight. Indeed, such things will not happen in many decades. As a parliamentarian, he should be extremely concerned that economic decision making, which until now has been not only the preserve of democratic societies, but the most important political issue within them, has passed to an institution that is not accountable or democratic, and that nobody knows how it will be made democratic and accountable in the future.

The Chancellor of the Exchequer was right to oppose the Prime Minister. I believe that he knows perfectly well that Labour Governments have often fallen in the past on trying to fix the exchange rate. He is a historian and he understands that perfectly well. He also understands perfectly well the political point that he is not prepared to admit to us and the people of this country—that if we join the euro, he will give up political power. In other words, he will no longer be the person who makes the key economic decisions. He knows that perfectly well and he is not prepared to give up power. At least, he will not do so until he has a new and different address to move to. Perhaps that will not be so very far in the future.

The Chancellor of the Exchequer has, by opposing the Prime Minister's economic policy, dished the Prime Minister and led to a collapse of the Government's economic policy. He has demoralised the Prime Minister to such an extent that we now see a complete absence of radicalism from him across a range of domestic issues, and, thanks to the Chancellor, who in this particular has been right—he has been right to oppose the Prime Minister—he has achieved the broader political result of leaving this Government absolutely becalmed, with nowhere to go and no sense of direction.

4.3 pm

Keith Vaz (Leicester, East)

What a depressing speech from the right hon. Member for Kensington and Chelsea (Mr. Portillo). I cannot imagine which country he could have been talking about. We have a country that is run by an excellent Chancellor of the Exchequer and the most economically successful country anywhere in Europe. I hope that the right hon. Gentleman picks up his mood before he appears on television this evening in his weekly programme. I shall have words with my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) otherwise, and make sure that she comments on his speech.

I am delighted to participate in this debate. I welcome the fact that we have had so many debates on Europe and European issues over the past month. Opposition Members and those from the Liberal Democrat party—it is a shame that no more of them were persuaded to come to the Chamber—who criticise the Government and the business managers for not providing enough time to discuss European affairs will probably have overdosed on Europe in the past week. We had a big debate on the Convention yesterday and we are, of course, discussing the euro today.

I was one of those Members of the House who was disappointed with the Chancellor's decision when he announced on 9 June that the five economic tests were not met. I had very much hoped that he would say that we had met those tests and were ready to join the euro, but I trust his judgment on these issues. There is no point in having a set of tests, looking at an assessment, having the kind of monitoring and analysis that has been undertaken over the past six years and then disagreeing with the person whose responsibility it is to look at those decisions, examine the detail of the assessments and come to a conclusion. I very much value the work of the Treasury Committee and welcomed the speech by my hon. Friend the Member for Dumbarton (Mr. McFall). Everyone has a role to play in the discussion.

Although I was disappointed with the result on 9 June, I welcome what the Chancellor has said about leaving the door open on reassessment. I hope that the Chief Secretary will be little clearer about the envisaged timetable. I understand that there is to be a review of the reforms the Chancellor has announced over the past few months and that it is possible that a further assessment will be announced at the time of the next Budget. If that happens, we are on track to have a referendum in this Parliament—that is an extremely important possibility. We should try to avoid the kind of pre-announcement hysteria that greeted the Chancellor's announcement on 9 June; that went on for several months and created a great deal of instability.

Mr. Redwood

The hon. Gentleman says that he was disappointed with the Chancellor's announcement. Was that because he felt that the Chancellor was wrong in his assessment or because the Chancellor is clearly not moving the British economy to converge with euroland?

Keith Vaz

I do not think that he was wrong. As I said, I trust his judgment. As Chancellor of the Exchequer, he is far more able to make such decisions than I am, and he has an army of civil servants and an excellent Front-Bench team to assist him. I am happy that they have made the judgment, even though I disagree with it. Having done so, however, let us have a clear timetable to facilitate the reassessment, which has not been ruled out. The Chancellor was very firm in what he said to the House on 9 June—that is, that he is very much in favour of the euro if the tests are met and if the conditions are right. That remains the policy of the Government. Certainly, when I served as Minister for Europe for two years, it was precisely the policy that I espoused—when the conditions are right, we will join. Therefore, please let us have a timetable so that we can put the matter to the British people in plenty of time for an all-singing, all-dancing referendum campaign that allows everyone to participate in the discussion. It should not be a three-week campaign—it has to last for months, because it will require us to go round the country explaining the policy and listening to what ordinary people have to say.

The shadow Chancellor reminded us of the bus that I took around the United Kingdom. It was called Eunice. We went to different parts of the country to talk about the importance of the European Union. The shadow Chancellor was wrong to say that our intention was to talk about the euro: in fact, it was to talk about the benefits of being part of the European Union. The only place that we did not visit was Smith square. I would have liked to have the opportunity to convince members of the Conservative party about the benefits of membership of the European Union. My ministerial colleagues and I met thousands of people, the vast majority of whom said that they were very much in favour of the European Union. They wanted us to remain as members of the EU, but did not know enough about the euro. That is why it is extremely important that in the weeks and months until the Budget, and until we know whether there will be a fresh assessment, there should be such public engagement.

On the day after the 9 June announcement, the Prime Minister and the Chancellor said in a press conference at Downing street that it was very important that leading members of the Cabinet should go out into the country and make speeches in support of the euro. I may have missed something, but a month has passed and I have not heard major speeches of that kind. We should not be afraid. The Government are committed to the euro at the right time and under the right conditions. Cabinet members should therefore not be afraid to go out and talk about the merits of Britain's joining the euro. I agree with the right hon. Member for Kensington on one point—

Mr. Bercow

And Chelsea.

Keith Vaz

We should never forget Chelsea. I agree with the right hon. Member for Kensington and Chelsea that convincing people of the necessity to join cannot be left to the individual charms of members of the Cabinet or, indeed, to the Prime Minister, charming though he is. It will require explanation and engagement on an individual basis with people throughout the country. If we do not explain and engage, the tabloid press and Conservative Members, some of whom want us to leave the European Union, will win the argument.

It should not be up to the Daily Mail to conduct a referendum at Welcome Break service stations on the M1. The Government should hold a referendum, not on the Convention, but on the euro. We can do that only if we have leadership from the highest echelons of Government. That means that every member of the Cabinet should go out and make a major speech on the euro between now and the Budget.

Mr. Colin Challen (Morley and Rothwell)

Does my hon. Friend believe that there are lessons to be learned from public participation in discussions on the Convention? My studies of the Convention's internet site show that only hundreds or thousands out of hundreds of millions of people have bothered to participate. The issue has gone right over most people's heads.

Keith Vaz

My hon. Friend is right. It has gone over their heads because of the distortion in the tabloid press—every discussion on Europe has to end in hysteria; we cannot have a sensible, reasoned discussion about the matter. My right hon. Friend the Member for Neath (Mr. Hain) tried to talk about the Convention when he led the British team. The tabloid press subjected him to appalling abuse and attacks. Consequently, the general public misunderstood the debate.

I should like the Government to take a lead on the matter and all members of the Cabinet to follow the example that the Prime Minister set on 10 June. I hope that the Chief Secretary, when he replies to the debate, will give us a list of Cabinet members who have made a major speech on the euro since 9 June, and make a commitment that the Government will continue to push the issue at least until the Budget, when I hope that we will be told whether a reassessment should be made of the tests. I am sure that that will happen.

I want to make two further points about policy on the euro. As usual, the Chancellor made a brilliant analysis of our position on economic reform in the context of the European Union. However, we should pay special attention to the Lisbon agenda, which was a great achievement for the Prime Minister and the Prime Minister of Spain, because their joint initiative allowed progress to be made on it. Lisbon was the first European summit that benchmarked progress on economic reform. It set out a list of dates, targets and tasks for the European nations to make us competitive with the United States. It reminded us that in the previous decade, more than 10 million jobs had been created in the United States of America, whereas the figure for the European Union was just 1 million. It is as a result of what the Prime Minister did at Lisbon that we have, for the first time, a specific set of tasks. I am afraid that we might have lost our focus in terms of what we were trying to achieve at Lisbon, and I hope that, in the run-up to the re-assessment on Budget day next year, we shall adopt a clear strategy on how to ensure that our European partners move as swiftly as we would like to move on economic reform.

Part of that economic reform must also include a discussion on the way in which the European Union itself should be reformed. I remind the House of the joint letter from the Prime Minister and Herr Schröder in February last year, in which they set out about 25 key policy aspects that they wanted the European Union to adopt in order to make it a much more efficient place in which to work. Economic reform is possible only with the consent of our partners, but in that regard, Britain has a leading role to play in the Council of Ministers.

The Chancellor also has a leading role to play on the issue. I believe that he is widely respected as the best Finance Minister in Europe. I accept that we are not part of that select little group that makes the decisions on economic and monetary union or on the policy of the euro, but we are part of a much wider initiative to push the European Union towards economic reform. If we do not do that, we shall be letting down the new member designate countries that will join on 1 May next year. They expect something much better from the new Europe that will be created at that time than they would have found in the old Europe that they originally applied to join.

Mr. David

Before my hon. Friend moves on to wider issues, may I ask him a question on economic reform? Does he accept that it is important that the Government should take the opportunity over the next few months to develop a proactive regional policy?

Keith Vaz

I entirely agree with my hon. Friend, and I pay tribute to him for the work that he did in the European Parliament, when he was leader of the Socialist group there, on pushing forward the idea of a Europe of regions to ensure that our regional economies benefited from any changes.

It is a mantra—almost a cliché—that we shall soon have the largest single market anywhere in the world. We shall be able to compete with any economy. When the applicant countries join on 1 May, the business opportunities will be huge for the United Kingdom. Anyone who has visited the central and eastern European countries, as I know that the Chief Secretary has, will know of their enthusiasm to deal with British business. There is no doubt that the opportunities are there, but they will not be seized unless the Chancellor and the Prime Minister push forward the case for economic reform that was clearly set out in the Lisbon agenda.

Sweden is a country very similar to ours in terms of its Government and economic policy. On 14 September, it will go to the polls on the euro. I very much hope that it will vote yes, and that the decision taken by our Government on 9 June will not scupper the Swedish referendum. The circumstances are different there. Sweden has had a very long referendum campaign, but the outcome is on a knife edge. I hope that this Government will show support to Sweden and that the Chancellor has telephoned the Swedish Finance Minister to explain that our decision was quite separate and different from the decision that Sweden is going to make. I want to see Sweden in the euro because it would be good for the country. I believe, having visited Stockholm recently, that it would bring enormous benefits.

Mr. Wilkinson

That is a matter for them.

Keith Vaz

That is a matter for them, but I think that I am entitled to my opinion. I hope that Sweden's joining will create an even greater momentum for our Government to take the matter even more seriously, and to be even more committed to that final timetable. A timetable is essential, and I look forward to hearing details of it when the Chief Secretary replies to this debate.

4.18 pm

Mr. John Redwood (Wokingham)

I have declared my interests in the Register of Members' Interests.

Yesterday, the Foreign Secretary came to the House to tell us that the Government were minded to accept most of the huge transfer to the European Union of powers and opportunities to govern ourselves that are set out in the draft constitution. Today, a rather reluctant and muted Chancellor of the Exchequer came to the House to tell us of his rearguard action to save the pound—forced, I think, by the political reality that there is no hope of his winning a referendum to abolish it, and by the fortunate fact that some of us have forced the Government into offering a referendum on the currency. The Government will not yet offer a referendum on the even more important issue of the constitution.

That means—unless we can force a change on the constitution—that the Government wish to embark on a most unusual experiment. It is quite normal for a country that wants to be self-governing to keep the powers to govern itself and to have, as part of that variety of powers, the opportunity to run its own currency, settle its own interest rates and make its own monetary decisions. Indeed, I do not think it possible to say that a country is an independent self-governing democracy unless it both retains all its principal constitutional rights and has its own currency.

I can just about understand those who wish to conduct the experiment of having a self-governing country without its own currency, although I do not think that it would work very well. Ireland gave up and wisely decided to have its own currency some years after becoming independent from the United Kingdom, and I believe that that judgment was correct. Never in my life, however, have I heard of, or read of in history books, any group of politicians wishing to run a self-governing currency without a country to go with it. That seems to be where the Government have taken themselves through their asymmetrical approach to referendums, and the political logic that led to their decision that, while they cannot sell the euro to the British people, they can ram the European constitution through the House regardless of opinion in the country.

The arguments adduced in favour of our sacrificing the pound and adopting the euro are extremely flimsy. I give credit to those in the Treasury—they are well-informed economically, and they clearly have a sense of humour as well—who have managed to produce 18 volumes containing all the evidence that people like me need to make a strong economic case against joining the euro today, against joining it next year, and indeed against ever joining it.

We know that, when having conversations in the bar, members of the Government who have not read all 18 volumes try to keep it rather more simple. We are told that joining the euro would be good for all those with mortgages, because clearly mortgage rates would be lower. Yet evidence from these documents, and from the pages of the interesting financial press, shows that mortgages are dearer on the mainland of Europe—in euroland—than they are in Britain. It is difficult to see how it can be argued that mortgage rates would fall, as we would be joining an area with higher mortgage rates.

We are sometimes told by Ministers and other campaigners that if we joined the euro there would be what they call price transparency, and that miraculously the prices of all the things that are dearer in Britain than in Germany or France would tumble. Suddenly the scales would be stripped from our eyes, and at last we would understand that cars were cheaper in Germany than in Britain. Then people would no longer put up with the current situation.

That too is complete bunkum. The studies show that in the early stages of currency union there was quite a bit of rounding up in the countries that were abolishing their own currencies and going in for the euro experiment—just as there was a lot of rounding up when we last had a fundamental currency reform in Britain, over the period of decimalisation. It stands to reason that there is a great temptation to round up prices when people are shopping in a foreign currency for a while, as they would be during the painful and difficult transition from shopping in pounds to shopping in euros, were we ever foolish enough to say yes to that.

More important, we could have price inflation if euroland set the wrong interest rates for us. As a business man, before entering the House, I was responsible as chairman for a fairly large industrial conglomerate. I gave careful consideration to the idea of the exchange rate mechanism, and decided that it was definitely against the interests of the business I was leading, and definitely against the interests of my employees. My decision led to my resigning the company from the CBI, which happened at the time to have a policy of urging membership of the ERM. I was able to save my company £20,000 a year in CBI membership fees because we could not see eye to eye on that central policy.

The CBI came to see me in despair, saying, "What do you want, Mr. Redwood? We will come and visit you every week." I said, "No, that is not quite what I had in mind. That would not make my day, or my week. What I want you to do is change your policy, because the ERM will be very damaging." The CBI said that that was the one thing that it could not do.

I tell that story because the entire British establishment recommended the ERM. At the time there were many wrong heads on the Labour Benches, in the shadow Cabinet and elsewhere, as well as in industry and the trade unions. It was a monumental mistake. The first thing that happened on linking our currency to the Deutschmark—as it then was—was that we set interest rates that were too low and we experienced rampant inflation. Subsequently, things turned round, we had to set interest rates too high and we experienced a very cruel recession.

I wrote a pamphlet in the late 1980s—before we joined—in which I said that if we joined, we would end up with either high inflation or a deep recession, because there was no right rate for entry. I said that there would be no common interest rate that would make sense across the ERM area, and that we would end up with the wrong interest rates because we would undoubtedly go in at the wrong currency rate. Even I, in my wildest nightmares, did not dream that we would end up doing both, but we did, because people did not understand the economics.

I was therefore delighted to discover that the Treasury officials who wrote the 18 documents have grasped that point. They say that it is quite possible to end up with the wrong interest rate, and that adjustments would then have to be made to the level of employment, taxation or output that would probably be more severe than allowing the strain to be taken through the exchange rate. What they say about exchange rates is particularly interesting. Today, someone expressed a misconception about exchange rate movements by saying that they could be a worse shock than other factors—but the Treasury clearly states that exchange rate movements have not been a significant source of shocks to the UK economy as a whole. Instead exchange rate changes appear to have absorbed shocks that might otherwise have had a greater impact on UK output and prices. Exactly. That was our experience of the ERM, and it would surely be our experience were we foolish enough to join the euro. It is the bitter experience of Germany, which is discovering that now she can no longer set her own interest rates—she needs them to be much lower than euroland rates—or influence her own exchange rate, all of the cruel adjustments to her economy are taking place in lost output, closed factories, bankrupt businesses and lost jobs.

We also hear from advocates of this foolish scheme that we would get exchange rate stability if we joined. Of course it is true that we would have absolute exchange rate stability against the former currencies of euroland, because that is the idea of the scheme. Despairing of being able to bring the currencies together in the normal marketplace through the ERM, which was busted apart by market pressures, such advocates decided on this ultimate ERM—the one that can never be got out of. One locks oneself in the burning building and throws away the key, as one of our right hon. Friends memorably reminded us. The advocates suggest that we would have guaranteed rate stability because there are no longer separate currencies, which in their view would bring business great success and the ability to plan well.

What advocates of the scheme ignore is that it could well produce greater instability for the new, adopted currency against the other very important trading currencies of the world. It so happens that we use the dollar much more than we use the euro for our trade and investment flows. We are an oil producer, and oil is priced in dollars. We are a big producer of high tech, and high-tech products are normally traded in dollars. We deal in all sorts of soft commodities and in investment markets, many of which are priced in dollars. On this issue, the Treasury study tells us the self-evident truth: In recent years the euro has been more volatile against the US dollar than the pound…If these trends were typical"— they are, because they have existed for a very long time— then the UK exchange rate against the dollar would be more volatile within EMU than outside. Were we to join this silly scheme, we would therefore be opting for far more volatility in the crucial exchange rate that influences our economic policy: the exchange rate with the dollar.

Keith Vaz

I understand the right hon. Gentleman's argument as to why he is opposed to Britain's joining the euro, but is he in favour of Britain's withdrawing from the European Union?

Mr. Redwood

I believe that we need to negotiate a better deal to improve our relationship with the EU. The UK cannot accept the current draft constitution and I recommend that the Government not only hold a referendum, but do a lot of negotiating first, because they will not have a cat in hell's chance of winning a referendum on that unacceptable proposal. I want us to trade with, and be friends with, our European partners, and I believe that we are much more likely to be friends with them if we get the veto back on several important areas. If a veto is in place, we will agree much more with our partners because we will not feel threatened. Losing so many vetoes—with many more to come—creates far more arguments and rows.

Mr. Bryant

How precisely would the right hon. Gentleman set about the renegotiation? Would he threaten withdrawal from the EU, or some sort of associate membership with it?

Mr. Redwood

Powers with nuclear weapons do not usually go around threatening people with their nuclear weapons. I would tell our partners that the relationship has not worked. We have had many Prime Ministers, and our present one, who is very Europhile, will not join the full common defence system and certainly not the euro—one of the main aspects of the whole integration process. So even a Europhile Prime Minister makes the correct—or forced—political judgment that he and the UK cannot participate in big chunks of the Union. We should tell our partners that the relationship is not working because integration is being pursued far faster than any reasonable British Prime Minister could accept. For our partners' sake and ours, we need a new deal, whereby France and Germany and their satellite countries can accelerate their political union, and we can have a relationship with them that is conducted within the single market and according to which we can work with them on a variety of matters— we might want common environmental policies, for example—but under which we retain a veto so that the House can decide what is right for Britain. It would be possible to negotiate that.

Government Front Benchers are always telling us that we can have enormous influence in Europe. I suggest that they go and use that influence to get something that the UK wants. I can tell them that a massive majority in this country want to be friends with and trade with our partners in Europe, but do not want to be bossed around by bureaucrats from Brussels or see more powers taken away from what used to be a sovereign Parliament.

Keith Vaz

I cannot remember whether the right hon. Gentleman voted in favour of the Maastricht treaty or against it, but it was his Government who signed the Maastricht treaty and gave away the vote in so many areas.

Mr. Redwood

The important point about the Maastricht treaty is that it retained the veto over the currency. That was the guts of the treaty, and I have always been at the forefront of the argument that Conservative and Labour Governments should use that veto. We are conducting a debate today and have the opportunity to keep the British people out of the euro only because we negotiated that important opt-out. Incidentally, we have learned from the Chancellor today that he has not managed to transfer that opt-out to the constitution, and it could then fall because it is part of a treaty that will be replaced. If the Government have any influence at all in Europe, will they please ensure that our vital opt-out from the euro is preserved in the constitution? When they demonstrate their influence, can they at last renegotiate the common agricultural policy so that it is not so offensive to the developing world and does not do so much damage to those living in poverty in Africa?

Mr. Love

Coming back to the renegotiation, what happens if the European states say no? What evidence does the right hon. Gentleman have to suggest that they would contemplate the sort of renegotiation that he proposes? If they do not, will we not be isolated in Europe and then have to make a fundamental choice between whether to be in or out?

Mr. Redwood

We have many opportunities to persuade our partners, and I would prefer to do it through reason, through strength of character and through the political will of the British people expressed in the ballot box at the next general election, when Europe may be a crucial issue. A referendum would strengthen the Government's hand because it would show our European partners that the will of the people is to have the sort of relationship that I am describing—based on agreement, common sense and not feeling threatened. Our partners could be allowed to proceed more quickly. Under the current system, we can always prevent our partners from proceeding as they want. That is one of the available threats, falling well short of the nuclear option. We send them an awful lot of money, and we could consider how much we should send them if they do not wish to co-operate. However, I would not want to start by threatening them. It would be better to proceed by saying that no matter who is the Prime Minister of the United Kingdom, we could never be a full participant in a scheme of political and monetary union, because we wish to be a largely independent, self-governing democracy, and that is not compatible with giving away our currency or the wide array of powers highlighted in the European constitution.

Mr. Laws

Is the right hon. Gentleman saying that a country such as France, as a member of the euro, is not a self-governing democracy?

Mr. Redwood

Yes, in many important respects, France is no longer self-governing in economic matters. If it signs the draft constitution in its present form, it will cease to be—in any meaningful sense—a self-governing,

independent democracy. It will become part of a much bigger, proto-United States of Europe, with a huge democratic deficit, which would have to make rapid strides towards developing a proper democracy before many of us who are democrats would be happy with that side of its arrangements.

The EU has put the cart before the horse. It has not built a strong democratic centre first, and then given it some powers—as happened with this House of Commons. Instead it has been done the other way round, which is why it does not work.

4.36 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

The right hon. Member for Wokingham (Mr. Redwood) discussed the economic implications of this issue, but I preferred the approach—although I do not agree with the conclusions—of the right hon. Member for Kensington and Chelsea (Mr. Portillo), who said that it was a political issue; he is right.

It was sad that we did not hear much European idealism from the Chancellor today. We heard much about trade in groceries, governed by the theories of 18th-century liberal economists. At one point, my right hon. Friend even appeared to pay tribute to the free trade work of the classical economists, but the issue is not about that at all. I do not want to get into a debate on the theory of exchange rates, but they were far more useful for nation states when theories of comparative advantage held sway and current account flows tended to produce equilibriums. Exchange rates have been far less useful to nation states when, as in recent decades, they have been governed by capital flows. That is the big mistake that people make when they imagine that it is a great prize to have control over exchange rates. Capital flows do not give the control that used to be achieved.

On 15 June 1990, I made what was probably one of the first speeches in the House on the merits of joining a single currency, which of course did not then exist. I had the luxury of speaking for 40 minutes to set out a position that I still hold. I shall not rehearse my arguments, because I am sure that all those present, including the Ministers, will have spent last night reading that speech. Let us take those arguments as read.

I have always seen Europe as an arena in which a new kind of politics can emerge. Often, in politics, a natural dynamic arises that is crucial to the development of ideas and actions. In the 21st century, the main motivator in Britain for that development could have been the European Union, with the euro at its core. We need a European Union that links global economies and social and environmental problems to the condition of working people. Proceeding through economic and political collaboration, it should be possible to create a Europe in which wealth can be shared. It is not so much that socialists and environmentalists could join together to hijack the European Union, more that it has a naturally interventionist social and political dynamic. I suspect that that is one of the aspects about which Conservative Members, who come from a different tradition, are worried. That, it seems to me, is where the dialectic in the 21st century will be fought. I do not see that dialectic ending in crisis—rather, it will be a way of dealing with practical problems that go beyond the boundaries of the nation state, and of finding solutions that will therefore have to be either regional or global.

The task for politicians is to bring a sense of idealism and purpose to the opportunism and utilitarianism that might otherwise dominate. We must widen the horizons for minorities and the disadvantaged, and protect the interests of working people.

I am one of those who believe that the nation state is not the fittest body to do that. However, the EU has an important role to play, in both regional and global economics and politics. Inside the EU, the power is bound to lie with those countries that are in the euro. People who do not believe in joining the euro ought to try and negotiate their way out of the EU, or to negotiate which elements they do not want to have any part of while still enjoying a bit of free trade.

I can understand that that approach would be plausible for people who support that sort of basic economic and political theory. However, do we really want to be outside the EU, on the sidelines, isolated and impotent? European unity based on a single European currency could change our way of thinking about Europe, and maybe alter the horizons of the British people. It could even offer a cultural renaissance for this little, backward, fractious island off the coast of north-west Europe. Our culture is becoming increasingly Americanised—on that point, at least, I hope that the right hon. Member for Wokingham would agree—and devalued.

The future does not have to be like the past. It can be better.

Mr. Redwood

What is backward about our country under the glorious Labour Government whom the hon. Gentleman supports?

Mr. Sedgemore

I give lectures and present papers on politics and culture, although I fear that you would rule me out of order if I went down that line, Mr. Deputy Speaker. I will invite the right hon. Gentleman to come and listen when next I give a lecture, or send him a copy of any paper that I publish in future, as I am sure he will want to read it.

It is against that background that I want to say something about my right hon. Friend the Chancellor's five economic tests for the euro. They were introduced for two reasons, and the right hon. Member for Kensington and Chelsea was roughly correct in his description of those reasons. The first reason was to kick the matter into the long grass, as the saying goes, so as to avoid a referendum. The second was to enable the Chancellor to establish five hurdles that would give him a veto on euro entry. I do not know what Opposition Members complain about. Why do they get worked up about a Chancellor who has created five hurdles to give himself a veto, and who intends to see that the veto operates for the foreseeable future?

Mr. Love

Will my hon. Friend give way?

Mr. Sedgemore

No, I will bat on for a moment, if my hon. Friend does not mind.

That view was effectively confirmed when I spoke to Britain's top civil servant about the matter. The conversation took place in the great hall of St. Bartholomew's hospital. The mandarin in question was Sir Andrew Turnbull, the Cabinet Secretary and a former permanent secretary at the Treasury. I clearly remember—because I have been telling all my friends about it ever since, and have even written about it—Sir Andrew telling me, in an entirely relaxed fashion, that the five tests were sufficiently opaque to allow people to come to any conclusion that they wanted to, at any given time. I believe that Britain's top mandarin is right about that. The conversation reinforced my view that the so-called economic tests were of extremely limited value.

In his speech today, the Chancellor said rather a lot about housing. I found it difficult to pick up on his point, but I understood him to say that one of the tests for euro entry was balancing supply and demand in the housing market. I do not know why he did not use that simple phrase, but that is what he seemed to be saying, albeit in a fairly convoluted fashion. Then, he said something that was almost unbelievable—that the Deputy Prime Minister was working out how to balance supply and demand and his ideas would come to fruition in 2016. That is not the short or the medium term; it is the long term, in which, as John Maynard Keynes said, "we are all dead". If that is correct, I will be 82 years old, if I am alive, before we even think of going into the euro. I find that astonishing, and even that presupposes that the Deputy Prime Minister is capable of meeting that sort of target. If 2016 is the target, we are probably talking about 2025, in which case I certainly will be dead.

Not so long ago, we had a strange display of unity from the Prime Minister and the Chancellor of the Exchequer over the five tests and entry into the euro. Clearly, I am on the Prime Minister's side on this one, so it was sad to see how the egomaniacs at the Treasury outwitted the straw men in Downing street. In consequence, we are now in the position where the Prime Minister's vacillation and delay have made it impossible for this Government to join the euro. Trust in his determination to join the euro has evaporated not only in Europe but among the British electorate. All the good will of 1997 has gone. It is now difficult to find people who are in favour of Britain joining the euro. I have seriously to ask, as someone who really wants to join the euro, how our politicians could betray the interests of our country and our destiny in that fashion.

Some people have rightly talked about having a long and sustained public debate. No one intends to do so. Every three or four months, we have a couple of speeches from the Prime Minister and then the subject is shoved back into the long grass and we can forget about it. I cannot see how we can join the euro in this Parliament, or indeed, how we are going to have the moral capital to be able to persuade the public to join it in the next Parliament.

Fellow euro-enthusiasts have suggested to me— hope this will not be misinterpreted—that if we want to enter the euro, the Prime Minister will have to stand down and hand over to someone else. How on earth can we persuade him to do that? Besides, what is the point? His most likely successor will be the Chancellor. He is a wonderful Chancellor, but he is hopeless on the euro. Now hon. Members are beginning to understand the almost impossible task that we face. The Chancellor promised, in that Tom-and-Jerry dance with the Prime Minister, that hereinafter he would argue regularly and publicly for entry into the euro. Of course, he did not mean it. Indeed, only a couple of weeks after he made the pledge, he went to talk to the money-makers in the City of London. Instead of a pro-euro speech we got the usual curmudgeonly stuff about there being no fudge on the five economic tests and no quick fix. He told us in effect that we would not be joining the euro on his watch.

So, we have to get rid of one Prime Minister and then we have to get to work to get rid of his successor. That is not practical politics—it is not a feasible scenario. In terms of practical politics, it means simply this: our Government are never going to take us into the euro and, sad to say, our generation of politicians have let our citizens down.

4.49 pm

Mr. John Wilkinson (Ruislip-Northwood)

What a refreshing contribution that was from the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore). He not only speaks his mind, but he has a mind. It is a joy to hear a Member speak in that way and, in particular, to be so unashamedly critical of the Chancellor.

I do not have the hon. Gentleman's background. My background is in aviation—you and I, Mr. Deputy Speaker, will understand this metaphor—and to me the Chancellor seemed to disappear into the stratosphere spewing out chaff. I knew where he was going, we could plot his course—it was to an environment of higher taxation, more regulation and more interference, preferably by himself. Of course, he was in his element. As usual, he had set the stage himself. We can see the monument in the pile of Hansards and euro-style dossiers under his arm. After all that, we were none the wiser, except for noting that he was only too delighted to make policy for the Deputy Prime Minister and to expand his own empire. The charge of egotism levelled by the hon. Member for Hackney, South and Shoreditch was valid.

At the beginning of his speech, the Chancellor claimed that he had perceived a global perspective in the European Union. He may have seen it in the EU but the analysis in his speech betrayed no such perspective. The Chancellor claims to be an historian, but if we look at the way that the world is constructed it is notable that none of the other free trade areas has followed the EU's model. The North American Free Trade Agreement does not require Mexico or Canada to give up their own currency merely because they have a powerful next-door neighbour. Those countries would not dream of giving up their currency.

In Latin America, the subcontinent that I know better, thank God Chile never dreamt of giving up its peso in favour of the Argentine one, just because Argentina was next door and had a bigger economy. In Asia, none of the Association of South East Asian Nations countries dreams of giving up their currency. Even outside the free trade blocs, Taiwan would not give up its currency in favour of that of the People's Republic of China.

The only instance of a movement to give up a currency, apart from the determination of many Labour supporters to give up the pound in favour of the euro, is in Belarus, where the Belarusians seem to be taking pride in the possibility that they may again adopt the Russian rouble in two years' time. That move is satisfying to Putin and the Russians, as it demonstrates the aggrandisement of the Russian Federation and the extension of its influence abroad.

Mr. Bryant

Does the hon. Gentleman agree that in many periods in the 20th century several Latin American countries gave up their currency, owing to terrible internal economic problems, and took on the dollar? In fact, on several occasions, Argentina gave up not only the peso but also the austral—its created currency—for the dollar.

Mr. Wilkinson

The hon. Gentleman is rather misguided. What happened in Argentina was the monetary dollarisation of its currency; the country locked itself into an uncompetitive situation whereby the peso was overvalued, which was catastrophic for Argentine exports. The case to which the hon. Gentleman should have alluded is, of course, that of Ecuador, where there was a complete implosion of the economy following the election of a clown as president. He raided the state's coffers and the only way to solve the country's economic problems was through full dollarisation.

Mr. Challen

Will the hon. Gentleman give way?

Mr. Wilkinson

No, I shall not give way.

The Chancellor also referred to convergence. Why should we want to converge with an institution as over-regulated, statist, corporatist, over-taxed and bureaucratised as the EU?

We must judge the euro in the context of the proposed European constitution; we cannot assess one without the other. In 1972, I, like you, Mr. Deputy Speaker, voted in favour of our joining the European Community, as it then was, but the Maastricht process was the creation of a single state via economic and monetary union. The proposed Giscardian constitution takes that process further and formalises the EU as a legal entity with all the characteristics of a single state. There would be competences and requirements for member states that no democratic free country such as ours ought, in my judgment, willingly to accept. I do not wish convergence on our nation; I wish the opposite. I wish our country to excel, in the economic field as in the political: a free democratic polity, setting its own laws and its own economic objectives according to the desires of its own electorate, setting an example to our continental neighbours. Taiwan offers such an example to the People's Republic of China, as does Singapore, which only became prosperous when it broke away from the Malaysian Federation, established its own currency and pursued its own economic policy.

The Chancellor also talked about flexibility.

Mr. Love

Will the hon. Gentleman give way?

Mr. Wilkinson

I will not give way.

Flexibility is not obtainable under the EU's current model, which is sclerotic and over-taxed. Although Mr. Prodi may now say that the stability pact is nonsense or stupid, or words to that effect, the fact is that it is at the heart of EMU, as laid out in the Maastricht treaty. The fiscal obligations that are now placed on member states are far too onerous in a time of quasi-deflation. We warned about those factors in debates on Maastricht and, time and again, we were told that we were stupid and that price stability was more important than employment. I disagree, and I suspect that the hundreds of thousands of unemployed people on the continent disagree today.

The fact is that is it is thoroughly dishonest of the Chancellor to embark on a campaign to soften up the British electorate, with taxpayers' money, in advance of a referendum on whether the British people wish to join the euro. We ought to have the referendum first. Then, and only then, if there is a majority in favour of our participating in a single currently, should we go ahead with the softening-up and, of course, the decision-making process in government and the approval of Parliament.

People say that these issues are confusing and complicated. They are not—any more than the Maastricht treaty was complicated. I urge my hon. Friends to remember Matthew chapter 22, verse 21. When the Pharisees sought to trick Our Lord by challenging him on whether he ought to pay tribute to Caesar or to God, Our Lord asked for a denarius to be brought forth—a penny, which was the single currency of the Roman empire at that time. It was the unit in which tribute was paid, inasmuch as we will have to pay tribute to the EU if we are part of EMU. Our Lord asked whose superscription was on the penny. That says it all. The superscription was that of Caesar, and on the euro notes it is that of the euro. On our currency, it is that of our Queen, it is she whom we serve in Parliament and it is to her that our people owe allegiance. That is something that I am not prepared to give away.

4.58 pm

Mr. Chris Bryant (Rhondda)

On that rather religious note, and on the day Her Majesty has signified her assent to the Clergy Discipline Measure 2003—it sounds rather more interesting than today's debate, but that one passed me by—I would say to the hon. Member for Ruislip-Northwood (Mr. Wilkinson) that the biblical allusion that perhaps more readily springs to my mind is that of the moneychangers in the temple. Perhaps Our Lord had more direct intentions of getting rid of moneychangers, and a single European currency might have appealed.

The debate has been an interesting. I am struck, however, by the fact that every hon. Member who has spoken in the debate has been a man. Indeed, every person who has sought to speak in the debate has been a man. There have been only three women in the Chamber at any point during the debate: one was a Parliamentary Private Secretary, one was a Whip, and the other was Madam Deputy Speaker. I sometimes worry about the nature of the debate in the country, because many people are clearly put off. Every opinion poll says that people, particularly women, feel that they do not have enough information on the subject. They want to understand the subject, but until now we have perhaps used language that has not been very appropriate.

It is good to be involved in a debate with three of the great beasts of the Conservative party. We have had quite a display of great bestiality from the right hon. Members for Wokingham (Mr. Redwood) and for Kensington and Chelsea (Mr. Portillo) and from the right hon. and learned Member for Folkestone and Hythe (Mr. Howard).

I want particularly to nail one piece of Tory mendacity today, however, which is that the draft constitutional treaty makes no provision for member states to remain outside the euro. Article 1.14(2) makes specific provisions for those who have adopted the euro, and therefore, by definition, for those who have not adopted the euro. We can therefore see an end to that point.

Mr. Bacon

Is the hon. Gentleman saying that the provisions of protocol 11 of the Maastricht treaty are explicitly reflected in the draft constitution?

Mr. Bryant

Indeed, I think that they are admirably met in the draft constitution.

To move on to the debate in the country about the euro, a sharp divergence seems to exist between those who are ideological on the matter on both sides—those who want to join the euro at any price, and those who refuse to countenance the euro at any price, whatever the burden of proof may be—and those who want to adopt a more rational approach. I think that the Chancellor got it spot-on earlier, when he drew the distinction between this Government, who have sought to prove or to make sure that the economics are right before recommending membership of the euro for the UK, and the Conservative Government, whose Chancellor was torn between two different sets of ideologues—those who ideologically wanted us to join the exchange rate mechanism for wholly political and not economic reasons, and those who were wholly opposed. In the ebb and flow between those two ideologies, the then Chancellor ended up taking us into the ERM at wholly the wrong time, and gave us all the economic problems throughout the early 1990s that we know about.

I believe that we should adopt a wholly rational approach to this matter. We should look at the economics, and we should of course look at the politics. It is not solely an economic issue. Several right hon. and hon. Members, including my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore), have made the point that it is not purely an economic argument, but if we were to go into the euro solely on the basis of politics, when we were not able to prove that the economics were right, we would have wholly undermined our case. I believe that a combination of the two is required.

The potential benefits of joining the euro for the United Kingdom, however, are clearly laid out in the Treasury's documentation, most notably in terms of increased trade. We need only look at page 59 of one of the documents, "EMU and trade", to see that there are many different estimations of what the potential increase in trade to the United Kingdom might be were we to join EMU, as it says half way down page 59: any increase in trade arising from the complete elimination of exchange rate volatility within a given area is not likely to exceed 10 per cent at most…a large body of empirical work shows that the impact on trade of membership of a currency union could be much more substantial. I believe that the Treasury has been sage in outlining that it is difficult to be absolutely categorical about what the likely increase in trade would be. It is worth pointing out, however, that not a single economist has suggested that British trade, were we to join the euro, would decline. In other words, there would be some benefit, and it is uncertain precisely how much that would be.

Even if we take the lowest estimate of all the economists who have done substantial work on this issue, the growth in the economy over the next 20 years would be something in the region of 4.5 per cent. That comes out at £50 billion growth in GDP—£16 per head growth in GDP for everybody in the country—and were we to estimate that, say, 40 per cent. of GDP would go to public services, that would mean an additional £20 billion spent on public services in this country. That is a significant benefit, and it is on the basis of the Treasury's lowest estimate of the likely benefit to UK trade.

Of course, there will be significant benefits in terms of transaction costs. Many businesses are already experiencing the problems of all their competitors in Holland, France, Germany, Spain, Portugal and Greece not having to face the problem of transaction costs, and of their business in the United Kingdom being less competitive than those on the continent as a result. This issue is likely to grow over time. Some still believe that Britain is a pre "in" country and they are therefore maintaining their links with British businesses and still buying from them. However, the moment Britain were to say, "We will not join for the next 10, 15, 20 years or ever," those people would start to think that they could not accept the additional transaction costs and that they should take their business elsewhere.

I also believe that there would also be significant benefits for prices. From work that has been done by the venture capital company 3i, we already know that two thirds of all companies that operate across several eurozone countries now use the same price in all those countries. Whenever one goes to shops on the high street in the UK and also on the high streets of Paris, Rome or Madrid, one often sees a single pricing ticket that has been put there by the manufacturer and that shows the euro price and the British price. The exchange rate between the two is the worst in the world.

The people of the eurozone are now getting considerably cheaper products, and prices are going down to the lowest price across the eurozone. We know that the two most expensive cities in Europe are London and Copenhagen. What do they have in common? They are both outside the euro. The transparency of pricing that would come from our joining the euro would have a significant effect not only on the cost of items such as cars, but on all prices and the cost of living.One sad fact that was established last year is that the cost of the gifts that are likely to be given to children is 19 per cent. higher in the UK than in the eurozone. By joining the euro, we would see a significant improvement in the standard of living, because prices would come down.

There is also a significant danger in delay. Although I accept the Government's rigorous assessment of the five economic tests and of the economics of whether we should join at this point, our economy will suffer if we delay for too long. It is not as though the economy will be like a lemming and fall off a cliff, but there will be a gradual and slow deterioration in our economic strength, viability and competitiveness.

We have already seen that we face problems with the inward investment into this country. Ernst and Young, which is by no means an ardent pro-European company, conducted a survey earlier this year which shows that Britain's share of the inward investment into European countries from 1998 to 2001 fell quite dramatically. In 1998, we took 28 per cent. of inward investment into Europe; in 2000, we took 26 per cent.; and, in 2001, we took only 19 per cent. My worry is that that figure will get worse.

For those hon. Members who think that inward investment is not all that significant, it is worth bearing in mind that 2 million Britons are employed by foreign investors, that 40 per cent. of the UK's gross exports are produced by foreign companies that invest in this country and that, since the euro was founded, 115,000 jobs in the UK have been lost in a variety of industries. In each of those cases, our failure to be in the euro and the long-term prospect of our never joining has been cited as the major problem.

Delay would be a problem for economic reasons, but it would also be a problem for a political reason. The European Union faces dramatic change in every aspect of its workings, from the operation of the Council of Ministers to that of the European Central Bank. The argument of my right hon. Friend the Chancellor on the Lisbon agenda is vital, but it will be difficult for us to win arguments about how the growth and stability pact and the ECB should operate, and about transparency within the ECB, unless we declare our hand and say that we intend to join the euro. As the Treasury Committee pointed out, if we do not move towards euro membership in the near future, we will lose a vital opportunity to affect the European economy that is being built on our doorstep and on which we will be wholly dependent in the coming years.

It would be folly, as ever, for Britain to end up playing catch-up yet again. We have done that so often. We were not part of the common agricultural policy at the start, so we were not able to influence the debate on that and we have spent the past 20 years battling for minor reforms. Although we have won several battles in the past few weeks, there are battles yet to win. If we had been involved from the beginning, we would have ensured either that the CAP did not exist or, if it did exist, that it was in the interest not only of farmers, but of the whole of Europe.

It is likely that Poland, Hungary and the Czech Republic will want to join the euro in the next couple of years. If that happens, we will be playing catch-up with them. The British Prime Minister will have to visit the Polish and Hungarian Prime Ministers to argue about our possible entry rate. That shows a complete failure of political leadership.

There are many nay-sayers—we have heard from them today—who say that there is no reason why we should join the euro and that we would lose out. Some argue that we should not go down the road of joining because there has been dramatic inflation in countries that have joined the euro and prices have been marked up. I spoke to a gentleman in the marketplace in Treorchy two weeks ago who said that it is much more expensive to buy a pint of beer in Spain this year than it was last year, and that that was all because of the euro. I pointed out that the beer was exactly the same price for a Spanish person—it was €3 last year and it is €3 this year—but that it cost him more this year because it costs £2.50 to buy €3 this year while it cost only £2.20 last year. The exchange volatility affected the price of his beer, and that is the same problem as British industry faces as it tries to do its business throughout Europe. He said, "That's a very good point; I think you've persuaded me."

I am keen to allow other hon. Members to speak, so I shall not address the one-interest-rate-fits-all problem raised by the right hon. Member for Kensington and Chelsea in great detail. I do not accept his argument that just because the United Kingdom has a problem determining an interest rate that suits the whole of the country, we would have a greater problem determining a euro interest rate that suited the whole of Europe. Most of the economic assessments that have been done show that there is greater convergence of interest rate needs between the United Kingdom and eurozone countries than among many of the eurozone countries, and, indeed, among different parts of the United Kingdom.

I want to put a final nay-sayer opinion to rest; it is prevalent in several of the trade unions that are opposed to membership of the euro. They believe that joining the euro would mean that we could not invest in public services. That is sheer nonsense. France invests 46 per cent. of its gross domestic product in its public services but the United Kingdom invests only 36.8 per cent. of its GDP in public services. We would be able to afford all the significant—and right—extra investment that we want for our public services if we joined the euro. My worry is that if we do not join, our economy will dwindle and die in the long term, which would mean that we would not be able to invest in our public services because we would not be able to afford it.

5.13 pm

Mr. Michael Fallon (Sevenoaks)

We have had a passionate and vigorous debate, but it will not be decisive because there is no motion before us. Given that the Government have considered the issue for six years, in which time they have conducted two major assessments, it is extraordinary that they are not prepared to commend a substantive motion to the House.

Perhaps that is a reminder that the final decision is political rather than economic. Our currency is not only a trading convenience—if it were, we would probably all use the dollar. The decision is not only economic, because if we were just considering our economic interests we would probably not even consider joining the North American Free Trade Agreement—we would want to join the United States of America. It is a sobering thought that if one measures the gross domestic product per head of G8 countries and the 50 individual states of the United States of America, one realises that not one of the G8 countries would rank in the top 40 of the 50 states. The decision is not simply economic. Currency is a definition of sovereignty. It is an expression of our political and economic culture.

I want to deal not with the political tests that the Chancellor set, but with some of the fallacies that have characterised the debate. I have singled out five euro fallacies, which I shall tackle one by one. The first is the fallacy of convergence. The extraordinary idea that great economies can be locked together like passing spaceships ignores the reality of the very different and international nature of the British economy. No student of the international structure and openness of our economy could ignore the wisdom of Henry Grattan's dictum that the channel forbids union, the ocean forbids separation. Anyone who believes that convergence can suddenly be attained should look hard at page 71 and what follows in the Treasury's document. It sketches out a horrifying prospect of the extent to which taxes might have to rise to dampen UK inflation or public spending might have to be cut to meet certain scenarios. True convergence—permanent convergence—of the kind sought by proponents of euro entry could take many years, as the Government have begun to realise as they flounder around in housing market reform and regional pay reform. That is the fallacy of convergence.

The second fallacy is what I call magical advantage—that there is some benefit to our economy that can be achieved only by entering into one or other of the euro arrangements. We had that argument with the ERM. There is nothing advantageous about any European discipline that we could not achieve in this country anyway. To their credit, the Government have demonstrated that successfully by imposing a new monetary policy framework over the past six years. Every business man would like more certainty or stability—I remind the House of my business interests—but there is nothing in joining the euro that we could not do here anyway.

Thirdly, there is the fallacy—we heard it sketched out by the hon. Member for Rhondda (Mr. Bryant) and many other euro enthusiasts—of the missed bus. We are always being told that we will be too late and that it will be impossible to mould the arrangements in the way that we want unless we join at a particular time. In fact, the history of European co-operation shows that it has always been possible for different states to join in at different times under different arrangements, as France does even today in its membership of NATO. I cannot believe that the fourth greatest economy in the world cannot make its own way in its own time.

The fourth fallacy is that of influence—only by joining the centrally prescribed arrangement can the UK change Europe to its way of thinking. The Government have tested that theory to distraction. It began when they put themselves at the heart of Europe and ended six years later when the Prime Minister left the last European summit a day early because he was fed up with what was being discussed. Britain is already locking itself out of the key axis of Brussels, Berlin and Paris. The Government are just as far away from influencing or restraining the federalist centralising impetus that derives from that axis as they were when they started six years ago.

Of course there are useful reforms in the European Central Bank and the growth and stability pact that a good dose of British realism can help move along, but we should not delude ourselves that Europe will suddenly be converted to following the UK agenda. The reality is otherwise, as chapter follows charter, convention follows treaty. The drag-along rights are all the other way and Britain, if anything, is becoming more continental day by day.

Fifthly and finally, there is the fallacy of the single stand-alone currency. As my right hon. Friends the Members for Kensington and Chelsea (Mr. Portillo) and for Wokingham (Mr. Redwood) have demonstrated far more eloquently than I have, no single currency can operate without a common budget or a uniform tax regime. That has not happened or worked anywhere else in the world, and it certainly cannot work here. We see that that is the case even in the Treasury's own assessment and its prediction that taxes might have to be used to regulate our economy at times when the euro interest rate is inappropriate. Having lived through the ERM debacle and the unnecessarily high interest rates that followed it and did such damage to our business, I never want to live in a country that has an inappropriate interest rate. Our interest rate should be in our interest, and if it is not, the single currency cannot be in our interest either.

Of course, I concede that there may well be some marginal trading advantages, particularly for manufacturing companies and possibly even for British agriculture, in eliminating the exchange rate risk. However, I believe that those advantages are far outweighed by the loss of political and economic sovereignty that would be involved in the decision and that they do not constitute the basis for a decision that would be irrevocable.

I wish that there were a motion in front of the House tonight. If there were, I would certainly oppose it.

5.21 pm

Mr. Colin Challen (Morley and Rothwell)

I have only one test for supporting the European Union—that it should be greater than the sum of its parts, or, as somebody said in another context, that we can achieve more working together than we can alone. In addition, we should never be asked to pool or share our sovereignty if the outcome is no greater than what could be achieved by our acting alone or even bilaterally with other countries.

I am concerned by some of the comments that I have heard this afternoon, especially from the Opposition Benches, as the argument seems to be tending towards the Cubanisation of this island off the north-west coast of Europe. Just as the North American Free Trade Agreement is creating a very large trading area in which Cuba and other small islands could be completely isolated, we could go the same way if we followed the Opposition's line of argument.

There is no doubt that European economic union is an article of faith for the many who share a vision of Europe as a united and strong political body, underpinning what they see must be its renaissance and reinvention as a powerhouse of innovation, productivity and economic growth. I should like to add a few other items to that list, such as care for the environment, our civilised values and the social needs of European Union citizens, as well as respect for democracy. Those are some of the things for which economic and monetary union should provide the foundations, and in the main that principle is worth supporting.

We can clearly see the alternative, which is laissez-faire liberalisation, driving down standards and health and social care for the many, destroying the environment, seeking ever cheaper and nastier solutions to all the problems that it encounters and widening the poverty gap in all the societies in which it finds purchase and in the wider world. A short name for that is NAFTA, which does not have a social and environmental context, whereas the European Union does.

Sadly, economic union as it is currently on offer is failing. In the eurozone, it has failed to produce the right answers—the only kind of answers that we should be seeking in respect of the worldwide economic downturn. If anything, it has probably exacerbated those problems, with the European Central Bank stuck like a rabbit transfixed in the path of deflation. Its monetarist nostrums have been of little use in helping member states to escape from their recessionary tendencies. The growth and stability pact is widely derided and now seems more obeyed in its breach than its observance. For the third year running, Germany is likely to break the 3 per cent. deficit rule, France likewise, and Portugal, which had a good dose of the pact's remedy, is reportedly ready to slide back over the 3 per cent. level. A recent article in the Financial Times claimed: Many analysts have welcomed the acceptance of the Pact's uselessness as a necessary condition for more stimulative policies for Europe. Thus, following the flawed George W. Bush approach to boosting the US economy, the Germans are considering massive tax cuts. It is to be hoped that if they do so, they will not follow the US's regressive tax changes, but will at least seek to be progressive in their approach. However, the other side of the coin is almost certain to be regressive—that is where the cuts in spending will bite.

What is happening in Germany is a direct rebuttal of the oft-repeated argument by EMU enthusiasts that membership of the euro will not invalidate or limit the spending choices that are open to Governments. They say that the rules of the pact limit only borrowing—on the face of it, that may be true—but they do not admit that one policy will have consequences for others. In this case, radical fiscal policies are being implemented because of reduced freedoms and stagnation in others. It is ironic that the Germans are following the United States down that route, because the US's tax-cutting policy has been attacked by the Bank for International Settlements for creating the danger that Government debt could reach unsustainable levels and may be followed by a painful correction. However, at least the Americans have their hands on all the economic levers and may be able to use them all to avoid such a boom-and-bust scenario. They also have more freedom than we do to move more regional assistance around, so deprived areas may have some protection. By comparison, the European Union's regional budgets pale into insignificance, and cannot realistically be seen as sufficiently effective tools to even out the damage of a one-size-fits-all monetary policy in more than a handful of cases.

Enlargement spreads that support even thinner. That is not to oppose enlargement, but merely to recognise the basic truth that unless we are prepared to put a lot more money into the EU, we will not see many more transformations like that of the Irish Republic. It may prove excessively ambitious to have enlargement take place so early in the life of the eurozone. There are already plenty of strains in the European Union, and it would have been better to ensure that enlargement bedded down well before embarking on the single currency. I place more importance on enlargement than on the expansion of the eurozone. It is far better to engage with those further 10 countries and to help their development in all the areas that I have mentioned than to force them swiftly into an as yet unproven experiment, especially since we do not yet feel confident enough to join the single currency despite being in a stronger position.

It would be advisable to consider another impact of enlargement on the eurozone—its impact on democracy. The European Central Bank has already looked to its future enlarged structure, and has concluded that the only way in which it can cope with enlargement is by restricting the participation of national representatives through a system of rotation on its key rate-setting committee. That is highly undemocratic. It is already difficult enough for the ECB to be influenced by events—hence its sloth-like responses to the current downturn—but for it then to deny a vote to member countries would be appalling. That is not pooling sovereignty, but losing sovereignty.

Moreover, the ECB is speculatively seeking to introduce ideas that go way beyond its remit. During a recent Prime Minister's Question Time, I drew the Prime Minister's attention to the suggestion in a recent ECB bulletin that in future countries may not be able to afford to run health services, so Governments should perhaps consider a system of co-payments. That runs absolutely contrary to this Government's policy. However, although we may look on the policy wonks at the ECB with haughty disdain, there is no denying that when such ideas are combined with the tax-cutting agenda in Germany, people may begin to wonder whether two plus two equals four, and to suspect that the ECB is influential in unintended ways.

Another, entirely intended, feature of monetary union is that it should be a major plank in constructing the single market. I suspect that many citizens originally believed that the single market meant simply removing some tariff barriers to shifting a container-load of widgets between one country and another. The more naïve may have fondly imagined that it meant simply reducing some paperwork on cross-border trade. If so, they will have long been disabused of that misconception, which Margaret Thatcher and her band of scheming acolytes nurtured assiduously.

The single market, of which economic union forms such an integral part, means removing every obstacle to free trade. For example, although we currently find the phrase "tax harmonisation" difficult because we want to retain control of our tax policies, it is increasingly obvious that that objective does not appeal to everybody. Companies such as Marks and Spencer that trade in more than one country and want to offset their losses in one country with their profits in another are wont to go to the European Court of Justice to seek the removal of tax regulations that prevent them from shipping their losses around the European Union. I assume that the same principle would apply to a company's profits and that the least onerous tax regime would be sought.

That leads to tax harmonisation not though the front door, with countries agreeing a common rate, but through the back door, where judicial decisions are to taken to remove so-called barriers to the single market. There is an inevitable drift in one direction.The European Court of Justice, through implementing economic union bit by bit, may have more to say on the matter than, for example, the European Parliament. The court is making far-reaching decisions, which cut across the powers of elected representatives.

I recently highlighted the court's decision that Governments may not own golden shares in companies. The decision, especially its effect on Royal Mail, shows that the court is finding an ever wider role in determining the detailed application of what stands in the way of a true single market. In the light of that decision, the Government are reviewing the status of 25 British enterprises.

Some decisions may appear peripheral to the central theme of the debate. However, I highlight the way in which the detail of the grand vision is increasingly determined outside the democratic arena. The further the European Union enters economic and monetary union, the more the European Court of Justice will be employed to interpret its implementation. If Governments can be told to sell strategically important assets, what next? How does the project enhance our democratic rights? Are we meant to admire only the grand vision, and never mind the detail? What will be national Parliaments' ability to pass legislation that may challenge the European Court of Justice's decisions?

I said that economic union had a duty to underpin a wide range of goals. National Parliaments must therefore scrutinise the institutions that implement the single market to ensure that definitions of the public good that are too narrow or run counter to democratic expectations are not used. We must answer for the consequences, just as some elected representatives on the continent are grappling with the European Central Bank's failures.

5.33 pm

Mr. Andrew Tyrie (Chichester)

Today, my right hon. Friend the Member for Chingford and Woodford Green (Mr. Duncan Smith) is making a speech, the central theme of which is that if the European Union is to be relevant to its electorates in the 21st century, it must abandon its old agenda of deeper integration in favour of the construction of an intergovernmental Europe. He is right. Europe's leaders have behaved myopically since the fall of the Berlin wall, and there has been scandalous foot-dragging over enlargement.

I agree with my right hon. Friend that most of the old European integrationist agenda needs to be ditched, along with much of the regulation and most of the EU budget. However, as I shall try to explain, although I strongly oppose joining the euro now, I would be wary of throwing it out with the rest of the integrationist baggage for ever.

Economic and monetary union is part of the global logic for fewer currencies. Currency instability costs countries dear. Since international trade took off in the 19th century, periods of free floating among major countries have been rare and some form of currency arrangement and stabilisation has been common Global financial deregulation will make setting monetary policies increasingly difficult, especially for smaller countries.

Mr. Hopkins

Does the hon. Gentleman agree that having a stable world currency regime with occasional relocations or adjustments is very different from having a single currency?

Mr. Tyrie

Over the last century and a half, we have had a mixture. We have had the gold standard, which was a reference standard currency, and we have had Bretton Woods, which was a fixed and adjustable peg system, to which the hon. Gentleman appears to be alluding. The problem with a system such as Bretton Woods is that once the capital account has been liberalised, very heavy speculative flows can be generated, which make the system very difficult to run. That is why a number of countries in Europe started to discuss something like what we have now. There are many other approaches to currency union, apart from the one that we have. If I have time later, I shall allude to the fact that EMU was perhaps designed not with the best economic interests in mind, but with too many political interests in mind.

I shall complete the point that I was making a moment ago. In the absence of a massive global shock in the 21st century, there will definitely be fewer currencies around the world. There will probably be more countries, however. The number of countries is growing all the time; half a dozen new ones have been created on Europe's doorstep over the past decade. The first thing that many of those countries have done—paradoxically, after they have created a currency—is to find ways of abandoning their monetary independence, because they have needed to find a way of stabilising their exchange rates.

I certainly do not think that Britain should join the single currency at the moment, but before setting out my reasons for that, I should like to address some of the more strongly put arguments that have been adduced for never joining. First among them is the idea that joining a monetary union involves an irrevocable loss of sovereignty, and that it would be the end of Britain as we know it. That is utter nonsense. If a country wants to withdraw from a monetary union, it can. I am sure that, sooner or later, a member of the EMU will withdraw, and there will be no Panzers rolling anywhere to prevent that.

Currency unions come and go. That has been the history of all previous currency unions, and there have been a lot of them. All the same, there is a quasi-constitutional issue at stake, which is whether monetary policy should be determined by an unaccountable and undemocratic body. We have already enabled that by the Bank of England Act 1998. We put in some safeguards, including a section in the Act, to enable us to claw back monetary control—at least in theory. I think that it would be very difficult to exercise that power in practice without triggering a colossal speculative run in the bond markets. Of course, reclaiming one's currency from the European Central Bank would be an altogether bigger job than exercising a power under the Bank of England Act, and I do not underestimate how messy it would be. It would certainly be possible, however.

A second major argument for never joining the euro travels under the guise of "one size fits all", a concept about which we have heard a great deal today. The theory is that at any given time, a single interest rate cannot be right for everyone. Stated in those terms, it is irrefutable. If we can set the optimal interest rate, we will, by definition, achieve an optimal result. If we scratch that argument a little, however, it is nothing like as strong as it looks.

The argument makes a number of assumptions, the first of which is that our monetary authorities will always set the appropriate interest rate. The second is that markets—particularly exchange markets—do not overshoot. Of course, we know that they do. Most importantly of all, the argument assumes that there is a clear and single answer to the question, "What is the right size for the currency area?" Well, there is not. Each economic shock or problem that might come our way might best be handled by a different size of currency area. The optimal size might not coincide with a country's frontiers. No doubt the English regions could, from time to time, have put up a good theoretical case for having their own currency or for calling themselves an optimal currency area. From time to time, an area larger than Britain could have benefited from being in a currency area as well.

Mr. Bacon

Does my hon. Friend agree that one way of dealing with problems in the English regions, for example, is to have fiscal transfers within the country from poor areas to rich areas? By analogy, the same applies within Europe, except that it is necessary to have the political integration and authority at the centre to establish the taxation to make that possible. That is one of the fundamental problems.

Mr. Tyrie

In theory, fiscal transfers can be used to assuage the impact of one-size-fits-all interest rates. In practice, however, what has happened in the United States shows us that only about a quarter of the shock that might hit a particular state ends up being assuaged through federal transfers. Three quarters of the burden is borne by the state or region. Fiscal transfers play a much smaller role in the effective working of currency unions than is commonly supposed.

I was saying a moment ago that the English regions themselves might decide that they wanted their own currency to absorb a particular shock, but the best way for a region or part of a currency area to absorb a shock is to introduce supply-side reform, and to have flexible labour markets. That is what the Chancellor should be calling for when he talks about regional pay initiatives, and that is what Germany needs if it is to absorb the shock of an entry rate that was undoubtedly too high. "One size fits all" is a very good rhetorical line—indeed, it is a bit more than that—but it is a long way short of a knockdown argument against the euro.

There are also some largely bogus arguments. I will not devote too much time to knocking them down unless I am challenged. We hear, for example, the argument that we will inevitably pick up the German economy's pension bill, the argument that the European Central Bank will steal all our reserves, the argument that EMU will inevitably mean the EU's setting our direct tax rates or even our spending levels, and, most extraordinary of all, the argument—we have heard quite a lot about it today—that we will end up importing continental levels of unemployment.

Mr. Wilkinson

I am sure that my hon. Friend has read the proposed European constitution. At its heart is the theme that there should be an approximation of economic policy, that that should be an explicit objective of the Union, and that everything possible should be done to promote it. What Brussels calls unfair tax competition—we regard it as a competitive advantage for the United Kingdom—is not something that the Convention would bless.

Mr. Tyrie

We have a veto, and if the Government do not exercise it they will be colossally at fault. Ministers have said at the Dispatch Box that they will exercise it, and they had better do so. It would be crazy to consider direct tax harmonisation.

Those who argue that employment may be affected in the long run by a single interest rate and "one size fits all" are really making a Keynesian point. They are suggesting that somehow there is a Phillips curve—that there is a trade-off between interest rates, and thereby inflation, and the level of employment. Even this Labour Government have ditched that idea, but amazingly a small chunk of the old left and a small chunk of the new right seem to have alighted on the same territory in order to oppose EMU.

What are the strongest arguments for not joining EMU? There are two, the first structural and the second semi-political.

The structure is faulty in several respects. We will find out just how faulty it is only in the face of a serious economic crisis, but there is plenty of evidence that it is not right at the moment. The stability and growth pact, for instance, has more or less crumbled between our fingers at the first whiff of trouble.

Secondly, it is simply not possible to divorce monetary policy from fiscal policy in the 21st century, as it was in the 20th. We may be creating institutions with completely separate monetary and fiscal policies at the very time when more fiscal and monetary co-ordination is needed. We may have created an independent Bank of England while looking at the rear-view mirror when we should have been looking at the windscreen. I am not predicting deflation, which would of course mean our needing much more fiscal and monetary co-ordination; but it is a risk. The ECB is out on a limb as a model of almost complete monetary independence. Fiscal and monetary policy are made in virtual isolation. The ECB is even more independent than the Bank of England is now. We do not have to join EMU now, so why take the risk? Let us wait and see. Let us watch for a while.

A third structural weakness is that, as the Chancellor has rightly pointed out, the ECB's methods of democratic accountability leave a great deal to be desired. The Treasury Committee may get only half a loaf from the Governor each month or two, but at least it is half a loaf. On current form, Parliament will be lucky to get a crumb from Wim Duisenberg or his successor.

The second big argument for being careful about joining EMU at this time relates to my previous point about politics. Even if there are clear economic gains to be had from a single currency—or from a global currency, for that matter, in the long run—can we take our electorates with us on this issue? Democratic legitimacy does not flow from Brussels, and no amount of institutional reform will divert it there; I do not even want to try. When the next major financial crisis occurs, people will turn not to Brussels for protection and guidance, but to this place.

Let us imagine a serious economic crisis that hits some countries more than others. What would happen? The stability pact would collapse altogether—of course it would, because it is a very weak instrument—and then,one or more countries might get themselves into very serious financial difficulty. A debate would then take place as to whether that country should be bailed out or allowed to go bust. Nobody raises these issues at the moment because we are a long way away from such a situation. The credibility of the treaty's no-bail-out clause has received far too little attention. Virtually no mention of it is made in the 18 studies—some 1,000 pages, with almost nothing on it. Sooner or later, we may be facing just such a crisis, and whatever we do we could end up facing a large bill. If the EU bailed out the country in question, we would have to help write the cheque; if we did not bail it out, huge instability could arise in our bond markets anyway, as the contagion effect in those markets got through to all other members of the eurozone.

It is possible to imagine currency unions that do not have the political and structural flaws that I have just discussed. The fundamental problem with EMU is that it was not designed primarily to maximise the global benefits of free trade and investment. It derives from a grubby political deal. It was a child of the Franco-German alliance—a deal through which the French would get their hands on the Bundesbank; they were sick of being told what to do by Frankfurt—and of Helmut Kohl, who wanted to edge Europe towards an ever-closer Union in which the German problem, particularly after unification, could be subsumed in a wider European framework.

In the short term, the French have won. For now, they have got much of what they want—such as a measure of control over monetary policy, where before they had none—without having to sign up to a superstate. The truth is that they are as intergovernmental as we are, but they know how to do euro-rhetoric much better than us. However, I am not so sure that the French have won in the long run. Charles Powell, Margaret Thatcher's foreign policy adviser, once described the relationship between France and Germany as like that between a stoat and a rabbit. The trouble for France is that the rabbit is gradually turning into a stoat. That is why France wants Britain in EMU: they want two medium-sized stoats to deal with Germany.

I am sure that the French and the EU will be able to ward off a superstate. The pressures for a superstate are overwhelmed by the key players, who want to prevent it and who want an intergovernmental structure. The old federalist German vision, such as it is, is in any case being overtaken in that country by its own domestic worries.

Mr. Andrew Rosindell (Romford)

My hon. Friend is outlining a number of instabilities, uncertainties and vested interests that surround the entire debate on the euro. Does he agree with me that the best thing for our country is for this debate to be ended as soon as possible and for the British people to make a decision, so that we have some certainty about the long-term future?

Mr. Tyrie

No I do not, but explaining why to my hon. Friend would take time out of my speech, so I shall do so later over a cup of tea, if I may. The French may find out that once enlargement beds down, the disproportionate influence that they have exercised over Germany for nearly half a century simply will not be there.

Did the Government get it right in publishing the material that they did and in taking the position that they have? Who really is right: the Chancellor, whose 1,000-page study has kicked the ball into the long grass, or the Prime Minister, who has been looking for the ball ever since he got to No. 10? I think that the Chancellor has it, but he has done the right thing for entirely the wrong reason. One cannot help sensing that he kicked the ball into the long grass precisely because he knows that the Prime Minister wants to get his hands on it. There is hubris, I am afraid, on both sides. The Prime Minister thinks that EMU might give him a bigger place in history, but of course, the Chancellor seems to believe that blocking EMU might give him a bigger place in history.

Fifteen years ago I saw from the inside a first-class row between No. 10 and No. 11. It was about monetary policy and the eurozone, and it literally ended in tears. I do not know who will end up crying, but if the Prime Minister persists in trying to get Britain into the eurozone quickly, I would not bank on a happy ending.

5.50 pm

Dr. Alan Whitehead (Southampton, Test)

During my long sojourn on the Back Benches during this afternoon's debate, my spirits were somewhat lifted by the thoughtful contribution from the hon. Member for Chichester (Mr. Tyrie), which stood in some contrast to the rather miserable fare offered from the Conservative Benches during the rest of the afternoon. Conservative Members have joined in shouting to each other, "Never, never, never"—I cannot do the accent—without any indepth argument in support of the proposition beyond an inference that terrible things will happen. Exactly what, we do not know.

One feature of the Conservative argument has been to dismiss the idea that any serious analysis of this country's interest in economic and monetary union in Europe should be conducted. The issue is presented as a tussle between No. 10 and No. 11, or an entirely bogus exercise. The nadir of that approach came from the right hon. Member for Wokingham (Mr. Redwood), who has given his leader a lovely little present for when he returns from Prague. The right hon. Member for Chingford and Woodford Green (Mr. Duncan Smith) spent the day attempting to convince people that the Conservatives were in favour of Europe and not about to back out. He will enjoy reading the comments of the right hon. Member for Wokingham on his return.

The truth is that if we are serious about assessing the implications, conducting something like the five tests is a good way to proceed. As the hon. Member for Chichester mentioned, one starting point is optimal currency area theory. If we are serious, we should reflect on it; the theory has been around for much longer than the current debates on economic and monetary union. Roughly speaking, the theory states that two countries will benefit from sharing a common currency if the micro-economic benefits of lower transaction costs and exchange rate risk and greater price transparency exceed the macro-economic costs of adjusting to country-specific asymmetric shocks in the absence of the ability to set national interest rates or the possibility for the nominal exchange rate to adjust. That is a pretty exact description of what the five tests have been trying to achieve.

Indeed, that rather sets the seal on the frankly inane riposte of the shadow Chancellor to the Chancellor's statement a few days ago and in today's debate. The shadow Chancellor sought to make fun of various inter-country currency areas—a joke he thought was so good that he repeated it twice. It is perfectly logical to examine experiences in history in order to develop a serious case for deciding how best to proceed. I have already expressed my disappointment at the contributions of Conservative Members this afternoon, and the shadow Chancellor's speech had something of the slight about it.

If we examine the benefits and costs in respect of how that theory has developed, we see that lower transaction costs—perhaps saving between 0.1 and 0.2 per cent. of gross domestic product, or £1 billion a year—are not insignificant. In that context, it is extraordinary that the right hon. Member for Devizes (Mr. Ancram) said today on the BBC that he was in favour of a European Union with a single market, but did not even mention the issue of transaction costs. We can also put on the plus side of the micro-economic benefits that the theory suggests the potential increase in trade, of perhaps 50 per cent. over 30 years, a cut in borrowing costs, on a sustainable basis; and better investment. Against that is the question of the sustainable convergence of the economy and the ability to withstand country-specific asymmetric shocks without exchange rate protection, which are the macroeconomic consequences.

The decision must, however, be based on other factors. Some critics of the theory have suggested that its limitations include the fact that in reality most decisions are made under changing circumstances. That is true, and circumstances are changing fast at present. It is significant that we have had a mea culpa—I welcome that—from the Conservative party on the previous Government's entry into the exchange rate mechanism. We have also heard several claims from Conservatives that they were right all along, but the record demonstrates that they have been systematically wrong about how things would develop and how the changing circumstances would affect the question of whether to join EMU.

Conservative Members initially said that the single currency could not be achieved, when the idea was suggested. After the framework had been agreed, they said that no detailed agreement could be reached and the member states would not be able to agree a final modus operandi to make it happen. When a detailed agreement was reached, the Conservatives said, "Well, it may have been agreed in theory, but it will not happen in reality. The currencies will not be converted in time, the cashpoints will run out of money, it will descend into chaos and the economies simply won't work." Of course, from the first day, the economy worked well, the currencies were converted and the new currency worked fine. Then the Conservatives said, "Ah yes, but as soon as there are any strains, it will all collapse, like the ERM." But it has not collapsed under the first strains. Then they said, "Well, it hasn't collapsed, but the rate will sink inexorably against the dollar, and that will be the end of the single currency." Of course, not only has the euro not collapsed against the dollar: it has improved against the dollar in recent months.

The Bank of England has said that the technical success of the single currency was greater than anyone could have anticipated. That is the reality, and that is an important factor in consideration of the tests. We now have a single currency in the single market of which we are part. Even the Opposition now say they are happy for us to belong to that single market, and that is a central plank of their new pro-European stance, as described in Prague. We are in a single market with a single currency that operates in the majority of states that make up that single market, and that has implications for our decision on whether to join. The likely outcome is that foreign investment in the UK will start to slip. How long will our trading partners continue to believe that we will join eventually and therefore give us the benefit of the doubt? The evidence is that doubt is beginning to creep in. Some hon. Members have cited a survey by Ernst and Young. More recent figures released by Invest UK and the OECD show a 7 per cent. fall in projects between 2001–02 and 2002–03 and a 60 per cent. fall in foreign direct investment in 2002. Figures from EUROSTAT show that foreign investment in Britain from outside the EU fell by no less than 73 per cent. in 2002. We are therefore seeing the real effect of the ground moving under our feet. In my view, it is essential that we should have the tests, and that they should be applied properly and rigorously, but additional factors must be taken into account.