European Monetary System: ECC Report

HL Deb 14 November 1983 vol 444 cc1112-43

6.29 p.m.

Lord O'Brien of Lothbury rose to move, That this House takes note of the report of the European Communities Committee on The European Monetary System (5th Report, 1983–84, H.L. 39.).

The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. This report is the result of seven months' work by Sub-Committee A, most ably supported by its staff and specialist advisers.

This sub-committee reported briefly on the European Monetary System in 1979 and said then that a more detailed examination would be appropriate after the system had been in operation a few years. This second report fulfils that intention. When it was published last September it aroused considerable interest in the press and broadcasting media. That does not mean that the European Monetary System arouses widespread popular interest, still less controversy. It is too technical for that. Nevertheless, the subject is important to us all. The primary aim of the committee, therefore, was to divest it of its mystery. I hope your Lordships will have found the committee's description of the system straightforward and clear. Without this, what follows would inevitably be less helpful than it is intended to be.

The committee's second aim was to ascertain how successful the system had been over the first four years of its life. Any judgment about that must largely depend on one's understanding of the objectives of those who created the system. From evidence given to the committee we found that there were widely differing views of this subject.

Your Lordships will remember the Werner Report of 1970, with its ambitious plan for achieving economic and monetary union in the Community, involving the creation of a common gold and currency reserve fund leading to the formation of a European central bank and eventually to a common European currency. It will also be recalled that Mr. Heathand President Pompidou made a joint declaration in Paris supporting these aims and pledging themselves to their realisation by 1980. These aspirations were, I fear, never very realistic, and they were brought to nought by the recurrent oil crises and the high rates of inflation brought about by these and other causes.

The Brussels European Council resolution of December 1978 (which did not, however, mention economic and monetary union) could be described as the first step towards rebuilding this edifice. This was the view taken by representatives of the Community institutions and by most of the academics we saw, notably by Professor Niels Thygesen of Copenhagen University, a most impressive witness.

Most of our banking and trading witnesses took a more limited view. We were told that the creation of the EMS was nothing more than a device for breathing some life into a Community which was in the doldrums, its aim being to produce a zone of relative monetary stability to help bring the European economies a bitcloser together. There are thus two views against which to judge the degree of success achieved by the EMS in the past four years.

No-one can say that the Community is much nearer economic and monetary union today than it was four years ago. So, at best, any success of the EMS has been modest. But some success it clearly has had. It has at least survived intact during a period of exceptional worldwide economic difficulty. Our inquiries also satisfied us that greater currency stability had been maintained among the participants than has been evident in the rest of the world, the behaviour of sterling not excluded. It is true that there have been numerous parity changes in Community currencies, but they have not been large and have been arrived at after consultation and agreement between the Community countries, involving in the process some convergence of economic policies.

Looking to the future, it is to be hoped that we shall not come to a world brought to turmoil by an international banking crisis. At the moment it could be said that we are edging carefully along a narrow path above the precipice. Assuming that in due course we reach safer ground, your committee are persuaded that the EMS is likely to endure and modestly progress, with the European currency unit (the ECU) coming into wider use as a unit of account and even as a currency. There has already been some unpredicted expansion of its use in private markets.

The achievement of any larger aims by the EMS still seems far distant, with little sign yet that any country concerned is prepared for the necessary surrender of national autonomy. Meanwhile, greater exchange rate stability is worth having for its own sake. Bankers may find that they can prosper without it, but traders and manufacturers, particularly exporters, need it more. Glib talk about the availability of forward cover is not the full answer to all their problems.

Greater exchange rate stability within the Community, apart from contributing to its wider and more distant objectives, helps to promote trade within it in both goods and services. It also provides an important nucleus of stability in a world context, and may thus contribute in the end to the return of worldwide stability in the exchanges. Any such return, it need hardly be said, must include the US dollar and the yen. Despite the many calls, particularly from some European and Commonwealth countries, for the creation of a successor to the Bretton Woods system, there seems to be little prospect of early action, mainly because the USA shows little interest in the proposal. Nevertheless, I believe that if the Community system can endure and progress it will increasingly influence world opinion.

That brings me to the United Kingdom's membership of the EMS, or, rather, of the exchange rate mechanism. We have been members of the system itself from the beginning, having deposited 20 per cent. of our gold and dollar reserves with the European Monetary Co-operation Fund and having participated fully in all consultations and negotiations about exchange rate changes. What we have not done yet is peg our currency to the other currencies of the Community in accordance with the rules of the exchange rate mechanism. Your Committee are of the opinion that further delay in taking this step is no longer justified, although we do not venture to suggest any precise timetable, realising that other aspects of policy and of EEC negotiations are relevant.

Her Majesty's Government have said that they are ready to join the exchange rate mechanism when the time is ripe. From this one must assume that the Government have no fundamental and permanently valid objection to joining. There was a time when sterling was clearly overvalued and this was an acknowledged impediment. I doubt whether that argument holds good today.

Sterling still is a petro-currency with its rate, therefore, more dependent on the US dollar that that of other Community currencies. But this is less important now that a reasonable degree of stability pertains in the oil market. Nor does it seem likely that joining the other Community currencies in the exchange rate mechanism would unduly hamper Her Majesty's Government's ability to fulfil their internal policy objectives, in particular in the field of monetary policy. The other Community countries apparently do not find that a stumbling block. Why should we?

It seems not unreasonable, therefore, to ask Her Majesty's Government what they mean by "when the time is ripe". Are not present conditions acceptable? Your Lordships' committee believe that they are. And does it make sense to wait for the perfect moment, which may never arrive? How can Her Majesty's Government's present stance retain credibility if even more years are allowed to pass while they shiver on the brink? Her Majesty's Government's full commitment to Europe has recently been re-affirmed. Becoming a full member of the EMS would give substance to this affirmation. It would also add weight to British influence in the Community at what looks like being an important time in its development.

I realise that I have, perforce, dealt only somewhat sketchily with a number of the considerations involved in this important matter. They are of course dealt with at greater length in the report. Members of the sub-committee taking part in this debate will naturally have their own points to make, and no doubt more cogently than I. So also will other participants from whom the House will look forward to hearing, especially the noble Lord, Lord Barnett, who is making his maiden speech in your Lordships' House. I am sure that we all look forward to hearing the noble Lord, Lord Barnett, many times in the future. The noble Lord the Minister's own contribution will be listened to with special attention in the hope that in his usual forthright manner he will be able to give us a positive lead. My Lords, I beg to move.

Moved, That this House takes note of the report of the European Communities Committee on The European Monetary System.—(Lord O'Brien of Lothbury.)

6.40 p.m.

Lord Barnett

My Lords, I am most grateful for the kind reception that I have had since my introduction last week. I am grateful to the noble Lord, Lord O'Brien of Lothbury, who has just said such kind things about me. I am very grateful for the early opportunity of making my maiden speech in what is an important debate. I understand that I am supposed to be non-controversial. That is difficult at any time, but in a debate like this one either comes down in favour of full membership of the European Monetary System, against it or does not bother coming down at all. Either way is bound to be controversial to some extent. I will promise your Lordships that I will try to make this brief controversial contribution as non-controversial as possible.

I said that this is an important debate for although the European Monetary System sounds complex to some—not, I hasten to say, to your Lordships—it is comparatively simple. It is about whether we in Britain can improve the living standards of our people by this form of international co-operation or whether full membership would be damaging to our interests.

Although exchange rate mechanisms can be complex, I do not believe the issue is complex. Strong supporters of the EEC have in the past—and indeed now—tended to be equally strong supporters of our full membership of the EMS. As one of those who voted for entry to the EEC, with some problems in various places for so doing, I have always wanted the EEC to succeed and I have every sympathy with the view that it can better succeed by our full co-operation within it. But the arguments are often massively overstated, although not by the noble Lord, Lord O'Brien, in opening this debate. But sadly at the moment one is bound to say that there is little or no political or economic will to move towards the essential economic convergence.

I congratulate the committee generally on the way it presented its report; but I am bound to say—I will try not to be too controversial—that it will not be surprised if I do not agree with every dot and comma in it. In paragraph 58, it said on the subject of convergence, Convergence has been less than complete. I hope the committee will not mind my saying that that must be one of the understatements of the century. But if strong supporters of the EEC have tended to favour our full membership of the EMS, opponents have tended to oppose as they see it as one more step towards a single currency and a full economic and monetary union. They also occasionally try to have it both ways saying that, as there is no economic convergence and no transfer of resources, we should not join.

But the main political and economic argument against is usually that it is an absolute limit on our freedom of action. Whether noble Lords or anyone else are either monetarists of Keynesians, they would no doubt call in aid a speech in this House by Lord Keynes on 23rd May 1944 when he was referring to his pre-war experiences. He concluded: We are determined that in future the external value of sterling shall conform to its internal value, as set by our own domestic policies. That was in 1944, and I find it hard to believe that a man of such powerful intellect would have stuck with so rigid a view nearly 40 years later when there is so obvious a need for greater international economic co-operation. As it happens even if he had not changed, he would have had no problem with EMS because, as paragraph 40 of the committee's report points out, we do not have a quick exchange rate. Indeed, in the four years between 1979 and 1983 that paragraph tells us that there were 21 changes as the member states felt it necessary, as Keynes might have said, to adjust the external values of their currencies to conform to the internal values as set by their own domestic policies. So we have little economic convergence. The committee clearly tried hard to find evidence that there had been some. The best they could do was perhaps summed up in paragraph 59 where we are told: It is not easy to assess whether, or how far, the EMS has encouraged policy convergence. However, the Committee accepted the evidence by Professor Thygesen on the effects of EMS on such convergence. He argued that the most positive thing that can be said about convergence within the EMS is that:

1. (i) without the system it would clearly have been weaker still and
2. (ii) governments, at least outside Germany and the Netherlands, continue to consider adherence to the EMS and hence better convergence a high priority and hence an important constraint on their domestic policies. The Commission witness offered a somewhat similar view".

That is the view of the committee. I must say I remain rather more sceptical than the committee. My own ministerial experience at EEC Council meetings taught me that one needed to hold tight to one's own pro-EEC views in face of strong nationalistic positions invariably taken up—and certainly by the major members.

However limited the progress, whether pro- or anti-EEC, there must surely be agreement on the vital need for greater economic co-operation in the world, and the vital need for a zone of monetary stability, if this can be achieved. Such co-operation and such stability would, as I am sure your Lordships will appreciate, be enormously helpful to trade and with it industrial expansion and also the hope that it will have some impact on the appallingly high level of unemployment throughout the whole EEC.

Pro- and anti-EEC members can surely agree on that. Indeed I see that my good friend, the noble Lord, Lord Kaldor, said in a debate in this place on 28th November 1978 that what the world needs is greater economic co-operation and greater monetary stability to deal with the problem of worldwide inflation. I am sure that my noble friend and no doubt others who would agree with that statement would not accept the EMS would provide that co-operation.

I confess to not being madly optimistic. The nationalistic pressures to which I have referred will, in the short term, I fear prevail. EMS will move slowly, if at all, towards the co-operation and stability which I certainly want to see.

I am not confident that inside we will do a great deal to achieve that essential economic co-operation. I am only sure that outside we can play no part. I therefore hope that we can join fully, including the exchange rate mechanism, and join as soon as possible—and do so, genuinely determined to work towards achieving the greater co-operation that is so vital if we are to provide a real and lasting improvement in living standards in this country and in the EEC generally. I am grateful to your Lordships for listening to me in my brief maiden speech.

6.48 p.m.

Lord Taylor of Gryfe

My Lords, this House is fortunate to be able to welcome the noble Lord, Lord Barnett, and for me it is an honour to be the first speaker to congratulate him on a splendid maiden speech. Over the years I am sure all of us have admired his contributions in another place, particularly in the field of financial strategy and fiscal policy. He brings to this House an immense knowledge and experience as a Treasury Minister. He confessed in his excellent book, Inside the Treasury, that he had two regrets. He said: After five years in the Treasury, I finished a pessimist". He also regretted that his responsibilities prevented him from speaking freely. I hope the noble Lord, Lord Barnett, will be encouraged by tonight's proceedings to be more of an optimist and to recognise that, if this House has one virtue, it is that it encourages people to speak freely. I hope he will do so frequently and give us all the benefit of his great wisdom and experience.

My second duty is to congratulate the noble Lord, Lord O'Brien, not simply for his balanced and excellent speech this evening but also for his considerable contribution as chairman of our committee. He led us quietly but efficiently through the great maze of argument and he was supported by an excellent staff and, if I may say so, a good committee. We weighed up the evidence after questioning the expert witnesses and I hope that we arrived at reasonable conclusions.

This report may not be a best seller but we on these Benches, together with our Liberal allies, welcome its publication, since I think we were the only party in the last election which included reference to the EMS and supported British membership. I am glad, therefore, that our distinguished all-party committee unanimously endorsed that view. This report, in my opinion, is the best and most objective presentation of the complex issues involved and it should help to secure a greater understanding of these issues. As the committee has stated, We hope to provide the information on which Parliament and the public can reach an informed conclusion". Nowhere is that more important than in British industry. Fourteen days ago I attended the CBI conference in my favourite city, where there was a debate on the subject of trade and the effects on trade of currency fluctuation. Mr. Kenneth Dunham of Unilever, speaking on behalf of the General Council, stated: There was no evidence that the EMS had brought about any long-term financial stability and joining now could have a very great cost to us. He was followed by Mr. Jeremy Leigh-Pemberton—incidentally, this is not the Governor of the Bank—who asked indignantly: How can we ask the British Government to join the EMS? It is a closely-knit club which relies on intervention. There is a certain obsession on the part of the CBI these days regarding Government intervention, but how they will ever be able to achieve the desirable object of currency exchange stability without intervention of Governments or central banks I fail to understand.

Both those speakers and many members of the general public are apparently unaware that we are already members of the EMS, having deposited 20 per cent. of our gold and foreign currency reserves into the European Monetary Co-operation Fund, as the noble Lord, Lord O'Brien, has reminded us. We take part in all discussions on the realignment of currencies. The CBI, in my view, would do well to read the wise words of our chairman, the noble Lord, Lord O'Brien, when he says: Any success of the EMS has been modest, but some success it has already had". Significantly, he goes on to say this: Greater currency stability has been achieved by the participants than has been evidenced in the rest of the world. In a world which must surely seek some system to replace Bretton Woods, the experience of this European nucleus could be important.

Other speakers will no doubt enlarge on the history of the EMS and the Snake which preceded it. It is sufficient to say that the Snake had no mechanism for indicating which currency was moving out of line and which central bank had an obligation to intervene. Secondly, there was a lack of provision for reserves for the purposes of intervention. The EMS sought to remedy some of those deficiencies and indeed it has four advantages over its predecessor. First, central rates are expressed in terms of the European currency unit, so that a member currency's position is determined in relation to the average of all participant countries; secondly, when a member currency approaches one of the limits to its divergence from the central rate, all participant countries are obliged to intervene to keep that currency within its prescribed limits. Thirdly, divergence indicators set at 75 per cent. of maximum permitted limits of divergence mean that intervention is triggered before the limit is reached, and it is hoped that fluctuations are thereby diminished. Fourthly, member states are permitted to intervene before the trigger levels are reached, which helps to avoid an air of crisis management and reduces fluctuations induced by speculation. I suggest that these four reasons are basic, fundamental and desirable in order to avoid the violent fluctuations which seriously affect smooth trading relationships.

There is one concern which will be expressed in this debate tonight—indeed it has already been raised by the noble Lord, Lord Barnett—and that is the fear that membership implies a loss of sovereignty and is a constraint upon our ability to pursue our own domestic economy strategy. It is true that membership would encourage convergence in economic policies, but since we are members of a community this could be a good thing. The EMS is not a regional bloc: it is an EEC institution and it has shown a flexibility which has not inhibited the French or Italian socialist governments. The effect of the ERM on the exchange rate targeting is well argued on page xx, paragraphs 67 and 68.

The other major concern is that the EMS has no policy in relation to the US dollar, and, while our trade with the EEC is growing, the relationship of sterling to the US dollar is of greater significance in our trading pattern. The report expresses the hope (which I share) that United Kingdom entry, together with the importance of the deutschmark in relation to the dollar, could help the ERM to develop a common policy in relation to the US dollar.

It is a complex subject, and there are many speakers. Short speeches will not do justice to its importance, but the report itself deserves to be widely studied. I commend its contents and its conclusions.

6.59 p.m.

The Earl of Bessborough

My Lords, may I join the noble Lord, Lord Taylor, in congratulating the noble Lord, Lord Barnett, on his very wise and notable maiden speech. I remember him very well from when I had the honour to lead the European Parliament delegation to a Council of Ministers, when he was the United Kingdom Minister concerned in respect of the budgetary conciliation procedures between the Council and the Parliament. That was in the early days, before, I think, the noble Lord, Lord Bruce, and the noble Lord, Lord Brimelow, became Members of the Parliament. I have a great admiration for him; and I was always so pleased because although we did not exactly agree he always smiled back at me, and I hope that I smiled back at him.

May I also congratulate the noble Lord, Lord O'Brien, on his admirable report and on his able chairmanship of the sub-committee, of which I was not actually a member but whose meetings he very kindly allowed me to attend from time to time. His report is very able and wise, and, from the European point of view, encouraging. I enjoyed attending the few meetings to which I went, and, of course, I followed as closely as possible the transcripts of other meetings.

I agree very much with the report's conclusions and, in particular, that the balance of advantage lies in early entry to the system. Personally, I could go a little further than this in advocating that, with present sterling exchange rates, now may well be a good time. As your Lordships know, as a former member of the Budgets Committee of the old European Parliament I have always been one of those who, like, I think, a majority of members of the present European Democratic (that is, Conservative) group in the Parliament, believe that full entry into the system should be thought of as a step towards European monetary union.

I know that this is a controversial subject, but I do not hesitate to state what has always been my view. I know that not all will agree with me, and I speak personally. But there is a great deal to be said for the original, if very ambitious, Werner Report of 1970, to which the noble Lord, Lord O'Brien, referred. Personally, I stand by virtually all I said in the debate on my Unstarred Question on 26th June 1978, over five years ago, on the need for monetary union within the Community. Indeed, I could almost repeat that speech verbatim today—which your Lordships will be relieved to know I shall not do—with the addendum, that I think the time for our entry into the exchange rate mechanism, followed by further study of the feasibility of full monetary union and the creation of a common reserve fund and a European Central Bank, would be even more appropriate now than it was then.

I have gained the impression that that view is also held not only by those Members of the European Parliament who gave evidence to the sub-committee—that is, Sir Fred Catherwood and Sir Fred Warner (the two Freds, as they are well known), and Mr. John Purvis, whose admirable memorandum can be read at pages 33 to 38—but also, I think, by Mr. Robert Jackson and Lord Douro, who appeared before the sub-committee last week on the future financing of the Community, which, in my view, is not an unrelated subject.

Already, five years ago I strongly supported Mr. Roy Jenkins, the then president of the Commission, in his argument that monetary union, as a successor to entry into the EMS, would favour, as I think the noble Lord, Lord Taylor, has said, a more efficient expansion of industry and commerce in Europe. It was clear then, as I think it is now, that many businessmen believe that the removal of exchange risks and inflation uncertainties between member states would have a major confidence effect, and that trade can be fostered with greater confidence if British firms can make quotations for business in other member states, so that the currency risk is removed from any given transaction.

Ultimately, monetary union would also bring all the advantages to Europe of a major international currency, and I found five years ago, as I now know from personal discussions with members of OPEC, that that organisation might well welcome an alternative currency for quoting oil prices, even if they would continue using the dollar as well.

I regret that the Bremen summit in 1978 did not make greater progress and that the subsequent discussions between Mr. Pompidou and Mr. Heath did not produce the hoped-for results. However, as the noble Lord, Lord O'Brien, has said, and as the noble Lord, Lord Taylor, has repeated, the system has had some modest success in recent years, and I was glad to hear the noble Lord, Lord O'Brien, say that greater currency stability has been maintained among the participants than has been evident in the rest of the world, the behaviour of sterling not excluded.

As the noble Lord has said, the committee were clearly persuaded that the EMS is likely to endure and modestly progress (I liked his words) adding, as he did, with the European currency unit coming into wider use as a unit of account, and I was glad to hear him say even as a currency. In the banking sector, as we know, there has already been an expansion of the use of the ECU in private markets, and I understand that even the City of Quebec has been borrowing in these units, as well as others. Therefore, do let the United Kingdom get within the exchange rate mechanism itself.

It does not seem to me to be enough merely to deposit 20 per cent, of our gold and dollar reserves with the European Monetary Co-operation Fund. That has undoubtedly been a step in the right direction, I agree. But should we not also peg our currency to others in the Community? I am glad that the committee are of the opinion that further delay in taking this step is no longer justified.

It is very good to hear this from the noble Lord, Lord O'Brien, so distinguished a Governor of the Bank of England; and also, I imagine, his other colleagues on the committee, another Governor of the Bank of England and the noble Lord, Lord Bancroft, who I think is to speak tonight, probably agree with this. I was glad to hear the noble Lord, Lord O'Brien, ask how Her Majesty's Government can retain credibility if even more years are allowed to pass while we shiver on the brink. Do let us now take the plunge. This would not only add weight to British influence in the Community, but, above all, would demonstrate to other member states that we are true Europeans and determined to help make the EEC work. I am sure that our entry into the system would create a much more favourable climate in our difficult discussions over the British budget contribution and on the future financing of the Community. It would assure our partners that we were in fact full members of the club.

I know that we are not the only member state that has caused difficulties. I should like to make that clear. Other members should be persuaded—one other member, certainly—to free up exchange controls; and another should allow the ECU to circulate freely, which it does not do at present in that particular member state.

With the coming next June of the European Elections, I have been interested to find that all the MEPs to whom I have spoken—and they are quite numerous—say that their supporters in their constituencies are very much in favour of our joining. Therefore, whatever qualms the CBI may have about full EMS membership imposing constraints on the United Kingdom following the best fiscal and monetary policies for domestic management, I believe that now there is an overwhelming political, diplomatic and economic case for full membership. Therefore, I look forward to my noble friend Lord Cockfield, the Chancellor of the Duchy of Lancaster, giving us some encouragement that we shall in due course join the system. Again I congratulate the noble Lord, Lord O'Brien of Lothbury, and the members of his sub-committee on their encouraging conclusions.

7.11 p.m.

Lord Seebohm

My Lords, I believe that all the members of the Select Committee should consider themselves extremely lucky that the noble Lord, Lord Barnett, was introduced into your Lordships' House in time to join this debate. We are most grateful for his wise remarks and we shall look forward to hearing him on many occasions in the future.

I should also like to offer my thanks to the noble Lord, Lord O'Brien of Lothbury, who steered us quite brilliantly through the straits of Scylla and Charybdis. Although he came through satisfactorily, it was not into entirely still waters on the other side, but it was not only his tact but his experience and wisdom that got us through so satisfactorily. From the start, it was absolutely clear to me and to most members of the committee that we should hear two contrary views about the rights and wrongs of entry into the European Monetary System. First, there were the politicians, who were entirely in favour of us going in, for reasons which I shall mention in a minute. Then there were the bankers, who took the contrary view. I agee with the noble Lord, Lord Barnett, who said that both sides probably overstated their case. I found the whole exercise one of the most interesting experiences I have had since joining the Select Committe.

To take first the arguments of the politicians, they said—I believe the noble Earl, Lord Bessborough, also mentioned it—that we give the impression that we are not wholeheartedly members of the Community. This not only damages our own image but reduces our influence in the Community, which is detrimental not only to ourselves but to the development of the EEC as a whole. They further argue that the EMS, unlike its predecessor, the Snake, has shown that it has sufficient flexibility to meet quite serious strains and has succeeded in preventing exaggerated short-term movements in rates and, furthermore, has had an appreciable influence on individual members' convergence of monetary policy towards the control of inflation and sound monetary policies. Finally, they argue that it has helped to bring about a welcome use of the ECU not only as a unit of reference but as a unit of account, with a secondary market which is not only of benefit to traders but is a move towards the long-term objective of European currency union. That is an objective to which I still adhere, although it may well be a long way ahead.

The bankers, on the other hand, while not disregarding these arguments, put strong emphasis on the special nature of sterling. It is a petro-currency and still to a considerable extent, whether we like it or not, a reserve currency. It is therefore a home for public and private liquid funds which are extremely volatile and could amount at any one time, I am told, to a figure of about £50 billion.

This situation, the bankers say, is likely to persist because of the sophisticated capital market and forward exchange facilities in London, particularly in relation to the dollar, and the fact that the large national debt offers a form of investment in readily marketable secondary securities which does not exist in any other member state, since most of their public debt was wiped out in the war. They argue further that by going fully into the EMS and the ERM we could actually be an embarrassment and not a help or, as one banker put it: I suspect it is quite possible if we join we would be regarded as a cuckoo in the nest". My own views are that on balance the advantages of being a full-time member of the system outweigh the disadvantages, with the following provisos. First, that we are satisfied that we are going in at the right rate (I shall say something about that in a minute)—that is, one that can be sustained for a reasonable length of time and has a reasonable relationship to the real as opposed to the nominal rate of exchange. I should explain that the nominal rate of exchange is the actual rate of exchange at any one moment of time, and that the real rate of exchange is a notional figure based on a common level of prices and an equal rate of inflation. At the moment I believe, as is shown by the "Macdonald index", sterling is overvalued in European terms, but not so much as the dollar.

Perhaps I should explain, to those who have not had the advantage of being educated in America, what the Macdonald index is. The Macdonald Corporation is an international corporation of food shops and hamburger shops around the world. The Macdonald index is quite simple. It takes the cost of a delicious meal of a bottle of Coca-Cola, a hamburger and a plate of chips in one country, A, and compares it with what it costs in another country, B. The difference between the two shows what should be the real rate of exchange. For example, if you go into Macdonald's in the Brompton Road and have that delicious meal, it will cost you about £3. If, on the other hand, you go to Macdonald's on the corner of 96th Street and Third Avenue in New York, it would probably cost you over five dollars. This shows that the real rate of exchange according to the Macdonald index is something like 170, not 150. This sounds rather a fatuous statement. On the other hand, it is quoted in the financial press in America and is not far off the real truth. If we take the Macdonald index, it shows that at the moment the dollar is heavily overvalued, that the yen is heavily undervalued and that sterling is slightly overvalued.

Secondly, we must accept the fact that, by opting for a stable exchange rate policy, we are to some extent sacrificing our ability to have an interest rate policy. You cannot have both strictly under control at the same time. With our very high—I believe damagingly high—rates, this must be a serious consideration. With fluctuating exchange rates, it is easier to compromise between the two requirements. In oral evidence we asked representatives of Her Majesty's Treasury whether they were now in favour of joining the ERM. Their reply was, predictably: When the circumstances are right, that is the right time to join". With that I heartily agree, but it was not really helpful.

My final proviso is this. If we join, owing to the special nature of sterling, both we and our fellow members must be prepared to use massive support for sterling if large, short-term fluctuations are to be avoided. If these factors are taken fully into account and all are acceptable to the Government, then I am of the opinion that this could be the right moment to join. In my view, it is better to join when sterling is somewhat overvalued than the other way round.

7.19 p.m.

Lord Lever of Manchester

My Lords, I would very happily spend the brief minutes of my comments upon expressing my pleasure, in the first instance, at the chairmanship of the noble Lord, Lord O'Brien, of the committee of which I was a member but from which I was continuously absent, though following closely and admiringly the labours of my colleagues which have been brought to fruition to some extent this evening. The noble Lord, Lord O'Brien, and I have had dealings with each other over a long period of years. I know him as a calm minded man of great experience, of world reputation and of good judgment and good temper—good temper strained with his colleagues in the central banking world only, I believe, on those occasions when he played tennis with the chairman of the Federal Reserve Bank in Washington.

I could spend the rest of the few minutes I have expressing deep pleasure at an old colleague in Government and in the House—my noble friend Lord Barnett—having joined us, especially in the light of the very valuable contribution he has made to our debate from his own vast experience from his years at the Treasury—vast experience which must be enormously valuable to him but which should be overcome at the earliest possible moment if we are to have the advantage of his keen and logical brain in the years ahead.

I will however offer a few observations on the substance of the debate tonight. I was strongly in favour of entering the EMS when I was in the Labour Cabinet when this matter came up. I do not wish to engage in the delicious improprieties of betraying other people's reasons for opposing it. I will merely say that my reasons for strongly wishing to enter the EMS remain my reasons today. The central reason when I then wished it, and why I now wish it, is that in my opinion, world prosperity at a reasonable level will only be maintained, and grave and damaging crises in our affairs only avoided, if we achieve a certain level of minimum international co-operative discipline which will make the interdependence that we have achieved work.

It was because we achieved those minimum levels of international co-operation that we prospered in the dangerous years following the war. And it is because we have abdicated from those levels of co-operation that we are now suffering the dangerous world crises which beset us. It becomes urgent that we restore in the world at any rate the minimum levels of co-operation in economic matters.

One of the many institutions which I regard as being involved in that minimum level of co-operation is the institution of the international management of money for the achievement of fixed but adjustable rates instead of the floating rates from which we have suffered in recent years. Those of your Lordships who recall the debates which led us away from the management principles of Bretton woods, which could well have done with adjustment, will recall that we were told that fixed rates were restricting freedom of economic policy. In fact, fixed but adjustable rates do not restrict freedom of economic policy. They do however place some restrictions on the delusions or mirages of economic New Jerusalems which one is entitled to peddle to one's fellow citizens. I personally find that restriction rather welcome, and the release from that restriction which was brought by floating rates has not been advantageous to us.

I do not wish to recall the promises which were made in the floating rate prospectus. Distinguished and learned friends of mine whom I am apt to name in moments of impatience—but will not tonight—told us that balance of payments was an old-fashioned notion that need not trouble any Government any longer; that a simple floating rate—and leaning back and adjusting to it—would enable us to abandon any of those absurd restrictions and restraints of monetary disciplines which we were inflicting upon ourselves for no good reason.

We have had some practical experience in the past few years of that prospectus and its fraudulent character. Our currency is floating downwards. Have we really emancipated ourselves from our problems by still further perhaps halving the rate of our parity against the dollar or other currencies? Have we in fact dealt with any of the fundamental economic problems by that attempt to reach a short-cut solution of devaluation? I hope that the noble Lord, Lord Cockfield, will not this time have the misunderstanding he once did of supposing me to be a champion of the solution of strength through devaluation. I am not, as your Lordships will gather.

Incidentally, I was interested to hear the noble Lord, Lord Seebohm, offer the House the argument that of course if one has some responsibility in the management of one's rates, this restricts one's interest rate freedom. Again, I have to point to the triumphs of the floating rate merchants in the way of interest rates. Are the American people spared the rigours of fantastically high real and nominal rates because they have a stricter policy of non-intervention than anything in Europe? Of course not. They have higher rates than any among the leading currencies. Our own interest rate experience under floating rates does not encourage me to believe that my noble friend Lord Bruce of Donington's hearty endorsement of the dangerous risk of high interest rates that will come from entry is not in fact justified by our experience.

I go along very strongly with my noble friend Lord Barnett and with the quotation he gave of my noble friend Lord Kaldor, who is not a friend of the European community principle, in recognising that world co-operation must be enhanced if the world is to deal effectively with the kind of crises we now have. I find it difficult to believe that those who passionately demand world co-operation can be serious if they demand large co-operation on the one hand but refuse to co-operate with their next door neighbours on the other. I find it unconvincing as a posture.

I must say, however, that when the EMS was formed there was clear evidence from the private discussions and some of the public pronouncements of somewhat naïve delusion from which both Giscard d'Estaing and Helmut Schmidt were suffering; namely, that in some way the EMS could achieve stability and success for the monetary situation of the Europeans without really recognising the need for that co-operation in Europe to be linked to world co-operation with the United States and Japan. I myself regard that view as an illusion. I believe that the EMS is just like the Community itself in its proper understanding. It is a regional piece of monetary co-operation which enables us to link arms with our trade partners in the United States and in Asia to achieve that minimum level of co-operation required for common prosperity.

It is because of our special interests and our special experiences that I press strongly upon my colleagues—but in vain—that we should enter the EMS precisely so that all our weight can be thrown on the need for the EMS to recognise itself as being fundamentally part of a world system; a regional piece in a triangle of crucial world co-operation.

I must confess that the argument that our special needs should keep us out of the EMS is a very flimsy one. Every country has special needs, and to plead special needs as a reason for not joining in a vital piece of international co-operation—which one has recognised as a valuable piece of co-operation—is really a simple plea of unilateralism. It is not compatible with the spirit of co-operative disciplines to say, "It is a splendid idea but my needs are rather special. My feet are bigger than yours. My problems are different from yours".

Of course the problems are different. Belgium's problems are different from those of the French; and Dutch problems are different from those of the Germans, and so on. But that is not a reason for staying out. The whole point of international cooperation is that a number of people with special needs co-operate so that those needs should be met in a co-operative manner without damaging each other.

I will say two words in conclusion upon two points. I know that the Government will be inclined to say, "It is all very well talking of world co-operation. Are the Americans prepared to co-operate?". Of course it will not be difficult to quote statements from the Americans that they do not believe in it, that it is against some fundamental religious or economic convictions of their leaders. But I have to say that underneath those statements is a deep uncertainty inside the American leadership, and that goes for the Federal Reserve, the American Treasury, the American State Department. I can speak from personal knowledge, but also from public statements, from all those sources of American policy-making to show that there is no unanimous hardline opinion that prevents them moving towards that world cooperation for which I have argued. Indeed, there is deep disquiet in the United States, and while they preach this laissez-faire they are practising every day a greater co-operation in the face of the immense world dangers which face us all.

7.32 p.m.

Lord Benson

My Lords, I should like to add my congratulations to the noble Lord, Lord Barnett, for his contribution to this debate. The report before the House proposes that we should join the European Monetary System as full members. At the moment, we do not share in the mechanism. Apart from the smaller companies, which are not greatly affected, the almost unanimous view of industry is that one of the factors which is inhibiting growth and recovery is widely fluctuating exchange rates. So long as that persists, it is impossible for industry to plan investment appropriately or to settle buying and selling policies. Anything, therefore, that we can do which will smooth those fluctuations should be done for the benefit of the industry in this country.

There is another reason which proposes very strongly that we should join the system and which is political: so long as we are members of the Common Market, we should observe its main policies. We cannot allow ourselves to be put in the position of appearing to pick and choose only those policies which happen to be agreeable to us. In respect of both those factors, I think we should bear in mind that 45 per cent. of our visible exports and 45 per cent. of our visible imports are now effected with Common Market countries.

Those two reasons are compelling, but they are not conclusive. The joining of the EMS will not ensure that there will not be exchange rate fluctuations. There have been various realignments in recent years, some of them quite large. What ultimately determines the rate of exchange is not adherence to a system; it depends on the strength and the weakness of a country's economic policies. Exchange rates, like water, must eventually find their own level. If a participant country strays from economic probity, it has three courses open to it. The first is to spend its reserves in supporting a weak currency. This is a costly and expensive process, as France found to her cost a year or two back. Belgium is suffering from exactly that problem at this time. The second course open is to ask for frequent realignments of the currencies, but that destroys credibility and may in fact destroy the system altogether. The third is to leave the system altogether.

It follows from this that the EMS is not a panacea which will ensure stability of exchange rates. The system has survived but not without difficulty. Nevertheless, we had evidence before us which was spoken with conviction that fluctuations in exchange rates were materially less in the last few years since the system has been in operation than would have been the case if there had been no system at all. Moreover, the system imposes a physical obligation and a very strong moral obligation on its members to adhere to sound economic policies.

There are two factors which affect this country particularly. Partly because we are a producer of oil, the price of which fluctuates considerably, and partly because by tradition we are one of the bankers to the world, we engage in very large capital flows which take place quickly and without notice. These big capital movements place a great strain upon our exchange rate when they occur. It is one of the factors which may make it difficult for us at times in the future, if we join the system, to adhere to the limitations which will be imposed upon us.

The other factor which affects this country is that in 1981 and 1982 the pound sterling was grossly over valued. If we had joined at that time it would have been disastrous. We should have had to adopt one of the three courses I described just now. At the present time—whether we can rely upon the revolting evidence of Coca Cola and hamburgers I do not know—it seems possible that the exchange rate has reached a more realistic level, and, if that be so, that particular barrier to our joining has been removed.

After weighing all these factors, the committee came to the conclusion that the balance of advantages lay in joining the system and that we should do so earlier and not later. I hope the report will commend itself to this House.

7.37 p.m.

Lord Vaizey

My Lords, while not being a member of Sub-Committee A, I have had the privilege of sitting in on its meetings and, in particular, the opportunity of listening to the witnesses and reading the evidence submitted. It has been an especial privilege to watch Lord O'Brien's chairmanship. I regret that 30–odd years ago, when I was offered a job with the Bank of England—I chiefly knew of him because he was signing the bank notes at that time—they offered only £350 a year, so I took my services elsewhere, to my Cambridge college. I only hope they have improved the pay since then; perhaps the noble Lord will tell us.

My Lords, the period of exchange instability we have been living through in the last 15 years really dates, I think, from the British devaluation of 1967, and the subsequent movement of the dollar led pretty directly to the first major oil price rise, as the Arabs thought, plausibly enough, that their oil was being paid for in cash that was losing its value. As the turmoil led to the depression, and as further depression led to more turmoil, so the world entered its present period of floating exchange rates—a direct antithesis to Bretton Woods and something from which we all now wish to escape.

I agree strongly with the noble Lord, Lord Lever, that Bretton Woods played a major part in the great boom of the postwar years. Underlying its effective working were two major considerations. Most economies kept their working pretty much in line with international standards; and, of course, behind those international standards was the strength of the leading economy, the United States, the dollar. The basic cause of exchange rate instability was, of course, the wildly different economic experience of the different economies during the turbulent 1970s. In this context I see the EMS as some attempt to achieve, at least in this corner of the world, some exchange rate stability.

Things are now calming down. In particular, the era of major inflation is almost over. Germany. Japan and America are down to 1 per cent. or 2 per cent., and the United Kingdom is within sight of 4 per cent. in the next year or 18 months. The OECD weighted average, therefore, is now low and falling. I speak of inflation rates. That means that ultimately the ratio of exchange values will be related to purchasing power parity—the Macdonald index, as the noble Lord, Lord Seebohm, so vividly and perhaps nauseatingly, described it to us.

In this context I have three or four things to say which I hope will not take very long. I think I am right in saying that the EMS was more a reaction to turmoil than a step along the road to the Werner system of European monetary union. This was rather reminiscent of the 1930s, when the free world economic system collapsed into a series of monetary blocs—the sterling zone, the franc zone and, of course, the Schachtian zone. Fortunately, of course, the reaction of the world to the current depression has not been as autarchic as the reaction 50 years ago. In fact, the EMS is relatively outward looking, and I agree very strongly with the noble Lord, Lord Lever of Manchester—I always agree with practically everything that he says—that the purpose of currency stability is to promote trade and not to limit it, as it was in the 1930s.

Next, the search for exchange rate stability seems, however, to have become of diminishing significance because the period of major currency turmoil, if I am right, is now virtually over, if only because the great world inflation is over. Of course, one speaks subject as always to the proviso that there might be an explosion in one of the oil countries or the closing of the Straits of Hormuz. Given those exceptions there are reasonable expectations of world inflation being over. This means that the period of tremendous exchange rate volatility through which we have been living is also over, except as a result of adjustments to long-term changes in productive relationships. I agree, for example, with the noble Lord, Lord Seebohm, that the dollar is in that context over-valued and the yen is under-valued. I doubt myself whether the EMS exchange rate mechanism has contributed greatly to currency stability during this period in which it has, generally speaking, come about.

I therefore find myself slightly more cautious than Sub-Committee A in its conclusions. It said in the evidence and in the report that currencies within the EMS have fluctuated less than they would have had the EMS not existed. I do not think that the statistical evidence fully supports that. So much depends on the measuring rod that is adopted. Of course, Ireland apart, the economies have tended to harmonise around the dominant European currency—the deutschmark. I speak now of members of the exchange rate mechanism rather than of the EMS itself, which includes the United Kingdom.

I am not sure, either, how sterling will move in the world context. So much depends on the oil price, which I expect to fall, possibly significantly. But if that is at all the case it might be a little premature to join the exchange rate mechanism as a full member yet because (although I say this in fear and trembling of bringing down upon me the wrath of the noble Lord, Lord Lever of Manchester) to some extent it might limit our freedom of action and substitute a series of step-jumps instead of day-by-day fluctuations. Speculation about step-jumps is far more dangerous than speculation about day-by-day fluctuations.

On the whole, the report is an absolutely first-class piece of work, and very compelling reading. But I am not yet fully convinced that the time is quite right, although I must say that when the next step towards fuller political union comes then obviously this will be part of it. But looking realistically at what is about to take place in Athens and elsewhere at the moment, I think that is a little further off than optimistic colleagues might think.

7.45 p.m.

Lord Bancroft

My Lords, under the guidance of the noble Lord, Lord O'Brien of Lothbury, the sub-committee chose its words with consummate care. The recommendation for early, though not necessarily immediate, entry into full membership has a resonance about it which will live.

Others have commented, and others will comment, on the technical arguments raised by the report. I have only two very brief points to make. The first relates to time. Even the opponents or the sceptics about our joining agree that the arguments are very finely balanced and that it is really a question of the time not being quite right. The noble Lord, Lord O'Brien of Lothbury, and others have pointed this out. We are in danger of becoming the high priests of the doctrine of unripe time. We are just not as good as we used to be at reaching decisions and carrying them out. Over the past 25 years and more it is within our recollection that our attitude towards the European Community and its policies has provided several examples. We have hesitated. When at last we have jumped in, we have sometimes found that the tide has been on the ebb and that the level of the water has been too low for comfortable, let alone elegant, swimming. Super-powers have time to spend, but for smaller powers time is a currency that they do not have. I do not believe that we can afford to hang hack any longer, however finely balanced the arguments. Time takes more spin than some spectators realise.

My second point is about decisions. As a country, we have been tending to dodge hard policy issues. This applies to most, although not all, Governments of all colours. We have tended to go for the infinitely softer option of organisational or structural change. Consider local government, consider central Government and consider the National Health Service. But now we have to decide whether to stay out or to join in. This time there is no easy organisational substitute. It is a policy decision which we must make and if we do not we are left, as has been pointed out by the noble Lord, Lord Barnett, and others, in an ecstasy of indecision. This, too, is neither comfortable nor elegant.

Those who agree with the analysis of the sub-committee will want this country to join early. There are those who feel that the issues are very finely balanced indeed. I believe that history and the future point in the direction of a rejection of the doctrine of unripe time and to a decision to join earlier. How splendid indeed that the noble Lord, Lord Barnett, shows himself to be a joiner, even though a sceptical one. It would be a pity if we showed ourselves to be more afraid of failure than we are fond of success.

7.50 p.m.

Lord Sherfield

My Lords, I rise to support the Motion moved by the noble Lord, Lord O'Brien of Lothbury, introducing the Select Committee's report on the European monetary system. It is the latest of the reports on this subject which the committee has produced. I also support its recommendations.

I should like to thank the noble Lord, Lord Barnett, for his speech. The noble Lord, Lord Taylor of Gryfe, quoted from his book. He said that five years in the Treasury had left the noble Lord a pessimist. I left the Treasury remaining an optimist after three years, which I suppose shows that I was not there long enough.

The EMS has become to the Select Committee a familiar topic: but this report is nevertheless timely if only since it may help to dispel the widely held misconception among the public that the United Kingdom has still to join the EMS. It is a misconception which kept creeping in even during the drafting of the report. As has now been made abundantly clear, we have of course been members from the outset, though we have so far declined to take the admittedly important step of joining the operating unit—namely, the exchange rate mechanism. The committee has come in this report to a firm recommendation that the United Kingdom should at an early date become a full member of the system. This certainly represents an evolution in its thought.

The committee had the advantage of hearing, apart from what one might call the official witnesses, evidence from two individuals who were well placed to take a personal and objective view. They were Professor Thygesen and Mr. Padoa-Schioppa. It is true that the latter has been a director in the European Commission, but he was on the point of returning to the Bank of Italy, and his evidence does not give the impression of "adhering somewhat strictly to a full brief"—as I once heard a Minister say that he was doing in your Lordships' House. I found the views of these two individuals of special interest and importance. One of the questions that they were asked was what they thought would have happened had the United Kingdom been a full member of the EMS from 1979. Their answers, with some difference of emphasis, were the same. Using shorthand, they were that the rise in sterling would have been smoothed out, the inflation rate would have come down more slowly and our progress would have been surer and steadier. Both witnesses were sharply cross-examined on this thesis in the committee without, in my view, being seriously shaken. It is a matter of opinion as to whether this would have been better or worse for us than what actually occurred. The point is that it would have been a situation—although different—which we could quite easily have lived with.

The position today has certainly improved over what it was in the years from 1979 to 1981. The concern expressed this evening is that sterling, having some of the attributes of a petro-currency, is sensitive to movements in the price of oil. But I believe that the consensus in the oil industry at the present time is that the price is less likely to fall and more likely to firm up slowly in the next few years. Moreover the sterling rate against those of other countries has not moved much in recent months. But on this subject I can only bow to the expert opinion of the noble Lord, Lord Seebohm.

However, we seem to be in a state of greater stability. Of course there will always be some reason against taking the plunge. All I am underlining is that on the basis of the evidence that the committee received the risk is now less than it was. Incidentally this well-balanced evidence is in some contrast to the views of two economists which were printed in the appendices to our report. One was firmly against full membership by the United Kingdom on the grounds that the EMS is redundant; the other maintained that the United Kingdom had been wrong not to join as a full member on the grounds that the system has been a great success and that full membership would help to stimulate economic recovery. These two economists' views neatly cancel each other out.

It seems that a great many of the reasons which have been advanced in opposition to our joining the ERM have disappeared and lost their force, while the Government have maintained their stance that they are in principle willing to join the ERM when the time is ripe. The Government have been saying this now for some years.

Those of your Lordships—and I am sure that there are many, and certainly the noble Lord, Lord Bancroft, is one—who are familiar with F. M. Cornford's Cambridge classic Microcosmographia Academica will know about the principle of unripe time. As it is being applied by the Treasury in the case of the EMS, I venture to remind your Lordships of the text of this principle. It is that: People should not do at the present moment what they think right at that moment because the moment at which they think it right has not yet arrived". Cornford adds as a wry comment: Time by the way is like the medlar: it has a trick of going rotten before it is ripe". I fancy that this quotation is quite topical in relation to the official attitude to the ERM. In a way it is a pity that this debate comes when it does, because not even the most enthusiastic supporter of a move to become a full member of the EMS would expect an announcement to be made at a time of such turbulence in the Community over the budget and the CAP. Unfortunately, the Minister has too easy a task in saying again this evening that the time is not ripe.

One must assume that the hassle over the budget and the CAP will soon find a solution. Otherwise the Community is unlikely to advance and develop and could tear itself apart. What I would urge is that when the eventual compromise is found and the members of the Community can again think more calmly of the future, the Government should, so to speak, seal the bargain by the United Kingdom becoming a full member of the EMS. In my opinion, this move is now justified in itself, but it would also have the political effect of reassuring our partners that we really do mean to join with them in strengthening and guiding the Community into a more harmonious future. It is my hope that this report and the evidence on which it is based will help the Government to take the fence.

7.58 p.m.

Lord Ardwick

My Lords, it would be presumptuous of me to congratulate such an experienced parliamentarian and distinguished ex-Minister as my noble friend Lord Barnett on his maiden speech, but I can congratulate him on getting exactly the wavelength of this Chamber. It is something which not everybody is capable of doing. I also ask him to note that we gave him a solid Mancunian second row, going back to Lord Rhodes, and including himself, with Lord Diamond beyond, and also my noble friend Lord Lever of Manchester.

I intend to speak on one single aspect of this report: the tenuous relationship between the European monetary system, as it has evolved, and European union which is still a dream of a Utopia which may never be attained and perhaps never even universally desired. The subject is of some importance for one reason. A minority—a small minority—even across the Channel give their support to the European Monetary System because they believe that it is the first stage on the road to the Holy Grail of monetary union, the first stage on the road to the millennium, when the lira will lie down with the deutschmark and the pound sterling with the French franc. These relationships between the currencies will be both fixed and eternal; or, better still, they will acknowledge their irrevocable union by taking the same name: the ECU, the Europa, or some other title as historical and romantic.

We could be indulgent towards this hope, which the noble Earl, Lord Bessborough, shares, but for one reason: its effect on the majority of people in Britain who do not share the dream of monetary union, and who do not wish to set out on that pilgrimage. They say that if the monetary system is intended to serve mainly as a precursor of monetary union, then it is a dangerous instrument, and the less that we have to do with it the better for Britain.

The noble Lord. Lord O'Brien, discussed the objectives of those who created the system, and he pointed out that representatives of the Community institutions and most academic witnesses regarded the monetary system as the first step towards building the edifice of monetary union. That was in contrast to the banking and trade witnesses, who saw it as a means of producing a zone of monetary stability to help to bring the European economies closer together. Indeed, I may add, the EMS has recently been described as the backbone of the Community. And surely it is significant that no mention of monetary union was made in the resolution of the Council of Ministers which set it all up.

As the noble Lord said, the Werner Report of 1970, with its aspiration to achieve monetary union by 1980, was never realistic. And the aspiration was killed in the early 'seventies by the recurrent oil crises and the development of widely different rates of inflation among the member nations. Monetary union, in the eloquent phrase of Mr. Roy Jenkins, became immobilised in scepticism; and there it remains.

These distressing phenomena of the oil crises and high inflation also destroyed the European euphoria created, as it had been, by the economic miracles of the original member nations. When the monetary system was formed in 1978, it was legitimate in Britain to have pragmatic doubts about our full participation. But these doubts were magnified and distorted by the cries of the anti-Marketeers that this was the primrose path to federal Europe and the final abdication of British sovereignty. My answer then was that a journey to Dover could be an end in itself; it was not essential to travel all the way to Paris. What filled many people in Britain with alarm probably made it easier for some Governments in Europe to join the EMS, because a belief had grown that monetary union would mean an economic and political nirvana.

I am dwelling on this point, my Lords, not for historical reasons, but because the federal phobia still exists and may yet create a climate of opinion and deter a British Government from taking what our committee believes to be a useful step. I was not present at the birth of the EMS, but I was in the antechamber and indeed had been a close observer during the period of gestation. I was rapporteur of the subject in the European Parliament and my greatest difficulty was to convince both the monetary unionists and their opponents how far the proposed new system would he from the hopeful dream of one side and the nightmare of the other.

There was an excess of both hope and fear and an absence of realism. M. Robert Marjolin was a former secretary of the OEEC and vice-president of the Commission, and in 1975 he produced a report which pointed out that Europe was no nearer to monetary union than it had been in 1969. I quote: National economic and monetary policies have never been more discordant, more divergent, than they are today". He added that there were other causes of failure, such as, lack of political will and of understanding of what monetary union really meant. At Government level there was no analysis of the conditions to be fulfilled…as if it was sufficient to decree the formation of monetary union for this to come about at the end of a few years without great effort or difficult and painful economic and political transformation". Monetary union demanded that the instruments of economic and monetary policy should no longer be in the hands of national Governments, but should be required to be put at the disposal of Community institutions. These institutions would have to include a European political power, an integrated system of central banks, and a Community budget of some weight. One can see how hopelessly far away from that is the Community today in practice and in concept, as the member states are locked in battle over the principles of their relatively small budget.

M. Marjolin had the perspicacity to say eight years ago that member states working in co-operation with North America and Japan must face the problems of inflation, massive payments deficits, and unemployment without asking too many questions about the future. We arc still contemplating these dangers today. We are still longing for the day when the European Community, Japan, and the United States together create a more stable monetary world.

As the noble Lord, Lord O'Brien, pointed out, there are many calls for a successor to Bretton Woods, but the United States seems to have lost the interest that it once showed. I was very relieved to hear my noble friend the noble Lord, Lord Lever of Manchester, express a slightly different and more optimistic view about the opinions in the United States on this subject.

I believe that we should regard the EMS not as a precursor to monetary union, but as a nucleus of stability in a world context, and thus the precursor of a new Bretton Woods and a return to stability in the exchanges of the world. We must hope that the next stage in the evolution of the Community will be reached shortly at Athens, with a budgetary system acceptable to all and an agricultural policy no bigger and no more costly than it need be.

For five or six years British Governments have been fighting for a fair budget, and sometimes in that struggle rhetoric has had a certain acerbity and there have even been threats and counter-threats. This has been created in Europe an impression that Britain is the reluctant partner in the Community. If all goes well at Athens, then surely the time will have come when we should make a gesture towards our partners by becoming full members of the monetary system and proving that we share the faith of the founder nations of the Community that the further development of that Community is in the interests of each and all of us.

8.9 p.m.

Lord Brimelow

My Lords, I thank the noble Lord, Lord Barnett, for the pleasure he gave me by his maiden speech. I look forward to many more such pleasures. My own remarks this evening will be narrower in scope than those of previous contributions to the debate, and entirely devoid of rhetoric. The Select Committee is of the opinion that membership of the exchange rate mechanism is desirable, and that early, but not necessarily immediate, membership is desirable.

The Government have not yet seen fit to accept the full obligations that would flow from membership of the exchange rate mechanism. It seems to follow that the criteria of the Select Committee for accepting those obligations have been met but the criteria of the Government have not been met. That gives rise to the question: what are the Government criteria? A Treasury witness said: It is Government policy that when the circumstances are ripe, that is the right time to join". That seems to imply that the criteria of substance for joining have been met and that the only criteria that remain to be met are those of timing, of circumstance, of conjuncture and of expediency. But what are those criteria? Are they such that perhaps the acceptance of the full obligations of joining the exchange rate mechanism will be postponed indefinitely?

I should perhaps say why I raise the question of indefinite postponement. In the evidence appended to the report there are scattered references to past events and recent trends that give rise to doubts—doubts that found expression in the reserved attitude of witnesses from the Confederation of British Industry and from the British Bankers' Association. They are doubts which, in my opinion, were not fully reflected in Part 7 of the Select Committee's report. Thus, Professor Thygesen, on page 147, referred to periods of tension in September 1979, in May-June 1981 following the French presidential election, and in the weeks preceding the realignment of March 1983. He thought that: The EMS may … be stoking up more severe speculative forces for the future by permitting realignments in the 8–10 per cent. range, as observed since October 1981. Realignments of this order of magnitude make it almost unavoidable that speculators gain at the expense of the authorities, hence encouraging speculation on future occasions … once the adjustments of central rates is allowed to move well beyond the limit of 4½ per cent., the authorities of the devaluing country may be forced to raise short-term rates to very high levels—well into triple figures, as was the case in France in the week prior to the March 1983 realignment". Given the special vulnerability of sterling to speculative pressures, until this trend has been durably reversed, can the Government deem it prudent to enter the exchange rate mechanism? Then, again, Sir Fred Warner, on page 43, at paragraph 134, spoke of the negotiation of realignment as getting "really nasty". Difficulty and slowness in the negotiation of a realignment can be very expensive. During the brief period of our participation in the so-called Snake, we spent £1 billion in support operations in the foreign exchange markets, as shown on page 10, paragraph 28. Future costs might be greater. I have said enough to indicate that, in my opinion, for the Government a decision to accept the obligations of full participation in the exchange rate mechanism cannot be free of misgivings about the potential costs. It is for that reason that I wish to elicit the Government criteria for joining or not joining the mechanism.

8.15 p.m.

Lord Bruce of Donington

My Lords, the House will be grateful to the noble Lord, Lord O'Brien, for introducing this Motion and for having so successfully presided over the deliberations of the Select Committee formed especially to consider the European Monetary System. I have said it many times before, but the reports from the Select Committee on the European Communities have attained an international reputation because of their comprehensiveness, their thoroughness and their lucidity. We are most grateful to the noble Lord, Lord O'Brien, and his committee members for having lived up to that standard.

The House will also have listened with pleasure to the maiden speech of my noble friend Lord Barnett, who did his best to be non-controversial by departing completely from his party's policy in connection with the European Monetary System. This is completely acceptable. We in the Labour Party are a broad church. We believe that democracy is essentially government by discussion. As is well known, although happily not by personal experience, the only place where there is unanimity is in the graveyard. Your Lordships' House can never be accused, I trust, of suffering from that defect.

I find myself in my customary position of dissenting from most of what your Lordships have said. I find myself in the strange company of the noble Lord, Lord Vaizey, and I anticipate, although I dare not say so with confidence, that I may possibly to be in some significant agreement with the noble Lord, Lord Cockfield—an unusual event for me, and one to which I look forward with eager anticipation. The Treasury, on balance—one has to use the term "on balance"—came out against joining the full European mechanism. I assume that the noble Lord, Lord Cockfield, will in all probability, although one is never certain, follow the same lines as the Treasury, the National Institute of Economic and Social Research, the CBI, the British Bankers' Association, the Ford Motor Company and myself, whereas we have for joining the European Monetary System, in its full sense, through, the acceptance of the automatic mechanism, the representative of the European Commission, Mr. John Purvis MEP, and his two associates, and the Deutsche Bundesbank. I am a little baffled because, despite the eloquent words of the noble Lord, Lord O'Brien, the Bank of England, so far as I can read its evidence, remains profoundly neutral. It is difficult to interpret the evidence of the Bank of England in any other sense.

I am not a banker; I am not skilled in matters of banking. I hold the rather plebeian standpoint which may or may not find itself acceptable to your Lordships—namely, experts should be on tap, never on top. Therefore, I tend to take a view in regard to this report based on rather broader lines.

We in the free world live in a world in which there are vast unused resources and plenty of people willing to work in order to obtain benefit from the use of those resources. This of course is so commonplace that it may perhaps be accepted as part of the scenery. But to people like myself it remains still profoundly illogical. At the same time it is reflected in our own country. We have vast need of people being satisfied and yet we have an army of unemployed people that would be quite prepared to work in order to satisfy those requirements. That may be trite, but it is inescapable. That sometimes means that I look a little askance at the most distinguished individuals, including many of your Lordships, who move in these very high monetary and banking circles and who seem to be completely oblivious of this fact, which must remain a reproach to civilised society.

I am not at all reassured by the statement, amounting to conviction, by the noble Lord, Lord O'Brien, that the world banking system is still in imminent danger of crisis. That hardly adds up to complete self-confidence among that band of experts—most reputable people and, indeed, most charming people—who presume to know how the affairs of the world should be conducted. Indeed, we know full well that the whole of the banking system—in so far as its policy of unrestricted advances, particularly in South America, was concerned—pursued a most asinine policy which is still due to haunt it for many years and will give rise, I suspect, to the anxieties voiced by the noble Lord, Lord O'Brien, about the stability of the system.

I have read through the report carefully and I have come to the conclusion that, although the members of the committee come down all fair and square in favour of its conclusions, by and large the conclusions run contrary to most of the logically argued evidence that was put before the committee. I ask myself the reason why. Indeed, it is revealed in the report itself. There seems to be the impression that it is a political necessity. The most compelling part of the report and the report's recommendations lies in the political desirability of joining the system. That bothers me a little because it is based on the assumption that the European Economic Community is all that it is advertised to be.

I was amused to listen—and I say this not in any terms of disrespect—to the noble Lord, Lord Bancroft, who said that we cannot afford to hold back; and then to the noble Lord, Lord Seebohm, who said that we present an unforunate impression in the Community; and then to the noble Lord, Lord Sherfield, who said that he thought it was necessary that we should reassure our partners. Why, my Lords? Have we in this country reached the stage when we find it necessary in our expressions of national policy and the determination of national resolve to pursue decisions which are made purely with the aim of reassuring people that are associated with us? Those comments do not echo the Churchillian terms in which the Prime Minister herself has become accustomed to addressing the United States.

It seems to become an end in itself that somehow, for some reason, this nation has to make itself agreeable to people. I am certainly not in favour of our being disagreeable; I am certainly not in favour of our declining or pursuing objectives that are disruptive to other people. But when the chips are down the ordinary people of our country—who cannot travel out of the country at the speed at which capital is transported from one corner of the earth to another by key-tested telex from bank to bank—are invited to be patriotic. It seems a little odd that one of the prime purposes of our joining the EMS should be to ingratiate ourselves with other people, as distinct from co-operating with them on a friendly and, I trust, co-operative basis.

By now we know in our hearts—even the most perfervid supporters of the European Economic Community—that the European Economic Community is the common agricultural policy with a few peripherals, and that as a community it is desperately trying to furbish that image by taking on extra political objectives of co-operation that were not envisaged originally in the Treaty of Rome. I am all for co-operation. I believe that we should co-operate everywhere in the world with our European colleagues. But let us talk straightforwardly, let us talk with a degree of confidence and resolve, rather than doing things because we have to reassure people.

The evidence in the report suggests to most people—including, if I may say so, the Institute of Bankers, with whom I must say I rarely disagree—that it would not be in the interests of the United Kingdom to join the mechanism at this stage at all. They give a variety of reasons with which I shall not weary the House. However, it is quite certain that the existing system is under strain and according to most distinguished economists who have had an opportunity of looking at the situation since the report was published, the existing system and the existing currency alignments are already under strain and will probably have to be altered in the spring anyway. Perhaps the noble Lord, Lord Cockfield, will confirm that.

I admire the thoroughness of the report. I admire the sincerity and the wisdom of the people who have spoken in this debate, including not least my noble friend Lord Barnett. I am sorry to have to dissent but, along with the noble Lord, Lord Vaizey, oddly enough—with whom I very rarely agree—I find that the case is not proven. In my opinion, we should not at this stage subject ourselves to this mechanism; rather, we should pursue our own objectives as cogently and as courageously as we can. We have never been found failing in the past when we have been a little more self-reliant, and perhaps a little less supine.

8.30 p.m.

Lord Cockfield

My Lords, may I, first of all, congratulate the noble Lord, Lord Barnett, on a distinguished and elegant maiden speech. He has of course great experience in these matters. His appointment as Treasury spokesman for the Opposition will add lustre and illumination to the Benches opposite. I do not know whether that means that the speech this evening of the noble Lord, Lord Bruce of Donington, was his swan song on Treasury matters; but if indeed it was, may I be permitted to say that I have greatly appreciated the forthright way in which he has always put the points on matters about which he feels deeply and sincerely.

May I also, very briefly, take up the point made by the noble Lord, Lord Lever of Manchester, who suggested that on one occasion I had misunderstood what he said. In the early days when I crossed swords with the noble Lord I had not realised that his attacks were not directed at me at all but at the record of the Government of which he had been so distinguished a member. Once one realises that, everything drops into place! I am also glad that we have been forewarned about the likely approach of the noble Lord, Lord Barnett.

Since this matter was last debated in your Lordships' House on 27th January last year we have had the benefit of the very detailed analysis of the European Monetary System by the Select Committee of your Lordships' House. The sub-committee was under the distinguished and expert chairmanship of the noble Lord, Lord O'Brien of Lothbury, who also introduced this evening's debate.

Rarely has a debate so short in time been marked by contributions from so long a list of distinguished experts in the field. We have had two former Governors of the Bank of England, two former Chief Secretaries to the Treasury and many other prominent bankers and leading experts in the field. The debate has also transcended party lines, a matter which I think is a great tribute to your Lordships' House, because it means that we can bring our collective wisdom to bear on these matters without necessarily expressing a purely party point of view.

Although the report is guarded in its conclusions—and wisely so—the careful analysis, the wealth of factual information and the opinions elicited from distinguished experts are a valuable contribution to our stock of knowledge and will enable decisions to be taken—when that time should come—on a more informed basis. The conclusion reached in the report that: United Kingdom participation in the ERM [Exchange Rate Mechanism] is desirable", is one which would be endorsed by the Government as an ultimate objective. Indeed, we have said so on many occasions. On the question of timing, I could not be so forthcoming. The committee itself accepts that the: exact timing must depend on general Government policy". But it suggests that: the balance of advantage lies in early … entry". But it qualified this by saying: though not necessarily immediate entry". I felt that perhaps the noble Lord, Lord O'Brien, as well as my noble friend Lord Bessborough, went perhaps somewhat further than the report itself went in advocating immediate entry.

The problem as we see it in Government is that it is not possible to be specific about when conditions for entry will be right, and quite simply the reason for this is that the problems which remain cannot themselves be solved within a specified timescale. Perhaps I might touch briefly on some of these problems.

The Government recognise the concern felt by many in industry on the question of exchange rate volatility, and expression of these concerns was given in the debate this evening. It is not surprising that the ERM should be viewed as a kind of haven in which to shelter from the storms which periodically sweep through the exchange markets of the world. But it is important to recognise the source of the problem. It is to be found in high and variable rates of inflation. This was one of the factors which led to the breakdown of the Bretton Woods system and has been responsible for much of the subsequent instability in exchange rates.

The Williamsburg Summit recognised the critical role that co-ordinated and prudent policies must play in bringing about a lasting reduction in exchange rate volatility. Your Lordships' committee recognises the overriding need for a greater degree of policy convergence. The noble Lord, Lord Barnett, argued that there was little or no political or economic will towards the greater convergence needed. I would not perhaps go quite so far as the noble Lord in saying that there was no political will in this direction. But I agree that the progress made is simply not sufficient. There are indeed encouraging signs that convergence is taking place and at a significantly lower rate of inflation. The Government's own record here has been an exemplary one.

But despite this progress, much more progress needs to be made. Many countries are still going through periods of significant financial adjustment; market expectations still show a frequent lack of confidence. The general climate is still one which falls well short of the stable conditions which we are seeking.

This is the background to the concern recognised in the report that in certain circumstances sterling's membership of the ERM could entail more instability against the dollar. This in turn would impose strains within the ERM itself. True, such strains can be accommodated to some extent by currency realignments. This has happened with some frequency in the past and one cannot rule out further realignments in the future. Indeed one would not want to do so. But these step-changes in exchange rates can be as disruptive to industry as small day-to-day fluctuations.

Broadly therefore, our view remains that greater convergence of policies needs to come first, and it is very much a second best to argue that failures of convergence can be compensated by currency realignments.

It is important also to avoid—or at least to minimise—conflict with domestic policy. If there is a failure of convergence or if more generally conditions for membership are wrong, then the pressures on member states' financial systems are not eliminated. Instead, the pressures are reflected in domestic rather than external factors. Countries cannot rely on exchange market intervention by itself to withstand pressures of anything more than modest and temporary force. This is particularly true of the United Kingdom, whose currency is widely held and traded. In these circumstances domestic policy changes are required. Were sterling to become a member in the wrong circumstances, this would simply substitute interest rate volatility for exchange rate volatility. This could be just as damaging to trade and investment as the CBI in particular have argued.

The noble Lord, Lord Taylor, rather dismissed the reservations expressed by the CBI as ill-founded, but the CBI after all represent the people actually responsible for conducting our trade, and their views are based upon hard, practical experience. They represent, therefore, important evidence which needs to be taken very much into account.

Apart from these general considerations, sterling, as the report itself recognises, has two special characteristics which differentiate it from many other EMS currencies and complicate the decision as to timing. I hope the noble Lord will forgive me if I say that the report perhaps assumes too readily that the difficulties to which these characteristics give rise have eased sufficiently. First, the United Kingdom stands on its own in the European Community by being self-sufficient in oil. Sterling therefore tends to rise and fall with oil prices while other Community currencies do the opposite. Oil markets have been relatively quiet recently. But considerable fluctuations in supply and demand do occur and there are political factors which affect this market. While one would hope that the violent movements which characterised the 1970s will not be repeated, it still remains the case that political tensions in the Middle East tend quickly to be reflected in the exchange rate between sterling and other EMS currencies. The caution suggested by my noble friend Lord Vaizey is very relevant in this connection.

Secondly, both sterling and the deutschmark are widely used in international finance and so are particularly vulnerable to large speculative flows. Experience suggests that any large and sudden movement of the dollar, for example, tends to lead to strains between the existing members of the ERM and often to quite sharp movements between sterling and the deutschmark as well.

Perhaps I may comment briefly on the claim that the EMS has contributed to exchange rate stability. There is some evidence that nominal exchange rates of ERM members have been more stable than those of the United States, the United Kingdom and Japan over periods since 1979. But this is not conclusive evidence that it was the ERM itself which contributed to this greater stability. Sterling and dollar rates have fluctuated over that period for rather special reasons, and the narrowness of Japanese capital markets may well be behind the volatility of the yen. It is also unclear whether real exchange rates have been made any more stable.

I do not propose following the noble Lord, Lord Seebohm, on the question of the Macdonald index. All I can say is that I wonder whether it might leave us with more indigestion than enlightenment. As the noble Lord, Lord O'Brien, has reminded us, Britain is already a member of the EMS as such. We contributed to the European Monetary Co-operation Fund, and 20 per cent. of our gold and dollar reserves are in fact deposited in the fund. We welcome the modest but growing private use of the ECU, with London playing its full role as a centre for the market in ECU denominated assets. My noble friend Lord Bessborough referred with approval to this development.

We participate also in the negotiations on EMS modifications and in realignment conferences. Indeed, when my right honourable friend the Foreign Secretary was Chancellor of the Exchequer, he chaired a number of these conferences. We already play, therefore, a responsible and indeed substantial role in the EMS.

My Lords, the Government have always accepted that sterling's eventual membership of the ERM would be an important step forward. But it would be essential that our membership should be successful and continuing. This means that it needs to be achieved in the right circumstances and when the time is right. Joining in the wrong conditions would neither strengthen the system nor be helpful to British industry. Nor would it be sensible in terms of domestic policy.

While, therefore, we are united on the ultimate objective, we need to be particularly cautious on timing. We have in the circumstances I have described no immediate plans for entry. This is not a matter of indecision as the noble Lord, Lord Bancroft, has suggested, but a conscious decision taken on the facts as they exist at present. But I can assure the House that we will continue to keep the matter under close review and the views expressed by your Lordships will be fully taken into account in that review.

8.46 p.m.

Lord O'Brien of Lothbury

My Lords, my first very pleasant duty is to thank all those noble Lords who have taken part in this debate, which I think it will be agreed has been an interesting one. I am particularly grateful to the noble Lord, Lord Barnett, for having done so. He made what one would expect him to make: a most thoughtful and helpful contribution. Until we came to the end of this debate we had almost reached unanimity. It became almost dull, but one or two rescued us from that unhappy fate. The noble Lord, Lord Vaizey, I was sad to hear, did not think it worthwhile going to the Bank of England at £350 a year. I should tell him that I went in 1927 at £150 a year, and 46 years later, on the whole, I thought that it had not been a bad deal for me.

More important, the noble Lord referred to what happened in the 1930s—something which I lived through as a young man as a central banker. The currency blocs, the clearing systems, the barter, the restriction of trade which went on at that time—they were things which those who went through that period as working people will never forget. That is one of the situations we are now trying to avoid through the co-operation of the world today, and particularly co-operation in Europe.

I believe that, as the noble Lord, Lord Barnett, said, the ultimate aims of the European Community are no doubt far distant and show little sign at the present time of being realised. Nationalistic attitudes have prevailed in many countries of the Community; but we have all joined the Community, and if our hearts are in it we hope that eventually it will achieve those aims. If it takes 50 years it is better than not happening at all. One step forward is better than one step back, and I fear that the attitude of the British Government represents a step back rather than a step forward.

It seems to me that the arguments which have been put forward by the noble Lord the Minister could be put forward as arguments against ever joining the exchange rate mechanism rather than choosing the right time to join. Therefore, they leave me somewhat depressed. However, we have had the debate. We have our report. The Government will no doubt consider it, and we shall be interested to hear how things develop in the future.

On Question, Motion agreed to.

House adjourned at ten minutes before nine o'clock.