EMS Exchange Rate Mechanism (Hansard, 29 April 1985)

§ Lord Reay
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)
My Lords, the Government have no objection in principle to joining the EMS exchange rate mechanism, but the question of participation requires assessment of a wide range of factors. For instance, recent experience has shown that sterling responds very differently from other EMS currencies to dollar and oil market developments.

§ Lord Reay
My Lords, may I thank my noble friend for that reply? Would he agree that in recent months the movements of the pound against the dollar have been greater than the movements of continental currencies against the dollar? Also, would he agree that this is probably at least in part due to the fact that currencies within the EMS are less attractive to speculators than currencies outside the EMS and that therefore if this country were to join fully the EMS this should give some stability for the currency and be of help to British manufacturers as well as those responsible for making Government forecasts?

The Earl of Gowrie
My Lords, I have considerable sympathy, as I think my noble friend is aware, with the desire of manufacturers and exporters to have greater certainty; but this is not a world in which certainty about exchange rate movements, whether within the EMS or outside it, is very easy to achieve. The fluctuations mentioned by my noble friend, had they taken place within the exchange rate mechanism, would not have been very material because as a second reserve currency linked to oil factors there would have been volatility for sterling in any case.
On the question of speculation, when a fluctuation is not containable, even though it might take place within the exchange rate mechanism, the slowing down of the adjustment process through the ERM is an invitation to virtually risk-free speculation, and the Government of course would be highly criticised if we promoted that.

§ Lord Diamond
My Lords, what is the point of the noble Earl rehearsing the arguments against the principle of joining when he has already told us that he is in favour of joining? He is one of the principal members of the Government. Is the noble Earl aware that there is a huge body of expert opinion, including the Governor of the Bank of England, which has recommended that we should be joining the EMS now? What is the reason for further delay?

The Earl of Gowrie
My Lords, I was not rehearsing an objection to joining in principle. Indeed, in my original Answer to my noble friend I said that the Government had no objection in principle. I said that it was not as easy, given petro-currency fluctuations, as many people thought. As to the Governor of the Bank of England, he has been prayed in aid on this subject before so I took the precaution of looking up what he actually said. It is somewhat equivocal support because the Governor said that joining would produce other problems. If I may quote him, he said: You see, our membership might change the actual working of the system itself".

§ Lord Bruce-Gardyne
My Lords, would my noble friend agree or not agree that if the primary purpose of Government policies is the abatement of inflation by the application of monetary discipline at home, then membership of the EMS would be contra-indicated? But if on the other hand the Government's primary purpose has been the achievement of an exchange rate level, whether disclosed or not, then logically it would follow that membership of the EMS would be indicated.

The Earl of Gowrie
My Lords, in logic I think my noble friend is quite right. This is why the Government have no objection in principle to joining. The trouble is that movements of oil prices round the world are not dictated by logic and we are uniquely affected by them.

§ Lord Ezra
My Lords, would the noble Earl not agree that this petro-currency argument is being overdone? It was not so long ago that the Government were saying that only 6 per cent. of our national product was due to oil. We cannot keep on using this argument in opposite directions. The sooner we strengthen the European monetary system, the sooner we can bring some stability to world currencies.

The Earl of Gowrie
My Lords, if I may respectfully say so to the noble Lord, he is wholly wrong. Even if only three per cent. of our economy were affected by oil price movements, that would have a very considerable effect on the movements of sterling.

§ Lord Stoddart of Swindon
My Lords, is the noble Earl aware that the Opposition understand the difficulties which the Government have in this matter? Would he agree that, in spite of what the noble Lord, Lord Ezra, has said about sterling as a petro-currency, the fact is that the world sees sterling as a petrocurrency and reacts accordingly? Is it not a fact that if we at this present time go into the EMS the divergence limits will have to be very high indeed, perhaps as high as 25 per cent.? Would he also say what he thinks the rate against the ecu would have to be if we entered the EMS? Would it not have to be much lower than the present rate of 1.82 ecus to the pound?

The Earl of Gowrie
My Lords, I do not believe that I can comment on the noble Lord's latter point because, as I have said, we would remain subject to petro-currency regulations and fluctuations even within the EMS. As to the noble Lord's former point, I am glad if somewhat surprised to be rescued by the noble Lord, Lord Stoddart of Swindon, and I think 6 that what he says on this occasion has considerable merit.