EMS: United Kingdom Participation

HL Deb 06 June 1986 vol 475 cc1243-70

2.23 p.m.

Lord Soames rose to ask Her Majesty's Government in what circumstances they would consider it expedient for sterling to join the exchange rate mechanism of the European Monetary System.

The noble Lord said: My Lords, until fairly recently the Government chose to let it be known what were the reasons which inhibited them from joining the exchange rate mechanism of the EMS. The noble Lord, Lord Cockfield, when he was responsible for these matters in the House, told us so from time to time. They were in effect—were they not?—first of all, the argument that sterling, unlike other European currencies, was a petrocurrency and that in the event of a serious fall in the oil price that might have a deleterious effect on the British economy while having a beneficial effect on the Continental economies. The second was that sterling's exchange rate was too high. A third was that inflation was high enough to endanger our economic prospects for the future and that they were notably worse than those of some of our trading partners in the Community.

More recently, and in particular on 6th May this year, in reply to a Question from me, we received a somewhat different message from the Government. They were waiting until the time was right. The Minister made it abundantly clear that he had no intention of saying what we were waiting for, and that meanwhile they were not interested in the views of Parliament or anyone else. Why that change of reasoning? The presumption must be that primarily, at least, the old arguments no longer stand up. Oil prices have dropped but that did not seem to have any major effect on the parity of sterling in relation to our trading partners on the Continent or with the dollar.

The Government, as have others, have done marvellously regarding inflation. That is good. With the fall in oil prices and, low commodity prices, inflation is now 3 per cent.—not all that different from that of our trading partners. Of course, we have the added factor of the trend, among thinking people, notably the Secretary to the Treasury in the United States and the governor of the West German Central Bank that greater co-operation rather than less cooperation is necessary to keep a healthy relativity in exchange rate parities. I think that was the reason the Government felt it necessary to fall back on that somewhat arrogant and apparently meaningless formula of waiting until the time was right.

If that has a meaning, the Government apparently had no intention then of telling us or anyone else what that meaning was. There can be no doubt about the advantages that have been derived by our trading partners on the Continent during the years 1979–1986 from being within the exchange rate mechanism. They were years of horrific international turbulence in exchange rates; and the EMS exchange rates, apart from the lira (which has a connotation of its own), moved in all those years by single percentage points, while during the equivalent period, if we take the deutschemark, for instance, our rate has moved at least 30 per cent. up, at least another 30 per cent. down and then 15 per cent. up again. There is no doubt that sterling's exchange rate relationship would have been much less volatile with European countries, at least, and with our trading partners in Europe, to the enormous advantage of our industrialists who are seeking to export to the Continent. They would benefit by having a much more stable exchange rate.

We should then have been in single figures also, instead of having those violent movements. It would also be a fair assumption—let me put it no higher than that, but I think there is good evidence for it and I shall say a word or two to your Lordships about why I think there is good evidence—that our interest rates during those years would have been lower had we been within the EMS.

When he replies, the Minister may well say that I have been pressing this matter for some time and, "Look what would have happened if we had gone in sooner" because our exchange rate was much less favourable vis-á-vis, for instance, the deutschemark in 1982—and I have looked up a debate that we had then—than it is today. One cannot always aspire to get in at the bottom of the market in the first place.

In the second place, we would have had the advantage of far lower interest rates for a number of years, which would have had its effect on our industrialists. our levels of production and our levels of unemployment. I say this having taken an interest for some years in the French economy. France joined the EMS in 1979. It was able to bring its interest rates in that year down to 12.5 per cent. when our interest rates were in the high teens. It also achieved in 1980 a remarkably high level of exports and of investment in industry. Why did France achieve that investment in industry? The answer is that being in the exchange rate mechanism gave a credibility to the franc. It gave credibility to speculators outside that the French Government intended it to stay in the same sort of relationship vis-á-vis the other European currencies. That credibility gave strength.

In 1979 and 1980, when French interest rates were 12.5 per cent., ours, although I cannot recall this precisely, were of the order of 18 per cent. This was in spite of the fact that the exchange rate with the dollar at 2.40 dollars was much too high for comfort. It was at that level not because of exchange rate problems but because of money supply matters. The monetarist doctrine was that interest rates had to stay up because of money supply not because of exchange rates. The situation has changed since then. I am not trying to make a lot of this. But the hard fact today is that the perception in the country is that interest rates are no longer governed by money supply but by exchange rates. That is what guides them.

No one knows—because, understandably, the Chancellor does not want to say—what are the exchange rates that the Chancellor wishes to see. As no one really knows, there is not the credibility. If, however, we were to join the exchange rate mechanism, there would be that credibility and the strength that flows from it by virtue of the fact that the world would know—our industrialists would have that much more credibility—that this was where the Government stood. We do not know at the moment what exchange rates they are looking for. If, however, we were in the ERM we would at least know what sort of exchange rate was in the Government's mind. You do not join the EMS to have a realignment. You join it at the rates of your choice. This provides the credibility that such exchange rates are those the Government aspire to. That, in turn, would have an effect on interest rates. This would give, I believe, lower interest rates. There is good evidence to that effect. Lower interest rates equal greater investment. And greater investment is the main key, in my view, to the cure for our severely high unemployment—at least for some reduction in our unemployment. That would be a considerable advantage to our exporters.

I turn to the fact that the broad spectrum of informed opinion of those who live in the real world are in favour of our joining the exchange rate mechanism. Rumours that are not necessarily unfounded have it that the Chancellor of the Exchequer, the Foreign Secretary, the Secretary for Trade and Industry, and for all I know (although I certainly do not know), my noble friend the Minister, are in favour. Certainly, the Governor of the Bank of England, we are told, is in favour. Certainly, the chairmen of all the clearing banks are in favour. We shall hear shortly from my noble friend Lord O'Brien what he, as an ex-Governor of the Bank, thinks about these matters. Certainly, the captains of industry, whose industries depend on exports who will get more production if they can export more, all want to see the certainty that flows. from being a member of the ERM. After all, 45 per cent. of our trade is with our Continental partners now. It is not what it used to be—a small proportion. It is 45 per cent. Only about 14 or 15 per cent. of our trade is now with North America, Canada and the United States. This should not be cast aside as if it were nothing.

All these gentlemen are, or are reputed to be, in favour of our joining. Who do we put on the other side of the scale? Who is not in favour of our joining? I am told that Mr. Alan Walters is not too keen on it: and the still small voice of Brian Griffiths may well be added to that. However, if you put that in the balance against others in the Cabinet to whom I have referred, there is no doubt what tips the scale very considerably.

What is the remaining fear? As I say, it is no longer the petro-currency. It is not inflation. It is not our existing parities. We have missed the 3.30 mark with the deutschemark but not by all that much. One cannot always aspire to get in at the bottom of the market. I do not think that there is anything wildly out of phase with the present parities of sterling.

What, therefore, are the fears? I can see two. The first that many of us can see is the possibility that if the polls are running against the Government in the run up to an election, and the polls may show signs of the Labour Government getting in, those who deal with the matters at home and abroad are frightened that if the Labour Government were to get in they would revert to type—like a ponticum rhododendron—and all kinds of silly policies would be forthcoming. They might want to "short" the pound. There might well be an exodus of pounds in the same way that France, before the presidential elections, had to take very drastic action in order to inhibit a flight from the franc temporarily, for a day or two. That stopped it. When M. Mitterrand got in, in spite of some temptation to throw it over because it would permit him thus to throw out of the window all forms of discipline, he saw it to be in the French long-term interest to remain in. Remain in they have, and they have benefited much therefrom. If there is going to be a flight from the pound it will not be for only political reasons but others as well. This will happen anyway whether we are in or out of the EMS. It is no less a devaluation if it is a realignment than if it is a floating down. Perhaps we have become more accustomed to it now than we used to be. However, it is no less of a realignment if it comes down by 20 per cent. by floating down by 20 per cent. or by there having to be a realignment within the exchange rate mechanism, within the EMS. The Goverment cannot be waiting for that. That cannot be the factor for which the Government are waiting to decide whether or not it is "the right time" to join.

Perhaps it is the fact—and this is a real anxiety—that, with an inflation rate of 3 per cent. and a productivity increase of almost minus, but certainly of nothing worth having, we should still be having increase of earnings of between 7 and 8 per cent. and of real earnings of around 4 or 5 per cent. Is that the reason? It worries me. I believe that it must be the main worry for our country that it is still happening and apparently it does not seem to matter whether inflation is at 20 per cent. or 2 per cent., or whether unemployment is at 2 per cent. or 13 per cent., because we still seem to have to have these vast increases in earnings which are neither warranted by inflation nor matched by productivity. However, that is not because we are in or not in the system. We must solve it anyway. If we do not solve it, then God help us. We shall pale into uncompetitive insignificance if we do not cure it somehow. The ingrained difficulty which we have lived with for so long—namely; the habit of every year having to have an increase regardless of what happens in the market—is a habit of which we must cure ourselves. That cannot be the reason why we are waiting for the time to be right.

No, my Lords, the EMS—of which the exchange rate mechanism is the important feature—is a system which imposes a degree of discipline in the conduct both of monetary and of fiscal policies. It provides both an incentive and an imperative for the prudent conduct of economic policy. It provides an effective and a wise inhibition on the Government of the day not to allow themselves to follow along the lines of policies which could be those of dogma of any government. It is an inhibition against dogma in governmental economic policies. That must be right for us.

If it be right, my case is that we should not brook further delay before joining the ERM so that we may have between 18 months and two years of experience of it before the election. Plainly it would be neither good timing nor wise to join the ERM too close to the election. That is why I ask the noble Lord whether or not we have decided to join. We cannot wait much longer. They must decide either to do it or not to do it. It behoves the Cabinet itself—and I underline the word "Cabinet"—to come to a decision without delay. That and that alone is the crux of the issue. This above all: to our own selves be true. It has nothing to do with waiting for circumstances to change, because there are no circumstances that will change to make it more or less attractive for Her Majesty's Government to join. The bullet must either be bitten or it must be cast aside. I hope that my noble friend the Minister will agree and will say as much today.

2.45 p.m.

Lord Lever of Manchester

My Lords, it must now become clear to all that the relatively high level of co-operation the world's advanced countries achieved immediately after the war depended far too much on American dominance and not sufficiently on a shared and settled understanding of the nature of the modern world economy. Hence we had a regression in the 1970s from that co-operation which had been the key to the greatest advance in wealth creation in such a period that the world has ever seen.

The reason why world co-operation is vital in monetary and international economic and financial affairs is that world trade is increasingly financed and increasingly internationalised whereas political power is exercised within national boundaries. One has to build bridges. We did build bridges in GATT and the monetary system after the war. We let the main bridge, which was the monetary system, fall to pieces and consequently GATT, which preserved the onward liberalisation of trade, was weakened, because first where there is no pooling of effective sovereignty to create the bridges the alternative is anarchy. Anarchic, restless and blind forces take over the crucial areas of the world's finances and economics.

We have seen the result. The result has been distorted trade patterns, dangerous imbalances of trade causing immense friction between nations and economic disruptions. So much for the achievements of the apostles of the free market with an inadequate understanding of what Adam Smith wrote and thought. In fact, they have turned to the enemies of the free market because of the anarchy which prevails in international monetary affairs.

It is absurd to believe, as people continue to believe, that you can have on-going liberalisation of trade on the one hand and distorted and yoyo parities on the other, because the whole basis of liberalised trade advance is the law of comparative advantage. That basis is completely undermined if you have the kind of parity distortion, volatility and absurdity we have experienced. It is not surprising therefore that if you practise currency instability and preach increased liberalisation of trade you do not get increased liberalised trade; you get increasing demands of protectionism and other major disorders in the world scene.

In fact, all this arises from the regression in the 1970s, from the crucial need for international cooperation behind the monetary system. It is not only the rising protectionism. Protectionism, with its menacing threat of trade war, the debt crisis and the high levels of unemployment—all three are the ugly children of that backsliding from international cooperation which made us so uniquely prosperous in the immediate post-war period. Incidentally, it is nice to have a repentant sinner, and you are on the right road, but even if we get repentance now we have let the trade imbalances caused in large part by currency distortions go on so long that you will not be able, in my firm opinion, to reduce or control those trade imbalances in time to avoid their being overtaken by protection merely by parity changes.

We have the extraordinary anomaly at the present time that the strategy of the great nations on the one hand, is to press the most competitive nations to get rid of their surpluses and, on the other, the least-developed countries of the world are being pressed to achieve an export surplus. You have only to ponder that to see the muddle that international money is in at the present time.

The key to this is not merely parity changes, I must say briefly; it is a recycle of surpluses in the most efficient and competitive nations to the right places where they create employment and economic advance—not as now, where they go to the wrong places, where they disrupt employment and retard economic advance. The reason these funds flowed into America was that the parity prospects in the unstable parity world made it inevitable that that would be evermore the gravitational centre. There is nothing wrong with that if there had been a proper monetary system in force to control it. The restoration of monetary stability is therefore an important precondition of handling all this range of problems of international finance and trade.

When the EMS was formed, it was beginning to dawn on everybody that this was the case. I happened to be in the Government at the time and we recognised the desirability of the objective of currency stabilisation and the need for co-operation to achieve it. We blessed the EMS, we put one toe in the water—not the relevant part of our anatomy—as a little entry to the fringe of the EMS. We said, "The whole thing is a splendid idea, but count us out". I think it would perhaps be kinder and more decorous if I do not outline the reasons that were given in cabinet discussion for staying out at that time.

The doctrine of unripe time, to which the noble Lord, Lord Soames, has referred is always there, available to the Treasury when they prepare these briefs, when they are not in sympathy with the purely negative position that they are asked to adopt. They have got the doctrine of unripe time to help them. I think it is a waste of time to recite the contradictory arguments that have been used to encourage us to stay out. But since we did not go in, the weakness of the EMS has been that it has not been able to play its full role in the world. The full role of the EMS is to be the European regional piece in world co-operation with America and Japan. That is its full role. How do you expect it not to be inward looking when Britain, Europe's greatest financial centre and biggest link with world finance and trade, ostentatiously abstains year after year from joining?

I do not know that it is widely realised that we have now reached the point in the world where it is a dangerous race between the achievement of an adequate level of monetary co-operation and a further rise of protectionism to a level where liberal achievements post-war and the economic advances built on them are in serious danger. Nobody here should delude themselves that President Reagan's firm position on this is not to be qualified. He has already been driven to compromise. He will be driven to compromise further. And if he is driven in that way (unless we act to ameliorate the difficulties) against his intentions and wishes, to accept further protectionist measures in the United States, we are at the point where this will inevitably produce retaliatory action from Europe and Japan. The consequences of that will be very disastrous indeed to all our prospects; and if economic and financial co-operation is gravely battered in this way what do your Lordships think will happen to political co-operation?

The Western world, as yet somewhat tentatively and half-heartedly, is groping towards a recognition that only by regaining a level of international co-operation in financial and economic matters can we again achieve the prosperous independence of the two decades that immediately followed the war. Two of the biggest stumbling blocks to that recognition have been the United States and Great Britain. Happily, there is a beacon of light. James Baker, Secretary of the Treasury in America, is now leading the world in this healthy direction. I wish I could say the same of Britain.

If Britain is not willing to co-operate with its neighbours in a community of which it is a member and in an institution of which it is a part-member, what confidence can the world have that Britain is going to co-operate in the vital and immediate task of international monetary co-operation and reform? The question for the Minister today is this: is Britain to continue in this path? Is Britain to continue, alone in Europe, to pursue the fantasy of autonomy in a global economy on these monetary matters? It is not splendid isolation: it is isolated ineffectiveness.

I should like to conclude by saying this. I know there are doctrinal differences in the Labour Party: I understand there are even some in the Government, according to the noble Lord, Lord Soames, on the question of Europe. But I can say that if I had not been (which, of course, I am) an enthusiastic member of the European Community, I would still have wanted to join the EMS because of its vital world role, when we get in, in relation to money as well as its European role.

I end by expressing my view that the Labour Party would accept an intelligent act of international cooperation that joining the EMS would mean, and all that might flow from it, to deal with the debt problem, the unemployment problem and similar matters. My final words are an expression of deep gratitude from myself, and indeed from all of us, to the noble Lord, Lord Soames, for having given us the opportunity of discussing this subject. Far from being untimely, if the House is at all persuaded on the themes that I have offered, it is exceedingly timely and right.

2.59 p.m.

Lord Ezra

My Lords, this is not the first time in recent years that we have debated this issue. To go back no further than three years ago, we had the very important report of the Select Committee of this House, which sat under the chairmanship of the noble Lord, Lord O'Brien, who is going to speak to us later, which analysed very clearly and impressively the whole question and which concluded at that time, in the debate which took place in this House on 14th November 1983, that the question was then: what were the reasons which had led the Government not to feel that the time was right? If I may quote from the speech of the noble Lord, Lord O'Brien, at that time he said: It seems not unreasonable therefore to ask Her Majesty's Government what they mean by 'when the time is right'? Are not present conditions acceptable? That was three years ago.

We then had the Federal Trust Report entitled The Time is Ripe, in November 1984, produced under the chairmanship of the right honourable David Howell, which asked the same question and came to the same conclusion. We had a debate initiated in this House by my noble friend Lord Diamond in March 1985 on the question of currency stability. We had the report of the Select Committee in another place, the Treasury and Civil Service Committee, produced in October last year. Then, quite recently, we had what I consider to be a most important and well-reasoned article by Mr. Sam Brittan in the Financial Times dated 29th May 1986, under the heading "Sterling, the Election and the EMS". We are much indebted to the noble Lord, Lord Soames, for enabling us at this very crucial moment to redebate this question, and I think we shall have to go on debating it until a solution is reached.

I am going to assume that both the previous Labour Government and the present Government, when they say that we will join the exchange rate mechanism when the time is right, mean what they say and that this is a truthful statement of intent. Therefore the debate is not about whether we should join the exchange rate mechanism, but when we should join it. I hope that when the noble Lord, Lord Young, replies to the debate he will confirm that this is a proper interpretation of government policy; that we are exclusively concerned with timing and not with principle.

So it is to timing that we clearly have to address ourselves today on that assumption and I should like to have a look at it on three bases—from the point of view of national interest, which is obviously paramount; from the point of view of European interest and from the point of view of world interest. In that latter connection, I shall be referring to some of the remarks which we have just heard from the noble Lord, Lord Lever, in his highly intellectual and impressive analysis of the world currency and economic situation.

Let us look at the national interest. As the noble Lord, Lord Soames, has made clear, over recent years we have heard repeatedly specific reasons why the Government felt the time was not right. I personally have asked a number of Questions in this House and, until recently, I was told that the main reason was that sterling was a petrocurrency. That answer is no longer given, because it is quite clear that sterling is no longer a petrocurrency; and a very good thing too. In the recent oil crisis, with the massive decline in oil prices it has been very satisfactory that this country's currency has managed to avoid the dragging down which there might otherwise have been. So the petrocurrency argument, which was used to say that we really do not fit in with any other Western European currencies, is clearly no longer valid.

There have been arguments that we ought not to get ourselves committed to a system of this sort until there was a greater convergence of economic policies. This argument of convergency has been used time and time again, but if the argument were taken to its logical conclusion—that there ought to be complete convergence before we were to join the European monetary system to its full extent—we would in fact never do so. What has in practice happened is that within the countries that have joined fully there has been a greater degree of convergence. It is becoming more and more noticeable.

For example, in quite recent times it has become apparent that both the French and the Italian governments are giving serious thought to reducing the exchange control systems which they have operated for so long. Had one accepted the argument for not going into a European currency system before the economies were convergent, one should have thought that they would have been much further off coming to that conclusion, but in fact they have come much nearer to it.

One of the other interesting developments is that, although Germany has been a crucial member of the system, the Central Bank in West Germany has been against the extended use of the ecu for the purpose of official currency transactions. Nevertheless we now gather that the attitude of the Central Bank in Germany is changing. It is very noticeable within the other members of the Community who belong to this system that their economies are beginning to converge more as a result of having being within the system since 1979 than converge less.

The fluctuations of sterling have been referred to by the noble Lord, Lord Soames, and were dealt with in detail in the article by Mr. Sam Brittan to which I referred. It is quite remarkable that if you leave out the Italian lira, which is a special case and allowed for, the fluctuations over the whole period of the existence of the European monetary system among those members who belong to it wholly have been in single figures, whereas in the case of the United Kingdom the fluctuation in sterling has been in double figures over the same period.

There is growing concern that as the oil revenues continue to diminish and as we could possibly become less competitive for a variety of reasons, including the diminution of investment in our industrial potential, we could be running into balance of payments difficulties in a year or two's time. Those balance of payments difficulties would inevitably bring with them an enormous strain on sterling. The question we must ask is: if that unfortunate situation were to arise, would the strain on sterling be greater if we were on our own or if we were part of the system?

Being part of the system has certainly helped the member countries. They have been buttressed by the support of the monetary facilities available to them from the system as a whole. It is beginning to look as though, viewed from the purely national aspect, this could be the right time for us to contemplate taking this step, which in principle governments both of the Labour Party and of the Conservative Party have said they are not against taking.

The important question of the relativity of sterling to other currencies has been resolved by the effluxion of time. In relation to other European currencies we are now in about as good a state as could be expected. It would seem to be not unreasonable that we should seek to lock ourselves into that rate of exchange having reached it, rather than allow the relationship to get out of kilter once again.

Let me now turn to the European dimension of this problem. Britain is about to assume the presidency of the European Community. If we want to demonstrate our positive intentions vis-à-vis the Community, this would be absolutely the right time to take that step. We have already taken one important European step in supporting the concept of the Channel tunnel, the legislative requirements of which we shall no doubt be debating later on. But now is surely the time when we could demonstrate our intention to create a European reality by joining the Community's monetary system in its full sense.

We have made clear that we are in the forefront of the campaign to create a real internal market and the noble Lord, Lord Cockfield, is now vigorously leading that campaign as the vice-president of the Commission. It does not seem to me to be logical to aim to create an effective internal market within the European Community if at the same time we, as one of the major trading partners within that market, do not fully adhere to what has proved to be a very successful monetary system.

There is a wider consideration. Quite clearly, having created an effective internal market we should be looking for more and more cohesion on a European basis. And so the ideas that were mooted in 1970 towards European monetary union could once more become something of a reality. It would be an extremely serious matter for this country if that movement were to emerge among those who fully adhere to the existing monetary system and we were to be left out. That would put us further out on a limb. So from the European point of view, I can hardly think of a time that would be more appropriate for us to move.

Let me finally turn to the world impact. As the noble Lord, Lord Lever, rightly said, what is now needed is for us in Europe to respond positively to the Baker plan. If we wish to try to stabilise trade in the world, to diminish the problem of international debt, and above all to prevent a return to protectionism, then we must seek to achieve some degree of world currency stability. Nobody is suggesting—not yet at any rate—that we should return to Bretton Woods. But there is not the slightest doubt that with the Americans having taken up their positive posture, and with the Japanese having shown themselves to be more reactive vis-à-vis the yen, the European part of that dialogue would be immensely strengthened by the UK becoming a full member of the European monetary system.

So it would seem to me, looking at the matter from the national point of view, from the European point of view and from the world point of view, that we have a combination of circumstances that overwhelmingly suggest that the time is now right for that important decision to be taken.

3.13 p.m.

Lord Bruce-Gardyne

My Lords, like other noble Lords who have spoken I should like to thank my noble friend Lord Soames for giving us the opportunity to have this important discussion this afternoon on a vital subject. I must confess that I always find myself in a slight quandary about it. The more that I listen to the arguments that are advanced for believing that the time (in the time-honoured phrase) is not right, the less convincing I find those arguments to be. But unfortunately I also find that the more I listen to the impassioned pleas of the dedicated enthusiasts for immediate entry, the more my doubts revive. I must confess also that I have felt a little of that this afternoon.

I agree entirely with what has been said by my noble friend Lord Soames and the noble Lord, Lord Ezra, about the weakness of some of the objections that are raised to early British participation in the exchange rate mechanism. In particular, I agree very much with my noble friend that the argument that we might, in a pre-election situation, find ourselves confronted by an obligation to devalue the currency is not very impressive. It is hard to see that the difference between a devaluation within the exchange rate mechanism and a rapidly-slipping currency caused by the same factors of anxiety about the emergence of a Labour Government would really make a tremendous political difference.

However, I confess that I wonder a little about some of the consequences that have been held out to us this afternoon as likely to flow from our participation in the exchange rate mechanism. The noble Lord, Lord Lever, not for the first time suggested that in some sense it is a first step towards a more comprehensive and coherent global monetary system. The noble Lord has always been entirely consistent in his advocacy of the need for that. I confess that I have always felt, and still feel, that the obstacles can be more formidable than the noble Lord sometimes suggests. As I understand it, the present rate of capital movements across the financial markets are something like 30 billion dollars a day. That is a staggering sum for any system of co-ordinated intervention by central banks to be able to control.

I make one other comment in this context. The noble Lord, Lord Lever, referred to the grave danger of protectionism resulting from disorderly markets and parity imbalances. I am sure that we are all very well aware of that danger. Indeed, I entirely share every word that the noble Lord said about the consequences of a lurch into protectionism. However, I venture to suggest that the more immediate danger in that respect is the excesses of the common agricultural policy. It is the threat of a head-on conflict over agricultural policy between Western Europe and the United States which, in my submission, is a much more urgent and acute threat to the outbreak of protectionism around the globe.

I should also like to say a few words about the comments of my noble friend Lord Soames on the consequences of our entry into the exchange rate mechanism, in particular for domestic interest rates. He argued that, following French participation in the exchange rate mechanism, from the start France had substantially lower rates of interest in 1979–80 than we had in this country. But, as he rightly pointed out, the levels of interest rates prevailing in this country were directed at the requirements of domestic monetary policy. That may or may not have been right; I happen to think that it was right but others may think that it was wrong. However, those were the circumstances and the question of the exchange rate mechanism did not come into the position.

I find surprising, not for the first time. the assumption that if we enter the exchange rate mechanism we should be experiencing lower levels of interest rates than we have had outside. Frankly, I cannot help thinking that on numerous occasions the reverse must be true. The noble Lord, Lord Ezra, when dismissing the argument about our petrocurrency status, said that when there was the oil price drop at the beginning of this year the currency managed to avoid being dragged down. But the fact is that the exchange rate against the deutschemark fell by 20 per cent. in a very short time.

Of course, if we had been members of the exchange rate mechanism we could have sought, and obtained, an adjustment in the parity. But to go into the system with a view to responding to any development of the kind by changing your parity within the exchange rate mechanism is like going into marriage with the view to divorce. Divorce may happen, but you do not go into marriage with a view to consumating it through the divorce courts. One therefore assumes that if we go into the exchange rate mechanism we do so with the view to maintaining our station within the system.

Now the fact is that over the past six months, if we had been in that position, we should have had to maintain our station in the system by having very substantially higher interest rates than we have had. We chose the option of accepting an appreciable decline in the exchange rate of sterling against the deutschemark. Within the rules of the system that was not an option that would have been open to us. Therefore, I do not understand how it can be assumed that entering the exchange rate mechanism will be likely to lead to lower interest rates than we would experience outside it. In certain circumstances I accept that it might do so; but I submit that those interest rates would almost certainly be substantially more volatile. Of course, the fact is that the exchange rate mechanism is quite simply a deutschemark bloc and the obligation on the members, unless they change their parity within the system, is to keep in step with the deutschemark.

I submit to your Lordships that evidence over many years suggests that when the dollar has been going through a period of substantial appreciation, as it did for instance in the period 1981–1985, on the whole, with the pound outside the exchange rate mechanism, the pound has tended to depreciate against the dollar less than the deutschemark has tended to depreciate. Equally, when the dollar has been running weak, as in the period 1979–81, the pound has tended (as again today) to appreciate less against the dollar than has the deutschemark. So at a time when the deutschemark appears to be depreciating (and I submit to your Lordships that it may well continue to depreciate), the likelihood is that outside the system we would expect to see some depreciation, some perhaps small, further depreciation, of sterling vis-à-vis the deutschemark. That would not be an option which would be open to us within the system. Within the system we should have to use monetary policy, and in particular higher interest rates, in order to maintain our parity with the deutschemark.

I must confess that this leads me, perhaps rather paradoxically, to the conclusion that there is a short-term case to be made out for our participation in the exchange rate mechanism, but I must say that I do not think it is really the case that is usually made. I personally have some sympathy for the proposition that we should enter the exchange rate mechanism, because I believe that it would be likely to lead to interest rates in this country being higher than they would be if we stayed outside it. I happen to believe that monetary policy at the present time is (shall we say?) a little incontinent. I happen to believe that there is a great deal too much credit floating around the British economy and that some greater stringency in monetary conditions would be desirable.

Of course, in these circumstances it may be argued—and I should be inclined to argue—that there might indeed be a short-term benefit in joining the exchange rate mechanism and having the obligation of the discipline to which my noble friend Lord Soames has referred. But I must say to your Lordships—did the noble Lord wish to intervene?

Lord Ezra

My Lords, may I ask the noble Lord how he would explain the fact that those countries which are members of the exchange rate mechanism and have varying strengths of economy, as one must accept, have nevertheless all brought down their interest rates in recent times?

Lord Bruce-Gardyne

My Lords, I am bound to say to the noble Lord that part of the answer is that they have not. At one time, the French Government were induced to have overnight money market rates of 2,000 per cent. I believe on the basis of experience that it is just not true to argue that the existing members of the system have been able to avoid very considerable fluctuations of interest rates, and it seems to me to be even more unlikely that we should be able to do so.

However, as I said, my sympathy for the notion of participation in the exchange rate mechanism at the present time is heavily weighted by short-term considerations. We seem to discuss this issue—and the noble Lord, Lord Lever, did in particular—as if the exchange rate mechanism has proved an effective stepping stone to a greater co-ordination and stability of international exchange rates. I see no evidence for that at all. On balance, perhaps for the reasons that I mentioned just now, sterling has shown slightly greater stability over the period vis-à-vis the dollar than the deutschemark system. I do not think that that is at all surprising.

That leads me to my final reservation which is a point that has not been mentioned. What would the impact of our participation in the exchange rate mechanism be on the mechanism itself? I know that today the participating governments are on the whole overwhelmingly enthusiastic that we should join in. I sometimes wonder whether their enthusiasm would be long lasting. I have a nasty suspicion that, owing to its persistent remaining international role and also because of its vulnerability—which I believe still exists—to sharp changes in oil prices, sterling could turn out to be a destabilising partner.

Once again I emerge in a condition of agnosticism. If in replying to the debate my noble friend can assure us that the primary purpose of government policy in the months ahead will be to ensure that domestic monetary conditions are directed towards the fulfilment and achievement of a continued progress towards zero inflation, I should feel that, even if by the back door, this debate had performed an extremely valuable purpose.

3.26 p.m.

Lord O'Brien of Lothbury

My Lords, I too think that we should be grateful to the noble Lord, Lord Soames, for returning to the question of full United Kingdom participation in the European monetary system after the somewhat cursory response that he received from the Minister on this matter on 6th May. He has given us a most eloquent and impressive statement of the case for joining the exchange rate mechanism. Impressive contributions by other noble Lords since, not happily all in the same vein, have left little for me to add. But perhaps I may be allowed to cross a few "t"s and dot a few "i"s.

On 6th May (at col. 584 of the Official Report) the Minister said: we are a full member of the European monetary system". With respect, I cannot accept that, and nor I believe would any of our Community colleagues. Only by participating in the exchange rate mechanism can we qualify as full members. At this stage, keeping 20 per cent. of our gold and dollar reserves with the European Monetary Co-operation Fund is no more than symbolic of future intentions, and it is those intentions which are at the heart of the argument.

I am among those who believe—and I have always believed—that it is in the best interests of the United Kingdom to make a wholehearted contribution to the greater unity of Western Europe and to do that through the agencies of the EC. Despite often repeated statements by the Prime Minister and other Ministers strongly endorsing that view, so far as I am concerned they do not carry complete conviction.

Doubts which I and many others have about the strength of this Government's commitment to Europe were, not unnaturally, much increased by the failure to join all the other members of the Community in the exchange rate mechanism when it was established in 1979. This mechanism was a real first step towards the greater unity to which those truly committed to Europe aspire.

The noble Lord, Lord Ezra, kindly referred to the subcommittee of the Select Committee on the European Communities which I chaired some three years ago and which studied the EMS at length and recommended that the UK should join the exchange rate mechanism. We concluded that over the years that mechanism had worked increasingly well and had served to minimise exchange fluctuations between currencies of the participating countries. We believed, and I still believe, that sterling would benefit from the co-operative support available to it within the EMS. Naturally, exchange rate adjustments are necessary from time to time as they are inevitably in any system or lack of it.

Those are made within the EMS in co-operation with fellow members and after full consultation, and the burden of adjustment, if such it be, is shared. I believe that support of our fellow members would minimise, not maximise, the need to increase interest rates. The United Kingdom has again just assumed the presidency of the EC for six months. We are told that it is most anxious to press ahead with the completion of the free internal market which President Delors and the noble Lord, Lord Cockfield, aim to achieve by 1992. Can anyone doubt that success on this front implies considerable advances towards a united Europe with closer harmonisation of fiscal and monetary policies and consequent greater stability of exchange rates within the Community?

The benefits of such stability would accrue mostly towards Europe but they would contribute also towards the greater stability of exchange rates worldwide for which Mr. Baker, the US Secretary to the Treasury, and Mr. Pohl, the President of the German Bundesbank, and others, have called in the past few days. Whether worldwide stability in exchange rates is achievable with a principal reserve currency—the US dollar—not convertible into a stable store of value such as gold used to be, and as the special drawing right in any wide sense has notably failed to become, I take leave to doubt, much though I desire that end. However, that does not mean that we should abandon that objective within Europe.

The Government would probably find little to quarrel with in what I have said so far. I believe that Sir Geoffrey Howe has recently said that we intend to join the exchange rate mechanism but in our own good time. The noble Lord, Lord Young, said much the same in this place on 6th May, adding that that would only happen when there was a clear balance of advantage in our doing so. I wonder what he is waiting for. He will not tell us. Well, it is not quite that. He did give us a hint in reply to the noble Lord, Lord Boothby, when he said: What we must do is, first, to have a sound monetary policy for the United Kingdom."—[Official Report, 6/5/86; col. 582.] The implication was that a sound monetary policy was not compatible with a fixed exchange rate. Who am I to deny that a fixed rate for sterling implies an interest rate policy suitable for internal and external purposes and that sometimes those may be at variance? But if they are, something more fundamental is wrong in the economy and would, in any case, have to be corrected.

I have never accepted the argument about the special circumstances of sterling as an oil currency, and who can do so now in view of its continued strength despite the dramatic fall in oil prices? Not unnaturally, many noble Lords have referred to that. Nor do I believe that we need to take seriously the horror stories put out by that admirable man Sir Alan Walters, apparently the Prime Minister's most respected adviser. He has said that if we join the exchange rate mechanism it will lead to the reimposition of exchange control, particularly over capital movements, to the reintroduction of a travel allowance, hire purchase controls, directed credit, corsets and all that. I have been through all that over many years, and I do not believe that any of it need return, even if our exchange rate is fixed but readily adjustable.

If a new government should reintroduce such outmoded and irrelevant devices for their own purposes, that is another matter and a very serious one for our country's future prosperity.

I conclude by reminding your Lordships that this Government have not said that they will not join the exchange rate mechanism at any time or at any price. On the contrary, they firmly emphasise their intention to join, but only when it suits them. When, some day, they conclude that the time is ripe and join, how can they know that the then prevailing conditions will endure? Are they proposing to go in and come out as conditions fluctuate, as of course they will, over the years ahead? Surely not! Meanwhile, many years have passed since 1979. Many friends in Europe have been disappointed by our behaviour, and when, if ever, we do join, the credit and esteem, let alone the advantages, that we might have gained by joining earlier will have evaporated.

3.36 p.m.

The Earl of Bessborough

My Lords, I am very glad that my noble friend Lord Soames has raised this question again. I greatly admire his persistence, and fully support what he has said this afternoon. I hope that my noble friend Lord Young might be a little more informative than he was the other day. I feel that the time has come for us to join the ERM, recognising that we already belong to the European Monetary System and make a considerable contribution to the European Monetary Co-operation Fund. As your Lordships know, I have been advocating Britain's full membership of the EMS for a long time. Indeed, in June 1978, almost exactly eight years ago, I went further, supporting Mr. Roy Jenkins, then President of the European Commission, in relaunching plans for economic and monetary union which had already been announced at the Hague summit in 1969 and which were subsequently supported by President Giscard d'Estaing and Chancellor Helmut Schmidt. In 1978 I regretted that the EMU target date of 1980 for European monetary union agreed at the 1972 summit had been abandoned.

I shall not now restate all the reasons why Mr. Jenkins and others, including myself, thought that monetary union would favour a more efficient expansion of commerce in Europe and why I thought that the removal of exchange risks and inflation uncertainties between member states would have a major confidence effect. I still believe this and consider that from the export point of view—other member states, as my noble friend said, take the largest percentage, 45 per cent. of our exports—exchange rate stability would be a great advantage to exporting firms. I am glad to learn that the CBI now supports that view. It is, in my view, negative and defeatist to say that if joining ERM increases our exports, it will also increase our imports. Do not let us be so defeatist.

In November of the same year, 1978, I thought that my noble friend Lord Soames made a very good case then for our being full members of the EMS. I liked his references to the increased use of the European currency unit. In January 1982 we had another debate on the EMS on the Motion of my noble friend Lord O'Hagan. Again, there was widespread support for our full membership and a recognition that the EMS exchange rate mechanism had so far been surprisingly successful. Then, in November 1983, as we have heard, we debated the report on the EC by the noble Lord, Lord O'Brien, which I strongly supported, having attended some of the meetings of his sub- committee and having already been a member of the Budget Committee of the European Parliament. It was good indeed to hear again from the noble Lord this afternoon that he has not changed his views. I said then in 1983 that I stood by all that I had said in 1978.

At that time, 1983—under three years ago—I thought that the time had come for our entry into ERM. This, I said, could be followed by further study of the feasibility of full monetary union, without which I do not think we can have an effective internal market, which the noble Lord, Lord Ezra, mentioned, and which I know the Government want. Also in 1983 I advocated the creation of a common reserve fund and a European central bank. All this is in the future but it is, I believe, what should follow.

As my noble friend, Lord Soames, said, it is many years that we have been considering this matter, and doing so in depth. Each time we debate it I think that the moment is even more propitious, although I must admit that I think it would have been even more appropriate if we had joined as full members of the system at the outset in 1978, and thus have avoided giving the impression that we were not really wholehearted members of the Community.

I have been reading with great interest an admirable new book by Mr. Christopher Tugendhat, who was, like my noble friend Lord Soames, a commissioner in Brussels. He was a commissioner for eight years and a vice-president for four years. The book is entitled Making Sense of Europe. It is a very realistic, down-to-earth assessment of the state of Community affairs. References to the European monetary system run all through the book and I cannot summarise all that he says. There is, however, an excellent section on the European currency unit towards the end of the book. I like his references to the fact that procedures such as EMS have the potential in time of deepening the habit of co-operation to the point where it becomes accepted by public opinion and governments alike as the normal framework within which member states conduct their affairs; and that the EMS is among measures that can be appreciated by the general public as well as by the cognoscenti and thus strengthen the bonds between people of the member states themselves.

I think that Mr. Tugendhat agrees with others in your Lordships' Chamber that three things need to be done. First, Britain should join the exchange rate mechanism. Secondly, Germany should accept the ecu as a foreign currency. Thirdly, France and indeed—as the noble Lord, Lord Ezra, said—Italy should demolish their exchange controls. It looks as though the new French Government are beginning to do so. There are also signs of a change of mood in Germany. It would be nice to think that Britain would also play its part since it is in effect shadowing the EMS currencies. I agree, therefore, that there would seem to be both external and internal reasons for once again reconsidering the question of British membership.

I have read no less than three recently published volumes about the EC, all of which make a valuable contribution to thinking about the future of the Community. But I think that Mr. Tugendhat's book is by far the best and I hope it will win a prize. I strongly recommend it to your Lordships. I think that we should all congratulate him on becoming chairman of the Civil Aviation Authority—although this is not a purely European body.

It is very interesting to note how the use of the ecu in private markets has been expanding. Yet I would still ultimately like to see full monetary union. This would bring all the advantages to Europe of a major international currency. As I said in 1983, I know from personal talks with members of OPEC that they might welcome an alternative currency for quoting oil prices even if they continued using the dollar as well. In my view, joining the ERM would be a step in the right direction.

As my noble friend Lord Soames has said, the great majority of those closely concerned with these matters now seem to favour our joining, with the exception, as we have heard and as we have read in the press and as my noble friend has said, of Professor Alan Walters. I sincerely hope that the professor has not permanently closed the door of No. 10.

In the Daily Mail last Tuesday Andrew Alexander argued that if Britain joined the EMS and sought to peg the pound there would be a real loss of room for manoeuvre, and that our joining as full members of the EMS would signal a loss of nerve. Personally, I take exactly the opposite view and believe that it is our hesitation in joining the ERM that indicates a loss of nerve. In my view greater confidence would be created if we joined, so that the EMS would not continue to be described, as my noble friend Lord Bruce-Gardyne has described it, as "mainly a deutschemark system".

Therefore, I hope that we shall not have to wait until after the next elections before we join. I wholeheartedly support my noble friend in all he said. I believe that we should do everything to avoid volatility of exchange rates. Paul Templeton, in his recently published Guide to UK Monetary Policy, refers to the widespread calls for a return to the use of a fixed exchange rate as an intermediate objective in current circumstances and to the fact that full membership of the EMS is one of the more obvious ways in which that objective might be expressed. While I believe that, I also think, along with the noble Lord, Lord Lever, and others, that we must take into account political aspects of the problem as well as purely economic and monetary considerations.

I may add that I hate being repetitive in matters such as this, and I assure your Lordships that I am no Eurofanatic. However, as some people maintain, you have to repeat something many, many times before it is accepted by a sufficient number of people. Therefore, I do not apologise for being a little repetitive this afternoon, and I thank my noble friend Lord Soames for having given us this further opportunity to reiterate our beliefs.

3.48 p.m.

Lord Williams of Elvel

My Lords, as a relative newcomer to your Lordships' House, I find that this is the first time that I have been able to take part in a debate on the European monetary system. However, I understand from the contributions which have been made this afternoon that this has been a fairly long-running saga in this House, and no doubt we shall have more occasions on which to debate the matter. In the meantime, I must also express gratitude to the noble Lord, Lord Soames, for raising this important issue in this House even if it comes as last business on Friday, and that at the end of what has been rather a tiring week for some of us. I think that it merits the attention that your Lordships are giving it this afternoon.

I have also been very impressed by the distinguished contributions that noble Lords have made to this debate. I must say a special word to my noble friend Lord Lever of Manchester. I am most glad to see my noble friend in his place and hear him speaking as trenchantly as always on matters with which he is deeply concerned.

Although the noble Lord, Lord Soames, has addressed his Question to the Government, it is a matter which, as we see this afternoon, all sides of the House must address, since governments do not last for ever and sooner or later—and I hope sooner rather than later but I cannot expect support from the Front Bench opposite on that particular point—the Government may change and the then government will have to respond to the Question, assuming that it is still on the agenda.

The presidency of the European Council set out the aims of the European monetary system very clearly at its inception in 1979: The EMS will facilitate the convergence of economic development and give fresh impetus to the process of European union.

We come face to face with two major themes which underlie the EMS. The first is convergence of economic development and the second is impetus to the process of European union. If the United Kingdom became a full member of the EMS by joining the exchange rate mechanism we would have to do so either in the spirit of those aims or because we genuinely believed, in the light of the policies that were being followed at the time by the Government of the day, that doing so was in our own national advantage. It is no secret to your Lordships that we on these Benches do not approve of the present Government's economic policies and we should like to change them. We should like to adopt a remarkably different economic stance. Convergence on the policies that are presently being pursued make no sense to us at all. If entry into the exchange rate mechanism were to inhibit us changing those policies, we are bound on those grounds to be opposed to it.

There is then the second aim spelt out by the European Council and this was referred to by the noble Earl, Lord Bessborough, the noble Lord, Lord Ezra and, indeed, by the noble Lord, Lord O'Brien; that of giving fresh impetus to the process of European Union. This is, with due respect to noble Lords, what I would call a somewhat theological position. One either believes that this is possible, desirable and practical or one does not. I do not think it is an easy thing to argue about in factual terms. We on this side are rather sceptical about both propositions, whether either European monetary union in the full sense, or European union in a political sense is practical or desirable. We were sceptical even before the entry into the community of Spain and Portugal, welcome though that is and the widening of the Community has increased our scepticism on that point.

If I may add a personal note here, I have lived long enough in France, Belgium, Italy and Germany to know the problems of European union at the working level. When you spend four years working in Paris in a French bank you understand what the problems are; they become all too apparent. The theological argument, if I may say that without disrespect, has little appeal to us and I doubt it ever will. We have therefore to consider the matter from the point of view of our strict national advantage.

This for us is all the more difficult in that we have to look ahead perhaps two years and to try to estimate the effects of a new set of economic policies. We have to take a view on whether full membership of the EMS, in the sense of joining the exchange rate mechanism, would act as a serious constraint on any part of economic policy that we wish to put into effect. In calculating the balance of advantage and disadvantage, I must start by saying that I doubt whether the mere membership of the exchange rate mechanism would, by itself, necessarily stop a new Government from doing what it wanted to do. But the expression "by itself' begs the question of the entry sterling-ecu relationship and, second, because to date it begs the question of convergence. The noble Lord, Lord Ezra, pointed out that recently there has been some degree of convergence other than on the general reduction in the rate of inflation but up until that point I think he would agree that such convergence has been relatively modest during the period of the EMS.

Nevertheless, it has to be said that there is nothing Britain could do in the ERM which could not be and has not been done outside it. It cannot be denied that entry into the ERM would potentially reduce the UK Government's power—such as it is, in today's world of the variety of financial instruments, swaps, options, futures, and so on—to manage the exchange rate and domestic interest rates to their best advantage. Equally, it cannot be denied—here I take issue with the noble Earl, Lord Bessborough, I am afraid—that the deutschemark is the dominant currency within the EMS and is perhaps becoming progressively more dominant over the years. I have serious questions about whether it is possible—here I join the noble Lord, Lord Bruce-Gardyne—to accommodate within the ERM two international currencies which may vary according to different criteria at different times without some very close arrangement between the United Kingdom authorities and the German authorities on how to stabilise the relationship between the currencies. The Bank of England, in its evidence to the Select Committee of another place, did see major problems in that.

Finally, it is clear that the UK economy is going to have to adjust—indeed, may have started to adjust—to the decline of North Sea oil as a major contributor to gross domestic product and, above all, as a resource which has masked, and some would say has provoked as well, the alarming deficits that have appeared under other headings in our international accounts. In other words, the United Kingdom economy is in a process of transition from an oil-related economy to a non-oil-related economy. That transition will take time and will be complicated. I am doubtful whether the membership of the exchange rate mechanism will contribute to that process.

The advantages of being in the exchange rate mechanism have been put by a number of noble Lords, notably of course the noble Lord, Lord Soames: greater strength against currency fluctuations, particularly the problem of overshoot, to which the noble Lord, Lord Soames, referred. He cited the case of the period 1979–81, when there was a substantial overshoot in the adjustment of sterling to dollar as a time when we had relatively high interest rates and we were regarded as a petrocurrency.

He also referred, and other noble Lords also referred, to the disciplinary effects, if you like, of linking sterling to what I believe is very much a deutschemark parity; but let us for the moment call it a ecu parity, on the assumption that this discipline would not entail a series of either frequent realignments because we were out of line, or on the assumption that we could not control our own rise in real earnings in a sensible manner. Either of these two things I think would be very difficult for us to stomach.

I confess to being somewhat less concerned about the immediate problem of the exchange rate at entry, were we to enter, largely because I believe that the "appropriate rate"—and I deliberately use the words in inverted commas—is, in fact, a moving target. One cannot simply decide today that this is the rate, and that is there for all time. There have been of course elaborate statistical analyses of the competitive position of the United Kingdom, but I am not sure that they really add up to all that much. Because I believe that if it ever got out—if the noble Lord the Secretary of State said this afternoon—that the Government has changed their mind and had decided, after all, to join the exchange rate mechanism, the financial markets would take that on board, very, very quickly and we might find that the rate of entry was set pretty quickly by the markets in a very short period of time. That is the way the financial markets nowadays work.

My own preference—and it is a pure personal preference; I have no very strong feelings about it—is to adopt what I think some of the Community officials were saying to the Select Committee in another place: that if we are going to do it, we should, as it were, jump into the pool and, afterwards, when we had been there for some time, we would see where we were and be prepared to negotiate an appropriate realignment. I realise that is not something that the noble Lord, Lord O'Brien, as I understand from what he said, would be very happy with. We would like to see a rate at the start and stick to it, but I do not necessarily believe that is the right way to go about it.

Lord O'Brien of Lothbury

My Lords, I can see nothing against a subsequent realignment. It seems to me that the benefit of the system, as it has shown over its years, is that realignments can now be effected really quite easily.

Lord Williams of Elvel

My Lords, I am grateful to the noble Lord for his intervention. I perhaps misinterpreted what he said and, if so, of course I apologise. I personally believe that would probably be the best way to do it.

If we are going to go into the exchange rate mechanism, I think your Lordships and the Government will have to recognise that we on this side of the House are relatively lukewarm about the prospect.

Lord Lever of Manchester

My Lords, not me!

Lord Williams of Elvel

We will wish, if we form the next government, to pursue our own policies. If full membership of the EMS is compatible with our policies, and the price of entry looks not unreasonable, we are certainly not going to rule it out. We would be much encouraged, however, if entry into ERM and full membership of EMS would be accompanied by a programme either of co-ordinated European expansion, which has been much discussed, or, as my noble friend Lord Lever said, if it were accompanied by some serious initiative which could persuade us that entry into the ERM was a valid way of doing what G5 has been trying to do and get greater international monetary stability. That is an objective which I am sure my noble friend Lord Lever and I both share.

I must say that, like the noble Lord, Lord Bruce-Gardyne, I am rather sceptical about whether those desirable objectives can be given to us; but the recent remarks of the United States Secretary of the Treasury and of the chairman of the Federal Reserve Board in Boston seem to have fallen on rather stony ears, at least in West Germany. But in the course of time (who knows?) these attitudes may change and better arguments than the present ones may be brought forward for persuading us that joining the ERM would give a substantial boost to the possibility of achieving some form of international monetary stability and solutions to the national debt problems, to which my noble friend Lord Lever has referred. If that can be shown, clearly that is an argument we must pay attention to, but in sum we prefer to await developments and see what the situation looks like should we be in government in a year or two's time.

We do not believe this is a matter of political faith—the Sabbath was made for man, not man for the Sabbath—and we certainly do not subscribe to the view held in some quarters that our domestic problems will meet a magic solution if we join the exchange rate mechanism. We are in a period when it is fashionable to call for entry, but we should be wary of fashion. We prefer to stand aside; but, in the words of John Milton, They also serve who only stand and wait".

Lord Boothby

My Lords, before the noble Lord sits down, may I ask him whether he realises that looking at problems from a purely national point of view, which is what he advocated, has been directly responsible for two world wars in this century?

Lord Williams of Elvel

My Lords, I am not sure what the noble Lord, Lord Boothby, means by asking that question, but clearly there have been two world wars in this century and clearly there has been a problem of nationalism. What I was trying to say, if I may explain myself a little further, is that it may be in the national interest and to our national advantage to co-operate in the way that my noble friend Lord Lever has described; but I think we need to be persuaded of that.

4.2 p.m.

Lord Young of Graffham

My Lords, I am grateful to my noble friend Lord Soames for raising this matter this afternoon, though I must confess that at times during the debate on the snake, listening to his persuasive guile I wondered whether I was not listening to the snakecharmer himself! I listened very carefully to what he had to say. He said to start with that my noble friend Lord Cockfield had said one thing some years ago and I another last month. That may be, but the world moves on, times and conditions change and we have to look at the world as we find it today. However, the one statement or implication I did not make was that we did not listen to the views of your Lordships' House.

I think it is only fair to say that this afternoon I could hardly stand here and say that today we are about to joint the ERM. That is a matter for my right honourable friend the Chancellor of the Exchequer. Nor will I be standing here this afternoon and saying that we are not going to join. It is the Government's intention to join in due course. What I can say is that I shall draw all the arguments that have been advanced today to the attention of my right honourable friend and my colleagues. I am sure they will take them all into consideration.

If I may come back for a moment to the arguments advanced by my noble friend Lord Soames, he says that greater investment is the key. In each of the past three years we have had in each succeeding year record capital, fixed capital investment in this country. My noble friend pointed out that wages are going up. That is true; but, I must say, so is productivity. However, the really crucial figure is that for unit labour costs. What concerns me and, I hope, all your Lordships is that in this matter of expectation of annual pay rises the United Kingdom has turned in to some kind of super-tanker which is finding it increasingly difficult to change course. We must change course and put behind us this collective memory of annual pay rounds, and must adjust to the new conditions of inflation—

Lord Bruce-Gardyne

My Lords, I apologise for interrupting my noble friend. I listened very carefully to what he said just then, but if we want to break the tradition of an annual pay round then what are we doing having great pay advisory bodies to perform precisely that service for us?

Lord Young of Graffham

My Lords, I well hear and understand what my noble friend says. That is, of course, another matter, and one to which I would be happy to return at another time. But perhaps I may turn to the noble Lord, Lord Lever, who gave us, as he always does, a global view of the ebbs and flows of the international monetary system and looked, as we should all be looking, for international monetary stabilisation. Of course, joining the ERM and being an even fuller member of the EMS is only part of it. I suspect that it requires more than just that.

The noble Lord was absolutely right to draw attention to the rise in protectionism. It is a danger of which we should all be aware. I am not sure, though, whether joining would accelerate or slow down the danger of protectionism. That, I think, has other causes, and we must look for other remedies. But I am grateful to him for the doctrine of "unright time". It is a doctrine which I shall remember in my future discussions with the Treasury.

The noble Lord, Lord Ezra, recounted to us this afternoon the history of the number of times that this subject has been debated, and I realise that I have come along at the tail-end of a very long discussion. But may I confirm to all your Lordships that it is our intention to join the ERM when the time is right, and that that is the matter which we are debating. It may well be that assuming the presidency is another factor in our considerations. But I should like in a moment to come to the factors which will help us to decide whether or not the time is right.

I am grateful to my noble friend Lord Bruce-Gardyne for drawing attention to the factors outside the ERM with which Europe must deal; in particular, the agricultural policy. That, certainly, is a matter which is imposing contraints and with which we must deal. I suspect that it will have more to do with our future monetary stability than whether or not we join the ERM. My noble friend certainly gave his view that he did not believe in divorce, at least so far as the ERM is concerned; and I rather liked his reasons why he thought joining would raise interest rates, when most of your Lordships thought it would lower them, which at least shows there is some room for different opinions.

If I may say so to the noble Lord, Lord O'Brien, I regret that he considered my response to have been cursory when we discussed this topic on a Starred Question. But there is little opportunity to go into an exhaustive discussion of something which, according to the traditions of your Lordships' House, is really set down for a very short answer rather than for debate. The noble Lord wondered whether we are committed to Europe. We certainly are. The whole discussion is not about whether we join, but when we join. Indeed, to put up the argument that, even if we join when the time is right, circumstances will change and it will become difficult, is no reason to say that we should therefore join when the time is not right. We should at least ensure that, when we do join, we do it when we think we will be able to do it with the greatest efficiency.

I am grateful to my noble friend Lord Bessborough for giving to me a book with the slightly ambitious title, Making Sense Of Europe. If it does, I shall assuredly read it. He looked beyond the ERM to full monetary union, which is the right direction and the direction which we should certainly follow. If I may say so, I slightly regret not so much the surprise I had that the noble Lord, Lord Williams of Elvel, did not approve of the Government's monetary policy, but the fact that he would reserve his position in quite such definite ways. I had hoped very much that we would all see the objective of joining the ERM. The objective of working together with all countries in Europe, whatever their political persuasion, is one which all your Lordships would share.

The question is not whether we are for or against Europe, because our commitment to constructive membership of the European Community is surely beyond doubt. If we look in the financial area we see how often we have taken a lead in Europe. We have freer capital markets, with fewer restrictions on access or freedom of establishment than any of the other member states, and we are pressing hard within the Community for the removal of restrictions on trade in financial services.

Nor is the question whether we are for or against financial discipline. Maintaining a fixed exchange rate against countries who share our resolve to reduce inflation could certainly be a robust way of keeping financial policy on the rails. But there are other ways of achieving the same objective. Our record—with the rate of inflation now down to 3 per cent.—speaks for itself. Nor is it whether we are in favour of exchange rate stability. It clearly makes sense to limit wild swings in the exchange rate. This applies both to movements against those currencies represented within the system but even more to those such as the yen and the dollar, which are still very important to our trade, but are outside. Membership of the mechanism—which I need not remind your Lordships has itself gone through several realignments since 1979—even though it may help is clearly not by itself enough to achieve this.

Nor is the question even whether we are for or against international co-operation on exchange rates. We have played our full part in the Plaza agreement and subsequent discussions in the IMF Interim Committee and elsewhere alongside not only other major European countries but also the United States and Japan. Nor, finally, is the issue about what the right level of sterling against the deutschemark might be. Experience shows the futility of trying to make judgments of this kind, particularly since finding the right level is often seen as an easy alternative to maintaining domestic discipline on industrial costs.

The question before us is none of these things. It is whether membership of the exchange rate mechanism, with all that involves, would provide a more effective and safer means of achieving our economic objective, the pursuit of stable non-inflationary growth, than the strategy which the Government have successfully pursued for the past six years. It is a complex technical question, with practical arguments on both sides.

One aspect of this is that, unlike most of the other ERM currencies except the deutschemark, sterling is a widely held and internationally traded currency. It is, moreover, a currency to some extent subject to different and often opposite strains from those that affect the other currencies currently in the system. This is principally but not entirely because of its sensitivity to the price of oil. The reduction in the price of oil, and the more balanced view which the market now appears to take about the importance of oil to the United Kingdom, have probably reduced the importance of this petrocurrency effect. But it is still one to which we have to give due weight. Apart from anything else, the price of oil can go up again, and all things can happen.

Apart from oil, the other major factor in the exchange markets in recent months has been the movement of the dollar, which has given rise to very substantial adjustments by other currencies, not excluding those within the exchange rate mechanism. Since February last year the deutschemark has appreciated by 51 per cent. against the dollar, the French franc by 45 per cent. and the yen by 54 per cent. The movement of sterling over the same period has been 45 per cent. This is the background against which we must judge the question of membership of the exchange rate mechanism. In doing so, we must recognise that to join would bring about a significant change in the operation of the system itself. At present, the deutschemark plays a dominant and central role. The addition of sterling would undoubtedly introduce an element of bipolarity into the system with which it has not so far had to cope.

Lord Lever of Manchester

My Lords, if that is so, can the noble Lord tell us why we should ever go in?

Lord Young of Graffham

My Lords, because it is a factor that we have to take into account. Of course we have said we should go in, but what I am trying to show to all in your Lordships' House is that it is not a simple step of just moving in. It is a factor that we have to take into account.

This Government have so far followed a slightly different route to success in combating inflation and restoring growth from those followed by some other Community countries but one which has proved equally effective. But we have said that we will keep the question of membership of the exchange rate mechanism under review and will join it as soon as we are satisfied that there is a clear balance of advantage in so doing.

I have been asked to indicate the circumstances in which we would consider that that condition was met. To some extent I fear that I must disappoint your Lordships. If I were to say, for example, that we would join the mechanism when oil prices reached one level, or the exchange rate with the franc one rate, the deutschemark another, and the dollar a third, then the speculation that would result if those conditions looked like being satisfied can only be imagined. For the complexities of the situation that I have outlined simply mean that it does not make sense to provide a simple checklist of that kind. The judgment has to take account of a wide range of factors, both domestic and international. It is impossible to set out in advance the ways in which they would have to interact, to justify a decision to enter the mechanisms. Nor, I might add, would it make conditions in the exchange markets in the period leading up to any decision to join any easier if I were to be any the more specific today.

In all the circumstances I fear that it would be unreasonable for a responsible Government to take any other position. What I can say is that when we say that we shall keep the question under review, that is what we will actually do. Our essential objective is the defeat of inflation. We have succeeded in bringing inflation down to 3 per cent. and I am continually reading in the press that that figure is likely to fall even further. But I will ask my right honourable friend the Chancellor of the Exchequer to read all the arguments that have been advanced today and consider whether that time, within the doctrine of unripe time, has yet arrived. I have no doubt that he will make the decision at the very first moment that he feels it is prudent and wise so to do.

House adjourned at seventeen minutes past four o'clock.