The World Economy

HL Deb 02 December 1987 vol 490 cc1062-124

3.11 p.m.

Lord Thorneycroft rose to call attention to the state of the world economy and its effect on the United Kingdom; and to move for Papers.

The noble Lord said: My Lords, I rise to move the Motion standing in my name on the Order Paper and to welcome those noble Lords who have expressed their intention to take part in the debate. In particular, I welcome the maiden speakers—my noble friend Lord Crickhowell, who is sitting here beside me in, I hope, a broadly supportive role and my noble friend, if I may call him so, Lord Jay, who has played a large part, and has had great experience, in a department in which we both served. Last, but by no means least, I welcome the noble Lord, Lord Richardson of Duntisbourne. There are few men in this country better qualified to address themselves to these questions than the noble Lord, Lord Richardson, with all his experience. We look forward to what he has to say.

These are grave and difficult matters. Despite all that has been said and written, nobody has claimed to know precisely why the New York Stock Exchange crashed when it did and no one has really said, or knows, where these events may end. Therefore, this is not really a debate for dogma or, I should have thought and as far as I can see, for party division. In other words, it is a debate eminently suited to your Lordships' House.

It is said that no man is an island, and I believe that to be true. However, it is true also of nations. It is perhaps particularly true of this United Kingdom. We depend enormously upon what is going on in the other parts of the world. We need a prosperous, free trading, non-protectionist world. Those must be the thoughts in our minds as we address ourselves to these matters. We export from this country more per head than the United States and more per head than Japan. If anything happens to interfere with our trade, it has a disastrous effect upon our own economy.

I start with the good news. The good news is that we are in much better shape than we were five or six years ago. I do not exaggerate this part of my argument. There are plenty of things wrong, and other noble Lords will no doubt point out what they are. Your Lordships' House has expressed doubts about the uses of research and there is the report of the noble Lord, Lord Aldington, on manufacturing industry. There are many aspects which could be commented upon, but I believe that, reading the reports on this country and looking at what the CBI is saying, with production moving in the right direction, productivity moving and profits up, most people would agree that, by and large, we are in a stronger and sounder position than we were five years ago.

It is more than statistics, it is an attitude of mind. A few weeks ago I was touring a factory in the North of England. It was busy introducing one of these management schemes; this was called "Just in Time". The object is to get materials and manufactures to the right place at the right moment in order to minimise the cost of stocks and work in progress. It is a system that demands an enormous amount of co-operation and willingness on the part of both management and the shop floor. The shop steward said to me, "Lord Thorneycroft. I think we ought to be grateful for the Japs". I will quote what he said in the vernacular. He said, "If it wasn't for the Japs we'd still be sitting on our arses glaring at one another." In a sense, that shop steward had the guts of this debate. There is no hiding place. Unless we are prepared to compete and to match our ability against that of other countries we have not much hope of doing as well as we should.

We are, therefore, in a good position in every way to face whatever it is we have to face. What is it we face? I do not think that it is disaster. What we do face is a new era. We have seen the end of an old one. For many years now a booming American economy has led this world, like a great locomotive pulling the other economies of the world behind it, financed by borrowing and based upon huge deficits. There is no particular reason for not having a deficit. In the great Victorian era this country ran a huge deficit but ran it against the background of substantial overseas assets. The Americans have been running a deficit against the background of huge overseas debts. That era has come to an end. I can see no spare locomotive to take over from the Americans. America is not going back to the situation that existed before the Wall Street crash. It is, therefore, an entirely new situation.

I do not believe that we should be too censorious of the Americans. I say that for many reasons. We owe them so much in so many ways. No one has enjoyed the American bonanza more than we have. We have sold them everything in sight. We have sold them aircraft engines, whisky, hotel rooms, services—you name it, we have sold it. We have watched our Stock Exchange moving up behind the Dow Jones index and enjoyed every moment of it. Therefore, I do not believe we ought to be too critical. Moreover, in my political life I have met many people who believed in borrowing and spending. It has been part of my life meeting people who want to borrow and spend.

In 1981, 364 economists in this country were busy rebuking Mrs. Thatcher for closing the deficit. They thought that it was a foolish, pedantic thing to do. Even the Labour Party knew the words "borrow" and "spend", although I am not making party points. Even the "two Davids" (in the years when happily there were "two Davids") were keen on that policy. I remember there being a debate about it in the other place. In a way, only Mrs. Thatcher was against borrowing and spending, and she was dramatic about it.

It is not the time to blame, rebuke or lecture the Americans; it is a time to recognise that we have a new situation, and to decide how best to deal with it. There is a certain inevitability about what lies ahead. If the Americans do what everyone is telling them to do—that is to say, if they spend less and tax more and close their overseas deficit—that will be good. But it will be uncomfortable for us. It is no good howling for it and then complaining when it happens. It will mean a downturn of activity for us. But, if they do not, the dollar will fall still further.

If the dollar falls still further, the Americans will buy less from us; exports will be more difficult, and then perhaps in even more uncomfortable ways we shall face a downturn. There is now an inevitability in this situation.

Sometimes I read that if the Americans did something, or we did something, or the rest of the world did something, somehow we should all return to where we were in those earlier happy days. It is not true. We are facing some inevitable downturn of activities in America—not disastrous, but real. That must be faced.

We are still a rich country, and America will still be a rich country. The world will still offer enormous opportunities for trade. If we look at these things from the point of view of a manufacturer or someone running a service industry—I know many of them—we are not talking about recession in those areas; we are looking at our management plans for next year. We expect an expansion, but not on the same scale as before. Growth will be a little slower, but it will be there.

We think that our shares are much too low, unless they are discounted for a slump. But we are not planning for a slump; we are planning for steady, cautious, determined growth in our trade. If we could get that message over to as many people in the world as possible, it would be a good thing.

What then do we do? I shall be brief about this. First, we shall not solve America's problem by adopting the very policies which caused it; in other words, it is no good us suddenly turning to a policy of gross overspending in the hope that somehow that will cure the position. It would be folly to do that. We need to pursue the policy of sound money, prudent finance and living within our income. Where can I have heard those words before? Mrs. Thatcher uses them frequently, but they can never be said too often. This country's basic policies must be broadly those and "steady as she goes". We do not want to abandon those policies. They have given us the strength which we so deeply need.

My second point is about protection. The greatest danger that we face is that of protection. In some ways, protection would be a soft political option for the United States at this time. If they adopted protection, there would be wide repercussions and retaliation by the rest of the world. No series of actions could cause us more harm than that. Our aim therefore should remain to secure wider trade. For that, we need international co-operation. The signs are good. I note the Japanese acceptance of Cable and Wireless. It is an indication of that co-operation. There is the German determination to increase investment in that country. There are the statements of my noble friend Lord Young of Graham, to whose speech we shall listen presently, and to which we look forward, about the world trade in telecommunications systems.

We sell enormous quantities of goods to Europe. but the ideal of the common market in Europe has hardly got off the ground. It is marked by a massive misuse of resources in agriculture, and, in many cases a closed shop in telecommunications and high-technology products. At any time, but especially at this time, it would be of immense help, not only to us hut to the rest of the world, if we could open up those markets in the way that my noble friend Lord Young has been talking about.

My third point relates to exchange rates. I ask the House to fasten its seat belt while I talk about exchange rates. I was active in politics at a time of fixed exchange rates. One tried everything in one's power to hold the value of one's currency. If one failed, it was a terrible black. I shall never forget poor Sir Stafford Cripps. It nearly killed him when he had to devalue the pound. These mechanisms all move together. If one holds on to one hit, the other starts to judder somewhat. While we held the exchange rate, we had a great deal of stop and go. The industrialists were critical of that, and so we moved to flexible exchange rates. The industrialists did not stop criticising, because although trade may have been a bit steadier, the exchange rates then started to go up and down. That, they said, made it impossible to plan their futures.

We seem now to have moved to a kind of hinterland between the two. We have the Louvre agreement. We are more or less acting as honorary members of the European monetary system. I am not going to say what people should do, or to rebuke them for not doing it, but I would make three observations. I do not think one should try too hard to support the dollar unless one is certain that one knows whether the Americans wish it to move up or down.

The central bankers have just put in 500 million dollars to support the dollar. It is absolute peanuts! One of them was quoted as saying that there was no sign or signal from the United States that the Americans were prepared to support the dollar or to prevent it from falling further. This is a difficult moment to support the dollar, even with 500 million dollars. Nor do I think that we should fling money at that until we are clear that the Americans intend to do something at their end to alter the basis of their own economy to hold the dollar.

Last, but by no means least, I agree with what the economist from Hoare Govett said this morning. Those actions are only a palliative. We shall not solve the problems of the world by tinkering with the exchange rates. We must go back to basics. We have to have our own affairs in proper order if we are going to make a contribution to them.

That brings me to my conclusion. We face not a disaster but a challenge. We face it at a moment when we can speak from considerable strength in our economy and in the standing of our Prime Minister and our Government. We should fight protection by precept and example in every way we can because that is the biggest danger that we face. I applaud the Government for their courage, confidence and common sense. I beg to move for Papers.

3.31 p.m.

Lord Bruce of Donington

My Lords, the House will be grateful to the noble Lord, Lord Thorneycroft, for having moved this Motion this afternoon, and for having showered his benevolence upon us and upon the deliberations that we shall have.

Before passing any comment on the words that have fallen from the lips of the noble Lord, I should like to join him in giving an anticipatory welcome to the three maiden speeches that we are to hear this afternoon. We on this side of the House will he extremely interested to hear from the noble Lord, Lord Richardson of Duntisbourne, who played such a prominent part in the financial affairs not only of the United Kingdom but in realms quite significantly outside it. I, and I am quite sure the House, will welcome the speech of my noble friend Lord Jay, who is a distinguished economist and who played a distinguished part in a former Labour Government. Finally, since the Principality of Wales is not exactly under-represented on this side of the House, we shall welcome the partial redressing of the balance by the noble Lord, Lord Crickhowell, whose contribution we shall be very interested to hear.

The Motion is to call attention to the state of the world economy. The noble Lord, Lord Thorneycroft, will forgive me if I say first that he attempted no such tour d'horizon; and the House will also be relieved that I do not intend to do so either. However, the state of the world economy and the national economy depends upon the point from which one is looking at it. Nobody would dispute that for those in that part of the economy that is working, it is working quite well. Similar observations could be made about various parts of the world. The United States economy, in spite of the reverse, is working reasonably well but with a reduced prospect, and with still a considerable amount of unemployment amounting to some 5 per cent.

The centrally planned economies are working moderately well with a small rate of growth and some internal dispute as to the way in which their future production consumption should be organised. All this we understand. The developing countries over these past three years have been doing rather better although they are beset with problems relating to their international debt. I refer to those in Africa, and even more to those in South America where debts of some 400 billion dollars are reckoned on a resale basis to be worth some 200 billion dollars. That is a fact which is already causing some distress within the international banking community and may still be some cause for alarm within the international financial framework which is so closely interconnected country by country.

However, there is a larger part of the world economy that is not working. There are people who are part of the resources of the world economy huddled in little shanty towns in Mexico, South Africa and indeed in some parts of Europe, who are not partaking in the economy at all and who are a shocking waste of the resources. When one is talking about the world economy, or indeed the national economy, one must bear in mind always those millions of people—no fewer than 15 million people in Europe—who are not taking part in the economy at all. Any judgment as to the future of the world economy or the European economy must take account of that.

It is noteworthy that there have been some objective views as to which way the economy will go. One of the principal views was given at a time when there were 1.61 dollars to the pound, 144 yen to the dollar, and 1.80 deutschemarks to the dollar, compared with 1.80 dollars to the pound today, 133 yen to the dollar, and 1.65 deutschemarks to the pound. Those observations were made in June. If they were good then they portend even worse now.

The European Commission report published at the end of July, said this, and we should note it well: The slowdown in growth in the Community is now confirmed. In 1987, and probably in 1988 too, gross domestic product in the Community is unlikely to increase much more than 2 per cent. per annum. Unemployment remains at around 12 per cent. Even if the growth rate were to pick up to 2½ per cent. a year, this would not improve the entirely unsatisfactory employment outlook. The slowdown is due primarily to a less favourable international environment. The dollar's depreciation has been greater and world trade is growing more weakly than expected last autumn … This unfavourable trend for growth potential and employment seems set to continue in 1987 and 1988. Those words were written in July of this year, before the crisis occurred to which the noble Lord referred. How much more do those predictions have force now!

If I may say so with respect, the noble Lord is not entirely correct in saying that this crisis suddenly blew up and was completely unforeseen. Not a hit of it, my Lords! It was quite clear to many of us in the City that equity share prices were grossly over-valued in relation to their net maintainable revenues, and that all that was sustaining them was a continuing optimism of the bull market. We knew—and incidentally the Chancellor of the Exchequer should have known—that the bull market would come to an end, and on the basis of share valuations would probably come to an end fairly quickly. At any rate, it was not unexpected. If it was unexpected to the Chancellor, it should not have been. I agree with the noble Lord, Lord Thorneycroft, that it does not lie in the mouth of Mr. Lawson to rebuke the United States in this matter. He was a member of the Government when in the early 1980s the dollar was standing at 2.40 to the pound, much lower in terms of value than today. At that time his Prime Minister, far from commiserating or showing alarm, was boasting in another place that at last the pound could look the dollar in the face. With the exchange rate bolstered at that level, and with a ridiculously high interest rate going up to 17 per cent., as I have said before, she half-decimated British industry.

But the noble Lord has a point. We are in a very insecure position. Even the most optimistic City forecaster would not like to sustain or even half-sustain the output predictions that have been made for next year and the succeeding year at anything like the level that has been adumbrated. We are insecure. The noble Lord said that we must get back to basics. Of course we must. But it depends what the basics are. I well remember—and it will be within the recollection of the House— that in the course of debate last week, in a reply, the noble Lord, Lord Young of Graffham, said that I was speaking in the language of the 1950s and therefore I was old hat. Believe me, my Lords, the policies being followed at the moment by Her Majesty's Government—which as the noble Lord, Lord Thorneycroft, has more than once said cannot possibly influence employment: that is outside the control of governments—are almost an exact replica and as old hat as those pursued in the 1930s when the sole reliance on market forces was supposed to be the answer to all our prayers. In fact it proved to be quite the reverse.

The noble Lord, Lord Thorneycroft, was very careful not to stray too far outside the oasis of generality. The main theme used by the Government to get them out of any kind of difficulty is that market forces and the freedom of market forces will ultimately do the trick: that market forces alone and the climate of encouragement given by the Government will solve the problem. I do not want to rub salt into wounds. However, that was the principal reason which lay behind the urgings that we were given to join the EC: that the exercise of free market forces over a wider area would result in fuller employment, would avoid more unemployment, and all the rest. It is no good the noble Lord, Lord Cockfield, in his capacity as Commissioner, saying that the completion of the internal market will solve all the problems.

Leaving aside services, particularly insurance other than life assurance, the internal market in physical goods has been virtually complete for years. There has been massive internal trade throughout Europe and yet unemployment has increased from 5.5 million to 15.4 million at the last count. The answer is that the exercise of market forces is old hat, it never did work and it will not work this time. In fact it is manifestly failing.

I shall give noble Lords the reason. The deployment of the economy is fundamentally dependent upon the deployment of capital. There has to be capital to acquire or construct the means of production—the factories, warehouses and so on—in which labour, human effort, can then be employed. But one characteristic has been accentuated in the modern world. Capital is mobile. It is mobile in terms of seconds. It can go from one side of the world to the other in split seconds. Labour cannot. Labour is contained within the various nation states in which it lives and works amid the social furniture in terms of schools, hospitals, churches, recreation grounds and everything else that is part of the social furniture of people's lives. Therefore labour from that point of view is immobile. Do not let us talk about holidays on the Costa del Sol within that context. Capital therefore has a unique power and it is exercised, particularly in the electronics field.

As your Lordships know, the wage rates in Korea, a semi-fascist state, are 30 to 40 per cent. of those in Europe. In Taiwan and Hong Kong the wage rates are something like 25 per cent. of the wage rates in the United Kingdom; and in India, I am sorry to say, the rates are sonic 10 per cent.

So, my Lords, in the electronics industry what happens? Our scientists here played a prominent part in founding the electronics industry. Capital apprehends that labour in Western Europe is too dear. It can get it in Korea, in Taiwan, in Hong Kong and in India. So what does it do? Together with Germany and the United States it invests massive sums in factories there. The imports into this country, since they are based upon recorded costs, do not come within the dumping rules and so they undercut British manufacturers who cannot possibly compete in those circumstances. Unemployment is then caused in British industry. Ten years ago we led in the electronics field, and in many others; but there is now an annual deficit in trade of £1½ billion per annum because capital is mobile, but labour of necessity is confined physically within the country in which in the main it was born.

That is one of the reasons that market forces will not solve any national problems and because of lack of co-operation it will not solve any international problems, either. It cannot possibly. Indeed, we are faced with the situation today where perhaps 50,000 people in the world with large capital resources, including corporations, are far more powerful than governments. The first task therefore of the nation state, particularly of a democratic state, is to restore to government the power from which it has abdicated, and abdicated willingly, in favour of the large financial interests, which incidentally subsidise on a very large scale the party which forms the Government. The first thing to do is to regain control for Parliament.

But there is much more to do than that. I shall not go through the various steps that have to be taken in reduction of interest rates by 2 per cent. That should have been done months ago; but talking in the generality, what is required in this nation is that it shall have a government who can give the people of Britain a sense of purpose, a government who do not rely on the fear of unemployment to secure labour's subjection to the whims of capital. Those things—the sense of purpose; the sense of direction; and, yes, even a sense of honour too—sustained this country so that with our allies we could achieve victory in 1945. The re-kindling of that spirit wants something more than the greed to which it is now turned, the greed of some sections of private enterprise, to rescue the nation from its difficulties and to give peace and some serenity of mind not merely to a few of our people in well off circumstances but to the whole of the population of our kingdom.

3.51 p.m.

Lord Ezra

My Lords, I am very pleased indeed to be able to take part in this debate so ably initiated by the noble Lord, Lord Thorneycroft. I have not only known him for many years but for a number of years worked closely with him. He has quite rightly a reputation for being one of the most effective and witty speakers in the House and, from my certain knowledge, also outside it. He has chosen as a subject for debate today one which is worthy of his skills and which I am sure will also be worthy of the skills of the three noble Lords who will be making their maiden speeches later on.

Rarely has a series of economic events led to so much being written in such a short time; and, for the life of me, I cannot think of anything very new to say about the situation. However, we can use this opportunity to be reflective; to reflect on the events that have occurred, to reflect on the solutions proposed and to consider whether in our opinion the right balance is being struck or other things should be done.

I should like to start by reiterating and supporting the point made by the noble Lord, Lord Thorneycroft. As he said, it was the locomotive of the United States that enabled us to benefit from the growth in the world economy over the past four or five years. If I may continue his metaphor, the fact that the locomotive has gone into the engine shed for repair will obviously create problems throughout the world. We have been nourished over the years by the twin American deficits and it was fairly clear before Black Monday that this could not go on for ever. Indeed, the noble Lord, Lord Thorneycroft, and I have been present at international discussions at which the deficits were very much to the fore of thinking and of concern. That position has now changed. What is now required is a rebalancing of economies: a rebalancing of the United States economy to diminish the pressure of domestic demand and to increase its export potential; and a corresponding rebalancing of the other two strong economies in the world, the German and the Japanese, with the reverse in mind; namely, a stimulation of the domestic economies and a reduction of their export potential.

What is satisfactory to note so far is that this has been generally realised. Germany and Japan have already taken steps—some might say not before time—to do precisely that. There is evidence of a major move on the part of the Japanese Government to stimulate domestic demand and the German Government have recently announced that they propose to stimulate investment. In addition to that, during the course of next year the first tranche of their tax reductions will come into play, thus stimulating domestic demand.

The United States has at last come out with its budgetary package, which some have found rather vague and possibly inadequate, but at least agreement was reached. The way ahead in this rather delicate rebalancing act appears to be fairly clear.

What is unclear is whether the various measures of which we now have a foretaste can effectively be brought to fruition. There is no point in masking the fact, as the noble Lord, Lord Thorneycroft, emphasised, that we cannot by any dramatic move suddenly get back to where we were. We are in a new phase of uncertainty when world economic activity is bound to decline to some degree. The issue is how between us we can prevent that reduction in world economic activity falling into recession.

Among the many things I have read recently on the subject is a document issued by a leading clearing bank. It assessed the chances of our going into recession as about 25 per cent. I see the noble Lord, Lord Boardman, recognises the wording, so the House will have an indication of which clearing bank it was. It is not a big risk but unless the cards are handled properly it could become a greater one.

What we should be reassured to see would be further clarification of the American position so that the Group of Seven could then have an early meeting. The leading economic countries in the world could then get together to ensure that that 25 per cent. risk not only stops growing but is in fact diminished, and on that basis we could move to a more stable position. In the meantime I fear that until we achieve such a conclusion the stock exchanges of the world will remain jittery and the possible impact of that state of affairs on industrial and economic activity in general will remain to some degree unpredictable. Undoubtedly, Britain can play an important role in avoiding this further period of insecurity.

I should like next to turn briefly to the United Kingdom position, because it is part of the Motion that we not only take note of the situation worldwide but also consider the position of the United Kingdom. Like others, we shall undoubtedly be suffering in the sense that there is likely to be a lowering of economic activity next year. That was forecast in any event after the very high level achieved during the current year. It is necessary to try as much as possible to secure a maintenance of the momentum, and the weapons available are limited mainly to lowering interest rates. This should certainly be seriously considered. The noble Lord, Lord Bruce of Donington, referred to that and I think we all hope that we shall soon see interest rates coming down further. We in Britain still suffer from relatively high real interest rates. The exchange rate position is becoming worrying as well. At a time when we need to maintain the momentum of our exports, the currency is growing ever stronger while at the same time the United States currency is declining rapidly. Within our scope we should be doing something about that.

We should avoid putting any additional charges on industry at the present time. I do not want to upset the noble Lord, Lord Young of Graffham, by referring to the little interchange we had on Monday on electricity price increases, but it is the kind of thing that we should be avoiding at present if we want to make sure that industry remains as effective as possible in these difficult times.

Finally, I should like to turn to the longer term for the United Kingdom. The time has really come with the opening up of this new phase which the noble Lord, Lord Thorneycroft, has described so graphically when we have to take a longer-term view and where it would be encouraging also if we could see more of a long-term view taken by industry. I believe that, over the past decade or so of great difficulty. industry has recovered in a remarkable way, but unfortunately in large measure by a series of short-term expedients. It is that process that we must try to move out of, and start thinking in terms of long-term growth and expansion.

First, we need long-term growth and expansion in investment—we are still lagging behind the 1979 rate of investment of industry. Next, there should be long-term growth and expansion in civil research, a subject which was fully explored by your Lordships in the debates so effectively introduced by the noble Lord, Lord Sherfield. Then we shall need expansion in the sort of training that we provide for people to prepare them for the new types of job that will have to be filled in this country—and there are changes that the Government have in mind there, I know.

Therefore, in summary, I believe that there are some positive signs of realism in dealing with the present situation but we are now by no means out of the difficulty. Britain has an important role to play both internationally and at home. This is a time to apply measures which correct the weaknesses now emerging, and in my opinion it is a time to be thinking about long-term growth as well.

4.2 p.m.

Lord Richardson of Duntisbourne

My Lords. I must begin by expressing my warm thanks and appreciation for the extremely generous welcome that the former speakers in the House have extended to me as one of the maiden speakers, and I ask the House's indulgence for my apprentice efforts on this occasion.

I should like, faced by the bewildering variety of matters in the world economy, to start, if I may, by confining myself to what I consider the core problem. I mean of course the problem of the disequilibrium in the industrial world; the huge imbalances evidenced by the enormous deficits on the United States current account and trade account and on the other side the surpluses which are their counterparts.

This is not in any sense a new problem but it is one which has become urgent. One of the consequences of the increasingly integrated state of the world economy, and especially of financial markets, has been a heightened sensitivity to percieved problems and discordance in policies. For my part, although I can find triggers such as widening yields between bonds and stocks or stubborn United States trade deficits appearing month by month, I am inclined to attribute as the fundamental determinant of the collapse in stockmarkets the concern that has arisen and grown up over a long period of time about these global imbalances and their scale. Market developments have been fed by a scepticism—a mounting scepticism—about whether policy process was going to deliver policy initiatives appropriate to these problems.

In thinking about the solution I find that it is helpful if one can look at how the imbalances began. In my view they began in the divergent policies taken on the one hand by the United States and on the other hand by the other major industrial countries in the 1980s. The United States went for monetary contraction and massive fiscal expansion; the other industrial countries went for monetary restraint with a parallel fiscal restraint. I believe that the root of the imbalances lies in that divergence.

The growth of demand in the United States in the 1980s compared with its growth in the other developed countries has been dramatic. Demand grew at something like twice the rate in the United States through the 1980s compared with the other developed countries, and imports into the United States expanded almost two-and-a-half-times as fast as imports into other countries.

In those circumstances the budget deficit appeared, a trade gap yawned wide open and the United States, in order to supply the deficiency of its own domestic savings, sucked in savings from the rest of the world, where it is fair to say they were available partly by reason of the constrained fiscal policies being pursued in those other countries. But the scale of that sucking in of savings was enormous and the imbalances are there clear to see for everybody and they are unsustainable.

It is clear that the United States cannot go on calling on the rest of the world's savings at that rate to supplement its own deficiencies. It is clear too that a massive disequilibrium between the industrial countries cannot form the base for sustained growth and stability in the world. Beyond that, the disequilibrium between the economies has meant that we have had a switchback in the dollar, first rising to unsustainable levels and then subsequently having the possibility emerging of a downward correction of an excessive kind unless the appropriate policy measures are taken.

It is in these circumstances that the focus of policy in the industrial countries has switched from domestic stability alone, which was the fashion earlier in the 1980s, towards making the relationship between the main exchange rates the prime focus of attention and of policy co-ordination. That started at the Plaza when the policy on intervention and on having a concern for the exchange rate swung in the United States by 180 degrees. It was continued in the Louvre Accord and the initiatives that have followed it.

We come then to what is to be done. I think in many ways the story that I have told about the source of the imbalances gives the clue to the remedies, and I speak for a moment analytically. I start first with the United States. I do that with some reluctance, because I think that the Americans must often feel that the rest of us are always dissatisfied with their conduct of their economy; either it is growing too fast or it is going too slow. One is reminded of the title of the book by Ralph Nader, the scourge of the US automobile industry, which was Unsafe at any Speed.

But the fact is that the United States has basic problems, and those basic problems are excessive consumption and inadequate domestic savings. They have been borrowing more than they save and they have been spending more than they produce. As a matter of analysis, that has to be corrected through an intermediate time-scale. The domestic savings gap, which has been running at something like 100 billion dollars in recent quarters, has to be closed in that time-scale.

Speaking again analytically that can only happen if for an extended period of time domestic consumption in the United States is below domestic production. In order to allow the trade flows to rebalance themselves room must be made for exports. On the other side complementary measures must be taken, and in the surplus countries domestic consumption has now got to exceed for a period of time domestic production. That is the only way in which the balance can be re-established.

It is easy to say these things as a matter of analysis; it is more difficult to accomplish them through policy and action. The adjustment which is required against the scale of the imbalance is large and can only take place over a medium time-scale. The adjustment is an adjustment in real economies so that production, marketing and employment require a switch. Those things take time.

That is the argument for continuing the constructive co-operation on macro-economic policies that has already started between the major countries. The adjustment will take place either as a result of co-ordinated policy (where nations get together, explain their policies and what they can do, and see how the fit works knowing that the direction has to be one of re-balancing) or it will take place by market action. If the market is left to its own devices the adjustment is likely to be haphazard and perhaps excessive. It will be difficult, if not impossible, to take appropriate compensatory action. I believe that that is the reason for continuing our macro-economic co-operation.

The Louvre Accord was essentially about macro-economic co-ordination. if one looks at the way it appears in the common debate or in the media, one's attention is caught by the fact that it is all about exchange rate stability. However, if one looks at the actual communiqué that was issued, one finds that a large proportion of it is devoted to the subject of policy co-ordination—what is thought among countries to be a proper reaction for individual countries in respect of their own economies—and the part dealing with exchange rate stabilities comes only in a humble paragraph at the end. That balance must surely be right. The emphasis must be on getting the right policies in individual countries. The exchange rate stability can then emerge from that, as the product of a co-ordination of policies, and not be the instrument which seeks, I fear ineffectually, to force those policies in the absence of a real determination to take them.

I believe that there are some welcome signs. The adjustment has already begun in principal part by reason of the fall that has already taken place in the dollar. The adjustment is underway and, as the noble Lord, Lord Ezra, said, there have been welcome signs in recent days that further action is in prospect. The Japanese and the Germans, in addition to the actions that have already been taken, seem ready for further supportive action in the direction of re-orienting their economies. The United States has been engaged in a great debate between the leaders in Congress and the President about a budget package which will take the place of the mandatory Gramm Rudman reduction. The shock in American markets is likely to tilt the savings ratio, which is very low in the United States, in the proper direction. Beyond that I think that the United States has a heightened perception that this problem must be dealt with and it is part of the co-ordination.

The desiderata for change there are that, through time, we should have a full implementation of a reliable programme of budget cuts. We should also have from the United States a recognition that it is concerned with the value of the dollar and is prepared to support it by policy action and intervention at some appropriate level.

I think that we in the United Kingdom have been fortunate in many ways. In particular we have had rather robust growth and our public finances are strong. However, in the disturbed conditions of the world we should, as always, be watchful. We must be careful that the rate of growth in this country does not become excessive in relation to that of our industrial partners. Inflation is higher than it should be and we should keep a watchful eye on our trade accounts, especially if, with the slowing of the world economy, pressure on exports and export possibilities become more constrained.

I should like to end with a remark from experience. Over the years I have come to feel a healthy and rather wary respect for markets, maddening as they can be. At the moment they have had a severe shock of confidence and are mired in uncertainty. Restoring that confidence is an important constituent in sustaining the growth of this and other economies. The markets are looking for a sign and will be ready to take a lead. In those circumstances, I hope that we can apply today in an international context the famous words of Benjamin Franklin: We must hang together for, assuredly, if we do not we shall hang separately". My Lords, I thank you for your indulgence.

4.16 p.m.

The Secretary of State for Trade and Industry (Lord Young of Graffham)

My Lords, on behalf of the whole House I should like to congratulate the noble Lord, Lord Richardson of Duntisbourne, on his maiden speech. I was first privileged to meet and hear the noble Lord when I joined the council of Neddy in 1982. All members of the council valued the noble Lord's contributions to our debates and I know that we, in your Lordships' Chamber, shall do so in the future.

I have listened with interest to the debate so far, I must apologise to your Lordships' House that, on this one occasion, I have a longstanding engagement and shall not be able to stay for the entire debate. However, I shall study Hansard and I have little doubt that my noble friend Lord Beaverbrook will report to me what is said. I owe a further apology to my noble friend Lord Crickhowell because I shall not be able to hear his maiden speech. However, I look forward to hearing him on many occasions in the future.

I am grateful to my noble friend Lord Thorneycroft for proposing this Motion and for giving the House the opportunity to debate the world economic situation. The subject is topical and important. Fears have been expressed that the world economy is moving into recession and our economy with it. That seems to me to be an alarmist view.

The expansion in the world economy, which got under way in 1982, lost a little momentum over the last two years. But that has not been the case with our economy in spite of the fact that while most other industrial countries gain from lower oil prices, the United Kingdom, being an oil producer, stood to lose significantly in terms of public finances in the balance of payments and, to some extent, overall growth.

The slackening of the growth rate of industrial countries in aggregate has been largely due to the problems of adjusting both to the collapse in oil prices in early 1986 and to large changes in exchange rates. By the middle of this year, though, there were some encouraging signs, particularly in the United States and Japan, that growth was picking up again.

At the end of 1986 the rate of inflation in industrial countries had fallen to its lowest level for 20 years. There has been some rise since then but this was only to be expected once the effects of the fall in oil and other major commodity prices had worked through. It is a major achievement of the counter-inflation policies pursued by all major countries that inflation is now substantially lower than at the start of the upswing. Underlying inflationary pressures remain low, with few signs of capacity constraints—except perhaps in parts of the United States—and with commodity prices recovering only moderately. There is little chance that economic expansion will be ended by a resurgence in inflation as often in the past.

The chief threats to sustained growth remain the fiscal and trade imbalances in the world. There is expected to be a yawning gap of 150 billion dollars in the United States current balance of payments this year. That is about 3½ per cent. of United States national income, and no less than 15 per cent. of savings in OECD countries outside the United States. The chief counterparts to that deficit are the Japanese and German surpluses, also amounting to around 3½ per cent. of the national income of those countries. These imbalances reflect a variety of factors, and in particular the American fiscal deficit which is too large to be financed from their low rate of domestic savings.

Over the past two to three years the finance Ministers of the major countries have strengthened their co-operation in order to tackle the imbalances, notably at the Plaza meeting in September 1985 and again at the Louvre meeting in February this year. In fact, policy changes since the Louvre Accord have helped to stabilise exchange rates and reduce imbalances, while sustaining non-inflationary growth. The United States has reduced its budget deficit and Japan and Germany have eased policies somewhat. But correction of such huge trade imbalances was always bound to take time, and impatience was always liable to set in. Disappointment with the development of the United States trade figures, doubts about the American commitment further to reduce a budget deficit that was still far too large, and concern that interest rate developments and public statements about them meant that the Louvre Accord was breaking down, contributed to the sharp falls in equity prices on the world's stock markets and subsequent weakening of the dollar.

But we need to put the fall in share prices into proper perspective. For five years the major stock markets had been booming, share prices rising much faster than company profits and the gap widening between returns on equities and on bonds. There was an element of overshooting in that and a correction was bound to come sooner or later. Even following the fall, share prices in New York and London are about twice and in Tokyo three times their real levels in mid-1982, at the start of the long bull market.

I must tell your Lordships that share prices are not an infallible indicator of real economic developments. Paul Samuelson, the Nobel Prize-winning American economist, once wryly observed that Wall Street had correctly forecast 13 out of the last five American recessions.

It was not the 1929 stock market crash that caused the depression of the 1930s but the policy response to it. The noble Lord, Lord Bruce of Donington, should know that the failure then of the American authorities was to provide adequate liquidity to the system. That led to a collapse of the American banking system which led in turn to a further tightening in money and credit. At the international level, beggar-my-neighbour trade policies led to a collapse of world trade.

My noble friend Lord Thorneycroft referred to my call for open markets in telecommunications and our desire for an open trading system generally. It is critical and indeed crucial to all our futures that the negotiations for a single market in the Community and the completion of the Uruguay round in the GATT negotiations should succeed and succeed in full. Nothing could contribute more to converting the present difficult situation into a dangerous situation than the rise of protectionism.

However, there is no prospect of either of those errors being repeated. The United States authorities acted quickly to preserve the liquidity of the system. In this country the Government borrowing requirement was under-funded in October by £1.9 billion in order to add liquidity to the system, and interest rates have been lowered twice. In most other countries, too, interest rates have been allowed to decline, which will act to offset the effects of lower equity prices. All the major nations are now committed to an open trading system and we must see that commitment converted into action.

The United Kingdom Government quickly recognised that the share price fall would tend to reduce world demand. Particularly in the United States there will be people now feeling less wealthy than they did a few weeks ago and who will be more cautious in their spending. Companies will find it less attractive to raise finance on equity markets with the lower prices now prevailing. The size of these effects is very uncertain, which makes forecasting even more hazardous than usual. Our best assessment, given in the Autumn Statement, is that growth in the industrial countries will slow down somewhat next year but that there will not be a recession.

Prospects for the United Kingdom are also particularly uncertain, with our heavy dependence on events overseas. However, we are well placed to cope with the repercussions of the sharp falls in equity prices on Wall Street and any consequential slackening in world activity and trade. Our economy in recent years has consistently confounded the pessimists. Indeed our performance has exceeded what most of the optimists dared hope for. We are now in our seventh successive year of expansion, with growth in total output averaging 3 per cent. a year since 1981. In 1987 we expect the economy to grow by 4 per cent., substantially more than any other major Western industrial country.

Manufacturing industry, which was a weak element in the economy in the 1960s and 1970s, is now sharing disproportionately in this growth. Manufacturing production is expected to increase by 5 per cent. this year. Manufacturing productivity has continued to exceed expectations. Currently, it is growing at nearly 7 per cent.—much the fastest rate among the major countries—and so containing the growth of our labour costs and helping to make our manufactured goods more competitive abroad. With the benefit of substantial gains in competitiveness and the benefit of fast growth in demand, manufacturing industry has enjoyed large increases in profitability.

The improved economic climate has revived business confidence. New businesses have mushroomed and business investment has risen twice as fast as in other Community countries on average since the first half of 1981. Along with that, employment has expanded by over 1¼ million since 1983 and unemployment is now showing the largest sustained fall on record. Individuals, benefiting from fast real-income growth, tax cuts and less need to save to combat the ravages of inflation, have enjoyed a boom in their living standards. But it is not just domestic demand that has increased. Exports have also risen rapidly this year. Indeed exports have risen more rapidly than world trade itself.

The buoyancy of the economy has been reflected in a further strengthening in government finances. Even after tax cuts, the PSBR is estimated for this financial year at only £1 billion—just one quarter of 1 per cent. of GDP. Even without the proceeds from privatisation, the PSBR only amounts to 1½ per cent. of GDP. Who in your Lordships' House would have expected that just a few years ago?

A side effect of the current growth gap between the United Kingdom and the rest of the world is that our imports have been growing rather more rapidly than exports this year. The effect of that on the balance of payments has been compounded by last year's fall in oil prices. However, this year's modest deficit follows many years of substantial cumulative surplus. Our net stock of overseas assets is at its highest level since the war and is now larger than that of any other country, apart from Japan.

It is unlikely that our economy will continue to grow in 1988 at the same exceptionally rapid pace as it has this year. Instead, we may return to something closer—and perhaps a little below—the trend rate of growth that we have seen since 1981.

I believe that this prospect will prove pretty robust to the events of the last few weeks. The impressive growth in profitability and productivity of recent years means that industry is now in excellent shape to cope with the fall in share prices. Of course, the cost of bank borrowing, which accounts for a much higher proportion of company finance than new equity issue, has been reduced by a full percentage point since the fall in stock markets began. Moreover, even now our stock market is higher than it was on average in 1986. All the evidence on UK industry's order books, output expectations and investment plans available for the period immediately before the fall in stock markets could not but leave one optimistic about prospects for the next year or so. The latest CBI survey, conducted after the stock market fall shows that the fall has done little to dent this optimism. Indeed, a greater proportion of firms in manufacturing expected to increase investment over the next year than at any time since the question was first asked a decade ago.

As my right honourable friend the Chancellor of the Exchequer concluded in his Mansion House speech, our economic performance of recent years, is not something that will be blown away by a financial blizzard, however violent it may seem at the time". I believe that this is the time to look outward from the financial markets to the country at large. Confidence in the manufacturing sector and in the service sector is there in abundance up and down the land. Let us keep our confidence, and we shall overcome the interesting times through which we now live.

4.32 p.m.

Lord Jay

My Lords, I should like to thank the House for the warm reception that is much needed by any maiden speaker. It is indeed rather unnerving in any debate to follow an ex-Chancellor of the Exchequer, an ex-Governor of the Bank of England and a still surviving Secretary of State, who did his best to cheer us up this afternoon. I can claim perhaps one experience that none of them has had. I started my working life on 24th October 1929, the first day of the great Wall Street crash. That memory gives one a feeling of having been here before.

Recalling the near panic that that event caused in some quarters, in an uncontroversial speech I approach these explosive issues with a good deal of caution. I have never forgotten the advice given by the governess in Oscar Wilde's "The Importance of Being Earnest" when she said to her young pupil: This evening you will read your text book on political economy. But pray omit the chapter on The Fall of the Rupee. It is somewhat exciting for a young girl". Of course there are contrasts today with the world of 1929. We all know that. One is that we have that lesson before us. But there are also ominous similarities.

Then, as this last summer in London and New York, the idea that share prices always go up and never come down had taken hold and indeed been encouraged by some people. and the habit of buying shares, partly with borrowed money, not as a genuine investment but only to sell at an expected higher price, had spread far and wide. Then as now the point was inevitably reached when a lot of people at the same time decided that prices would not go higher and began to sell in a rush. I think that the present Government may one day regret some of their privatisation propaganda in recent months. Then as now deregulated market forces made things worse rather than better. Then as now statements were made by a number of eminent persons to the effect that the whole economy was sound, and usually prices fell even steeper the next day. I was reminded of that when I think I heard the Secretary of State say that there will not be a recession.

What happened next in 1929 was that the loss of purchasing power in Wall Street and in other stock exchanges spread to the real economy of output and employment and in time spread round the world. The United States monetary authorities, as the noble Lord, Lord Thorneycroft, said, kept interest rates high and money tight for too long and so lost control of the situation. One black Monday was followed by an even blacker Monday a week or two later. Even those schools of economists who in the 1920s and 1930s still favoured restrictive policies now agree that the Federal Reserve authorities should have cut interest rates much sooner and might by so doing have avoided the world slump. But they did not, and "vast deflationary forces", if I may quote the words of the late Lord Robbins, although only 30 years later, took charge.

Let us not—and here, with diffidence, I differ slightly from the noble Lord, Lord Richardson of Duntisbourne—push too far the fashionable doctrine that the United States budget and overseas deficits are the whole or even the main cause of the Stock Exchange crash this time. Although those deficits no doubt tended to raise interest rates, it is not these deficits that have destroyed general spending power: nor will the correction of them hold back the deflationary forces. Indeed, it might make them worse. Such deficits were certainly not the main cause of the 1929 crash, but it happened all the same.

Doubts about this explanation of what happened are indeed strengthened by the fact that the announcement of the so-called United States budget package last week has had almost no effect in rallying share prices either here or in New York. Harping too much on United States policy may even become an excuse for other people doing nothing or not doing enough.

Nor should we imagine that exchange stability can itself halt a slide into depression. Exchange movements are very often an effect of deflation rather than a cause of it. Indeed, it was evidently the fall in the sterling exchange rate against the German mark in 1986 which has been one main cause of the upturn in employment and output in the British economy after six years of rising unemployment.

The lesson of that, I suggest, is that exchange rates are a powerful instrument, and that we should on no pretext lose such control as we have over the sterling rate. We are going to need it badly in the rather longer term when our oil earnings decline in the early 1990s. Even in the short run the sterling rate is probably now too high against both the German mark and the dollar.

I agree of course with other noble Lords—I do not think that the Secretary of State said this, but I am sure that he would agree with it—that governments cannot do everything. But they should do what they can do. I hope I am not being too controversial in saying that I think that the Government were right in bringing down interest rates a week or two ago, although only a little, now that monetarism and M3 and all that have been abandoned by our born-again Chancellor of the Exchequer. He was incidentally lucky to have abandoned M3 some two years ago, because it is now rising at 20 per cent. a year and according to his earlier theories we should have to expect 20 per cent. inflation in 1988, which no one does. I wholly agree with both the earlier speakers that what is most needed, if it can be achieved, is concerted action by the major industrial powers to bring interest rates right down. Even after the recent reductions and even in real terms they are as high as they were in November and December 1929 when, as everybody now agrees, they were much too high.

In addition to that the third world debt problem, which we have only mentioned rather cursorily today, cannot be solved satisfactorily without lower interest rates. Certainly the countries with surpluses should take the lead. The Germans now appear to be doing so this very week. But in my opinion there is no good reason for everyone else to wait and do nothing until others do something. If lower interest rates here push the exchange rate down a little, so much the better. Maintaining both interest rates and the exchange rate here at present levels might very well cause unemployment to start rising again next spring.

A further plunge into a world depression is not certain and perhaps not probable. I fully agree that none of us knows that for certain. But on the evidence that we have the downside risk, as it is called in the City, is clearly now the greater, and time is getting on. If everyone waits for someone else, the risk of a world slump will be real.

The Chancellor has effectively abandoned some of the rather amateurish policies which caused such a lasting shock to the British economy in 1979 to 1981 and led to six years of unemployment. I notice that the Government now date all their figures from 1981. Today the Secretary of State said very little about the years 1979 to 1981. Therefore let the Chancellor, having now seen a bit of the light, not wait any longer for others, but press on positively himself with the right policies both on the interest rate and on the budget fronts. In budget terms this is a time for improving our public services, not crippling them. There is plenty waiting to be done.

4.42 p.m.

Lord Nugent of Guildford

My Lords, it is my pleasure and privilege to thank the noble Lord, Lord Jay, for his excellent and authoritative maiden speech. Many of us have had the pleasure of knowing him in another place and we can acclaim him here for his distinguished reputation with the Board of Trade and as a Minister in the Treasury. We can also acclaim him for his very special reputation for infallible accuracy on everything he has said in the way of figures or facts. I am sure that everyone would agree with me when I speak of his infallible integrity. Therefore we welcome him as a distinguished new Member of this House. We greatly enjoyed his maiden speech.

I thank my noble friend Lord Thorneycroft for giving us the chance to discuss this immensely important subject today and for opening the debate with one of his usual fascinating speeches which we all enjoyed very much indeed. My remarks will be fairly brief because I shall cover a great deal of ground which has already been covered.

I think that my noble friend might have attempted some comment on the cause of the trouble, but the noble Lord, Lord Richardson of Duntisbourne, dealt with that so well that I need do no more than say as a layman that it was fairly obvious to many of us that the growing and enormous imbalance in the United States both in its budget deficit and in its trading account would eventually dry up the sources of credit from Japan and the Arab states. The huge financing operation of American consumption had been resting on those sources and it was clear that the day would come when they would wish to send their money elsewhere. Then of course the crash came and nobody could get rid of their dollars quickly enough.

I agree with all that has been said as regards the fact that this problem will not be cured overnight. We do not want America to do anything in a great hurry. If it really did slash its deficit that would hurt everyone even more than what has happened to date. The cure must be gradual and the answer must lie in the co-ordinated effort of the Louvre leading financial powers who will act together and, I hope, closely with the United States' leading financial experts to achieve the best co-ordinated policy that they can.

But further reductions of bank rate will obviously help. I come to the point that was made as regards a comparison with the 1929 crash. In those days I did not occupy such an important position as the noble Lord, Lord Jay. I made a rather indifferent start in the 1920s in the army when prospects were nil. I then spent some time in the League of Nations. I started my farming career on the very bottom rung of the ladder. I watched that cataclysmic happening without understanding very much about it.

One of the things that is worth observing is that there have been many financial crises since then in this country and I should say that most of them were homemade. They were due to our own mistakes and weaknesses. But it would be true to say that this is the first time that instead of there being a flight from the pound there is a flight to the pound. The fact is that, as people look round the world to find a place to put their money, Britain seems a relatively safe place in an unsafe world. In fact the attraction is so strong that there is an excessive flow of foreign funds coming in. One of the reasons why we must reduce interest rates is to try to check that.

I should expect that in co-ordination with the other financial powers our Government will continue to do that. I should have thought it inevitable that a 25 per cent. shrinkage of investment values right across the world must have some effect on the world's credit structure. Therefore anything that banks can do to make credit easier and to reduce interest rates must help.

Again I entirely agree with the noble Lord, Lord Jay, that this is exactly the reverse of what happened in 1929. The slump was greatly intensified because interest rates were raised and credit was shortened, and so the situation went from bad to worse. But this time there is a most welcome and praiseworthy attempt by the leading authorities to move in exactly the opposite direction and correct the worst effects of what has happened.

It is worth supporting some of the things that my noble friend Lord Young of Graffham said so well about why it is that we in Britain this time seem able to stand up to a financial crisis without flinching and indeed to be able to help towards finding a solution. During the past eight years our Government have practised a sound policy, the aim of which has been to ensure that we live within our income. There have been blandishments from noble Lords opposite, from distinguished leaders of the Labour Party and also, as my noble friend said, from 360 economists who together raised their voices to advise the Prime Minister that she should engage in a major programme of borrowing and spending to improve and relieve our situation. Those siren songs have been resisted by the Prime Minister and her respective Chancellors. Thank goodness they have. As my noble friend Lord Young told us, we are today a strong economy with a growth factor which is going well.

The noble Lord, Lord Richardson of Duntisbourne, rightly said that inflation which stands at 4 per cent. is perhaps a little higher than we should like but it is a great deal better than it has been. Exports have been increasing. Last year's exports, even in manufactured goods, were up 14 per cent. Unemployment is falling, thank goodness. It is getting on towards half a million down. And the factor that I consider to be most important of all in the financial health of a country, our borrowing requirement, is reduced and is reducing to vanishing point.

Instead of steadily increasing our national debt, we are at last showing signs of stopping the increase and reaching a point where we may even reduce it. That is a big change from the situation of 10 years ago. Noble Lords opposite will remember that during the years 1974 to 1979 the national debt was doubled and that must be paid for in debt services every year. It costs as much as the Department of Health and Social Services costs every year—some £17 billion.

Those are all encouraging factors. As my noble friend Lord Young said, we have an investment portfolio overseas. It is the biggest we have ever had and indeed it is the biggest in the world. It amounts today to some £114 billion. It brings in an income of between £5 billion and £6 billion a year. What a benefit that is.

In this country today there is a sound financial economy. The world looks at Britain and says, "We think it looks a safe place to put our money and we can rely on it". The result is that in financial affairs our voice carries weight and we have a valuable influence in moving towards the kind of solutions which we are talking about today. Only by co-ordinated action is it possible to get such strong countries as Japan and Germany to increase consumption in order to balance the reduction in consumption which is inevitable in the solution towards which the United States will gradually work.

Perhaps I may conclude with a word of congratulation to my right honourable friend the Prime Minister. She has been attacked more than any other Prime Minister for refusing to spend money which she does not have and for insisting that our expenditure must be kept within our income. That has made us a strong and competitive economy, able to face the extremely worrying and dangerous situation with some prospect that our people will come through without losing the benefits of a rising standard of living and without suffering the kind of penalties we have suffered in the past. For that, I think we should all be very thankful.

4.50 p.m.

Lord Crickhowell

My Lords, I ask for that traditional courtesy which is given to maiden speakers. It is almost 17½ years since I made my maiden speech in another place. I am a mere babe in arms in terms of experience compared with my noble friend Lord Thorneycroft, who has opened the debate, and indeed the two previous maiden speakers.

I propose to do something which appears to be a little unfashionable these days. I wish to express appreciation for the privilege of serving for eight years in a Cabinet of remarkable achievement and under an exceptional leader. I did not agree with my colleagues on every occasion, and no doubt there will be occasions in the future when I shall not agree with them. However, this country works on a system of collective responsibility and it seems curious to me that so many members of differing administrations over the years appear so anxious to disassociate themselves from the decisions for which they have recently been responsible. No doubt we did not get everything right. But I am content to share whatever blame or praise may be due.

During my eight years as Secretary of State for Wales, I travelled frequently to the United States and the Far East. I came to have a clear view about the nature of the world economy and our place in it. We live in a multicontinental interconnected world in which the markets, products and financial resources of the Pacific basin are going to be at least as important as those of Europe or America. World financial markets have become equally fast moving and interdependent, with vast capital flows. Events in one market trigger reactions around the world to such an extent that the strengths and weaknesses of individual economies sometimes seem to be overlooked.

We heard from the noble Lord, Lord Bruce of Donington, of vast capital movements and an immobile labour force. I must say that it seems to me that the inexorable logic of what he is saying is that he would not only set out to manage our own economy but he would also set out to manage the world economy as well. The instruments for doing that are a little imperfect.

Three factors dominated the scene during the eight years that I was in the Government. The first is the scale of the American budget deficit; the second is the transformation of British economic performance and reputation; and the third is the impact of North Sea oil. Perhaps I should also add a fourth factor—the growing importance of Japanese capital and financial institutions.

The contrast between the comments made to me on my first visit as a Minister to Japan in 1980 and my last visit six years later was dramatic. On the first occasion, everyone asked me, as politely as they were able, about our lack of competitiveness and our appalling industrial relations record. On the last visit, the only person to ask me that question was a British journalist. The only comment that I received from the Japanese on the subject was about the excellence of the performance of British plant.

In the transformation of our economy, North Sea oil has been a potent force creating great difficulties as well as great benefits. Those of us who had responsibility through the agonising period of industrial readjustment, job losses and exchange rate pressures never had any illusions about the difficulties. Perhaps I am entitled, without being controversial, to say to the noble Lord, Lord Bruce of Donington, who referred to interest rates of 17 per cent. at the time, and to the noble Lord, Lord Jay, that governments before ours had some responsibility for that situation.

I think that those who talk about the destruction of British manufacturing industry exaggerate, and those who warn that we can barely survive without North Sea oil will be proved wrong. Old and inefficient industries have been substantially replaced with those that are competitive and up to date. We sold a large part of our North Sea oil at around 30 dollars a barrel. Today when the price is very much lower it is invested around the world. As my noble friend Lord Nugent has said, it was producing an income of between £4 billion and £5 billion a year as long ago as 1986. It will continue to pay an increasing annuity to sustain our economy and provide fresh investment long after North Sea oil is exhausted.

At the very moment that the voices forecasting doom reach their crescendo, the price of oil halved and the Chancellor's annual revenue from it fell from £11.4 billion to £4.9 billion. The economy, far from faltering, continued to grow stronger. Our manufacturing output is back to the levels obtained before the great upheaval began, but industry is much healthier and the City has adapted to take its leading place in this multicontinental world. As the Chancellor considers the options on interest rates, I shall only say that I should not like to see industry suffer again the exchange rate pressures of the early 1980s.

I came into politics from a generation deeply depressed and apprehensive about the future. I believe that the sense of confidence that I feel today is now widely shared. Yet however much our performance improves, in the world that I have described we cannot escape the consequences if other major economies falter or if fear drives them to protectionist measures.

I am not sure how far lectures to the Americans—or those with balance of payments surpluses for that matter—will help. Market realities may. Certainly we are fortunate that at this dangerous moment sound financial management has placed us in a strong position so that even the pessimists of the National Institute forecast growth of 2.4 per cent. next year. I also believe that we are fortunate to be part of the European Community, which is just beginning on the essential task of breaking down barriers, though I have to confess to a continuing scepticism about the benefit of joining the EMS.

Until I heard the speech of the noble Lord, Lord Richardson, I was going to express almost equal scepticism about great public get-togethers of world financial leaders. If it is seen as an agreement about exchange rates, the Louvre Accord has come spectacularly unstuck. The noble Lord was right to call for co-ordinated action to deal with underlying economic realities so far as that is possible.

The noble Lord also spoke of his respect for market judgments. What is fatal is to sign up to agreements which seek to erect barriers against the judgment of the markets without tackling the realities. I cannot help feeling that King Canute would be a useful person to have along at these gatherings of Ministers. The truth is that most of the real work should be done in private discussion before one ever gets to the summit.

The great danger that I see for this country is that uncertainty rather than any real economic weakness will damage us. Confronted with uncertainty it is not surprising that firms and investors postpone decisions. If that happens for long and on a large scale it will be self-fuelling and self-destructive. It is not enough to say that Big Bang and the City have proved themselves because the system has survived without disaster. The real test will be whether the markets return quickly and effectively to the job of financing the investment which will enable us to go on playing a competitive role in a world which will not suddenly stop but which will go on changing and developing.

The Chancellor has provided a sound basis for business. Given leadership in the business and the financial communities of the kind that my noble friend Lord Thorneycroft spoke about in his own area of industrial responsibility, we can avoid the risk of recession and strengthen our competitive position in the world. That surely must be the aim of us all.

5.3 p.m.

Lord Ardwick

My Lords, I am glad to be the first to be able to congratulate the noble Lord, Lord Crickhowell, on a very lively maiden speech. I do so all the more warmly because the noble Lord was once the Secretary of State for Wales and Wales was the land of my father. I understand that he was not brought up Welsh-speaking but he nevertheless had a very sympathetic approach to the Welsh language. That is a rarity in an English speaker and one which is well and gratefully remembered in the Principality.

I should also like to congratulate my noble friend Lord Jay. He, the noble Lord, Lord Cudlipp and I are three of the few remaining remnants of the old Daily Herald. I should like too congratulate the noble Lord, Lord Richardson of Duntisbourne, too. If it had not been a sacred maiden speech I should have asked him why between 1980 to 1985 the dollar rose 70 per cent. against the average of the industrial countries. This was despite a growing adverse trade balance. That is not the way they taught me in the WEA that things worked. Perhaps it has something to do with capital flows. I should have liked him to explain it to me slowly and in words of one syllable.

The debate now taking place on the world economy is about the work, the wealth and, to some extent, the happiness of mankind. Inside that wide framework it is also about the economics of Atlantic security. The North Atlantic Treaty Organisation is not just a military pact. It is also a political pact. If the Western economies lost their coherence and the member nations began to put up protective tariffs against one another and to engage in competitive devaluations, the alliance would be weakened and perhaps even demoralised. That is a risk we must not take.

It would be ironical if, at the very moment when we may be on the verge of an era of detente and disarmament, the alliance were undermined by its failure to develop a monetary system which allows its economies to develop in unison. The leader of the alliance, the United States, is a military and economic giant. If we have any fears on the military side they are not because our leader is irresolute—on the contrary. But on the economic side America's feeble efforts to deal with its double deficit have aroused doubts and disagreements among its allies, who have pursued their own wilful course, and they share responsibility for our current woes.

The market has responded in the only way it can. Unless order can be restored we are threatened with a recession of unknowable depth and duration. In Britain we may suffer from it less badly than some others. That is not the question. The question is: what can we do to help to avert it?

If we are not a major partner in the world economy alongside Japan, Germany and the United States, we have a unique strength at this moment. We have a Government with a strong and a fresh majority with years of time on its side. We have a strong economy which enables the nation to maintain, to its shame, 3 million unemployed—to its shame but not to its embarrassment. Perhaps if the Prime Minister had listened to those 356 economists the number of unemployed would not have been so great as it is today. In a recession, that 3 million could grow to 4 or 5 or even more millions, and who then would guarantee the continuation of social peace?

There is no room for complacency about our current ability to weather a minor storm. It may blow a lot harder and we may be faced with a major storm. The Government must use its political strength on the side of wise courses throughout the world. The problem is not what to do, it is how to do it. It is to convince the nations with great export surpluses which are regarded as signs of virility and success to go through the pain of winding them down and of facing the political risks of changing the pattern of production. They may also have to face threatened manufacturers and the hostility of workers. Yet it is in their own long-term interests to do so. It is in the long-term interests of manufacturers and workers. What seems to be prudence today, may well be seen to have been foolish when viewed from the future.

Nobody has put these things more clearly than Mr. Volcker, the former chairman of the US Federal Reserve Board. He describes himself as "a monetary has-been". All the more reason, then, to respect his views. He spoke only two days ago of the urgent need for concerted international action to reduce payment imbalances. He said that the alternative was abrupt and disruptive market reactions that would greatly increase the risk of recession and inflation and would probably undermine the chances of constructive trade negotiations. What is needed is convincing and sustained budgetary discipline in the United States and more than offsetting domestic expansion in countries with a large surplus on external account. And, putting it mildly, he said that the critics of the Louvre Accord had ignored the broad need to give exchange rate stability more prominence in economic policy-making. He went on to warn President Reagan that America cannot count on a floating exchange rate to smooth over all difficulties—the very fear of the market this week.

The chaos began in 1971 when instead of reforming the Bretton Woods agreement the nations thought that their problem would be solved by laissez faire— a policy of unmanaged floating. That led to the enormous and sometimes perverse fluctuations of the dollar, the world's leading currency. It was not until 1985 that the need for change was accepted. The Plaza agreements and later the Louvre Accord were indicators of a fundamental change in world policy.

What is needed now is to implement those policies, to find an effective way of managing currency rates collectively and to ensure that they do not get too far away from what is required by economic fundamentals.

I had hoped that the noble Lord, Lord Lever of Manchester, whose views on these subjects are known and greatly respected outside this country, would take part in this debate today, but his doctors would not permit it. Indeed, he intended to initiate a very similar debate a few days ago, but his health did not allow it. He regrets the disappointment caused to his noble friend Lord Jay, who was to have made his maiden speech then, and to other noble Lords such as the noble Lord, Lord Bonham-Carter. I am glad to say that his illness was of a passing nature and that he hopes to become active next week.

I conclude with some points he made in a lecture that was read for him during his illness last week. It stated that we need now to reaffirm the Louvre Accord and implement its policies. We need a United States programme to reduce the budget deficit over a period but not of a kind likely to create a recession. We need action to expand the world's economies, notably those of Germany and Japan. We need an agreed programme of interest rate reductions—the only clear and immediate sign to the markets immediately available. We need proposals to take fiscal action and we need an intervention policy which includes United States intervention.

That was the point made by my noble friend Lord Thorneycroft. We need United States participation and a range of currency values which the market will recognise as a deliberate and collective decision and not just the product of chance. Finally, we need to make progress with the debt problem to restore demand in the debtor countries.

I might add on my own account that Europe is by far the biggest importer of raw materials from Africa and South America. Therefore, Europe in recession could only add to their distress. The possibility of European expansion is largely, if not entirely, based on Germany's own expansion, which at the moment is a mere 1½ per cent.

5.14 p.m.

Lord Bonham-Carter

My Lords, it is always a great pleasure to follow the noble Lord, Lord Ardwick. I hope that the maiden speakers will forgive me if I do not mention each of them by name. I will be following instructions recently issued to the House that we should not do so.

I would be a brave man to engage in this debate amid a galaxy of Chancellors, central bankers, academics and journalists if I repeat or even try to refine the analysis of the causes and cures of the present crash. In the course of my speech, I am more concerned with trying to make a political point which, I hope, will emerge.

In June this year, in a remarkable article in the New York Review of Books, Felix Rohatyn, a senior partner in Lazard Freres, announced: The US today is headed for a financial and economic crisis. The only real question is when and how". He then proceeded in June to give the reasons for the crisis, the first of which was: The US has been guilty of the most irresponsible fiscal behaviour in its history over the last seven years". He went on to say that the second cause was that it had shown itself unable to co-ordinate its policies with Europe and Japan. In a speech on 5th November he added a third factor to the other two factors when he said: The market collapse was as much due to irresponsible private financial behaviour as irresponsible government financial behaviour". He went on to criticise the role of pension funds, investment banks and commercial banks. I found that interesting as I have heard no comparable self-criticism from the City of London.

As the noble Lord, Lord Thorneycroft, said, there has been much criticism of United States Government policy, and I wholly share his view that to go around lecturing the United States is probably not a very constructive activity. I suggest that he pass on his message to the Chancellor of the Exchequer, who has perhaps been the chief lecturer in this respect. I also wonder whether the criticisms he made in his Mansion House speech and elsewhere were ever made in private over the last seven years.

However, the consequence of US irresponsibility has shown itself, as other speakers have mentioned, in the trade deficit and fiscal deficit. Therefore, if the trade deficit is to be dealt with, it is clear that the dollar has to drop to a level where imports are restricted and exports stimulated. It cannot be in our interests in this country to prevent that happening.

It is also the case that if that happens and if world trade is not to decline sharply, someone has to take up that slack and that has to be the other industrial powers in the world. At the same time, if the fiscal deficit is to be handled, there must be substantial cuts in government expenditure in the US. I believe that we should be clear where those cuts are most likely to fall; that is to say, in defence expenditure. As one-third of United States defence expenditure is in Europe, the most likely cuts will be in its expenditure in Europe. It will be no good our asking it to make cuts in expenditure and then complaining when it falls in the most obvious place.

It appears to be relatively easy to prescribe what should be done in present circumstances. It is much more difficult to say how it should be done. The responsibility for putting right what has gone wrong does not lie solely with the United States. If, as Mr. Rohatyn and Mr. Volcker said, it is essential for the United States to co-ordinate its policies with those of Europe and Japan, it is equally essential for Europe and Japan to co-ordinate their policies with those of the United States. The fact is that we now live in a tripartite system in a tripartite world in which the United States is no longer the overwhelmingly dominant economic power, but the three units—Japan, Europe and the United States—each have a responsibility to each other and to the world, including the third world, for world economic growth and for co-ordinating joint policies.

It cannot be done simply by the market, as several noble Lords have said, and it is generally recognised today that economic interdependence is almost as clear and as total as nuclear interdependence. World currencies and world trade have to be adjusted, and if it is not the responsibility of the United States alone nor is it the responsibility of Germany or Japan. Indeed, as several noble Lords said, the Japanese have behaved with considerable responsibility. Their domestic demand has grown by 4 per cent. and the general economy by 3 per cent. That is not bad going, and they are taking further steps, as has been announced in the past few weeks.

Nor does the responsibility in Europe lie solely with Germany. The European Community has to respond as a unit to the situation in which we find ourselves. As a unit, Europe is in fact of the same order as Japan and the United States as a locomotive of growth. If world economic co-ordination is essential, so also is the co-ordination of European economic policy. In that, this country with its strong economic position which has been so frequently emphasised this afternoon has a responsibility which goes beyond lecturing our colleagues.

The fact is that we must play our part in co-ordinating European policy and Europe must play its part in co-ordinating world policy. It appears to me that, to date, it has singularly failed to do that. Dr. Lomax, in the National Westminster Bank's International Review, writes: Western Europe has totally failed to grasp the implications of the new tripartite system, and has neither said nor done anything to take on hoard its responsibilities as the third leg contributing to the worldwide macroeconomic structure". The political point that I want to make is the simple one that this is a responsibility in which this country can play its part. It is a responsibility which we must take on if we want to avoid a world recession; that is, that Europe should play a part in the world and that the United Kingdom should play a part in Europe.

5.23 p.m.

Lord Rugby

My Lords, it may be assumed that with such a long list of speakers, including three eminent maiden speakers, everything that is likely to be needed in this debate will be expressed in it. I assure your Lordships I will be brief.

I intend to speak about languages because I believe that the subject is fundamental to the debate. A recent Starred Question asked whether languages should be given a greater priority in our schools in order to improve our trading prospects. In a supplementary question I asked the Minister, the noble Lord, Lord Young, whether Latin, being fundamental and basic to European languages, should continue to be taught in our schools. His somewhat enigmatic reply indicated that as Latin was spoken by no one, there was no call for it.

A debate was also initiated by the noble and learned Lord, Lord Simon of Glaisdale, suggesting that English be simplified so that it would become the universal world language. To that suggestion I can only say that I hope not. It is my fundamental belief that we are basking in a sense of what I call the superiority of speaking our mother tongue and holding to the idea that everyone else should make the effort to learn our language on top of their own mother tongue, thus giving us an automatic commercial edge in our dealings abroad. Nothing could be further from the truth. That is a most dangerous philosophy.

No country is an island, however geographically that may appear to be so. The Japanese, who are an insular race, as the noble Lord, Lord Thorneycroft, said, have gained our gratitude by showing us how to stop glaring at each other across the table and how to seek a common goal by co-operation. There is another lesson we are painfully learning from them. It was not enough for the Japanese simply to pick the brains of all the most advanced technologists, put those ideas together in the form of motorcycles, cars, and televisions and then sell them back to us. It meant learning the other man's language, and learning it thoroughly. For the Japanese, that was an exceedingly hard task.

This debate concentrates the mind on what vital steps need to be taken by this country in order to extend our commercial variety. We should learn the other man's language. That is where I pin my hopes on our future prosperity. But how can this be achieved? It cannot effectively be done in schools. Nor can it be achieved totally successfully by crash courses, language laboratories or tape recorders, although they are helpful. The last occasion on which a total and fundamental grasp of the other man's language became of critical importance was during the war. We achieved those: aims by sending our agents to specialist language camps from which they emerged with a new identity. That identity enabled them to merge and move about in the market places of other cultures.

The noble Lord, Lord Thorneycroft, has given us a wide-ranging appraisal of the crisis which confronts us. My solution to a part of his presentation is that we should cease to be a mono-lingual, insular society. We must learn the lesson from our Japanese counterparts and become, as their businessmen have become, language specialists. That will be the road to promoting our industries in the world's markets.

5.27 p.m.

Lord Hatch of Lusby

My Lords, the debate is intended to be on the world economy. It seems to me that the first feature of the world economy of today is that scores of billions of pounds, mostly unrelated to trade or to world production, are searching the world for the highest returns. Meanwhile, the stock markets have crashed in this country, the United States, and in Asia.

In introducing the debate, the noble Lord, Lord Thorneycroft, said that our policy was "steady as she goes". That is a peculiar description of the policy of this Government over the past eight years and certainly an extremely peculiar description of the activities of the present Chancellor of the Exchequer, Mr. Lawson. He calls the stock market crash absurd. It appears that Mr. Lawson believes in market forces, provided they do as he wishes; when they do not, he merely says that it is absurd. It was Mr. Lawson who, as Financial Secretary, set monetary targets, being more Thatcher than Thatcherism; who scorned the Treasury forecast of a deep depression; set out the medium-term financial strategy; and declared that the decline in sterling M3 was essential for the reduction of inflation and that monetary growth must be reduced when it was, in fact, growing by 20 per cent. He declared also that money supply was essential to combat inflation and poured scorn on the ability to control exchange rates.

However, inflation in this country fell despite the money growth. It fell as a result of a number of factors. The first was the high exchange rate; the second, the deceleration in earnings rises; and the third, higher unemployment. There is a fourth element to which I shall come later. The Chancellor of the Exchequer has, within his tenure at the Treasury, abandoned monetarism and targeted the exchange rate. The noble Lord, Lord Thorneycroft, thinks that is a policy of "steady as she goes". I suggest that it fits better with the quotation from Emerson: Speak what you think to-day in words as hard as cannon balls and to-morrow speak what to-morrow thinks in hard words again, though it contradicts everything you said to-day". If Mr. Lawson had a little more humility and a little less arrogance, he would at least acknowledge to the electorate that he was wrong, that all the elements of his policy and all his speeches had been disproved and that he had changed his mind and his policy.

I wish to come to the fourth element in the reduction of inflation because it is the most important when looking at today's world economy. The matter was excellently introduced by my noble friend Lord Bruce of Donington. He deliberately left the issue to be followed by others when he talked about the people who are outside the economy. I agree with the noble Lord, Lord Thorneycroft, when he talks about the dangers that could result from the cutting of the United States trade deficit. We should open our eyes to the dangers that we shall inevitably face when that deficit is cut, as it must be because it cannot be financed. It cannot be financed because the United States does not have the overseas assets to finance it indefinitely.

I predict that within five years that deficit must have disappeared. What will happen during those five years? That is the point upon which I wish to concentrate. The fourth and most important element in the reduction of the inflation rate, which was higher in 1980–81 than it was when the Government came into office in 1979, has been the reduction in commodity prices. What does that mean to the people who are outside the world economy? I wonder whether any of your Lordships heard Clayton Yeutter, the United States trade representative, when on 11th November he spoke at Chatham House. He spoke about the restrictive trade Bill now before Congress. He talked about the United States policy on GATT. He said that the United States would have to move into trade surplus to service its debts.

He continued: Countries that depend heavily on the United States market to fuel their economic growth will be hardest hit when that adjustment occurs". Who are the people who depend upon the United States market? We do, for one thing. The report of the committee on overseas trade chaired by the noble Lord, Lord Aldington, showed that we depend heavily upon our exports to the United States.

The United States trade deficit may also be eliminated by a fall in the dollar to the point at which the United States becomes super-competitive. It will become super-competitive in low-grade industrial goods, because it cannot compete with Japan or Europe in high-grade goods. If the United States becomes super-competitive, those low-grade industrial manufactured goods will become a direct threat to all the lesser developed countries. If the dollar falls to two to the pound, or perhaps beyond, it will diminish United States imports and increase our exports. That will be at the expense of the third world countries which now depend upon industrial exports for the foreign exchange with which to build their economies.

Mr. Yeutter further said: The United States import 65 per cent. of the manufactured exports of the lesser developed countries; the EEC 22 per cent. and Japan 7 per cent.". Does anyone suppose that if the United States uses protection or allows the dollar to fall so low that it becomes super-competitive in manufactured goods, Europe and Japan can take its place and absorb the cheaper imports which it then discards? I do not believe so. Will they accept the exports of Brazil, Argentina and Mexico? Those are the countries which will be in competition with the United States. We know what their debts are now. How will they survive?

There was an indication of that in the recent meeting of the eight Latin American countries when they met and recognised that their common interest is to refuse to repay those debts. If they do, they are impoverishing and, in many cases, killing their people. That can only add to the pressure of third world debt. Those debts have not gone away because the newspapers have not written much about them over the past six months. They are still there. They are still a major burden on thousands of millions of people who are outside the world economy.

All the industrial countries, including Britain, have infrastructuralshort—falls roads, houses and hospitals—which require public spending. That is one way in which the threat of another world depression can at least be cushioned. It can be cushioned by boosting domestic demand and by getting together quickly to look not just at the debts but at ways of co-operating to sustain and to build up commodity prices without refuelling inflation. I do not have time to go into the detail of how that can be done, but it must be done.

I shall give the example of Zambia. It relies on copper for 95 per cent. of its foreign exchange. The price of copper today in real terms is about half what it was 10 years ago. How can people exist? Unemployment in Zambia, like every third world country, is growing massively. There is starvation. When I was last in Zambia—a copper-rich country—17 people died from malnutrition.

The only answer to the threat which now menaces the world economy, and the millions of people who depend upon that world economy, is international co-operation on commodity prices, debts and trade. That is the only answer to the malaise which has overtaken the world's capitalist system.

Many people, in particular noble Lords on the other side of the House, may think that that is a socialist answer. If it is, so be it. But international co-operation is essential if we are to sustain the present capitalist system. It is even more essential if we seek a world in which half the population is not on the verge of starvation. That is the threat that we are facing today. Unless the world economy is managed in an international way on a basis of natural equity and justice, we are facing a world for our children and grandchildren which must be one of conflict. If we are to avoid that, we can do so only through international co-operation.

5.41 p.m.

Lord Boardman

My Lords, I hope that the noble Lord, Lord Hatch of Lusby, will realise that, no doubt because of important matters, he has missed almost the whole of this debate. I hope that he will understand, if I do not therefore follow his remarks.

I start by congratulating the three noble Lords who have made their maiden speeches today. Singly and collectively they bring, a great wealth of experience to this House which I am sure we shall value greatly in the years ahead. I also congratulate my noble friend Lord Thorneycroft on introducing this debate. He has done so with his inimitable wit and wisdom and he has brought forth a subject which is of very great importance.

In trying to explain economic and political problems one is tempted to begin by saying, "I would not start from here". There may have been a suggestion of that nature from the noble Lord, Lord Bruce, in his speech. However, I am extremely happy, if we are faced with the problems and strains of the stock market today, that we are starting with an economy which is so immensely strong. That has been said by the noble Lord, Lord Thorneycroft, and others today. There could not have been a time in the last 50 years, faced with the situation that we have had in the last few weeks, when we could have been better fortified in this country than with the great strength in the economy at the present time.

One then turns to the question: what is the cause of the crash? The accusing fingers tend to be pointed to the United States of America and to budget and trade deficits. There is a heavy burden there. But I wonder whether we are being a little unfair and quite realistic in putting so much of the blame on them. The budget deficit is 150 billion dollars, a large sum, and even netted out, when one takes account of the local and state surpluses at 100 billion dollars, it still sounds vast. But it is only about 2½ per cent. of the grossed national product of the United States. That does not compare badly with many other countries. The budget deficit of the gross national product of Belgium is 8 per cent., that of Greece 10.6 per cent., and that of France is 2.9 per cent. of GNP. I believe it only right that we should put that budget deficit in and that of France is 2.9 per cent. of GDP. I believe it only right that we should put that budget deficit in perspective and not suggest that it is something which suddenly came upon us of disastrous proportions and of which we were unaware.

With regard to the proposed adjustment that is being made in the United States, I think that some of it is a little optimistic but in so far that it seems practical to achieve it, it should have the effect of reducing the United States' domestic growth by about I per cent. I believe that should be enough to begin getting the sort of balance that we should all like to see.

I now turn to the trade deficit. Again it is a very substantial figure of 150 billion dollars but it should be put in perspective against an enormous economy—that of the United States. If the United States were suddenly able to turn round and say. "You have asked us to balance our budget. We shall do so forthwith", there would be cheers from all the protectionist lobby; they would have a field day. There would be howls of anguish coming from many other countries which have relied upon the openness of that American market for their exports, and we are one of those.

One cause of the sudden drop in the financial markets, may have been a lack of confidence in the United States Administration, due no doubt to the tensions in a presidential year. There were also some unwise or misunderstood comments by senior members of that Administration that tended to trigger off this sudden collapse.

With regard to the stock markets, I wonder whether the real question is not why the markets fell so sharply but why they had gone up so steeply in the previous 12 months. What has happened in the last few weeks has very largely been blowing away a lot of the floss that had accumulated there during that 12-month period.

I now turn to the United Kingdom. I question why the drop in the stock markets was so severe here because we have such an enormously strong economy. As has been said by noble Lords, and I referred to this earlier, the strength is there and all the economic indicators are pointing the right way. I shall not attempt to list them. They have been listed by other noble Lords in the course of the debate so far. However, it is worth referring to one matter. In the last 12 months 100,000 self-employed new jobs have been created. One hundred thousand new people are in self-employment. That is an illustration of the dynamism that is being achieved and is an indication of our economic strength. Yet the fall in share prices in London was more severe than in some other countries which have had much weaker economies. I question why that should have been so. It is a question that still remains to be answered.

I turn briefly to what should be done now and the position today. Above all we must avoid the opposing dangers of recession on the one hand and inflation on the other. The lesson has been learnt from way back in 1929. It has been referred to by my noble friend Lord Nugent of Guildford and others as the need for liquidity. The lesson of 1929, when they tried to tighten up, has been learnt and applied. There will inevitably, and perhaps rightly, be some slowing down in the rate of growth from 4 per cent.—and estimates vary—to about 2¼ per cent. over the next year but that will still be the best in Europe. There will be some drop in consumer expenditure, a drop in the growth rate from 5 per cent. to 3 per cent.

Lord Hatch of Lusby

My Lords, will the noble Lord allow me to intervene? Can I ask him whether he is including Sweden in Europe?

Lord Boardman

My Lords, I am not sure whether my statistics include Sweden. I shall certainly let the noble Lord known the answer to that. It will be a relatively small part of the total sum.

There is some uncertainty about what will happen to the oil price in the Middle East and that somewhat clouds the picture. I see some beneficial effects that may come out of what has happened. In the short term there will be a reduction in the rate of inflation due to the change between the dollar and the pound. On the more worrying side I believe that the exchange rate of sterling is significantly too high for the comfort of our industries. We have been through a period of high sterling exchange rates in the past and it was extremely uncomfortable. At that time it was a more necessary element in containing inflation. I am not very worried about the threat of inflation in the present climate.

I believe that an early reduction in interest rates of ½ per cent. or 1 per cent. fairly quickly would be extremely helpful. It must be a matter of judgment by the Chancellor of the Exchequer and the Governor of the Bank of England, who are well capable of taking account of many factors that are not even known to me as a poor commercial banker. I recognise how important it is not to reduce interest rates in a way that makes it clear that the next move will be upwards, because I believe that is a self-defeating move.

A lower interest rate would, I believe, improve the exchange rate, the pound against the dollar and the pound against the deutschmark both very critical to our industry and commerce. It would help the trade balance obviously and I think it would also encourage further investment. I do not believe it would have any significant effect upon increasing consumer expenditure.

Lord Bruce of Donington

My Lords, I am obliged to the noble Lord for giving way. In view of the importance and urgency of the problem which he has addressed, does he agree that a reduction of interest rates tomorrow would not be out of court?

Lord Boardman

My Lords, I cannot apply a judgment from my point of view on matters which are only available to the Chancellor of the Exchequer and the Governor of the Bank of England. They know the attitudes of other countries and luckily —the noble Lord, Lord Richardson, made this point in his speech, and rightly so—a cohesion has been achieved among the major countries by the finance ministers and central bankers so that they can act in unison on these matters of critical importance. I should not like to prejudge what they might do. From my point of view, I would hope that they could achieve such reductions at an early date.

I do not believe that it would have an effect upon consumer expenditure because in the short term that is directed far more by how much the buyer has to pay per month than by the rate of interest. Experience does not suggest that a reduction in interest rates necessarily leads to a rapid increase in consumer expenditure, which would itself have inflationary effects. The inflationary effect from a reduction would possibly be less than that arising from the support given under the Louvre Accord, which must mean a fairly massive increase in the money supply. That itself, as I am sure the noble Lord, Lord Richardson, would agree, must add to the dangers of inflation.

Again I agree with the noble Lord, Lord Richardson, in his wise speech earlier today that above all one of the key factors is confidence. It is so important that we are able to show and display the confidence in our economy which is so fully justified at present and which is so important at a time when pressures are being applied. We have all the foundation and justification for doing so. I believe that we shall come through this crisis stronger and in a very formidable position.

5.53 p.m.

Lord Basnett

My Lords, this year our economy has been growing strongly. Next year in an unsettled international situation it could bring the rate of growth down below the already predicted fall to 2½per cent. A much lower rate of growth will bring sharply into focus again the consequences of the immediate post-1979 economic policies, the period to which my noble friend Lord Jay referred in his magnificent maiden speech.

Unemployment has grown from 1.3 to 3.3 million and is still at about 3 million. Our dole queues are growing more rapidly than those of any other industrial nation. Manufacturing output has fallen and only now is it recovering to its 1979 level, while investment is still well below the level for that year. The non-oil balance of payments has fallen from a surplus in 1979 to a predicted deficit of between £7 billion and £8 billion. While unemployment is falling and investment is rising, these trends will need policy initiatives from the Government to avoid them being reversed. We have to ask ourselves: can we hope for these initiatives?

There have been some signs of a more pragmatic approach in the management of the economy. We have seen the demise of fiscal targeting, zero inflation, slow economic growth and enough U-turns to make a London taxi driver envious.We even have the Prime Minister in her Financial Times interview last month coming close to talking the language of demand management. The Chancellor, who tried some years ago to bury Keynes in a lecture, has been forced to intervene. No doubt with his intervention on BP he saw that, without it, confidence would further collapse. But it was demand management, espoused by Keynes, which has been followed by most post-war governments. More importantly it was a view that admitted that markets do not automatically balance and that speculation is not necessarily a benign force which dampens fluctuations, and that makes the current wait-and-see attitude a little more incomprehensible.

Nevertheless we still face the future with a less deliberate doctrinaire attitude on economic affairs. We must hope that the new realism will stretch far enough to encompass the policy initiatives which are needed, initiatives which must relate to the international economy as well as to our own economy. Internationally the view that has been expressed is that the imbalance in trade between the United States and the rest of the world is the basic problem. However, in identifying the budget and trade deficits as a problem, it is important to stress that they have in the short term had certain positive effects in the United States and in the world generally. The budget deficit was the key factor in the sharp drop in United States unemployment from about 1 per cent. to 6 per cent. since 1982. The trade deficit has also greatly assisted not only European but many developing economies.

Reducing that deficit without replacing the demand it represents will obviously deepen the recession. While the current difficulties from the stock market collapse to the dollar devaluation will influence the situation, it is important to overcome the trade surpluses of West Germany and Japan. It has to be said, worryingly, that there is little sign, even given today's announcement, that the West German Government are prepared to take sufficient action to tackle the problem, which if it continues will push us further into the recession that we all wish to avoid. We know the damage that that will cause to jobs and to industry. We know of the international initiative that we need to avoid it.

We urgently need an internationally co-ordinated growth strategy. It can be argued that an exceptional economic summit should be held and should include in its own right the European Commission. It has formulated a co-ordinated growth strategy which could be advanced not just on a European Community basis but on a OECD basis.

Nationally, in order to play our part in the international strategy and to prepare our defences against the effect of a possibly deepening world recession, there is a clear case for the measures that were advanced by the noble Lord, Lord Ezra, and, in addition, if needed, for a stimulus, fiscal and monetary. To provide the stimulus the Government should be prepared in their 1988 Budget to increase the public sector deficit by as much as the situation requires. If the Government can bring themselves to increase the public sector borrowing requirement when the situation demands it, the last taboo standing in the way of pragmatic and undoctrinaire economic management will have been broken and that will be welcomed by the unemployed of this country.

6.1 p.m.

Lord Beloff

My Lords, no one thinks it peculiar that the subject we are debating today should have been proposed by the noble Lord, Lord Thorneycroft. It is clear to most people in this country who think about these matters that the world economy and our own prosperity are so closely interlinked that to discuss one without the other would be pointless. However, I think we have to remember, as did the noble Lord, Lord Richardson, in a maiden speech which illuminated so much for us, that this is a peculiar feature of this country. It is a feature of Japan. It is not a feature to the same extent of all our partners in the European Community; and above all it is not a feature of the United States of America.

It is difficult to believe, even if the Senate were to go in for our kind of slow motion debate, that the United States Senate would debate a motion about the effect of the world economy upon the United States economy. In America, people do not think of it in those terms. While everyone must agree with the importance attached by the noble Lord, Lord Richardson, and others to getting, so far as possible, the heads of the advanced industrial countries to co-ordinate their policy with a view to the common good, we should not underestimate the difficulty when those who represent the United States have to take with them a vast electorate which is largely unconcerned with or indifferent to foreign trade, which has never thought of itself as being primarily a part of a world economy and which therefore provides, even apart from the obstacles of the obsolete American constitution, a very great difficulty in the way of such negotiations.

It was not on that point that I wished to detain your Lordships. It seems to me that in most of the debate we have been almost implicitly assuming that what we ought to be thinking about are the relations between the major industrial countries. Only one or two of your Lordships have referred to the fact that these comprise only a relatively small proportion of the world's population and an even smaller proportion of the world's land surface. If one looks at economic history and one takes a somewhat less immediate view, one is bound to ask the question as to whether the new phase into which we have entered, as the noble Lord, Lord Thorneycroft, reminded us, might not become one in which there would be a further impulse given by bringing into the exchange of goods and services countries which are largely outside it.

I am not thinking primarily of what might be called the "Hatch of Lusby countries"—poor countries which have been further impoverished by taking the economic line which the noble Lord suggests. I am thinking of countries with a great and unused capacity for production and therefore for exchange which is at the moment not in full use.

I shall give only one statistic. Many Members of your Lordships' House bandy figures with an aplomb which for an innumerate like me is a constant source of wonder. It is stated in the Economist, which most of us would regard as reliable in these statistical matters, that the average private citizen in the Soviet Union is less likely to own a motor car than the average black in South Africa. That is a powerful thought.

Let us assume that Soviet policy, evolving as we are told it is, reached the point where it was thought desirable that Soviet citizens should own motor cars in the way they are now commonly owned by ordinary citizens—sometimes more than one each—in all the advanced industrial countries. Let us assume that Soviet citizens did not pitch their ambitions too high and settled for one each. Can one imagine the impetus that would be given to the motor manufacturing industries in our Midlands and elsewhere in Western Europe if the Soviet Union decided that it needed 100 million motor cars?

I give this example because it illuminates at once the basic problem. It is a problem about which the noble Lord, Lord Young of Graffham, has been concerned in terms of exports to China. No doubt China is in a position to purchase important elements for its reconstruction. The difficulty with the Soviet Union and Eastern Europe, whose peoples have a great industrial tradition, and the difficulty with China is that they have nothing to offer in exchange. There is little they can export and therefore their purchasing power is very limited.

It used to be said in Lancashire when I was young, or perhaps a little before that—the noble Lord, Lord Ardwick, will remind me—that if the shirt tails of every Chinaman were to be one foot longer there would be no problems in the textile industry for generations.

Lord Ardwick

My Lords, it was one inch, not one foot; and it was India, not China.

Lord Graham of Edmonton

Otherwise correct.

Lord Beloff

I stand corrected. Therefore, it is enormously important that we should lose no opportunity to explain to those countries and their rulers who are beginning to feel pressure from their populations to improve their economic performance, using whatever language and whatever context we can, that there is a chance for the world to advance by the introduction of a new purchasing power which would at the same time provide a new locomotive, if I may use a simile already heard in the debate. Otherwise it seems to me that at best we shall go around in a circle. It is rather as though in the 15th century people discussing the economy were to have concentrated entirely on the exchanges between Florence and Flanders on the very eve of the discovery of the New World.

My view, and the view no doubt of noble Lords on this side of the House, would be that in order to achieve this these countries—and indeed the "Hatch of Lusby countries"—would have to dispense with the doctrines of socialism. They would have to admit that there is no discoverable way of improving productivity, and therefore giving themselves purchasing power, but a rapid de-centralisation, de-control of their economies. It seems peculiar, when we have this great example of these talented peoples—the Russians, the Poles, the Czechs and the Romanians; people who have great natural resources —before us and of what controlled economies can do, that noble Lords opposite suggest that the remedy for our problems is more control.

I may be over-optimistic in thinking that we are on the eve of such a leap forward, but if I were the Prime Minister—about which most people will say under their breath "God forbid"—I would not meet Mr. Gorbachev at Brize Norton. I would suggest that he made the short journey into Oxford and that the two leaders met at one of the counters in Marks and Spencer. It might give him some ideas.

6.12 p.m.

Lord Donoughue

My Lords, I must begin by thanking the noble Lord, Lord Thorneycroft, for opening a debate on a crucial subject at such an apposite time, and also, I am sure with the whole House, by expressing appreciation of the three quite notable maiden speeches that we have enjoyed. The noble Lord, Lord Richardson, spoke with the accustomed clarity and authority that we all envy, so that suddenly—if, I must admit, momentarily—I thought I understood the problem. I recall in Downing Street some decade ago seeing him once smile. That was after the 1976 IMF settlement, and I hope we shall have that pleasure and opportunity again after the next G.7 meeting.

The noble Lord, Lord Jay, took us back to 1929 both personally and with his wise reminder of the dangers of high interest rates and a high exchange rate, which I think is the heart of the problem facing us in Britain today. I am sure I was not alone in feeling that I would have liked to have seen him some years earlier in this House, and we look forward to catching up on what we have missed.

The noble Lord, Lord Crickhowell, adds to the Celtic majority in quality as well as quantity, and that is always welcome here. If he is half as bright and nice as his brother (who I may declare is a partner and fellow director of mine) we shall enjoy his contributions—and I think encourage him not to do everything that pleases the Government Chief Whip.

As to the problem, we know that it is one of payment imbalances; that huge disequilibrium in the industrial world, to which the noble Lord, Lord Richardson, referred, focusing on the United States with its double deficits, domestic and external. While they persist they will produce these recurrent, sharp disruptions to markets. They will produce volatility in the equity, debt and currency markets, thus creating a climate that is difficult for investment and economic health, and brings now the imminent threat—only a threat so far—of recession or inflation, or both.

We could be back to "stagflation", and the danger of a retreat from open free trade towards protectionism and trade bilateralism, from which we would all suffer. I would urge noble Lords not to underestimate the dangers of the recent crash. It may pass, but remember that markets, if they get the bit between their teeth, have the habit and capacity to run away with politicians.

The problem is particularly acute because it involves centrally the United States, hitherto the West's dominant economy. You simply cannot have a healthy world economy while the government of the dominant economy are periodically weak and irresponsible. It is interesting to note that many of us thought that the stronger Western economies and markets such as those of the United Kingdom and Germany had de-coupled. The evidence of the recent crash is that you cannot de-couple from the United States' crisis.

Several noble Lords have expressed the view that we should not put all the blame on the United States, and as an old friend of the United States I have enormous sympathy for that point of view; but we must not duck saying where the responsibility lies—though I do not agree wholly with those who seek consolation in the thought that the crisis would have been even worse had President Reagan still been alive!

Certainly the bad combination of tough rhetoric and weak policies that we have seen there has been unhelpful. If I am allowed to say so, it smelt a little at times of pre-1976 in Britain, though without someone of the stature of the noble Lord, Lord Callaghan, hand held by the noble Lord, Lord Richardson, to help us out of it. It is extremely worrying to have a dead-duck administration in a pre-election year, when what we need is positive leadership to provide budgetary discipline, dollar stability and international co-operation.

The problem specifically for the United Kingdomb—to which the Motion refers—is obviously the threat to our economic health. But with sterling's appreciation against the dollar, the slowdown in world trade will hit our exports and our balance of trade and do again the kind of damage to manufacturing industry that we suffered so unnecessarily during 1979 to 1982. The danger is that the damage to confidence from the stock market collapse will hit both consumer expenditure and capital investment and that together we shall have lower growth and, I am bound to say, higher unemployment.

On the present forecasts the encouraging and welcome improvement in unemployment that we have recently-experienced seems to me highly likely to be brought to a halt. If you look at the deceleration there in all the consensus forecasts you have the rate of growth actually halving over the next two years. Most people agree that it will be down to about 1½ per cent. in 1989. Then if you look at the trade imbalances—the non-oil current account—they are doubling at the same time as growth is halving from currently about £1.2 billion to anywhere between £5 and £7 billion in 1989. That is not a good combination, though the Government may feel that it comes conveniently in mid-term. That trade deficit is not encouraging—although one must say that it is not a catastrophe either as a percentage of GDP—but it is a serious deterioration, and that should worry us all, including those who are concerned for the outlook for growth and unemployment.

Another threat, speaking more parochially, is the damage to the City from the stock market collapse. I am aware that Yuppie-baiting is currently fashionable and giving pleasure to all who are still in bed at 7.15 a.m. when the Yuppies fixate blearily on their screens. I should say that I do not consider myself a Yuppie, being neither young nor upwardly mobile. However, it is a serious issue. The United Kingdom houses in the City are basically the smaller ones, with one or two exceptions represented by the noble Lord, Lord Boardman. Further stock market damage could kill off many of the small British houses and leave the City of London primarily dominated by overseas finance, and I do not believe that that would be a good thing.

There is a wider dimension to this, and that is the extent to which it relates to the changing international balance of power and the dramatic reversal of the balance of world power since 1945. It is striking that sterling is now trailing the mark and there is talk of linking the dollar to the yen. What a transformation that is in 40 years, suggesting that economic vitality is more important than battlefield strength. It is interesting to note that the successful economic powers are those that have been positively excluded from the defence power game. I mention that not just because of its historical irony but because it appears to be relevant to the problem and the solution.

Future stability in this area requires the new surplus nations, Japan and Germany, to take more responsibility and initiative. Internationally it requires synchronisation of the withdrawal of the United States from some of its commitments, with Japan and Germany taking up the responsibility. That point also applies in the area of aid to the developing and the under-developed nations. We cannot look to the United States to carry that burden so extensively in the future. There must be synchronised co-ordination to enable the United States to withdraw a little and the surplus nations to move in. One bears in mind the time bomb that is ticking away as regards the sovereign debts of developing countries. There is £200 billion owed by the Latin American countries and that time bomb is ticking away at the same time as the problem which is under consideration today.

As regards the solution, ideally we should have had a satisfactory United States budget and a satisfactory G.7 meeting. We do not have that and we must now accept that progress to the solution will be less tidy and in stages by telephone rather than at summits. However, the desirable components of the solution remain the same: it must be the stabilisation of the world's monetary markets while maintaining steady economic growth. That is the only broad objective that is acceptable.

Negatively speaking it means that we do not want a savage recession; we do not want the United States to be left alone to slip into minor recession with the rest of the world taking up the slack; we certainly do not want the recent experience of the United States irresponsibly and unilaterally pushing down the dollar. We need currency stability and a situation in which private capital will still flow to the United States to finance her deficits, because, although reduced, they will continue. Also negatively speaking it is not satisfactory to have spasmodic interventions by the central banks to support the dollar temporarily and smooth its decline, especially when the United States is not participating. Intervention is appropriate only as part of an overall satisfactory package.

Looking at the situation more positively, I agree with what I see as the general thrust of the debate; that only through international co-operation will a collective solution be produced. We must have an agreed, broad-band rate for the dollar and we must have the United States producing credible budgetary discipline. That may involve some deceleration in its economy and may also involve a move towards higher interest rates there. It would be helpful if the United States would recalculate its deficits on a more realistic basis to include its state surpluses. I believe that the figures would then look less depressing and perhaps this Government, with their experience of recalculating the unemployment statistics, might give a little advice.

The Japanese must accept the responsibility of world leadership. It gives priority to currency stability, but if it is to achieve that from an agreement it must contribute and must accept that the Japanese economy should expand. Japan should be more willing to cut its interest rates and ease its negative ceiling on government expenditure. The same point applies to Germany, where we have seen encouraging signs.

I believe that there is a British role to be played in encouraging the Germans and the Japanese to move in this direction. We know that by inclination monetary authorities are natural deflationists and reluctant to take initiative and responsibility in this field. There is a role for the United Kingdom in encouraging them to work to co-ordinate an international approach. We must set an example with lower interest rates and avoid the devastating damage to industry that follows from an over-high sterling rate.

The recent earthquake in world markets gave us a relevant message. It was that the economic and monetary geology of the West are unstable. As with those people living in California, we did not know when the quake would come but we knew that it would come at some stage. Fortunately we have more scope to rebalance the world's monetary situation than the structures beneath the earth. It needs will, collective action and an acceptance of the urgency. We do not have much time. I am sure that it is better to have international management than to wait for the markets to do it for us more damagingly and certainly with over-reaction. The price of inertia, of not acting together, could be further massive disruption to the world markets, which will damage the livelihoods of us all.

6.26 p.m.

Lord St. John of Bletso

My Lords, I too should like to extend my thanks to the noble Lord, Lord Thorneycroft, for introducing this most critical and important debate at a most worrisome time. It is a time when so much uncertainty and nervousness surrounds our market. Like the noble Lord, Lord Donoughue, I had the misfortune of being behind a Topicline screen on Black Monday to evidence the precipitous falls and to look on in sheer horror and trepidation, not only as my personal portfolio fell but as the markets collapsed around me.

I should also like to extend my congratulations to those noble Lords who have today made their maiden speeches. I apologise for not being present to hear all the speeches; I am afraid that I was a late entry to this evening's debate.

Many noble Lords have extended theories as to the causes of the great crash. I am sure that historians will argue for ever on the possible causes. Among other reasons are that the speculative bubble had built up, the markets were overheated and would ultimately burst. Many may argue that computer trading programmes exacerbated the fall and the speed at which the markets collapsed. There were also doubts about the ability of the US Administration to cope with the budget deficit. I believe that one of the major causes was the belief that co-operation between the major powers to stabilise the dollar had broken down and that the Louvre accord was basically ineffective.

In focusing our attention on the world economy, I believe that we are faced with three immediate challenges. First and foremost is currency instability. All noble Lords have mentioned the fact that the need for a viable G.7 accord is more imperative now than ever before. We have seen the central banks in Europe and Japan supporting the dollar and it is front-page news in today's Financial Times. However, the dollar cannot be continually supported until some commitment by the US Administration to stabilise its own currency is seen.

I believe that the second challenge we are facing is a slow-down in OECD growth rates, possibly leading to a recession. I do not say that we are facing a recession, but the possibility exists. Certainly Germany has shown encouraging signs of relaxation of monetary and fiscal policy. Its discount rates are set to fall and investment spending is being encouraged. However, they are modest steps and will not necessarily be sufficient. Thirdly, I believe that we may be facing a revival of inflationary fears as the US dollar falls, with the need for even more painful adjustments there.

How will these challenges affect the UK market? First, and most important, the rising exchange rates will pose problems for our exports, more specifically our exports to America and Canada. A slow-down in export demand would lead to a slow-down in output growth which would, I believe ultimately lead to a rise in unemployment. Finally, the revival of inflationary fears in the US would have no immediate impact on the UK. In fact, quite the contrary; rising sterling would dampen inflationary fears in the UK.

As a stockbroker I have witnessed the crash. What have the immediate effects been on the equity market? Certainly one of the most critical, and one of the central themes to come out of today's speeches has been the lack of confidence, which has resulted in desperately small volumes of stocks being traded. Mention has been made of yuppies getting into their offices every morning at a quarter past seven. I can assure you that by half-past three when you have been continually talking the market through and your bargain pad still shows a blank, it certainly is depressing.

Fund managers, however, have tended to hold on to the bulk of their portfolios. This is something which I personally am worried about. If you compare the present crash with that of 1974, when the speed was much more gradual and fund managers were able to sell much of their portfolios, it raises fears that if many fund managers are holding on to their portfolios we could be facing a liquidity crisis. Despite the optimistic content of the recent CBI report, I believe that companies will tend to look more cautiously at capital expenditure and expansion. Certainly funding projects and rights issues will be a lot more difficult now. Many analysts will have to reduce—some have already—their profits forecasts.

Another major question overhanging our market is the fear that the Japanese market, which has had only a minor correction, may quite possibly, should the dollar continue to slide, experience a major correction which would have a knock-on effect on our market. The lack of confidence and uncertainty have also resulted in a tendency for international investors to switch their funds to their own domestic markets.

In conclusion, where are we going now? I do not believe that this is the beginning of the end. Certainly I believe that we are in a stage of adjustment, but co-operation between the major powers is essential to stabilise world markets so that fundamental values rather than speculative fears can be reasserted. Certainly the trend over the past week has been that our markets have mirrored the performance of the international currency markets. I would welcome the day when we at least will be able to value our shares on fundamental worth rather than on sentiment. Indeed, we have seen some encouraging signs that the US and others are recognising the need to give markets a lead. The currently negotiated budget deficit package, although not yet concluded, is an encouraging sign that things are moving in the right direction. So also is the fact that the Germans are set to reduce their discount rate, possibly tomorrow. I believe these moves should lead in the short term to some stabilising of the dollar.

I believe that the most important criterion to restore confidence and international co-operation is the need for a global agreement to show markets that the major powers have a common objective of steady growth and low inflation. This may mean painful adjustments for the Americans in the forthcoming election year. The surplus countries, notably Japan and Germany, will need to avoid undue monetary caution. Without such confidence-building measures I believe that the fragility of the markets will break and we may conceivably see another major correction.

The noble Lord, Lord Donoughue, referred to "yuppiedom". I was reminded by one of my colleagues today that gone are the days of yuppiedom. Now it is called "puppiedom"—"previously upwardly mobile".

6.35 p.m.

Earl Cowley

My Lords, I would like to join in thanking my noble friend Lord Thorneycroft for introducing this important debate with his usual style, flair and humour, and also express my appreciation to the three noble Lords who gave their maiden speeches and made such a tremendous contribution to the debate.

The world economy is at a dangerous crossroads. Not since the early 1930s has the global political and economic order been threatened as it is now by the spectre of deflation—deflation which could occur if the current stock and currency market crisis is not managed carefully. As has been said previously in this debate, because the Western world is bound together economically to a far greater extent now than it was 60 years ago, the threat to our prosperity and to our political and economic stability is far greater than it was then.

The current threat has been developing for many years. It is manifest in four principal areas: the weakening US economic leadership, which is a long term trend, compounded by recent excessive US budget and trade deficits, extreme global foreign exchange market instability and the continuing overhang of third world debt.

Although the US remains the most powerful economy in the world and is one of the most innovative and productive, its dominant economic position has inevitably declined as the competitiveness of Asia and Europe revived after the devastation of World War Two. America has in a very real sense unselfishly and magnaminously led the world to unprecedented wealth while providing sponsorship for international financial and political institutions. However, recent events have substantially undermined the ability of the United States to continue world leadership without a substantial contribution from its allies.

Foreign exchange instability has contributed very meaningfully to America's weakened position. Currency volatility followed the termination of the Bretton Woods agreement in 1971 and the failure of the world's leaders to substitute a meaningful method of co-ordinating economic policies and to engender exchange rate stability. The lack of co-ordination ultimately resulted in foreign exchange rates becoming detached from economic fundamentals. Between 1980 and 1985 the US dollar rose 70 per cent. against the average industrial country in spite of rapidly increasing budget and trade deficits. An increasingly overvalued dollar resulted in a sustained surge in US imports and dampened exports during a period in which federal deficit spending fuelled domestic demand.

The resulting twin deficits were increasingly funded by foreign investment. I do not believe that the noble Lord today mentioned that the startling result has been the transformation of the United States from the world's largest creditor nation to its largest debtor nation during the period of President Reagan's Administration.

After 1985 the dollar began to reflect economic fundamentals. Between the beginning of 1986 and February of this year, when the Louvre Accord was established to stabilise relative exchange rates, the dollar declined approximately 23 per cent. against the deutschmark and the yen. That decline was probably sufficient to result, in time, in improving the United States' balance of trade. However, a prolonged period would have been required because of the earlier large and prolonged misalignment. It would also have required relative currency stability, which in turn would have necessitated fiscal and monetary support by the larger industrial nations.

Such was the premise upon which the Louvre Accord was founded. In the event, the G.7 central banks were largely unsupported by their political masters in their currency support efforts. The accord failed and the dollar fell another 12 per cent. The continued fall of the dollar and the failure of the United States Government to take meaningful steps to reduce the budget deficit led to the sharp world equity market correction in October. The spectre of a serious disruption of the world financial systems and global deflation became manifest. The decline in stock markets since 19th October, ranging from 20 per cent. in Japan to over 50 per cent. in Singapore, represents a worldwide depreciation in wealth and a reduction in worldwide savings totalling over 1.5 trillion dollars.

The slump has severely affected financial markets and consumer confidence and has had a negative impact on business investment plans. According to some estimates the combination of these factors will result in a reduction of OECD gross national product by one half of 1 per cent. or more in 1988, and in the United States it will be over I per cent. The United States Congress is currently negotiating a meaningful reduction in the federal deficit, which is necessary for the restoration of sound economic policies and investor confidence. However, any decrease in federal spending and increase in taxes will be deflationary. Thus, deflation will be added to deflation and could result in a recession in the United States. A serious United States recession will spread to the rest of the world if its global effects are not managed and compensated internationally by a renewed and strengthened version of the Louvre Accord. Such an agreement must have the power to stabilise currency exchange rates within specified bands and must be fully supported by G.7 economic fiscal policies and actions.

Whatever the eventual scope of the US deficit reduction it must be matched dollar for dollar by increased spending, principally in Germany and Japan, in order to accomplish a global zero-sum game. Additional stimulus may be required if economic activity falters more than is expected or if individual countries do not contribute sufficiently to any future accord.

Because the EC is dominated to such an extent by the deutschmark, any positive West German deflation will permit similar action throughout the EC. However, close co-ordination between G.7 member states will be required and any agreement must be honoured by individual governments in the interests of the whole.

There is evidence that Germany and Japan are stimulating their economies to meet the current challenge. However, those actions alone may not be sufficient. The surplus countries—Japan, Germany and others—should be willing to make sacrifices in terms of individual market protection and cherished political and economic ideals. They should assume part of the role and some of the risks that the United States can no longer afford. Those nations could play a major role in resolving the third world debt problem which must be resolved in order to increase demand from the debtor nations, through increased support of the World Bank and the International Monetary Fund.

They and the rest of the G.7 nations can bring pressure to hear on the four Asian surplus countries, Taiwan, Hong Kong, Singapore and Korea which have currencies relatively pegged to the dollar, to co-operate in any trade deficit reduction plan. Those countries are increasing sales to the United States almost as fast as European and Japanese exports are declining. They accounted for 19 per cent. of America's imports during the second quarter of 1987 more than those from Canada and nearly as much as from Europe in total.

The world is on the edge of a potential chasm. The stakes are high. No nation, even Great Britain, with its currently solid economic outlook domestically can avoid participating in a worldwide economic debacle. Such an event would undermine not only the Western world's economic stability but also its political stability and it would be disastrous for the third world. It would be a major setback for the steady, inexorable demise of Communism as a viable political system.

However, the chasm can be bridged if the major Western industrial nations are willing to band together in co-operation and to make the individual and collective sacrifices that are necessary to see through what will he a painfully slow adjustment to past excesses and to a changing world economic hierarchy.

6.45 p.m.

Lord Kagan

My Lords, as the noble Lord, Lord Beloff, pointed out, we do not loom as large in the minds of the American public as America does in ours. The question was asked: is America able to stop the slide of the dollar? That question should be rephrased: does America really want to or need to stop the slide of the dollar?

America is spending more than it earns and wants to curtail spending on imports. A lower value dollar makes imports more expensive. Only a few days ago there was an announcement in the German press to the effect that, in anticipation of what will happen in the United States, Porsche has declared substantial redundancies. The Japanese have decided to double the car plant capacity that they have in the USA and have announced that instead of exporting cars to the United States they will in future build them in the United States. Moreover, they have undertaken to use 65 per cent. American components and 100 per cent. American labour in their manufacture.

American industry is quite happy to accept Japanese technology and, by all accounts, equally happy to adopt Japanese attitudes in industry. The Germans are preparing in much the same way to keep their markets in America by producing locally more jobs for the Americans. In other words, the low dollar has not adversely affected that side of things.

The Americans have not simply an emotional but almost a neurotic fear of the 1929 bank crash—not share price crash but bank crash. It has dominated American thinking. As has been mentioned by previous speakers, the American banks are deeply overcommitted by way of loans to South America and the third world. The easiest way to rescue the banks is to devalue that debt. The dollar has been reduced by 45 per cent., which is purely a settlement of 55 cents in the dollar. That is all that that represents. The Government would otherwise have had to act, and that is a very neat way of transferring a visible and electorally unpopular responsibility from the Government to the whole population.

In a country such as the United States, which has an abundance of raw materials and all the essential raw materials inside its own borders, the dollar in one's pocket feels the same. Therefore, if one devalues a currency, one achieves protectionism without being criticised, without being seen to be practising it and without incurring the displeasure of GATT. It is a back-door way of doing it.

The American deficit is now 150 billion dollars. America maintains 325,000 soldiers in Europe at a total cost, according to the latest figures, of precisely 150 billion dollars. If America can achieve a pull back of its forces from Europe, the deficit problem will be solved. The wide American public and even some people in the Congress and Senate have felt for some time that Europe should stand on its own two feet in defence and not sit on America's two knees. It is grown up now: it is 40 years. If Europe will accept the defence responsibilities the slack will be taken up automatically. Let us face it: for nearly 40 years Germany and Japan have been excused from any substantial spending on armaments while the rest of the world has had to do this for them.

Germany is as neurotic about inflation as America is about a bank crash. No politician in Germany will ever risk inflation again. But I think that Germany will be quite prepared to spend a larger proportion of its gross national product on defence. I think that Germany wants to be more independent than it has been in the past.

How does this affect Britain? Britain has to turn totally towards Europe. One would not be surprised if relations between America and the Soviet Union improved to the extent that Mr. Gorbachev would suggest to the next President of the United States, "We'll get out of Central America; we'll stop causing you a lot of trouble; you just ease up in Turkey, the Middle East and Europe". It is not an unattractive proposition from the point of view of the United States. The fact is that the United States is turning to isolationism militarily, and it will follow economically.

Europe has 250 million people. Europe has a sophisticated industry. Europe has a potential market, a hungry market, in the Eastern bloc and beyond. Therefore, Europe is not an option that Britain may take but possibly the only practical option that it will have to take long term.

6.53 p.m.

Viscount Chandos

My Lords, the noble Lord, Lord Thorneycroft, has done great service to the House and to the country on many occasions but not least today in introducing such an important subject for debate and making such an enjoyable contribution to the discussion. Over and above that, to have introduced a subject that stimulated remarkable maiden speeches from three distinguished Members of your Lordships' House should earn him another place in the record book of parliamentary achievement.

The record books of the economic and financial markets have been rewritten over the last two months. While it has been possible for many people to view the gyrations of the world's stock market with detached fascination, the theme of today's debate has been that both the underlying cause or catalyst of the stock market decline and the decline itself pose a real threat to the patchy and uneven prosperity of the United Kingdom and to the prospects for any further improvement in the UK economy. While it is clearly right that your Lordships' House should be particularly concerned about the implications of recent events for the UK economy, we should not be so parochial that we ignore the parallel but greater threat to the delicate and struggling economies of the third world, as the noble Lord, Lord Jay, has already emphasised.

Although we are accustomed to thinking about the stability of the international trade and financial system from an essentially British perspective, I am sure your Lordships would agree that a stable and strong international economy is an important objective in its own right even if we believed, however misguidedly, that the United Kingdom's national interest was not affected.

As the noble Lord, Lord Thorneycroft, predicted, this has not generally been a partisan debate since the subject is less susceptible to the extremes of party jousting than many others. That said, however, just as there has been an inevitable focus on the effect of recent events on the United Kingdom economy, so it has been natural for speakers to concentrate on what the United Kingdom and the United Kingdom Government can do in trying to edge the world's economy back on to an even keel.

The ubiquitous Dr. Feldstein, whose return to academic life from serving in President Reagan's Administration has led to a flowering of his contributions to economic debate, recently wrote that economic co-operation between the major developed countries was disintegrating and that we should be thankful for that. While this may be a theoretically logical continuation of the free market economic policies pursued in the United States—and arguably in this country—I do not believe that the tone of the debate has signalled any widespread concurrence with this view.

The Chancellor of the Exchequer himself has repeatedly suggested changes in the policies of the United States Administration on the one hand and of the Japanese and German Governments on the other. I am quite confident that this demonstration of support for co-ordinated international action reflects the unanimous view of the Government. The arguments for an international approach to the problems of the world economy were marvellously advanced, perhaps more so than by the Government Front Bench or by the Opposition Front Bench, in the lucid speech of the noble Lord, Lord Richardson of Duntisbourne, while another maiden speaker, the noble Lord, Lord Jay, advanced one of the few possible amendments to the exposition of the noble Lord, Lord Richardson.

It is easy to become a little obsessed with the US federal deficit, as the noble Lord, Lord Jay, suggested, and in doing so to accentuate the United States Administration's feeling that the rest of the world regards US economic policies as "unsafe at any speed". Indeed, the characteristically blunt comments of the Spectator's parliamentarian of the year, the Chancellor of the Exchequer, in his Mansion House speech may regrettably have delayed his invitation to be an honorary freeman of the City of Washington.

As my noble friend Lord Donoughue has already said, in considering the federal deficit, account must be taken of balancing factors such as the massively funded state employee pension funds, which, contrasting with this country's practice of unfunded pension arrangements for large parts of the public sector, represent a significant offset to the generally quoted deficit figures although not of course to the savings gap, to which the noble Lord, Lord Richardson, drew attention. The current account deficit in my view is ultimately the more critical strain in the international system, although again an unduly negative picture can be presented. For instance when the noble Lord, Lord Thorneycroft, presented the United States as a massive debtor nation I suspect that he may not have taken fully into account the real value of US companies direct as opposed to portfolio overseas investments.

The stock markets have found the US federal deficit to a large extent a convenient whipping boy for their own dramatic collapse and loss of confidence. It is simple enough for all the shell-shocked participants and investors to understand but a little too simple to be entirely credible.

I was delighted to hear the noble Lord, Lord Young of Graffham, express his scepticism about the infallibility of stock markets' ability to predict or reflect the real world. I am sure that he and his noble friends on the Front Bench will not give your Lordships' House any chance in future debates to charge them with inconsistency through the use of stock market statistics as an illustration for the strength of the underlying economy. I am sure that my memory, dazed by the tumultuous events of recent weeks, is failing me when I seem to remember such claims being made in the past.

The only addition I should like to make to the elegant arguments of the noble Lord, Lord Richardson of Duntisbourne, is to refer your Lordships to recent work by the Brookings Institute on the effectiveness of synchronised reflation within Europe. As President Mitterrand would testify, this is hardly a novel concept, but the independent work of the institute suggests that significant intra-European reflation could be achieved without unacceptable consequences to individual countries' balance of payments or inflation, unlike the case of unilateral reflation, as again President Mitterrand can testify.

Even though the United Kingdom currently enjoys a relatively high level of growth, through the Community it could, as my noble ally Lord Bonham-Carter said, exercise direct and real influence on the European reflation needed to balance the slowdown in the US rather than merely lecture and scold the other G.7 countries for their varying inadequacies from the sidelines.

Important though the reform of the common agricultural policy may be, it is still disappointing that the agenda for the Community summit in Copenhagen this weekend is so bare of international economic initiatives. I believe furthermore that the last summit to be held in Copenhagen nine years ago witnessed the first evidence of the establishment of the European monetary system under the inspiration of my noble friend Lord Jenkins of Hillhead.

It is even more disappointing that such an anniversary should pass with the United Kingdom still only, in the words of the noble Lord, Lord Thorneycroft, an honorary member or more correctly an honorary full member of the EMS. The opponents of our belated entry to the EMS—I suspect that the noble Lord, Lord Jay, may be one—can be divided perhaps into two categories: those who fear that the influence of Germany and the Bundesbank on the UK economy would thereby become too strong or those who fear it would be diluted by the policies of other member governments and become not strong enough.

As opportunities to enter the EMS at optimum exchange rate levels have come and gone, however, we have in turn missed the chance of playing a full role in ensuring Europe's own proper contribution to international growth and prosperity. Germany is not an unmovable block to co-ordinated European reflation, as this week's moves demonstrated. Nor is full membership of the EMS an irresponsible ceding of UK sovereignty. I hope that the noble Lord, Lord Young of Graffham, will join the Chancellor in continuing to press the Prime Minister relentlessly in Cabinet to bring the United Kingdom, at the appropriate exchange rate, into the EMS as soon as possible. I am certain that that would be an important and productive step towards synchronised European reflation as well as concurrently towards a stronger domestic UK economy.

The domestic UK economy has been referred to, most notably by the noble Lords, Lord Bruce of Donington and Lord Young of Graffham, in a marked departure not only from the main theme of the debate but also from the unpartisan tone of the discussion.

Tonight is not the time to refight old campaigns and contest old statistics, but it would be a great mistake to overestimate the underlying strength of the UK economy. The recovery from the acutely depressed levels of 1980 and 1981 is fragile and patchy and requires both the best possible international and the best possible domestic economic policies to be implemented if further progress is to be achieved.

I have found this an enjoyable and stimulating debate and the high degree of consensus in favour of co-ordinated international action is cause for possibly irrational optimism. But out of darkness may come light. I shall leave your Lordships' House tonight with one image in the forefront of my mind: the saviour of the British motor industry as designed by the noble Lord, Lord Beloff—the Rover Glasnost.

7.6 p.m.

Lord Peston

My Lords, I too say with great pleasure that this is an excellent debate which the noble Lord, Lord Thorneycroft, has introduced. He referred to grave and difficult matters. I agree with him on that. He also said that we really do not know where these events may end. I very much agree with him on that. Indeed I am not the kind of economist who always claims to know ex post facto everything that was going to happen and always has a perfect explanation of everything that does happen.

I find a lot of what has happened very puzzling and I think that it will be a long time before we fully understand it. The noble Lord, Lord Thorneycroft, referred to the debate as being non-political. I can only say that I shall try to be as non-political as he was. On the three maiden speeches again it is very pleasurable to congratulate all three maiden speakers. However I do have a slight difficulty from where I sit on this side of your Lordships' House. I am a great believer in equality and therein lies my difficulty. I agree with everything pretty well that my noble friend Lord Jay said. I shall refer to one or two of those particular points in a few moments. I agree with about half of what the noble Lord, Lord Richardson of Duntisbourne, said. I certainly agree with his point about the heightened sensitivity in world financial markets to perceived problems and the comparatively sluggish response of real markets to the same forces. That represents quite a lot of what lies behind the problems which confront us.

I found the speech of the noble Lord, Lord Crickhowell, absorbing and extremely interesting. I found one thing in it with which I could agree. That was his acceptance of responsibility as a member of the Government for what has happened. I believe that that attitude—a loyalty to what one has been involved in and a loyalty to what one believes in—is an extremely important one to have. I shall also return to that matter in a few moments.

I hope that noble Lords will forgive me if I make one or two points either of elementary economics or of elementary logic. I must remind your Lordships of the following very simple propositions. First that one country's surplus must by definition be another country's deficit. If it is right that any country can pursue a surplus the people who argue that must also argue that it is right for other countries from time to time to be in deficit. But a much more significant point is that each country's capital outflow is some other country's inflow. Those countries which say what a good thing it is for a country to have a capital outflow—which means essentially that it is spending less than it is earning—must consider it right for other countries on that same occasion if they have a capital inflow, which they must have, to spend more than they earn. It is simply trivial nonsense to argue that every country must, at all times, spend only what it earns.

I could go on to say that every country's stock of net overseas assets must correspond to some part of the rest of the world's stock of net liabilities. That is not trivial when we come to consider the present United States position. In so far as they have moved from being a major net holder of assets internationally to a major net holder of liabilities, that is simply the counterpart to some of us moving from being holders of net liabilities to net assets. If we are now saying to the United States—or simply noting that it will happen anyway— that they should move back into a net asset position, then somebody else will move back into a net liability position or at least their net asset position will have to decline somewhat internationlly. There is no way out of that logic. Therefore, those, including the Prime Minister, who appear to think that one can have a zero sum in which there are some pluses and no minuses are simply mistaken. One must always bear that in mind.

It follows that, except in the very long run, there is simply no reason to live within one's income. Some people will, over some period, wish to live well within their income. But the consequence is that some people must spend more. I am sorry to be so tedious in reminding your Lordships of that. However, it is occasionally forgotten in economic debates, and in one or two of the contributions that we heard today it was definitely forgotten.

We all agree that the crux of the matter is international economic and monetary co-operation. However, we must remind ourselves how difficult that is, as many noble Lords have pointed out. It is particularly difficult, if not impossible, if the aims which different countries have are themselves so different. In the 1960s most countries—although not all—were agreed on giving first priority to economic growth and the maintenance of full employment within a framework of relatively stable exchange rates. All I can see now are disagreements, rancour and everyone blaming everyone else.

I should like to take a longer view and refer to the quarter century from 1945 to 1970, when several noble Lords sitting in the House today had some degree of responsibility for what happened at least on occasion. If we ask why that period was so successful the answer is that earlier on our predecessors were determined, in winning the war, that we should learn the economic lessons of the 1920s and 1930s, of which the noble Lord, Lord Jay, has so eloquently reminded us, and not repeat the old mistakes. In my view, it took a war to make us do that. I do not believe that the battle was won simply as an intellectual argument by Lord Keynes against the other economists. It took a war to do that and it took two oil crises to blow the whole thing away. Obviously we do not want another war to concentrate our minds yet again.

I for one had hoped that the crash of the stock market and the dollar crisis would do the same job for us. However, it has not and it is rather worrying that the squabbling and, to some extent, the policy paralysis still continues. On that matter I agree with what other noble Lords have said, that at least to some extent the problem is the United States current account. The obvious point is that that deficit can be reduced in one of two ways. It can be reduced by contraction in the United States economy or it can be reduced by expansion in the rest of the world. If America is forced into a formal position of contraction, that will add to the impending recession—so far as it is impending—and it will create the danger of a serious depression. It is obvious that expansion on the part of the rest of the world is the right path to follow.

I am encouraged by some of the news which we hear from Germany and even by some of the news which we hear from Japan. However, it is all rather tentative and I think it is optimistic, to say the least, to believe that everything is going to be all right. I am willing to wait and see. However, I remain my normal gloomy self on that matter.

Let me add, in saying that the rest of the world has a major responsibility here, that I am not also arguing that the United States policy stance is the correct one. It seems to me that there should be some fiscal tightening in that economy, although it ought to go hand in hand with some monetary ease. I agree with other noble Lords that the dollar has fallen far enough, if not too far. Contrariwise, that means that the pound sterling is, if anything, too strong against both the dollar and the Deutschmark. In that connection, let me add that I hope that it is true that the existing United Kingdom current account deficit, while rather undesirable, is probably manageable. But a larger deficit consequent on an uncompetitive exchange rate, plus the danger of a downturn in the United States, would be most worrying.

Following my noble friend Lord Donoughue, I know it is wrong to engage in yuppie baiting. But those of us who have had to work for a living all our lives cannot avoid a certain sense of schadenfreude at what has happened to some of the young people sitting in front of video screens. Perhaps they will learn the lesson of easy come, easy go, and next time round they will not be quite so shocked. More seriously, I should like to say a word or two about financial markets.

Until recently, it was argued by some, including some in my profession, that they operated on rational principles. We were told about the correctness of the so-called efficient market hypothesis and that equity prices were a true reflection of the real underlying happenings in firms. One knows that such a view has always been incompatible with the observed volatility of share prices. It was impossible that the underlying reality was as volatile as share prices were. But the view that it was so is surely even more clearly refuted by recent events. Whatever one thinks about the real world, I for one find it impossible to believe that the discounted present value of the returns to business enterprise in the United States or here could possibly have fallen overnight by 30 per cent. or that that underlying reality somehow dawned on everybody on the same day.

Therefore, we must accept the view that either shares were overbought before the crash or have now been undersold. My difficulty is that I do not know which and I cannot advise noble Lords in the speculation business which way to move. Either way, I hope that the irrationality of financial markets, which Lord Keynes emphasised strongly many years ago, and their belief in all sorts of mumbo-jumbo is exposed once and for all. Certainly the idea that economic policy should he constrained by what financial markets want or fear is quite preposterous. It has about as much sense in it as saying that scientific agricultural methods should not be introduced for fear of offending the witchdoctors.

Before concluding my remarks on that subject, perhaps I may say that I hope that at some time soon we shall hear from the International Stock Exchange its explanation of what has happened and, to say the least, an apology or two about the behaviour of market makers and related activities within the exchange.

I said that I did not wish to be too political. However, I cannot resist the opportunity which this debate gives me to refer to another matter. I often sit on these Benches and hear a particular view put forward—as it may be put forward by the noble Lord, Lord Beaverbrook, in a few moments—which is that we are asked to contrast the excellent economic performance of the 1980s with the dreadful performance of the 1960s.

It is late in the evening but I must try your Lordships' patience by referring to a few of the relevant facts. In the period from 1979 to the present day—I also take the view that 1979 is the correct start date—the gross domestic product has grown by about 1.8 per cent. per annum. Over the dreadful decade of the 1960s, which was the heyday of Keynesianism, the growth rate was 3.2 per cent. per annum. The growth rate of GDP per capita in the great new days from 1979 to 1987 has been about 2 per cent. per annum. That is a reflection of the tremendous improvement in the efficiency of our economy. In the bad old 1960s it was actually 2½ per cent. or more per annum. In the had old days of the 1960s British industry was capable of expanding employment while productivity was rising. It was a period of rising employment. There was more employment at the end of the decade than at the beginning. In the great 1980s one is almost too embarrassed even to mention the employment position.

An even greater curiosity is this. The average inflation rate from 1979 to 1987 has been 7.3 per cent. per annum. I believe it is now just over 4 per cent. per annum. It is worth reminding ourselves that the average of the bad 1960s was actually below 4 per cent. per annum. The average for that decade was below the great achievement of this current year. I could go on at greater length drawing all sorts of paradoxes; namely, that the ratio of gross fixed capital formation to GDP was actually higher in the 1960s than it is today. The ratio of taxes to the GDP of the 1960s was lower than it is today.

We now have a great difficulty for the Government, and for me, in that public expenditure relative to GDP was lower in the 1960s than it is today. I am willing to criticise the 1960s for that but I am not sure that the Government are willing to do the same thing. Even the balance of payments on current account over the whole of the 1960s just about balanced despite the stop-go and the crises.

Performance in the 1980s has been that the ratio of the surplus to GDP is about 1 per cent. That is better than nought, I agree, but there is a slight difference, which is known as North Sea oil. It is worth bearing that in mind. I go through this boring compendium plaintively in the hope that these references to the had old days can be scotched once and for all.

I conclude by saying that the impression is being created that the UK economy now is inherently sound and if the storm breaks we shall emerge unscathed. My view is that nothing could be further from the truth. I agree that the immediate position may not appear to be too bad for some, although I am indebted to my noble friend Lord Bruce for reminding us that what is true for the aggregate may still not be true for some parts of it. There are still quite a number of inhabitants of this country who are both not terribly well off and probably worse off than they were in 1979. To quote the noble Lord, Lord Bruce, we are in a very insecure position.

This takes me to the point raised by the noble Lords, Lord Ezra, Lord Donoughue, and others and it is my concluding point. Whatever our view is of the immediate position—and we can argue that backwards and forwards—what matters is the long term outlook. My view is that the summary position both of our own economy and the world economy is to say at the least that the long-term outlook is a good deal less than satisfactory.

7.24 p.m.

Lord Beaverbrook

My Lords, first of all I should like to congratulate the three noble Lords who have today made their maiden speeches. The noble Lord, Lord Richardson of Duntisbourne, has well-known expertise in the world of banking and finance and I am sure he will contribute greatly to your Lordships' deliberations in the future. I should also like to congratulate the noble Lord, Lord Jay, and also my noble friend Lord Crickhowell, who both bring to us great experience of government.

I am grateful to my noble friend Lord Thorneycroft for introducing the debate today. He said that he felt that this was a debate which transcended political boundaries. I was going to ask the noble Lord, Lord Peston, what happened to the 1970s but because of the words of my noble friend I decided I would not do that tonight.

As today's debate has reminded us, the world is a difficult place. But we should not lose sight of what has been achieved in recent years. Perhaps noble Lords can cast their minds back five years to 1982. At that time North America and part of Europe were in recession. Output of the industrial countries was falling and the volume of world trade was contracting. The average rate of inflation in the major countries was still close to double figures. Interest rates were extremely high. The burden of debt and of debt interest payments on less developed countries was rapidly growing. There were fears of a crisis.

Since then the world economy has enjoyed five years of continuous growth. The volume of world trade has expanded by a quarter; and the United Kingdom has held its share of that trade in contrast to the position in the 1960s and 1970s when the United Kingdom's share was steeply declining. Inflation and interest rates have declined. I agree with my noble friend Lord Nugent of Guildford that the progress which has been made partly reflects a greater recognition of the need for prudent fiscal and monetary policies. Increasingly governments have come to realise that they cannot spend their way to target rates of real economic growth or target levels of employment: the result is inflation.

Perhaps this is an appropriate point to reflect on the policy proposals of the party opposite. Its policy used to be clear. It was a policy based on spending beyond the country's means. This had to be financed by borrowing. Then followed higher inflation and the ignominy of IMF rule. That was a long time ago. But it did not seem to have learnt the lesson, and the party has stuck with its policy of spending.

A few years ago the party opposite advised us to follow the example of the United States and run up the kind of budget deficit that has contributed to recent difficulties. Now it is difficult to say with certainty what its policy is. Perhaps the co-ordinated fiscal expansion advocated by the noble Lord, Lord Basnett, is part of it. What is clear is that it is still a high spending policy.

The noble Lord, Lord Bruce of Donington, says that reliance on market forces does not work and that freeing the internal market in the European Community will not boost growth. Market forces can only work if they are allowed to work and that is why this Government place so much emphasis upon deregulation and the freeing of enterprise.

The key to long-term growth is not faster growth of money demand; it is supply performance. There is an increasing consensus on the need to allow markets to work more freely through tax reforms, reductions in government spending and industrial subsidies, labour market reforms, deregulation and privatisation. Governments of varying political complexion in almost all of the OECD countries now recognise this. The improvement in performance has been particularly impressive in United Kingdom manufacturing industry, where the productivity trend has accelerated sharply following the marked slowdown in the last decade.

Speaking in Washington of the United Kingdom's strong growth performance, the Chancellor said: It is the enterprise economy that has done the trick". Cuts in marginal rates of income tax and reforms to the system of national insurance contributions have improved incentives. Changes in housing and pension arrangements have encouraged mobility of labour. Legislation has made trade unions more responsible to their members and more accountable for their actions. The privatisation programme has transferred 16 major companies to the private sector, reducing the state sector by one-third. Those activities still publicly owned are being exposed as far as possible to market pressures; for example, by requiring services to be put out to tender. With more flexible markets we can have more growth and jobs without more inflation.

My noble friend Lord Boardman called for a cut in interest rates. The Government have recognised that the fall in share prices implies a tightening in monetary conditions. Interest rates have accordingly been cut by a full 1 per cent. since mid-October but the Government are not prepared to take any risks with inflation.

The noble Lord, Lord Rugby, gave one example of a supply-side policy; namely, more widespread teaching of modern foreign languages in schools. Supply-side policies need to be pursued within a stable framework of fiscal, monetary and exchange rate policies that will secure continuing steady non-inflationary growth in the world economy, while at the same time encouraging a necessary reduction in current account imbalances, which have caused so much concern.

Let me remind your Lordships of the background to the strengthening of economic co-operation in recent years. Since the late 1970s we have seen huge swings in the real exchange rate of the dollar—swings that have clearly not reflected fundamental economic factors and that have distorted investment decisions, damaged growth in world trade and increased protectionism. It was a growing concern about protectionist measures in the US Congress that led to the Group of Five meeting in September 1985 at the Plaza Hotel. The immediate problem then was that the dollar was much too high. The Plaza Agreement played an important role in securing a steady fall over the succeeding year and a half.

Plaza marked an important step towards a more managed system of floating exchange rates. The Louvre Accord in February this year marked a further step. By then the dollar had depreciated by a third from its peak two years before to a level more consonant with economic fundamentals. It was agreed that the interests of the world economy would be best served by a period of stability in exchange rates. This would allow time for the major realignment that had taken place to reduce trade imbalances, the effects of exchange rate changes on trade balances being long drawn out and moreover initially perverse.

At the same time, the major countries committed themselves publicly to economic policies to support the necessary adjustment of trade imbalances. The United States undertook to curb its fiscal deficit, while the surplus countries, Japan and Germany, agreed to follow policies to promote faster growth of domestic demand. These commitments were reaffirmed at the meetings in Washington in April and in September. I agree with the noble Lord, Lord Ardwick, that exchange rate swings in the 1980s have been impossible to predict. They have not reflected fundamental economic factors but short-term speculative forces which have added to uncertainty and discouraged risk taking and investment. I agree that management of floating exchange rates by the major countries is essential to avoid such swings in future.

Over most of the period since February, exchange rates have been much more stable following the Louvre Accord. This is partly no doubt because the authorities have given the markets a clear lead. Progress towards reducing trade imbalances has been slow, but this was not unexpected. Given the sheer scale of the imbalances that have built up over a period of years, the adjustment is bound to take years rather than months. It was undoubtedly necessary to correct the huge misalignment in 1985, but a further sharp fall in the dollar now would do little to reduce the current account deficit and would increase inflation in the United States. In consequence, it would increase the risk of an eventual recession there.

I welcome the rational and balanced analysis of problems in the world economy from the noble Lord, Lord Richardson. He is of course correct to point to the problem of inadequate savings in the United States and the fact, which seems to be so difficult for many to grasp, that adjustments of the imbalances will only take place very slowly. Currency depreciation is not the answer to low domestic saving and the fiscal imbalance in the United States, which is the root cause of the US trade imbalance. This is a problem which needs to be tackled. The recent agreement on a package which will reduce the US budget deficit by 30 billion dollars this year is a welcome step.

I agree with the noble Lord, Lord Bonham-Carter, that the United States fiscal policy must take a large part of the blame for the trade imbalances. However, I disagree with the noble Lord, Lord Bonham-Carter, and the noble Lord, Lord Kagan, that the United States must cut its budget deficit by cutting defence spending. There are many other ways in which the deficit can be cut.

Worries have been expressed that such a reduction in the budget deficit would tip the US economy into recession. These worries are exaggerated. Last year the US budget deficit was reduced by almost 75 billion dollars without causing a recession. As mentioned by my noble friend Lord Thorneycroft, in the UK in recent years a very substantial reduction in government borrowing has been achieved without any faltering in the rate of economic growth.

The noble Lord, Lord Donoughue, is right to say that prospects for the British economy depend partly on what is happening abroad. However, a world recession is far from inevitable and the British economy is currently strong and well placed to cope. The noble Lord made the accounting point that the US budget deficit would appear smaller if the surpluses of state and local government were allowed for. Crucial, however, is the relation of the United States budget to the low level of domestic saving in the United States because its saving is exceptionally low. The deficit has to be financed to a great extent by borrowing abroad.

The noble Lord, Lord Jay, sounded a warning of the dangers of over-reliance on the US cutting its budget deficit as a substitute for taking appropriate action ourselves. However, I assure your Lordships that my right honourable friend the Chancellor of the Exchequer will not hesitate to take any necessary action to keep our economy on the path of steady, sustained growth combined with low inflation.

My noble friend Lord Nugent of Guildford said that the soundness of the British economy had made it a safe haven for funds from abroad. I agree with him and with my noble friend Lord Crickhowell, who, in his excellent speech, noted the resilience of the British economy in the face of last year's fall in oil prices, which stood to damage our balance of payments and public finances. In the event, growth has strengthened in this country while it has slowed down in other industrial countries.

The noble Lord, Lord St. John of Bletso, mentioned the possible depressing effect of the stock market fall on business investment. However, we have to bear in mind that the recent fall follows a very substantial rise. Share prices in London are still no lower on average than in 1986. The recent CBI survey, as mentioned by my noble friend Lord Young of Graflham, conducted after the crash suggests that there is no break in investment intention. I believe in the strength of our enterprise economy, and, as suggested by the noble Lord, Lord Beloff, if the Soviet Union had such an enterprise economy more of its population might be able to afford, for example, motor cars. Recent experience in this country shows what a powerful engine capitalism is for economic growth and increasing prosperity.

The noble Lord, Lord Hatch of Lusby, I believe is quite wrong, and I am sure he would not expect me to follow him down the road claiming that the Government have not followed consistent policies. We have throughout pursued sound fiscal and monetary policies. Our policy has sought to create the financial conditions for low inflation and steady economic growth.

However, I believe that the noble Lord is quite right to draw attention to the plight of the lowest income debt distressed countries. Their needs have been given increasing emphasis at international meetings and my right honourable friend the Chancellor has urged other creditor governments to join in offering a package to relieve the severe debt servicing burden. I agree with the noble Lord, Lord Ezra, and the noble Lord, Lord Richardson, that while the US budget deficit is a major weakness and imbalance, better management of the world economy also requires the full co-operation of other countries. As my right honourable friend the Chancellor said last week, there is a need for the two big surplus countries—Japan and more particularly Germany—to commit themselves to further action to improve their economic momentum. Recent cuts in German interest rates and news this morning that Germany is taking fiscal measures to stimulate demand is encouraging.

My noble friend Lord Cowley compared the current situation with that faced after the 1929 stock market crash. He focused on the economic developments in the US and the Louvre Accord to tackle the underlying problems. However, I believe that he was wrong to suggest that the situation is now worse than that in 1929. We will not repeat the mistakes made then. The cuts in the United States deficit will not lead to a worsening of recessionary risks. By increasing confidence, the cuts will help to stabilise the equity in foreign exchange markets and reduce those risks.

The noble Viscount, Lord Chandos, mentioned membership of the EMS. I accept that arguments can be put both ways on membership of the exchange rate mechanism, but we have said that we will join when the time is right. It is unrealistic to think that our membership will, or could in the future, have a significant impact on the world economy. International co-operation between the Group of Seven is, I am sure, the best way to ensure that the world economy continues to enjoy the steady growth and low inflation that we have now seen for five years. I can assure your Lordships that this Government will play their full part in securing that co-operation.

7.40 p.m.

Lord Thorneycroft

My Lords, I rise simply to thank your Lordships for this excellent debate. There were some very good speeches from noble Lords, including those from the maiden speakers. I learnt much from listening to the speeches from all sides of the House and I am grateful for having had the opportunity to do so.

There is no assembly in the world which equals your Lordships' House, with its range of experience and knowledge of different disciplines, and which can conduct a discussion on such a difficult subject. I hope that we made a contribution to a swiftly moving problem. I ask leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.

House adjourned at eighteen minutes before eight o'clock.