Economic and Monetary Union

HC Deb 09 June 2003 vol 406 cc407-36 3.31 pm

The Chancellor of the Exchequer (Mr. Gordon Brown)

With permission, Mr. Speaker, I should like to make a statement. For many decades, Governments formed from parties on both sides of the House have made the case for Britain's engagement in the European Union. It is right that at every point we show that every decision that we make on Europe is made in the British national economic interest.

Today, therefore, I will set out the following: first, the economic context for the euro decision; secondly, the case in principle, in the national economic interest, for membership of the euro; thirdly, the detailed conclusions of our assessment; and finally, the policy changes that our country must now make.

Let me start with the economic context. Since 1997, every economic decision of this Government has been designed to build and then entrench stability in order to achieve for Britain high and stable levels of employment and growth. That commitment to put stability first led us to adopt a new fiscal and monetary regime, to make the Bank of England independent, and to cut debt substantially, and it has given us low inflation, low interest rates and low unemployment. That commitment to long-term stability, growth and employment is the foundation of our decisions today.

Central to the pursuit of stability, growth and employment by Governments of both parties has been our membership of the European Union. Our assessment shows that Britain's trade with the European Union has grown from just over 40 per cent. of our total trade when we joined to 55 per cent. today.

Membership of the European Union is central to stability, growth and employment for another reason. Just as Britain benefits from being part of Europe, so, too, Britain stands to benefit from an enlarged Europe that is more integrated in the global economy—globalisation increasingly moving Europe away from an exclusive trade bloc to a Europe that must look outwards, not least to the USA, and a Europe that, to meet global competition, must liberalise and reform.

Therefore, in addition to our decisions that I will announce on the euro today, we will also make proposals that, by reducing tariffs, regulatory and competition barriers to European Union-USA trade, will fulfil our objective of a fully effective transatlantic economic partnership between Europe and the USA. Following the joint declaration of all EU Finance Ministers placing, for the first time, labour market flexibility and structural economic reform at the heart of the new economic policy guidelines for Europe, the Government will later this week publish our further proposals for economic reform in Europe.

I have no doubt that an enlarged Europe pursuing, like Britain, economic reform, and, like Britain, modernising fiscal and monetary policies, will be conducive to British stability, growth and employment. I believe that, around that, a modern pro-European consensus can be built in Britain.

It is in this context—with stability the foundation and our membership of the European Union central to our economy—that we must decide whether joining the euro now is in the national economic interest. It is a decision of far-reaching consequence. Indeed—because it is irreversible—it is one of the most momentous economic decisions our country has to take, and it is one that must contribute to the attainment of stability, growth and employment.

When, in 1997, I set out the Government's position, I listed the potential benefits for Britain of a successful single currency in transparency of costs, currency stability and in trade and long-term interest rates. The detailed work set out in the background papers published this morning allows us to set out these benefits with even greater precision.

The first benefit is lower transaction costs for business and consumers. We estimate these as worth around 0.1 to 0.2 per cent. of GDP—£1 billion a year—with the gains greater for small companies and the gains permanent. The second is diminished exchange rate volatility, with gains for both large and small companies especially in the manufacturing sector with, again, potentially the greatest gains for the smallest companies. The third benefit is greater cross-border trade and thus the potential for increased commerce and growth.

Our assessment makes it clear that, with the advent of the single currency, trade within the euro area has already expanded and that, with Britain inside the euro, British trade could increase substantially with the euro area—perhaps to the extent of 50 per cent. over 30 years.

I come next to interest rates. For 30 or 40 years, continental Europe has been able to combine stability with consistently lower interest rates than in Britain, to the benefit of both business and, of course, homeowners. Indeed, over the last 30 years, interest rates in Britain have had to be, on average, 3 per cent. higher than in Germany.

With Britain in the euro, business could benefit through greater access to a more integrated European capital market. And if, on the basis of sustained and durable convergence, we could lock in stability for the long term, business could see a cut in the cost of borrowing on a sustainable basis with a long-term boost to cross-border investment flows and to foreign direct investment in the UK.

So I can today confirm the principled case: our view that membership in a successful single currency would be of benefit to the British people as well as to Europe is strengthened by the results of our assessment.

While we argue the case in principle for joining, there are those who would rule out joining the euro for ever as a matter of dogma. They would rule out joining the euro even if it was in the best economic interests of our country. And that cannot be right for the future of Britain.

The Government's view is that, if the economic case is clear and unambiguous, then the constitutional issue, while a factor in the decision, should not be a bar to entry. And my conclusion is that if, on the basis of the five economic tests, membership of the euro is shown as good for sustaining British jobs, British business and British future prosperity, then it is economically right and in the national interest to join.

Indeed, our assessment on trade and output is that, inside the euro, UK national income could grow by a quarter of a percent a year, boosting, subject to convergence, potential output and national wealth. That is worth up to £3 billion extra a year, delivering higher living standards and lower prices for consumers and households.

Just as there are risks of joining before a clear and unambiguous case has been demonstrated, so too there are risks in delaying these potential benefits once sustainable and durable convergence has been achieved. So from the assessment we have done, I have also no doubt about, first, the potential benefits to Britain and the British people of joining; secondly, the potential risks of delaying the benefits of joining; and, thirdly, the advantages within the euro area of greater influence over policy towards the euro and thus Europe.

Provided the crucial tests are met concerning the British economy, it is our intention to join. If on the basis of the tests we can make a clear and unambiguous case, this Government's view is that it is in the national interest to recommend to the British people to vote yes in a referendum to join the single currency. In short, if the economics are right for Britain, we should join.

So let me turn to the conditions that have to be met if we are to secure the potential benefits of the euro. We must be sure that there is cyclical and structural convergence between Britain and the euro area and be sure that there is flexibility to withstand stresses and strains. Indeed the more flexibility in the economy, the easier it is to tackle problems that arise from the divergence of business cycles.

Sustainable convergence means that the British economy can live on a permanent basis with euro area interest rates, able to advance our objectives of high and stable levels of growth and employment and sustained and stable funding of our schools, hospitals and other public services. The flexibility required is, as I said in 1997, sufficient flexibility to be able to adjust our economy quickly to any shocks that arise so that we do not put at risk these objectives.

So it is my duty to demonstrate in detail whether we have secured for Britain convergence, which is compatibility with our European partners that is sustainable—the first test—sufficient flexibility, the second test, and whether we can affirm conclusively and confidently to the British people that the potential benefits for investment, financial services and employment, growth and trade—the other three tests—are indeed realised.

The five tests are our stability guarantee: to meet them would ensure that we would not put at risk our economy or our public services. With the tests met, Britain in the euro can enjoy the benefits that I have outlined: greater trade, investment and employment. If we entered with the tests not met, at the wrong exchange rate, then just as with the exchange rate mechanism, we could see unemployment rise, public service investment fall and growth stall. The discipline of the five tests is to ensure that there will be no repeat of the experience when Britain joined at the wrong rate and at the wrong time, without either convergence or flexibility, and the potential benefits could not be realised.

In our 1997 assessment, we took the view that a period of stability was required to ensure that business cycles and structures converged sustainably and durably. We concluded that UK interest rates were higher than in the euro area and remained higher because of structural differences, particularly in the housing market.

The new assessment that we publish today also shows that because of a lack of convergence with the euro area, joining in 1999—as some in this House advocated—would not have secured the stability inside the single currency that we have enjoyed outside it.

Cutting interest rates substantially to join the euro below the level that would have been right for Britain, and joining at an exchange rate that was too high for the long term, could have locked us into another cycle of stop/go economics. But I can tell the House that the consistent polices that we have pursued since 1997—an independent bank, new fiscal rules, lower debt, housing market reform and greater flexibility in labour, capital and product markets, including an independent competition commission—have contributed to meeting, quite comfortably, the Maastricht criteria for nominal convergence in a better position than some members were in 1997 and even are now, and are also leading toward the sustainable convergence and greater flexibility required by the five tests.

We can report that since 1997 there has been significant progress in achieving cyclical convergence. The short-term interest rate divergence between Britain and the euro area has fallen from 4 percentage points to 1.75 percentage points. Long-term interest rates have virtually converged at around 4 per cent. Over the last six years, there has been a weaker euro and a stronger pound. And the inflation rate has been on average 1.1 per cent. below the eurozone average for the last three years.

Over recent months, the euro exchange rate has strengthened against sterling and the dollar, and we are today publishing an independent study examining the sustainable level for sterling reflecting economic fundamentals.

The issue at the present time, however, is being sure that there is structural convergence that is sustainable for the long term; and we also have to be sure that, if real interest rates or business cycles diverge, Britain will have the necessary flexibility to sustain growth and employment.

We do not know whether or how shocks will occur, but there are risks for the UK, and let me give the House two specific examples—one from housing, one of inflation generally—of how in the new circumstances we would need to respond.

Take the challenge of an inflation rise particular to Britain from, say, the housing market. For a 1 per cent. rise in British inflation, the British interest rate would, other things being equal, tend to rise by 1.5 per cent. The real interest rate—that is, the interest rate after taking account of inflation—would therefore rise by 0.5 per cent. as we brought inflation under control and back to its target.

Inside EMU, Britain's economy would be one fifth of the euro area economy. A 1 per cent. inflation rise specific to the UK which would today lead to a British interest rate rise of around 1.5 per cent. would lead to a euro area interest rate rise of about a third of a per cent.—a real interest rate fall for the UK of around two thirds of a percent. As a result, real interest rates for Britain which ought to increase could actually decline. And it is for this reason that, inside the euro, Governments need other forms of flexibility. If inside the euro Britain's inflation rose faster than that of the euro area, Britain would suffer a loss of competitiveness. So to restore lost competitiveness, a period of higher inflation than the euro area would have to be followed by a period of inflation lower than the rest of the euro area.

These two examples show why it is important to learn the lessons not just from the experience of the euro area but also from how states and regions adjust flexibly in the United States monetary union. In other words, we must be sure of sustainable convergence and that if business cycles do diverge or shocks arise, Britain has the price and wage flexibility—and the fiscal flexibility—to ensure stability.

Our assessment finds that obstacles to convergence do not lie in the provision of small business finance or large company finance, where, in fact, overall on business finance, the UK economy is found to be not more interest-rate sensitive than others.

The issue in housing, where we are more interest-rate sensitive, is not the attainment of identical market structures for housing with other countries—all countries have unique features of their market—but the fact that to deliver stability in Britain, the combination of house price inflation and volatility, and the impact of both on consumption, has generally led to interest rates higher than in other countries.

Indeed, most stop/go problems that Britain has suffered in the last 50 years under Governments of all parties have been led or influenced by the housing market. The volatility of the housing market and its potential for higher inflation is a problem for stability that we are determined to do more to address to produce greater stability and reduce the risks of inflation irrespective of the decision on the euro.

Because Britain has experienced difficulty in balancing supply and demand in housing, we propose to build on and extend the reforms already announced in respect of planning and supply. That includes simpler planning guidance, the speeding up of decisions, reserve powers to call in applications and the case for binding local plans—and, having asked Kate Barker to conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK, we will bring forward further proposals in the pre-Budget report and Budget on how we can produce greater stability in the British housing market. And because Britain has had a different system of housing finance—just 7 per cent. of mortgages in the UK are at long-term fixed rates—we are learning the lessons from other countries where, for example in America, they securitise long-term fixed rate mortgages, and an independent review is now examining the structure of mortgage finance including the case for, and how we can help the development of, the long-term fixed rate mortgage market in the UK.

So further housing reforms will be put in place in the coming year—reforms right in any event for the British economy—that will help to ensure that by having a reduced propensity to house price inflation, which is in everyone's interest, stability can be further entrenched.

It is also right to consider a further change that is right in itself and will foster convergence—that is, a new target for domestic inflation. The advantage of the current indicator of inflation—RPIX—is that it is known, well understood and has served us well. The advantage, however, of the internationally recognised index of consumer prices is that it is a better measure, it will improve the quality of our target, it is in line with best international practice, and it is used by every other G7 nation except Japan and by all our neighbours in Europe.

I turn from issues of convergence to issues of flexibility. To strike the right balance between fairness and flexibility in the pursuit of full employment, we have introduced a minimum wage and a tax credit system, which guarantees a national minimum income for single persons and couples over 25 and for families. So no one should fear that when they move areas or move jobs, they will lose those national income guarantees.

With this national framework for fairness in place, it makes sense to recognise that a more considered approach to local and regional conditions in pay offers the best modern route to full employment in our country. In addition, in the south-east, where professionals have benefited from London weighting and other arrangements, many low-paid workers have missed out. So in future we plan to publish data on regional prices and inflation; remits for pay review bodies and for the public sector, including the civil service, will, within their nationally determined frameworks, include a stronger local and regional dimension; and the reform of housing benefit will remove disincentives to work or to move. These measures—which will be put in place over the coming year—can make Britain, with already the lowest unemployment of all the main industrialised countries and 1.5 million more jobs since 1997, the most employment friendly country in the world.

The other form of flexibility is fiscal flexibility. Because of our history of stop/go, prudence dictates a cautious approach. Some countries have proposed new domestic procedures for faster and more effective adjustment of their fiscal policies inside the euro area. In the principles that we have applied to British monetary policy—to ensure stability and flexibility—we have insisted on clear symmetrical rules, well understood procedures, and enhanced transparency. Central to that is the open letter system, which is a means for dealing with potential pressures. To promote stability and flexibility in future, the same principles should be applied to any new arrangements for British fiscal policy inside EMU.

To ensure stability inside the euro area we will consult on the case for an open letter system on fiscal policy and a new and additional fiscal rule. We propose a regular fiscal stability report published on a pre-announced timetable to Parliament, ensuring that fiscal decisions are fully transparent and accountable and that they are made by Parliament; an assessment in the report of the gap between actual and trend output in the economy; and when actual output materially diverges from its trend, an open letter sent by the Treasury to Parliament setting out the Government's response. In that way, inside EMU, the principles underlying our monetary policy regime, which has been successful in delivering stability, would be mirrored in a similar fiscal policy regime.

Let me give the conclusions on each of the five tests, the full details of which, the benefits and the challenges, are set out in the Treasury's assessment published this afternoon and in the 18 documents published this morning, which cover in an open and full way all aspects of British economic policy, all of which are now available for open public debate.

With regard to convergence, on long-term interest rates we have made significant progress in lowering inflation expectations and establishing a platform of stability. There are grounds too for optimism about increasing compatibility of business cycles and market structures. Today, interest rates, which were 4 per cent. above those of the euro area, are 1.7 per cent. higher. Structural differences remain that could pose a risk to stability unless addressed, which they are by the proposals I will put forward today.

On flexibility, the assessment shows that considerable progress has been made to reform markets in the UK and euro area. Flexibility—right in itself for every economy—has improved in the British and European economies. The more flexibility in the economy, the easier it is to deal with problems when cycles diverge, and the better it is for our competitiveness. Yet as the persistence of volatility in inflation rates within the euro area demonstrates, we cannot be certain that there is as yet sufficient flexibility to deal with the potential stresses. It is for these reasons that we are making structural reforms that will bring increased flexibility to our economy.

On investment, the assessment shows that inside the euro there will be new opportunities for investment, particularly for foreign direct investment. At all times, by continuing to maintain macroeconomic stability and encouraging flexibility, the Government will continue to ensure that the UK retains our position as a magnet for foreign direct investment. We have taken particular account of the views, indeed the qualitative evidence, from Japanese, and other Asian, American and European investors, many of whom have said that membership would be beneficial and is important to them. There can be confidence that on the basis of sustainable and durable convergence, a successfully operating EMU and UK membership of it on the right terms would boost investment and foreign direct investment over the longer term.

On financial services, the assessment shows that in or out of the euro, UK financial services, wholesale and retail, are and will remain competitive. Future integration of financial markets inside the euro could promote the kind of diversity, flexibility and risk diversification seen in the capital markets of the United States of America, therefore making it easier for a more flexible Britain to win business throughout the euro area.

On employment, stability and growth, the fifth test, the potential benefits in increased trade and competition, and then in higher long-term levels of output and employment, are significant. Without sustainable convergence and sufficient flexibility, we would not realise the potential benefits for stability, jobs and investment.

It is because we will never put stability at risk that the tests we set were, and indeed are, high ones: namely, to show a clear and unambiguous case for British membership. So we conclude that the financial services test is met. We have still to meet the two tests of sustainable convergence and flexibility. Subject to the achievement of sustainable convergence and sufficient flexibility, the tests for investment and employment would be met.

So I am today announcing major reforms, right for the British economy: reforms that will be implemented over the next year and will greatly assist the process of achieving sustainable and durable convergence and the flexibility necessary for Britain to succeed sustainably within the euro zone and realise the potential for trade and investment.

Under Bank of England legislation, it is my duty to set the inflation target. I have written to the Governor of the Bank of England today stating that, subject to confirmation at the time of the pre-Budget report, I intend to change the inflation target at that time. The inflation target for Britain will be set on the consumer prices definition. I can confirm that pensions and benefits and index-linked gilts will be calculated on exactly the same basis as now. We have said throughout that we do not believe it necessary or right to rejoin the exchange rate mechanism.

I am asking by the time of the pre-Budget report for interim reports on the step changes we need in the planning and supply of housing and on the market for long-term fixed rate mortgages. I am today publishing for consultation our proposals for a new system within EMU of fiscal reporting to Parliament.

As part of radical reforms at a national, regional and local level, I propose that by next year almost all pay remits for public sector bodies will include a regional or local pay dimension. We will publish six-monthly reports on trends and progress in flexibility in labour, product and capital markets.

At this particularly uncertain time for the world economy—with adjustments only recently in the exchange rate—and when we do not know the future path of growth and inflation rates in Britain and Europe, it is right, prior to the point of transition and in the light of progress, to consider both the exchange rate and the balance of monetary and fiscal policy.

We will also continue to pursue our objective of a stability and growth pact that takes into account the economic cycle, debt sustainability and public investment, and we will seek reform of the European Central Bank. It is important that we resolve the uncertainties over the European Convention, and we will continue to pursue successfully our objective of tax competition and reject tax harmonisation in Europe. We will report back on progress in all these areas of reform in the Budget next year.

It is this resolve to implement far-reaching reforms in our economy that is the practical and best expression of our intent. It is a reform agenda that is right for Britain's economic interest and right to help meet the five tests: a reform agenda on which I believe there is a realistic prospect of making significant progress over the next year.

The Government believe that the implementation of these reforms, right in themselves, would help towards sustainable and durable convergence and flexibility, so that we can, within the euro area, achieve high and stable levels of growth and employment and deliver our objectives for public services.

We will report on progress in the Budget next year. We can then consider the extent of progress and determine whether on the basis of it, we make a further Treasury assessment of the five tests, which, if positive next year, would allow us at that time to put the issue before the British people in a referendum.

I can announce the publication of the draft referendum Bill this autumn; the introduction of further paving legislation for additional departmental allocations for preparations, and the publication today of the full and complete version of the British national changeover plan, which sets out the possible timetable for a changeover, its management, and the impact on consumers, business, financial services, the voluntary sector and the public sector.

I propose Scottish, Welsh and Northern Irish preparation committees, which will examine local, regional and sectoral preparations. I am also asking representatives from consumer organisations, local authorities, the voluntary sector and the regional development agencies to join the standing committee on euro preparations.

I will publish a detailed report on euro preparations in government, the public sector and across the economy this autumn. I will shortly issue guidance to local authorities on preparation. The publication of the changeover plan will lead to a period of information and discussion in each region and nation of the country, Including in each constituency.

So, in this statement, we strengthen our commitment to and support for the principle of joining the euro and show that the gains to the country and to our businesses are greater than anticipated.

We have shown how financial services would benefit from membership of the euro. We have shown how, with sustainable convergence and flexibility, investment can benefit from membership of the euro. We have shown how, with convergence and flexibility, employment can benefit from membership of the euro. We have also shown the critical importance of achieving sustainable and durable convergence, and I have announced major reforms to be implemented in the next year.

At all times, we have and will put stability and the national economic interest first. We have set out the real benefits to Britain of membership of the single currency; we have shown that, with the achievement of sustainable convergence and flexibility, all five tests could and can be met. We have also laid down the concrete and practical steps that we will follow.

Those radical steps set out a new direction for reform and the clear path ahead for Britain. With a programme of economic reform benefiting Britain, I believe that a modern, long-term and deep-seated pro-European consensus in Britain about Britain's role in Europe and Europe's role in the world can and will be built in our country.

I commend the statement to the House.

Mr. Michael Howard (Folkestone and Hythe)

I draw attention to my declaration in the Register of Members' Interests, and acknowledge that the 1,738 pages of background papers—not the Chancellor's statement or assessment—were made available at 9 am this morning. The Chancellor generously gave us six and a half hours to read them, in sharp contrast to the 480 hours that he gave his Cabinet colleagues. I am not sure whether that reflects the Chancellor's contempt for the intelligence of his Cabinet colleagues or his admiration for the intellectual abilities of the rest of the House.

The time of indecision is over."—[Official Report, 27 October 1997; Vol. 299, c. 588.] The Chancellor said that about the euro six years ago. He said that it was time to "establish clear national purpose", to show "economic leadership" and to "make … hard choices". He said that divisions led to "indecision" and "inconsistent and unclear" policy. How refreshing it must be for the British people, after hearing those words, to see the Chancellor and his colleagues producing such decisiveness, clarity and leadership.

To be fair, Ministers are speaking with one voice today. They are united in common purpose, with only one objective: to paper over the cracks that have riven them in the past few weeks. Is it not clear from any objective reading of the evidence, including the 18 volumes that we have been given today, that joining the euro would damage our prosperity, destroy jobs and lead to an irreversible—the Chancellor's word—loss of control over our economic policy? That is certainly our view; it is also the view of the clear majority of the people of this country.

Today's statement is not the result of any real assessment of Britain's national economic interest. It is a result of the frantic efforts by the Chancellor and the Prime Minister to cover up their differences. After all, that is why the five tests were thought up in the first place. We all know that they were written on the back of an envelope in the back of a taxi to fix the damage done by the Chancellor's spin doctor in the back of the Red Lion pub. It was a four-pint briefing, which led to a five-point plan that has just given us a six-year runaround. And what a runaround it has been.

Ministers could not even agree on what question they had to answer. The Leader of the House—that rogue element in the Cabinet—said that the five tests were to determine when we should join the euro; three days later, the Foreign Secretary said that they were to determine whether Britain should join. The Secretary of State for Scotland has said that there should be a sixth test. The Chancellor said that the economic assessment would be decisive. The Prime Minister's spokesman said that an assessment was not a decision. Indeed, the Prime Minister was so determined that the Treasury view would not prevail that he thought the unthinkable: he suddenly saw the merits of Cabinet decision making. There is a first time for everything.

The Prime Minister will pay any price to do down his Chancellor. There they sit, united in rivalry, each determined to frustrate the other, to scheme against the other and to do the other down. So there is no clarity in policy and no consistency of purpose, and each of them is the loser. The Chancellor is losing, the Prime Minister is losing and, much more importantly, the British people are losing. The Government's ability to deliver has broken down on health, on education and now on the euro. Blair goes one way, Brown goes the other way, and bang goes the third way, lost in conflict, compromise and confusion. No wonder so little ever gets done under this Government. That is the price that we are paying for the fault line at the heart of this Government.

What a humiliation today's announcement is for the Chancellor of the Exchequer. Was it not he who said that there was no reason to keep the question open or to look at it again in this Parliament, that there was no need for another assessment and that we certainly should not have a referendum in this Parliament? He told us again today, as he did in 1997, that the results of the tests would have to be clear and unambiguous before we could join, but the permanent secretary to the Treasury has told us that the economics can never be clear and unambiguous, and the incoming Governor of the Bank of England has said that we would need 200 or 300 years of data to find out whether business cycles have converged.

What would have happened if the 18 volumes of data that we have been given today had shown that the tests had indeed been passed? How on earth are we to know whether a similar assessment next year, or in five or 10 years' time, would reach a similar conclusion? If the data change in one direction, how can anyone know that they will not change back again? If, at any particular moment in time, our growth rate, inflation rate or interest rates are at similar levels to those in the eurozone, how do we know whether that convergence is permanent? Might it not be because our economies were like ships that pass in the night, coming together for a moment before moving off in different directions?

The Chancellor predicted that trade with the European Union could grow by as much as 50 per cent. over 30 years. Will he confirm that his own Department's reports conclude that improved levels of trade are totally dependent on sustained convergence, which has not been achieved? Will he confirm that other economists have challenged his conclusion in the academic studies published today by the Treasury? Will he confirm that the author of one report that supports his assertion points out:

any extrapolation of my results to EMU may be inappropriate since most currency union observations are for countries unlike those inside euroland"? Will he confirm that that expert's assumptions, on which the Chancellor relies, are based on studies of currency unions involving Angola and Mozambique, Burkina Faso and Chad, Vatican City and San Marino, and Tuvalu and Tonga? The Prime Minister is obviously surprised by that. It is one of the reports that he had not got around to reading.

In 1997, the Chancellor said that the most critical test was convergence, and today he was forced to admit that it had been failed. One of the Chancellor's documents is succinctly entitled "Analysis of European and UK business cycles and shocks". Its conclusion in paragraph 9.2 is clear: the UK cycle is more strongly correlated with that in the United States than with those in Europe. Indeed, not a single UK region is strongly associated with the European cycle. Astonishingly, there was no mention of that in the Chancellor's statement.

That is just one example of the gloss that the Chancellor has tried to put—the gloss that he has been obliged to put—on the studies that he has published today. He has given us his solutions, which are the solutions that we always get from this Government when the evidence does not suit their case: change the evidence, fiddle the evidence, distort the evidence. If the mortgage market in this country differs from that in the eurozone, change it, whether or not that is in the interests of British home buyers. If the inflation index in this country differs from that in the eurozone, change it, whether or not that is in the interests of British monetary policy. Perhaps the Chancellor will tell us what independent advice he has taken about the abandonment of the retail prices index. He has a Retail Prices Index Advisory Committee; perhaps he will tell us whether he took its advice before abandoning the RPI.

How would either of those changes affect the conclusions of the Treasury's assessment, "Housing, consumption and EMU"? Paragraph 8.10, on page 86, states: deviations in UK interest rates from their appropriate level could lead to particularly large swings in the housing market … and hence in the wider economy in the UK". It is true that the document on fiscal stabilisation suggests, in paragraphs 6.89 and 6.92, that fluctuations in the housing market might be damped, and sets out how they might be damped by an increase in stamp duty or by charging capital gains tax on residential property. Perhaps the Chancellor will tell us whether that is what he had in mind. Is he suggesting that the choice for this country, in the euro, would be between even higher taxes and even more boom and bust? [Interruption.] Yes—more boom and bust.

The Chancellor has been forced to admit that the flexibility test has been failed as well. Indeed, according to his own assessment of the flexibility test, inflation volatility is very likely to increase inside the euro. Perhaps he will tell us whether that is why he is going to such lengths to make our economy less flexible. Perhaps he will also tell us what grounds he has for thinking that the test is more likely to be met by the time of next year's Budget, or in a year's time.

What of investment? Only last week Ernst and Young said that Britain's share of inward investment projects for the EU rose last year. It described euro membership as a bit of a damp squib as far as inward investors into Europe are concerned". It is not surprising that the Chancellor has been forced to admit that that test too has been failed; but what grounds has he for supposing that it is likely to be passed by the time of the next Budget, or next year?

What of financial services in the City? Far from the City having been hit by Britain keeping the pound, the Bank of England says: The evidence indicates that, since the launch of the euro, the City has maintained its market share. Why? As the Bank of England says: The City is a global financial centre, and not just a European centre. That conclusion is reinforced by paragraph 7.8 of the Treasury study, "The location of financial activity and the euro." Why, in the face of all the evidence, does the Chancellor insist that this test has been passed? Will he reassess it this time next year, or are the test results allowed to change only in one direction?

It is no surprise that the final test on jobs has been failed. At the moment, we can choose to have the same interest rates as the eurozone when that suits our needs. Why on earth should we be forced to do so when it does not? Why on earth should we accept the straitjacket of a one-size-fits-all interest rate when it is not the right rate for our economy? Competitiveness would be lost, growth would be hampered, jobs would be put at risk, and that will be just as true at the time of the next Budget and in a year's time as it is today.

Other countries have discovered these truths the hard way. As a former director of the Bundesbank said yesterday: The present Eurozone structure is devastating for Germany. And I am convinced the UK would be crazy to join—you should stay out for as long as I can foresee. Is that not what we found with membership of the exchange rate mechanism? The Conservative party has learned its lesson from the experience of fixed exchange rates, but the Government have not, despite the fact that the present Chancellor of the Exchequer was calling for early entry to the ERM almost a year before we joined.

Today, the national economic interest took a back seat. As the Government dither, uncertainty is maximised. What does the Chancellor say to business leaders, such as the director general of the CBI, who said: The last thing we want is an annual reassessment. David Frost, the director general of the British Chambers of Commerce, said: once the Euro verdict is announced, business would expect a period of stability on this matter for at least three years. Ruth Lea of the Institute of Directors said: We need to know where we stand. This is the Government who in opposition promised not to be "de-railed by … internal bickering" on Europe. This is the Government whose election manifesto in 1997 pledged that Labour would make a hard-headed assessment of Britain's economic interests rather than be "riven by faction". This is the Government who promised to "prepare and decide", but now it is not prepare and decide, it is not wait and see, it is just hope and pray. Today, they have not put off a referendum because they are against joining the euro, or because they think it will damage the national economic interest. They have not put off a referendum out of conviction. The only reason we are not having a referendum now is that they know they cannot win it.

Today's statement comes from a divided Government—a Government on the run. This whole exercise has been an exercise in deceit: the deceit that they had the national economic interest at heart; the deceit that they wanted an objective assessment of what this country needs; the deceit that they were united. It is time for an end to the deceit. It is time for an end to the duplicity. This is not the end of the beginning for this Government. It is the beginning of the end. The sooner it ends the better it will be for the national economic interest and for the British people.

Mr. Brown

When, by his own admission this afternoon, the shadow Chancellor was in the ERM Cabinet and was the Secretary of State for Employment who lost 1 million jobs, how can he come to the House to lecture us about economic stability and putting the national economic interest first? The Conservatives joined the ERM with no assessment of investment, no assessment of jobs, no assessment of financial services and no assessment of home owners. Interest rates were at 15 per cent., inflation was at 10 per cent., 1 million jobs were lost, 1 million were in negative equity. Set that against our record, which is the lowest interest rates for 40 years, the lowest inflation for 30 years and economic stability, which they failed to achieve.

When the shadow Chancellor tries to give us his balanced account of the studies that were produced this morning, he fails to mention the benefits in transaction costs. He fails to mention that 55 per cent. of our trade is with the European Union. He fails to mention that we have 3 million jobs dependent on the European Union. He fails to mention the estimates of an increase in output as a result of membership of the euro. He fails to give a balanced account of the national economic interest. The reason for that is that he is against the euro on grounds of dogma, even if it is in the national economic interest to join. Even if it were good for jobs, he would refuse to join. Even if it were good for investment, he would refuse to join. [Interruption.] Oh, yes. He said in 1997 that he was against the euro in principle. When he was asked for his dispassionate judgment using the non-prejudiced mind of a lawyer, he said that it would be crazy to join. Far from being open to argument and debate, far from being prepared to look at the studies dispassionately, all he wishes to show is that, to his prejudiced mind, we should not join the euro at any time, ever.

I heard the shadow Chancellor on television yesterday morning. He called for a referendum on the euro immediately. When he was asked whether he would abide by the result of the euro referendum, he could not give a straight answer, so we know what the agenda of the Conservatives is. When the Leader of the Opposition was on the Frost programme yesterday morning and was asked whether he would be staying in the European Union, he could not give a straight answer either. They do not want just to stay out of the euro. They want to get out of the European Union. It is time that we fought the prejudices and the myths of the anti-Europeans on the Conservative Benches and built a pro-European consensus in this country.

On housing and taxation, I do not think that we on the Labour Benches can take any lectures from the party that put up VAT on repairs from 8 to 17.5 per cent. Nor can we take a lecture from the party that put VAT at 17.5 per cent. on house extensions. Nor can we take a lecture about the use of a regulator from the party that when in government used a stamp duty regulator in the early 1990s. If the shadow Chancellor does not believe that volatility and instability in the housing market is not a cause for concern that should be dealt with, again, he is failing the national economic interest.

The shadow Chancellor asked whether all the five tests would be reassessed next year. As I said in my statement, if he had heard me properly, the answer is yes, if the review in the Budget says that we should have an assessment. It will be an assessment of all the five tests. As regards the figures for investment, the shadow Chancellor, again to make his point that he is against the euro in principle, quotes selectively from one set of figures about projects, when the published figures for last year show that there are issues to be dealt with in terms of inward investment, and that is what we are doing.

What the shadow Chancellor and the whole of the Conservative party have revealed by their failure to take these issues seriously today is that, when it comes to the question of stability and instability, we are the Government of stability, they have no policy to avoid instability. When it comes to a positive attitude to Europe, we are the party of Europe, they have shown themselves to be wholly against Europe. When it comes to issues of the future, we are the party of the future, they are the party of the past. They spent 18 years in government. They will spend 18 years now in opposition.

Matthew Taylor (Truro and St. Austell)

It was nice to see the Chancellor return to form in responding to the Conservatives, and it was noticeable how confident he was in doing that. He was rather less confident in presenting his own policies, perhaps because there may have been a return to form there; saying no but dressing it up as a warm "almost yes", as if we were poised at any moment to join.

Two assessments, three national changeover plans, 18 studies, 2,000 pages, endless spin; but still we have indecision. The Chancellor said that it was prepare and decide. Actually, for the Prime Minister, it was wait and see, and the Prime Minister still has to wait and see. I take it that the Chancellor remains the guardian of the tests. Yet he says that he is in favour of the principle of joining, and today's studies show why.

Joining the euro means more growth and better-paid jobs, on every range of assumptions. It could save an average mortgage payer £15,000 over a 25-year mortgage—£50 a month. It would mean lower prices and the end of rip-off Britain: televisions, computers, mobile phones, perfumes, shampoos, toothpaste and even chips are cheaper in France and Germany. That is why three out of the five tests clearly have been passed—jobs, investment and the City.

As for convergence and flexibility, there are now three positions on the euro. "Never join" is the Conservatives' position, which would make the economic assessments irrelevant. There would be a long response, but no point to it; the assessment would not matter, as we would know the Conservative's answer: "We will not join the euro ever, no matter the economic consequences for this country."

The second option is "wait and see", the old Conservative position and the policy of the last Conservative Prime Minister. In truth, it has been the position of the Chancellor over the last six long years, too. However, that left the Government taking no action for six long years while our share of investment fell, manufacturing collapsed and rip-off Britain continued to rip off Britons.

The third position is, "Yes, in principle". That means taking the action necessary to steer the economy towards joining. The last of those has long been the Liberal Democrat position, and, it seems, the Prime Minister's position: to take the action necessary to meet the conditions for joining the euro to give us lower prices, higher growth and the increased jobs and incomes that the euro can bring. We want the Chancellor to take the action to get us there. That is the real test for the Chancellor; it is time for his indecision to be over.

Having heard all that the Chancellor had to say today, I must ask whether, if he wants the convergence and flexibility that he talks about, he will take the action to get it. Today, the Chancellor's warm words suggest that he will, and we welcome that. But staying out of the euro for so long has already had a cost, in higher prices, lower investment and lower exports. He set out some proposals for action today, but he did the same six years ago and nothing happened. He dressed up no as almost yes and nothing happened.

Will he clarify the timetable for proposing legislation for a referendum? Will the draft lead to a Bill before the next assessment, or before the Budget? When will we debate and legislate to allow the British people to decide at last? Will he set a target date for a referendum if progress is made by the next Budget? If his assessment at the Budget is to have another assessment—as he announced today—how long will it take for the assessment after the assessment after the assessment? There could be four assessments.

Will he enter negotiations with our EU partners on terms of entry—particularly the key issue of the exchange rate—before a final assessment and a referendum for the British people, or will they be asked to vote in the dark? Will he take action to end the boom and bust in housing beyond today's announcements, which are no more than a rehash of announcements made in the Budget? Such action is needed to help people in this country afford a home, whether or not we join the euro.

Just as in 1997, in truth the decision today was no, even if the words were warm. For six years, support in principle from the Chancellor has been all talk and no trousers. The time for indecision is over; warm words are not enough. On the question of whether the Chancellor is going to make progress on the decision—on whether this is really about action—the jury remains out. No wonder that throughout the Chancellor's statement, the Prime Minister looked so gloomy; he clearly has no better idea today than the rest of us about whether the British people will get the chance of a referendum on the euro this year, next year, the year after that, or at any date in the future. Beg my pardon—we do know one thing: the date. It is simply the year that is now missing from the Chancellor's assessment.

Mr. Brown

I am glad that the shadow Chancellor from Truro read more of the background documents than did the shadow Chancellor from Folkestone, although I do not believe that we referred in them to the cost of chips across Europe.

I agree with the hon. Gentleman that housing reforms are absolutely necessary, whatever decisions are made about the euro, and I hope that his party and others will support us in the reforms that we are introducing.

The draft Bill on the referendum will be published in the autumn, and there will be paving legislation on expenditures that are to be incurred by Departments for euro compatibility systems.

On the hon. Gentleman's general point about wishing to join immediately, rather than waiting for the review and the further assessments of the tests, just as the Conservatives never want to join, there has never been a time in the past six years when the Liberals have not wanted to join, whatever the exchange rate, whatever the interest rate and whatever else is happening. Indeed, the leader of the Liberal party, who is missing this afternoon, said that we should have joined on the first date in 1999. If members of his party look at our assessment, they will see that the divergence in interest rates and in the exchange rate from a sustainable level was such that it would not have been right to join in 1999; indeed, it would have ignited the very stop-go problems that we have tried to get away from, and which occurred under the previous Government.

I hope that the hon. Gentleman will now accept that the five tests and our examination of them are a serious effort to look at all the economic challenges, as well as the benefits ahead. I hope that he will join us in attempting to address the challenges over the next year, and that when we introduce legislation to deal with the problems he will support us.

Mr. James Plaskitt (Warwick and Leamington)

My right hon. Friend will know that in the Treasury Select Committee report that was published in April we highlighted several criticisms of the workings of the monetary policy arrangements in the European Central Bank. I was interested to see that six of those criticisms were reiterated in the policy framework document that was published this morning, so how will my right hon. Friend seek to secure maximum UK influence on ECB reform while we are outside the euro, and does he see convergence on monetary policy management as a precondition of eventual entry?

Mr. Brown

The Government are taking on board and examining very carefully all the points that my hon. Friend makes about the Treasury Committee's report. I applaud the work that he and other members of the Committee have done in identifying the challenges, as well as the benefits, of membership of the euro.

I define sustainable convergence as the ability to converge with the European area—in other words, that we can permanently live with euro interest rates at the same time as being able to advance our objectives of high and stable levels of employment and growth and the funding of our public services. That is why we are looking at putting in place reforms to the housing market, but we are not trying to seek structures in the British housing market that are identical to those in other countries' housing markets. What we are trying to do is to lessen the inflationary pressures that arise from the housing market. So, on convergence, I believe that we can make significant progress during the next period.

We will make proposals to the House on how we can create the flexible economy that is necessary to adjust to whatever stresses and shocks anise, so that we can get what I know my hon. Friend wants to emphasise: the potential benefits of the euro in terms of trade, in investment in the financial services industry as a whole, and, of course, in growth and output.

Mr. Kenneth Clarke (Rushcliffe)

I welcome the Chancellor's reassurance that he still fully shares my views on the single currency—that it is in Britain's interest to join as soon as the economic conditions are right. I did not advocate joining over the past five years because I believed that sterling was, until recently, overvalued.

The Chancellor urges us to wait. Am I right that his principal concern over convergence is the housing market, and can he assure us that his studies will not take too long, given that we have the same proportion of owner-occupiers in this country as the average across Europe? We are not the only country with flexible interest rates, and the mortgage market will respond when financial services markets are made universal across the European Union, so we should not wait too long on that account.

As to flexibility, I have already welcomed what the Chancellor said about the end of national pay bargaining in the public sector, but I trust that he is not going to make us wait until he has achieved that, in the teeth of resistance from his own Back Benchers, before taking a final decision. Surely we are already one of the most flexible economies in the European Union, and, unless he is going to erode our tax and regulatory advantages further than he already has, we should be able to withstand shocks of the sort that he described.

How near are we to satisfying the tests? Surely we must be very near. I look forward to Budget day next year, when he and I might at last begin to campaign together in support of the views that we hold in common, but that requires some courage of conviction and some exercise of judgment on his part.

Mr. Brown

I am grateful to the former Chancellor for what he said about the benefits of studies of the housing market and issues of flexibility. I believe that he is a late convert to the importance of the five tests. I welcome the fact that we can reach common ground on the problems that need to be dealt with if we are to secure sustainable convergence and flexibility.

On the housing market, the percentage of owner-occupation is not the issue. As the right hon. and learned Gentleman knows from his own experience—and, let us be honest, as the Conservative party knows to its detriment, from what happened in the late 1980s—the real problem is the inflationary pressures that arise, partly because of the wealth effect of housing and partly because of short-term interest rates, in the housing market and their effect on the whole economy. Those are the matters that we will examine.

I said in my statement that there was a realistic prospect of making significant progress during the next year. When we introduce proposals in October, we will deal with the inflationary problems that arise—and have arisen under all Governments—in the housing market. I would correct the right hon. and learned Gentleman: I talked about a national framework in pay bargaining. As London weighting and other issues relating to London and the south-east have shown recently, there must be a degree of flexibility in view of the different inflationary pressures, particularly from housing, in different parts of the country. I believe that there is currently a willingness to examine those issues, particularly when we have a framework for fairness in the economy built around the tax credits. We can establish common ground and make significant progress over the next year.

Mr. John Hume (Foyle)

Does the Chancellor agree that the logic of a single market is a single currency? What is the meaning of a single market without a single currency? Let us imagine the largest single market in the world competing with us—the United States' single market—and what would happen if one of the states had a different currency. The logic of a single currency for a single market is powerful. Does the Chancellor agree that, since entering the euro, Germany's trade within Europe has increased by 18 per cent., whereas this country's has decreased by 6 per cent.?

Northern Ireland is the one region in the United Kingdom that has a border relationship with the eurozone, and people who live there know the difference that it is making to trade on our side of the border. About 88,000 employees in Northern Ireland are dependent on membership of the European Union, and 155,000 workers in Wales are dependent on it. I am quoting an in-depth study carried out by independent people. All the arguments show that we must join the euro as soon as possible for the benefit of all sections of our people.

Mr. Brown

I am glad to see my hon. Friend back in the House; I hope that his health is recovering. It is always a privilege to listen to him. He raises an important question about Northern Ireland's cross-border issues, which arise because the Republic of Ireland is in the eurozone. We have discussed those issues and tried to deal with the some of the problems, as well as the opportunities, that arise from that. He is right also to draw attention to the jobs that are dependent on our membership of the European Union; one of the failings of the Conservative party is not to recognise that 3 million jobs depend on the trade—imports and exports—that we have with the European Union.

On the individual issues that my hon. Friend raises, we learn from the experience of the United States as both a single market and a single currency. The US has much mobility between the states—more so than in the European Union—but the same issues of flexibility arise, and we will have to deal with them.

I agree with my hon. Friend about the importance of the single market and the benefits and principle of the single currency. The assessment that we have done shows that there are risks as well as benefits, and it is the responsibility of Government to continue to consider how we can solve the structural and cyclical problems. We will report back to the House in the Budget next year.

Sir Michael Spicer (West Worcestershire)

Last week, the Prime Minister told me that he did not know what the right rate of exchange was for entry to the euro, because he did not know what the circumstances would be. Since entry into the euro would be for ever, the circumstances surely do not matter. The Chancellor said today that he knows what the wrong rate is: what is the right rate?

Mr. Brown

The hon. Gentleman can see the studies that we have produced today. One of them is a study by Professor Wren-Lewis, in which he gave his view of what the equilibrium exchange rate is at this point in time. It is the Government's view, as I said in my statement—to which I refer the hon. Gentleman—that it is right to consider the issue just before the point of transition. Governments outside a fixed exchange rate system have never predicted or announced the exchange rates that they favour. The issue will be dealt with just before the point of transition and it would be wholly irresponsible to announce an exchange rate today. Indeed, the hon. Gentleman would not expect me to do so, although I sometimes wonder why he asks all these questions about the detail of joining the single currency, given that he has made it clear that he is against it in principle.

Denzil Davies (Llanelli)

As a former Treasury Minister in a Labour Government who, after a rigorous analysis, decided that it was not in the national economic interest to join the ERM, may I congratulate my right hon. Friend on his rigorous assessment of the five tests and the sensible conclusion that he has reached? However, he will remember that in addition to the five tests there was also a question about whether the euro was a successful currency. Given the problems of most of the euro area since the Maastricht treaty was signed, is it his view that the euro is a successful currency?

Mr. Brown

The euro has been a successful currency. It was introduced successfully when everybody said that it would not work. They said that it would not happen in 1999 and they said that it would not, technically, work, and it did. They then said that the euro was too weak against the dollar, but that position has reversed in the past few months. We now have a far stronger euro against a weaker dollar. The question for us, however, is not the value of the currency at a particular point in time, but whether we have the convergence and flexibility necessary to gain all the benefits of trade and investment that would come from being part of the single currency area. I agree with my right hon. Friend that the rigour of the assessment is a sign of whether we take the issues seriously. I am disappointed that the Conservative party seems to have no interest in taking seriously the rigorous assessment that we have made.

Mr. Alex Salmond (Banff and Buchan)

Do not the 18 documents, 1,700 pages and tens of thousands of words amount to the longest "don't know" in political history? May I caution the Chancellor against the mental gymnastics he was performing in his statement? I have seen the House cheer him and I have seen it howl at him, but I have never seen it laugh at him, as it did for parts of his statement this afternoon.

As far as the lack of analysis of the benefits to the economy of Scotland, Wales, the English regions and Northern Ireland is concerned, with the clear pointers to the benefits of output and employment through joining the euro, is there not a fair case for saying that the economies of those areas of the country are being sacrificed on the altar of problems in the south-east England property market?

Finally, will the Chancellor tell us why he has suddenly made reducing pay for nurses, firefighters and policemen in Scotland, Wales and the English regions a condition of entering the euro? Does he really think that that will mobilise support for the single currency, or has he not bothered to tell the Prime Minister?

Mr. Brown

I thought that the Scottish National party spent all its time arguing for special Scottish rates and not for national and UK rates for wages. The idea that the hon. Gentleman now supports British rates and that there should be no separate Scottish rates seems to be a reverse for the Scottish National party from its previous position. The hon. Gentleman has spent most of his career arguing for a Scottish pound and for breaking away from the British pound, yet now he seems to be arguing that he wants the euro introduced and he has forgotten his policy for a Scottish pound. The Scottish National party has adopted a remarkable set of contradictory positions.

On labour market flexibility, there is a national framework of fairness that the hon. Gentleman and other Members should support. Not only is the minimum wage agreed at a United Kingdom level, irrespective of the costs of living in different parts of the United Kingdom, but the tax credit system means that people who move between jobs, especially those in low-paid jobs, have additional funds whether they are single, part of a couple, or part of a family. The hon. Gentleman should support that framework of fairness for the whole of the United Kingdom.

Mr. Stephen Byers (Tyneside, North)

As someone who has discussed the issue with the Chancellor on several occasions over recent years, I applaud the positive tone that he struck this afternoon. Does he accept that although it is clearly right to delay a referendum until it is in the national economic interest to join a single currency, that does not prevent the Government from consistently setting out the benefits of joining the single currency in terms of more jobs, increased trade and higher investment? Given that that is the case, will the Government begin to go out and campaign, and convince the British people of the benefits of joining the single currency? Will they move away from the present position of prepare and decide to a more positive one of campaign and convince, and will the Chancellor, alongside the Prime Minister, lead that campaign?

Mr. Brown

When my right hon. Friend was Secretary of State for Trade and Industry, as well as when he was Chief Secretary to the Treasury, he was active in promoting the case both for Britain in Europe and for a single currency. He agrees with me that the economic conditions must be right—that has always been his position—and that the five tests must be observed. He would agree with me that the rigour that we have brought to the analysis of the five tests is not only important but necessary if we are to get the right decision.

I agree that it must be shown to the British people that there are benefits to joining in terms of trade, investment, the importance to the financial services and, as a result, jobs. I also agree that, in the campaigns that he mentioned, we should tell the British people that the benefits are real and available to them, and that we have to solve the problems of structural convergence and flexibility to make the benefits possible. We will consider all those difficult issues over the course of the next year and report back to the House.

Mr. David Ruffley (Bury St. Edmunds)

In the interests of clearing up uncertainty in the markets, will the Chancellor tell us in which month next year he will re-run his assessment of the five economic tests?

Mr. Brown

If the hon. Gentleman had followed my statement, he would know that we will report back and review the situation in the Budget. If the review shows that there is progress, we will decide whether to have a further Treasury assessment of the five tests. That will be contingent on the announcements that I make in the Budget next year.

Angela Eagle (Wallasey)

In the evidence that the Treasury Select Committee took on the issue, we came across a significant worry, particularly among trade unions, that the stability and growth pact would put at risk the historic and very welcome investment that we are currently experiencing in our public sector. Will the Chancellor reassure them on that point?

Mr. Brown

The Government's position throughout has been that we would like to see a stability and growth pact that takes account of the three issues, and I believe that the previous Government took the same view. We have to take account of the level of debt. Countries with low levels of debt, such as ours, ought to be able to borrow more, particularly in difficult circumstances or in making public investment. Investment should be taken into account, and it should be realised that there is a distinction between investment for the future and current consumption. The economic cycle should be taken into account as well. In my view, other countries are gradually recognising that those issues are necessary for a successful stability and growth pact. There is considerable debate in the European Union, and I believe that, intellectually, we are winning that debate: the stability and growth pact must take into account those conditions. Of course, that is one of the issues on which I said I would report back to the House next year.

Mr. John Maples (Stratford-on-Avon)

If we were in the euro and found ourselves with a manifestly inappropriate interest rate, as do, for example, Germany and Ireland at the moment—in one case, it is too high, preventing economic recovery, and, in the other it is too low, failing to control inflation—what action would be available to the Chancellor to offset that? If he says, "Adjustments to fiscal policy", will he explain exactly how they affect monetary conditions, except in the medium to long term?

Mr. Brown

On convergence, the aim is to be able to live comfortably with the euro area interest rate—that is what sustainable convergence is about, and it is what we have looked at and are looking at in the five tests, and we have reported to the House on that—but we do not believe at this stage that that is the position. We believe, however, that reforms are important, first, in the flexibility of the labour market, so that there is sufficient flexibility to respond if business cycles start to diverge. We believe that, as a back-stop, the monetary policy regime that we introduced, which is based on the open letter system, should be introduced for fiscal policy, so that we have a modern form of fiscal policy that can back up the stability and growth pact in the monetary union. At the end of the day, four flexibilities are available to the Government: exchange rates, interest rates, fiscal policy and flexibility in wages and prices markets. We are looking to greater flexibility in wages and prices and to greater flexibility in fiscal policy.

David Hamilton (Midlothian)

Does the Chancellor understand that, when he talks about breaking national pay bargaining, he is also talking about breaking national wages and conditions for the lowest-paid people in this country? I for one would oppose such a move. Does he understand that national pay bargaining is there for the weakest in our country and, indeed, that it is protected? The danger of moving down such a road would be that the minimum wage would become the maximum wage in many areas, especially in deprived areas?

Mr. Brown

I must correct my hon. Friend: he has been misled by Opposition Members. In my statement, I referred to the maintenance of the national bargaining framework, not to its abolition, but I said that, within the national bargaining framework, we now have to recognise, for example, conditions in London and the south-east, where, because of high inflation or high house prices, the cost of living for workers must be recognised in the wage bargaining formulae that are agreed. That has happened in many cases for professional workers, but not for low-paid workers, and it is very difficult for low-paid workers in some parts of London and the south-east to afford the housing that they need. I believe that recognising such problems is a progressive cause that he and other hon. Friends should support.

It is true to say that the minimum wage itself is not the only component of the national framework for fairness that I am talking about. The people who benefit most from our national framework for fairness are, for example, single parents who are on relatively low hourly rates, but whose incomes are boosted very considerably by the operation of the tax credit system. The working families tax credit, which went to 1.3 million people, was a framework for fairness that allowed single parents and others returning to work, part-time or full-time, virtually to double the amount of earnings that they would have had under the national minimum wage.

In April, thanks to the decisions of my right hon. Friend the Secretary of State for Work and Pensions, single people and couples are now also able to benefit from tax credits. So people who move between jobs or between regions can rely on there being in Britain—one of the few countries where this happens—a national framework for fairness, where the tax credits system ensures that the tax system will pay them money, rather than take money from them, if their wages are below a certain level.

I hope that my hon. Friend will agree that the national framework for pay bargaining is in place, that there is a need to accept that local and regional differences have to be recognised and that the national framework for fairness guarantees that, wherever people are—in the north-east, Yorkshire, Scotland, Wales or Northern Ireland—they are treated equally in the provision of tax credits, which is a fair way to tackle poverty in our country and to remunerate properly people who otherwise, under previous Governments, would have been pushed into poverty.

Mr. David Trimble (Upper Bann)

I welcome the Chancellor's reference to seeking reform of the European Central Bank. I would appreciate it if he could give us a little more detail about what reforms he is seeking and what are the prospects for success. I welcome that because it points to where the attention should have been: not so much on the UK economy, which is performing well, but on the euroland economy, which is not. Many of the problems in euroland stern from the ECB and the stability and growth pact, and from the way in which the European Union operates. Is not that where change is needed? Until that change occurs, it does not matter so much what is done in terms of the adjustments that the Chancellor has mentioned today.

I also welcome the reference to globalisation and promoting or removing barriers to EU and US trade. Does not that point to the future? The institutions that we have at the moment in Europe were designed in the 1950s, and may have been appropriate for the Rhineland economies then, but are not appropriate for the 21st century. The future lies in economic globalisation, which is what we should pursue vigorously.

Mr. Brown

I am grateful to the right hon. Gentleman. First, he raised the issue of Europe's future. The European Union was the first trading block and is now one of many trading blocks. It is recognising, however, that the only way to succeed in the global economy is to have far more outward-looking trading relationships, particularly with America. Whereas American investment in Europe has been very high since 1945, a feature of many of the last 10 years was that European investment in American companies was higher than American investment in Europe. An interrelationship therefore exists between the two economies on which we should build, and the proposals we have made today would add to the strong relationships that should exist between the two continents.

On the right hon. Gentleman's point about the European Central Bank, I believe that there is a possibility of reform. In the last few weeks, he may have seen proposals that, while not removing the old two-pillars approach to monetary policy, would lead to a greater emphasis on the inflation target, and suggesting that the inflation target should be 2 per cent. on the harmonised index of consumer prices target, or less. That is a change from the position of the European Central Bank at the beginning, and we look forward to further progress on these issues. That is one of the issues on which I hope to report back next year.

Mr. Patrick Hall (Bedford)

Most people will welcome my right hon. Friend's commitment to a balanced and fair public debate, which is long overdue on these matters. Does he therefore share my concern at the increasingly hysterical and scaremongering tone of many of those in the anti-euro camp? Does he accept that the longer that we delay the referendum, the more that hysteria will seek to fill the void, which makes it all the more important that the Government should promote that public debate, treating the British people with respect as adults who are capable of making clear and rational decisions in the interests of Britain?

Mr. Brown

I am grateful to my hon. Friend for his comments, as I am for his work in promoting the car industry and manufacturing in his constituency and right across his region. He is absolutely right that the public debate is necessary and should be informed by the documentation that is being published today, which is most comprehensive on British economic policy and covers a range of issues from exchange rates to fiscal policy and monetary policy. Therefore, a degree of information is now available to the public that has not been available in the past. Equally, he would agree about the importance of convincing the British people that the five tests that we have set must be met. I was looking earlier at a speech that he made in the House saying that we must be clear that the five tests are met, which the measures that I have proposed today would help us achieve.

Mr. Ian Taylor (Esher and Walton)

The Chancellor's enthusiasm for the euro today was positively infectious, and I congratulate him on the change: no longer are the five tests mere obstacles but benchmarks against which he can make a judgment that we should join as soon as possible. Therefore, would he accept that to those Conservative Members who believe that it is in the national interest to join the euro his reforms are welcome and positive? What evaluation has he made of the costs of our not yet having made the decision? He may be delaying it for only a year, but those costs are tangible in terms of investment, uncertainty and often on the effect of influencing changes in the European Central Bank and the stability and growth pact, which will not await our joining.

Mr. Brown

As the hon. Gentleman knows, I have always been positive about the principle of the single currency, and I have said that the five tests that we set down are an important guarantee of stability. We have looked at what might have happened if we had joined in 1999. I repeat what I said to the Liberal Democrats a few minutes ago: we looked at both the costs of not joining and the benefits of joining, and we found that to have joined in 1999 at the interest and exchange rates that existed would not have been in the national economic interest and would have led to a recurrence of the stop-go problems that we had in the past.

I hope that the hon. Gentleman will agree that, although it is right and necessary for this debate to take place in the country and we can join together in supporting the principle of the single currency, it is also important that we are absolutely sure that convergence and flexibility are at the right levels so that the five tests can be met.

Mr. Martin O'Neill (Ochil)

While I welcome my right hon. Friend's commitment to the achievement of the convergence and flexibility objectives, will he share with us how he proposes to secure changes in the growth and stability pact and the European Central Bank? The example that he gave about the change in the ECB is both fairly modest and one in which we cannot participate because we are not part of the eurozone. Is that not a major obstacle to our securing the changes in the ECB that he achieved with such style and élan in the Bank of England?

Mr. Brown

I am grateful to my hon. Friend. His work as Chairman of the Select Committee on Trade and Industry has led him to look at the issues in some detail, and I appreciate what he is saying. As for the European Central Bank, I would not underestimate the importance of what is being considered. From a monetary policy that has essentially been about the examination of monetary aggregates, we now have a far greater interest than ever before in inflation targeting, and it is a debate that will continue.

As for the stability and growth pact, just as on the issue of tax harmonisation where we are now winning the intellectual argument that tax competition and not tax harmonisation is the way forward, I believe that we are winning the argument about debt, investment, the economic cycle and the stability and growth pact. People now see that some of the elements that we have been putting forward should be built into the pact. The lessons from British monetary and fiscal policy are lessons that we will continue to put forward, and I believe that there is a great deal of interest in Europe in the British experience.

Sir Peter Tapsell (Louth and Horncastle)

As the Chancellor is so fond of raising the bogey of the exchange rate mechanism, may I remind him that, in total contrast to him and to the Labour Front-Bench spokesmen of the day, I argued strongly against joining the exchange rate mechanism? After we had joined it, on the Floor of the House I urged the then Chancellor to leave the exchange rate mechanism well before Black Wednesday. In that context, may I ask the Chancellor whether he has seen the famously macabre French play, set in a lunatic asylum, in which some of the cast try to slash their throats in the first act and then spend the rest of the play discussing whether to mount a further suicide bid before the final curtain? Is it really necessary for him to ask the British people, even in principle, to slash their throats a second time?

Mr. Brown

I thought that the hon. Gentleman was describing events at a Conservative party conference.

As far as the exchange rate mechanism is concerned, this has all become a bit much: a Conservative Government took Britain into the exchange rate mechanism. They took the country in at the wrong—[Interruption.] One or two Conservative Members want to disown the process. They took us in at the wrong rate and the wrong time, and their only defence is now to try to blame the Labour party for decisions of a Conservative Government. We will make the right decisions for Britain in the national economic interest, and I believe that our record over the past six years in achieving stability contrasts entirely with the record of a Conservative Government who gave us two recessions and boom and bust.

Mr. George Howarth (Knowsley, North and Sefton, East)

Does my right hon. Friend accept that although manufacturing businesses in my constituency and elsewhere, especially those that are heavily dependent on trade in Europe, will be disappointed by today's announcement at first glance, when they think about it, they will realise that he has taken a balanced approach? As he considers these matters further in the coming months, will he ponder on whether it might be sensible for future assessments to include the Bank of England Monetary Policy Committee fairly prominently?

Mr. Brown

My hon. Friend has been active in pursuing the case for manufacturing industry in the north-west for many years since coming to the House. I believe that industry will welcome the way in which we are going about this. Industry wants stability most of all. We have provided stability over six years and we are saying today that we will do nothing that would put stability at risk.

Bob Spink (Castle Point)

Uncertainty.

Mr. Brown

If the hon. Gentleman wishes to compare the record of the Conservative Government with that of the Labour Government on stability or certainty, he will find that he has very little to say to the House.

My hon. Friend the Member for Knowsley, North and Sefton, East (Mr. Howarth) asked about the Monetary Policy Committee. Of course we are in regular consultation with the Bank of England on various matters and several people from the Bank worked on the studies that we produced today.

Mr. David Heathcoat-Amory (Wells)

Stripped of its rather desperate camouflage, the Chancellor's statement boiled down to saying that if Britain joined a low-growth and high-unemployment rigid monetary system, it would not be a very good idea. Will the Chancellor be a little clearer about the referendum on which all this will eventually depend? He re-announced that there will eventually be a referendum on the issue, so why is it the Government's simultaneous policy to rule out in advance a referendum on the constitution of Europe, whatever the constitutional implications might be? What is the logic or sense behind those two positions?

Mr. Brown

The first is that the euro is a specific proposal that would change fundamentally the operation of monetary policy in this country. All parties in the House agree that it is a matter for a referendum. Secondly, the Government are not convinced that the proposals that will arise from the European Convention will be as bad as the right hon. Gentleman thinks but believe that they will be in line with the British Government's policies and will not raise fundamental issues of sovereignty, as he suggests.

Mr. Ronnie Campbell (Blyth Valley)

When the euro was launched in our partners, all those countries, especially Germany and France, and more so Ireland, experienced a steep rise of prices on their high streets. Why should the British people vote for something that will cost them more money?

Mr. Brown

The issues of transition that occur when a currency is replaced with another currency, which caused problems in some European Union countries, are something on which we would keep a very close eye, if we reached that point. We would continue to report to the House on such matters. My hon. Friend rightly raises that subject but it is not an issue for the moment but at the point of transition to a single currency.

Mr. David Curry (Skipton and Ripon)

I sometimes wonder whether the Chancellor draws a distinction between the national economic interest and the national interest. As far as the national interest is concerned, there is a great deal of talk about the new Europe that enlargement will bring into existence and the United Kingdom's opportunity to play a leadership role in that wider Europe. Given that there will be a natural gravitational pull toward countries that have espoused the policies that are considered to be central to the European Union, is it not important that the Chancellor bears those facts in mind and gets on with his further assessment at the earliest sensible opportunity?

Mr. Brown

I agree with the right hon. Gentleman on one point: the changes to the European Union, especially the addition of 10 countries, mean that we will have a European Union that will look outwards rather than inwards. The idea of fortress Europe will become a thing of the past and the concept of a trade bloc that exists on its own and is obsessed by its internal rule will change partly because of enlargement and partly because we must meet the needs of competition in the global economy. However, I would not jump from that to saying that irrespective of achieving convergence and flexibility, we should jump into membership of the European single currency. It is necessary to ensure that we have convergence and flexibility that will enable us to live with euro interest rates permanently while advancing our goals of high and stable levels of employment and the proper funding of public services.

When considering those matters, I hope that the right hon. Gentleman will agree with his colleague the right hon. and learned Member for Rushcliffe (Mr. Clarke), the former Chancellor, that the five tests have a great deal to say for them and that it is necessary to meet them to ensure that potential benefits for trade, investment and co-operation with other EU countries are fully realised.

Mr. Ian Davidson (Glasgow, Pollok)

May I congratulate the Chancellor on ensuring that the decision, which as I understand it is clear and unambiguous, that it is not in Britain's interests to join at the moment is based on economic grounds, not on dogma? Can he assure us that any future review will be taken on similar grounds? Can he tell me how I can expect to inform people in my constituency that in order to get ready to join the euro we need to see an increase in postcode pay—in differentials—according to where people live? Does he not believe that if we want to become truly European on labour matters, we need to accept the information and consultation directive as soon as possible?

Mr. Brown

I think that the rest of Europe is warming to the tax and benefit integration that we propose. It recognises that social cohesion depends on a proper system of remuneration for people who might otherwise be the lowest paid workers in a community. That is why the tax credit system is important. I disagree with the conclusions that my hon. Friend draws about flexibility in the labour market. If we are to achieve full employment in every region of the country, we have to determine what other barriers to employment opportunity exist in those regions. The Secretary of State for Work and Pensions is examining how the Employment Service can do far more. Many people are unemployed in my hon. Friend's city who could be brought back to work quickly.

However, we have to get the right balance between the fairness on which we insist—and on which the Conservatives would not insist—and the flexibility that is necessary in a modern economy to get the benefit of all the opportunities available. I hope that on reflection my hon. Friend will agree that the best strategy to get full employment in his city and his country is to combine the tax credit system with the reform of the Employment Service, to ensure that the new deal works effectively for the long-term unemployed or youth unemployed, and to get the flexibility needed to ensure that we have policies that adjust to the circumstances faced in different regions.

Mr. Andrew Tyrie (Chichester)

This statement was drafted somewhere in a corridor between No. 10 and No. 11 and, frankly, it sounded like it. For the past six years, the Chancellor has told us that he is firmly in control of the decision. Indeed, he made that absolutely clear when he recently came before the Treasury Committee on which I serve. After the extraordinary events of the past few weeks, with the titanic struggle over the drafting of the statement between No. 10 and No. 11, can he assure the House that he is still in control of the decision?

Mr. Brown

The hon. Gentleman heard me speak at the Treasury Committee and he has heard me speak today. The policy that we are pursuing is the policy of the Government. It is the right policy. It would be better from his point of view, as someone who has supported many of the changes that I am bringing about, if he directed his attention to the policy rather than the personality issues.

Mr. Geoffrey Robinson (Coventry, North-West)

Is my right hon. Friend aware that there will continue to be widespread support on the Labour Benches for his continued adherence to the five tests and, indeed, for the economic reform agenda that he announced today? I am sure he can reaffirm that the adoption of the consumer price index in no way implies the shadowing of any decision that might be taken by the Central Bank and that he would not, as he made clear in his statement, allow decisions in Europe to affect the sustained public investment programme, which is so necessary not just for the reconstruction of our public services, but for avoiding deflation that might otherwise occur.

Mr. Brown

I am grateful to my hon. Friend for raising that and for his work on promoting our country's industries, especially in the west midlands.

On the inflation target, we are moving to the internationally accepted definition of consumer prices. It is a far better definition with a greater quality of information provided to influence the announcements of price indices. I believe that if the rest of the G7, excluding Japan, operate to that system, it is better to have an internationally valid system of comparison if at all possible. That is why it is right in itself as well as something that brings about greater convergence with the European Union.

On the ERM, let me repeat what I said about monetary policy: we do not propose to rejoin the exchange rate mechanism. As for public investment, my definition of sustainable convergence is that we can live permanently with the euro interest rate while maintaining our programmes for the funding of public services and for high and stable levels of growth and employment. I believe that that is the best way forward for our country.

Several hon. Members

rose—

Mr. Speaker

Order. The Clerk will now proceed to read the Orders of the Day.