EUROPEAN MONETARY SYSTEM TALKS

HL Deb 28 November 1978 vol 396 cc1241-84

8.20 p.m.

Lord SOAMES rose to ask Her Majesty's Government what progress has been made in bi-lateral and multi-lateral talks within the European Economic Community towards the setting up of a European Monetary System. The noble Lord said: My Lords, I shall try in the course of my few remarks to put some of them, at least, in an interrogatory fashion. Discussion of the European Monetary System tended to concentrate on a rather narrow front and to be largely about economic technicalities until we got the Green Paper the other day. I suppose that this is partly because it is a complicated subject but partly because our poor comparative economic performance in this country, coupled with the major differences within the Labour Government on all things European, has forced Britain—probably alone among all the Community countries—into a defensive position. But I should like to pay tribute to the fact that the Prime Minister has tried to give the whole subject an international flavour, and rightly so. It is at this end of the spectum that I should like to start; looking first at the free world's need for monetary reform and monetary management, then at what contribution Europe can make to this and, lastly, at the part that Britain should play in the European scenario.

First, the international monetary scene. It has become chaotic. The weakness of the dollar, for instance, reflects in reality the basic weakness of what is left of our present international monetary system, the child of the Smithsonian Agreement. That system—or perhaps it should be better called that non-system, as it has become—is suffering from two fundamental problems: these are, first, the instability of the exchange rate relationships and currency flows which have, in the event, proved much worse under floating rates than under fixed; and secondly, the lack of a pivotal international currency of trusted value, which the dollar was but no longer is. Indeed, the United States cannot solve the whole question of the dollar by itself. But, if it is not solved or if, on the other hand, the United States, in trying to solve it, ends up in a deep recession, then the difficulties that we live with today will seem as nothing compared with what will then ensue. In sum, international monetary instability is sapping the strength of the Western world. Over-violent swings in parity changes—first one way and then the other—have done a grave disservice to world trade in general.

This instability is, for instance, an important element in the doubt which has to be cast on the successful outcome of the vital international trade negotiations under the auspices of GATT which are now coming to a crunch. Why so? Because what point is there in talking about, say, a 20 per cent. reduction in a tariff between the United States on the one hand and the Community on the other when we have recently seen a 20 per cent. reduction in the parity value of the dollar with the Deutschemark over a period of 12 weeks. This therefore tends to call into question the whole purpose of the tariff element of what is known as the Tokyo Round. Yet I am sure that your Lordships are aware of the terrible risks that we should all run if these negotiations were to fail, the risks that we should all run in terms of a free-for-all in competitive protectionism.

What is more, these over-violent awings, especially over-violent devaluations, have not only proved to be the result and reflection of inflation but now they have also become, to a great extent, its cause—with all the damage that that does to the very structure of Western society. So I do not believe that it is possible to exaggerate the need for a greater degree of international co-operation in the management of exchange rate movements if trade is to grow rather than to diminish, with all that that means in terms of employment and prosperity within the free world and even of its ability to sustain its defensive guard against those who would wish to see the collapse of the Western way of life.

Now, it so happens that, through a combination of circumstances, we are, I believe, presented with a Heaven-sent opportunity to restore greater order, in that the strong desire among the countries of the European Community to bring about a higher degree of monetary stability between themselves is coinciding with the announced determination of the United States Administration to maintain within certain margins—unspecified but, nevertheless, potentially valid—the exchange rate value of the dollar. It also coincides with a strong desire on the part of the Japanese to bring some order into the system for fear of the real dangers to world trade of the present situation.

So, if ever the time was ripe for a major initiative to restore some order to international money markets, it is now. And what better timing or origin could there be for such an initiative than the meeting of the European Council next month? I should like to see it there agreed among Heads of State and Governments that there should be an approach by the European Community to the United States and Japanese Governments along the following lines: "We, the Community"—Ishould be so bold as to like them to say—"are determined to work through the European Monetary System to create greater monetary stability among ourselves. We want you to know that we look upon this not merely as something which is necessary as a means of encouraging investment, trade and growth within the Community but also as a contribution to what we see as the much-needed improvement in monetary stability within the Western world. We should like, therefore"—I hope that they will go on to say—"to open formal discussions at appropriate level between spokesmen for the Community itself on the one hand and your Governments on the other, with a view to agreeing, first, on the need for co-operation in bringing more order into the world monetary system and, secondly, on the methods necessary to bring this about. A suitable forum would be the economic summit where the Community is represented as such. Officials could start discussions there in January to have a paper ready for the June meeting of Heads of Government, where discussion would be taken further and when decisions could be taken and commitments made." That would be the end of my message.

I do not mean by all this that we should be urging a return to a would system of fixed parities, but rather that the Community, the United States and the Japanese authorities should come to agree upon the necessary decisions and disciplines required to restore greater order in the Western international monetary scene to the benefit of all. I see such an agreement being of primordial importance to the much-needed increase in world trade in these difficult times.

My Lords, let us not lose sight of the fact that international monetary arrangements and systems are not an end in themselves; they are but a means to an end. And that end is the encouragement and expansion of trade across national frontiers. But I also believe that in purely Community terms, the chances of the European Monetary System proving a lasting success will be much enhanced if it is related to an agreement or at least an understanding with, as it were, the dollar and the yen to co-operate together to sustain a greater degree of world monetary stability. Such an agreement would do more than anything else to remove possibly dangerous pressures on the European Monetary System, to ensure its long-term survival and its contribution to a wider European union.

My Lords, this brings me to my second point: What contribution can the European Community make to greater monetary stability? First of all, it has to cobble together a monetary system which serves the European interest in the widest sense. To this end there are evidently a number of decisions of an internal Community character which have not yet been decided and which will need to be taken at the December meeting of the European Council. These are necessary whether one looks at the European Monetary System purely in terms of European self-interest or, as I prefer to do, also as a contribution which the Community can make to the world monetary and trading scene.

Of these decisions, I will mention just two—there are many more—which seem of major importance. First, the quantity of ECUs which should be created, and what they should be used for. At present, all that is proposed is that 20 per cent. of the member States' national gold and dollar reserves would be deposited with the European Monetary Fund which would issue in return ECUs to the value of 25 billion units of account. If the ECU is going to play the part in world monetary affairs that I believe is called for from so large, important and wealthy a base as is the European Community, it should be seen as becoming one of a number of international pivotal currency options along with the dollar, the yen and perhaps SDRs. To do this, will require more ECUs. It will require both a more imaginative approach to their creation in return not only for gold and dollar reserves, but also for national currencies; and also in their use, which is at present envisaged—particularly by the Germans if I understand it aright—as being essentially restricted to exchanges between Community central banks.

If that is the sole purpose of the ECU, it seems hardly worthwhile creating it. Central banks deposit a proportion of their gold and dollar reserves with the European Monetary Fund. They get ECUs back in return, and then can only use the ECUs to exchange among each other as the need arises. That is not much more than a charade, to be honest. I hope that the European Council will agree that the whole question of the ECU should be made much less restrictive, both in the manner of its creation and in its use and purpose.

The other matter of great importance which is still open for decision by the European Council is the whole question of consultation among member States to bring about a genuine co-ordination of monetary and fiscal policies. This must be made a reality. It is essential if the system is to work. It seems that the Community is moving inexorably towards the parity grid system whereby the relationship between each currency has to be maintained with each and every other. But it should be agreed that when the first signs appear of one currency seeming to be about to get out of line, when the bell tolls or the light flashes—however your Lordships wish to put it—there must be immediate consultation with other member States on the action to be taken. It is, as I see it, vital that this should be just a part of regular consultation and not a mere ad hoc arrangement to deal with a specific problem at a specific time. There should be frequent and regular meetings in good times and in bad of, for instance, the deputy governors of central banks and a senior Treasury official from each country who should anyhow keep in constant touch with each other in order to make a reality of co-ordination and convergence.

My Lords, what then of Britain's part in all this? It seems as if the Prime Minister's main concern has been to steer between the Scylla of infuriating our Community partners even further by refusing to have anything to do with the monetary system, and the Charybdis of the anger of the extreme Left which riddles his Cabinet, Government and Parliamentary Party. What a sorry state of affairs! I must comment on what seems to be the principal argument used by those who are against our joining the exchange rate mechanism. It is that sterling might get drawn, as it were, in the slipstream of the Deutschemark, to an uncomfortably high parity in relation to the rest of the world. I believe this to be the main fear.

Nobody can of course be certain how sterling's parity is likely to move, whether we are in or out of the European system. Two things I believe to be certain. One, provided we pursue monetary and fiscal policies which are sound in themselves we will not have difficulty in getting the agreement of our partners if, in spite of all, devaluation becomes patently necessary. Secondly, what is also at least probable is that those currencies that are within the exchange rate mechanism will suffer less from the more violent swings of parity movements which have been such a regrettable feature of recent years.

But, my Lords, is there any point in our putting today such points as this to Ministers? It looks as if—though I still hope I will be proved wrong—the United Kingdom will prove to be the one Community country whose Government lacks the combination of political will and economic strength and purpose to join the whole system from the beginning. Yet I do not think I should be accused of chauvinism if I were to say that the experience we have in the Treasury, in the Bank of England and in the City on world monetary matters is greater than that which any other member State can contribute to the Community's fund of knowledge in this area.

Given the prospect of the European Community taking—as I hope it will—a major initiative to strengthen the world international monetary system, then what a tragedy it is that Britain will not apparently be able to play her part as a full member of the European system with all its risks, yet with all its opportunities. What a sad commentary, my Lords, on the affairs of our country and its lack of influence in Europe that the Government should apparently feel the need to adopt such a motheaten and weak-kneed attitude on so vital a matter.

8.40 p.m.

Lord BANKS

My Lords, I am sure that the whole House will be grateful to the noble Lord, Lord Soames, for asking this important Question this evening. Briefly, I should like to join him in seeking an answer to it. We know from the Green Paper to which he has referred and which was published last Friday what are the Government's aims. They have expressed themselves as ready to join a European Monetary System on the right terms. They have given some indication in the Green Paper of what those terms would be. What we are anxious to know is what response they have had when putting these terms to the Governments of the other Member States: whether there has been any give and take, and whether any compromise solutions have emerged.

We on these Benches have made clear on a number of occasions that we are in favour of a full European monetary union. We believe in the concept of one economy for the Community. We believe that it is by pooling our resources in that way and by standing together as one that the Western democracies can ensure their survival and prosperity and also make a positive contribution to the welfare of the world. We may be right or wrong in thinking that, and this is not the moment to embark on a discussion of that question; but anyone who holds that view sees the question of EMS in a different light. EMS is primarily an exercise in currency stabilisation, providing fixed but adjustable parities within the Community. We do not see the main issue as being whether fixed exchange rates are better than floating ones and whether a degree of stability in Europe would help world currency stability. I do not say that that is not a very important issue: I simply say that we do not see it as the main issue. Our aim is not nine currencies held together within limits: our aim is one currency for the Nine.

Nevertheless, we welcome EMS as a step on that road and so we welcome the initiative of the German Chancellor and the French President and also, before them, of Roy Jenkins. But, although we want to go much further than EMS, we are not blind to the difficulties which the introduction of EMS must involve. Indeed, the difficulties arise precisely because EMS falls so very far short of economic and monetary union. To impose a discipline on nine independently-managed currencies in countries with differing economic parities is a formidable task. The pressure to break apart will be enormous, and failure could set the whole concept of economic and monetary union back for years. The Government, in my view, are right to say in the Green Paper: No currency intervention, however large the resources used for it, and no country, however powerful, can in the long run hold an exchange rate if the fundamentals are wrong". I am sure that the Government were right to press for the eight characteristics listed on page 3 of the Green Paper. The Green Paper explains very clearly why the basket of currencies system is preferable from our point of view to the parity grid system. I think the Green Paper is right to point to the importance of the convergence of economic policies if EMS is to last. I have expressed doubts in this House before, and I express them again, about the possibility of ever bringing the economies into a complete state of convergence. I think that so long as you have independently-managed currencies that is not possible. On the other hand, an economic and monetary system of the kind envisaged could not last for long unless there were a tendency to converge.

The Government face a difficulty, to which the noble Lord, Lord Soames, referred, in putting across these views—views which I feel are justified. They have gained a reputation for being lukewarm in their attitude to the EEC. A section of the Cabinet remains opposed to British membership, and the Labour Party on the whole is hostile to it. It would be a pity if this reputation were to prejudice the Community and to prejudice within the Community a careful consideration of the case over EMS which the Government have been seeking to make. I doubt, however, whether the Government's eight points go far enough. As The Times said on 13th October: If you are going to merge currencies you have to merge monetary policies and if you merge monetary policies you have to merge economic policies; you have to merge institutions; you have to have one institution in charge of money supply and there has to be a transfer of resources". I agree with that. The Government go part of the way with that, but not all the way. In my view, if EMS were established on the basis that was advocated by The Times in that leading article, it would not last even then unless it were designed in the not-too-distant future to lead to economic and monetary union. To linger too long on the way is to court a break-up. The time must not be too long delayed after the creation of EMS before the Member States agree to leap to monetary union, to what would in effect be a single currency. Francs, marks, lire and pounds would be local names for a single money. Of course, it would have to be a very well-prepared leap, with all the policies which are going to follow afterwards most carefully planned and thought out.

It is clear that EMS as agreed by the Community in 1978 will fall short of that kind of EMS. It would certainly fall short of economic and monetary union and of the EMS that I have suggested as a necessary prelude to economic and monetary union. It seems likely even to fall short of the kind of EMS which the Government have said they want and the question is: what should the Government do in that event? We read that they will opt for half-membership. We are told they will not join in the exchange rate system officially, although they may seek to maintain the rate of exchange from outside; but I wonder whether that would give us a full say in the running of the system. Past experience would suggest that it is only full membership which enables participation in the drawing-up of the rules. If it is right that our future is bound up with Europe, then it is better to be in, however large the risks and the dangers; and on that point I agree with the noble Lord, Lord Soames. It is better to press the eight points, and other points, from within than from without. From inside, Britain can press for the kind of EMS that the Government believe to be desirable and I would hope we would come to work for the kind of EMS which would pave the way for a genuine and comprehensive economic and monetary union.

8.48 p.m.

Lord KALDOR

My Lords, I should like to preface my remarks by saying that I find myself in agreement with many of the points made by the noble Lord, Lord Banks, even though, for reasons that I explained in an earlier speech, I would be strongly opposed to a European Monetary Union in advance of a political union, but I agree with him that what is now proposed is not a step towards it. I am also in agreement with the noble Lord, Lord Soames, that what the world needs is greater economic co-operation and greater monetary stability to deal with the problem of worldwide inflation and to ensure that prosperity is maintained or rather restored throughout the Western World. I want to say these things because I am going to talk more particularly about the arrangements that are now proposed and whether those arrangements serve any of the objectives put forward by the noble Lord, Lord Soames, and whether they are in the Community's interests, quite apart from whether they are in the wider interests of the Western World.

I feel that when the dust has settled on these events and the verdict of history comes to be written, the present German Chancellor, Herr Schmidt, will emerge not as a Bismarck but as a Talleyrand of the late 20th century, whereas M. Giscard d'Estaing, for all his brilliance, will go down in history as the man who was outsmarted by the Germans at the critical moment. Our own Prime Minister, I think, will emerge as the man who in the circumstances made the best of a bad job.

Why do I say all this? In the light of the Green Paper—and here I very much agree with the noble Lord, Lord Banks; the authors thoroughly deserve our congratulations for the clarity of their presentation and for the cogency of their arguments—there can be no doubt that the EMS, as it is likely to emerge from the summit meeting, is a very one-sided set of arrangements. It operates greatly to Germany's advantage and greatly to the disadvantage of most other members of the European Community—and that includes France and Italy as well as Britain, though in the case of Britain it remains to be seen to what extent our formal membership of the system will effectively restrict our freedom of action. It is possible—we do not know—that the Prime Minister may secure for us the best of both worlds. In the natural course of events, it is the potentially weaker members of the Community who should have come together and laid down the conditions necessary to make the system a success, in terms not only of greater stability of relative exchange rates but of concerted, well-conceived and well-directed action to achieve greater comparability in the performance of the members of the Community, and to counteract the tendency towards greater divergence in economic performance and in living standards which has been evident over the last five or six years.

However, the main effect of the proposed arrangements is not that; it is to hold down the German mark in relation to other European currencies and thus to preserve Germany's privileged position as the one large industrial country in the EEC with a large surplus in her balance of payments, especially in her trade in manufactures, which is thus able, in conditions of international recession, to maintain her domestic employment levels at the direct expense of the employment levels of other member countries.

Nothing illustrates this better than the steady and dramatic deterioration in our balance of trade in manufactures with Germany. In 1970 we had a deficit in this account of £100 million. In 1973 the deficit was £600 million. In 1976 it was £1,000 million. In the first half of the current year 1978 it was running at an annual rate of £1,800 million.

Lord SOAMES

My Lords, will the noble Lord forgive me for interrupting? Would he like to tell the House whose fault he thinks that is?

Lord KALDOR

My Lords, I should certainly not say that it was not our fault—at least not entirely. We are not the only ones in this position. France maintains an adverse balance of trade in manufactures with Germany which is quite as large as ours. It is Germany which failed in the obligations which she assumed at previous summit meetings to reach certain targets in the balance of payments. This was agreed upon when President Carter and other leaders of Western countries agreed on how to deal with the recession. Germany did nothing to reduce her surplus in the balance of payments. Your Lordships may ask: Whose fault is it? Perhaps it is not the Germans fault. But "fault" is not the proper expression to use. I am talking merely about the consequences. France suffers from a chronic rate of inflation which apart from a few years in the middle seventies has been worse than ours and is now greater than ours and has suffered from it for much of the post-war period. I agree that in comparison with us France can look back on a remarkable record of prosperity and progress since the war. But that progress would have been inconceivable had France not made frequent use of the weapon of devaluation, with a downward adjustment in the rate of the franc particularly in relation to the mark. As I said on an earlier occasion, if you add all these adjustments together the value of the franc now is less than 40 per cent. of what it was just before the Community was formed.

M. Giscard d' Estaing no doubt thinks that the discipline imposed by the new system will itself serve to moderate France's chronic and persistent inflation. I do not believe that this is true. But even if it were true it could happen only in circumstances in which the level of production and employment in the French economy were seriously jeopardised and in which France's standing, both political and economic, was considerably weakened in relation to Germany's.

I do not of course suggest that German policies are unwise from the point of view of Germany's national interests. Given Germany's high standard of living and relatively low unemployment, its preference for slow growth and stability combined with guaranteed free access to the markets of Europe is thoroughly sensible. But for countries like Britain—and this includes France—it may involve a dual loss: a loss due to Germany's surplus in trade and her increasing market share in the manufacturers' market of the Community; and a loss due to the general slowing down in growth rates imposed on the Community and ultimately on the rest of the world. The slow growth rate may make sense in the case of Germany, but it will not make sense when translated into the situations of other countries.

It is true that exchange rates will still remain adjustable, but only by a cumbrous and unsatisfactory procedure, as the haggling and bargaining which preceded the most recent adjustment in the exchange rates of the snake a few weeks ago has shown, and which is indeed inevitable in any system in which adjustment of exchange rates can be arrived at only by mutual consent. In fact, the whole notion of "fixed but adjustable" exchange rates, which was originally conceived at Bretton Woods, has proved to be unworkable on account of the large speculative movements which any expectation of impending adjustments necessarily engenders. One need only recall what happened before and after our 1967 devaluation, when we made use of our right to make an adjustment in the system of fixed exchange rates, and the enormous difficulties that we had with speculative losses both before we devalued and in maintaining the new rate afterwards; and compare that with what happened in 1972 when we gave up the fixed rate and thereby brought to an end the speculators' one-way option—that is, "tails I win and heads I do not lose"—which is inherent in the so-called "fixed but adjustable" system.

Hence the concession that we should continue with a floating rate regime, which appears to have been gained by the Prime Minister in his talks in Paris, is a very important one, even if our aim is to maintain a stable rate for the pound de facto. There is all the difference between keeping the pound floating in a formally floating system and entering on a fixed system.

I trust, moreover, that we shall still be free, as we have been hitherto, to stabilise the pound in terms of the Smithsonian average rather than in relation to the German mark or in relation to the group of currencies in the new snake, because from the point of view of our exports, our competitiveness and our balance of payments, this will make an enormous difference. In the last 20 months, the pound was completely stable in terms of the Smithsonian average. It is the same today as it was nearly two years ago, but over that period the pound appreciated by some 15 per cent. in relation to the dollar and depreciated by some 12 per cent. in relation to the German mark. Had this not occurred, had we been compelled to appreciate the pound by 30 per cent. in relation to the dollar, our non-European trade—which is the one part of our trade where we are in surplus, whereas in the EEC we are in considerable deficit—would have suffered very severely.

I am in agreement also with the analysis of the Green Paper on the need for greater stability of exchange rates. Indeed, in a paper which I wrote on the effects of devaluations in the last 10 years, which by sheer coincidence happens to be published in a volume of essays which comes out on Thursday, I come to very much the same conclusion as the Green Paper. Those like myself who advocated devaluations and floating rates in the 1960s greatly exaggerated, as subsequent events have shown, the effectiveness of the price mechanism as a remedy to dis-equilibria. Exchange rate depreciation, as the Green Paper says, would not solve "the economic problems still facing the United Kingdom". But that does not mean that the problems do not cry out for the use of more effective instrumentalities. We need new measures to ensure the orderly growth of mutually beneficial trade, in the absence of which, in the words of M. Barre, the French Prime Minister: Free trade is nothing but a pretext for the strongest and the least scrupulous and nothing but a snare for the weakest. We need, above all, instruments for the selective promotion of trade, for redressing the imbalances which hamper general international economic expansion, similar to those by which, on American instigation and support, trade was progressively liberalised between the countries in receipt of Marshall Aid, while maintaining the strictest economies on dollar imports through selective import controls.

But, apart from this, economic monetary stability, like peace, is indivisible. So far, the countries of the European Community, just like Japan, have followed a purely selfish policy from the point of view of the maintenance of world prosperity. Since the onset of the oil crisis, the Community remained in surplus on its current balance of payments in every year bar one, just as Japan remained in surplus in every year bar one. The burden of carrying the balance-of-payments deficits, which were the necessary and inevitable counterpart of the surplus of the oil producers, had fallen entirely on the United States and on the developing countries, despite repeated commitments—and this is what I think needs to be emphasised—by all the leading Western countries to a rational distribution of this burden, to a rational distribution of the balance-of-payments deficits.

The danger now is that the EMS, by creating a new currency bloc, will serve to isolate the dollar—the very opposite of what the noble Lord, Lord Soames, thought that it would do—and will enhance speculation against the dollar [and also the pressure on the United States Government to follow deflationary policies. It will make speculation against the dollar easier and more attractive—for reasons that I cannot go into here, as they are too technical—and encourage the risk that the world will be carried into a major depression like that of 1931, as the two blocs force contractionary policies on each other. The possible political repercussions on the unity of the West and on the stability of the social system are of a kind that, I submit, could scarcely commend themselves to Members on either side of this House.

9.6 p.m.

Lord ROBERTHALL

My Lords, we must all welcome the initiative taken by the noble Lord, Lord Soames, in giving us an opportunity to speak about this very important subject at this crucial although, as I would say, very awkward time. Both the noble Lord, Lord Soames, and the noble Lord, Lord Banks, spoke in rather visionary terms. Lord Soames wanted a new approach to a better world system and Lord Banks wanted a full monetary union, neither of which, I am afraid, is on the near horizon. I should like to refer a little later to Lord Kaldor's speech.

I begin by saying a little about the machinery of Sub-Committee A which watches economic affairs in connection with Community proposals. Your Lordships discussed in July the proposals that were then being made for economic monetary union, and I had to say then on behalf of the committee that although we considered these proposals, they were so vague and uncertain that we could not go through the ordinary procedure of summoning witnesses and asking them about the probable effect of specific proposals upon United Kingdom interests.

The proposals that we are discussing tonight for an economic monetary system were first heard of in July, and the discussions went on during the Recess, mostly at a very high level. Although some members of that committee were watching developments on behalf of the committee, we felt very much the same difficulty, that there were no concrete proposals about which we could cross-examine witnesses in the way that is our usual practice, which was illustrated in the earlier debate tonight in your Lordships' House.

The first thing that even approaches something concrete is the Green Paper which came out a few days ago, although even that is still extremely vague. So I think that tonight we are speaking of something about which we know very little, except in broad outline. But the sub-committee of the main committee have today had an opportunity of considering briefly the Government Green Paper and the reports of recent intergovernmental meetings. Although, as I have already said, nothing is yet sufficiently definite to justify us in making a report, it was generally agreed by those members of the committee who were present that if acceptable arrangements could be made there would be an advantage both to the United Kingdom and to the EEC in some association with the EMS from the outset.

Having said that, and speaking now entirely for myself, I should like to deal with the proposals. It is quite clear that the European Monetary System is not anything like an economic monetary union, although it might be a step towards it. It appears to be something much more like the Snake, which was founded in 1972, which we and Italy and the French had to leave and which now goes on as a comparatively small number of countries grouped about the Deutschemark. But I think the essential feature of the EMS is to be an agreement on the rates of exchange that they will maintain with one another. There will also be settled machinery and a quite substantial support fund which I think is designed to give temporary help to debtor countries who are having difficulty in maintaining the rates.

My impression of the Green Paper—and we are all talking about impressions tonight—is that the Government are very sympathetic to the idea of a much more stable monetary system within Europe and that they would very much like to maintain full relationships with the new system, if it comes into being. I agree with one point made by the noble Lord, Lord Soames, about the expertise that is in existence in this country, and I think it will be a great pity if we cannot make a contribution. But I also read the Green Paper as suggesting that although we express interest and co-operation and sympathy we do not feel that we shall be able to be full members from the beginning; we are not strong enough to join at present.

If I am right about this I think the Government position as set out in the Green Paper is a sensible one and is a great advance on some of the things that we have said and done in this field recently. After all, we were a founder member of the International Monetary Fund, which was designed to give currency stability to as large an area as possible of the Free World. That Fund worked extremely well for 25 years or so and few would deny that things are in a much more chaotic state now than they were during the period before the Smithsonian Agreement, when the IMF was still functioning reasonably well. I think, therefore, we should be very ill-judged if we were not prepared to take as constructive a view as possible about the steps going on. If the scheme is successful it will give stability to a very important area, an area of which we are a member, and it would be some step towards the goal of economic monetary union to which we are all committed.

I therefore think that we ought to welcome the Green Paper; we ought to welcome the endeavours of the Government to go as far as they can and their wish to play a continuing part and have an association, to use the word that Sub-Committee A used in the statement that I read. But, my Lords, looking at the difficulties of the present situation, I think there can be no doubt that they have arisen because of the emergence of inflation all through the world and inflation which goes on at very different rates in different countries. I am not myself a believer in the view that we should join something which will help us to do something that we are unable to do by ourselves, that we should dive in and submit ourselves to discipline. I do not think it would work. I do not think it would help the EMS at all if we joined it as an act of faith and were forced to leave it soon afterwards because we could not carry out the steps necessary to enable us to remain within it.

The Green Paper pointed out, and several of your Lordships have referred already to the point, that we have succeeded in keeping the pound stable against the Smithsonian parity for the last year. I hope very much we will be able to continue to do that, and that will enable us perhaps not exactly to be a de facto member of the new system but to play at any rate some part in the direction of stability. But even if the details when they are worked out turn out to be satisfactory—and here I think the noble Lord, Lord Kaldor, put his finger on one of the great difficulties—we will all have to get used to the word "symmetry". I am almost tempted to quote an Australian poem, or at least one written about Australia, on the use of the word "bloody" in Australia. It was about a man riding his horse and one verse began: He said this bloody horse must swim The same for me as bloody him". That is what symmetry means. I do not think the new system will get off to much success unless it was the same for bloody Germany as for bloody us. There again it is speculative, and we do not know the details.

The other thing we have to do is to get our own internal troubles right. What we are suffering from now is low productivity and high inflation. What we must work towards is high productivity and low inflation. It must be faced that although the Government have done better recently they still have not done very well. We have got very painfully to about a 9 per cent. rate of inflation, against the German rate which is about 3 per cent. or below, and in the light of the Ford settlement and what is going on, I think it would be a very optimistic man who thought we were going to stay as low as 9 per cent. Until we can show that we can control these things I think to make a de jure commitment to holding a fixed rate could not be the right thing for us. All our experience since the world got into these troubles, with this very large amount of speculative money floating around, is that if you are committed to a fixed rate and you are not behaving in a way which will enable you to maintain it, you will get a flood of speculation against you; you are on a hiding to nothing, and you will end up leaving the rate, having lost a lot of reserves and incurred a lot of debts at the same time.

I conclude, therefore, in thinking that the Green Paper is at least a step in the right direction. I think we can welcome it, and if the attitude of the Government is what I suspect it is going to be, but we do not know, that is to say, to co-operate as much as possible but not to take the step of maintaining the rate, then I think that is the right step. I think that our attitude ought to be to wish success to the new arrangements, to hope that they will progress, and particularly to wish success to France which is acting in rather a quixotic way in offering itself as an experiment. We shall learn quite a lot, even if we are not a full member, from watching its developments. However, I am sure that it could not be right for us to commit outselves now to something we have shown we cannot do.

9.21 p.m.

Lord COCKFIELD

My Lords, this is a matter of great importance for both this country and indeed the European Community as a whole. We are members of the European Community and as long as we remain members our aim ought to be to make a success of it. We ought to remind ourselves of the opening words of the Treaty of Rome which represent the obligation which we, and the other members of the Community, undertook. It says: It shall be the task of the Community, by establishing a Common Market and progressively approximating the economic policies of Member States, to promote throughout the Community a harmonious development of economic activities. It is a cardinal principle of the Community that there should be free movement of goods, persons, services and capital. Those objectives cannot, in the long run, be achieved without, as the noble Lord, Lord Banks, says, a common currency. But it will, I suggest, be a very long time before we reach a common currency and that is much more likely to be reached by convergence of economic policies first, with the emergence of the common currency afterwards, rather than the other way round. It is also a matter as regards which we need to make progress slowly, carefully and step by step.

The Werner proposals of 1971 were subsequently abandoned as too ambitious.

The Snake proved successful for the strong economies: it was a failure for the weak economies. However, I think that in fairness it ought to be emphasised that the failure was on the part of the weak economies rather than on the part of the Snake.

The EMS is the third attempt to make progress in this area. There are some countries which seem to be willing or, indeed, anxious to join the EMS because they have weak economies and they believe that EMS will prove to be a prop for them. I do not think that we ourselves ought to approach the matter in that spirit. To a country with a strong economy, and therefore a strong currency, a system such as EMS poses no threat. Therefore, the question that we really need to ask ourselves is whether our basic policy should be one of building up a strong economy or whether we are content to see ourselves condemned to economic weakness and progressive decline.

The present state of this country is not a happy one. The noble Lord, Lord Roberthall, has referred to our lack of productivity and to our continuing high rate of inflation. Our output also is showing a not-too-happy trend. On the latest Treasury forecasts, next year's growth will fall to 2 per cent., which is only half the figure for the current year, and that compares with an average forecast for the OECD as a whole for next year of 3.3 per cent. Indeed, our own projected growth rate next year is the lowest of all the OECD countries.

It is perfectly true that membership of EMS will entail severe financial disciplines, but those are just the sort of disciplines that we need here at home if we are to beat inflation and if we are to lay the foundations of a stronger and more prosperous economy. Some people claim that by joining EMS we would have these disciplines forced on us from the outside. Maybe that would be no bad thing. However regrettable it may be, experience tends to show that it is only when these disciplines are enforced from the outside that we observe them; and this, after all, is the lesson that we ought to have learned from the IMF. If we suffer from the kind of weakness of will which has been evident in recent years, there may, in fact, be no alternative but some measure of external discipline. If this discipline coincides with the kind of policy we ought to be following anyway, it is an advantage and not a disadvantage.

I think it is regrettable that the Green Paper has only just been published when the European summit on these matters will meet next week. As the noble Lord, Lord Roberthall, said, it is true that we still lack sufficient information to enable a proper judgment to be reached, particularly on technical issues and on the technical merits of many of the points involved. Nevertheless, having said that, there are certain aspects of the Green Paper to which one must give an unreserved welcome—if I may say so, a welcome coupled with a certain degree of relief. This is so, first, because the Government accept in the most positive terms—and here I quote from paragraph 8 on page 2: the concept of a zone of monetary stability in Europe to be achieved by establishing a European monetary system". Secondly, one must also welcome the fact that the Government express their determination to maintain exchange rate stability as an essential part of the policy of fighting inflation. They reinforce this when they say—and here I quote from paragraph 2 on page 9: To accept a formal commitment to exchange rate stability would not represent a major break with existing policy". However, having welcomed these declarations of good intent, there are certain points which must be made. In the Green Paper the Government endeavour to draw a distinction between the European Monetary System as such and the exchange rate regime to which this term is popularly applied. Thus the Green Paper says at paragraph 30 on page 8: It is important to make clear that in the Government's view the choice to be made in the coming weeks relates not to a European monetary system, but to the narrower issue of a particular exchange rate mechanism". That is rather like telling one's architect that one is very pleased indeed with the house that he has designed, but will he kindly omit the foundations because it is well known that from time to time foundations cause trouble. The exchange rate proposals are not only an integral part of EMS, but they are the very foundation on which the whole system is built. The simple truth is that one cannot in any meaningful sense of the term join EMS and stay out of the currency arrangements. If the attempt to separate the two is simply a device to gain time for negotiation, well and good. But if it is a serious expression of intellectual conviction, I suggest that it is both fallacious and misleading.

I also want to comment on the description of the proposed European Monetary System as one of: fixed but adjustable exchange rates". Those words appear in paragraph 8 on page 2 of the document and I recognise, of course, that they, in turn, are quoted from the annex to the Bremen communique. I know that in this rather exotic field of exchange rate theory, as Humpty Dumpty said: When I use a word it means just what I choose it to mean, neither more nor less". Nevertheless, these particular words are apt to bring to mind the fixed but adjustable rates which formed the basis of the Bretton Woods system, thus creating a form of guilt by association.

In fact, I suggest that the EMS proposals represent a considerable technical advance both on the discarded Bretton Woods system and on the now largely discredited free floating rate system. The EMS system provides a considerable degree of flexibility where this is desired. It can legitimately be argued that the general margin of 2½ per cent., which apparently is contemplated, is a narrow one. But in the case of Italy, for example, a margin of 6 per cent. in each direction appears to have been negotiated. This is in fact a very considerable margin of fluctuation indeed.

If one applied these figures to the dollar/sterling exchange rate—and I quote these figures simply because they are familiar to us; I realise that, strictly, it does not come into the EMS at all—merely as a standard to illustrate how big a margin 6 per cent. is, and if one took today's rate of 1.94 dollars as a striking rate, a 6 per cent. margin would permit a fluctuation between 1.82 dollars and 2.06 dollars. This is a big margin of fluctuation, particularly in the light of the figures which are quoted in the Green Paper, and have been quoted again in this debate, to show the considerable stability of the pound over the last two years. With this degree of flexibility, which might be available through negotiation, the system could prove to be an acceptable and effective combination of the virtues of both the fixed but adjustable exchange rates of Bretton Woods and the free but dirty floating of the last few years.

On the evidence of the Green Paper, one could reasonably say that the Government are pointed in the right direction. What has characterised Government policy in the financial field in the last two years—that is, since the rescue by the IMF—has been not so much an error of direction as a failure to carry the policy through. I suggest that we must not fail in this way in the case of the EMS.

If we look back over the last 25 years at our relations with Europe, the whole of our relations have been bedevilled by reluctance, delay, and half-heartedness. We did not join the Iron and Steel Community when it was set up in 1949; we did not join the European Economic Community when it was set up in 1955. Our membership of the EEC has not brought the advantages for which we had hoped and, on the contrary, we find ourselves faced with serious disadvantages which were not foreseen. But much of this could have been avoided had we come in at the beginning and had we been prepared and able to take a full part in the shaping of the Community when our industry and agriculture could have taken advantage of the opportunities offered as the Community developed from the very outset. We must not make this same mistake in the case of the EMS.

If our attitude is to be one of standing on the sidelines faintly cheering, which is really what the Government are doing, we shall lose the opportunity of making a serious impact when it comes to negotiating the actual details of the scheme and the way that it will work. These matters may be of great importance. For example, it is possible that the Government are right in preferring the basket to the parity grid, but the decision seems to be set in favour of the grid. The Government's present stance cannot have helped very much in the negotiations on matters of this kind.

For a very long time this country has regrettably been in a state of decline. We are slowly but inexorably becoming the impoverished gentleman of Europe. It is not a trend which is easy to reverse: it is too deeply embedded and reflects long-established attitudes which are mistaken and harmful, but reversed it must be if we are to have any hope for the future. We must not neglect any opportunity which will help us along the right road, and EMS may well present one such opportunity.

9.36 p.m.

Lord ARDWICK

My Lords, I have a good deal of sympathy with what the noble Lord, Lord Cocklield, said, though I would not be so sanguine about Treasury forecasts. Experience shows that looking into the entrails of a chicken is about as useful as many of the forecasts that come out of the Treasury. I am in a good deal of agreement with what the noble Lord, Lord Soames, said, but not in his strictures on the Government for their cautiousness. I would ask him: where are the heroes? Take, say, the economists and technicians. Nobody could have been more cautious in his wisdom than the noble Lord, Lord Roberthall, was tonight. And what about the caution of my noble friend Lord Kaldor; he did not make first base for boldness.

What about the Opposition? I welcomed Lord Soames's statement because it was the first definite and positive statement I have heard from the Opposition that they support EMS. I raised the subject in the debate on the Address and then the noble Lord, Lord Thorneycroft, skated all round the subject, though it was possible to deduce from what he said that the Conservative Party had some sympathy with it. During the course of my speech I asked him to confirm it, but I did not get a positive assertion; I got a nodding of the head from Lord Thorneycroft and from the noble Earl who was by his side on that occasion. They assented, but this is the first time I have observed the Opposition saying in terms that they are in favour of EMS. I hope that when the vital debate takes place in another place tomorrow the Opposition speakers will be as forthright and outspoken as Lord Soames has been tonight.

Lord SOAMES

My Lords, I am grateful to the noble Lord both for giving way and for what he said. There is simply no doubt in our minds that if the Conservative Party had been in power, following the monetary and fiscal and economic policies we would have followed, this country would be able to go along with EMS. What has happened is that with the policies of the present Government, they are frightened to take the country into EMS. That is the difference. But let us be clear that EMS will not solve our problems; the fact that we join EMS will not, as my noble friend Lord Cockfield pointed out, of itself resolve our problems. That we must do for ourselves. But we need disciplined policies and if we have those policies then certainly we can join EMS as a whole.

Lord ARDWICK

My Lords, since I last spoke in this House on the subject I have, as rapporteur, taken before the European Parliament a resolution on this subject which I think would receive the approbation of the Government, judging by their views in the Green Paper. The resolution sharply distinguished between EMU, about which the noble Lord spoke, and EMS. It spoke of the loss of national responsibility that would occur in EMU but not in the EMS. It mentioned particularly the necessity for converging economic policies, higher growth rates, less unemployment, and immediate national and Community policies towards further convergence, with a reduction of regional and social disparities, and with a transfer of resources. This resolution, passed by the European Parliament—all Parties, all nations—had all the ingredients of the case which the Government have been making in these negotiations.

I want to congratulate the Government upon the clarity and the comprehensiveness of their Green Paper. It sets out the economic policies needed in the European Community if the monetary system is to prove durable; but of course it still leaves us unable to make a final judgment on whether or not Britain should go into the system. When I say that it leaves "us", I mean those of us who want to go into the system if it has acceptable conditions. I say this because some people would not go into a European system even if it gave more than Mr. Callaghan and Mr. Healey are asking for. These people want no part in any system, or policy, which binds the Community more closely together; and some of them are totally opposed to the economic policy which the Government are now pursuing. Despite all the lessons, they still think it possible for Britain to spend itself out of the slump into full employment, helped by import controls—and all without the support of an incomes policy. Others think in terms of import controls, but allied to a rigorous economic policy. All these are alternatives, but they are all national alternatives, and to anyone who has lived through an era of nationalism, as some of us have, they are rather frightening.

This controversy has been bedevilled by two conflicting suppositions. The first is that if we join the EMS, we should be on the road to a European union with a single currency. This idea has been fostered by ardent Europeanists, many of whom have not—unlike the noble Lord, Lord Banks—looked into its implications. They just love the word "union" as a form of cosy togetherness. The idea that EMS inevitably takes us down that road has also been peddled by the anti-Europeanists who regard European union as a threat to our wellbeing and our national virility. The truth is that the European Monetary System is a practical answer to the Community's need to get monetary stability and economic cohesion into its customs union, into the trading zone where most of the member nations do 50 per cent. of their external trade with one another.

It is certainly true that anyone such as myself, who hopes to see full economic and monetary union in the long term, can take a little heart from EMS. It is a step on the way to that eventual goal; but it is not a long step. Between EMS and European Monetary Union there is an enormous gulf. To have a union with a single currency, such as Mr. Jenkins visualised, the member nations must give up their national sovereignty over monetary and macro-economic policies, and set up federal Community institutions to control them. It would be only a skeletal federal system, but it would be a federal system nevertheless.

This could not be created by Governments acting secretly under the cover of night. It would require every participating country to make constitutional changes to hand over these powers. In almost all the countries of the Community it would have to have a sanction of two-thirds of the Parliaments of the nine or the twelve nations; and that would mean the sanction of every political Party. That is a tall order—a very tall order. Nobody can hope, and nobody need fear, that we are within years of such a debate; and indeed it may never come.

Economic and monetary union is not, for most of its supporters, a considered political aim. It is an incantation, it is part of the ideological rhetoric of the founding fathers, whom I honour, handed down to a generation that has not thought seriously about its implications.

I asked some German enthusiasts the other day—when they were defining themselves as believers in EMU—when they thought the Germans would be ready to have a mere minority voice in their own economy—the greatest and most prosperous economy in Europe. They had no answer.

The Earl of GOWRIE

My Lords, may I intervene before the noble Lord leaves that point? Three years ago the Government of which he is a distinguished supporter instituted a referendum. As a result of that referendum there was exactly the kind of majority consensus in this country for which he is seeking. Would that not have been the time to make the firm commitment that he himself would like to see?

Lord ARDWICK

My Lords, the firm commitment was made before our entry in 1972, when the Heads of State or Government of the new Member Powers promised irreversibly to achieve economic and monetary union. The promise of economic and monetary union is part of the acquis of the Community which we accepted on entry and which, of course, was confirmed by the referendum; but there is no date on the promise. Anyway, as I was saying, I asked these German enthusiasts when they thought the Germans would be ready to have a mere minority voice in their own economy. They had no answer. They regarded this as a brutally realistic intrusion into a beautiful dream. What is essential for us is to look today and next week on EMS as a thing in itself. Is it desirable? Is it feasible? Is it durable?

The other supposition which has bedevilled the discussion is that this is just another monetary scheme among geographically contiguous States; just an enlargement of the snake, designed simply to help Germany spread the burdens caused by the delinquent dollar. We had this from my noble friend Lord Kaldor tonight. Why are the French so keen on it? The cynics say, exactly as he said, it is simply to get some outside support for a tough counter-inflationary policy. These are facile explanations. The idea that President Giscard is being taken for a ride—something new to him—seems to me to be absolute nonsense. For the last eight years at least he has been an absolutely firm devotee of a fixed currency system. But what Messrs. Schmidt and Giscard did was to pick up a set of ideas which had been developing in the Community over the years; when the Werner plan for the EMU faded away in the turbulence of six years ago, the idea of economic and monetary union was not abandoned. Bankers and academics started thinking along the lines of a parallel currency which might one day become a common currency, and then Margolin and Tindemans revived the idea of a monetary union.

Meanwhile, the Commission was trying to get the member nations to co-ordinate their economies, to align their budgetary policies, to counter inflation and to get greater stability in external balances and exchange rates. Poor Vice-President Ortoli did not get much further as the inflation rates diverged wildly and the imbalances grew. He used to say he was like a missionary vainly trying to bring the Gospel to nine recalcitrant tribes. But convergence began and has continued, and at last it made sense for M. Ortoli to present a five-year programme. Of course, it had to be presented in terms of the Community rhetoric; that is, as an advance towards EMU. He and President Jenkins were encouraged to act because as early as March 1977—March last year—Messrs Schmidt and Giscard asked for a progress report on the subject by the end of the year; and M. Ortoli then presented his programme, which disappeared into the Council of Finance Ministers. But some months later Messrs Schmidt and Giscard came up with a set of ideas which were consistent with all that he had been planning. What I am trying to show is that EMS is not just the answer to a German exporter's prayer: it is a most important step towards the economic cohesion of the Community, and so an important step towards its political solidarity.

My Lords, in terms of economics I am a child compared with my noble friend Lord Kaldor, who has gone, and the noble Lord, Lord Roberthall. They could chase me round the currency grid and bury me in the basket. I am a mere WEA student. But politically I have no feelings of inferiority at all. The idea that the noble Lord, Lord Kaldor, was advancing—and he has come back into the Chamber now—that Germany would like to see a weak and impoverished Europe seems to be a really remarkable one. There is nothing that Germany needs more or wants more than a prosperous Europe keeping inflation at bay, a cohesive Europe—because what Germany needs is a politically cohesive Europe in the delicate situation in which she finds herself as a kind of front-line State.

Lord KALDOR

My Lords, I am sorry to interrupt the noble Lord so soon after entering the Chamber, but I must correct an impression that I did not mean to give. Nothing I said was intended to imply that Germany in any way desires the rest of the EEC to be impoverished. That is very far from what Germany desires. Certainly none of the German leaders is conscious that their policies may lead to that consequence. I was saying that Germany, as is well known, puts a very high priority on stability and on the absence of inflation and she, for herself, is not anxious to grow faster.

Lord ARDWICK

My Lords, noble Lords heard Lord Kaldor as well as I did and they will agree or disagree with the inferences that I drew. Anyway, EMS deserves to be supported by all those good Europeanists who want a more cohesive Europe yet do not want to sacrifice national sovereignty. Again, this word "sovereignty" has been much abused by both the Europeanists and their opponents. It is the fashion to describe long-term international commitments such as we entered into when we joined NATO or the IMF or even the United Nations as an acceptable abdication of sovereignty. It is no such thing. Nor is it a loss of sovereignty when we pool competences in the Community. A loss of sovereignty is when you give something away for ever; and if you want to get it back often you have to have an army to help you. A pooling of competences is just a loan, which you can retract at need, if you think it essential to do so.

Nobody is going to be locked in the EMS for ever. Nobody is going to say that the value of each currency is fixed and immutable which was the final goal of Werner; merely that you will try to follow policies which are compatible with that parity and, if you fail, then the parity can be changed. In spite of all the evidence to the contrary, there are still quite a number of people who regard floating—that is, the right to let a currency lose value—as a useful and precious national asset. One can certainly see it as a useful alibi for Governments who can blame their own economic policy failures on blind and malevolent market forces.

But where has it got us? Where has depreciation got the United States and its powerful economy? Has a strong exchange rate ruined German exporters despite the enormous revaluation of the mark against the dollar—something like 100 per cent. in the 1970s? Of course, in EMS, the possibility of devaluation by general agreement remains. You must have a safety valve. But that means that a Government obliged to devalue must ask why. It must ask what has gone wrong with its economic policy that it should have to accept this punishment.

I rejoice that our Government have turned their back on exchange rate policy as a weapon. Mr. Healey said: We do not regard the soft option of depreciation as a desirable one. The lessons have been well learned. He added: Stability in exchange rates cannot be achieved through intervention unless the underlying economic situation is appropriate. We have learned a lot in the last seven or eight years. We do intend"— he says— to pursue fiscal and monetary policies which are likely to keep our rates stable whether we are in the EMS or not". Finally, he argued, if you decide to maintain a fairly stable currency and if you think you can pursue the appropriate internal policy for the purpose, the question is whether the role of intervention will be easier and cheaper for you in a collective system than if you are on your own. I agree with that, though I think he was putting it too narrowly. Even if it is not so cheap, it might be as well to go ahead. It might be in Britain's wider interest to pay a premium to join the System.

We can now look back on the early years of the decade and believe that these were exceptional times. The dollar was finally laid low by the expenditure of the Vietnam war. That is not going to happen again. Then followed the rise in commodity prices as all nations tried to expand together. Is that going to be repeated? Then there was the gigantic rise in oil prices. Will they ever go up five-fold again? Then there was the incoherent response of floating, and each nation going it alone. This era of the permissive society applied to currencies may well be fading away. The dollar is no longer being neglected. It is being tenderly nursed. Throughout Western Europe we are all following counter-inflationary policies with some success. The voters are longing for stable prices. Most people have come to grasp that in today's conditions price inflation is not a creator of jobs, but a destroyer.

My Lords, I know the difficulties for the Government of timing. I believe that perhaps a summit will not produce satisfactory answers in time. I know that there are political difficulties—which would be lessened if the Opposition spoke out loud and clear in favour of EMS as it has tonight. Yet I still hope that, if not at once, before long, Britain may find it possible to join EMS and at last play a leading role in the construction of the Community.

9.57 p.m.

Lord REAY

My Lords, we can be grateful to my noble friend Lord Soames for having put down this Unstarred Question. Thereby this House has been given the opportunity to discuss this matter in the most unsatisfactorily brief and hurried period, as the noble Lord, Lord Cockfield, pointed out, that will have elapsed between the publication of the Green Paper last Friday and the meeting of the European Council next week, when this issue will have to be decided. Also, we can be grateful to my noble friend for the very interesting, powerful and, above all, constructive speech that he made—constructive in the way it pointed out some of the things that we could be saying in the councils of the Community, and some of the initiatives we ourselves could be taking rather than some of the complaints which we have tended to make in the recent past.

There is general agreement that the objectives of the proposed EMS are desirable, that greater monetary stability in the world at large is an objective worth pursuing—indeed an objective it is essential to pursue—and both major Parties would at least go so far as to say that we should not stand wholly outside the EMS and that, in principle, we should aim to be fully integrated members at some later date, if not now. The question I should like to ask is: If at some later date, then why not now?

The Green Paper makes very clearly the point that there has been a growing disillusion with floating exchange rates; that they have not eliminated payments balances in the way that had been hoped; and that currency movements have become exaggerated by speculative pressure if no restraints are operated. There has developed a strong desire which has been reflected in the policies and statements of Governments—and I quote from the Green Paper: … in situations as different as, for example, those of the United States, Japan, Germany, France, the United Kingdom and other countries of Western Europe —to move back towards greater exchange rate stability. In paragraph 33 of the Green Paper it is stated: The Government sees no objection of principle against entering into international agreement to maintain stability in the exchange rate with the help of a co-operative credit and reserve asset arrangement: provided they are satisfied that the timing and nature of the agreement is right. It is wholly appropriate that we should do this within the European Community to which we belong. In other words, the Government accept the principle of a Community-based scheme to stabilise exchange rates. The question then is: Why should the timing be wrong?

Sterling, in terms of Smithsonian parities, is now stable and has been for almost two years. It is Government policy, moreover, to maintain the exchange rate. The Government do not wish to retain the freedom to devalue the currency as a stimulus to export. As the noble Lord, Lord Ardwick, has pointed out, that is perfectly plain from the Green Paper. It is because the Government now fear more the consequences of a depreciating pound on costs, and therefore in their fight against inflation, than they see its value as a stimulus to exports. The Government, of course, are afraid of the strength of the mark, and that is the reason why the Government earlier in the negotiations concentrated their criticism on the parity grid intervention system, because, unlike the basket system, this would not have left the Germans with the exclusive responsibility of intervening to bring their strong erring currency back into line.

But is it the British who are most vulnerable? What about the Italians, who do not have massive contributions from oil to help their balance of payments? What about the French, who have taken an enormous gamble in joining and in promoting the EMS, when their inflation rate is at least three times the German rate and is even higher than ours? Of course, EMS may break down—and it would be right, as my noble friend Lord Soames has said, to take every step to see that it did not—if we were members; but of course it might break down. As the Green Paper points out, inflation differentials between member States are much greater now than they were when the snake was set up in 1972, and yet the United Kingdom, Italy, Sweden and France on two occasions were forced out of it.

However, is the danger of it failing a sufficient reason for us alone not being a founder member? I would suggest it is not. In fact, of course, there is a reason why we are not joining—and I align myself here totally with my noble friend Lord Cockfield when he says that to pretend we can half-join is really far more akin to not joining; you cannot claim that you are joining a scheme and not join the basic exchange rate intervention system.

What I criticise the Government for is the fact that they were not more frank in their negotiations originally. If the Government had embraced the principle of the EMS even as warmly as they did last Friday in their Green Paper, and if they had done so when negotiations first began, and then if they had gone on to say, "Of course it will be very difficult for us to join now unless we can show that something really is going to be done to give us what we want in regional policy or in the establishment of a really substantial Regional Fund", and if the Government had proceeded along those lines, we might have got somewhere-even to the point of the Government's feeling that they could sell full membership to their own Party. Now I fear it is too late. I think we have squandered a negotiating possibility.

It is plain that concessions are won by countries who join a scheme like this rather than by countries who do not. Italy has gained the freedom to allow her currency to move in a 6 per cent. band on either side. Ireland is asking for £650 million over five years to offset any deflationary effects for her on joining the scheme. We get nothing—no promises of a Regional Fund, no promises to reform the CAP and no promises to renegotiate for the second time the budget arrangements. We are coldly told that all such questions have nothing to do with the matter in hand. All we get is a sort of permission not to join. To add insult to injury, it is Ireland who is likely to get even more in compensation if in the end we do not join.

The Government, I suggest, went off on the wrong track when they based their negotiations on criticism of the intervention system that was to be used, because everybody knew that the British Government either had already decided not to join for political reasons or else was postponing a decision. At worst, therefore, it even looked as though the Government were by this means preparing a false excuse for not joining the scheme. Neither this Government nor any other will win concessions in the Community if we negotiate in such a patently insincere manner.

If we were to join, we could emphasise that if necessary, as the Green Paper brings out, the scheme will include provision for currency realignments. The noble Lord, Lord Ardwick, emphasised this. It will not have to be permanently rigid. But there is also likely to be provision for temporary leave of absence, as it is put; also, as in the case of the snake, it will be possible for a member State to leave the system altogether in the last resort. It would be better to do this and to join than stay outside and say that we hope to join later.

Whether it is now too late for us to join, I do not know. All I can say is that taking account of the fact that influence in Community affairs is won by being inside rather than outside, taking account of the fact that this Government avow that they wish to pursue the same economic policies whether or not we join the EMS; that they accept the principles and purposes of the EMS; and, not least, taking account of the fact that our not joining will break our currency union with Ireland with quite unexplored consequences, I believe that we are likely to lose more than we gain if we stay outside, whether the scheme fails or succeeds.

As for the argument of economic sovereignty, the EMS will only prevent us from doing either what the Government have already ruled out in the way of policies, or pursuing the kind of undisciplined policies that I would not wish to see any Government pursue anyway. So far as the City is concerned, it would be very sad indeed, and we definitely run a risk of being excluded in the future from playing a proper part in the formulation of legislation coming from the Community, as it may affect our financial institutions. We run a great danger of not playing the kind of part that we would otherwise be able to play if we were a member of a scheme of this kind. If the die is cast, then I fear that this error, as I see it, will have to count as part of the long, painful and continuing story of Britain's path towards acceptance of the fact that she is a member of the European Community, and I hope that it will be corrected as soon as possible.

10.7 p.m.

The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)

My Lords, the noble Lord, Lord Soames, in posing this Question, went a good deal further in his remarks than the Question itself implied, and surprised me by being so lukewarm towards the actual proposals under discussion, which he suggested were rather too narrow and parochial, and what he said recognised the limitations in a world context of any EMS of the kind now being considered. What he desiderated was something on a much grander scale, and certainly I would go along with him in that. The Government have always attached great importance to stability in the international monetary system, and if EMS comes into being, as it surely will, we would hope that the European Monetary System will be a first stage towards greater currency stability worldwide. The Government have, indeed, publicly welcomed the measures taken by the United States Government to stabilise the dollar in this same context. But I do not want to follow the noble Lord any further down that road, because of the Question that has been asked.

I would also regret that the noble Lord found it necessary to make a ritual attack upon the Left of the Labour Party. There are cogent reasons, other than narrow political ones, for looking very carefully and very critically at a particular scheme that is evolving. The noble Lord, Lord Cockfield, and my noble friend Lord Kaldor—hardly wild men of the Left—gave some cogent reasons for looking carefully at the system that is evolving, and indeed as more than one noble Lord has pointed out, the history of the snake provides another reason for looking very carefully to see that the system that we are thinking of joining is technically sound.

I do not know how many of your Lordships have taken the trouble, as I have done, to read carefully the evidence that was submitted to the Expenditure Committee of the House of Commons—the General Sub-Committee. But your Lordships will find that there are very powerful economic arguments put forward there—I do not say that they are good or that they are bad—by many economists for doubting the technicalities of the present scheme. Accordingly, I think that one can properly say that the Government's position is a sound one: to look very carefully at what is proposed. Again, it was hardly a voice of the Left which wrote in the first leader of The Times on 25th November 1978: The Prime Minister is well justified in the position that he seems to be taking. On the one hand, this country has as strong an interest as any in any progress towards greater exchange rate stability. On the other, an enlarged Snake arrangement is almost certain to break down sooner rather than later, damaging the cause of European monetary stability in the process and perhaps provoking more of the currency instability that it was intended to reduce. I think that there are powerful arguments, therefore, from sources other than the Left of the Labour Party for looking with great care at this scheme, particularly when we are reminded by the noble Lord, Lord Cockfield, that this is not the first such scheme of its kind to be tried with a view to dealing with the difficult situation that has arisen, particularly within the last eight years or so.

Again, in posing this question the noble Lord, Lord Soames, rather suggested that we were paying far too much attention to detail. Her Majesty's Government are not paying too much attention to matters of technical detail and losing sight of the grand design. I repudiate also what the noble Lord, Lord Reay, has just said. Her Majesty's Government have consistently supported the concept of a European Monetary System which included mechanisms for achieving stable relationships between exchange rates in Europe. The Green Paper—I have particularly in mind paragraph 8—is a clear reaffirmation of the Government's support for this principle. But the details do matter.

The experience of various European countries, including ourselves, with the snake has demonstrated that unless the details are thought through properly, unless the mechanics are properly worked out, unless the system properly takes account of the economic, political and international pressures which each member is likely to have to face after joining, it will not work. If a particular scheme were in this sense economically or technically unsound but, despite that, came to be adopted because of what was seen to be some overriding political imperative and if, because of its economic technical weaknesses it failed, in the sense that members had to leave it, as they left the snake, or had to adjust their rates frequently and prematurely, then that very failure would be likely to harm the aims and aspirations of those who fathered it or supported it for primarily political or idealistic reasons.

Lord SOAMES

My Lords, would the noble and learned Lord give his mind for a second to the fact that it is not only Her Majesty's Government who are interested in these matters and the technicalities involved? There are nine member countries of the Community. Why does the noble and learned Lord think that it is only the British who are not going to join this scheme, or who, apparently, are not going to join it in total? Does the noble and learned Lord attach no importance to the technicalities of the scheme?

Lord McCLUSKEY

My Lords, I have certainly made no such suggestion. I was dealing with the point that was made by the noble Lord, Lord Soames, in opening, that we were, in a sense, losing sight of some grand design by being obsessed with technical details. It is the details which matter at this particular stage.

Lord SOAMES

My Lords, for the others, too.

Lord McCLUSKEY

Yes, my Lords, for the others as well, of course. The others must look very carefully at the details and, indeed, they are doing so. I am astonished to hear from the noble Lord, Lord Reay, who has just spoken, that the Government are to be criticised for putting forward their basket proposal, a proposal which I understood the noble Lord, Lord Cockfield, at least mildly to favour. The noble Lord, Lord Reay, criticised the Government for putting forward this proposal because, somehow, it seems to be anti-European. It is right for us to put forward a proposal which we regard as being sound and one which will help the system to work. The system which is agreed at Brussels on 4th and 5th December is one which each country must decide whether or not to join.

I would remind your Lordships that the proposals were not "heaven sent", to use the expression used by the noble Lord, Lord Soames. In fact, they emerged from proposals put forward by the French and German Governments at the European Council meeting at Bremen on 6th and 7th July. Since that time, if I may return to the Question itself, there have been regular meetings of the Finance Council of Ministers and official committees on this particular subject. There have also been a large number of bilateral discussions. Indeed, as your Lordships will know, within the past week the Prime Minister has had discussions with Signor Andreotti, President Giscard, Mr. Lynch and M. Thorn of Luxembourg today. In addition, my right honourable friend the Chancellor of the Exchequer has had frequent contact with Ministers of Finance in other countries. All this is leading towards the meetings in Brussels next week. Your Lordships will recall that at the Bremen meeting in July it was decided that at the meeting next week decisions would be taken and commitments made.

Many of these discussions have been technical, but a good deal of progress has been made, and subject to the European Council meeting agreement has been reached on the creation of a new European currency unit and its issue against deposit of reserves by those countries wishing to participate. Agreement has also been reached in principle that a European Monetary Fund will be set up. This major enterprise will take up to two years to accomplish and no doubt there will be detailed problems on the way. But the concept of the new fund is clearly established. In the interim period, the existing Community credit facilities will be expanded to the figure mentioned of 25 billion European units of account and that figure is now accepted by all members of the Community. So there has been some progress on this point since the Government published their memorandum on 1st November.

Discussions continue about the details of the proposed arrangements to apply margins of fluctuation to the Community currencies together with rules for intervention in the currency markets at these margins. There has been considerable progress here too, but, again, all the discussions have taken place without commitment by those concerned and subject again to a final decision by the Heads of Government at the European Council. Again, if I may reply to a point made by the noble Lord, Lord Reay, about concessions won by Ireland, nothing has been won by anyone so far. All matters remain to be resolved at the meeting next week.

Our Government have thought it right to contribute as fully as possible to all these discussions because they have always believed in the principle of greater exchange rate stability and regarded that as a highly desirable objective. Indeed, the Prime Minister—and I remind the noble Lord, Lord Reay, who seemed to think otherwise—made this one of the key features of his five point plan which he put forward in the early part of 1978, and this plan was adopted as the basis for discussion and decisions at the Western economic summit in Bonn in July.

The Government have put forward a number of basic requirements for a system of currency stability in Europe. Their principal requirements are set out at paragraph 10 of the Green Paper, and I am grateful to the noble Lord, Lord Banks, for recognising their value. All of these are important, but I want to draw particular attention to two of them which lie at the heart of the technical discussions about parity grid, baskets and deviant currencies, which are also described in detail in the Green Paper.

Requirement No. 3 is that the system should provide a basis for improved economic growth and higher employment in the Community, rather than impose further constraints on growth and employment. This is of course a key point. To many people exchange rate stability may be desirable in itself, but the main test of its usefulness must be whether it contributes to improving the rate of growth and reducing unemployment. As the noble Lord, Lord Soames, said, it is a means to an end, not an end in itself. If the European Monetary System were guaranteed to improve the rate of growth and reduce unemployment, that would be an extremely attractive proposition.

The Government's view is that the system will have a much better chance of achieving this desirable result if it provides for symmetrical or comparable obligations to fall on its stronger and weaker members. This is not a new point in international financial discussions. It was widely discussed, for example, when the IMF was set up in the 1940s, and some think that the IMF never achieved the desirable degree of symmetry in its treatment of the weak and the strong. It is certainly a difficult thing to achieve. A country whose currency is under attack is under great pressure to take action to stop the outflow of its reserves. We know this from our own experience in 1976. A country with a strong currency, on the other hand, experiences no such direct and immediate pressure. As its reserves rise it may experience some increase in money supply, which may in turn lead to upward pressure on its inflation rate, but this is a comparatively slow process compared with the immediate pressure faced by the deficit country.

That is why Requirement No. 4 is so important. The system should, in the view of the Government, impose obligations on its stronger members symmetrical with those falling on its weaker members, and it was with this requirement in mind that the Government proposed that the EMS should be based firmly on the ECU as its reference point. It was not a patently insincere proposal, as the noble Lord, Lord Reay, described it; it was a genuine proposal to try to solve a real problem. Each currency would have a margin of fluctuation round its exchange rate with the ECU. Thus a currency exceeding its margin could readily be identified as "deviant" and appropriate corrective measures could be applied. By contrast, other countries in the Community favoured continuation of the parity grid arrangement, which is an important feature of the present snake, which of course we and other countries left in 1972 and subsequently. Under that system each of the currencies is permitted a margin of fluctuation around its exchange rate with each other one. In this system two currencies will always reach their margins simultaneously at opposite ends. It is difficult to identify the deviant currency under such a system and thus it is hard to get agreement on corrective measures. Again this is a matter which the Government put forward with sincerity and in a desire to produce a workable system.

Some progress has been made on this issue as well. The Government have modified their original position and are now studying a compromise proposal which another country has put forward in which both systems would have a place. But the Government have continued to urge their view that in the operation of the compromise arrangements comparable obligations must be placed on the weaker and stronger members of the system. So far the Government's proposals have not been accepted by all other members of the Community, although the United Kingdom is not isolated; there are others who support it. Discussions on this are likely to continue right up to the European Council meeting itself. I do want to emphasise this point. It cannot be "un-European" for the Government to go forward with what they believe is a technically sound proposal, to modify the proposal in the light of representations by others and continue to argue in favour of what they believe to be sound. That cannot be "un-European", and I do not see how it can be suggested that it is.

Another area where some progress has been made, and is still being made, is in the field of resource transfer. The Community has as one of its essential longstanding objectives that of achieving economic convergence between its different member States. This, of course, becomes even more important in the context of proposals for an EMS. Everyone recognises that without convergence of economic performance of members any monetary system is likely to come under strain. It was largely at the insistence of my right honourable friend the Prime Minister that it was agreed at Bremen that there should be studies of the measures necessary to strengthen the economies of the less prosperous members of the Community in parallel with the studies of the monetary proposals themselves. These studies have been carried out by the Community's Economic Policy Committee and their report will be considered by the European Council when it meets next week.

Lord SOAMES

My Lords, I wonder whether the noble and learned Lord would allow me to intervene. Do we have to take it for granted that this country is one of the weaker members? Is this something we just take for granted despite North Sea oil, that Britain has to be a weaker country within the Community? If so, why?

Lord McCLUSKEY

My Lords, the term I used, which is well understood in this context, was, "one of the less prosperous members". There are three countries regarded as the less prosperous members. They are Ireland, Italy and the United Kingdom. That will hardly come as an astonishing surprise to the noble Lord, Lord Soames. That is the context in which I used that term. The Government will be pressing for action to be taken on the basis of the report of the Economic Policy Committee. So far as the Community budget is concerned, it is well known that the Government believe that the resource transfers through the budget must be brought into line with the Community's own objective of economic convergence.

In conclusion and in relation to the Question which I have been asked, as a result of these bilateral and multilateral discussions no Government are finally committed to any particular aspect of a scheme for a European Monetary System, but it seems reasonably certain that decisions will, in fact, be taken as promised on 4th and 5th December. A scheme will probably start on 1st January 1979. It is reasonably certain that there will be fixed exchange rates with provisions for realignment by mutual consent. It is reasonably certain that realignments will be less frequent than now under the float. It is reasonably certain that the amount of credit will be, as I have indicated, 25 billion European units of account and that the EMF will replace the existing EMCF in about two years, and of course, there could be wider margins of fluctuation for those countries which wanted them.

I hope that the House will understand that I cannot go any further than I have gone tonight and, indeed, than the Green Paper has gone. I acknowledge with gratitude what noble Lords have said about the quality of the Green Paper. It saves me having to say it, but I acknowledge what has been said. I hope that your Lordships will understand that I shall rest upon the Green Paper and that the Government will, having listened to this debate and having listened to the debate tomorrow in another place, approach their decision in the light of the best judgment they can possibly make.