European Financial Area: ECC Report

HL Deb 23 January 1989 vol 503 cc460-96

3.5 p.m.

Lord Kearton rose to move, That this House takes note of the report of the European Communities Committee on a European financial area [21st Report, 1987-88, HL Paper 109].

The noble Lord said: My Lords, I beg leave to introduce this debate on the report of the Select Committee on the European Communities, the subject of which is the European financial area. The investigation was carried out by Sub-Committee A of the Select Committee. I should like to express my thanks to the hardworking members of the Select Committee, to its specialist adviser, Professor Begg of Birkbeck College, and to the sub-committee's indefatigable clerk, Mr. William Sleath. I should particularly like to thank also the eminent witnesses who were uniformly helpful.

It is an unusual but most welcome development that one of our witnesses, the noble Lord, Lord Cockfield, will be taking part in today's debate. The noble Lord has just concluded a distinguished and most successful term as a commissioner and vice-president of the European Commission. His energy, extraordinary abilities and advocacy as well as the reports that he has sponsored have been decisive in the second half of this decade in getting Europe moving briskly forward—movement after a long period of comparative stagnation.

The Single European Act was the political decision which ended that stagnation and set the stage. The follow-up was the remarkable Brussels White Paper of three-and-a-half years ago which listed some 300 specific proposals for action and set up a timetable in which those actions should be achieved. It was a timetable with completion set for the end of 1992, a date which now dominates Europe. The White Paper, the wide range of specific proposals, the timetable and the very considerable progress to date all result from the commissionership of the noble Lord, Lord Cockfield. His manifold services to this country in the Civil Service, industry and commerce, the chairing of commissions and finally in government had already established him as a great Englishman. His four years in Europe have established him as a great European too and a key figure in building up a Europe in which he sees Britain as a pillar of strength in every sense with the opportunity to play a major part in Europe's development and destiny.

The basis of the committee's inquiry was the Commission's proposed directive and regulation of November 1987 in line with the White Paper to complete the liberalisation of capital movements within the Community and to move towards the liberalisation of capital transactions between the Community and third countries. After consultation with the European Parliament the Council adopted the proposals in June 1988. Most member states are to implement the directive by 30th June 1990. The exceptions are Spain, Greece, Ireland and Portugal, where compliance may be delayed until 1992.

The directive is not absolute. It provides for exceptional circumstances. With the authorisation of the Commission, reimposition of capital controls (under certain conditions) is allowed for a period of no longer than six months. The regulation accompanying the directive consolidates existing Community instruments for medium-term balance of payments support and sets up a permanent facility with considerably increased resources.

The European financial area which is in the making requires a free internal market in financial services. That is an objective which goes back to the Treaty of Rome itself. Following the White Paper of the noble Lord, Lord Cockfield, that freedom is now being established by a series of proposals and directives. For instance, the "own funds" directive harmonises the definition of bank capital to be used in banking supervision; the solvency ratios directive sets out the formula to determine capital adequacy for credit institutions; and the second banking co-ordination directive establishes the principle of a single banking licence, which would allow firms to create a Europe-wide banking system with consequent Europe-wide competition. There has been the adoption of the 1987 directive on mutual recognition of prospectuses. After many years of deadlock, there is movement in the insurance market; large risk services to major corporations are now expected to be fully integrated in an open market by next year. There are also the recent proposals on the control of mergers, and so on. The impetus to a free internal market in financial services is now unstoppable.

In all this activity the freedom from capital controls is a more fundamental step than the others. It raises important questions to which at this time no certain answers can be given. It was to air these questions that the committee carried out the inquiry.

In the introduction to the committee's report the post-1945 developments in the international monetary system are set out, the keystone being the Bretton Woods Conference of 1944, which initiated the various post-war international financial institutions. There were four key objectives at Bretton Woods: free trade in goods and services; free international capital movements; exchange rate stability; and national automony over domestic economic policy. However, it was recognised that those four goals could not all be reconciled. Fixed exchange rates was the chosen option with free trade in goods and services the target, with retention of national autonomy in ecomic policy. Free movement of capital was the goal which was sacrificed.

The Bretton Woods systems provided a framework for the worldwide dramatic post-war increase in production and trade. The fixed exchange rate regime lasted until the 1970s. Events since then are another story. But one might remark in passing that today's G7 meetings are in the spirit of Bretton Woods. The architects of the Treaty of Rome in 1957 had the same dilemma as was evident at Bretton Woods and there was no immediate liberalisation of capital movements within the Community of Six, although it was an objective. Some modest but abortive attempts at liberalisation in the 1960s were removed in the 1970s after the oil price shock and exchange rates between member states were themselves highly volatile. Such volatility was a hindrance to the development of the Common Market, fast though its economic growth proved. Various attempts were made to reduce the volatility, including the short-lived so-called "snake" of currency parities which followed the accession of the United Kingdom to the Common Market in 1973.

The successful attempt to stabilise exchange rates within the Community was launched in 1979 with the founding of the European monetary system. The European monetary system depended on the twin pillars of a European currency unit, the ecu, and an exchange rate mechanism. The ecu was to be used as a unit of account in settling transactions between European governments and between their central banks, but with the hope that in parallel a private ecu market would develop. The value of the ecu has derived from the weighted average of the value of the individual countries of the Common Market, including the pound sterling. The exchange rate mechanism sets a central value for a country's currency against the ecu with fluctuations allowed within a narrow and defined band for each currency. A European monetary co-operation fund provides credit facilities between member governments. Changes in a country's exchange rate outside the band can be made but only with the consent of all the members.

The United Kingdom is a member of the European monetary system but not of the exchange rate mechanism. The United Kingdom Government have said at various times that they will join the exchange rate mechanism when the time is right. That pledge was repeated by Mr. Peter Lilley, the Economic Secretary to the Treasury, in his evidence to the committee. It must be stressed that the absence of the UK from the exchange rate mechanism is regretted by other members of the Community.

The exchange rate mechanism is regarded by those participating as having constituted a major success. Since 1983 exchange rates between the respective currencies have been remarkably stable. Adjustments have indeed been made but they have been small and managed in an orderly fashion. The anchor currency of the system has been the deutschemark and over the years the inflation rates of the participating countries have converged to the very low inflation rate of Germany. That convergence also owes much to the growing co-ordination in the monetary policies of the participating countries.

For most of the period of the exchange rate mechanism only Germany, with its strong export performance and export surplus, has had freedom from exchange controls. It lifted them in 1981. The Netherlands followed suit in 1986. France recently introduced partial liberalisation and with Italy hopes to accomplish complete liberalisation by 1990. However, meanwhile France is pressing for harmonisation of Community rules to protect savers and depositors and for measures to prevent tax evasion when all controls have been lifted. With Italy, it would like such arrangements to be introduced and in place before 1990. The Commission has considered whether harmonisation of company taxes should also be encouraged.

The position of Italy is interesting. A considerable budget deficit is at present largely financed by internal savings which currently cannot be deposited outside the country. Freedom of capital movements will almost certainly have to be matched in Italy by considerable fiscal changes.

Retention of capital controls enabled the weaker countries of the original Community of Six to adjust their policies to preserve exchange equilibrium and to help move towards economic convergence. It is that success which now permits capital liberalisation. For the poorer countries of the enlarged Community, being locked into fixed exchange rates, with no control over capital movements, implies a considerable degree of risk for the development of their economies. That is the reason why such countries have been so insistent on support by way of grants from Brussels to develop their infrastructures especially in transport and provision of energy. Whether the increased flows agreed by the Council last year, and which it is intended will be co-ordinated with increased investment by the European Investment Bank, will be sufficient is a moot point. Certainly future regional aid will have to be more carefully thought through and more closely monitored. In my view these transfers will have to be considerably increased—far beyond anything at present envisaged.

The United Kingdom has so far stayed outside the exchange rate mechanism. Has that caused any economic harm? Until two years ago I think the answer could be unequivocally "no". The United Kingdom's economic performance since 1979 was initially a sharp recession followed from 1981 by vigorous and sustained growth—faster than in the rest of the Community. Many reasons have been attributed: the benefits of North Sea oil; the reduced power of the unions; the encouragement of an entrepreneurial climate; the removal of many restrictions from business; and the reduction of government activities and government intervention in industrial affairs. It must be remembered that this growth was a catching-up process with the rest of the EC. After the oil price reduction of 1985 our country also had the advantages of a modest exchange rate and low import commodity prices. There were considerable increases in the money supply, plentiful credit, and significant reductions in taxation. Not surprisingly, the UK has had three boom years.

The UK lifted exchange controls in 1979, when the prospect of large external oil revenues was immediate. The freedom helped the City of London in its role as a world financial centre, and in the 1980s it has permitted a large capital outflow and a major build up of private overseas assets. However, in 1988, again not surprisingly, the boom has meant that the country has experienced a large deficit on the balance of payments. The high interest rates for short-term money have provided the incentive for capital inflows compensating for the trade imbalance. The high interest rates have pushed up the exchange rate of the pound and there has been a sharp rise in inflation in 1988. The United Kingdom now has one of the highest inflation levels in both the Common Market and the OECD countries.

As I have said, there is no evidence that United Kingdom membership of the exchange rate mechanism of the European monetary system would have improved the UK economy or UK growth prospects, at least until 1985. Whether the disciplines of the exchange rate mechanism would have helped prevent the post-1985 system is a question which may give a guide to the UK's future course of action.

The evidence that the committee received on the implications of all the recent steps to provide a European financial area and freedom of financial services is summarised in Part 3 of the report. The verbatim accounts of the interviews with witnesses are in the report and make interesting reading, so diverse were the views expressed. At one extreme were those who saw the resultant pressures on the European monetary system being such that the adjustment bands in the exchange rate mechanism would have to be so widened as to lead to a breakdown of the system. The hard won gains of greater financial freedom would be in peril.

In the centre were those who thought that the pragmatism of the European Community nations and their habit and experience of working ever more closely together in monetary affairs would bring a new equilibrium. A framework would be established, capable of withstanding jolts, tensions and temporary mismatches between economic growth and fiscal management.

At the other extreme were those who thought that the inevitable and logical conclusion of the present package of liberalising financial measures and the intimate welding together of the economic and financial apparatus of the individual nations must be a common currency, managed by a European central bank. Even on this flank there was no agreement on timetable or on the powers, constitution or independence of such a central bank. But it was maintained with fervour that a common currency, with the common concomitant of a central bank, was necessary to achieve the full economic potential of the European Economic Community, and that the pooling—a favourite word—of national sovereignty in such financial and in due course fiscal matters was a fair price to pay. The prize was worth the price.

It is highly significant that the Commission, with the agreement of the Council, has set up a special exploratory committee under the presidency of Monsieur Delors to look into the whole situation, with a remit to give a provisional report to the European Finance Ministers by April this year. The views of your Lordships' House as expressed in this debate will be timely.

The sub-committee, in summarising the evidence, used a series of headings to aid consideration. These headings included, "The benefits of liberalisation"; "The effect on taxation and regulation"; "The ecu and a common European currency"; "A European Central Bank"; and "The drawbacks of monetary union". The contributors to the debate will, I am sure, develop these themes.

The committee's opinions are given in Part 4 of the report and a summary of conclusions is in Part 5, paragraphs 93 to 105. In brief, the committee welcomed the liberalisation of capital movements and all the steps being taken to create a European financial area. It considered that considerable benefits could accrue—I stress the word "could"—to the United Kingdom, and wanted the United Kingdom to be in a strong position to exercise leadership in the Brussels debates. The committee favoured a pragmatic step-by-step approach to the development of the European monetary system. It felt that the United Kingdom should now take any early opportunity to join the exchange rate mechanism, although recognising that that is not an immediate prospect. It was against any promotion of "fortress Europe" in financial matters.

The committee considered that it would be some time before the Community and not just Britain was ready either economically and, even more important, politically for full monetary union with a common currency. Nevertheless the committee emphasises that the Community—all the nations of the Community—by ratifying the Single European Act has accepted closer monetary co-operation as an agreed policy and notes that the Act provides that if institutional changes are necessary then treaty amendment can he considered.

The full implementations of the momentous developments which the Single European Act and the White Paper that the noble Lord, Lord Cockfield, put in train, are worthy of the closest attention from your Lordships' House. I am sure that the present debate will be both informative and constructive. My Lords, I beg to move.

Moved, That this House takes note of the report of the European Communities Committee on a European financial area [21st Report, 1987–88, HL Paper 109].—[Lord Kearton.]

3.25 p.m.

Lord Cockfield

My Lords, the House, the country and indeed the Community as a whole owe a debt of gratitude to your Lordships' Select Committee on the European Communities for the very clear, penetrating and impartial reports which it produces on matters of Community interest and policy. The present report is very much in that honourable tradition. I greatly welcome the report's support for the European financial area. This is an integral part of the White Paper programme for the completion of the internal market by 1992 to which the noble Lord, Lord Kearton, referred.

It is of immense importance to our country because of the stake that we have in financial services. It is wise to bear in mind also that it is important not just from the point of view of the prosperity of the financial sectors, but also because of its impact upon the prosperity of trade and industry as a whole. This was one of the major areas studied in the Ceccini Report, to which the noble Lord, Lord Kearton, referred, which indicates considerable benefits flowing from completion of the European financial area.

There has been some criticism of the figures that were given in the Ceccini Report, but it is important to make the point that those figures were, if anything, extremely conservative and the benefits likely to flow will be considerable. I welcome also the support that the report gives to full membership of the United Kingdom in the EMS. I prefer frankly to refer to "full membership" rather than to deal in acronyms like the "ERM" because full membership is what is really involved. The argument for our full membership of the EMS goes much further than simply the industrial and commercial arguments. All experience shows that without an external discipline, sooner or later finance Ministers—I am talking not just in terms of this country but generally—will depart from the path of prudence.

This is amply borne out by history. For many years the external discipline was provided by the gold standard. After the end of the last war this was replaced by the Bretton Woods system, which remained in being for some 25 years. Perhaps it is relevant to mention that during that period of 25 years the pound sterling was devalued in terms of the dollar only on two occasions—a feat which has not been matched since, I may say—and indeed it was the breakdown of the Bretton Woods system in the early 1970s which ushered in the great inflation.

I know that it is customary for people to ascribe the great inflation to the oil price increases. But in fact the oil price increases accounted for but a minor part of the ensuing price increases. The major part was due to the failure of governments to react in a proper and prudent manner to those oil price increases.

The only effective external discipline which exists at present is the EMS and that is the reason why we should join. I know that at present it is said on behalf of our Government that we need no such external discipline. I entirely accept that statement, but the day may well come when our present Government are replaced by another government. That government may well require external discipline, as past events have proved. The time to introduce that external discipline is when it is not needed.

There is one point on which I dissent somewhat from what has been stated by the Select Committee. Page 23, paragraph 105, of the Summary of Conclusions reads as follows: The Committee note that the Community, by adopting the Single European Act, has accepted closer monetary cooperation as an agreed policy". In fact, the commitment goes very much further than that. The Single European Act states: the Heads of State … approved the objective of the progressive realization of Economic and Monetary Union". The same point appears in the conclusions of the meeting of the Heads of Government at Hanover in June of last year. On that occasion they stated: The European Council recalls that, in adopting the Single Act, the Member States confirmed the objective of progressive realization of Economic and Monetary Union". I shall deal with the implications of that statement in a moment but I should like to make an immediate point. I make it not with any criticism of the Select Committee but as a general point.

There is a tendency on the part of government—not just the present Government but all governments—to use emollient language in order to gloss over what they believe may be inconvenient or controversial facts. Unfortunately, this is such an example. The difficulty with such an approach is that while it may avoid immediate trouble and embarrassment it stores up a great deal of trouble for the future. Many of the problems which have arisen in the Community have occurred as a result of a failure to realise the extent of the commitments which have been undertaken. The commitment that has been undertaken in the present case is a commitment to monetary union; not simply a commitment to monetary cooperation. Unfortunately, when the unvarnished truth finally emerges it tends to lead to a considerable reaction. That reaction we have seen on a number of occasions.

That brings me to the question of the European currency. I have not the slightest doubt that before the end of this century we shall have a single European currency. The path in that direction is already clearly staked out. There is the EMS; the creation of the single banking market; the declaration by the Heads of Government at Hanover; and the appointment of the committee under President Jacques Delors to study and propose (it is most important that we look at the language used): concrete stages leading towards this Union". That is where Europe is going and it is where a great majority of the member states intend going.

The real point at issue is not whether that will happen but whether our own country will be part of that movement. The problem that we face at present is that, because of a refusal to face the commitments which have already been entered into, the debate is taking place on the wrong issue. In other words, people are discussing whether there will be a single currency; while the real issue is whether this country comes into a system of a single currency or whether it does what it did in the case of the EMS. It was to allow the other member states to go ahead and for us to remain outside. It is crucially important that the issue should be faced because it has great implications for this country, for the City of London and our financial services generally.

I should like to end with two comments. First, I sincerely thank the noble Lord, Lord Kearton, for the kind remarks that he made about myself. Secondly, I repeat what I said at the beginning: that I regard this as a very helpful, constructive and well-balanced report.

3.36 p.m.

Lord Banks

My Lords, the House is once again indebted to the noble Lord, Lord Kearton, and to Sub-Committee A for producing another thorough report on the financial future of the European Community. It has also had the benefit of hearing from the noble Lord, Lord Cockfield, fresh from his four years as a commissioner in Brussels. We are delighted to see him in the House, once again taking part in our debates.

The report deals with the liberalisation of capital within the Community and the establishment of a European banking system. Both of those are to take place by 1992. It is natural that, in that context, the report should discuss the United Kingdom and the exchange rate mechanism to which the noble Lord, Lord Cockfield, referred.

I am glad that the committee has decided to stick to its previous policy. In the Summary of Conclusions, paragraph 103 states: The United Kingdom should take an early opportunity to join the ERM, and so he in a stronger position to exercise leadership in debates on monetary policy". Paragraph 83 states the committee's belief that the exchange rate mechanism has been successful in reducing exchange rate volatility. The noble Lord, Lord Cockfield, said in evidence to the committee that the European monetary system had been of immense value to the participants.

Ben Patterson, a United Kingdom MEP, explained the difficulty which he had in defending to his colleagues from other countries in the European Parliament the current British position on the exchange rate mechanism. I hope that the Government will take the advice of the committee on that important issue.

The report discusses wider issues. It appears that there are two intertwined themes running through the report from the beginning to the end. The first is the old argument between the visionaries and the pragmatists. The visionaries are there proclaiming the brave new world, perhaps even setting out target dates for the different stages which must be reached if we are to see it established. The pragmatists are also there, singing the words to the hymn, "'I do not ask to see the distant scene; one step is enough for me".

The second issue, very much intertwined with the first, is whether the establishment of one European currency and the central bank is a relevant issue for contemporary discussion. Some pragmatists believe that weshall eventually come to one currency and a central bank but they believe that it is a long way off and would prefer not to speak about it now. They would rather leave it to come about by stealth. The noble Lord, Lord Roll of Ipsden, whom we are looking forward to hearing later in the debate, put a question to Professor Goodhart, of the London School of Economics. He asked: do we really need to commit ourselves, knowing the resistances, political and otherwise, however unreasonable they may be, to accepting here and now a need for a single currency and Central Bank? Do we really need to go through the agony of using these words and committing ourselves to these now, much as I personally think that these are inevitable end stations? I suppose we might call that the voice of enlightened pragmatism, but the reply of Professor Goodhart was not encouraging. He foresaw speculative flows caused by the liberation of capital which might blow the EMS apart, to use his phrase. He thought that in that situation the Community would either have to proceed to close monetary union or slip back to something of a looser system, perhaps something akin to the crawling peg concept. However, if economic and monetary union is the aim of the Community in such a situation, he did not believe that that could be done by stages. He thought that we should have to take, A fairly major jump literally all the way to a single currency". He also thought that to do that would be a major political act, therefore not something that could be done by stealth. I believe that he is probably right in saying that we shall have to take a fairly major jump and I think he is certainly right in saying that it will be a major political act.

If that choice between monetary union or slipping back were forced upon us, I should hope that the Community would move to monetary union with all its difficulties and implications and with no resort to a two-tier Community. The point I wish to make is that we may face that choice before the end of the century and that is why we should face up to the possibility now and discuss it now; and it seemed to me that that was also the view of the noble Lord, Lord Cockfield. I certainly await with great interest the results of the deliberations of the Delors Committee.

Liberalisation, though to be desired, clearly brings its problems. We have seen that speculation may be one. Others covered in the report include reciprocity, company taxation, tax evasion and the establishment of safeguards. However, monetary union also brings its problems and in the pages of the report we again meet our old friend convergence. We have discussed that in this House in the past. I believe we agree that there has been some convergence, but running 12 separate economies with 12 currencies means that there are limits on convergence and we may wait for ever until we come to a moment which seems to be particularly propitious to make the move.

I suggested once before to this House that what the Community does immediately after one currency is established is important. I am sure that that has to be planned most carefully. Therefore, we should need to take Professor Goodhart's fairly major jump and then follow an agreed course. The completion of the internal market and the establishment of monetary union would tend no doubt to increase the existing disparities within the Community and therefore it would be necessary for the Community to be prepared to provide funds in excess even of the present doubling of the structural fund which is to be achieved by 1992.

I also believe that it would be necessary for our Government to take a more welcoming attitude to the concept of a social Europe than they appear to have done so far. It is obviously desirable to secure the maximum agreement in this country as to our future course but it would be sad indeed if the price to be paid for that were that we should be always lagging back and always deciding to sail on the most sluggish stream. A clear decision is needed on where the Community should aim to reach on monetary union and then some vigorous and positive leadership to ensure that we reach that point.

3.46 p.m.

Lord Seebohm

My Lords, first, I should like to express my admiration of the way in which our chairman, the noble Lord, Lord Kearton, conducted our examination and inquiry. He sometimes went at a great speed, which left us somewhat breathless, but I am sure that all members of the committee are most grateful for the way he conducted the meeting and for the report he produced.

The chairman has already explained that the decision about the single European currency area was taken last June except for the four weaker territories. I was very pleased that the committee decided to examine that agreement, as there would not only be repercussions which had not been fully thought through but it could be a precursor of further moves towards the completion of the internal market.

The abolition of exchange controls no doubt puts some strains on the EMS although one cannot tell how great they will be. Mr. Lilley, in his evidence, played down the potential strains and pointed out that many capital barriers are already brought down and those nations with free capital flows have not experienced wild exchange rate fluctuations. It was suggested that bands within which exchange rates fluctuate may have to be widened and that the powers now given to the Commission to borrow up to 16 billion ecu from capital markets in order to counteract speculative attacks on a member's currency should be of considerable help.

I should be utterly dismayed if the EMS were to collapse as I am convinced that it has been genuinely effective in stabilising exchange rates. Also the ecu is now beginning to have an expanding commercial role and, although it will not be a common currency, it brings many of the advantages that monetary union would bring. It is also my view that the UK should join the ERM as soon as practicable as that would strengthen the EMS generally and avoid the danger of the deutschemark taking its place, which is on the cards and which would diminish the standing of London as the centre for world financial markets. It could also bring about a two-tier Europe, which would be a disaster for this country.

As regards monetary union, that is clearly a long way off but its value for international trade when it comes, will be very great. I remember with considerable nostalgia, at a time when I was in charge of what might be called a Commonwealth bank, what a great advantage it was to operate in the sterling area. keeping the reserves in London and moving them around our colonial territories to meet the large seasonal, fluctuating demands for financing crops and raw materials without needing to have any regard to exchange rates or, for most of the time, to the balance of payments. Of course that ceased with a bang in 1967 when the United Kingdom devalued and floated the pound.

A recent survey of a thousand leading EC businessmen shows that 80 per cent. want a common currency. There is now a clear conflict between the commercial world and politicians. Politicians do not want to give up what they call sovereignty and would retain it at the expense of some prosperity; the commercial world wants prosperity and would not in the least mind giving up a certain amount of sovereignty.

The single financial area means that it would no longer be necessary to operate through a mass of local companies. One will be able to return to employing local branches, if that is thought to be more advantageous. As the noble Lord, Lord Cockfield, said in giving evidence, the role of the Commission must be the provision of a framework of minimum standards for financial institutions: it should not legislate on matters which are better done by national legislators, leaving market forces to determine the details.

If financial barriers are removed, the question of other barriers will clearly have to he given serious consideration. Mrs. Thatcher has said that national frontiers must remain because of the dangers of terrorism and other problems; but we have signed the Single European Act, which clearly lays down the goal of completion of the internal market by 31st December 1992 and that the market is to be an area without internal frontiers in which goods, persons, services and capital moves are free. That is contained in Article 13 of the Treaty.

I cannot reconcile the Prime Minister's statements with the signature to the Single European Act. If the fear of terrorism is to make a substantial reduction in the standard of living of the whole Community the terrorists will have obtained a substantial victory. I cannot see that being accepted as a reason for maintaining barriers.

Much more difficult is the question of indirect taxation. Here it is a question of bargaining and of deciding how much to leave to market forces. The Select Committee has already studied this problem and reported in 1986 (its 11th report of that session). The Select Committee did not underestimate the difficulties and said, in paragraph 114: Despite the manifest advantages for all member states in completing the internal market, despite the commitment of the Commission and the European Parliament to achieve this aim, and despite the declaration of the European Council, the Committee expect the Commission's proposals in the area of indirect taxation to be resisted at every stage by member states concerned for their fiscal sovereignty, their taxation policies, their tax revenue and the undeniable difficulty of finding solutions to the many problems explored by the Report. Nevertheless, the committee looked forward to the day when frontier controls are abolished altogether. It also received evidence that the benefit to traders was estimated at anything up to 10 per cent. according to the type of merchandise concerned. Since the report was issued, the Single European Act has been completed and some progress in ironing out differences has already been achieved. I look forward to comments from the Government Benches on this subject.

Finally, I wish to make some comments on monetary union. It is clearly a long way off but it is firmly on the agenda, whatever the Prime Minister may say. The noble Lord, Lord Cockfield, said in evidence: If you are going to reap the full advantages of European integration, then you have to go through the route of a common currency. I fully concur with that.

UNICE (the Union of Industrial and Employers Federations of Europe) and ICI, in evidence, predict a common currency. Mr. Lilley criticised the "teleological" approach (as he called it) and preferred the practical, piecemeal, step-by-step approach. That, of course, begs the question: approach to what? The point I wish to make is that the subject cannot be left to drift but must be studied and preparations made for implementation.

We have been told over and over again that the main advantages that America and Japan have over Europe are: first, a common language; secondly, no internal barriers; thirdly, a common currency; fourthly, common fiscal policies. Are the Government going to rule out all those points? If so, the Single European Act makes no sense and the prosperity of Europe will never catch up the high standard of living that those countries enjoy. Let us hope that the single financial area will show the way to further progress towards a meaningful internal market.

3.55 p.m.

Lord Reay

My Lords, we are much indebted to the Select Committee on the European Communities and in particular to Sub-Committee A, which is so brilliantly led and the proceedings of which have been so dominated by the noble Lord, Lord Kearton, for this opportunity to debate the report.

It is also a great pleasure to welcome back my noble friend Lord Cockfield who is returning after what gives all the appearance of being a triumphant success in his turn at the Commission. My noble friend was the commissioner responsible for launching the campaign to complete the internal market in 1985 and it is remarkable the degree of success it has had in galvanising both official and private effort into making this aim a reality. Indeed, the whole world has had to react and if the internal market is achieved it will be a milestone of enormous significance in the Community's development.

The single market in services, goods and capital will undoubtedly be hindered by the existence of multiple currencies. They add to transaction costs and so inhibit trade within the area. So, of course, do multiple languages; but as regards languages English, not in all respects to our advantage, seems to be becoming the common language—the Latin of our time.

Is there any sign of a desire for a common currency? It is fair to point out, as the noble Lord, Lord Kearton said, that alignments within the EMS in recent years have occurred less frequently and have been contained within narrower bands than previously. This reflects a degree of convergence in economic policy, particularly in so far as the containment of inflation is concerned, between member states which may be supposed to have had exchange rate stability as one of its aims.

The call of business for greater exchange rate stability, which is already quite considerable, is likely to intensify after the completion of the internal market as currency instability will then stand out more as a surviving impediment to trade within the Community. I suggest that in the short and medium term all this is, and will remain, far short of the conditions which are necessary for a common currency. A common currency requires a common monetary policy and a co-ordinated fiscal policy. The Community is some distance from having those at the present time. Incidentally, it also requires a substantial and well-developed regional aid policy, which the Community has, and the unrestricted flow of capital, which the Community is about to have. Therefore, while the Community can be said to be moving towards the conditions necessary for monetary union, it is far from being about to arrive there.

Whatever happens I am sure that the commercial use of the ecu will grow. In some member countries it has made more progress than here. In Italy and France ecu invoicing accounts for 1 per cent. of foreign trade. Ecu invoicing is replacing dollar invoicing in the oil trade to parts of the Community. It is also evolving in the travel trade: IATA is to offer the ecu alongside dollar and sterling as a method of clearing payments between airlines. The use of the ecu will grow as the market educates itself into its possibilities. Her Majesty's Government have given a welcome boost to these developments by the recent issue of ecu denominated Treasury bills.

However, this increased use of ecus, however far it is developed, will not amount to a common currency. A common currency needs a central bank to issue and manage it. The ecu is merely an alternative denomination for existing currencies against each of which it necessarily fluctuates.

It follows from what I have been saying that there is no immediate need for a central bank. I am sure that it would be a mistake to create such a bank before it has such a role to play. I go along with my noble friend Lord Cockfield in that we certainly should not refuse to enter into discussions about it. We must be there from the start. We are entitled to enter discussions with a sceptical attitude, but what would be inexcusable would be for us to put in jeopardy London's position as Europe's principal financial centre by absenting ourselves from the first discussions on the grounds that these were premature. We have too often already allowed events in Europe to overtake us. If anyone doubts the importance of this issue let him look at the example of New York whose pre-eminence as a financial centre has quite a lot to do with the fact that it is the Federal Reserve Bank of New York that undertakes all currency intervention in the United States.

But I strongly doubt if we shall be the only member country wanting to resist the premature establishment of a central bank. When it comes to creating new Community institutions or adding to the powers of existing ones, there are other member states just as jealous of unnecessarily giving away their national sovereignty. I believe that the Community will move inexorably towards a greater degree of economic integration or, as the noble Lord, Lord Cockfield, reminded us, of commitment to economic and monetary union. I hope that the Delors Committee will recommend concrete steps in that direction.

I suggest that it is a process that will happen in little steps and often invisibly. It is something that must be allowed to develop naturally. I believe that new institutions should be introduced to make existing practices more efficient, not to anticipate the requirements of tomorrow's conditions. I am sure that this country will continue to play a constructive part in this process and that once we have joined the exchange rate mechanism, which I am sure we eventually shall, we will then be able to play a leading part.

This country has been one of the first to issue ecu-denominated Treasury bills and it is now 10 years since the decision was taken here to abolish exchange controls. Europe needs economic integration if it is to be able to meet the United States and Japan as an equal. It needs economic integration also to underpin political co-operation. Political co-operation needs to be reasserted in the face of the crisis in Eastern Europe. As an excellent article in today's Independent by Patricia Clough sets out, members of the German public are starting to entertain all sorts of romantic and fanciful notions that are uncorrected by their leaders and yet which need contradiction. Events in the East will bring untold trouble to us, as they have done before, unless we hurry on with the construction of the European house.

4.3 p.m.

Lord Roll of Ipsden

My Lords, we must be grateful to my noble friend Lord Kearton for the manner in which he has introduced this important debate. Those of us who had the privilege of serving under him on the sub-committee that produced this report have had many occasions upon which to admire the masterly way in which he has steered us through this jungle of highly contentious and very perplexing issues.

The newspapers have referred to this report as having very balanced conclusions. When one considers the contentious nature of the matters with which it deals and the great differences of opinion not only among economists but among many practical men and women who have responsibility for decisions in government and business, it is indeed a highly balanced document. It is a complement to an earlier report produced by my noble friend Lord O'Brien of Lothbury which dealt more particularly with the European monetary system and with the position of Britain in that system. Noble Lords may recall that it reached a positive conclusion. It also complements the recent report of the Select Committee on the structural funds, which is highly relevant because, in a system of a single market and free exchanges, there will obviously be a greater demand for the support of the structural funds.

The work of the Community in this whole area I believe can be conveniently divided into two parts. One deals with those aspects which directly and immediately affect the activities of the financial services industry—that is to say, the regulatory provisions for entry into the different markets such as banking, insurance and so forth and the rules concerning conduct within those markets. I shall have a few words to say about that in addition to what is in the report. I must declare an interest because I myself am engaged in certain aspects of the financial services industry. In this area the work of the Community covers a very wide range of matters. It is designed to ensure free competition and financial services side by side with the creation of a single market in goods. On all these matters progress has been made, and my noble friend Lord Kearton has given a number of examples.

I believe it is important to stress that recent developments in this area as regards the Community show a considerable desire to be guided by the principle of the mutual adoption of standards rather than by the often frustrating search for an immediate adoption of single uniform standards for all member countries. I believe that the work of the Community thus offers considerable promise that sensible solutions will be found for those matters that are still outstanding, such as takeovers. The noble Lord, Lord Alexander of Weedon, has recently published his own views on the matter. He is the chairman of our own Takeover Panel and I believe that his analysis shows that the rules now being drafted in the Community are very similar to, and may be inspired by, the operations of the Takeover Panel, which has been extremely successful in this matter. Further work and consultation lie ahead and there may be difficulties in enabling an efficiently working non-statutory sytem like our own to continue to operate side by side with statutory systems, though those systems themselves are inspired by the same objectives and purposes and work to the same rules.

Another related problem is the principle of competition and the question of preserving the public interest in that matter as regards mergers and acquisitions. That goes much wider than the financial services industry but it does affect its operations to a considerable extent. The resolution of these matters will no doubt give rise to many problems.

However, what I believe to be important to recognise is that from the experience so far it would be very wrong to assume, as it is sometimes done in some quarters, that those concerned with these matters in Brussels are motivated by a malign urge to bludgeon the members of the Community into an artificial and premature uniformity. That is certainly not the case. All the experience to date shows exactly the opposite. Any bureaucracy has to be constantly watched for signs of exuberance and excessive growth. But even if such tendencies did exist in the Community, the checks and balances in the system are such that if anything is to be feared it is the lack of progress rather than a headlong rush into artificial and compulsory uniformity.

The evolution of a single European financial area raises a question that has been pointed to by a number of noble Lords; namely, the future of the financial services industry of this country and the future of London as an important financial centre. There are perhaps dangers in the fact that the rules of business conduct will not be uniform to start with and will probably remain so for quite some time. As regards the fact that this may lead to undesirable practices seeking a haven in whatever environment is the most lax in this respect, that is not a new problem. We have it now and unfortunately there have quite recently been some cases of that kind, quite apart from the development of the single financial area. I suppose that the development of a single European financial area should make for improvement as regards the Community. It is reasonable to expect that the evolution of standards will be to the higher rather than to the lower level.

The single area for financial services will lead to increased competition. That is what it is designed to do and that is what it will do. This need not affect the position of London, which has been to a much larger extent than Continental centres an open house for foreign enterprises. The City, which contains several hundred foreign banks, has long been used to a high degree of competition from all comers. The open door policy has served London well and the opening of other markets must be beneficial to the position of the City.

One important point is the attitude of the Community towards non-members. The creation of the single market has already aroused a certain amount of concern in the United States, in Japan, in the developing world and among the European non-member countries. The Commission has so far taken great care to make very reassuring noises in that regard. However, now and again the word "reciprocity" is still mentioned rather prominently, particularly in regard to financial services. While I sympathise, as we all must, with the desire of the Commission to have bargaining counters, I support strongly the conclusion of the Select Committee that insistence on reciprocity can be self-defeating. Liberal policy in these matters, like mercy, is twice blessed—it blesseth him who gives and him who takes.

The second part of the committee's report deals with monetary unification. This has been a major theme in our debate so far. This is a concomitant of the Community's commitment to a single market by 1992 and the abolition by 1990 of exchange controls with only a few exceptions. The European Council has decided that a committee under M. Delors should study this matter, one on which economists differ greatly and which also arouses considerable concern among politicians.

The first question to ask is surely this: does anything need to be done in the monetary sphere at the Community level if the single market is to function effectively? The fact that the Delors Committee has been set up suggests that the heads of government believe that there is at least a prima facie case to be examined. I would certainly go much further, as would many others, and say that a single market will not work unless there is—I put this as a minimum—a high degree of stability of exchange rates within the Community. For 10 years now, even before the commitment to a single European market, the objective of stable exchange rates has had its practical expression in the European Monetary System, albeit without the membership of the pound sterling in the exchange rate mechanism. It follows therefore that for the existing members of the exchange rate mechanism, the need for greater exchange rate stability must—with 1992 in view—have even higher importance than hitherto. Indeed, such stability seems essential if the single market, let alone any further economic integration of the Community, is to have any real meaning. To my knowledge the British Government have never questioned the desirablity of a high degree of stability of exchange rates, not only within the Community but on the world scale.

Differences arise on how this stability is to be achieved and maintained and what priority it is to have over other economic objectives with which it may conflict. It may surprise some of my noble friends to know that I regret that the public debate on future developments has been so much in terms of a single European currency and a European central bank. These are perfectly proper terms for an academic discussion. They are by no means ignoble objectives—in fact they are ones which I thoroughly support—but they have a highly emotive effect in international negotiations since they touch on sensitive symbols of national sovereignty or autonomy, or at any rate perceived autonomy. The thought of Britannia on our 50p coin being replaced by Europa—presumably with the bull—would make many throw up their hands in horror.

A long period of great stability of exchange rates is needed. We may then have to consider a single currency. As for talking of a European central bank rather than asking which, if any, functions of a national central bank must now be put upon a Community basis—for example, within a strengthened European monetary committee—this raises questions of how the governor is to he appointed, where the bank is to be located and to what political authority it should be responsible. Much as I believe in the eventual need for a single currency and a European central bank, I do not think that these questions are of such urgency that they must be tackled now. If pressure for them now increases, however irrational is resistance to Britain's entry into the exchange rate mechanism, I would rather leave them over for a while.

The entry of the pound into the exchange rate mechanism is probably the single most important immediate step that should be taken. The entry of the pound into the ERM is a long way from the more lofty objectives which I have just mentioned. It may be regarded by some as a first step which would inevitably drag one along this road which leads eventually to a single currency and a single central bank. Noble Lords may remember what the Marquise du Deffand said about the legend that Saint Denis had walked two miles after his head had been cut off. She said: The distance does not matter, it is only the first step that is difficult". I fully share and strongly support the committee's view that we should take an early opportunity to join the exchange rate mechanism. I regret that we have not long since done so. It would have been good for us and good for Europe. Noble Lords may remember that I likened the attitude of the British Government to Saint Augustine's prayer. He prayed to the Lord: Oh Lord give me chastity and continency—but not yet". Saint Augustine was, however, shrewd enough not to add the words, "but when the time is right", thereby saving himself the embarrassment of constantly being asked to define the right time. As the report points out, many of the earlier arguments against our membership of the exchange rate mechanism have lost their validity.

The argument which is heard most nowadays is that exchange rate stability cannot be attained if there are substantial divergences in economic policy leading to substantial differences in such matters as growth and, above all, inflation rates. These indicators are of course influenced by many other factors, but they are—particularly inflation rates—especially under the influence of monetary policy. Monetary policy is one of the most important instruments for affecting exchange rates. It has been argued that further steps towards greater monetary unification via relative exchange rate fixity would restrict the efficacy of an important instrument of national economic policy. It would follow, therefore, that one cannot move on the exchange front until there has been considerable convergence—somebody called it "our old friend convergence"—of national economic policies.

I have two comments on this view. It seems to me inconsistent to cling to an absolute automony of national economic policy, which many of us would in any event regard as increasingly illusory, while urging convergence as a precondition for exchange rate stability. On this basis, exchange rate stability will be postponed to the Greek Calends. The other point is that this view also ignores the fact that maintenance of stable exchange rates is a powerful factor for directing national policies towards greater convergence. The history of the EMS, as indeed the older history of the gold standard and the history of Bretton Woods, demonstrate that, as the noble Lord, Lord Cockfield, pointed out, although I shall have a word to say about a further point he made in that regard.

They have shown how great is the importance of this commitment to exchange rate stability in actually furthering convergence of national economic policies. Of course, convergence produced by an obligation to maintain stable exchange rates is not always welcome. France and Italy may complain that, given the position of the deutschemark in the EMS and the rigour of the monetary policy of the Bundesbank, the effect of the system has been unduly deflationary. We have heard an echo of that argument in this country when it has been said that if the pound were in the ERM it would be tied to a deflationary deutschemark. It seems rather odd that this argument should be used side by side with an insistence on the fight against inflation having priority over all other economic objectives.

The noble Lord, Lord Cockfield, has spoken about discipline in that regard. He has drawn a distinction between the necessity for discipline according to different governments of different political colour. Sitting where I am, I shall not follow him in that. In fact, I would go further than he, because I would say that a truly liberal trading and financial policy, whether within the Community or on the world scale, cannot be had without a degree of discipline; that is to say, without some restraint on national economic policy, whether that is explicitly recognised and institutionalised or not. It inevitably brings about a restraint on monetary policy.

As for Europe's money system in the longer term, I hope that whatever one's aspirations—I share some of them—the question could be discussed in practical terms of what the next step should be. I put that point to the Treasury Minister who was good enough to give evidence to the sub-committee under the chairmanship of the noble Lord, Lord Kearton. He agreed that that was entirely in accord with the Government's philosophy and approach. When I went on to suggest that if that were so it would be highly appropriate for the government of a country which over 150 years ago was the cradle of monetary economics, and which has the oldest central bank, to say what those practical steps might be, I was told that that would mean "leap-frogging" the Delors Committee. I find that hard to understand as there has already been a certain amount of "leapfrogging"; indeed some powerful pre-emptive strikes have already been delivered.

I would therefore respectfully suggest to the Secretary of State that in those matters a touch of glasnost might be appropriate. I also note that the Chancellor of the Exchequer will be speaking on the subject of this debate later this week at the Royal Institute of International Affairs. I hope that he will be less coy than his Treasury colleague and that he will indulge in a certain amount of "leap-frogging".

4.22 p.m.

Lord Butterworth

My Lords, I should like to pay a tribute to the skill and industry of the noble Lord, Lord Kearton, in bringing the report to the House this afternoon and to thank him for his chairmanship of the sub-committee.

A number of noble Lords this afternoon have drawn attention to the fact that the European financial area is an important stage in achieving one of the aims of the Treaty of Rome—economic integration—and much of the debate has turned on that point. Economic integration is an aim which was repeated in the Single European Act and it is therefore neither new nor revolutionary; but it has been accepted as Community policy from the beginning.

Since the war, a disproportionate share of wealth and influence has tended to cohere around the superpowers—the United States, Russia, Japan and, probably before long, China. The question behind the report is: can Europe become so militarily organised and achieve sufficient economic integration to become the equivalent of a superpower? Its potential is enormous. It has a population of 320 million. Together EC countries have 22 per cent. of world GNP and 37 per cent. of world trade. Can the EC therefore get its act together in time and, by economic integration, seize the rewards which crude statistics of population, economic activity and military strength suggest are within its grasp?

It has been suggested that economic integration demands that the European states should surrender sovereignty and that the internal market is one stage towards some form of political union. There is no authority for that proposal in the Single European Act. My noble friend Lord Cockfield pointed out that the Single European Act refers to European unity; but it resolves to implement it: on the basis, firstly, of the Communities operating in accordance with their own rules and, secondly, of European Co-operation among the Signatory States in the sphere of foreign policy". That clearly foresees a relationship between sovereign states—a confederation rather than a federal constitution—with only the minimal loss of sovereignty. The Single European Act is an attempt to reinvigorate the European economy by a complete change of principle. The original approach of the EC was harmonisation—a crippling notion that a single European norm or set of norms must be found for each area. The White Paper on The Completion of the Internal Market does something new. It builds upon the crucial decision of the European Court of Justice in the Cassis-de-Dijon case. It proposes the mutual recognition of norms. The norm of any member state would he recognised by all the other states. In short, the Community is released from centralisation, and instead of the enormous dinosaur in Brussels, to which the Prime Minister quite rightly objects, whatever is legitimated by any member state, within European guidelines, will be recognised throughout Europe.

At a stroke, the wind of competition will, unless thwarted by bureaucratic action, be allowed to blow into every part of the economy; and if it is allowed to do its work, will raise efficiency and liberate growth. In his evidence to the sub-committee, my noble friend Lord Cockfield stressed the importance of the move from harmonisation to frameworks; from the futile attempt to impose identical rules on all member states to frameworks which lay down guidelines for each area, leaving it to member states to draw up their own rules within the frameworks.

That approach will give to the consumer the widest possible choice of goods and services; and far from threatening sovereignty, if properly exercised, will draw the minimum necessary into the legislation at the centre—that is to say, to Brussels—and will allow national governments freedom to legislate within the overall frameworks.

Much of the debate this afternoon has assumed the existence of the internal market and has spent time looking forward to what are the next stages. We have as yet no guarantee that the internal market will work or that it will not be thwarted. In 1992 the single market will of course be far from perfect. Let us remember, it took the United States 200 years of amending legislation to improve its market; 1992 is only the beginning, not the end, of a process.

The big question is: shall we be tough enough to allow the market to work or will interventionist groups be constantly interfering with the market. through Brussels, to preserve this or that industry; to save a particular group of jobs? The Poitiers incident is still fresh in our minds. If governments meddle to protect some particular national interest, if trade unions cry "social dumping" whenever jobs are threatened, if their pressure raises wages in countries such as Spain, Portugal or Greece to the point where any competitive advantage in intensive production is lost, the internal market will buckle under the strain. We cannot assume the success of the internal market unless we ourselves make it successful. Economic rationalisation is bound to be painful and the social and political tensions will he difficult to contain. The new approach, if rigorously followed through, may provide solutions for many of the problems that we have been talking about this afternoon.

In our evidence it seemed almost as though two major views emerged, one the "teleological" view that we are embarked upon a journey towards certain fixed, final and ultimate objectives and that all future moves should be judged by the extent to which those ends are achieved. The other view involves a practical step by step approach to the market, accepting change when we can foresee that its benefits will exceed its costs. However, whichever view one takes, what has already happened in the Community has brought about a much greater approximation of monetary policy than existed a few years ago.

Perhaps I may return for a moment to the question of joining the EMS. It is my submission that it would be imprudent for Britain to join until Europe has successfully achieved free movement of capital and then sustained it for some time, for we cannot be sure that the EMS itself will survive the pressures which the market will impose by the free movement of capital and the scrapping of exchange controls. Professor Curzon-Price described the EMS as, a cartel of central banks attempting to anchor their currencies on the wing of a butterfly. It works fairly well on a fine summer's day". I admit that a more difficult question is whether full economic integration can be achieved without the introduction of a common currency and a European bank. The balance of the views before us suggested that monetary union would not be possible until member states achieved a much greater degree of convergence in economic policy and a much closer co-ordination of fiscal policies. Member states still need to agree what those policies should be. Moreover, as we saw in the debate on the structural funds, it will also be necessary to acquiesce in substantial transfer of wealth, on suitable occasions, between rich and poor regions of the Community.

I submit that there is no economic reason to regard monetary union as essential for the completion of the common market and our first overriding priority should be to see the completion of that market. Monetary union would necessarily involve a loss of sovereignty over economic and monetary policy and it would seem to imply some close political integration and institutional changes the ramifications of which have not yet been contemplated.

In the meantime, with the internal market, if it is successful, the unified capital market will put currencies in competition with each other, causing national inflation rates to converge. In such a situation, is it entirely fanciful to suggest that, if Europeans really become free to bank in any European currency which they choose, a single European currency may not spontaneously begin to emerge from the market?

The creation of the internal market will require an enormous effort of collective will. Economic integration will require a sufficiently strong body of European opinion in its favour, a deep conviction to bring it about, and once that is present the necessary legal and administrative changes will cease to be difficulties.

4.36 p.m.

Lord Benson

My Lords, I do not think anybody will dispute the principle that the economic and financial barriers of the common market should be removed as soon as possible. I do not doubt the principle; I have grave doubts about the timing. I gravely doubt whether the administration of the Community is strong enough to make it possible or practicable to achieve this for a great many years.

Let us look at the facts. The structural organisation of the Community comprising, as it does, six separate layers of authority is complex and not conducive to efficiency. There is no single line of responsibility or authority from the decision-making body at the top down through the various levels to the member states where the bulk of the revenue and expenditure takes place.

Secondly, fraud and irregularity in the Community is acknowledged to he rife, which is a sure sign of weak administration. Political will to stop it, to prevent these corrupt practices, is absent. Thirdly, the financial controls operating in the member states are weak or non-existent. Fourthly, we watched with alarm the mismanagement of the common agricultural policy, which absorbs 70 per cent. of the budget and has accumulated huge stocks of unsaleable goods which are carried at figures far above their realisable value.

Virtually every report by the Court of Auditors which has been made in recent years has drawn attention to mismanagement or inefficiency or both. Year after year, the Court of Auditors has drawn attention to grave defects in the administration and they have not been corrected adequately or at all. The report of the Court of Auditors on the accounts of the Community for 1987 implies—and I use a moderate word—that the accounts are not true and fair. I think that if any one of your Lordships cared to glance at the first chapter of that report you would be gravely shocked. Added to all that, the Community is labouring under the enormous burden of overhead expenditure in attempting to carry out the administration with translation of everything into nine separate languages.

Unless these defects are corrected now, what can we look forward to in 1992 is an even more ragged and inefficient administration in which there will he gaping holes and wide inconsistencies. Fraud and irregularity will no longer he rife; it will be rampant.

I turn now to my second point. There has been much talk of a single currency and a central bank. The strength and weakness of any currency depends on the strength and weakness of the economy in which that currency circulates. I do not believe that the nations outside the Community will have any faith in a currency which can be eroded by any one of the 12 member-states at any one time.

As the noble Lord, Lord Cockfield, has pointed out, finance ministers sometimes depart from prudence. For those reasons I do not think it is possible to contemplate a single currency until there is some form of federal government which can control the economy of the Community as a whole. I do not believe that that is politically possible until deep into the 21st century.

If your Lordships would care to glance at page 82 of the report before this House, Question 289, it will be seen that the Economic Secretary to the Treasury did not see a single currency arising within this century. It follows that it will be deep into the 21st century, if then, before we can look forward to a single, efficient Community market. The removal of cross-border barriers, the necessary harmonisation of legislation and of taxation, the free movement of people, services, goods and capital, and the establishment of a single currency and a central bank are a long way off. In short, I believe that the objectives proclaimed for 1992 are not attainable. We have been hypnotised for too long by gazing at pie in the sky.

4.40 p.m.

Lord Geddes

My Lords, I hope that today of all days is not a poor one to start with a cricketing analogy. I am batting at No. 9 and frequently that position is occupied by a quickish bowler, so I intend to be pretty quick this afternoon.

I should like to thank our captain, the noble Lord, Lord Kearton, for his very able stewardship of Sub-Committee A. As the noble Lord, Lord Seebohm, said, he left us breathless on a number of occasions, but I think we just managed to keep up with him. He did a masterful job in chairing the committee.

The committee heard evidence, as has been heard from many witnesses, and found a great diversity of opinions on almost every subject covered. On most matters it was hard to find a consensus. least of all on the question of Britain's participation in the exchange rate mechanism (ERM) and thence, I submit, a common currency.

London is the financial centre of Europe. Should not every effort be made to retain that prime position? As my noble friend Lord Cockfield pointed out both in his evidence and in his speech this afternoon, the importance of the financial services lies not only in the industry itself but also in the fact that those services are the "essential underpinning" of manufacturing industry. It is surely of vital importance to the whole economy that the financial services sector is in flourishing health.

Concern has already been expressed in some quarters of the City that our relatively new stringent controls could make London less attractive than other European member states in an internal market. No opportunity of reinforcing the City's continued pre-eminence should be lost.

The committee drew the conclusion that Europe will gain substantial benefit from the internal market in financial services and the liberalisation of capital movements. Some witnesses felt that London in particular would benefit.

Again I unashamedly quote my noble friend Lord Cockfield. He said: The United Kingdom has more to gain than anybody else in this field simply because we have a strong, active, enterprising financial services sector". Mr. Anthony Loehnis of the Bank of England agreed that the consequences of the creation of an internal market as far as concerned London should be "positive".

The committee went on to conclude that the gains of the internal market and liberalisation would be even greater if those achievements were followed by more stable exchange rates, which in turn would reduce the exchange rate risk which businesses now suffer and would mean that resources would be released for new development.

Many have asked both this afternoon and outside this House how more stable exchange rates are to be achieved. We think that the machinery is there in the ERM, and I strongly endorse that. Members of the ERM have found that it has been successful in reducing exchange rate volatility and in combating inflation.

It is the policy of Her Majesty's Government—at least until my noble friend the Secretary of State speaks this afternoon—that Britain should join the ERM when the time is ripe (I think the word is "ripe", though some say "right"). The committee heard from Mr. Patterson, the MEP, that the other member states feel very strongly that Britain should join the ERM without further delay. It is considered that the old arguments for Britain's non-participation are no longer applicable. In my submission, my noble friend Lord Cockfield was right when he said, "the time is now getting very ripe indeed".

I said at the beginning of my comments that we found it hard to find a consensus from witnesses on most matters. However, nearly all, whether they welcomed it or not, saw a common European currency as the inevitable and logical final step to full financial integration. The noble Lord, Lord Seebohm, has already quoted the comment of my noble friend Lord Cockfield—and I wholeheartedly endorse it—that: I have no doubt at all that if you are going to reap the full advantages of European integration, then you have to go through the route of a common currency". As recently as last week first Mr. Delors and then Mr. Van der Klugt, president of Philips. added their considerable voices in support.

Given that Europe is committed to economic integration, half measures are surely to be avoided. Proposals such as the abolition of exchange controls are to be welcomed, but these half measures should not be seen as an end in themselves. While they may facilitate internal movements within the EC, they may also make us more vulnerable to the rest of the world.

I quote from one witness, Mr. Costa of the European Commission, who asked: What is the point of harmonising this and standardising that, when eventually the ultimate barrier is still there and commodities cannot move because one country has an exchange parity too low? He for one felt that a single market without a single currency would be "highly unstable".

Surely the essential stepping stone to a common currency is that every member state should be a member of the ERM. Discussions as to whether or not Britain should join the regulatory system of the EMS have been going on for long enough. It is time to dispense with political rhetoric and join the ERM before Britain's standing as a Community member and that of London as the financial centre of Europe are thrown into jeopardy.

Finally, on a much wider note, it might help the overall climate in this and other contexts if we in this country gave overt recognition by saying so to the fact that we are in Europe. Not just the media but most individuals are prone to refer to the Continent as Europe and to these islands as the United Kingdom. Both are part of Europe, and the sooner we British realise that and—more important—say so, the better.

4.50 p.m.

Lord Bruce of Donington

My Lords, on this side of the House we wish to thank the noble Lord, Lord Kearton, for having presided over Sub-Committee A and, to use a term which has already been aired in this House, steered it towards its report. We are also grateful for the very comprehensive way in which he has presented the report to your Lordships' House this afternoon.

I wish to join the noble Lord, Lord Kearton, in welcoming back to this House the noble Lord, Lord Cockfield. His party and mine are in frequent and violent disagreement and the noble Lord himself, with considerable ability, is occasionally able to give a non-partisan gloss to an intensely partisan speech. Nevertheless, we welcome him back. I welcome him hack because of the clarity with which he expresses his ideas and the honesty with which he presents his case. I do not know who was the author of the term, and although he may have "gone native" we are very glad to see him repatriated here.

The debate this afternoon on the completion of the internal market with particular reference to the European financial area is part of the process of what has been termed, somewhat quaintly I think, "the completion of the internal market". It is common ground, as has been expressed in many official documents, that most of the internal market has already been established. What is now required is a few finishing touches on the side of our visible trade and a fairly considerable extension of the freedom to establish financial services and to liberate capital movement.

I say that because I was under the impression that we entered the Common Market in 1972 and that we had been operating it ever since. Some 95 per cent. of the Common Market has already been in existence, as regards Great Britain, for some 17 years. There has been a very free flow of goods across the frontiers, not least—as the noble Lord well knows—into the United Kingdom, amounting almost to a flood. So the Common Market has already been with us for some time. What we are concerned with is putting the finishing touches to it.

It is sometimes the practice, and it grows more and more into a habit in political and academic gatherings, to discuss such questions in almost abstract terms. Thus the term "internal market" acquires a life of its own. The single market becomes almost a physical concept. But the Community does not only consist of bankers, heads of great financial institutions, politicians of eminent rank, captains of conglomerates all over the world. It is not only confined to the perhaps quarter of a million people in Western Europe and in the Western world who control the masses of capital either in its corporate or in its individual form which have such a profound influence on the economies of the world and the individual nation states.

If we talk of the Community and Community countries, we are talking not merely of people in very august places, many of them in your Lordships' House; we are talking about millions of individual people in Europe—not all of them rich, some of them very poor. We are talking not merely of people but also of communities of people. When we congratulate ourselves on the progress that we have made and when we make known ideas that we seek to pursue in order to achieve further progress on the lines that we have ourselves considered very beneficial, perhaps it is wise to examine just what has happened so far. Otherwise we tend to have our minds diverted from what can be factually and historically established to yet another star in the future. We must not allow our fixation upon a new Holy Grail to divert us from the facts that unfortunately lie under our noses.

It is regrettably a fact that under the Common Market rules so far and with the progress that has been made, unemployment has now risen to 15 million in the Community from about 5 million in 1972. I know that there have been differences in the number of members, but it should also be remembered that that can be compensated for by the fact that alien workers from Portugal and Turkey, at any rate in Germany, who have now been sent hack were not counted in the original unemployment figures.

According to a report concerning poverty, which was recently published as a European parliamentary document, the poor now number 45 million in the Community. Moreover, there are still vast regional differences. In spite of the existence of the social fund and the regional fund, regional disparities have become progressively worse.

In ordinary economic terms, growth in the Community, according to its own economic reports, is still substantially below the growth rates which obtain in the United States and Japan. Moreover, the whole balance of trade as between the individual countries of the EC has turned and has become greatly unbalanced. I only need to mention as regards the United Kingdom that from the position of a current balance of trade on a balance of payments basis in 1980 and 1981 we now have a position where our trade deficit on visible accounts with the European Community has reached some £13 billion in the 11 months to the end of November. It is likely to reach £15 billion by the end of the year.

Our entire adverse balance on current account in the United Kingdom is accounted for by our adverse balance of visible trade with the remainder of the Community. These facts can be checked and I mention them because, are we to assume that the completion of the process which we have already undergone over the last 17 years is likely to produce any different results?

These are the matters which we ought to be discussing or thinking about. It may be all very well for the very rich and powerful throughout the Community and in the world that this should be done, but what will happen to ordinary people? It is against those five considerations that I venture to lay before your Lordships that we now consider the financial services a part of the process. Let me say straight away that in our view there should be an increase, and a benefit to the United Kingdom in particular, of the right to establish insurance other than life assurance services throughout Europe.

The noble Lord, Lord Reay, will perhaps recall that I took a leading part when I was in the European Parliament in urging just that in order that there could be a freedom of establishment. I have no doubt that as regards employment opportunities and the general facilities of commerce, the right of each member state to establish financial services over a whole range, including insurance in various member states, will facilitate matters.

As regards the freedom of movement of capital, once again I can conceive of advantages to corporate bodies, vast institutions, financial institutions and banks. I can see that. I can see that freedom of movement of capital will greatly facilitate mergers and acquisitions across a far wider area than is the case at present. But we need not be so intoxicated to think that in all circumstances this drive for mergers and acquisitions will necessarily be to the benefit of the people in the member states involved. In our own country—this is not a matter of great controversy, in fact the CBI tends to agree with me—this massive devotion of capital and of leverage by banks and operations of this kind lead to the adoption of shorttermism within manufacturing industry. We are faced with the necessity of producing short-term solutions to problems rather than long-term plans for the benefit not only of companies and their employees but also for the benefit of the nation as a whole.

We have to face the fact that in many instances the financial world itself, and the limited number of people who comprise it, are more powerful than governments. That may be considered advantageous by the noble Lord, Lord Young of Graffham. His position obliges him not to determine any kind of a national economic policy, but to allow the free play of ordinary market forces. As I say, that fact may be agreeable to a comparatively small minority of rich and powerful people in the world. But I suggest to your Lordships that on the basis of what has happened so far it has not been a very conspicuous success among that vast number of people who are in a less fortunate position than ourselves.

There are among us those, including the noble Lord, Lord Cockfield, who welcome external discipline, provided of course that his own party's policies have been established before the external disciplines are exercised against any government of a different political complexion. The drive towards the establishment of a financial area has, as has been accurately pointed out, evoked different opinions among members of the committee. Indeed there were many differing views among those who gave evidence before the committee. I was present at most of the committee sittings and I am still unable to discern just how all these plans, and the capital rationalisation, which the noble Lord, Lord Butterworth, admitted would be painful, will affect the fortunes of the ordinary man and woman in the street. I ask for whom it will be painful. I am not talking just of the ordinary people in our own country but of those in Germany, Spain. Portugal, France, Italy and the other EC countries.

If we are genuinely convinced that these provisions are to the benefit of the mass of people, then we should support them. But in the meantime many of us will regard—I do not want to get too involved in any argument that may arise between the noble Lords, Lord Young and Lord Cockfield—the maintenance of the nation state with its own democratically elected government, subject to the will of the people, as being the ultimate determinant of the destinies of the people in whose political system they function, rather than the imposition upon them of an external discipline which is impersonally applied by nonelected people with no responsibility whatever to the body politic at large.

We hope that the co-operation between the member states of the Community and the cooperation between sovereign states will progressively increase. We hope that it will become ever more harmonious and will result in agreed common objectives to which political assent has been obtained. We value ever increasing co-operation within the European Community. But for our part we prefer and indeed insist that in the final analysis it is the people through their elected representatives who determine policy and not those who are in the fortuitous and perhaps pleasant possession of great financial power and who occupy positions of great financial responsiblity.

5.7 p.m.

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

My Lords, I should like to take this opportunity to thank the noble Lord, Lord Kearton, and his committee for producing this comprehensive report on an important and wide-ranging subject. It is not only a useful contribution to public debate, but it has also been the focal point for our debate this afternoon. I understood clearly why so many compliments were paid to the noble Lord, Lord Kearton, for the way in which he chaired the committee when I heard the way in which he introduced his report today. His speech was an admirable model for us to follow. It expressed the very essence of a report which, I believe, will be a great contribution to our thinking.

The European financial area is an essential element of the single market. It will enhance competition in the provision of financial services and it will give more choice to individuals and businesses. It will offer a major challenge for the United Kingdom financial sector. I am sure we will seize this as an opportunity to build on our traditional strength.

I am pleased that the committee has emphasised releasing rather than constraining market forces and that it sees liberalisation and deregulation, rather than bureaucratic harmonisation, as the way forward for Europe. It is not up to governments to create a successful European economy. The role of government is to encourage individual initiative and enterprise, which is the key to the future prosperity of Europe as a whole. Surely the British experience in the 1960s and 1970s showed how an increasing burden of government doomed enterprise. Only in the 1980s, when we reduced the burden of government, did Britain become the fastest growing major European economy.

Lord Molloy

My Lords, it was also the country with the most unemployment.

Lord Young of Graffham

My Lords, I shall certainly come to the matter of unemployment where our record is as good as that of any other state in the Community.

The Community's commitment to the free movement of capital in Europe is an important element of a free market in financial services. In Britain we abolished exchange controls in 1979. I hope that member states that have not already done so will liberalise all capital movements, as they are already committed to doing.

I know that some member states fear that as a result capital will flow out on a large scale. Our experience was the opposite. When we removed exchange controls the financial markets saw it as a sign of the economy's strength and money flowed into the United Kingdom at an almost embarrassingly fast rate. Other members states have argued that dismantling exchange controls will lead to widespread tax evasion. I am sure that those fears are overstated: there was certainly no evidence of massive tax losses as a result of our own removal of exchange controls.

Much more needs to be done to create a truly integrated financial market which will enable the European financial services industry to develop in competition with Japan and the United States. For example, progress needs to be made to secure common standards of banking supervision and capital adequacy. That is an issue about which my department is concerned. Banking and financial services were identified at the Hanover Council as one of the four priority areas for the internal market.

Your Lordships' committee has concluded that the ambitious goals of full monetary union, with a common currency and a European central bank, are neither economically nor politically practical in the foreseeable future. I welcome their common sense approach. Equally the committee recognises that there are practical steps on which early progress can be made. The Government firmly share that view. Action speaks louder than words. It was the United Kingdom which first abolished all exchange controls, well ahead of most of the rest of the Community. It was the UK which last October first issued Treasury bills denominated and payable in ecus. So, contrary to the widespread perception, we are in the forefront when it comes to making practical contributions to monetary developments in Europe.

The report focuses on the creation of a European financial area. That is a development that the Government support wholeheartedly. But we want to see a European financal area open to third countries: the so-called "fortress Europe" is no more appropriate in the financial sector than in any other. That is why the United Kingdom has the same freedom of capital movements with third countries as within the Community and why we have urged others to follow our lead. That is also why we consider the Commission's proposals for reciprocity in financial services to be undesirable in principle and unworkable in practice.

The noble Lord, Lord Kearton, in introducing the debate, gave a history from Bretton Woods to G7, from the snake to the exchange rate mechanism. He drew attention to the lifting of exchange controls, which is one of the more important if not the greatest of the hurdles that have been overcome in the drive towards a single market. He said that he felt that we should be a member of the exchange rate mechanism although until 1985 it had been in our favour to be outside the mechanism. He thought that since then it would have been in our favour to join. The Government's position is very clear; no one can say it is not. It is, "when the time is right". The determination of when that time comes is less clear, but I hope that as I continue my speech I shall make the position a little clearer.

The balance of payments deficit to which a number of noble Lords have referred is something that we do not want. However, it is only one side of a coin. The other side is our substantial investment overseas which even last year was considerably in the favour of the United Kingdom. What the noble Lord, Lord Kearton, said was in line with our approach to this subject and our general approach to the European Community as a whole, which was the theme of the Prime Minister's speech at Bruges last year. It is a step by step approach. It is only by progressing step by step and looking at the practical consequences of what we do that Europe will become a real working body.

I am delighted to be able to welcome back my noble friend Lord Cockfield. I hope that he will not mind too much if I describe his speech as his second maiden speech in your Lordships' House. He has been absent—in word if not occasionally in presence—for the past four years. He returns with a greater claim than any to be father of the single market. It was his White Paper which gave it its impetus and thrust; it was his intellectual vision which drove it forward. He left the Commission at a time when he could feel great satisfaction that of the 300 or so measures that are necessary not only had the majority gone through but most of the difficult ones are already agreed.

On the other hand, the noble Lord seemed to feel that we require some kind of collective discipline in financial matters. The effective discipline is the market. It is the effective discipline of exchange rates—fluctuations in exchange rates are perhaps as unwelcome to governments as they are to industrialists—which imposes some discipline on the actions of governments. The noble Lord seemed to feel that the great advantage of fixed exchange rates is demonstrated by the fact that we had only two changes in the many years after the war until the late 1960s. Those who were engaged in industry in those days saw the over-priced pound contribute to the erosion of our industrial advantages around the world. It may well be that had we had floating or more flexible exchange rates in those days we should not have seen many of our competitors rise to a preeminent position by the end of the 1960s.

All that has been said today relates to a single European currency. My noble friend Lord Cockfield said that he could foresee a single European currency within 11 years—by the end of this century. I find it difficult to understand—and the point has been made by others during the debate—how one can have a single European currency without a single European economic policy. The two should go together. However, let us consider the latest OECD figures for fiscal budgets. As indicated in the Autumn Statement the United Kingdom will show a fiscal surplus of 0.5 per cent. of GDP, and I read in the newspapers that that may well be higher. France shows a deficit of 1.6 per cent. of GDP, which is three times as great, and Germany a 2 per cent. deficit which is four times as great. Italy shows a deficit of 10 per cent. which is 20 times as great. Those are matters on which there must be some convergence of the economies.

There are other areas of concern. For example the German chamber of trade here reported that German industrial production is emigrating; it is leaving Germany and coming to the United Kingdom. The VDI (the German CBI) told me not many months ago that it was losing many members to the United Kingdom. I asked the reason: it is that German payroll tax is over 100 per cent. and its corporation tax 50 per cent. I hope that that issue will be dealt with. I believe we can live in a competitive Europe in which good taxes, I venture to hope, will in the end drive out bad.

The noble Lord, Lord Banks, also thought that there would be need for monetary union by the year 2000 but characterised it as a leap in the dark. A leap in the dark is something that none of us would wish to take. We should have to be absolutely certain of where we were going.

The noble Lord said that we should not forget "social Europe". That is a matter which a number of noble Lords have mentioned. Looking at what has happened in Europe over the past few years one can see that in terms of "social Europe" it is the United Kingdom which is leading the way. It is the United Kingdom which today has the fastest falling rate of unemployment in the Community. It is the United Kingdom which of the major countries in the Community can boast of having more people in paid employment than at any time in our history, disregarding those on YTS and other schemes. It is the United Kingdom that has shown during the 1980s the greatest growth in productivity of any nation in the world, including Japan. If it is a social Europe that is sought, by far the best protection that can be given to any employee is a job. It is not simply a matter of providing statutory protection of work, because companies do go into liquidation.

The noble Lord, Lord Seebohm, said that the commercial world wants a single curency. That is not quite the message that I receive when I travel around the country. Many industrialists who are exporters press me for a lower pound. At almost every level they are prepared to have a lower pound. Importers, who are people whom I do not encourage too much for reasons which are self-evident, feel quite happy, I am afraid, with the thought of a pound that goes higher and higher. In all these matters we must find a balance of opinion. As a whole the CBI wants stability; it sees a low rate of inflation as the most important matter.

Over the next few years I hope that we shall see an increase in growth in the use of the ecu. There are ways in which we could start to use the ecu as a trading currency. We could perhaps have contracts denominated in the ecu; certainly there could be more Treasury bills made out in ecu and perhaps more private loans also. That is one way in which we may see the growth of a single currency in Europe.

The noble Lord made a point that concerns me greatly. He said that Article 13 means that we must have a Europe that is open to both goods and people. We will do our level best to streamline the movement of both, and we shall succeed. However, the single market is not intended to provide a haven for those who push drugs or practise terror. All of us in Europe must work together to find ways of eliminating both those modern scourges of our time. It is the growth in the use of drugs which is today causing increasing concern throughout the Community, to Ministries of the Interior and to our own Government. Terrorism is a concern that needs no further words.

My noble friend Lord Reay said that there was no immediate need for a central bank and reinforced his point that a single currency would entail a single financial policy. He drew attention to the growth in the use of the ecu, which is something that I should hope would not merely be discussed but practised. I should like to consider the comment that we are not prepared to enter into discussions about a central bank. The Governor of the Bank of England is a member of the Delors Committee which is looking at the question of the creation of a central bank. Your Lordships' Committee also felt that that would not be appropriate at the present time. My noble friend also endorsed a step by step approach.

The noble Lord, Lord Roll of Ipsden, drew attention to dual standards in financial markets. I hope that the dual standards that exist will gradually go and that home standards will be practised abroad and extended all over the world. He expressed concern—a concern that has also been voiced to me during my travels overseas in the United States and Japan—about the single market representing some kind of shield for Europe. I think that we must take great care in the use of reciprocity. If we are not careful reciprocity itself will become a shield that prevents us from entering markets overseas.

The noble Lord drew attention to the need for long periods of stability in exchange rates. That would have to continue for some considerable period before one could see the evolution of a single currency and a single bank; in other words, one comes back to the step by step approach.

Finally the noble Lord made an appeal for more glasnost. I believe that one cannot perhaps have glasnost without more perestroika. We are talking about devolution of responsibility and not about putting everything together into a central body.

My noble friend Lord Butterworth was the first speaker in this debate to mention those whom I consider to be the principal beneficiaries of the European Community; namely, the consumers. There are over 320 million consumers within the European Community. They are the ones who will benefit from a competitive economy. It is only by having a competitive economy in which the benefit to the consumer is put first at all times that the economy of Europe will grow and flourish, our exports will sell and our standard of living will rise.

My noble friend also laid great stress on the working of the market. He said that there were some influences that we should ignore, such as trade unions and social dumping. I shall offer him another issue: what about European industrial strategy? That is something which is mentioned to me from time to time and it sends a shudder of fear down my back. He said that it is imprudent to join until the Community achieves free movement of capital for some time. That is a definition of when the time is right. I do not say today that that is necessarily the Government's definition. We have a number of hurdles still to overcome and we must see what happens then. The noble Lord spoke about the spontaneous evolution of a common currency. I believe that that concept is more and more coming through in our discussions.

The noble Lord, Lord Benson, drew attention to the fact that collective agreement is not the same as collective wisdom and took as his example the common agricultural policy. At one time when he referred to the qualified accounts of the European Community I thought that he was about to make a request that I send in my department's inspectors. Happily, the noble Lord did not go that far. However, he certainly made the point again that a single currency would need a single market. I believe that we can achieve a single market without having a single currency and indeed do it in our present position, because the single market is about the removal of non-tariff barriers. That is what we must achieve in order to have the free movement of goods and services.

How do we pay for them? We have already received testimony from the great increase in trade between us that it can be achieved by present practices. My noble friend Lord Geddes was an advocate of the theory that the time is right today. Membership of the ERM is not the same as having a common currency. It does not mean that once we are members of the ERM there will not be future variations in exchange rates.

I turn to the remarks of the noble Lord, Lord Bruce of Donington. I hope he does not mind my saying that when he approached this matter he gave me the impression of being a firm non-believer in the Community. He reminded me irresistibly of a vegetarian extolling the virtues of a fillet steak. That is because I believe that he did not understand the great advantages of being part of a single community in Europe. He seemed to be under the impression that we entered the Common Market in 1972 and thought that we had been in it all along. It may well he that we thought we were doing just that in the early 1970s, but it quickly became apparent that the non-tariff barriers were far more important indeed than the tariff barriers that we did manage to eliminate.

The whole thrust of the work of my noble friend Lord Cockfield in the last four years, which I believe will come to fruition in the next four years, shows how much the single market will mean for the living standards of the Community as a whole. I could not follow the argument of the noble Lord, Lord Bruce, when he said that freedom of movement of capital gave advantages to great corporations. No, it does not; it gives advantages to ordinary people—to the consumer.

I have already made the point that it also acts as a discipline on governments. I am happy to confirm to the noble Lord that my job, and that of the Government, is not to determine a national industrial policy. That is not the role of this Government. It is only in the last 10 years, when governments have avoided trying to create such a national industrial policy, that we have seen the enormous outpouring of wealth creation and growth.

Lord Bruce of Donington

My Lords, perhaps the noble Lord will permit me to correct him. I did not say "national industrial policy". I said "national economic policy". The two are slightly different.

Lord Young of Graffham

My Lords, I am very happy to say economic policy has been in the hands of two Chancellors of the Exchequer since 1979 and we have seen the enormous benefits that have occurred as a result of that. If the noble Lord is in any doubt, I suggest that he leaves your Lordships' Chamber at the conclusion of this debate and wanders around the United Kingdom. He will then see the enormous differences that have taken place over the last 10 years.

However, all these matters are not the point of today's debate, which is simply this. Your Lordships' committee has had a thoughtful and I believe a thought-provoking report which has been commented on by many in your Lordships' House. We are very glad to welcome back the noble Lord, Lord Cockfield. We can see that the time is coming when there will be a convergence of economic policies in Europe, hopefully through negotiations to a single market, in the way that we look on industrial and commercial behaviour. Step by step we have to work closer together to achieve the working of the single market, closer economic union, and all those matters which the noble Lord, Lord Cockfield, pointed out quite correctly were matters which we had agreed to do when we signed the Treaty of Rome. Indeed Article 102A talks about the need for co-operation in economic and monetary policies. However, it does not impose an obligation on member states to introduce the economic and monetary union as such. Indeed, the Article 236 procedure makes it abundantly clear that we must have unanimity in this and that we have to call intergovernmental conferences and ratification by national parliaments.

We must work towards the completion of the internal market. We have to work closer together step by step so that we can all achieve a Europe which will bring about the one endeavor that Europe can and should achieve: that of great wealth creation and better living standards for all 320 million members.

5.33 p.m.

Lord Kearton

My Lords, I should like to thank all those who contributed to the debate. At the beginning I expressed the hope that the debate would be both informative and instructive. It has indeed proved to be just that. We have had a remarkable range of speeches of great depth. All aspects covered in the report have been touched upon by the different speakers. We had from the noble Lord, Lord Bruce, a contribution which, if I may say so, we have come to expect—but we are none the worse for that. I should like to thank in particular the Secretary of State for his thoughtful, constructive and positive reply to the points made in the report. He left me, and I am sure the whole committee, satisfied that he—representing the Government—is moving in the

direction that the committee recommends. I beg to move that the House takes note of the report.

On Question, Motion agreed to.