European Monetary System and the UK (Hansard, 30 October 1984)

§ Baroness Seear
My Lords, I beg leave to ask the Question standing in my name on the Order Paper.

The Chancellor of the Duchy of Lancaster and Minister for the Arts (The Earl of Gowrie)
No, my Lords. When your Lordships last debated fully the question of sterling's participation in the exchange rate mechanism, my noble friend Lord Cockfield identified the difficulties created by the very different effects of uncertainty about the dollar and oil markets on European currencies, notably on sterling and the deutschemark. Both sources of uncertainty are clearly still affecting exchange markets at the present time.

§ Baroness Seear
My Lords, I thank the noble Earl the Minister for that reply. Is it not very disappointing that for so long we have been told that at the right moment the Government will become a full member of the EMS? What is really holding it up at the present time?

The Earl of Gowrie
My Lords, I do not think that it is quite as disappointing as the noble Baroness makes out, because strictly speaking we are already a member of the EMS. We contribute 20 per cent. of our gold and dollar reserves to the European Monetary Co-operation Fund, and we participate in realignment conferences. The pound is also included as a component of the European currency unit. Sterling does not participate in the exchange rate mechanism because, as a petro-currency, it rises and falls with oil prices, while other Community currencies do precisely the opposite.

§ Lord Barnett
My Lords, does the noble Earl mean that there are no circumstances in which we shall join the exchange rate mechanism?

The Earl of Gowrie
No, my Lords—I dare not. As I said, I think that the time is not ripe mainly because our currency, unlike the European currencies, is linked to the rise and fall in oil prices.

§ Lord Bruce-Gardyne
My Lords, as a congenital waiverer on this issue, may I put a question to my noble friend? Does not past experience suggest that outside the exchange rate mechanism sterling tends to weaken less than the member currencies in the exchange rate mechanism when the dollar is strong, and to strengthen less than the member currencies in the exchange rate mechanism when the dollar is weak? Might this not suggest, given that so much of our own imports are actually denominated in dollars and given that if sterling were to strengthen substantially against the dollar this would assist in the abatement of inflation expectations, the moment at which we might contemplate joining the exchange rate mechanism would be the moment at which we had concluded that the dollar was finally turning turtle as at some stage it will, always supposing that we can identify that moment?

The Earl of Gowrie
My Lords, I am rather entranced by my noble friend's suggestion that he is a congenital waiverer about anything. It is certainly the case that membership of the exchange rate mechanism does not provide immunity from the effects of dollar strength on European currencies. Experience suggests that when the dollar shifts significantly downwards then the exchange rate mechanism comes under strong 441 pressure. Since my noble friend and I both hope that this shift in the dollar will happen within the next six months or so, I think that my point is reasonably well taken.

§ Lord O'Brien of Lothbury
My Lords, on the assumption that Her Majesty's Government see the advantages of exchange rate stability, and that they say they will join the exchange rate mechanism of the European Community when the time is ripe, and having heard the Minister talk about the difference between sterling and the European currencies because sterling is a petro-currency, may I ask whether there is any early prospect of the Government's joining the exchange rate mechanism? I should have thought that that was a more or less permanent situation.

The Earl of Gowrie
My Lords, I think that the point I made in my first supplementary to the noble Baroness is the one that the noble Lord, Lord O'Brien, with all his experience in these matters, could perhaps take notice of: that we are already a very considerable participator in the European monetary system. The difficulty and the argument is about our participation in the exchange rate mechanism. It is not, I think, so much a question that this will be out of issue; that it will not be possible while we have oil assets. It will be more a question of Europe perhaps coming in line with a currency system that is less linked to oil assets.

§ Lord Diamond
My Lords, is the noble Earl aware that he seems to have gone back on the attitude of Her Majesty's Government with regard to this important issue? Would he care to make it absolutely clear that the Government are still in favour in principle of taking this further step? Is he further aware that there are many authoritative voices—we have just heard one most authoritative voice and there are many others—who take the view that it is extremely appropriate now to take that further step? If he is not in agreement with that as to timing, when can we look forward to the Government ending this question mark over their policy and making a clear decision?

The Earl of Gowrie
My Lords, it was, in fact, in your Lordships' House in November of last year that the Government gave their most recent and fully authoritative view of this position in a debate which enjoyed the maiden speech of the noble Lord, Lord Barnett. That was the point at which my predecessor my noble friend Lord Cockfield set out the position most authoritatively. He stated quite categorically that we were in favour of participating in the EMS—and I have dealt with that point—and that it would be in an ideal world a good thing to involve ourselves in the exchange rate mechanism, but that the timing was not right because of uncertainties in international currencies through their relationship with oil prices, which particularly affected ourselves.

Lord Bruce of Donington
My Lords——

§ Lord Denham
My Lords, if the noble Lord will give way for half a minute, we have been 26 minutes on Questions already. We were two minutes on the first Starred Question, which means that we have had an average of eight minutes on the others. I understood 442 that his noble friend behind him was speaking from the Front Bench opposite, but if the noble Lord, Lord Bruce, would like to put his question quickly and if my noble friend would reply, perhaps we could then move on.

Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord for his courtesy. May I ask the noble Lord whether the Government's apparent uncertainty in this matter is perhaps due to the fact that the Government's prime objective may be that which was talked about by his right honourable friend the Prime Minister in March 1980, when she burst with pride when the dollar was standing at 2.40 to the pound and said that the high exchange rate was a matter of national pride?

The Earl of Gowrie
My Lords, it is always a matter of national pride when one's national assets are fetching very large sums of money. But in the real world in which we live the prices of raw materials fluctuate.