The European Monetary System

HL Deb 27 January 1982 vol 426 cc962-93

3.25 p.m.

Lord O'Hagan rose to call attention to the question of the United Kingdom joining the European monetary system; and to move for Papers.

The noble Lord said: I am grateful that the House has been given the opportunity to continue our European discussions by debating the Motion which is in my name on the Order Paper. I am grateful too that many noble Lords have put down their names to speak. I welcome particularly the intervention of my noble friend Lord Soames. They, like me, will have to be somewhat telegraphic in contributing to the debate in view of the need to give the Minister plenty of time to reply to the various contributions. Indeed, the Motion itself is telegraphic, because it is shorthand for asking for a discussion on the question of Britain's full participation in the European monetary system by taking up our position within the exchange rate mechanism.

The European monetary system is an arrangement between member states of the Community which has had hiccups but it has been proceeding by and large with success since 13th March, 1979. We participated in the initial discussions but we have yet to make the final leap into the exchange rate mechanism itself. When—as I hope we shall do soon—we return to this subject under less pressure of time we shall be discussing it as a full member of the European monetary system.

Until recently there have been good reasons why we should not belong fully. Some of these reasons are of continuing validity; others, when put forward, do not have validity at all. They represent the type of point of view put forward by the noble Lord, Lord Molloy. We read in the Financial Times this morning an article written by Mr. Peter Shore, in which he came to the following conclusion: The EEC, in the straitjacket of a clearly obsolescent Rome Treaty, is coming to the end of its potential". I take the view that, even under the Rome Treaty, which needs modernising, updating and making more effective, there are developments which are of advantage to all member states. We can point to the European monetary system as one of the most recent advances which have been a success for the Community. I was interested to read the statement by the Financial Secretary to the Treasury during a conference in London shortly before Christmas, which was attended by the noble Lord, Lord Lever. Mr. Ridley said: The EMS exchange rate arrangements have so far been perhaps surprisingly successful". It is the success of these arrangements to which I should like to draw attention today.

What is now clear is that many of the objections which we in this country have felt to be valid before have been overtaken by time and events. I should like in my own modest and brief introduction to this debate to go through a few of the objections that have been levelled against our joining in the system fully.

Why should we bother about this scheme? Does it matter? There would be little doubt in any quarter of the House that since the collapse of the Bretton Woods system some 11 years ago we have all suffered from the wild and unpredictable fluctuation of exchange rates. This has done few people in the free world any good whatsoever. It has helped to destabilise all our economic systems and it has contributed significantly to the dangers that the world recession has brought, particularly unemployment. We need to find a path out of this dark wood, and the European monetary system is a guide towards the light.

What is it that has prevented this country from following the torch in the correct direction? There is the belief that we need to retain the freedom to float. I was interested to read earlier this week in the Daily Telegraph—not, as I am sure the noble Lords, Lord Banks and Lord Bruce of Donington, would agree, normally to be found among the ranks of the wild cavorters on the frontiers of European federalism— Although in a sense we may have become accustomed to grotesque exchange rate fluctuation which bears little or no relation to underlying economic performance, in no sense have we shown ourselves able to cope with it. In a volatile world, the European Monetary System has had some success in limiting violent exchange rate movements among the member currencies ". Since 54 per cent. of our overseas trade is with countries linked directly with the Dm. and its zone, these exchange rate fluctuations are particularly unpleasant for our exporters, and I think the argument about the sacredness of the floating exchange rate needs at least some re-examination.

Then there is the argument that the level is wrong, the pound is too high or too low, it may go up or it may go down; there is the eternal uncertainty of timing. But this argument, if pursued to the fullest extent, can always prevent action of any sort. I believe everyone now would be reasonably entitled to consider that the pound is at a more realistic level for entry to the system than it was when the present Government first came into office.

There is also what seems to me the most intractable argument of all—and I try to speak as an unbiased witness—which flows from Britain's role as an oil producer. How can we discern correctly what the nature of the effect of capacity as an oil producer will have on the standing of the pound? It is impossible to be confident. Equally, it is interesting to note that the current of opinion among the pundits and soothsayers is moving towards the view that we are reasonably entitled to believe that there are some grounds for thinking that there will be reduced pressure on oil price increases. While accepting that this argument is one that is hard to prove either way, I believe that if we were able to have something like the 6 per cent. fluctuating limit which has been demanded by the Irish and Italians, it would perhaps mean some amelioration of our position as an oil producer even though we are unique in the Community.

Then there is the argument about sterling's international role and the sensitivity of the pound to external factors. Again, no one can deny—not I, not any noble Lord nor anyone else who believes in the European monetary system—that this is a true statement. Nevertheless, the special nature of Britain and all its arrangements has throughout the history of the European Community been a major block, first, towards our admission and, secondly, to our progress within the Community. We must not allow this dusty old argument to be trundled out once again with exaggerated importance to inhibit our membership and participation in the exchange rate mechanism, when all the other arguments have begun to take their place in the history book and are irrelevant.

Briefly, may I give one or two points as to why we need to belong. If your Lordships were to make a study, as I am sure you have, of the pattern of our trade, the change in the distribution of our exports over the last 20 to 30 years is remarkable. In 1958, 20 per cent. of our total United Kingdom exports went to the nine other member states; in 1973 the figure was 32 per cent.; in 1980 the figure was 43 per cent.; and now it is 46 per cent. The pattern is shifting. We are European as traders; we need the trade to survive as a nation. Figures which came out only the other day show that we are successful and doing better. We are part of the European trading community as well as of the European political community, and by being a full part of the monetary system that position is not only safeguarded but considerably favoured.

Then there is another topical point. However prolonged the tortures that my noble friend the Foreign Secretary has been undergoing in recent days, on the European agenda at the moment there is, under the Belgian presidency, the question of the next stages of the European monetary system—how it can be widened, deepened and developed more fully. These steps may lead nowhere—Community initiatives often come to nothing—but it would be extremely bad for the national as well as the Community interest if we were excluded from real participation in those important discussions because we had not even taken a full part in the initial stage, which is what we have today.

I understand that it would be difficult for my noble friend Lord Cockfield to make a full statement today and reveal in its totality the nature of the Government's response to this interesting debate, as I hope it will prove to be. Apart from anything else, there would he a constitutional uproar if something dramatic on the subject we are discussing today were to be announced in this House rather than in another place. I also appreciate that there may be arguments for saying that any move in this field might be more appropriately displayed to the world during discussions of the budget as a whole. But I do not think that any kindness and courtesy on the part of your Lordships about these matters should inhibit the putting of penetrating questions to my noble friend about what the attitude of the Government really is going to be on joining the exchange rate mechanism.

I would suggest that what we are debating today is a modest step forward towards fully participating in a success story in the European Community. It will not change the weather; it will not ensure that we win the World Cup; it is not an all-purpose mechanism for a magic solution to all our problems in the Community. We should neither exaggerate nor diminish its importance. Nevertheless, on the other hand, it is neither an arcane nor a technical matter solely of interest to the City, the financial journals and economists. It is an important part of building the European Community, internally and externally. It has a substantial importance for businessmen, farmers, housewives, holidaymakers and for everyone in Britain who is affected by the level and rate of our currency against the currencies of our Community partners. I hope that today's debate will serve to underline that as well as being important for Britain within the Community, and important for the future development of the Community itself, as I believe, it is fundamentally in the British interest as well that we should be a full member of the European monetary system. My Lords, I beg to move for Papers.

3.38 p.m.

Lord Lever of Manchester

My Lords, I am sure the House is grateful to the noble Lord for giving us an opportunity—alas! all too rare—to debate Europe other than on a degraded level of fighting over whether the halfpenny in the pound of our national income which we contribute to the European budget is being adequately returned to us. There are very much larger issues involved, and this is one of them.

There are two central purposes of the European monetary system, one of which the noble Lord has emphasised—that is, to regulate in a more stable manner than would otherwise be the case, the relations between European currencies. But I shall not deal at any length with that, because, although that is a valuable role, it is a limited one. The crucial role, in my opinion, of the European monetary system is that the stabilisation process and the machinery involved in the EMS is a necessary step in producing that relationship with the dollar and the yen—the United States and Japan—which will start to restore order to the world monetary system, which is at present in a dangerous state of near anarchy; a state which, if it gets worse, will very soon prove to be gestating the worst financial crisis of this century, including the one which some of us experienced in 1933.

A second reason for my regarding the crucial role of the EMS as being a step in world co-operation in relation to the monetary system is that, unless you move on with the EMS into a stage of world co-opera- tion, the EMS will have the greatest difficulty in surviving in an isolated state. It was rather disappointing to hear a strong pro-EEC man, like the former Prime Minister, Mr. Edward Heath, talking about having a ring fence around Europe. That is not the purpose of the European Community. It is not the purpose, certainly, of the European monetary system. The purpose of the Community and of the monetary system, in particular, is to link us effectively together sufficiently to produce a coherent negotiating force, not in any hostile sense but in a co-operative sense with the rest of the trading world.

Can the EMS take this step without Britain? Quite frankly, a European monetary system that does not have Great Britain in it is a little like Hamlet without the Prince, because we are still the biggest monetary centre in Europe. Therefore, as long as we stay out, or are half-hearted, shadowy members, the EMS is likely to remain linked to its narrower purpose, which is marginally useful, of stabilising the currencies among themselves.

I have said that there is a dangerous state of near anarchy. Parity relations at the present time between the great currencies are in an incredible state of volatility, which, so far as I can recall, is unique in my life-time. The Club of 30, which is a leading group of bankers and economists of very considerable standing—and I endorse every word they said—reported in the following words. They said that changes of parity of 10 per cent. in a week and 40 to 50 per cent. in a year have become the order of the day for our great currencies. Changes of that kind not only cannot reflect economic fundamentals; they must dislocate and disrupt them, because parity changes affect not only the trading relationships between nations—being brutally disruptive of trade—but also investment.

When this Government—and I see the noble Lord, Lord Cockfield, in his place—rejected the notion of some kind of parity policy, the noble Lord said in this House in June, 1980, that we were helpless. The Government certainly proved themselves to be helpless, but they did not have to be helpless when the pound soared to 2.42 dollars. That change not only disrupted our competitiveness at home against imports and our competitiveness abroad against exports; it also encouraged a vast flow of export capital, because, of course, at those rates it became immensely attractive to invest in other countries.

Worse still, such a situation affects politics, too. You cannot have political and strategic co-operation in the western world on the one hand, and the rat-race in economics and finance on the other. The two will not last long together. So we have to end these yo-yo currencies and restore European-US-Japanese co-operation, to bring about some kind of stable relationship between the European currencies as a group and these other currencies—particularly the dollar.

I ask your Lordships to look at what the present situation leads to. If, as is very possible and as is predicted by many influential American bankers, the American dollar rate of interest once again jumps to 20 per cent., this will impose upon our Government and upon every European Government, even if they are all united in the European monetary system, an intolerable dilemma. They will either have to watch their currencies depreciate if they maintain their interest rates at their present level against a 20 per cent. dollar rate, as billions flow rapidly out towards America—in which case they will suffer a sharp blow to their anti-inflation policies, as their currencies proceed to depreciate rapidly to accommodate the vast outflow that will occur—or, in order to avoid the outflow, they can move to match the American interest rates, in which case they will knock on the head, quite irrelevantly to their own needs and interest rates, the potential recovery of western Europe.

In a small way, that is exactly what the Government have done, because when they abandoned their nonsensical, indefensible and intellectually reprehensible position that they had no parity policy—they had no parity policy until the pound collapsed against the dollar and then they found one—they, very largely, halted the downward trend of our interest rates and dealt quite a sharp blow to our economic recovery. That dilemma can be solved only if Europe as a group, with its credit and with its purpose, arranges swap arrangements with the United States which do not bring about this irrelevant dilemma for the Europeans.

If the Europeans know that under the system they have a swap arrangement with the Federal Reserve, which is sufficiently large to recycle the outflow of funds that will occur if they hold their interest rates below the United States rate, and if they know that that money will be recycled by arrangement with the Federal Reserve—and, to some extent, by using their own reserve— then they will be able to continue with rates of interest which are apt for their own economic needs and will not have them irrelevantly imposed from outside.

After all, we managed to recycle the OPEC money. People tell me that it is impossible to get this kind of agreement, but we recycled 60 billion of OPEC money to Brazil, 26 or 28 billion dollars to Poland, a similar amount to Yugoslavia and so on. It seems very odd that we cannot have these intelligent recycling arrangements to maintain target zones for our European currencies against the dollar and the yen—particularly the dollar. Without these arrangements, we are committed to the highest common denominator of interest rates or the lowest common denominator of economic progress.

The truth is that floating rates are quite incompatible with a prosperous interdependent world or, indeed, with political co-operation in the world. They have been sold to the world on a bogus prospectus. Because of the shortness of time, I shall recite very briefly a catalogue of false promises made by the floaters. It is said that they reduce speculation, but they have increased it to an all-time record size in world history. In that speculation, they have turned the major currencies from stable trading media into gambling counters. Seventy-five billion dollars a day are traded every market day on the spot markets of the world, and probably two or three times as much on the futures market. The spot market trade alone is some 15 to 20 times the amount which is required to finance the movements for trade and investment. Floating was supposed to reduce Government intervention. Government intervention, in this false floating, has been higher than it ever was in the period under Bretton Woods. They were supposed to produce parity changes which smoothly reflected fundamental economic factors. I have recited the figures on that. Speculation is supposed to smooth the changes. If ever it went too badly, speculators would come in and correct it, said all these pundits—I must say, pundits whose knowledge of the market was so limited that it is doubtful whether their wives would have trusted them with the Saturday morning shopping. To a large extent the western world has trusted them with their economic and financial destinies. These gentlemen, who know very little about the practices of the market, believed that the speculator would move in to counter the trend, whereas the normal reaction of the speculator is to move in behind the trend and create a kind of stampede.

If you compare the disastrous volatilities of parities and interest rates, you have got the highest real interest rates in the great countries ever recorded in world history—not nominal rates; the real interest rates are the highest ever recorded in world history and there is the greatest volatility in currencies. This is the achievement of the floating system. Bretton Woods was much criticised because, like all human systems, it was not perfection. But it begins to look like near perfection compared with this anarchic, dangerous situation of deformed parities which we have brought about under floating rates. No anti-inflation policy can work in any country for long if the unit of currency is jumping about like a yo-yo. That should have been obvious to bankers, of all people. No concerted world recovery is possible with these fluctuating parities and with these fluctuating interest rates.

I want to say a final word about the position of the Labour Party. It will have become apparent to the House that I find myself at some variance with the concepts on these matters of the leaders of the Labour Party. That causes me great unhappiness, though not so great an unhappiness as I should feel if I agreed with their views. I understand that the leader of the Labour Party and Mr. Eric Heffer are to go on a ceremonial visit to the leaders of the Socialists in the European Community. I wonder what they will have to say to each other. I wonder whether Mr. Foot and Mr. Heffer are going to be able to announce—

Lord Denham

My Lords, I wonder whether the noble Lord would refrain from referring to Members of another place by name.

Lord Lever of Manchester

I wonder, my Lords, what these two gentlemen will have to say to their Socialist comrades about the shameful repudiation of the great and honourable tradition in the Labour Party of internationalism which is involved in their position on the European Community. I wonder whether their Socialist comrades will draw their attention to the moral shabbiness of making large claims for international co-operation while combining them with hostility to every concrete opportunity in that area. It seems that they are able without any intellectual distress to combine the rhetoric of internationalism and interdependence with the actual practice and support of policies which in this area are nothing better than the dangerous national chauvinism which has brought the world to its present great difficulties.

I conclude by saying that floating rates do not work and that fixed rates did work. Under them the world enjoyed a prosperity unique in world history—fixed but adjustable rates. We have got to get back to some flexible, orderly, co-operative system. I am hoping that we can treat the reaction to international co-operation of the Labour leadership at the present time as being a momentary spasm of a dangerous and negative kind which will he corrected in due course and that they will join the view which I have expressed; namely, that the world must move back to enhanced co-operation unless we are to suffer deep economic crisis, deep financial crisis and a great social danger to the systems of the world.

3.55 p.m.

Lord Banks

My Lords, I should like to begin by thanking the noble Lord, Lord O'Hagan, for raising this important subject this afternoon, and also to thank him for the way in which he did so. I fully support the plea which he made that the United Kingdom should become a full member of the European monetary system. I am glad that the noble Lord, Lord Lever of Manchester, who speaks to us with such knowledge and authority on these matters, should have supported that plea as strongly as he did.

When we discussed this subject on 28th November 1978, just over three years ago, I said then that we on these Benches were committed to the concept of an economic and monetary union in the European Economic Community. I confirm that commitment today. But of course that may be dismissed as unrealistic aspiration, remote from the practical problems which we now have to face. I believe, however, that such a judgment would be short-sighted, because what we are saying is that the European Community will not realise its full potential, economic or political, until there is one economy instead of 10 or 12, as there may soon be, within the European Community.

On present evidence—and we had some of that just before we began our debate this afternoon—it will be a very long time before that stage is reached, but I think it is important to know where we want to go. Direction is vital. Of course, an economic and monetary union would have to be complemented by a political union. That, too, will take time. But, if you have these aims of economic, monetary and political union, then you do welcome any steps which are taken, however small, on the road towards them. That is one reason why we on these Benches at the present time welcome, for example, the initiative on European union of the German Foreign Minister, Herr Genscher. This is the reason why we welcomed the establishment of the European monetary system in March 1979.

We see the establishment of this system as a separate issue from the question as to whether the currencies of the world should be fixed, floating or crawling. That is a vitally important question, there can be no doubt, and it has been emphasised to us this afternoon by the noble Lord, Lord Lever of Manchester. When Mr. Roy Jenkins put economic and monetary union back on the European agenda during his presidency of the Commission, he envisaged large areas of stability, of which Europe would be one, linked by floating exchange rates. Perhaps the noble Lord, Lord Lever of Man- chester, would not see it in quite that way, but certainly he has this afternoon argued, as the noble Lord, Lord O'Hagan, argued and as I argue, that we want within Europe to have the system of monetary co-operation that is incorporated in the European monetary system and to see Britain as a member of it.

When this matter was discussed in this House in November 1978, the European monetary system was planned to proceed but it seemed likely that Britain would not join it. In initiating that debate, the noble Lord, Lord Soames, whom we are looking forward to hearing later this afternoon, attacked the Government for having, " such a moth-eaten and weak-kneed attitude on so vital a matter ". " What a sad commentary ", he said, " on the affairs of this country ". The noble Lord, Lord Cockfield, who is to reply to this debate, said it was perfectly true that membership of the European monetary system would entail severe financial disciplines, but these are just the sort of disciplines that we need here at home if we are to beat inflation. Much to our regret on these Benches, the Labour Government decided not to join the currency link, while taking part in some of the other aspects of the system. To our continuing regret, when a Government including both the noble Lord, Lord Soames, and the noble Lord, Lord Cockfield, came into office in May 1979, that Government did not join either, and so things have continued until today.

In the Green Paper on the European monetary system which the Labour Government issued in November 1978, at the time when the question was being argued as to whether Britain should join, they set out eight characteristics which, in their view, the system should embody. Among these was a requirement that it should be durable and effective. I think we can say after three years that it is durable and effective. Also, it should be truly European and be capable of containing all the members. Again, I think we can say after three years that it is so. Another requirement was that it should provide a basis for improved growth and higher employment. If there has been precious little improved growth and if there has been lower employment, I do not believe that the European monetary system can be blamed for that. Also, there should be provision for realignments. There have been four realignments, but on the other hand I do not believe it can be argued that there have been too many. And so one could go on through the whole eight points.

I do not believe that the operation of the European monetary system has militated against the Labour Government's conditions in any way. It is true that that Government did not like the parity grid system proposed as much as the basket of currency system, and they had good reasons for their preference, but surely that is insufficient reason for not joining then, and I imagine that it is not questions about the mechanism which prevents the British Government from joining now. Is it perhaps, as it has been suggested earlier in the debate, concern as to whether, because of our oil and our inflation, the pound is too highly valued in relation to the other European countries? It has, of course, fallen hack a bit now in relation to them. Would a small devaluation on joining be such a bad thing? And had we been in the European monetary system, might not our manufacturing industry have escaped the loss of competitiveness on the scale which has taken place?

May I say in conclusion that, if the Government could now see their way clear to join the European monetary system, I am sure that the political bonus for Britain would be considerable, and this would be a great advantage for us at a time when the delicate negotiations of which we were hearing earlier this afternoon, about the contribution to the budget, are taking place. If Britain joins, I am sure that it would be taken as a welcome indication of Britain's commitment to wholehearted support of the Community.

4.3 p.m.

Lord Soames

My Lords, now that we are discussing the European monetary system, I must first say how glad I am that my noble friend Lord O'Hagan has chosen this subject. As the noble Lord, Lord Lever of Manchester, said, we should look at this not only in parochial Community terms, but also in the widest international terms. We joined the Community, not just in the hope that we would enrich ourselves by so doing by being in a larger market but also because, off a European base, we could have a greater influence in the world than we could off a purely national base. The same argument holds with the European monetary system.

The main reason leading us to join the system would be that of a wider international character to which the noble Lord, Lord Lever of Manchester, referred. It is worthwhile at this time, some two or two and a half years after the European monetary system was set up, during which period we have seen enormous swings of parties, to consider how the monetary system has worked and how it has succeeded in the prime task that it had in its early days, which was to ensure that it was to some extent at least an island of stability in what was in a monetary sense a very unstable world.

I do not know whether your Lordships have looked at the figures recently and seen what has happened in the last two years. Taking 1st January 1979 as my base line, I looked at the parities then compared with 1st January 1982. I took the Deutschemark as the pivotal currency and I looked at the changes of parity during those two years, of the Deutschemark with other currencies within the EMS, and of the Deutschemark with the dollar and the yen outside it. I found that the difference today compared with two years ago between the Deutschemark and other currencies within the EMS varied between one half per cent. with the Dutch florin to a maximum of 13 per cent. with the Italian lire, the most volatile of the EMS currencies. Indeed, if one were to put to one side for the sake of argument the Italian lire and the Belgian franc, both of which have suffered particular difficulties during the last year or so, all parity movement among all the other EMS currencies have been within single percentage figures. But when one comes to look at what has happened between the Deutschemark and the major currencies outside the EMS, the dollar and the yen, one sees a very different picture.

With the dollar, compared with two years ago, the difference in the Deutschemark parity is 36 per cent. and with the yen it is 40 per cent. Let me put it to your Lordships another way. If one looks at the worst picture of the volatility of currencies during this two-year period, what does one find? If one takes the high and the low points of the currencies within the EMS one finds that the worst it ever was (between the Deutschemark and the lire, which is the most volatile of the EMS currency currencies) was 16 per cent. But if one takes the high and low points between the Deutschemark with the dollar and the yen one finds it was 51 per cent. against the dollar and 54 per cent. against the yen.

Now, if one departs from the simple premise that money is there to encourage the exchange of goods and services, what do we think we are doing allowing the parities to move around like this, to this sort of order of 40 and 50 per cent., over a two-year period? For this makes a mockery of forward planning by industrialists or traders. Also enormous profits or losses are made just by luck due to how the currencies of seller and buyer happen to move between the contract and sale. What has this done for employment? It has created a lot of extra unemployment.

I must agree that if you take my argument to a conclusion, one would expect to see a far greater degree of trade within the EMS countries than you would between them and the outside world, because their movements of parities have been much less. We have seen a change, but it is not all that phenomenal. If you take a base figure of 100 for 1975, the exports from the Nine among themselves has gone from 100 to 212 between 1975 and 1980, and with the outside world from 100 to 185. But an element we must bear in mind here is that the growth within the countries of the European currencies has been far less in these two years than has the growth in the dollar zone, and particularly the yen zone. So I believe the wide parity movements have had a significant effect on our trade, have had their effect upon our industries, and have had their effect, therefore, upon the levels of unemployment in western Europe.

Of course, I realise that there are difficulties in our joining the EMS. As my noble friend Lord O'Hagan said, there were those who were against it. I remember hearing certain individuals telling me that the pound was much too high at 2.40 dollars; then they said it was much too low at 1.70. Here it is at 1.80 to 2.00, somewhere in that area. I do not know quite where they want it to be. I do not want to take the Labour Party's arguments. To begin with, I do not understand them; but, secondly, the noble Lord, Lord Bruce of Donington, will tell us why he does not want to join the EMS. I suspect that anything that might be said from that Dispatch Box opposite will be related to the fact of the Labour Party's enormous capacity to wish to commit economic suicide by leaving the Community. This will have something at least to do with their desire not to join the EMS. So I ignore that argument.

Turning to our own real problems, the fact that we are a petro-currency of course makes a difference. Of course it does not make it easier for us to join. On the other hand, we have been through the two big oil hikes of the 1970s and they have had their effect. If we look to the future I do not think we can be expecting the kind of very rapid movement of oil prices which had the impact upon sterling that we saw in the 1970s when there was a conjunction of circumstances where two big rises in oil prices coincided with North Sea oil coming on stream. I should have thought that was a once-or twice-for-all phenomenon which is unlikely to be repeated, although of course there will be some movements in oil prices. But I do not think that that is sufficient to outweigh the advantages which I see in our joining the EMS.

Then of course one must face the fact that sterling is uncomfortably high in relation to the Deutschmark today. This, I agree, must be put into the balance as well, but I do not think that either of these points detracts from what I would call the tactical economic advantages of joining the EMS.

I move to the strategic arguments, the ones that were set out so ably by Lord Lever, and there I think one makes a very decisive case. The kind of movements of parities that I have described—30, 40, 50 per cent. over two years—everyone dislikes; there is not any country in the world that would not sooner get that put right, or at least get it dampened down. I do not believe that we could aspire to go back to fixed, although not immutable, currencies. But at least, if the will was there, there could be agreement between the zone of the European currencies, the zone of the dollar and the zone of the yen to build in a certain discipline with the combined objective which we all contribute towards reducing these wild parity swings. It could be done, but it must be done through zones. I do not believe that it could be done by individual European countries, and I do not believe that the United Kingdom could play its part in that unless we were in the EMS.

Although sterling does not carry anything like the international weight it did 20 years ago, nevertheless there is still a fund of knowledge in this country, in the City of London in particular, and in the Treasury, of international money markets which I think would be of enormous value when the EMS come to discuss these matters with the United States. I believe the United States is ready for it. If there was benign neglect in days gone by, it is not there today. It seems to me that we should at least try it, and we are not going to be able to play an effective part if we remain outside the EMS. Though I must tell your Lordships that this is not a matter, certainly on the tactical side, that I would go to the stake over—though I have been deprived of my stake and I have not got a stake to go to any longer—but, if I would not go to the stake for the tactical reasons, I think the strategic ones lead us into stake country. Because this is one of the few areas where all the Governments concerned would be seeking the same objective of reducing exchange rate movements.

The noble Lord, Lord Banks, was kind enough to quote a passage from a speech of mine in November 1978. That tempts me to quote another one which I was intending to quote anyway. He has given me a good peg to hang it on. I said: So I do not believe it is possible to exaggerate the need for a degree of international co-operation in the management of exchange rate movements if trade is to grow rather than diminish, with all that means in terms of employment and prosperity within the free world". I think it was true in 1978 and how agreeable to be able to say so again in 1982.

So I would make a plea to my noble friend Lord Cockfield, and it is this. I ask him to cast aside the prejudices of the past. We all know that there are certain individuals who have husbanded these prejudices for a long time. I would let somebody else have a look at it, let people with a fresh eye come to this. Of course there are arguments both ways, but let them consider them, the political, social, economic arguments. I am quite prepared to listen, but at the moment I am of the opinion that, if we were to start that ab initio, we should get the answer without peradventure that one of the great contributions this country could make to the world in general and to itself in particular would be to help to dampen down these vast swings of currency parities, and the way to do that is by our full entry into the EMS.

4.18 p.m.

Lord Roberthall

My Lords, I, too, am grateful to the noble Lord, Lord O'Hagan, for giving us this opportunity to discuss this very important subject, which, as we have been reminded several times in this debate, has been before your Lordships on several other occasions; the most recent one was the one that Lord Banks and Lord Soames referred to, the debate introduced by Lord Soames himself. At that time, while I was in favour of joining the EMS, I had some hesitations because of the timing. It seemed to me then that there were difficulties about our own position which made it rather risky to join just then. Since then I have become a wholehearted supporter not only of our joining but of doing it as soon as possible. All the speakers who have spoken so far have been enthusiastic supporters, and I am left with very little to say on the subject, but I will perhaps try to add a few words.

It seems to me in very broad terms that there are two reasons for joining, the political and the economic. The political reason, which I think is a very strong one, is that the EMS has a symbolic significance in connection with the general movement towards European unity. To me, the main achievement is the coming into being of what is practically a free trade area. I know that many people think that the CAP is the main achievement, but I doubt whether that is really a factor for unity. However, it is, I am sure, the case that our partners in Europe often think that we are rather uncomfortable bedfellows—all elbows and knees—and that although like everyone else we profess the need for unification, for working together, when it comes to particular cases we do not do that as much as we should.

Great importance is attached, symbolically, to our joining the EMS, because it is an area in which we shall have responsibilities to carry out as well as the benefits that we hope to receive. I feel that a lot of our negotiations in the EEC as a whole would be softened if we took opportunities like this for showing that we really do want to get together.

On the economic side, I suppose that it has been agreed for a very long time that stable currencies are very desirable in the economic world. In my active time, we enjoyed stable currencies because of the Bretton Woods system and because of the general agreement under GATT to reduce tariffs. There was a long period of growing world trade from Bretton Woods to 1971 under the influence of those two factors. As we know, the currency system broke down in 1971 and the reason was twofold. The main reason was that the problem of inflation hit different countries at different speeds so that prices became out of control and the preservation of the parity rates put too much of a strain on especially those countries whose costs were going up too fast. That led to great speculative movements which accentuated the difficulties.

As regards what has happened since then, I do not think that I need go any further into the chaos into which we are moving. However, it is clear that there was very little call for the sigh of relief that many people felt when we went over to floating currencies. The noble Lord, Lord Lever of Manchester, and the noble Lord, Lord Soames, both in their different ways have stressed the horrors of the present exchange rate system. I do not think that one can underemphasise the dangers into which we are now drifting—the breakup of the economic unity that we had been developing in the early years. There is a tremendous amount of movement back towards protectionism of one kind or another. We certainly are not getting together at the moment to try to overcome the recession. In my time that was the first step that Governments took when there was a concerted recession.

I was against joining this system at the time of our last debate, which was just after the new system had come into being, because I thought that our currency was then too weak and I remembered that we joined the first experiment in this connection, which was the old "snake", and had to leave almost at once. I thought that it would be unfortunate to join this system and then to have the same experience. Economic forecasters often have red faces and this was a wonderful example of that. I was afraid of joining because I thought that our currency was too weak to stand, but in a very short time we were propping up at, I think, £2.42 against the dollar. So instead of having to deflate like anything, because otherwise we could not have stayed in the system, if we had been a member of it then we would have had to inflate or sell the currency to bring it down—or both—or have a new parity.

But the European monetary system has, to some extent, become something of an island with a very stable position in a very shifting world. Our own rate has come down. Of course we are in a dilemma about our rate, because the oil surpluses suggest that we ought to have a higher rate than the exports which we have to depend on in the long run. The rate is perhaps a hit high, but it is not such a bad rate as it was, and our exports are holding up very well. So I think that now is a good time and that it really is incumbent on us, for the reasons already given, to join as soon as possible. I do not know, but from looking at the figures it looks as though the Bank of England is now trying to stabilise the currency, and it might even be—perhaps the noble Lord, Lord Cockfield, can tell us—that the Government are moving a bit more towards having an exchange rate objective rather than one of the very uncertain ones like M3. Anyway, I think that now is a good time.

There is one further reason which has already been referred to, and that is that the three years which we have had of the European monetary system have shown that the possibilities for changing the rate if it gets too much of a strain are much easier than they used to be in the days when it caused a great disturbance. I remember vividly the horrors of 1949 and, to a lesser extent, 1967. But changes have now been made inside the EMS. The French have made a change. It was quite a smooth and easy one. Therefore, we cannot in the long run, until we get the business of inflation going at the same rate, expect always to keep the same parities. But we want to get them stable for as long as we can and have not too much disturbance when we have to make the change. I think that that is offered to us now.

So I join the very eloquent pleas which have already been made, especially by the distinguished speeches of the noble Lord, Lord Lever, and the noble Lord, Lord Soames, and I hope that the Government—although I agree they cannot tell us today—are thinking much more kindly about this matter than they seem to have done.

4.28 p.m.

Lord Ardwick

My Lords, I am in agreement with the arguments of my noble friend Lord Lever of Manchester, but noble Lords on the Benches opposite must not assume from that that this is a common view in the Labour Party. Indeed, I think that when, later on, they hear my noble friend Lord Balogh on the subject they will discover that he is verily a doubting Thomas. I have no doubt that my noble friend Lord Bruce of Donington when he comes to wind up this debate will show a very restrained enthusiasm for the EMS.

Once again we are indebted to the noble Lord, Lord O'Hagan, for giving us the opportunity to debate a subject which is both important and topical. It is topical because the desirability of Britain entering fully into the EMS and participating in the exchange rate mechanism is now, so we are told, being seriously discussed in the corridors of decision. I myself hope that the Bank, the Treasury and the Foreign Office will at last find it possible to agree that full membership is in Britain's long-term interest, and that they will be able to convince the Prime Minister of that fact. I hope, too, they will agree that it is not against Britain's immediate interest to do so and that, therefore, the time is ripe for full membership. Of course, it is possible that the Government are waiting for our major problems in the Community to be resolved; I mean the problems of fishing and of our budgetry contribution. I should like to express sympathies with the noble Lord the Foreign Secretary in the struggle that he had in Brussels on Monday. However, I think that the Government might consider whether a European gesture as significant as our becoming full members of the EMS, might inspire a solution of those intractible problems.

The right honourable Member for Bexley and Sidcup spoke at the weekend of the difficult phase through which the Community is going. The last two years have been years of economic turbulence. For the second time the world has been shocked by the ineluctable demands of the oil producers, and the subsequent recession has produced cruel and unacceptable levels of unemployment. The members of the Community have no common economic policy. The dreams of Vice-President Ortoli of a co-ordinated, concerted attempt at expansion, have not been realised and it has been agreed that for the present each member state should seek its own solution—a kind of despairing recourse to sauve qui pent.

Until about 10 years ago—several speakers said 11 years ago—we had a world of comparative monetary stability as currencies were traded at rates based on the values of the United States dollar. Then President Nixon found it impossible to maintain convertibility, and the eventual consequence was that currencies began to float. Then the nations of the Community, which we were about to join, tried to create what was called at the time—if I may complete the phrase which the noble Lord, Lord Soames, recalled—an island of stability in a sea of chaos. However, the metaphor was swiftly changed; the island became a snake. Britain, France and Italy found the pressures against their currencies too great and they had to leave. The snake became a Deutschmark zone, with the smaller European currencies around it.

But this, of course, was too small a group to cope with the consequences of an unstable dollar and a soaring Deutschmark which threatened Germany's export trade. So the idea was born of this new monetary system with built-in safeguards to allow Britain, France and Italy to return to it. Professor Triffin wrote that: The Bremen initiative was an instinctive reflex, a desperate desire to make their countries less dependent on the unpredictable vagaries of a shaky US dollar ". But it was not only that. It was to be inspired and to be supported by a co-ordinated economic expansion. However, of course, that has not come.

But this initiative came to Europe shortly after the utopian and federalist dream of economic and monetary union had been reborn and nourished by President Jenkins' fervent and eloquent oratory. The nascent EMS was, however, not that. It was an urgently needed practical arrangement. It implied the ceding of a little more sovereignty than Bretton Woods had required. Each nation was to remain in charge of its own economy and must intervene if the rate could not remain within the permitted margin.

Between this and monetary union, which demands a single currency for all countries or its equivalent national currencies at externally fixed, unadjustable parities, there is a major qualitative difference. But this difference was not clearly perceived and it caused great confusion in the debates which took place in this country and in Europe at the time. I was the rapporteur on the subject in the European Parliament and I could never stop the federalists from commending the EMS as monetary union; nor could I dissuade the anti-federalists from opposing it for the very same reason.

This afternoon the noble Lord, Lord Banks, has advanced the same idea: this is a step on the road to complete economic and monetary union. It is only a step, but every time that argument is brought forward, it is used by the sceptics to oppose the EMS. I wish that they would forget about economic and monetary units, and simply say that monetary units are perhaps something for the very distant future; and that all the EMS does is to provide an experience which, after long duration, could give an indication whether or not monetary union is desirable and feasible. In short, the EMS is a thing in itself, performing a useful and necessary function for a group of states which do about half their external trade with one another and which have close political links. As several speakers have pointed out, it has, of course, proved possible, in a time of turbulence, for its members to keep their exchange rates within the set limits, and when modest adjustment to a rate has been necessary the change has been accomplished smoothly and without political drama.

The EMS has earned high marks for exchange rate stability, but it has not yet had, as was hoped, a conspicuous effect on prices. One more economic axiom has been disproved. It was thought that for strict discipline over prices it was essential to ensure exchange rate stability. Not so. It is, the pundits are now saying, only in the medium-term or longer that sustained inflation inevitably affects the exchange rate. When the United Kingdom took part in the negotiations it was judged that the time was not ripe for Britain to join, and the Government thought that the EMS was too much like the snake. Some people in that Government seemed to think that the snake shared the divine displeasure which the creature in the Garden of Eden had incurred.

Then, of course, there were many members of my party who were haunted by the ghost of domestic deflation which they thought would have to be summoned if sterling got into trouble. Of course, the time was politically inopportune. An election was imminent and many voters had recently become disenchanted with the Community because they had recently learned of the unfairness of our contribution; and, of course, they had become well aware of the extravagances of the CAP. Of course, it says much for human insufficiency that nobody predicted that Britain would soon be embarrassed by a pound soaring to an inconvenient and unjustified height.

But surely today the pound is somewhere near a realistic level, and the prospect is of oil prices remaining stable or even declining because of depressed demand. Is the time still not ripe? I shall make no attempt to answer, because I think that the question is beyond any individual. But obviously some of the obstacles have been cleared away. Of course, the strict monetarists who give a pivotal role to money supply still believe in floating rates, but whether there are any such people outside the academies is rather doubtful. There may be some people with a voice in monetary policy who fear that the obligation to buy or to sell foreign exchange at a given rate might make them miss their quantitative target. But that target is so elusive that it has become something of a joke. As The Times said today, money supply is no longer the touchstone of national virtue.

But for those who may still have doubts about the effect of the intervention on money supply, perhaps I could quote the Director-General for Economic and Financial Affairs, Signor Padoa-Schioppa. He said in London not long ago: There should be no systematic conflict between exchange rates and monetary targets if the two objectives are set as part of a consistent policy. Serious problems only arise if the targets are contradictory ". And he pointed out that most countries in the EMS have had quantitative monetary targets and have not encountered insuperable difficulties.

Then there is the fear that if the pound was fully integrated into the EMS, the special financial relationship with the United States might be weakened and London's ability to compete for business on a world-wide scale would be lessened. Again I must quote Signor Padoa-Schioppa, who believes that these fears are exaggerated; that there is nothing in the EMS to diminish the City's role as a provider of services throughout the world. Indeed, as the ECU develops into a reserve currency there should be a growing business in new financial instruments denominated in ECUs. But if the United Kingdom does not join the EMS fully, the use of the ECU will be held back and the City's share in the new business will be smaller.

Another argument against our full participation has faded. It is no longer true that other members of the Community are more involved in intra-Community trade than we are. About 53 per cent. of the Community's exports are traded within the Community and Britain's exports to the Community are close to that figure. My Lords, is there anybody who still regards a floating currency as a magic solution for our problems? Is there anybody who does not look back with yearning to the Bretton Woods days of growth and full employment?

Surely in the interests of trade and investment we must work for reasonable monetary stability, internally and externally. Surely we should be preparing to enter the stabilised zones where we do half our trade, in the hope that it will, as the noble Lord, Lord Lever of Manchester, has said, provide an example, an incentive, and an opportunity for a systematic liaison with those who control the dollar and the yen.

The Times points out today that the Europeans are now trying to create what is analogous to this; that is, they are trying to create a pool of lower interest rates to protect their nascent recovery from another surge of American interest rates. But, they ask, what will they do when it comes, as seems possible? This is the economic question which overhangs the petty cash of Sir Geoffrey's Budgets. There are answers; we need not be flotsam on the high seas.

4.43 p.m.

Lord Hankey

My Lords, my noble friend Lord O'Hagan has done a good job in bringing this question once more to your Lordships' attention. I agree with all that he says and wish to support him strongly, because I think that this is very much in our national interest. What an advantage it is that we have well-informed Euro-MPs of such ability in your Lordships' House here in Westminster. It is now very important that the Government should at long last make this country a full member of the European monetary system.

First, industry and commerce really do need a much more stable exchange rate. It is very bad for our exports when the exchange rate goes unreasonably high. It gives an undue encouragement to imports and to excessive exports of capital. The period of high rates we have gone through was really a calamity for our manufacturing industry. It made firms very anxious to reduce their staffs as export orders declined and as imports increased. Import prices were of course kept down, and this pressed on the retail price index. But looking at our inflation rates over the last three years I find it very hard to believe that that discouragement of inflation balanced in any way the effects of greater unemployment on the public sector borrowing requirement, on the morale of our workforce, and on the general reputation of the Government.

In my view, we should all have learned more from the sad experience of this country in the late 1920s when Mr. Churchill, as Chancellor of the Exchequer, revalued the pound upwards by 10 per cent. in order to facilitate the payment of our war debts to America. Coming to our own time, it was a disaster when the pound appreciated by 15 per cent. to 20 per cent. for a period last year.

If we were full members of the EMS I believe that our exchange rate would be more easily held within the permissible limits of the 2½ per cent. swing either way because our membership would discourage a lot of speculative movements of the enormous, loose-footed funds that now swing around the world, and the EMS as a whole would represent a more weighty inertia. In fact, I find it difficult to believe that the EMS would not be made very much more effective if we were full members.

The pound exchange rate looks about right to me now. This is a matter of judgment and I know one should fear to tread, but that is really what I think. I have an idea that my noble friend Lord Roberthall, for whose wisdom I have for many years had a prodigious admiration, feels about the same way. So for goodness sake let us seize this favourable opportunity and make this country a full member.

I also think that our joining as full members would tend to strengthen and build up the new Europe as a whole, and that in itself is worth working for and is very greatly in our own interests.

Having worked a good deal with this type of problem at OECD I do most fully realise the nervousness felt in some Treasury and Bank of England circles, that if we tie our hands in this way we might not be able to defend the new rate permanently. Such defensive action has cost us dear in the past. But I want to say in this connection that if the other members of the EMS can do it successfully, then it would be ridiculous if we could not also do so now that we have a petro-currency.

The Italians have, I believe, a special latitude of a permissible swing of 5 or 6 per cent. instead of 2½ per cent. Perhaps we could secure the same concession. But in any case experience shows quite clearly that no set of rates can be expected to become permanent, and the EMS rates have of course been altered from time to time. So I see no reason why we should do worse than all the others provided the Government take care to look after industry, especially export industry, as they ought to, and provided they continue to wrestle with inflation including both monetary and cost-inflation.

This brings me to industry and commerce, both of which desperately need stability of conditions if they are to progress. I hope, and believe, that our full membership of the EMS would not only produce a vitally needed foreign exchange stability; I believe it would also tend to encourage a greater stability of interest rates, and perhaps a better comparability of rates within the EMS countries. This would really be of great assistance to industry and commerce.

I am not just plugging a few technical points, important as they are. This whole question is really vital for the economic and financial future of this country, and I think that it needs to be looked at on a broad economic background. There are encouraging signs that our industries are at last beginning to pick up after the recession, but they have a very long way to go, and many businesses, like the Invergordon aluminium smelter, are still going bust. It is really essential to look back at our very, very slow recovery from previous recessions and to see the great present danger to our economy, and to the Government, if we do not at once remove the factors which hold our boards of directors back all over the country from making further progress. They have very little confidence at present. They cannot trust the exchange rates; the interest rates; the trades unions; the rating system; or the various taxes and levies. So they really cannot easily invest in new plant, new processes, or new factories. Yet we are in the middle of the greatest industrial revolution of the present century. There is an enormous technological revolution going on while we watch. This country is in real danger of being left behind, with potentially disastrous results on our unemployment and standard of living, for which our politicians of all parties will inevitably be blamed.

In previous slow recoveries since 1950 the Government of either main party have in the end always expanded general demand, with disastrous results, which this Government have rightly condemned. We absolutely must avoid that. What we need is a régime of intelligent exceptions designed to help industry; and, I repeat, intelligent exceptions designed to help industry. Let the Government now join this country to the EMS as full members and make a good start there. Let them use the occasion to have greater stability of interest rates and a greater regard for the effects of our interest rates on the economies of our neighbours. A greater regard for the effects of one's economic policies on neighbouring countries is something which used to be very strongly felt in OECD and has become much weakened in recent years. I hestitate to blame just the monetarists, but they certainly have less regard for that factor than others do. And my noble friend Lord Roberthall mentioned the danger of a relapse into protectionism—and it is a great danger if we are to make a proper recovery.

The Government have no chance of curing inflation unless they get industry going again soon. I have mentioned many factors that need immediate attention and there are many others which I have not mentioned; tax questions, local rates planning questions and many others all need dealing with. The monetary factor is only one, but an important one. The others are vital to the men in the boardrooms, to management and to those on the shop floor, and they are at least equally important. To make this country a full member of the EMS would be a most useful measure to take among the many that are now required.

4.52 p.m.

Lord Balogh

My Lords, I was suspecting that I should be followed by a horde of noble Lords agreeing with me. In fact, I think I am the first and sole representative of those who have certain misgivings about the step that is proposed. Economists cannot produce experiments, except perhaps Mrs. Thatcher, but what we can do is look back and see how certain policies came out, in favour or against the Community.

British monetary and fiscal policy has been dominated, in my opinion, by the passionate desire, especially on the part of the Bank of England but also of the Treasury, to return to the economic liberalism and freedom of the pre-1914 period. It was a repetitive performance. Even in those days a rather boring pattern was adopted, the Community reinforced by the EMS through those Keynesian doctrines, which had some influence, especially in the immediate period after the war, when we were still supported by wartime controls and some planning. That has now been swept away, to some people's delight.

The first real taste of what might be threatening was in 1947. Dalton, against United States' advice, restored convertibility; the loan which was supposed to underpin and support British reconstruction was exhausted in a matter of hours or days, certainly a maximum of weeks; and next we had the armaments crisis, when Gaitskell, contrary to most Chancellors, pressed for increased expenditure on armaments. That experiment expired in about two years, in 1950 or 1951. It resulted in the collapse of a number of our foreign markets never to be regained. The possibilities opened by the devaluation of 1949 were missed. Fortunately for the Conservative Government, the price of raw materials declined abruptly, giving the country over £1,000 million of new resources to sustain the balance of payments. A new liberalism was set in train with investment increasing very slowly. A new crisis followed in 1960, and another in 1967, and the latter gave a foretaste of what was to come. All of that happened while the Bank loosened its control over foreign payments and plunged the country into deflation, rectified only in election years.

Much more important in this respect was our joining the Community. I recall the debates which went on then, in many respects very similar to the debates going on today—that is, an overwhelming proportion of those who wanted to join tried to match those who were in opposition. Most noble Lords supported the move and most among those partisans pointed to the great potential gains which would accrue to the country by the opening up of a vast market of over 200 million people. Those were in their view the fabulous opportunities. Some noble Lords, however, suggested the dangers due to our opening our markets, as against the Germans opening the German markets. Nevertheless, the new liberalisation measures were accentuated and in the end the pound was floated, much to the displeasure of the majority of this House.

Our relatively more acute slump today finds its explanation in the problems created by Governments of both parties. In the meantime, however, the magnificent discovery of gas and oil increasingly made itself felt; at the moment some £6 billion of relief has been afforded to our balance of payments, with more to come. Regrettably, of course, the Government are giving away a large part of the profits to mainly American companies; 61 per cent. of British oil is really owned by the Americans. Hot money however regained confidence and fled to Britain, having first been diverted to America. The Government and the Bank, acting on foolish monetary lines, refused to intervene against the stream of foreign exchange streaming into the country, wrongly believing that the increase in money supply as such would have an inflationary impact. In fact, most of the moneys did not enter the income stream but were put to precautionary balances in either banks or other institutions.

The pound however, not being managed, rose precipitately, under the influence of hot money, from 1.56 to 2.45 dollars, and it is now back at about 1.82 to 1.83 dollars. That resulted in increasing British imports and stifled British exports. It must be stressed that the pound is still at least 20 per cent. over-valued.

As I have already pointed out, our balance of payments would be in a terrible state without the revenue from the North Sea. The non-oil balance is horrifying and the loss of domestic industries' potential is serious and is threatening to become permanent. It is in this sombre framework that some noble Lords wish to enter fully the monetary system. I do not disagree that that compact is flexible. It can accommodate changes in parities which seem necessary at the time. Unfortunately it is less flexible downwards than upwards, because an upward revaluation would attack exports.

The worldwide depression caused by monetarism is pressing on us, and we must not open a further breach in our defences, especially now when exchange control has been abruptly abolished and an enormous amount of capital is flowing out of the country—estimated at £4 billion since monetary exchange control was finished. Entry into the system might be accomplished if one is lucky, but it is unforseeable what will happen. It seems to me that to take that measure in a situation of inferiority—and despite oil and gas we are still in a vulnerable position—would fit Talleyrand's famous dictum: It is worse than a crime, it would be a mistake".

5.2 p.m.

Lord Dunleath

My Lords, I, too, am grateful to the noble Lord, Lord O'Hagan, for having given us an opportunity to debate this subject, which I believe is one of fundamental importance. Many of the points to which I had intended to refer have been covered by other noble Lords with much more skill and authority than I would have been able to command. Therefore, and bearing in mind that we are approaching the end of a short debate, I should like to refer merely to two points, the first of which is perhaps rather peculiar to Ireland.

I start by expressing an interest because I am a non-executive director of the Northern Bank, and with your Lordships' permission I should like briefly to quote the experience of the bank. Historically, the Northern Bank has had branches in all parts of Ireland, both North and South of the Border, and that worked well until the Republic of Ireland joined the EMS, while the United Kingdom did not. Thus we found ourselves faced with fairly massive exposure to the currency of the Republic of Ireland, the punt, and agonising decisions had to be made. In the event, believe it or not, we reckoned that it has probably cost us £7½ million to extract ourselves from that exposure.

None of us likes having a potentially profitable situation eroded in that way, but I think that in banking if you are going to make losses, you should try to make them properly; in other words, by taking calculated risks and lending to trusted customers. On the one hand, there will always be bad debts; so one loses money like that, and one regrets each and every loss. But against that, for every bad debt there are many good lendings, and they offset the bad debts. The bank is thus performing its duty by helping farmers to improve their farms and helping industrialists to install more modern machinery. In those circumstances the odd bad debt, while regretted, is not as resented as anything like as much as is the £7½ million, which is completely wasted—money down the drain. It is not going to do any good for anyone, unlike the other lendings which might he a little dodgy, but which at least are providing employment and, with any luck, making industry and agriculture more competitive.

There is another thing. The withdrawal of Republic of Ireland currency which was in circulation in the North of Ireland cost hundreds of manhours and womanhours—and to what good was that? It was not doing anyone any good at all. Then there is the ongoing cost of reconciliation between the two currencies, and no one knows from one month to the next how the disparity will vary.

I should like to mention one personal, bitter experience that I had. I sold a small parcel of land in the Republic of Ireland for housing development, and in order to assist the developer in his cash flow I came to an agreement with him that I would accept a slightly higher price if he deferred payment by giving me bills of exchange. In the event, over the nine or 10 months that elapsed before the bills of exchange came to maturity the punt had gone down from about 99.5p to 77.5p. I would have done much better had I accepted a lower price at the start and got cash on the nail. But there it is; that is water under the bridge.

I quote that example because I think that it is typical of what is being suffered by many firms and individuals, too, who have operations both within and without the EMS. The inconvenience and the extra bookwork that is involved is not inconsiderable. Therefore, I entirely support noble Lords who say that we would be well advised to join the EMS, and I think that the advantage thereof would be even more greatly appreciated in Ireland than perhaps in any other part of the United Kingdom.

Another factor is that when one goes to the South of Ireland and then on returning with some punts in one's pocket one tries to get rid of them by buying a meal on the train, a surcharge is imposed. If one takes sterling to the South, it is much welcomed, but there is no discount. So there we have inequitability, and were the United Kingdom to join the EMS, this inequitability would be removed.

The other point, to which I shall refer very briefly, is that were we to join the EMS, I understand that monetary compensatory amounts in the field of agriculture would no longer be required. That would be a much cleaner way of doing it and it would save bureaucratic work, which would be most desirable. People keep on telling me that we have a common agricultural policy, but I sometimes wonder myself. I had every sympathy with the noble Lord, Lord Carrington, in what he told us this afternoon regarding his vigorous and sincere attempts to thrash out this question. But we are part of the European Economic Community, and I suggest that it would be only logical that we become part of the European monetary system as well.

5.10 p.m.

Lord Kaldor

My Lords, I had not intended to take part in this debate, and my only reason for doing so is because I feel that to many noble Lords on both sides it almost appears that joining the EMS is one of those very rare acts for which there is everything to be said with nothing to be said against it. I feel I ought to introduce a slight note of discord into this almost universal harmony and say that we ought to consider what possible disadvantages this may bring, which may also be very important, and not just the advantages.

First, I fully agree with the noble Lord, Lord Soames, that this chaotic situation of 50 per cent. variations in the relative currency, which is the dollar and the deutschmark, is absurd and ought somehow to be brought to an end. But it will not be brought to an end by our joining the EMS. I think it is megalomanic to think that the fact that we join the European monetary system will make the world currency system any more stable or any less stable than it would be otherwise. I do not think that, from that point of view, it will make any difference.

My second point is this. Is it really so desirable for us to reduce our currency variations in relation to the European countries if that means enlarging the scope of the variations in relation to the dollar area, or possibly the yen area? I can quite imagine that if we maintain our independent situation and vary that much less in relation to the dollar and the deutschmark, even though we may vary it a little more in relation to the deutschmark than we would inside the EMS we would be in a far more favourable position. In other words, I would rather have a situation where the pound/dollar rate varies only by 25 per cent. and not by 50 per cent. if a 50 per cent. variation would be the cost of joining the EMS.

But my third and main point, to which I think completely insufficient consideration is given, is that the pound is still very over-valued. According to the IMF, even after a recent adjustment we have lost 35 per cent. of our competitiveness in terms of unit labour costs in manufactures since 1977. I feel that this is a very important consideration. Of course, it is possible within the EMS to have devaluations, but it will be much more difficult. If you look at the trade figures—I am looking at those for the last three months, which have just come out—you find that imports are still rising much faster than exports. In relation to 1975, our imports of manufactures went up by 75 per cent. taking the average for the last three months, whereas our exports of manufactures have gone up by only 20 per cent.

If you look at the position in relation to last year and take the last three months of 1981, again you find that despite the fact that in 1980 we went into an increasing depression, which should have reduced our imports very much, our imports rose by 12 per cent. whereas our exports rose by only 2 per cent. This is a disastrous record, and I think we ought to bear it in mind before we rejoice too much at our joining the EMS or doing anything which curtails our freedom of action.

Lord Lever of Manchester

My Lords, could the noble Lord help me to understand his argument? As I understand it, he is complaining of what he rightly describes as the disastrous effect of the parities achieved under the floating system as it now exists. Why is that an argument against going into a system which would eliminate or mitigate many of the movements which have produced these deplorable results?

Lord Kaldor

My Lords, may I say very simply that we ought to achieve a far more competitive exchange rate before we join the EMS. We ought to be far more competitive vis-à-vis the Germans and the Europeans than we arc now; and if we should join it now we shall just make a bad bargain.

5.15 p.m.

Lord Bruce of Donington

My Lords, the House will be grateful to the noble Lord, Lord O'Hagan, for having raised this subject today. It has been discussed by your Lordships this afternoon (if your Lordships will perhaps forgive me for saying so) in largely academic and perhaps monetarist terms. It is therefore important, I think, to set this whole debate within its context. While we are debating here today there are over 3 million unemployed individuals in this country. This is rather more than a statistical aberration. It is much more than figures. It expresses itself in the lives of millions of our citizens and their families. Its social consequences are enormous, and still have to be fully apprehended. I wonder whether the confidence in Parliament of those people is going to be enhanced by a feeling, perhaps, that at Westminster these questions become largely institutionalised in the detailed discussions of monetary and exchange control theory. They may not see the relevance of it, and I am very fearful of that. If our debates are to have relevance, they must surely have very serious regard to the state in which many of our countrymen find themselves today.

It seems to me, after having listened very carefully throughout the debate, that most of the contributions that have been made, some of them with eloquence and skill, have been based on an assumption that fundamentally there is nothing very wrong in the way in which the western world and the countries comprising it conduct their economies. There seems to me to be a tacit assumption that, while the ordinary people of the country are expected to have their loyalties to their family, their loyalties to their firm, their loyalties to their region, perhaps, and, last but not less importantly, their loyalties to their country, and are supposed to have specific responsibilities in those fields of which they are often reminded, yet the owners of capital are not required to have any responsibility to anyone whatsoever—no social responsibility at all; money can go exactly where it wishes without regard to the fortunes of the people in the country in which much of the wealth originated. I would suggest to your Lordships that this is a very dangerous supposition indeed.

Perhaps I may say to my noble friend Lord Lever of Manchester that I do not accept that my own political record in public life, which is as long as his, gives him any justification for saying that I am somehow less a socialist than he is—I do not know whether he still acknowledges adherence to that particular philosophy—purely because I may have misgivings about membership of an organisation of a comparatively few countries that might be conveniently classified, and so often is classified, as a rich man's club. The noble Lord may have many more international contacts and carry on international co-operation in many financial fields, and in that he is very eminent; but I think it is dangerous for one to regard one's political philosophy by any reference to that touchstone.

The fact is that the people of the western world—including our own country where there are over 3 million unemployed, Europe where there is total unemployment of 10,200,000 according to the latest figures, and the USA where the figure is approaching 12 million—are not going to accept as a kind of relentless logic that while they are idle there have to be so many human wants unsatisfied. It may satisfy the academics but it is not going to satisfy them. They are not going to be satisfied that their present lot is due to the mysterious onslaught of something which is supposed to be from Heaven or from Hell or from wherever but, anyway, from a supernatural source called recession. They know, as your Lordships know, that it is precisely the way in which human society in the West has for the moment sought to organise itself.

It has been said (and it was emphasised by the noble Lord, Lord Soames, who unfortunately cannot be with us at this moment) that we have had the most volatile exchange rate. This is true. There is one growth industry in the world at the moment and that is the growth of the money speculators. They produce no goods or valuable services for any individual, no goods for the use of mankind nor even any social services for them. Yet the people of this country, of Europe and of America are invited to observe the results of their speculation which is, of course, carried out by the simple transmission of key-tested telex from one capital to another in a matter of minutes where, as the noble Lord, Lord Lever, has already said, £75 billion can be changed within a very short time.

One thing is certain: the volatile rates of exhange have been caused largely by the actions of Her Majesty's Government themselves. When they first put up the interest rates—and they themselves put it up—in 1979 this was followed, as the noble Lord will be able to check from his various graphs, by a rise in the exchange rate due to the inflow of hot money and also to petrocurrency. Beyond argument (and the professor to whom my noble friend Lord Ardwick referred made it clear) is the linkage between high interest rates and high exchange rates. High interest rates very largely have been the direct result, first of all, of the deflationary policies and of the monetarist policies followed in the United Kingdom, and also of the monetarist policies and the deflationary policies followed in the United States.

This has had important results because high exchange rates have meant, first, that it is becoming increasingly difficult to expand exports to anything like the level that they would have expanded had exchange rates been more favourable and, secondly, encouragement of the inflow of imports. It is somehow assumed that if exchange rates were lower, and therefore import costs would rise, this would have an adverse effect on inflation. That is not necessarily so. Because what is not always realised is that only one-tenth of our imports are raw materials and go into the process of production. The remaining imports, after making allowance for imports of food under the special conditions of the CAP, go into manufacturing. What has been happening progressively over the past few years, owing to the very high exchange rates, is that this has amounted to a subsidy to overseas manufacturers whose prices have progressively undercut domestic firms. This is what has happened.

In consequence of this subsidy of the exchange rate—also helped by subsidised energy prices in many countries—there has been a flood of imports into this country of manufactures which is most difficult for our own domestic manufacturers to deal with. They have been beset by other matters. If one looks at the figures for import penetration over the past three years, one finds in field after field where we had previously been net exporters we are now net importers. So this policy of high exchange rates and of high interest rates itself has contributed to the progressive decline of the fortunes of most of the manufacturing sections of our industry.

Therein lies, so far as I am concerned, the anxiety—and I put it no higher than that—about joining the EMS. Despite the association of the EMS with the European Economic Community—of which I am not a devout supporter in view of the fact that, as Mr. Jenkins indicated, it consists at the moment of little more than the CAP and a few peripherals—the reason I am hesitant about joining the EMS is that I am afraid that under this Government we should join it on terms that would seek to perpetuate the disastrous policies that they are carrying out at the present time. As my noble friend Lord Balogh has indicated, the pound is probably over-valued at the present time by some 20 per cent. If we went into the EMS at the pound's existing level there would be a danger—and I put it no higher than that—of fossilising the situation of import penetration into this country, which has already reached very dangerous proportions and has been one of the principal causes of the unemployment from which this country suffers at the present time. These are the things which gave me misgivings.

The noble lord, Lord Soames, thought that perhaps I was going to be dogmatic about this. Not at all. I willingly concede that if it is possible for this country, in conjunction with other countries, to arrive at some kind of organised arrangements whereby one can establish a firm but flexible rate of exchange, I can see the advantages of that. It may well be, as the noble Lord, Lord Lever, has said, that the EMS is the best instrument for this purpose. Indeed, I concede that if that be so there is the advantage in the strategic approach of supporting the EMS on the basis that it is another step towards being able to obtain agreement within a wider context, possibly within the IMF or in conjunction with the various other organisations that have the support of the United Nations and some indeed with the support of the World Bank. I am all in favour of that.

What I do not believe is that it is right at this stage to dogmatise about it. I am convinced that the quicker we start abandoning these wretched, miserable deflationary policies that have scourged the country and produced this large-scale unemployment that exists at the present time, the better it will be for everyone, and it will make it easier for us to participate profitably and co-operatively in an organisation such as the EMS.

5.31 p.m.

The Minister of State, Treasury (Lord Cockfield)

My Lords, this has been an interesting and indeed illuminating debate. The fact that many of the opinions expressed have transcended party boundaries will be thought by most people to be a good thing and not a bad thing. The House owes a debt of gratitude to my noble friend Lord O'Hagan for instituting this debate and for the very thoughtful contribution that he made to it.

I must take issue with the noble Lord, Lord Bruce of Donington. We face of course very great problems as a nation and I realise that the noble Lord, in common indeed with all of us, feels very strongly and sincerely about these subjects. But this does not in any way mean that the House should not be debating subjects of the kind that we have been debating this evening. Many people may think that the House is uniquely placed to perform that function.

May I say in that connection that one must be very much struck by the great sense of vision shown by the noble Lord, Lord Lever of Manchester, in his portrayal of the EMS and the European Community as a step towards world-wide international and trading co-operation. My noble friend Lord Soames was equally right in looking at the European Community as much more than a purely economic community. It is an important step forward in international co-operation and has great political as well as economic importance. A number of noble Lords—my noble friend Lord O'Hagan himself, the noble Lord, Lord Lever of Manchester, my old friend—if I may so call him—Lord Roberthall, Lord Ardwick, and others—looked back with nostalgia towards Bretton Woods, as indeed I do.

For 25 years the Bretton Woods system of fixed but variable exchange rates maintained a degree of stability to the great benefit of international trade. Indeed, the benefits which flowed from the system went wider than that. The system imposed a degree of discipline in the conduct of economic affairs: and it provided every incentive for the prudent conduct of economic policy.

The breakdown of the Bretton Woods system in the 1970s was not the result of any weakness of principle in the system itself. It was the result of a number of factors which unfortunately came together at one particular moment in the world affairs. It was the result of rising world inflation, disparities in economic performance and above all the weakness of the dollar. A fixed rate system could not have coped with the oil price shocks of the past decade, and the huge increase in the volume of internationally mobile funds, which today dwarf the size of official reserves. This breakdown in the exchange rate stability while inevitable was of course a great loss, not only with repercussions on international trade; it also removed, as I have indicated, an internal discipline.

It is not surprising that in these circumstances people should search diligently for a successor to Bretton Woods and perhaps least surprising of all that the search for the successor should be made within the context of the European Community.

The greater stability we all seek can in the end only be achieved through a return to more stable world conditions; and, in particular, lower and more uniform rates of inflation. The EMS is a product of this search, as well as a step towards European economic convergence and intregration.

Although it has become customary for people to talk in terms of "When will we join the EMS?"—as indeed my noble friend's Motion does—the position in fact is that we became a founder member of the EMS when it was launched three years ago. Twenty per cent. of our official gold and dollar reserves are deposited in the European Monetary Co-operation Fund; and the Government participate fully in all discussions on the operation and future development of the system. My right honourable and learned friend the Chancellor of the Exchequer chaired the most recent realignment conference.

My noble friend Lord O'Hagan mentioned the discussions currently going on about the possibility of making some useful—though essentially technical—improvements in the present arrangements. I can assure him that Her Majesty's Government are already playing a full part in those discussions.

What is at issue is not simply membership of the EMS but whether we should join the exchange rate mechanism. The Government fully support the aims of promoting an area of greater currency stability within the community, and the contribution that the EMS and the exchange rate mechanism can make towards closer economic convergence and integration in Europe. Nevertheless it was decided when the EMS was launched that we should not at that stage join the exchange rate mechanism. That decision was right at the time; but, not unnaturally, people ask, as my noble friend Lord O'Hagan and other noble Lords have asked, whether the time has not come when a further step forward might be taken. A number of your Lordships spoke in this sense in the debate and powerful voices have been raised outside to the same effect.

There is, however, a difficult balance of advantages and disadvantages to be weighed up in considering sterling's possible relationship to the exchange rate mechanism. Some of the issues are more technical and complex than is commonly realised. I should like to touch on a few of these.

Participation in the exchange rate mechanism places an obligation on Governments to ensure that their exchange rates against other EMS currencies remain stable for a reasonable period of time. The mechanism is not of course one of immutable exchange rates—there have to be periodic realignments of rates to permit the necessary economic adjustments between European Community countries. But too frequent realignments would undermine the raison d'etre of the mechanism and bring it into disrepute.

One implication of this is that United Kingdom economic policy would inevitably become more directly affected by the decisions of our partners and by the policies that they in turn followed. This would clearly be a complicating factor for our own policies. A second implication, not perhaps always sufficiently recognised, is that membership is by no means necessarily an easy option. Maintaining a fixed parity—whether inside or outside the EMS—would often require a restrictive monetary and fiscal stance. Membership of the exchange rate mechanism presupposes a willingness to accept these disciplines and can indeed reinforce the need for them.

It is quite wrong, therefore, to regard membership of the EMS, including the exchange rate mechanism, as freeing us from the need to conduct our affairs responsibly and to accept the necessary disciplines in fiscal and monetary policy. In no sense would membership be a licence to pursue lax or expansionist fiscal or monetary policies.

At the same time our experience in the 1960s and 1970s has shown that it can be extremely difficult to resist underlying market pressures on exchange rates by intervention alone. The attempt to participate in the "snake" in 1972—and our membership lasted a few weeks only—the attempt to halt the depreciation of the pound in 1976, and the attempt to cap its appreciation in 1977 were all overwhelmed by market forces despite massive exchange market intervention.

The noble Lord, Lord Lever, has widened the argument and suggested that an EMS reinforced by the United Kingdom would be able to introduce stability vis-à-vis the dollar. This may very well be a desirable objective, but there is no reason to suppose that the United States authorities would co-operate in such a move. They have a policy, firmly stated, of only intervening in the foreign exchange markets in extremis, and whatever those like the noble Lord, Lord Lever, may wish, a fixed exchange rate system could not have coped with the instabilities of the last decade.

Lord Lever of Manchester

My Lords, does the noble Lord recall that the United States had precisely the same exchange rate policy of not intervening except in extremis, and when the 1978 difficulties arose they mounted the biggest exchange rate intervention ever known in history?—and that was the same Government which had the two opposite positions. There is no reason why this one could not.

Lord Cockfield

My Lords, the noble Lord is an optimist. One of his major attacks upon the United States Administration has been on their interest rates policy, and he himself has repeatedly drawn attention in your Lordships' House, and did so again today, to the damaging effect that the interest rate policy followed by the United States Administration had on the economies of Western Europe. Why he should now think that the United States authorities would bail him out in these circumstances I am not sure; I think it is most unlikely.

Experience has shown that attempts to maintain the exchange rate within the agreed bands would have to involve action on interest rates and perhaps fiscal action as well. Sometimes there measures would supplement the stance of the Government's policies to secure low inflation and continued recovery, but on occasions there could be conflicts which could be very difficult to resolve. There would clearly have been a conflict of this kind for the United Kingdom in 1979 and 1980—and also for long periods in 1981.

The noble Lord, Lord Ardwick, quoted Signor Padoa-Schioppa on these conflicts between domestic monetary policies and membership of the exchange rate mechanism; but I doubt whether even the most ardent advocates of the interest rate mechanism would deny that we would have had such a conflict had we been members in 1979, in 1980 and in early 1981. The Government have since 1979 made it clear that they have to give immediate priority to getting inflation under control and tackling the United Kingdom's deep-seated economic problems. So we would need to be as confident as we could be that sterling's participation would not result in early or frequent difficulties of this kind. Were it to do so we would scarcely be a welcome participant.

As yet the exchange rate mechanism, with its current members, has operated fairly successfully and has not encountered excessive problems. But there are two special factors relating to sterling which differentiate it from most of the other EMS currencies and whose effects must be carefully weighed. First, sterling retains its role as a major currency for international trade and finance. The sophistication of the banking and financial markets in London make the pound attractive for international funds and particularly susceptible to wide fluctuations in demand in response to changing levels of interest rates abroad and varying expectations of future exchange rates. This sets sterling apart from all other EMS currencies except the Deutschemark. Whereas the experience since 1979 has shown that the mechanism can be successful with one such international currency—as indeed one would expect—greater problems may emerge when one tries to link two, as they did in 1972.

The second factor relates to the pound's role as a petro-currency. Sterling's exceptional strength in 1980, and the comparative weakness of other EMS currencies, reflected among other factors the market's contrasting view of the effect of higher oil prices on these economies. As the pressures in the international oil markets have eased and expectations of future price movements been reversed, so their effect on sterling's exchange rate has moderated. But some of the economies affected have still to complete their adjustment to the 1979–80 oil price rises. The factor works in both directions and it would be premature to discount this. Even in recent months developments in international oil prices have been reflected in sharp, short-term movements in sterling against the other EMS currencies. These special characteristics of sterling do not automatically rule out sterling's participation in the mechanism, but they add to the complexity of the judgment on this issue.

Much has been said by my noble friend Lord O'Hagan himself, by my noble friend Lord Soames, by the noble Lord, Lord Hankey, and others about the need for greater exchange rate stability. But stability is something which cannot be imposed simply by Government decision or by joining an arrangement such as the EMS exchange rate mechanism. It is only possible to achieve stability if we tackle the underlying causes of instability. The most important of these is inflation, and particularly inflation at high levels and varying greatly from one country to another. Correspondingly, and in some degree linked with this, we have the high level and volatility of interest rates. Success in dealing with these problems would make joining the exchange rate mechanism of the EMS that much easier and that much subject to less risk. And I have no doubt that if, in this way, we could successfully avoid fluctuations in sterling's parity against the other EMS currencies, much of British industry would regard this as an important benefit. Nearly 40 per cent. of our non-oil exports are to other EMS countries. But it would not help those more concerned with the sterling/dollar exchange rate.

In times of difficulty, people cast around looking for the easy solution, the panacea for our troubles. It is not surprising that the EMS should be cast in this role. But the purveyors of instant solutions do the EMS no good service by this kind of advocacy. We need to recognise that full membership of the EMS, including the exchange rate mechanism, poses great problems and has disadvantages as well as advantages. It is all too easy for people standing on the sidelines, for people or parties out of office and, indeed, with little expectation of office, to see—and talk—only of the advantages and ignore the disadvantages. That is not the way that a responsible Government can approach major issues of this kind.

It is in the light of a careful assessment of all the circumstances that we do not, at the present time, feel able to join the exchange rate mechanism. We must wait until conditions are right, both for the system and for ourselves. But I do assure your Lordships that the Government will keep the situation under constant review. We will study with great interest the points which have been made by all noble Lords who have contributed to what, by any standards, has been an interesting and instructive debate.

Lord Boothby

My Lords, may I—

5.52 p.m.

Lord O'Hagan

My Lords, I should like to thank all noble Lords who have taken part in this debate, and particularly my noble friend Lord Cockfield, who was kind enough to describe me as thoughtful. When I was at university a person who was described as thoughtful was said to have some pretentions to intelligence, but to be fundamentally wrong. I am sure he will take it kindly from me when I say that I deeply admire the eloquent and elegant way in which he evaded many of the most important questions in dealing with the subject under debate tonight. Many of us will forgive him, because of the position he is in and because of the time of year and the approaching Budget. We will forgive him today, but not forever. I thank your Lordships very much. My Lords, I beg leave to withdraw my Motion.

Lord Boothby

My Lords, before the noble Lord sits down—

Motion for Papers, by leave, withdrawn.