EEC: MONETARY UNION

HL Deb 26 June 1978 vol 394 cc76-129

6.14 p.m.

The Earl of BESSBOROUGH rose to ask Her Majesty's Government whether they will give their views on the need for monetary union within the European Community. The noble Earl said: My Lords, let me say at the outset that I am no economist. Some of what I have to say may perhaps be considered simplistic, although I have had some experience in a bank and have tried to master some of the intricacies of this question. Then, as a Member of the European Parliament Budgets Committee, I have also in recent years become accustomed to thinking in terms of units of account and baskets of currencies. However, after five and a half years in that Parliament I think I can say that some of us, who would like to see a greater convergence and integration of policies within the Community, have been much concerned that the people in each Member State should more readily be able to identify themselves with Europe and have more of a sense of belonging to it than they do at present. I feel, in particular, that many British electors do not yet feel that they are Europeans.

Of course, direct elections to the European Parliament will certainly make an important contribution to their sense of involvement as they will have elected specific Members to represent them. Then I think that the introduction of a common passport, on which I hope the Council of Ministers will soon come to agreement, will also help to make the increasing number of travellers conscious of the fact that they are citizens of Europe as well as of their own country, as indeed the present Members of the European Parliament are when showing their Community laisser-passers. A common currency, which I hope will ultimately be attainable, would I believe give an even greater sense of belonging.

It was, therefore, a great disappointment to some of us to learn that the target date for economic and monetary union—the target date of 1980, which was agreed at the 1972 Summit—was abandoned. However, the question was recently revived by Mr. Roy Jenkins, President of the European Commission, and indeed by Vice-President Ortoli, Commissioner responsible for economic affairs, who has spoken about it in somewhat different, perhaps, but none the less realistic terms. These two departures have been widely welcomed in European circles. I think that we should congratulate President Jenkins and Vice-President Ortoli on the work which they have done on this subject.

Mr. Jenkins' re-statement of the arguments is, in my view, largely cogent and convincing, as are the recently published proposals of the European League for Economic Co-operation for a parallel currency. But I feel at the outset that I should summarise some of Mr. Jenkins' arguments briefly, and also add some comments of my own, taking into account particularly the Commission's communication of November last year, on the prospect of economic and monetary union, which is I think beginning to be more widely accepted. I refer particularly to the Action Programme on Convergence, which, I would guess, was largely the work of M. Ortoli.

First, to summarise some of Mr. Jenkins' points, monetary union would favour a more efficient expansion of industry and commerce in Europe. As Mr. Jenkins said, there are few businessmen, whatever their doubts about the political will—and I think that the political will is beginning to develop and the need for this union is more widely recognised—who do not believe that the removal of exchange risks and inflation uncertainties between Member States would have a major confidence effect. For instance, trade can be fostered with greater confidence if British firms can make quotations for business in other Member States so that the currency risk is removed from any given transaction. At the moment firms normally tend to quote in a harder currency. I need hardly tell your Lordships that.

Monetary union would also bring all the advantages to Europe of a major international currency backed by sufficient economic diversity and strength to make it an asset and not a burden. The United States, with a weak balance of payments, derives advantages from that position. For the first time Europeans would be freed from excessive dependence upon the dollar, which is still the only effective international medium of exchange, although not an entirely satisfactory one. I know from personal discussions with certain members of OPEC that they might well welcome an alternative currency for quoting oil prices even if, as I am sure they would, they continued using the dollar as well. But I recognise that it may well be wise in the first instance to use the proposed unit of account only within the Community; that is between the European central banks and not, at the outset, outside as well. It is, of course, already being used in respect of the so-called Ortoli loans, and in that sense the Commission's November proposals are already being implemented to some extent.

Then, as Mr. Jenkins says, monetary union would help us in Europe to control inflation and provide us with the means to recover control over prices and demand, which most individual Governments have lost. Such a union could also give a major new stimulus for growth and employment. By lowering barriers and giving a greater sense of assurance and opportunity to our people, it could, in Mr. Jenkins' view and, if I may modestly say so, in mine, constitute the means for the unleashing of energies on a major scale. This is greatly needed today if we are to restore the employment levels and even the confident growth of the' sixties. I agree, too, that monetary union must be combined with moves to promote better regional distribution of work and wealth in Europe through measures to accelerate the flow of private, as well as public, finance. The poorer regions of the Community will need assurance that their economic difficulties will not be aggravated, and the richer regions would know that they would have more stable and secure markets.

Economic and monetary union would also be part of the process in which we seek to balance the need for decisions to be taken at a level higher than the national one, with those in favour of decentralisation. I agree that there is no contradiction here. From long experience of the European Commission I am quite certain that it would in this case propose to give the Community only those functions which can best be performed by it. In present circumstances we have to manage a floating rate system with one group of countries grouped around the currency that happens at present to be strongest in the Community. In my view there must now be a different approach.

Bretton Woods may have served well for a generation, but, as Mr. Jenkins said, in 1968 it cracked; in 1971 it broke. Since then there has been no real system. Here, as elsewhere, without a system—and sometimes with one, too—the power, as has been said, goes to the big battalions. But we also in Europe have the big battalions, and we must now organise them. Without such re-ordering of the European monetary system, Member States will continue to be subject to all the short-term hazards.

I have no time this evening to follow all Mr. Jenkins' thoughts, or even all those of M. Ortoli, but I am mainly in agreement with them, and I beieve that the two have now come very close together in what they are proposing to the Council. I hope that those of your Lordships who are interested have read what they have written in their own words, as well as the Commission's official communications.

However, there are one or two further points which I should like to mention, particularly the point that much of the additional expenditure incurred in the Community budget will be redistributed, and as a Member of the Parliament's Budget Committee I should like to stress this point. Indeed, the purpose of this expenditure would be to direct it into the poorer parts of the Community so as to ensure a reasonable share-out of the greatly increased wealth which monetary union should make available as a result of increased investment.

As to the kind of institutions required, there could be various alternatives, including something similar to a European reserve bank, responsible, as in the United States, perhaps to Parliament rather than to the Executive. I should be interested to hear what other speakers have to say on this point. I am very glad that my noble kinsman Lord Cromer is to speak, as well as the noble Lords, Lord George-Brown, Lord Roberthall (who is, I think, chairman of a working party on this subject) and Lord Banks; and of course my noble friend Lady Elles. I regret that the noble Lord, Lord Ardwick, is not here, for he is a rapporteur on this subject in the European Parliament. However, I have no doubt that there will be other occasions on which your Lordships will be able to hear him, too.

As I see it, the basic first step should be vastly to strengthen the European Monetary Co-operation Fund by increasing its resources. As has been suggested, Member States would deposit in the Fund a portion of their gold and/or foreign exchange reserves, and against that deposit receive an equivalent amount of units of account. I rather like that concept. This would thus constitute something similar to European special drawing rights. As your Lordships know, there are several different units of account at present used by Community institutions which might be considered in this connection.

I should be grateful for the Government's views, as well as those of other noble Lords, as to whether before or at the same time as increasing the European Monetary Corporation Fund's resources, we should re-enter a larger Snake, or boa, as it has been described, or a Snake within a Snake—a Snake with a kind of double skin. These are thoughts which are being considered at the moment. Personally, I consider that the two steps—increasing the resources of the Fund and the introduction of the new snake—could well be taken simultaneously. That is not only my own view, but also the view of those who can speak much more authoritatively than I on this subject.

The new Snake would, I hope, be followed eventually by fixed parities, and then by a Europa bank note, which in the first instance would give the national currency, as well as the European, on its face. Each country could have its own design of notes in the same way as Bank of England, Bank of Scotland and Bank of Ireland notes; and Belgian and Luxembourg notes differ in design, although their parities are fixed. Therefore in Britain we should continue to have a portrait of the Queen, with a designation of £1 sterling and, underneath, the Europa equivalent.

Travelling, as my friends and I do, almost every week to the Continent, I cannot tell your Lordships how much this would simplify our lives, as well as, much more importantly, the conduct of business generally within the Community. It would also simplify life for millons of our electorates, particularly British tourists who are, as I have said, continually increasing in numbers. One of my colleagues in another place asked me the other day whether I thought that this whole concept of a single currency was a vote-catcher. He rather thought that it was not. I replied that for those increasing numbers in this country who travel on the Continent it could certainly be an electoral winner—not that I should wish in any way to turn the question into a Party political issue.

I know that it took the United States of America a long time to achieve monetary union after the Declaration of Independence. I hope that it will take Western Europe less long, for I believe that Europe now needs it even more urgently than the United States did then. I sincerely hope that the Bremen Summit will take a decisive step towards the creation of a zone of monetary stability in Western Europe. I believe there is some hope that it may.

6.30 p.m.

Lord BANKS

My Lords, the House will be very grateful indeed to the noble Earl, Lord Bessborough, for asking this important Question this evening; and he has chosen a very opportune moment to do so because, as he has himself told us, the whole question has been forced to the front of public attention recently by the speeches of Mr. Roy Jenkins. It was also the subject of Governmental discussion at the EEC Copenhagen summit in April, and aspects of the problem are bound to be discussed, as he has just said, at the Bremen meeting of the EEC Council. Then, ten days after that, there will be the further summit at Bonn of the seven leading industrial nations, when world currency problems are bound to be discussed and when the position of the dollar and the weakness of the dollar owing to the US deficit will undoubtedly be on the agenda.

The noble Earl has given us a clear summary of the views of Mr. Jenkins and the case for economic and monetary union as he has presented it—a case which he has presented under the seven heads which the noble Earl elaborated. The argument is that economic and monetary union would provide more efficient expansion of industry and commerce in Europe; bring the advantage to Europe of a major international currency with freedom from excessive dependence on the dollar; help in controlling inflation; provide a major new stimulus for growth and employment; lead to better distribution of wealth because of the shift of resources which would inevitably be a condition of economic and monetary union; allow a balance of decision-making at European national and regional levels; and provide the essential means of underpinning political union. I merely state the headings; the noble Earl, Lord Bessborough, summarised the arguments, and Mr. Jenkins has set them forth in detail.

I can say for myself, for my noble friends on these Benches, for my right honourable and honourable friends in another place and for my Party outside Parliament that we wholeheartedly accept the case as summarised by the noble Earl today for economic and monetary union. In what I now want to say, however, I shall be speaking for only myself, and I do so with diffidence in view of the expert speakers who are to follow; but I should like to discuss for a moment or two what we do once we have accepted the case for economic and monetary union as it has been outlined to us tonight. How do we progress towards it?

Various solutions have been put forward. M. Tindemans, in his report on European Union published a year or two ago, said that the Community should maintain the Snake linking the currencies of some EEC countries; should gradually abolish the remaining obstacles to the free movement of capital between the countries in the Snake; should place obligations on these countries with regard to domestic economic policies; should discuss all decisions with the EEC countries outside the Snake; and, finally, should devise ways of enabling those outside to join, although this was not to be automatic and was to be dealt with case by case.

The House may remember that that gave rise to the objection that this two-tier system would mean first-class and second-class members of the Community. M. Tindemans replied very strongly that that was certainly not his intention, but that what he wanted to do was to see that all the nations in the EEC were involved in making the decisions even although not all were initially in the Snake. Nevertheless, I think the objections to the two-tier concept were substantial: that inevitably there would be some feeling of first-class and second-class nations, and that politically, whatever the economic arguments might be, that particular solution was not "on". In the main, what we should have been doing if, in Europe, we had implemented that solution on its own, would simply be, so far as I can see, to institutionalise what already existed, and it would not have provided anything new to solve the problem of how we advance from the present situation to greater integration.

Following the Copenhagen summit of the EEC in April, three schemes appear to have been discussed which were summarised by Melvyn Westlake in The Times on 19th June. One, called the "boa", to which the noble Earl referred, would effectively build on the present snake arrangements but allow some currencies to move within a wider band of fluctuation than others. A second, less rigorous, scheme envisages target zones within which currencies would normally be held. The margin of fluctuation, however, would be quite wide. A third scheme would keep exchange rates within certain margins of the weighted average of all the other currencies in the operation. It seems to me that all these schemes are open to the objection that it is unlikey that the transfer of resources which is necessary to sustain them would be achieved so long as they are purely experimental with an escape route out which can be taken at any time. I should have thought that monetary union must be fixed and permanent. Surely, monetary union has to be entered as we entered the EEC itself—without thought of withdrawal. Otherwise, will not the pressures be too great, so that it will fall apart again, as it has in the past?

Then there are the ideas which might be summed up in the word "convergence". The Commission's report, to which the noble Earl has referred, dated 17th November 1977, contains many useful proposals for a five-year plan preparing the way for economic and monetary union. It has proposals with regard to the transfer of resources; proposals with regard to improving the single market; proposals for improving the Customs arrangements; proposals allowing for free movement of capital; proposals for abolishing monetary compensatory amounts and proposals for establishing an energy policy. Also, it proposes a parallel currency for Europe, and we know that recently, as the noble Earl said, the European League for Economic Co-operation have published a most interesting paper on this subject suggesting the creation of such a currency, to be called "Europa". The Federation of Liberal and Democratic Parties of the European Communities, with which we on these Benches are associated, in a recent declaration put forward a similar list of proposals: a pooling of currencies; a parallel currency (although they want to call it a florin); limits on exchange rate variations; a co-ordination of budgets and economic policies, and the hope that the Community would speak with one voice to the rest of the world on monetary matters.

I agree with these proposals in general, put forward by the Commission and by others. I am sure that the Community should attempt to do these things, whether or not we have monetary union. Nevertheless, they are all associated in the way in which they are put forward with the idea of convergence: with the idea of a planned programme leading up to economic and monetary union. It is rather like attempting to transfer men at sea from one warship to another by overhead cable: you have to wait until the ships are moving at the same speed and in the same direction. But I doubt whether the achievement of convergence should be made the condition for monetary union. I doubt whether it should be made the condition: I am not saying it should not be attempted.

Your Lordships may remember that there is a scene in the Gilbert and Sullivan opera, The Pirates of Penzance, where the policemen are being inspected by the major-general before they go off to deal with the pirates. "We go, we go", they sing as they march round the stage, postponing the dreaded encounter. "Yes, but you don't go" complains the major-general in exasperation. "We converge, we converge", sing the nations of the EEC as they march round the European stage, to which one is entitled to reply, "Yes, but you don't converge". I wonder whether the economies ever will converge so long as there are variable exchange rates, so long as there are loopholes or so long as there is an escape route out of monetary unity. After all, if we could converge at will, there would surely be no need for economic and monetary union. "Ah, but", it would be said, "we can manage to converge for a very short period of time". Rather like lining up horses at the start of a race. At the crucial psychological moment, we will transfix everybody in a locked embrace—if I may be permitted to choose a metaphor which does not mix very well with my simile.

That argument seems rather fanciful to me. Is it, perhaps, true to say that what is important is what happens after economic and monetary union rather than before? What happens after would certainly have to be very carefully planned: the institutions set up, the method of control clearly determined, the immediate policies prepared, contingencies prepared for, long-term policies developed and the transfer of resources provided for. It would all need very careful planning. It would be a complex and highly sophisticated D-Day operation. I am inclined to think that once that is thoroughly worked out and prepared the Governments of the Nine—if it is nine at that time—must take an unannounced and, in relation to the progress achieved towards convergence, purely arbitrary decision to link. It must be well understood in advance that that is the agreed aim.

It would be a great economic and monetary leap; it would be a great institutional leap; but, above all, it would be a great political leap for it would provide the cement for political union, not merely making it possible but making it essential. The political will would have to be there on the part of both Governments and people. I shall listen with interest to the noble and learned Lord, Lord McCluskey, to assess how much, if any, of that political will the Government have at this moment.

6.43 p.m.

Baroness ELLES

My Lords, my noble friend Lord Bessborough could not have introduced into your Lordships' House a subject of discussion more timely, more appropriate or, indeed, more relevant to our economy as a whole than the question of economic and monetary union within the EEC. I know that noble Lords on these Benches, at any rate, will wish to express their gratitude to him for his most clear exposition of the problems which are involved with this question. We have had over the years a succession of reports, studies and committees which have concentrated on the matter beginning with the Weiner Report in 1971, reviewed by M. Tindemans and his Report, then the All Saints' Manifesto, published, naturally and appropriately, on 1st November 1975 in The Economist, and other committees including, I understand, one recently chaired by my noble friend Lord Cromer from whose experience and opinions we shall be able to benefit this evening. I look forward to hearing him later in the debate.

All these reports have set out considerations involving very many alternative approaches. Perhaps one of the most interesting reports recently has been the up-to-date review which M. Pierre Weiner himself published at the end of 1977 on how he considers the situation on EMU to be to date. I think it makes rewarding reading. But the revival of the subject in the political sphere by Mr. Jenkins recently, and his views which have been ably explained and put forward to your Lordships by my noble friend Lord Bessborough and touched upon by the noble Lord, Lord Banks, ate elements for debate this evening.

The Government have had the benefit of the recent discussions in both Copenhagen and Hamburg, and now, within a few days, there will be discussions both in Bremen and, later, in Bonn. So EMU has become a subject of major political debate at supra-national level. It is therefore right that a subject of such major importance, which could well have considerable effect on the economy, on the financial measures to be taken by the Government and on our political co-operation within the European Community as a whole, should be debated. I think that it is perhaps, in hindsight, a pity that this debate has taken the form of an Unstarred Question and has come at the end of the day. It could have been a subject of major debate in this House. Even so, I am grateful to my noble friend for having initiated even an Unstarred Question which he has put to the Government this evening.

It is true that perhaps we should not have had many partakers even in a major debate because of the complexity, the technical aspects; and the fear of having to take any step forward in any political co-operation outside the boundaries of the United Kingdom and of losing some national control over decisions of national interest, has mitigated against any kind of discussion or debate either in Parliament or outside it. EMU remains one of those subjects which you do not talk about too much, and nobody quite knows the answer to it. It is a very complex subject with endless ramifications. We have already had two speeches which have covered different aspects, and undoubtedly we shall be hearing more speeches this evening looking at the problems of EMU from expert viewpoints possibly even unrelated to each other. The one thing that one learns about economists and experts in economics is that the only single factor which unites them is that they always disagree and that probably their forecasts are nearly always wrong. That is probably the one common factor between the economic experts and their forecasts; so that when we discuss a subject like EMU it is largely theoretical and I suppose that anybody's guess is as good as anybody else's.

I think, however, that there are certain facts we can go on. The first is that we have to accept that in the period since the war there has been a radical change both in our own international economic relations and among international economic relations as a whole. That is the first fact that everybody could accept. The bulk of our trade was with the Commonwealth countries, and despite wide geographical disparities, it was conducted in the same currency; that is, the pound sterling. One has only to think of our trade with South Africa, Canada and Australia, and the stability of the currency at the time and the identical unit as a measure of trade were undoubtedly a potent contribution to the reliability and trust on which long-term commercial relationships must be based to be successful.

For the United Kingdom, the European Community has become the group of countries with whom we have our largest trading activities. The Community itself as a whole is the world's largest trading bloc and the second strongest economy in the world taken as a whole. There has been another change in international commercial and financial relations to which my noble friend has already referred. That is, that following the collapse of Bretton Woods, we have noticed a steady decline of the rôle of the dollar as a reserve currency for the rest of the world, so that we are now faced with looking for some form of order and regulation which gradually could be recognised as being beneficial to international commercial relations. It is only necessary to think of the devastating effects of wide disparities in the exchange rates of currencies and their fluctuations over short periods and of the effect that they have on the economies of the less developed countries—countries, incidentally, to whose improved economies we are morally committed to contribute. The increasing trade between the European Community and third countries demands some stability for our currency for the benefit of both the European Community and others.

I should like to say a word on the currency in relation to monetary union. It is true European Community trade and finance are dependent on payments in national currencies. They are also subject to disruption by financial difficulties of individual currencies. It is not evident, however, that the adoption of a single currency would necessarily resolve these financial and economic difficulties. I think that this must be said. There may be some obvious benefits from the adoption of a currency such as is proposed possibly to be called a Europa. It must also be said that national economic improvement must depend on economic and fiscal policies which are pursued by a or any national government. The adoption of a single currency across Europe will not resolve even our own economic difficulties or the economic difficulties of any other individual nation, and it must be remembered that international co-operation, however close and integrated, is no panacea for bad national government.

The adoption of a single currency has been recommended. But it must also be faced that it would raise concomitant difficulties of a political nature: the establishing, for instance, of a European central bank; the question of the control of the money supply. These are all obvious matters for doubt and discussion and it would need, as the noble Lord, Lord Banks, said, political will of a high order to accept changes in our national financial institutions. Where I believe we are in agreement is on the need for a stabilisation programme, an exchange rate contained within some kind of limits, not necessarily confined, but nevertheless some kind of contained limit and, at the same time, allowing sufficient flexibility for national governments to respond to market forces.

I should be grateful if the noble and learned Lord, when he is replying, will set out the options for the Government before the discussions in Bremen, and what kind of results he is expecting from the summit meeting later on in July. The noble Lord, Lord Banks, has set out the three alternatives which were published in various newspapers, both daily and weekly. I shall therefore not take up the time of your Lordships in repeating those. Nevertheless, these three options are obviously ones for discussion and it would be helpful to the House if we might have some indication of the thinking of the Government on this particular aspect of monetary union. I should like to ask the noble and learned Lord whether he considers that the creation of a monetary zone on the basis of one of the three options would be a contribution to monetary stability and consequently of great benefit to the commercial relations of the United Kingdom and therefore of course to our economy as a whole.

It must surely be clear, however, that no monetary zone will solve our own problems in this country, as I have already indicated earlier, unless we in this country are willing to take the measures necessary to put our own house in order: cuts in public expenditure; reduction of the PSBR; tighter control of the money supply; cuts in taxation. All these are measures which would not only be of benefit to our own economy, but would draw our economic policies closer to those being followed by our major partners in the European community.

For myself—speaking purely personally and not on behalf of my Party, though I believe that it is an opinion which is shared by my Party—I do not believe convergence ipso facto to be a cure for our economy. Co-operation in economic affairs with our partners, yes; but convergence at this stage of the game is too early. While not necessarily advocating any form of monetary union, we have to ask, not to propose, that it should not be forgotten that contributions to decision making in co-operation among fellow Member States sharing the same overall objectives implies considerably less interference in our internal affairs than control by the IMF in exchange for massive loans to prop up a declining economy. It has often been said that EMU will lake away sovereignty in our economic affairs, but one must really ask how much sovereignty we have at the moment.

Certain actions have of course already been undertaken to ensure some small measure of unity in the financial and fiscal fields. We only have to think of the changes and modifications in relation to VAT on a Community basis: the formation of the Customs union itself is already a major contribution towards an eventual economic and monetary union, if that is indeed the objective of the Community.

The Commission's document which sets out an action programme contains a whole series of proposals. I do not think that anybody will say that these must be rigidly followed in the time-scale laid down in that programme. This would be unreasonable and nobody would expect that to be accepted by any national government. But I believe that there are some aspects of it which would be welcomed by sectors of our society in the United Kingdom. Traders would welcome increased freedom of movement of goods and services. Farmers would most certainly not object to the disappearance of monetary compensation amounts. Certainly, if a single currency—even for limited use—were to be introduced, it would be of benefit to those carrying on commercial contracts within the European Community and of course, as my noble friend has mentioned, to the many millions of tourists both from Britain and from other members of the European Community.

I do not think that this is the time to embark on a major discussion of the benefits or failures of EMU; but I believe that a full debate on this subject would be very welcome, perhaps after the noble and learned Lord has told us what are the views of the Government, and after some considerations have been taken in Bremen and Bonn which, as I have said, will undoubtedly affect the economic and financial policies of this country.

Our own approach to this question—which is a complex one—has been summed up clearly by my right honourable friend Geoffrey Rippon in a speech in October of last year, when he said: What is required—and possible—is a series of specific initiatives within the framework of a broadly agreed strategy". This view, while not accepting ipso facto the rigid timetable set out in the European Community document to which I have already referred, does not close the door to progress in monetary and economic co-operation for mutual benefit of Member States. Indeed, there are some initiatives which have already taken place and others which we would welcome.

It is fair to say that whatever quid pro quo is demanded by this country from other Community countries if we are to accept any creation of a monetary zone creating stability in the European Community, it must also be matched by members of our Government who go to Brussels, who must show that they are prepared to work with other Member States of the Community for the benefit of the Community as a whole. I should like to add my voice to that of my noble friend Lord Bessborough in putting this question to the Government: What is their view of economic and monetary union?

6.58 p.m.

Lord GEORGE-BROWN

My Lords, before I begin my speech, may I say that I find a certain piquancy in the fact that immediately after I sit down I shall be followed by the noble Lord, Lord Balogh, and, after him, the noble Earl, Lord Cromer. That brings back to me some exciting days during the latter part of 1964, throughout 1965 and early 1966 when I was receiving papers—most of which I found agreeable—from the noble Lord, Lord Balogh, containing economic advice for the carrying forward of our country's affairs.

We spent pretty well every morning in the economic committee of the Cabinet waiting for the Chancellor of those days to come in and tell us what "Rowley" had said: It became a touchstone to open that meeting by saying to the then Chancellor: "Well, what has Rowley said to you today?". I must say I did not find all that "Rowley" then had to say as agreeable as I used to find the advice I received from the noble Lord. I have a feeling that the position may be wholly reversed tonight. It is, as I say, one of the piquant and amusing sides of it.

One needs to find some amusement: I find this discussion—not because of the quality of the speeches—a frightfully depressing occasion. It is depressing because one has only to look round the House to see the vast amount of enthusiasm the subject raises; it is depressing because the Minister who is to reply to us, if he has any distinguished views on Europe at all, could hardly be described as passionately in favour of European integration of any kind. It is depressing because I have a feeling that everybody is feeling a sense of disappointment about the developments in Europe. Yet nobody is willing to confess that it is almost wholly because of us and partly because of our long absence from the European scene—the years from The Hague right down to just a few years ago when we stayed away and things had to develop in ways they would not otherwise have done because we were away, and because of the attitude we have taken there since we joined. We have gone there. We have sent Ministers there who are either openly-confessed non-believers or who, at best, have gone there to make the best of a bad job and do what they could with the details that arose. Therefore, we have produced the situation which we now affect to be disappointed with.

I think the value of the raising of the standard for the development of European economic and monetary union lies in the fact that, because of circumstances which have arisen, we now have the possibility to take some concrete, positive action which will make the whole idea of European integration mean something to people in circumstances where they need something to believe in and where there is a need for something to happen. I do not think the attempt to create a political union of Europe—which is my reason for interest—can be made out of an economic approach. I think the attempt to do that is, to some extent, responsible for what has happened in the last few years. I must say, by the way, that if I did not have the conviction that we need politically to integrate our Continent, I would not be involved at all in any of these side issues, as it were. I simply do not understand Ministers and other representatives who bother to go to the European Council of Ministers, to any of the ministerial meetings or to the Parliament, if in fact they do not have the conviction that they wish to create a political union of Europe. That is all it is about and that is the only reason for being there. I have that conviction and I confess it. It is the basis of what I want to say to your Lordships tonight.

The political development of Europe seems to me, therefore, the only valid purpose and the only valid cause for which we should now be fighting, partly because we need to create a European external policy towards the problems of the world. We were talking earlier today about an equally depressing situation; the situation in Central and Southern Africa, where there is no European external effective policy—the French made their own effort—but where there should be a European external policy and activity, because the matter is of critical importance to us.

We need a European external policy, with America, in my opinion, in a situation where it can give no leadership and where it will be unable to give any for quite a while ahead because of its recent past experiences. We need European integration in order to have a defence policy; and it is ridiculous that at the moment there is no European defence policy in a situation in which we are all talking about Russian aggressiveness and about our lack of faith at the moment in the American will or ability—and, of course, the neutron bomb hassle did not encourage any of us to feel very much different. Thirdly, we need European integration in order to get a common economic policy. The economic and industrial condition of Europe at the moment surely not only provides the occasion for having our present debate and for Mr Jenkins, Commissioner Ortoli and the others to raise the issue; it provides the reason why our people should be—I admit they are not, but they should be—so concerned about its achievement.

We have all over Europe at the moment—happily, in some countries not nearly as badly as in this country—a state of economic stagnation which, compared with what is going on in other parts of the world, is quite staggeringly depressing. We are thinking and talking about only achieving a growth of 2 per cent. or 3 per cent., and some of us doubt very much whether that will be achieved. This country, at the present rate of progress, will not achieve anything like that and, in a state of economic stagnation and almost nil growth, there is no hope of providing the standard of hung that our people talk about or that our trade union leaders spend their time demanding. All they can achieve is switching it from here to there. There is no way by which you can make a quart of anything, if all you have to fill is a pint pot and you are barely doing that. We have unemployment all over Europe —I forget the figure: somewhere about 9 million, is that right?

Baroness ELLES

My Lords, 6 million

Lord GEORGE-BROWN

My Lords, 6 million throughout Western Europe as a whole. We have a figure here that we do not really understand at all, but it is somewhere around 1½ million to 2 million. We have a trade situation in which we are greatly under pressure and in which we are finding it difficult to get our exports out or to stop other people filling our own market. Therefore, the whole economic situation of our Continent is one of the deepest possible depression and gloom—and with no prospects of coming cut of it.

All this, I think, is concentrating our minds rather wonderfully and is the reason behind the Question which the noble Earl has raised tonight, because possibly this may be just the moment when we could get something moving again. It is, after all, no use Ministers continually badgering Germany to take risks and chances with its own situation. It is no use badgering the United States to do things which, if one goes to the United States, one sees all the reasons why they cannot do them. It is no use calling on the Japanese to keep their exports at home. Why the hell should they!

Always, when we are told we should not have so many Japanese cars coming in here because we should be looking after our workers at Leyland, I say to myself: "What about looking after the other workers in this country who want to get a new car? If they cannot get a new car from Leyland, why should they be prevented from getting one from Japan or anywhere else who can supply it?" I never do understand the arguments of the trade unions on this point. These kind of arguments, which are the only ones which are put up, seem to me to have no particular virtue; and as for the general argument on protectionism, despite what the two noble Lords, economists, who are going to follow me later may say, I simply do not understand it. It seems to me quite impossible that there is any future at all for these islands, with this population, with or without any European integration, if there is a protectionist policy seeking to shut out other people's goods and inviting them to take retaliatory action against us.

For progress in any direction to deal with the major matters to which I referred just now, we need the creation of a common economic strategy and a common economic policy for the Continent. I agree entirely with the noble Baroness, and it must be repeated and repeated, that that does not excuse the non-existence of sound economic strategy and sound economic policies here at home. Just as our failure to make use of the domestic market which joining the EEC provided for us, because we could not become efficient enough to make use of it, has meant that the benefits which entry made available have not come to us, so, as the noble Baroness said, if we have a common economic policy and strategy and are in no condition to fulfil our part in it we shall still suffer very much. But that is not to say that there should not be one. Indeed, unless the countries of Europe fit their own economic policies and their own economic actions into a common strategy, then they will simply defeat themselves and export their troubles to each other, and the more successful ones at home will be the ones who export most of them to the weaker ones, such as ourselves.

I shall not go into all the questions of the technical monetary arrangements. Incidentally, the monetary arrangements, the common currency which is necessary and essential, are, in my view, only one part of this and are not a replacement for the rest, which basically has to be the economic strategy that we adopt. But on the kind of monetary devices that we use, the kind of arrangements that we make to keep stability between the various currencies, in order to stop us from adding to our other problems the one which flows from currency fluctuations, there are many possibilities, as has been said and as will be said again in a moment. I wish that we could stop using reptilian names by which to describe them; there must be something nicer than "Snakes" and "boa constrictors". But there are many ways by which we can provide for stable relationships between our currencies, and there must be a way—indeed, there is a way—by which we can fit national currencies into a scheme where they can work for quite a long time ahead, side by side with a common currency which can be used for other purposes, and, again, can cut down the instability with outside countries. I shall not go into all those details; it is not a major theme. We can solve the problem if we can get a determined will that the problem exists and must be solved.

I think that for economic improvement in this Contenent we must first look within this Continent. It is an absolute dream to think that there is any way by which we can solve anybody's problems, if we, ourselves, go it alone in the world outside. It is also an absolute dream to think that the Europeans nation, as a whole, could serve in that way. After all, half of our exports in this Continent go to each other, and it seems to me that the European dimension is the one that we must make the most of.

But this need, which is imperative today, will become so much greater when the other three nations which are immediately being considered for membership of the EEC—that is, Greece, Spain and Portugal—themselves join. We shall need to have some way of increasing our total available goods and services if we are to be able to do any element of social readjustment which will take care of the poorer of the territories—and the three incoming ones are, after all, among those—without pulling down the rest of us.

The main features were set out earlier, and perhaps I may briefly restate them. We must try to get a single market within Western Europe, with a minimum of harriers to movement of trade, of people and of finance among us. We must have a centralisation of major macro-economic policy decisions within the Continent, just as I have always thought we should have here at home. Alongside those, we must aim, as quickly as possible, for the adoption of a single currency. We must make sure that that currency, and whatever schemes we adopt to back it, are provided with adequate financial resources to enable it to stand up to the pressures. Finally, may I repeat my conviction that it is the political purpose of European integration which really matters; and that that political purpose, in turn, depends upon underpinning with a sound economic base and policy in our Continent to get it.

I believe that at this moment, because of the conditions of Europe, recent sceptics, such as the Chancellor of Germany, and even more, I gather, our own Prime Minister, have been brought to move towards a certain willingness to accept what yesterday they would have rejected in this field of economic integration. It also explains the change which I noted when I was in America only a few weeks ago, in that it is no longer seen as a ganging-up against the United States, which is what they used to say, but is now seen as a way by which Europe can cease being a drain, a heavy stone on progress in the world outside.

The only worry which they raised with me, both the economic people in the present Administration and those I knew in the last Administration when I used to have to deal with them, was whether we ourselves intended to do it. They were no longer telling us that we ought not to and giving us all the arguments against it. There has been a great change, which I believe is due to the economic conditions in the Continent. I believe that if we could produce some belief—what has been called some political will—we could give back to our people some degree of hope, imagination and drive.

One of the things missing in the wretched state of our nation at the moment is any positive will, belief or drive for anything. Part of the reason is in this place tonight. Part of the reason is with out political Parties. Nobody ever wants to commit any more. There is always the saving, qualifying clause. We are never committed to the actual details, even if we can get so far as to say that something sounds a rather nice, broad idea. We need some political will, some belief, some idealism, if you like.

I believe that it can only be within the terms of our Continent, because there is no other grouping available to us. I believe that a political Europe provides Britain with its role as leader, and provides Europe with its role in the world. I also believe that an integrated economic policy, which will necessarily involve a common currency and an integrated monetary policy, is the essential underpinning for that political Europe which I want to see. If anybody following me does not accept the basic premise then of course there is really no point in the argument. If there are those who do accept the basic premise or pretend to, as do Her Majesty's Government, then they have to come forward and say why my way is the wrong way, and put up some other way of their own.

7.20 p.m.

Lord BALOGH

My Lords, it is always very difficult to follow the noble Lord, Lord George-Brown. I have always admired his capacity for enthusiasm, and he has shown tonight that this capacity has not diminished with age. The noble Earl phrased his Question in a very reticent, restrained and discreet manner, totally in accordance with the traditions of this House. However, he obviously shares the view expressed so forcefully by my old pupil and friend, Roy Jenkins, that the establishment of a complete monetary union in the European Community is likely to help in diminishing unemployment which, as the noble Lord, Lord George-Brown, has just said, is at a frightening level. It results in a loss of something like £600 billion to £700 billion per annum in world production and income.

I must say to your Lordships that the noble Earl could not have bun more mistaken. He not only put the cart before the horse but he left them in a position where the cart is liable to roll backwards, crushing, or at least maiming, the horse. Monetary union results from a successful alignment of social, financial and economic policies and, provided that the participant who is entering into it does so from strength rather than weakness, might be beneficial. I do not doubt that; nobody does. For a weaker partner to mingle so intimately with the strong, without the assurance of help in the readjustment which will be periodically required from him, might prove to be fatal. Already the tariff union in manufactures and fisheries as against the violent protectionism of the Common Agricultural Policy has done, and does, enormous harm to this country. Monetary union at the present time would expose us to an extreme degree to the aggressive superiority of German competitive power without any means at all for self-defence. This does not mean that I share the views of conventional economists who for a long time, and with the stout support of The Times and the Economist, held that changes in parity—indeed, the floating of the currency—represented the panacea for all ills.

For us to succeed, as was made quite clear in the excellent debate that we had on the initiative of Professor Lord Baker, we need to find a more resolute attack on the structural shortcomings which have caused our relative decline since at least 1873 and which I tried to put before your Lordships' House last week. To go into the turbulent seas of the coming economic fluctuations in a small and fragile boat, shackled to the Teutonic elephant which obviously repudiates all accommodation, would be folly. It is the refusal of the monetarists to inquire into and take serious note of the realities of our problems, a refusal shared by a large part of our Civil Service and the Bank of England, which is so very disturbing. In 1967 and early 1968, when entry into the Common Market was being deliberated, the official as against the temporary advisers of the then Labour Government wrote their report about the probable consequences of our entry, on the basis of an assumption—I emphasise, assumption—that we were going to enter from strength rather than from weakness. That assumption was not proven then and has not been proven to be correct since. We have suffered from a relative decline in manufacturing, almost equal to a de-industrialisation. This has not been mentioned by any of the previous speakers. It is very important.

Nor is the second condition of a successful unification of currencies at all in sight. My right honourable friend the Prime Minister has fought a valiant battle for the enlightenment of the so-called Social Democratic German Chancellor, whose economic knowledge and co-operative spirit can be likened only to the most primitive, classical economist, bent on economic conquest after the failure of his nation to achieve military victory. The devoted effort of the Prime Minister, however excellent in conception, has failed. The Germans refused to initiate a sizeable expansion in their country, yet they suffer from grave unemployment even though they have repatriated hundreds of thousands of so-called guest workers and exported unemployment through a vast excess of exports over imports. Even the German Government's independent experts agreed that such expansion was bitterly needed, but some of our noble colleagues here do not seem to have noticed that. I fear that the guardians of our currency have succumbed to the monetarist tantrums dictated, at their own peril, by the Americans. Instead of analysing the real problems and discussing the modalities and requirements of full employment and full production, the irrelevancies of monetary controls are given official recognition by our Government.

I do not, as I said, believe in the "all-cure" effect of a floating exchange rate or repeated devaluations. This does not mean, however, that I am in favour of a total monetary union in a situation in which the basic trends in the participating countries are not aligned and cannot be aligned. As it is likely that our weakness does not entirely originate in existing costs and prices but results from non-price weaknesses, the irrevocable joining of our currency to that of Germany might have the most catastrophic consequences on the export of capital, general industrial decline and unemployment.

This danger is the greater as we have come to a point at which even the Bank of England, not to say those of the United States and Germany, have fallen into the Chicago trap and regard the supply of money, or money stock, as the main, if not decisive or sole criterion of monetary management. This surrender to a witches' brew would, like the insensate policy of credit control through competition (which, having done immense harm to the economy, had to he given up), undoubtedly increase the direct pressures emanating from a common central bank in charge of the common currency and in which the creditors will undoubtedly have a decisive voice. It would, like the colonial currency boards of old, rob us of a vital part of sovereignty even if, joined in the boa-constrictor of the European Snake, or, even more, a common currency area, we surrendered to the untutored dogmatic frenzy of the Germans. This choice of a policy indicator shows not only a regrettable ignorance of the complexity of the monetary system but shackles Governmental action to the market forces.

What are these market forces? Are they the result of basic economic factors? Do they reflect the balancing strength of a well-functioning, self-balancing economic system? Not a bit of it. As one of the monetarists authors, Mr. Congden, admitted in The Times the other day, these market forces represent nothing more than the views of many economic commentators principally but not exclusively City financial analysts whose ignorance of Keynes and the functioning of a modern monetary system is remarkable. In the inter-war period, their predecessors presided over the decline of Britain. Now their absurd notions about the money supply dominate our continued malaise. This is quite arbitrary and has undergone startling changes and can be influenced by completely irrelevant influences. I will not demonstrate to your Lordships the absurdity of this policy because there is not time.

The statistic of monetary supply or money stock cannot rationally be used for policy making because it disregards the possibility of non-income transactions which are totally excluded from the conventional concept of the velocity of circulation. Sadly enough we are here confronted with phenomena which are self-validating. The insistence of the Chancellor and the Governor on being strictly guided by that useless fetish has delivered us to the mercy of the financial analysts and other speculators who merely need to withhold the purchase of Government securities in order to push up the rate of interest and to make illicit profits instead of concentrating on maximising production.

If the danger of these delusions is ugly to contemplate how much more exposed we should be, shackled into monetary union, the central bank of which would necessarily be dominated by the main creditor country, Germany; unwilling to follow the rules of the game enunciated by the British philosopher Hume two centuries ago, which prescribed expansion for the creditor country helping the contraction in the debtor country to restore equilibrium. As the valiant but unsuccessful efforts of the Prime Minister show, even a so-called social democrat German Government is unwilling to give up this indirect dominance over our economic fate. What would happen should the Conservatives win in Germany?

We have already suffered from the invasion of German manufacturers into our markets and the turning of our deficit from a trivial amount in 1970 to over £2 billion last year. If the Americans give in to the false advice delivered by the 19th century notions of the Governor of the German Federal Bank and support the dollar instead of letting it press on German exports, the present economic hesitancy might be turned into a rout through the American defensive monetary restriction. Herr Schmidt, totally ignoring the grave dangers of such a financial crisis, is reported as saying, I understand that some participants want to talk about growth and unemployment. I want to talk about a better balance in t le energy equations of the world. I want to talk about a better balance in the network of payments, at least among the rich industrial countries". This means that he wants us to be dominated by a hopeless quest of shifting the desert Arab surplus from oil exports from country to country, each time adding a further twist to the pressure on employment and production. I very much hope that the Minister replying to this Question will give a firm and unmistakable negative to the suggestion implied by it, and will not contemplate being swallowed either by the monetary union or even a boa constrictor.

7.33 p.m.

The Earl of CROMER

My Lords, I should like to join with the noble Baroness, Lady Elles, in her words of thanks on the timeliness in tabling this Question on the part of the noble Earl, Lord Bessborough. I thought this was starting off rather well because I found myself agreeing with practically every word that the noble Lord, Lord George-Brown, said and right at the beginning of the speech that we have just heard by the noble Lord, Lord Balogh, I thought I caught a sentence that I agreed with, but as his speech continued I became more and more doubtful on that score. We tend to look at things from rather a different point of view.

Although it is late I feel that it is important to look at the question of monetary evolution in the context in which we are living and it seems to me that the politico-social challenge of the next quarter of a century will be that of providing a sufficiency of jobs so that the numbers of unemployed do not rise to intolerable levels. This is a problem that faces the whole of the industrialised world, not just the United Kingdom. It arises in large part from improving technological efficiency and other progress that is coming about at a rapid rate in such things as micro-processors. Here the Prime Minister is to be commended on commissioning those extraordinary brains in the "think tank" to examine this matter. I should be even more impressed if he had commissioned them 18 months ago when the French Government set up a similar study, instead of a week after the French study was reported.

Whether we like it or not, countless existing tasks in many fields, particularly in the clerical fields, are likely to disappear over the next quarter of a century and it will be the clerical field and not just the factory floor where the problems of redundancy will apply. It seems to me that efforts to mitigate this redundancy merely by protecting existing jobs are likely to prove wholly self-defeating and to lead to a rapidly spiralling decline in the standard of living of those countries which choose the road of protectionism rather than the road of moving with the times. It so happens that in this country and in Western Europe, and to a smaller degree in the United States, we have currently a high percentage of redundant industry. It is the same throughout most of the Continent, certainly in France, the Benelux countries, Italy, and only to a lesser degree in Germany. These redundant industries will have to be restructured. At the same time, we have too high a proportion of our economies depending upon what one might describe as non-market influenced activities.

Perhaps I may cite the example that in the years 1971 to 1976 public sector employment in Britain grew by 845,000 while manufacturing employment in Britain fell by 774,000. It has been estimated that each 5 per cent. increase in the share of national income going to the non-market sector activities will typically lead to a fall of one per cent. in the rate of growth of the GNP. So the crying need will be for the creation of new jobs deriving from new innovative activities and new industries.

An interesting study recently carried out in the United States on this subject showed that of new jobs created in an area where the study took place some 60 per cent. of the new jobs were created by new industries and only 40 per cent. were created by the growth of existing industries. In America a remarkable job has been done in job creation: some 3.7 million jobs have been created in the last 12 months. In Britain and in France particularly, very many large businesses are by general consent still over-manned.

This points to the urgent need for a higher rate of growth of new firms and new enterprises and the greater part of our energies being applied to the creation of wealth and less to the distribution of wealth. The birth rate of new firms and enterprises in Britain and in the EEC is generally much too low for our future good. But what clearly stands out as being self-evident is that if we are to seek our way through this difficult evolutionary process in the whole of the industrial world especially, then we shall have to do it in co-operation with our EEC partners facing the same problems. To seek solutions on a narrow nation state basis with the devil taking the hindmost can only end in disaster. Hence-and perhaps I have taken rather a long time to get there—there is a powerful need for an EEC integrated payments system to support the enterprising young people that I am sure we do not lack. It is the creation of new jobs in new industries and new productive pursuits that will be paramount.

Unfortunately, the current course of deterioration in the world international payments system is leading us in exactly the wrong direction. The decline in the rate of growth of international trade since the demise of Bretton Woods is a very worrying factor in its own right, since so much of the prosperity of the 'sixties was predicated on the growth of world trade, depending at that time very largely on the influence of the International Monetary Fund and the GATT in the removal of barriers to trade and in providing for the greatest freedom of movement of funds. We in this country, depending so heavily on international trading and manufacturing of raw materials imported, are perhaps more vulnerable than most countries to the demise of this old system. Only the other day I was talking to a man who was the buyer of one of our larger milling firms. He told me that today the erratic movement of exchange rates was a far greater hazard to him than the movement of the prices of the commodities that he was dealing in if he was to achieve the lowest possible costs to our consumers and obviously to optimise his own profits.

The disarray in the international payments system is a very serious affair. I think it is fair to claim that the highly volatile exchange rates that we have seen over the last year or so are inevitably leading to higher prices for the consumer as traders are driven to widen their margins to cover the wider risks, and this, of course, in turn feeds inflation. Now we have the looming fear of protectionism. The fact is that the Free World floating of all currencies has not worked out in the way that some thought it would. The random volatility of exchange rates which has built up since 1971 has led to all kinds of arbitrary fluctuations over and above the more fundamental movements between one country and another. Of course, the major influence in this has been the divergent inflation rates in the different countries: United Kingdom manufactured prices rose by 135 per cent., United States prices some 56 per cent. and Swiss prices only 21 per cent. But, even when these fundamental facts are taken into account, the highly volatile movements superimposed alongside the basic ones have caused tremendous instability of business.

I believe that what has gone wrong in the international payments system is the lack of any medium of constant value against which relative measurement can be made, and hence the absence of any unit which provides any tolerably constant store of value of monetary wealth. The pound sterling, of course, provided this under the gold standard up to 1914 in its own particular way. In the inter-war years the pound and the dollar provided a barely adequate successor up to 1931 when we went off the gold standard and a great deal of chaos and fluctuation occurred until the tripartite agreement in 1936 restored an element of stability. Post-World War Two, the Bretton Woods system, based on the US dollar, somewhat arbitrarily tied to the value of gold, served the purpose as a pivot for other currencies.

However, then the Americans discovered, as we had previously discovered, and the Germans were wise enough not to put to the test, that policies appropriate to the international reserve states of a national currency did not seem necessarily to meet the internal growth and employment objectives of the Government, and domestic politics naturally held the field. We are thus left with a situation in the international state in which currencies are relatively and randomly changing; against each other and there is no point of reference in the whole system. It is rather like trying to navigate by the sun, the moon and the stars, with each of these points of reference on a random, uncharted, erratic course. There is no single point of reference. In these circumstances a weathervane such as the dollar is no substitute for a compass aligned of a fixed point of reference. We are all floating incontrollably.

There cannot be any question of' any attempt to return to fixed exchange rates, even of the Bretton Woods type. I myself have the gravest possible doubt; about attempts to revive the original larger European currency Snake, although I would not deprecate it for those who happen to be in it at the present time. Similarly, I do not see a great deal of future for the boa. The disparity in inflation rates and the lack of harmonisation in monetary management and in fiscal approach in the Member countries, I think, make any kind of development along this road premature. There is, as we have heard from noble Lords, an alternative system of moving towards target zones for exchange rates. This, I think, is innocuous because I have had sufficient experience of public life to know that Governments have no shame in either missing the target or changing the aim if it suits them. So I think this is merely futile, but harmless. The SDR, similarly, suffers from the defect of the instability of its ingredients.

Nonetheless, against the background of my opening words, there is, I think, a crying and urgent need for some stabilising element in the world monetary regime, an element which will command confidence as a measure of store of wealth, something that is trustworthy, available, usable and used by international traders and by the international capital markets of the world, perhaps starting in the Community. Without this, I am convinced, we will not support the investment nor the trade that is needed to provide employment that we know that we need to provide. For the reasons I have stated, no national currency is likely to provide what is necessary in this respect. This is becoming more and more recognised by world traders, and in particular, of course, by the OPEC countries, who do not take great joy in having priced their oil in dollars; nor does that act beneficially to other countries, such as ourselves, whose rate may not improve against the dollar when it should, with the result that we may be paying more for our oil because it is priced in dollars than we would if it was in some more constant unit.

This distortion in the rates between one country and another is a very harmful affair for all the world trading countries. Neither the producer nor the consumer is, I think, well served or well satisfied. It is perhaps not surprising—and I say this with some diffidence with the noble Lord, Lord Cobbold, sitting just in front of me—that finance Ministries and central banks are the most reluctant to admit the inadequacy of a national currency to serve adequately as the ideal medium for international payment and investment as this tends to impugn sovereign monetary virility. There is, of course, an element of irony in this, as it is the policies of the central banks in fulfilling the requirements of their Governments that lead to this instability.

There was, of course, a world currency proposed by Lord Keynes at Bretton Woods, shot down by the Americans, and I think any idea of a world currency today is wholly too ambitious. The composition of the IMF is such that agreement would be interminable if not impossible. There is, however, in Europe a realisation that our nation-States are too small, that limitation of movement of funds in order to protect local employment levels creates a downward spiral in activity and employment, and there is in Europe certainly the technical expertise to set up, first, a European unit of account imbued with the essential qualities of constancy and continuing value which could, in due course, develop when the time is ripe, into a European parallel currency to be used alongside existing national currencies. It would be a mistake to try to elide those two processes too closely together. I think that it should be taken step by step. If that is the way that Mr. Jenkins's mind is directed—and I hope that it is, but he has been so far rather unspecific in his ideas—I think that he deserves all our support. That is the only way in which I see practical proposals coming forward.

The other matter that I would suggest to Mr. Jenkins from your Lordships' House with all due diffidence, is that as he will not get ideas welling up on to his desk from Ministries of Finance or central banks, he should convene a small group of experts—and God knows there are plenty of experts in this field!—who could work around him and see whether they can make any real progress, unencumbered by institutionalised postures of Ministries and central banks. I do not see any reason why discussion should be limited, as has been suggested, to the wholly unnatural phenomena such as Snakes bursting out of tunnels, nor even currency baskets containing withering aspirations and writhing currencies. Similarly, crawling pegs and SDRs seem to me signally lacking in market appeal.

Being the heretic that I am in these matters, I would suggest that, in an age when the synthetic is often superior to the traditional material, a synthetic inconvertible gold monetary unit might form the basis that would command respect in all the markets of the world and be highly usable. But here we get into the rather deeper esoterics. European monetary rationalisation to my mind is the only road that we can follow if we are to avoid a serious decline in our way of life accompanied by desperately rising unemployment. It is, curiously enough, only the European Community that is in a position to offer this opportunity to the world, as it is only that group of States that is in a position to create with credibility an element of monetary stability that could give light in a world that is steadily growing darker.

7.54 p.m.

Lord MORRIS

My Lords, I believe, with respect, that any discussion of European monetary union must surely begin by looking to it in the context of the European Economic Community as it has unfolded since the Treaty of Rome and the direction in which it is supposed to be heading. Whether the EEC was formed to re-accommodate Western Germany into the international fold; whether to provide balance to the free-world hegemony of the United States of America; whether to strengthen European defence policy with respect to the Socialist Republics; whether to provide the means towards longer term political union, the way it has evolved since 1958 is reasonably clear.

The European Economic Community is first and foremost a customs union—a Zollverein; that is, as I understand it, a group of countries that exchange their manufactured goods free of duty and agree common tariffs for goods traded into theblocfrom outside. To that can be added, as adjuncts, the Common Agricultural Policy and the Regional Fund, which fund has grown markedly in importance since 1975. Peripheral to these aspects are a horde of harmonisation issues—exhaust emissions, regulation of lorry drivers' hours et cetera. However, those issues do not change an initial judgment of the European Economic Community over the past 20 years. It is a customs union.

It is at this stage that I must try to make the point that the Zollverein, the German customs union of the 1820s—developed through the century until full German unification in 1871—provides a vital historical example of how, I would humbly submit, we should be thinking today. For it is fundamental that we bear in mind that the economic unification of Germany, over some 50 years at a time of sublime trading and industrial simplicity compared to our own times, came about not as a result of the customs union. The customs union was the result of urgent economic necessity. In other words, customs union, and thus monetary union, is a symptom of political will for union and not its cause.

Thus, in the context of what we are discussing today, we must be mindful of the fact that there are still a number of statesmen today—for instance, Mr. Roy Jenkins—who are not totally forgetful of the original concepts of Schuman. The fulcrum of the concept of European monetary union is that, for the European Economic Community to present a true bloc policy to external countries or groups of countries, it must itself show itself to be internally unified. To disbelieve that concept in the European context is to come to a sudden halt.

Noble Lords will recall that a group under Pierre Weiner presented a report on the subject of European monetary union in October 1970 which stated that European monetary union was possible, given the necessary political will and means, and that: the principal decisions of economic policy will be taken at Community level". Furthermore, the report added That: A monetary union implies, internally, the total and irreversible convertibility of currencies, the elimination of margins of fluctuation in rates of exchange, the irrevocable fixing of parity ratios and the total liberation of movements of capital". Needless to say, in spite of the affirmation of the idea of common economic and monetary policy at the Paris Conference in 1972, nothing happened as the world moved into a period of acute economic problems. Your Lordships will recall that the establishment of the Snake did not last too long as the French were obliged to move out and the British continued to assert the impossibility of joining.

In 1975, the Marjolin study group reported to the Commission recommending: the establishment of a Community system of internal and external monetary policies, accompanied by medium-term guidelines with respect to the movement of exchange rates, a broadening of the possibility of borrowing at Community level and the development of a European unit of account determined in relation to a basket of European currencies". Finally, the much acclaimed but little implemented Tindemans Report of December 1975 reiterated that the Council should: revise discussions within the institutions on the manner in which a common economic and monetary policy can be achieved and its role in the European Union". At least the Tindemans Report added that: During this policy discussion no proposals should be set aside a priori". Tindemans' recommendation was that since it was impossible that all States should reach the same state of harmonisation at the same time: those States which are able to progress have a duty to forge ahead. The others had to catch up". In other words, his recommendation was centred on the consolidation of the Snake, which, as he said, lies at the heart of monetary stability". But, as we know in so many walks of life, union springs from the heart and not from the mind. As with the Zollverein, there must be, from the first, an urgent necessity for union. For example, if one's exchange rate is fixed to the Snake and one's productivity growth is less than that of one's fellow Snake members, one's exports will decline as one's goods are over-priced, with consequent effects on employment. You cannot harmonise where there is no harmony. Hence, the United Kingdom's reluctance to join the Snake and France's exit from it.

However, as noble Lords are aware, full European monetary union would entail one European currency, the supply of which would be regulated by a central European body, like the "Fed" in the United States of America. To this extent individual States would suffer a loss of sovereignty in that individually they could less easily boost their Government spending by deficit finance, in that it was no longer the component Governments which controlled the money supply. Nor could they devalue. The State of Michigan cannot devalue its dollar. It is, of course, important to bear in mind that depriving States of the power to control the money supply removes from them the control of the level of economic activity.

European monetary union as proposed under Tindemans, with so much emphasis on a central body laying down restraints on Member countries' internal monetary and budgetary policies, must to some extent transfer sovereignty to that body and attempt to harmonise the policies of countries that are in very different stages of development. To this extent European monetary union is absurd. You cannot put the cart before the horse.

Before even attempting to harmonise the structure of European currencies in the Snake, or to create a new European unit of account, thus giving a man in Brussels the power to lend this new money to, say, Italy and the United Kingdom it is much more important that European Economic Community States should carefully examine why the discord exists. Why does productivity grow so slowly in the United Kingdom? Why does the United Kingdom have such a high rate of inflation? What of differing wage levels? What of deficit financing? Once these problems have been sorted out, then—and only then—can Europe move towards fuller economic and, hence, monetary union. This suggests what can and should be done to facilitate a gradual movement towards fuller economic and thus monetary union.

It must be right that the Europeans Economic Community Member countries do not pursue policies that are openly against the interests of the bloc. A country such as West Germany, enjoying a large external surplus to the detriment of its partners, should be encouraged to pursue measures to inflate its own demand for imports. Countries that are flagrantly incapable of satisfying that demand—like the United Kingdom—should be obliged to pursue policies that improve their level of production for export rather than for internal consumption.

Thus, by planning internal policies together, the EEC could prevent a period where all countries inflated together, causing wild commodity prices and ultimately high domestic inflation. When the movement between Member countries' exchange rates has been reduced to a more stable level, by eliminating differences in productivity growth rates, inflation rates and to some extent, taxation—which causes capital flows out of high-taxation countries—then the bloc as a whole can fix its currencies against a new European currency to be used for external trading.

At this moment the liberalisation of internal capital movements would provide a more satisfactory means of allocating resources than any Regional Fund. European monetary union, therefore, in my layman's view, is not even desirable without the provision of the correct groundwork. The Snake is viable as it stands for only a very few countries. The European unit of account could be a dangerously inflationary weapon, providing borrowings for overheated economies. When the European Economic Community countries have harmonised their budgets and have harmonised their taxation and domestic economic policies, then and only then is the time to think in terms of monetary union in full.

8.5 p.m.

Lord ROBERTHALL

My Lords, like most noble Lords who have spoken I welcome the opportunity given to us to debate this important question. As the noble Earl, Lord Bessborough, reminded us, it has come to the fore again recently, so that it has become topical. I am looking forward to hearing what light the noble and learned Lord, Lord McCluskey, will cast on present Government thought. I had hoped to get a little light from the other Front Bench speakers on the subject, but when both the noble Lord, Lord Banks and the noble Baroness, Lady Elles, arrived at what we were going to do, they were careful to say that they were speaking for themselves alone. However, I think that in both cases their counsel could be summed up as "Make haste very, very slowly". I do not think that they would be far out of line even if they were speaking more for themselves.

To me, this is a painful subject. As a convinced supporter of European economic union for a long time, it is painful because we are now further away from monetary union than we have ever been since we began to think about it. As this was to he the crown of the co-operative structure, it is to me—and I am sure to many others—a very melancholy situation.

I ought to begin by informing your Lordships' House that the Sub-Committee of the Select Committee on Community Affairs—the Scrutiny Committee—has considered various recent statements in Brussels and elsewhere which deal with the subject. Although I do not feel that its consideration has gone far enough to justify detailed examination and report to the House, it has appointed a working group, of which I am acting as chairman, to follow developments and to report to the Committee as and when any concrete proposals come forward. But as no concrete proposals have yet come forward and the group has, therefore, not had anything to get its teeth into, I must make it clear in the remarks that I shall mike that I am speaking purely for myself and not in any way for this Committee.

I do not want to range as widely as many speakers have. I want to talk manly about what I consider to be the main obstacle before us in this area. I have said that we are further away than we have been since we first began to talk about this We are a good deal further away than vie were in 1958, 20 years ago. At that time, most of the European currencies were becoming convertible. They were all declaring a fixed gold price and, as the noble Earl, Lord Cromer, has reminded t s, it was really a dollar gold parity. So the main requirements for monetary union that exchanges should all be fixed in relation to one another, were already present at that time and any monetary union could only hope to be a smoother and more efficient system than the one which the world used to have before 1914 and to which it was returning after 1958. Broadly speaking, the 1960s were a quite favourable period, and it is not surprising that at the end of that time great hopes were raised in Community circles of moving towards monetary union. I suppose they reached their height in 1972 when the Snake was formed, which was to have a narrower range of fluctuation than the Smithsonian range which had been reached before, when the United States, as we can now see, torpedoed the whole system by cutting the gold/dollar link.

What happened, as several noble Lords have reminded us, is that the United Kingdom only stayed in the Snake for I think seven weeks; they were followed out by Italy in the following year, and France the year after that. Although, the French made an attempt to came back in it did not last long. Now what has happened? We just have a small deutschemark group, and even some members of that have changed their parities within it. If you look at what has happened, the outlook, is extremely depressing.

Why is this? It is basically because the world has entered a different phase, in which, rightly or wrongly, it is much more preoccupied with the problems of inflation than with the other problems. Every country is now struggling with inflation, but, as the noble Earl, Lord Cromer, pointed out in his interesting speech, the rates of inflation that countries have are different from one another, and the rates themselves change. In 1976 the German annual rate was about 4 per cent.; the American rate, 7 per cent.; the French about 9 per cent.; we were up near 20 per cent., and the Italians beyond that. The Germans are now down a little, the Americans have gone up a little, and we are down to about 8 per cent., with a great deal of doubt in the minds of a great many people as to whether we are going to stick at that. It is a creditable rate compared to what we had.

Monetary union means that you have all got to be tied closely together. We are all struggling with the problem of inflation and no country has been able to solve it in a satisfactory way, and that is the problem about getting into a monetary union. Just imagine trying to get in when you have these different rates. First, you have to settle your monetary policy, and you cannot do that with a veto. The central bank must have an instruction. It cannot have 12 different countries vetoing it. Suppose that we and the Germans discussed having a monetary union now, with them having 3 per cent. inflation and our rate of inflation at 8 per cent. and rising. Who is going to work whom? They would never settle. The central bank would never get off the ground because it never got any instructions.

Suppose for a moment that they made this great act of will and agreed: then what happens to the Member countries at this point will depend on how their current rate depends on the chosen rate. Suppose we settled for 7 per cent. or 8 per cent. inflation a year, we would put a most violent inflation into the German system. Meanwhile, if we were up where we were a few years ago, we would get a violent deflation here. Political problems would arise if we tried to get a monetary union before we had not only control of inflation but control at more or less the same rate. There are all kinds of other things that we have to do in the way of convergence and harmonisation before we can get to a working union. But, dealing with what is to be the crown of the whole business, my view is that we are getting further away now because of this inability, one way or another, to deal with inflation.

I expect that your Lordships are frightfully bored at hearing that there are two main schools on how to deal with this: there is the monetary school, and the incomes policy school. I have long been a supporter of the incomes policy school of thought. I suppose we ought to judge the hope of progress towards monetary union by the progress we arc making in this way. Monetarists ought to be in favour of going to a monetary union as soon as possible, because, as I understand them, they want a particular monetary policy to be adopted willy-nilly, and everybody would have to adjust themselves to it. They are rather like the school of European thought at present which thinks that we should take a great dive forward; do it first, and then deal with the difficulties. I have always thought that you can only control this by some kind of agreement.

Therefore, as I say, I am an incomes policy man. From my point of view, the people who are doing the most to get us towards monetary union are Mr. Callaghan and Mr. Healey, because they are doing their utmost to get us to have a permanent incomes policy. I am not sure what the policy of a possible alternative Government will be on this. I think that the right honourable lady who leads the Opposition is right not to spell out in detail what she is going to do until she comes to power. Some of her pronouncements suggest that she leans rather more towards the monetary school, so I suppose those convinced Europeans who are monetarists would put it the other way round.

As I remarked in passing, a great deal has to be done before we can get to economic and monetary union. Under harmonisation we have to harmonise our tax system; we have made a start with VAT; and on convergence, which means convergence of policies, we still have a long way to go. But, in my view, however successful you may become in this field, until you have learned to deal with inflation and have a recipe you can all apply at the same time, you will not be able to get to a monetary union.

8.18 p.m.

Lord KALDOR

My Lords, I have listened to all the speeches in this debate. As I expected, I did not hear any new argument that would have caused me to change my views on the merits of the issue of monetary union which I am going to expound. I was glad to learn, however, that I was not alone in this House, and not even on this side of the House, in thinking such a move would entail great dangers and disadvantages. In particular I was glad to hear the noble Lord, Lord Morris, say many of the things that I would wish to emphasise, and I hope that he will forgive me if I sound somewhat repetitious in what I am going to say. I can think of few things that could be more inimical to the national interest of Britian and, in the longer run, even to the interests of a united and strong Europe, than the creation of a monetary union of Europe in present circumstances—on the lines on which it was recently advocated by my able and misguided friend, Mr. Roy Jenkins.

I cannot help feeling that those, like him, who urge this step have little understanding of the significance of a separate national currency under the direction of a national central bank from the point of view of the power of a country to direct its own affairs in accordance with its own interests—or else they have reached the stage, as I believe at least one noble Lord to whom we listened this evening has reached, that they regard this matter of the national interest as of little importance in itself. To deprive a country of the power to issue currency or create credit is the equivalent in the economic filed of an ultimate surrender of sovereignty in the political field. It is the economic equivalent of surrendering a nation's own defence force in order to merge it into a European defence force with a European commander-in-chief who would not be responsible to any particular Government. In the same way, a European currency would be directed by a European governor of a central bank who would not be responsible to the Government or Parliament of any particular Member country.

To create such vast power; without responsibility would in itself be irresponsible to the highest degree and it would be an understatement to say, as my noble friend Lord Balogh said, that creating a single European currency or a single European army in advance of political union would by putting the cart before the horse. Monetary union—I believe this was also said by Lord Morris—is a consequence of political union, but it cannot be its cause. Those who think that be creating complete monetary and economic integration they bring about political union—I feel I detected a note of this in at least one of the speeches in this debate—precisely because they create conditions that make life intolerable without political union, are not only disingenuous but, in my view, are in the highest degree misguided.

It is a naïvety to think that creating the stresses and strains which full economic and monetary integration would involve would strengthen the forces making for political union. They are more likely to have the very opposite effect; they are far more likely to strengthen the forces of disruption, to strengthen the centrifugal forces, which would make the ultimate creation of a united Europe far more difficult or possibly altogether impossible.

It would be a different matter from our own point of view if Britain were the strongest, richest and the economically dominant partner of this union, so that any act of integration—and monetary union is only one particular form of integration—would be bound to enlarge Britain's power and benefit her interests, even when, by so doing, she acted against the interests of the other countries. This may well have been the case in the first part of the 19th century. British industry no doubt benefited greatly from the opening up of Continental markets for British goods after Waterloo. We might have benefited even more if we had then been able to create a full economic union with Europe and impose on all the other European countries our own currency as the sole medium of payment.

But those days are long past. Germany emerged as by far the strongest European Power in Europe by the end of the 19th century. She surpassed Britain in her industrial capacity, in trade and in competitive power. After defeat in two world wars, Germany emerged divided into two parts, but the Western part by itself has, in a matter of two decades, achieved the same, or even greater, predominance among the Western European countries than that which imperial Germany possessed before the first world war. I am not saying anything against the Germans; they did it by sheer hard work, by ability and so on; but we are not talking about cricket or about who deserves to win the world cup or to win Wimbledon. We are talking about the life and the future of the nation.

We entered the Common Market with high expectations of mutual benefit in the matter of trade, on account of the disappearance of Customs barriers, in the hope that these benefits would more than offset the cost of membership in terms both of the large net contribution to the Community and of an agricultural policy which admittedly did not suit our interests. Some of us voiced fears at the time that the so-called "dynamic benefits" of membership flowing from the disappearance of Customs barriers would redound, not to our advantage, but to our disadvantage, because they would cause a further loss of market share to our Continental competitors, mainly to Germany but also perhaps to Italy and France, both inside and outside Britain.

The five years that have elapsed since our joining have done nothing to disprove such fears. Our trade balance, particularly the balance in our trade in manufactures, has deteriorated to the tune of £2,000 million a year in relation to the other countries of the Common Market. Although our exports to the other EEC countries have increased, our imports of manufactures have increased far more, and British industry is today in a relatively much weaker position in relation to the other industrial Powers of the EEC than it was when we entered the Community.

Baroness ELLES

My Lords, as the noble Lord mentioned our trade figures with the EEC, may I ask him whether it would not be fair to compare them with the trade figures of the other parts of the world?

Lord KALDOR

Our trade figures with the other parts of the world show in fact a surplus, my Lords. That our industrial position is so much weaker today ill relation to the other Members of the EEC than it was five years ago is best shown by the fact that our manufacturing production is hardly any higher than it was in 1970, whereas in the case of all the other countries, despite the unique, prolonged and deep economic recession that occurred in the course of this decade, current production levels are 20 per cent. to 25 per cent. higher than they were in 1970.

It is difficult to see in what way we should benefit from the creation of a European monetary union, if one ignores such trivia as the convenience of tourists in entering Europe and not worrying about changes in the exchange rates. On the other hand, it is difficult to exaggerate the disadvantages inherent in the loss of power that any sovereign state possesses for the protection of its own interests.

The Earl of BESSBOROUGH

My Lords, on this question of the surrender of sovereignty—because he has started talking about it again—would the noble Lord agree that we have surrendered sovereignty to the IMF?

Lord KALDOR

My Lords, I was just about to expound on this very point if the noble Earl will allow me to do it at rather more length. We shall lose our freedom to pursue independent fiscal and monetary policies and our ability to take specific measures in a national emergency, at least in certain fields such as exchange control, which in national emergencies are very important. We shall lose rights which any sovereign country can claim for the protection of its vital national interests.

It is possible that some people take the view, as perhaps does the noble Earl, who initiated this debate, that our record in the matter of economic management has been such a poor one since the second world war that nothing can he lost by losing this power or handing it over to someone else. This is saying, in fact, that we would be better off without the sovereignty of Parliament, just as it is said of some of the British ex-colonies, justly or unjustly, that they have become worse off as a result of gaining their own sovereignty and that they were better off when they had no sovereignty.

This would be a more arguable case if in fact a central authority existed which was capable, through adequate fiscal powers, of enforcing the maintenance of equal standards in different parts of the Community, in the same way as our own Government in Westminster enforces equal standards in different parts of Britain in the matter of equal pensions, of social services, of the Health Service and of educational facilities. Through this, a large and invisible transfer takes place, or rather flows all the time from the richer to the poorer areas of the country. The central Government at Westminster, by collecting taxes on uniform criteria based on income or on expenditure, automatically takes more from the rich areas than from the poor areas, and, by giving the same benefits to the different areas in the field of social and welfare services of all kinds, automatically pays out more to the poorer areas than to the richer areas. An enormous transfer occurs the whole time from one part of the country to another, but it takes place invisibly. It is an automatic consequence of having a central Exchequer through which all money flows, of collecting the money on principles of taxation applied equally to everybody, and of providing services of the same standard irrespective of the riches or poverty of the particular area. The achievement of this end pre-supposes a strong central Government with wide powers of taxation and charged with responsibility not only for matters like defence but also over a large part of the field of social and economic expenditure, which, in the 20th century as against the 19th century, takes up the greatest part of total Government expenditure.

There is no prospect of anything like this emerging in the near future and there is no prospect of having a political union which will have a strong central government of the kind which exists in the United States today but which was not in existence for a long time after the American colonies had become independent. It would he foolish in the extreme, in the absence of such political institutions, to rely on the present methods and organisation of the Community to receive adequate compensation for economic losses in the form of regional subsidies and their like. We should in effect become part of the German Lebensraum or Wirtschaftsraum, but we should have no political say, no political power to ensure that our interests were protected in the same way as, for example, they are in the case of a poorer Land within the present German Federal Republic.

Many noble Lords spoke about the regrettable state of economic stagnation in Europe at present and answered without any argument that the creation of a monetary union would be an effective way of overcoming this stagnation. I would say it was just the opposite. As some noble Lords have mentioned, Germany is a country which is in the strongest economic position from the point of view of taking steps to secure a policy of economic expansion. She fps a large surplus in her balance of payments, yet for reasons which we may consider good or bad and which may be due to Philosophy or prejudice—who are we to teach the Germans economics, or how they should conduct their policy when they have done so much better than we have? —they are not prepared to take steps to ensure full employment for their own citizens. How, therefore, can we expect them—if we put them in the dominant position in which they would be bound to be put through the very fact of a monetary and economic union—to take more effective steps than the Government in Westminster do to protect the economic livelihood of the people of these Islands? The people of these Islands, particularly those in the outlying areas such as the North of England or Scotland, are already in a very poor condition. Any country which maintains achronic surplus in her balance of payments does in fact follow what used to be called before the war a "beggar-my-neighbour" economic policy. It gains employment, it gains prosperity, it gains wealth, at the expense of other people. It draws wealth to itself. It pursues therefore a form of predatory behaviour and any step towards integration enlarges the scope and importance of this type of behaviour.

As I said, without the monetary union the Germans have succeeded in maintaining a large surplus and have thereby increased employment within their borders and increased production to a level which is far higher than that of the less, fortunate partners of the Common Market. This process would be greatly enhanced, not diminished, if we followed the present customs union with more fundamental steps towards full economic and monetary integration.

Since the war, we have taken many foolish decisions from the point of view of our national interest. In the light of all this, I would not by any means rule out our taking even more foolish decisions in the future. Fortunately, not all the members of the European Community are equally foolish. I must confess that I would not trust my own Government not to resist the temptations of the German Government, and not to accept some modest step which gradually eased the way into something which is completely contrary to our national interest.

However, I would far rather trust other people such as the French or the Italians to look after their interests. Italy benefited enormously by having her currency tied to the dollar at a time when we had foolishly cut loose from the dollar in the mistaken belief that this would improve out economic situation. I cannot see Italy lightly entering into any such step. Despite the declarations of some of the French leaders in the past, I cannot see France doing so. France's remarkable economic prosperity since the Second World War could certainly not have been realised without frequent devaluations of the French franc in relation to the German mark. I think that since the 1950s the franc has been devalued in terms of the German mark at least eight times. The franc value of the mark is today two and a half times what it was in the 1950s. The noble Lord, Lord Roberthall, referred to this when he said that if different inflation rates persisted—and certainly differences in inflation rates have persisted for 20 or 30 years between France and Germany—then monetary union can spell disaster. I cannot see these countries lightly entering into commitments which would so seriously compromise their ability to pursue the best economic policies from their own point of view.

Some people, including I fear, some noble Lords in this House, have become so European that they have ceased to be patriots. However, I was relieved from the tone of the remarks of the noble Baroness, Lady Elles, that this view is not shared by her. And though as she said she spoke only for herself, possibly this is not a policy that animates her Party. I think that is far from true of the people of Britain at large.

8.45 p.m.

The SOLICITOR-GENERAL FOR SCOTLAND (Lord McCluskey)

My Lords, may I begin by joining other noble Lords in thanking the noble Earl, Lord Bessborough, for raising this matter and giving the House the opportunity to discuss it. May I offer him my personal thanks for his kindness in giving me advance notice of what he intended to say in order that I might better prepare my reply to this debate. Other noble Lords, in addressing themselves to this Question, have considerably widened the debate. The noble Lord, Lord George-Brown, did so after complaining how thinly attended was the House. One notable Lord has left. The attendance is thinner because it is the noble Lord, Lord George-Brown, himself who has left.

I do not propose to follow him into the general debate about the European Economic Community. Nor dare I enter the arguments to which we have just listened, whether about the position of the cart and the horse or about monetarism, or about the other matters that have been spoken about with such expertise and differences by the various noble Lords. That is not because I disagree with all the points that have been made. I could pick out a number of points from the speech of the noble Lord, Lord Morris, my noble friend Lord Kaldor and the noble Lord, Lord Roberthall, with which I would agree. However, I do not myself want to widen the debate. I hope that your Lordships will understand if I attempt to take the question narrowly and therefore not indicate particular points of difference from what has been said.

As has been pointed out in this debate, discussion of economic and monetary union has a long history in the European Community although it is not referred to in the Treaty of Rome itself. It is indeed a later idea. In 1969 the Summit Meeting of the original Six at The Hague announced that plans would be worked out with a view to the creation of an economic and monetary union". By 1971 the European Council resolved to make the Community a single economy by 1980 with, in effect, a single currency and a single authority for domestic and external monetary management. That is a very far-reaching concept and it promotes diametrically different reactions, as we have seen in the course of this debate. A common Community currency would mean the elimination of exchange rate changes between member countries. A central monetary authority for the Community would remove much of the freedom that Member States have at the moment to determine their own fiscal policy, as the noble Lord, Lord Kaldor, has just been reminding us. It would, in short, involve very substantial transfers of economic sovereignty to the Community.

Since 1971 world conditions have changed radically. In particular the strong inflationary pressures of the 1970s, the upsurge in commodity prices, and the abrupt oil price rise at the end of 1973, have all had profound effects. The countries developed different policies in reaction to the crisis, and progress towards economic and monetary union was effectively halted. I would remind your Lordships of the White Paper on renegotiation in 1975 which stated bluntly, but I believe truthfully, that: events have shown that the programme of movement towards full economic and monetary union by 1980 was over-ambitious and unattainable". This does not mean that the objective of economic and monetary union has been formally abandoned. Indeed, as late as December 1977 the European Council reaffirmed its attachment to the objective of economic and monetary union. But all Member States now accept that it has become a more distant goal.

Against this background the Community has had to try to combat the recession of the middle 1970s with more pragmatic and less idealistic policies. The Commission is now broadly in accord with this way of approaching problems and looks at economic and monetary union less as a matter of ideology than in terms of the contribution it can make to solving the present problems of unemployment, low growth and inflation in the Community. This line of argument is shown in the most recent Commission paper (to which reference has already been made), on the prospect of economic and monetary union which was presented to the European Council last December (COM(77)620). This paper laid emphasis on a gradual approach to economic and monetary union, an important part of which was to make progress towards the convergence of economic performance in Europe. At the same time, however, the President of the Commission, Mr. Jenkins, was advocating in his speeches what might perhaps be described as a more idealistic approach. His arguments h we been summarised by the noble Earl, Lord Bessborough, but I think that it is important to reiterate that Mr. Jenkins' bold proposals would involve very far-reaching transfers of economic sovereignty. The Government feel that the Commission are right in arguing in the paper to which I have referred that the Community is not yet politically prepared For these transfers, and that a gradual move towards economic and monetary union is therefore preferable. Her Majesty's Government, and other Governments in the Community, have been readier to build on the essentially practical approach of the Commission to stress the importance of ensuring, by concerted action among the Member States, that the economies of the EEC should grow more rapidly And more harmoniously.

Several noble Lords have, in their speeches, recognised the absolute importance of such harmony. The Prime Minister and the Chancellor of the Exchequer have been advocating, and working for, policies of concerted action for growth to be worked out at the European Summit in Bremen, and the World Economic Summit in Bonn in July. Her Majesty's Government very much hope that these meetings will have positive results.

I have explained to your Lordships that the Government have in recent weeks and months thought it best to lay the greatest emphasis on co-operation among the Member countries of the Comrmnity to secure growth and to reduce unemployment. In the Government's view, the best way of promoting the European idea is to convince the peoples of the Community that Member Governments concentrate and co-operate on real issues, and that membership is going to promote welfare.

It is certainly true, as noble Lords have suggested, that the instability of currencies can be inimical to confidence among businessmen. That was graphically illustrated by the noble Earl, Lord Cromer. Instability of currencies can also stand in the way of the kind of growth we want to see. This is one reason why there has been renewed interest in the possibility of new currency arrangements in Europe. Your Lordships will all have seen—and some have mentioned—quite extensive Press comment about this. The noble Baroness, Lady Elles, asked me to say something about this. But your Lordships will not, I hope, press me for a detailed or definitive statement. It would be premature and necessarily incomplete.

This matter was one of those discussed at a meeting of the EEC's Finance Council in Luxembourg a week ago. My right honourable friend the Chancellor of the Exchequer was present, and there was a valuable exchange of views; not about the mechanics for a scheme, but about the principles on which a new scheme would have to be based if it were to be durable, and to serve the general interest. The Finance Ministers were generally agreed, for example, that a durable system would need to be founded on continued progress towards the convergence of economic performance. This is in line with the approach that I was mentioning earlier in my speech. A report of the Finance Council's discussion will be placed before the meeting of the European Council—the so-called European Summit—at Bremen next week. What the outcome of that further discussion may be, we must wait and see; but I can assure your Lordships that the discussion so far has been interesting and constructive, and I can at least venture to say that it will continue.

I was asked by the noble Baroness about the opportunities for debate. It may be that after the Bremen or the Bonn discussions noble Lords will, if they wish, find an opportunity to debate what emerges; but there will have to be much more discussion of, and indeed study of, the detailed mechanisms before the question arises of a choice of the precise way to seek and achieve currency stability in Europe—

Baroness ELLES

My Lords, will the noble and learned Lord allow me to intervene? Is any consideration being given to the publishing of some form of Green Paper or other Government document, which would set out the benefits or the alternatives on EMU? —because this is obviously a vital subject which will have to be discussed by the public at some time.

Lord McCLUSKEY

My Lords, I cannot positively say that that will be done, but certainly I take that as a suggestion from the noble Baroness, and I shall draw the attention of my right honourable friends to it.

We accept what several noble Lords have stressed; namely, that currency stability is obviously desirable, and would lead to the benefit of the economy and of trade. Indeed, it is for that very reason that Ministers are discussing it.

Reference was made to the role of the European Monetary Co-operation Fund. This is at present only embryonic, and carries out certain functions relating to the working of the present European currency margins agreement—the so-called Snake. If Community Governments so wished, this fund could be developed and built upon in quite ambitious ways, with functions relating to intervention in the foreign exchange markets, and to the provision and receipt of credit. I cannot say whether the European Council will wish further studies to be carried out of these quite complex and far-reaching ideas, but the Government would certainly be ready to join such further examination.

I do not know what comfort the noble Lord, Lord Banks, can take from the little that I have to say—perhaps not very much if he is looking for a resounding declaration of immediate and overriding political will. But, of course, I do not offer the resounding negative which my noble friend Lord Balogh sought. I can say that we agree that some progress on currency arrangements can take place before convergence is complete.

To summarise, I should say that the Government wish to continue to approach the question of achieving economic and monetary union in a pragmatic way with the fullest regard to what is practicable in a reasonable time-scale, and what is most helpful to the people of the Community. I can assure the noble Lord, Lord Roberthall, that the Government are alert to the significance of the present disparities in economic performance, including inflation, to which he drew our attention. The Government's approach has led to emphasis on co-operation at the levels of economic policy making, and this is, we believe, the crucial element in the way forward in present circumstances. But alongside economic convergence, so long as this is clearly seen to be something which Governments are joining together to work for as a continuing process, it is also right that the Community should be discussing whether there could be durable and sustainable currency arrangements within the Community, which many would see as further evidence of progress towards economic and monetary union.