Economic and Monetary Union and Political Union: ECC Report

HL Deb 22 November 1990 vol 523 cc778-892

3.23 p.m.

Lord Aldington rose to move, That this House takes note of the Report of the European Communities Committee on Economic and Monetary Union and Political Union (27th Report, 1989–90, HL Paper 88).

The noble Lord said: My Lords, this report on Economic and Monetary Union and Political Union is full, is calm and has a balance which I shall try to retain in my speech to your Lordships. I should start by reminding your Lordships, in view of the distractions along the corridor and in another place, that the conclusions in this report were reached on 24th October. The report is made to your Lordships in the course of the Select Committee's scrutiny of Community proposals. It is through this scrutiny that the House plays its part in securing the accountability of the institutions of the Community, and particularly the Council, to the Parliament of the United Kingdom.

The Select Committee has produced more than 500 valuable reports over its 16 years, involving hundreds of your Lordships. This report arises from the various proposals put forward by the Community's institutions about economic and monetary union and political union. They were laid out in the introduction to our report. Not for the first time, very important questions of policy and attitudes are raised; not for the first time, the report covers issues to be resolved by governments negotiating with each other and offers advice to our Government on the position they should take in their negotiations.

As is usual, the evidence we took governed our conclusions. The witnesses were as impressive and authoritative on their point of view as can be found. The members of the ad hoc committee who conducted the inquiry have a record in this field as distinguished as one could find anywhere. I have to confess that I was very proud when I was selected as their chairman. Now, standing in front of the House, I feel very humble and rather shy. However, I am told to get over it and I will!

The pattern of our work followed that of the many inquiries conducted by the European Communities Select Committee. We kept to our role all the more successfully because of the presence among us of the Select Committee's chairman, the noble Baroness, Lady Serota. Her reappointment last week most deservedly won the applause of your Lordships.

We could not have accomplished our work for noble Lords without the help of our splendid advisers: Sir Julian Bullard, Mr. Christopher Johnson and Mrs. Eileen Denza. They, with the members of the committee, will tell you that we should have made a poor show indeed without the guidance, the really encyclopaedic knowledge and the superlative pen of our clerk, Mr. William Sleath. How often do we need to pay a warm and well deserved tribute to these wonderful clerks of both sexes who serve us so well in our committees.

Before coming to the individual issues under each of the two heads—EMU and political union—which are to be discussed and decided upon by the inter-governmental conferences starting next month, it may help the debate if I begin briefly with the committee's conclusions about the nature of the Community itself—what is it?—and some of the terms being used and, we have to say, sometimes abused.

The constitution of the Community is unique. Its founders chose a unique name: not a federation, nor a confederation, nor the United States of Europe. There is no sign that they intended or that any member state since has intended any of these forms. They most certainly did not intend the form of a "superstate", a term which I heard used the other day when some of my noble friends were talking about the Community.

In our view it is sterile to waste time and valuable rhetoric on arguments as to what the Community might wish to be in its second, third or fourth half-century. It is not only sterile but we think positively damaging to public understanding to parade what my right honourable friend the Foreign Secretary has called ogres and we call spectres of idealistic visions or of federalism. It is as clear that the Community now contains some federal elements, as it is clear that the member states retain their independence and their international sovereignty and have every intention of doing so in the foreseeable future.

The application of Community law direct on our own citizens in the United Kingdom and in other member countries is one federal element. Another is the conduct of external trade relations and the whole apparatus of the single market. These and all other federal type elements in the constitution of the Community were agreed by the member states for the benefit of each of them. It was an exercise of national sovereignty to pool into a united sovereignty some of the political power which had been national. The key question to be asked before those decisions were taken, as it would be before any future decision on the transfer of political powers to the Community, was how the next step towards European unity would further the strength of the Community and the welfare and aspirations of its peoples.

There is nothing new about the commitment of all members of the Community to progress towards ever closer union. All members have accepted that commitment as part of the Treaty of Rome; they have agreed on many occasions that such progress is their aim. Progress has been, and will be, achieved by agreement and will be furthered step by step. The intergovernmental conferences will sort cut what steps should be taken now in the fields of economic and monetary union and of political union and when they should be taken. It is not a question of whether any steps should be taken but what steps and when.

Your Lordships will have noted that we asked ourselves questions about sovereignty. What does that word mean? What help does it give to independent and diverse states which have joined together to increase the prosperity of their peoples and to increase their influence in the world? I commend to your Lordships the sobering paragraphs on sovereignty in Part 2 of the report.

The two sovereignty issues of particular importance in our inquiry related to foreign policy and monetary union. We are quite clear that to include all aspects of foreign policy fully within the Community's competence would remove from member state, the right to take any independent action in foreign policy which had not been approved by the Council and would thus destroy the international sovereignty of each member state and its right to a seat in the United Nations. We reject that concept. Foreign policy can be well co-ordinated within the existing system of European political co-operation which we believe can be beefed up.

On the other hand, we see no fundamental objection on sovereignty grounds to full monetary union including a single currency. It would be a reasonable exercise of sovereignty by Parliament to pool with other members such elements of political power as exist in monetary policy if the advantages of so doing were clear. I shall return to that point when I talk about EMU later.

The report welcomes the acceptance of the principle of subsidiarity; namely, that there should be done by the Community only those things which can be better done or, under another definition, must necessarily be done at the centre and not by member states. This principle already appears in the Single European Act in relation to environmental matters. We think it should be included in the revised treaty, perhaps in the preamble, but in such a way that it does not become justiciable but rather a firm political commitment and guideline to govern the Council and the Commission.

As the Community has progressed with wider scope and more powers, its institutions, the Council as well as the Commission, have become too little accountable to national parliaments and to the European Parliament. The proposals to improve democratic accountability, financial control and the effectiveness and implementation of Community laws and court decisions arc all important for the Community at its present size but must be designed for a larger Community in a few years.

Those general themes led us to conclusions on some of the points to be negotiated at the EMU conference and at the PU conference. Your Lordships will note that I use acronyms for economic and monetary union and for political union. I hope I may intersperse a little light relief at this stage. In acronym language the report is about EMU and PU. The emu is the second largest bird and is distinguished from the largest bird, the ostrich, by not putting its head in the sand. Pu, which means simple in Chinese, is a state of Chinese meditation in which, believe it or not, all contradictions vanish.

I deal first with the happy thought of simplicity. Political union proposals are not simple, but they are not difficult to understand. Political union means the process of ever closer union. There is no defined goal. The general ideal of European union cannot be forgotten, but the intergovernmental conferences have to concentrate on the very real needs and concerns of the present. We recommend some principles which should be applied.

We consider that, as its first priority, the Community must take steps to meet the requirements of democracy. Its institutions must be, and must be seen to be, democratically accountable. I shall return to that point when I deal with the role of national and European parliaments and their relationships with each other and with the Council and the Commission.

However, there are other shortcomings which have to be remedied. We summarise those in paragraphs 141 to 144. The finger is pointed both at the taking of decisions at Community level when they should be left to national choices and at the unbalanced way in which the Community's development has been dominated by agriculture and the single market without enough concern being shown for social and environmental affairs. The key here, as in so much of the argument about increasing the scope of Community competence, is the principle of subsidiarity. If that principle is held fast, efforts to dispel the perception of an imbalance in Community objectives need not automatically be equated with cumbersome centralised intervention.

Another Community shortcoming lies in the delays in implementation of legislation. We ask that legislation should not be agreed in the first place if it cannot be implemented properly. We further ask that member states should be required to make a written response to Commission reports on implementation and that those responses can be discussed in the parliaments and in the Council. The United Kingdom has consistently been one of the best performers in implementation and has an interest in seeing that disciplines encourage other states to achieve similar standards. The same applies to judgments of the European Court of Justice. They have to be complied with by all and without delay. Effective and efficient implementation of Community policies and laws is vital to its reputation and to the confidence of the public in its control of money and resources generally. The enormous losses suffered by the Community because of fraud is a scandal to which the committee has drawn and will continue to draw the attention of the House. I am very glad that your Lordships will have another opportunity to debate that scandal next week.

There is one further principle that we recommend to the intergovernmental conference. It must look to the future when the Community will have been enlarged—quite soon—by some members of EFTA and later by some of the Central or Eastern European states. Institutional changes must allow for such enlargement. We firmly declare our view that enlargement is desirable and will take place. However, that enlargement is not a question of widening or deepening; the one needs the other. We believe that there is a dominant conviction across Europe that events require the Community to take further steps towards strengthening both the effectiveness and accountability of its actions. We believe that the prime reason why any European state might consider applying for membership is that the Community is seen as strong and growing stronger.

Many proposals have been made to increase the powers of the European Parliament. Our recommendations favour some extension of power over legislation, through the co-operation procedure, and over treaties. We call for the Parliament to have greater powers over delegated legislation and enhanced powers to scrutinise Community activity. That will mean more concentrated effort by the Parliament, particularly over the efficiency of spending. We recommend that the Parliament should have a role in the appointment of the commissioners by holding confirmation hearings.

I turn now to the question of the Council. How accountable is the Council? We considered the case for council meetings being held in public but rejected it, even for legislation. We believe that the Community is not yet ready for that. The Foreign Secretary made his view very clear and 'we agreed. However, we ask that the Council and its members should be much more informative both about their intentions and about the progress of legislation. The main answer to the question of accountability lies not so much in Brussels as in the accountability of Ministers to informed national parliaments, just as the European Parliament also has a need to know what the Council is doing and why.

In our view the key to the removal of the so-called democratic deficit in the Community lies with national parliaments as much as with the Community institutions. Members of national parliaments need to involve themselves more closely in Community affairs and to develop appropriate procedures for doing so. They have to be well and properly informed by the Council and by the Commission. They have to have a close partnership with Members of the European Parliament. That is something that your Select Committee, under the leadership of the noble Baroness, Lady Serota, has tried to develop. The role of Members of the European Parliament will be debated at the forthcoming conference of parliaments, or Assizes, in Rome. Perhaps our procedure here is not too bad an example of what can be done.

We considered but rejected the proposal for a second chamber of the European Parliament, to consist of members of national parliaments. That would put serious strain on the members chosen and would not fully involve their own colleagues back home. We believe that it would delay as well as confuse Community proceedings.

We also have important points to make about the Court of Auditors and the European Court of Justice. They must be given the resources and structure necessary to do their job properly. That job is of growing importance. They form an important part of the balancing mechanisms in the unique constitution of the Community.

My final point relating to the terms of political union concerns the means of securing full cooperation on foreign policy. The idea of European political co-operation has worked quite well but the Gulf crisis has shown some of its limitations. We were advised and concluded that it can be made to work better, and with closer links to the Council. The extent to which it should embrace defence matters came under public debate after we had started our inquiry and we did not take any evidence on that specific point. We therefore confined our opinion on defence to the statement that: The Committee believe that it will be in the interests of Member States to find a way of discussing relevant security issues in EPC meetings".

Your Lordships will see that we have tried to apply our general themes to questions relating to political union. I now turn to the subject of economic and monetary union, where we had the same themes in mind. The Community has declared itself in favour of economic and monetary union—not simply economic union—since 1969, before we became members. Many declarations have been made since to which the United Kingdom has been a fully consenting party.

Within that EMU has monetary union been seen simply as a process or as a definable goal? The other 11 member states are quite clear that it was and is a definite goal with irrevocably fixed currency exchange rates leading to a single currency, a single monetary policy and a single monetary authority by whatever name. We have recorded the different interpretation given to us by the Treasury which defines monetary union by the objectives of monetary policy rather than by the means of securing it.

Our opinion is clear. The goal of a single monetary policy, a single currency and a single authority to be responsible for the battle against inflation and for securing the stability of prices is generally accepted in the Community. That is the case not only outside Britain but it is a goal shared by many people within the country in banking, commercial and academic circles. The real and vitally important question for the IGC, and particularly for Britain, relates to how and when the Community proceeds to that goal. We are careful to ask the IGC not to fix dates now for the eventual adoption of a single currency.

It is now generally agreed that insufficient attention has been paid to the transition from the current stage one to the final stage three. Sir Michael Butler's British Invisible Exports Council came forward with a scheme for stage two using a hard ecu but expressly as the next move towards a single currency. That scheme was adapted by my right honourable friend the Chancellor of the Exchequer into his hard ecu scheme but expressly without commitment to the single currency as the end. It is that lack of commitment, albeit with the rider that the hard ecu could lead to a single currency if governments and peoples sc decide, that appears to us both to deny the acceptance of the proposal by other countries and to damage the viability of the scheme in itself. We regret that as we find in the Chancellor's scheme a number of elements of great value to the next stage in monetary union, even though, as we explain in paragraphs 79 and 80 of the report, we cannot regard the scheme as a whole as viable as it now stands.

Specifically, the valuable elements are the establishment and experience of a European monetary fund with supranational powers over the hard ecu and some other matters, and the use of the hard ecu to promote faster convergence of inflation rates and the opportunity for markets to give their verdicts. We very much hope that other members of the IGC will take those proposals seriously. However, I urge that they are more likely to do so if our Government accept the same goal as other member states have accepted. There are many details which will have to be considered by the intergovernmental conference, no doubt with the help of the Committee of European Central Banks, which will have in mind subsidiarity. I shall not mention all the points but I shall draw your Lordships' attention to some of them.

We are convinced that a successful monetary union requires a satisfactory measure of convergence of anti-inflationary performance before it starts. Stage two has to ensure such convergence before it ends. A Big Bang entry to stage three as was proposed at one time by some people in the Commission, regardless of inflation rates, would impose unacceptable strains. The institution chosen to issue the currency and to execute a Community monetary policy which will be put in place in stage two, and which we say should be called a European monetary authority, must both be independent of political interference in its operations, and work, as does the Bundesbank, within an agreed economic policy—in the case of the European monetary authority within an agreed Community economic policy.

Also, we say, it must be accountable to parliaments in the sense that it must regularly explain its policies to them. We assume that the Chancellor's European monetary fund would do the same. Experience of that form of accountability should be assured during stage two.

Timing of the next stages is all important. Stage one is by no means complete either in the single market generally or in the financial services area. The timing of the start of stage two clearly must depend on the content of that stage and on the progress in stage one, as assumed. In my opinion and, I believe, the opinion of all the committee it was a mistake for the Rome Summit at the end of October to try to fix the start date of stage two. I say that even though, on the assumptions that we have made, some time in 1994 (which is its date too) would in our opinion be an appropriate date. I repeat that the start date of stage three should not be fixed until stage two has been in operation for several years. Step by step and evolution are the right guidelines for progress in the Community.

The Community should not contemplate a two-tier monetary union. It should be viewed as an essential part of the Community's single market. Two-speed it may have to be if some countries are not able to keep up with the convoy at the chosen time. Firm dates must be established for those countries to join if they are left out in the first place. But we emphasise with all the force at our command that the United Kingdom must be in the front rank. The United Kingdom can only remain outside a monetary union at substantial economic cost.

Avoidance of such a division must be uppermost as government negotiators plan for the intergovernmental conference. Why do we stress that danger? It is quite simply because we believe, as do a great number of people inside as well as outside the country, that the advantages of a single currency to the Community and to each of its members are very large. The full benefits of the single market will not be realised while the Community suffers from having several different currencies.

Secondly, individuals as well as businesses would save substantial sums from the removal of transaction costs and the need to pay for hedging against currency fluctuation. For the whole Community the savings in costs under that head are estimated by the CBI and the Commission as around £10 billion a year.

Finally, the single currency would give Europe a major—perhaps the major—world currency and corresponding influence. Taken together, the advantages of a single currency (I quote from the report), in creating globally competitive industrial production and financial services would be of the same order as the gains of the Single Market programme itself". Those gains have been estimated at 5 per cent. to 7 per cent. of gross domestic product.

For the Community to pass up such advantages would seem to be fairly mad, but for Britain to deprive its manufacturers, traders and financiers of them while other members of the Community enjoy them would seem to me at any rate to be disastrous both for the City of London and for our industry.

It was said to the committee that those advantages have been overestimated. We questioned the CBI and bankers and are satisfied that they are real. It was also said that the disadvantages of moving to a single currency are substantial both in cost and in the loss of the weapon of devaluation. Certainly there will be costs in preparation for it and in the process of getting accustomed to it. As for devaluation, we were told that the value of the devaluation weapon in running the economy is doubtful in the long term. Our assumption is that there will have been sufficient convergence of anti-inflationary performance before the final fixing of exchange rates to avoid any basic disequilibrium that could lead to large unemployment.

There is the political objection to passing over to a European authority the power to set monetary policy and issue the currency for Britain as well as for the Community. I have said that there is no fundamental objection on sovereignty grounds to such a pooling of powers. But it is argued that neither the present Government nor the House of Commons will agree to a single currency because they believe that they must retain power over monetary policy. The assumption must be that they believe that they can use that power better than a European authority. Recent evidence going back to the 1970s hardly supports that proposition. However, I believe that in some of the objections there is confusion in some places between monetary policy and the rest of economic policy.

The Community has already progressed a long way toward economic union outside the monetary area through the single market and its associated arrangements on competition policy and other matters as well as through the agreements to seek co-ordination of national economic policies. Earlier ideas of setting binding rules for limiting national budget deficits have been dropped but procedures—binding procedures, as they are called—have still to be agreed to secure mutual scrutiny of policy and performance, lest the action of one country should put the Community currency in jeopardy. Baling out and printing money to meet deficits will not be allowed.

However, in the main the responsibility for deciding economic policy within each country is rightly to remain with national governments, which will control their own budgets, tax policies and public expenditure policies, paying full regard to the objectives of Community policy as agreed. That is the proper application of the principle of subsidiarity.

Our proposals for EMU—indeed, all our proposals—follow the step by step approach that the Community has taken over two decades. There is nothing new about progress to closer union or economic and monetary union as a goal. Nor is there anything new about the need for Britain right from the start to take a full part in the formation of new policies and institutions. All that is new is the recognition of the importance of the changes now under consideration and a realisation that a decision has to be made very soon on the next steps forward but not on the steps to be taken after them.

We emphasise that the Community's strength lies in the support of its peoples. Many of the points to which I have referred relate to a closer involvement of national parliaments and through them the people of each nation. There is a clear need for more understanding of what the Community is, what the European Parliament does, what national parliaments do and can do, and what advantages are sought from action through Community institutions rather than nationally. The committee hopes that the report will play a part in removing misunderstanding—and indeed help to slay the Foreign Secretary's ogres—and a part too in building a fuller understanding of the advantages that will come to Britain from a stronger and more democratically accountable Community. I beg to move.

Moved, That this House takes note of the Report of the European Communities Committee on Economic and Monetary Union and Political Union (27th Report, 1989–90, HL Paper 88).—(Lord Aldington.)

4 p.m.

Lord Cledwyn of Penrhos

My Lords, before I proceed to the debate, I feel I must refer to the events which are very much in our minds at this time; namely, the impending resignation of the Prime Minister, which is not unrelated to the subject of this debate. The right honourable lady has occupied her high office for 11 years. While we were often dismayed and occasionally distressed by her policies, nevertheless we always recognised her clarity, confidence and courage.

Mrs. Margaret Thatcher has given her name to a decade and left her mark upon it. For that, as well as for the fact that she is our first woman Prime Minister, she will have a place in history.

I must now congratulate the noble Lord, Lord Aldington, and the members of the Select Committee upon their report. It is timely, thorough and of the first importance and we are grateful to our colleagues for their hard work over several months. To read this document is to realise how complex are the problems facing us. The changes implicit in economic and political union are immense. There are implications for the way government is conducted, for the legislative process, for economic and financial management, and for the democratic process generally.

This country has committed itself to membership of the Community in a referendum and the policies of all political parties are based upon this commitment. I believe that to be significant because in matters of great national importance it is desirable if not essential that parties should seek agreement. The significance of the report is that it represents the views of Members from all parties in this House and it should therefore be taken seriously by the Government and Opposition parties alike.

We are also conscious at this time of the problems facing the Government and indeed of the debate which is taking place at this time in the House of Commons. The subjects that we are debating are close to the heart of the Government's current problems. I shall not pursue this aspect further at this time save to say that it is very much in the interests the country that these difficulties should be resolved quickly.

It has been said many times over the past 20 years that Britain has been slow to take advantage of the opportunities presented by the Community and that we should have been party to the negotiations of the Treaty of Rome and subsequent developments. That is probably true but there were at that time reasons for Britain's tardiness. We were disengaging from the empire; Commonwealth countries were strongly opposed to it; memories of the war were fresh in the mind; and General de Gaulle was not wildly enthusiastic about British membership. Finally, the English Channel has always been a silent barrier. However, the referendum, when it came, showed that the great majority of the British people had put those obstacles behind them. That is why it is imperative that Britain should play a full, constructive and indeed leading role in the development of the new Europe.

That does not mean that we must accept everything M. Delors proposes without question or that we cannot approach new proposals critically. We in this country have been brought up to scrutinise matters in detail from First Reading to Third Reading and we are not quick to change our habits. However, it is the spirit in which we approach the Rome Conference, and the language we use to express our views, that will make it possible for us to work for a consensus and to reach agreements.

There are other obstacles, many of them in the mind. I am glad that the committee went to the trouble in Part 2 of the report to define some of the areas which have caused confusion. The noble Lord referred to sovereignty. The report states: The word 'sovereignty' has a powerful emotional impact, bound up as it is with people's sense of nationhood". Let me, however, remind the House that we, the Welsh people, surrendered our sovereignty—very reluctantly at the time —several centuries ago. What makes that tolerable to me and my fellow countrymen today is that in Britain we live in a parliamentary democracy and that we enjoy freedom under the law. If we lived in a dictatorship, I would want our sovereignty back. It is in that context that I contemplate the great changes that are impending.

But the Community itself came into existence primarily for political reasons: to ensure that war would never again break out in Western Europe. That has so far been the great achievement of the post-war period, and I believe it to be our duty to build upon that. We must of course also concede and recognise that since financial markets and environmental matters cross national boundaries, sovereignty has already been removed to some extent from areas of our economy and national life.

The report deals with these matters—with the effect upon national sovereignty of economic and monetary union. Mrs. Margaret Thatcher and her colleagues have been involved in the argument that monetary union in the form of a single currency would detract substantially from the sovereignty of this country. That has been one of the chief causes of the division within the Government over the past few months. But in fairness it must be said that divisions on this are not necessarily confined to the party opposite.

When the Minister replies, will he agree that it will take a long time before a single currency becomes a reality? The report points out that even if a single currency materialises, this country and others will continue to be separate sovereign states. Will the Minister confirm that that is in fact the Government's view?

The report points out that there are several examples—and this I think is an important point which may have been overlooked—where sovereign states have shared a single currency, including, for example, this country and the Republic of Ireland for a period of years. Paragraphs 74 to 81 of the report are therefore of the first importance because the committee concludes in paragraph 77 that the majority of member states, see the IGC's goal as determining not whether, but how, to achieve a full monetary union". Last month's Rome Summit showed that Britain at that time was totally at odds with its 11 partners. It cannot be true that Britain is right and the Eleven are wrong on all issues and that there is no room for negotiation. The report takes a broader view and calls on the Government to play a constructive part in the coming Rome negotiations. On that we agree with the committee. However, we must now wait for a new Prime Minister to form his administration and to formulate new policies.

I believe that paragraph 93, which discusses the dangers which will result if the United Kingdom finds itself in the second tier of a two-tier Europe, is significant, as the noble Lord, Lord Aldington, has said. The report argues that London has an excellent case for becoming the operational centre of a European central bank if the United Kingdom is part of the monetary union from the start. Other noble Lords are better equipped than I am to judge the consequences for the United Kingdom if the central bank were to be established somewhere else. But if London is to keep its position as Europe's foremost business and financial centre, the Government will need to modify their approach.

How is London to organise its efforts to achieve that against the ambitions of Paris and Frankfurt? Here I must say in parenthesis that it was a major mistake to abolish the GLC and leave London without the leadership of a central authority which exists in every other major city. Can the Minister tell us precisely what action the Government are taking to meet this challenge which can have grave implications for our country?

I noted with interest the recent speech of the new Lord Mayor of London in which he emphasised the importance of preparing London for a drive to make a constructive bid as the city most qualified to accommodate the new centre. Can the Minister say what plans the Government have to co-operate in that? Is a body being set up which will take the place of a central authority such as the GLC and which will contain experts in all fields; for instance, economic, financial, commercial, industrial and political? If that is in the Government plans it would show that they are serious about securing the new centre for our capital city.

The House will recall that political union was placed on the agenda for Rome at the Dublin Summit in June, and we are grateful to the committee for dealing with that also.

During the years less attention has been paid to the implications of political union than to monetary union, which, as the report reminds us, has been on the agenda since the 1960s. Aspects of political union have been discussed in many reports but we assume that the IGC will study all the possibilities and implications. A number of national parliaments have already submitted their views and it would be interesting to know whether Her Majesty's Government are proposing to submit a memorandum setting out our views.

The basic question that people are asking is: what effect will political union have on the British Parliament? It is a question of the utmost gravity and it must be answered. People ask whether the European Parliament will carry more authority than national parliaments and whether the Commission and the Council will exercise wider and greater functions. These are matters which the report discusses in detail. Mrs. Margaret Thatcher has suggested that a referendum might be held on monetary union and the single currency on the ground that it is a constitutional issue. Personally, I do not believe that would be practicable. However, if a referendum were held on that subject I dread to think of the referendum which would have to take place on an even more obvious constitutional issue.

But one thing is certain; namely, that political solutions are needed now to resolve problems which have developed in the operation of Community affairs. Every member of the Community has a form of democratic government with a freely elected parliament. The report points out that in some respects the Community has the role of a supranational government; furthermore, that there is a danger that the democratic safeguards in the Community structure have not kept place with this development. The House will know that when Community government is criticised, as frequently happens, the response is that the Council of Ministers is there and because Ministers who attend are accountable to parliament the democratic process is thereby satisfied.

I regret to say that I find that totally unsatisfactory. I am glad to note that the committee shares that view. There is a fundamental weakness here which must be recognised and removed. The Council, which has a huge responsibility and which meets in secret, cannot through a Minister of a member state convey its deliberations to national parliaments so that they may be debated there and Ministers can at least be questioned intelligently by the members of those parliaments. More information about the work of the Council and its intentions must be released.

Paragraph 159 of the report states: The Council, through the mouthpiece of the Presidency, must be more open". I should add that I read with great care and interest the very valuable evidence of the noble Lords, Lord Jenkins of Hillhead and Lord Cockfield, upon this subject. After deliberating, the committee came to the conclusion that the key to giving national parliaments greater knowledge of Community affairs and a greater say in decision-making is to strengthen their relationship with the Commission and especially with the Council of Ministers. I see no argument whatever against that. Furthermore, we assume that the IGC will regard this as a first step in the consideration of political unity, accepting that much more work needs to be done before the twelve parties can hope to achieve a consensus. I am bound to say that I do not see that taking place in the immediate future.

We in this House are fortunate to have our European Communities Committee, whose reputation is high both here and in the Community. A warm tribute is due to my noble friend Lady Serota, the chairman, to members of the committee, the staff and their advisers for their outstanding work. It is far and away the most effective method yet devised of scrutinising the work of the Community. It is well in advance of that of the House of Commons, but that is no criticism because I know of the weight of work which these days Members of another place must carry.

Time will not allow me to dwell on other important matters in the report; for example, subsidiarity, the European Court of Justice and the Court of Auditors. Therefore, I conclude by commending and supporting the spirit in which the report has been composed. Its advice that, The Member States must continue to pursue the goal of a closer union of independent sovereign states, acting collectively in the Community when collective action is better than individual action to build on existing achievements is, in my view, sensible. Its emphasis on accountability and on the requirements of a democratic society are, however, crucial. I hope and pray that the new Prime Minister and his colleagues will study the report carefully and have it under their arms when they travel to Rome next month.

4.17 p.m.

Lord Ezra

My Lords, I begin my contribution to this important debate by stating that my noble friend Lord Bonham-Carter should have been speaking at this stage. He was a member of the committee chaired by the noble Lord, Lord Aldington, but unfortunately he is indisposed.

I was pleased to hear that the noble Lord, Lord Cledwyn of Penrhos, generally supports the report and its conclusions. We on these benches do likewise. I recently saw the noble Lord, Lord Aldington, in the corridor. I asked him how he could put his name to so many best sellers. I had the honour to serve with him on the committee on our overseas trade which produced his previous report. That was a best seller and, judging from the difficulty in obtaining copies, this report will be likewise. I have no doubt that another best selling report will come along at some future date.

The report could not be more timely. The committee is to be congratulated on the speed with which it has produced it and on the clarity and forcefulness of the argument. It is compelling reading. Before commenting on and supporting its conclusions, particularly in regard to economic and monetary union, I wish to fill in a little of the background. I have been continuously involved in the affairs of the Community since 1949. I then participated in discussions on the response that the Government should give to the Schuman declaration. There was a working party of officials and the steel and coal industries were represented. Our recommendation to the then Attlee Government was that on balance it would be in our interest to join. No doubt for other reasons the Government declined to take that advice.

From 1952 to 1956 I was a member of the United Kingdom delegation in Luxembourg. A big advantage of being there at that time was that it gave us the opportunity of regularly meeting that most remarkable man, Jean Monnet. It was from long discussions with Monnet that I gained a clear appreciation of the vision which had impelled him in the first instance to launch the Schuman plan with the support of his then foreign minister, Mr. Schuman, and of the further steps which he clearly envisaged right from the start.

He considered it imperative that the countries of Europe should band together, and do so in a more coherent way than had ever occurred before in history by voluntary actions. He felt that, in order to bring about that banding together, there should be clearly defined objectives and an institutional framework consisting of a council of ministers to represent the member states, a commission or executive, a court of justice and a parliament. Those would be the four main institutions. He believed in a step-by-step approach and that clearly defined dates should be set whereby certain achievements should be attained. Therefore the whole framework within which the Community is now operating was envisaged by that great man at that time.

It is remarkable that, in spite of periods of inactivity within the Community, the move forward within that broad framework which he envisaged has continued. There have been certain major landmarks. For example, after the signing of the Treaty of Paris in 1950 which set up the European Coal and Steel Community, with which I was personally much involved, there was the Messina Conference of 1955. That was the next big step forward which widened the area of operation within the Community to cover all economic affairs. There was then the Treaty of Rome in 1957. The next big landmark was the move towards the EMS—the European monetary system—in which my noble friend Lord Jenkins played such a major role when he was president of the Commission.

Moving on, we come nearer to our own times when, in 1987, we took the big step forward of the Single European Act. The noble Lord, Lord Cockfield, played an enormous role in translating into reality the intentions set out in the Single European Act for the creation of a single market.

That brings us to where we are now. The next big step forward is a move from the creation of a single market to the creation of a European system of economic and monetary union. The mistake which we appear to be making to our friends on the Continent, but perhaps which from now on we shall cease to make, is that we have given the impression that we want the evolution of the Community to stop at the single market. They do not envisage that as even a remote possibility. Nevertheless there is the lurking thought in their minds that we should have always preferred a European free trade area as an alternative. After all, in the early days we were responsible for the creation of the free trade area as an alternative to the European Community. They believe that we wish to return to that and they do not see it that way at all. Nor indeed will it be like that. The momentum in the European Community will continue and the important issue, as this report demonstrates, is that we should play a positive role.

The value of the report is that it brings out those points. I am glad to see that the noble Lord, Lord Roll of Ipsden, will be speaking later. I was with him last Monday at an international meeting in Vienna. The dominant consideration, when we came to speak about European affairs, was the way in which the Community is developing. Countries outside the Community—Austria and others—were represented there. They are keen to gain entry into the Community and their attraction to the Community is its strength. If that strength were weakened, their interest would diminish.

With the reunification of Germany what is very important is that the Germans give every appearance of being committed to playing their full role in this new evolving Europe. They do not want to give the impression of dominating the affairs of the Continent. At present that is the last thing they wish to do. I believe that that is a historic decision; we must participate to make sure that the present German intentions are turned into a reality. Currently one of the most important ways in which we can do that is by following the very sound advice in this report.

Of course the committee was absolutely right in saying that as we progressively move towards a single currency, we must achieve a greater degree of economic convergence. I should like to submit that we need not wait until there is total convergence because we may wait for that until the end of time. Indeed it could be argued that after a certain point the creation of a single currency could itself lead to greater convergence. Therefore, we must choose the right moment. I believe that the report is correct in stating that we should accept a date for stage two. The date of 1994, which was mentioned at the recent Council in Rome, does not seem to be out of place.

The press statement issued after that Council meeting made it clear that it would be some time before a single currency emerged and that a review of the whole situation would have to be made in 1997 when we would see where we are going. That seems to be a reasonable course to pursue if we wish to play a part in an increasingly integrated Europe.

Consideration is being given to the hard ecu scheme to which the noble Lord, Lord Aldington, referred. It is most unfortunate that that scheme, which contains some admirable features, should have been presented in such a confusing way; namely, whether it would lead to a single currency or a parallel currency; whether or not it would be legal tender; and whether or not anybody would use it. There is not the slightest doubt that our friends on the Continent are very dubious about the proposition. Let us hope that we can clarify their minds on this subject and make it clear to them that that is a practical way in which stage two of the Delors plan can develop. It has many merits and I am sure that our negotiators could show a way of introducing some substance into what is otherwise a somewhat nebulous stage two.

The report provides a framework for Britain to take a leading role in the next big step forward in European integration. I believe that our destiny lies in Europe. I believe that our interests lie there too.

4.30 p.m.

The Earl of Caithness

My Lords, I begin with an apology to the House for breaking the rules of debate, in that I shall not be here for the majority of the debate or indeed for the winding-up speeches. I wrote to the noble Lords, Lord Cledwyn of Penrhos and Lord Ezra, on the matter. The reason is that the Chinese Vice-Foreign Minister, Tian Zengpei, is in London, and I shall meet him tonight at a reception he is kindly giving for me. I hope your Lordships will understand that I do not like breaking the rules of the House—in fact I criticise others for so doing—but on this occasion I hope the House will understand.

I am grateful to my noble friend Lord Aldington for tabling today's debate on economic, monetary and political union. His committee, which has been examining these questions since May, has produced a thorough and detailed report for which we are all grateful. Clearly it is the product of a great deal of expertise and thought, and I should like to congratulate all those who took part.

I shall approach the subject in the same order as does the report of my noble friend. I shall deal first with economic and monetary union, and then with political union. When speaking of EMU my noble friend described it as a bird that does not put its head in the sand. It is also a fast runner, but not a flyer. Be that as it may, today's debate provides us with an excellent opportunity to cover three key areas on the subject of EMU: first, the degree of common ground that already exists between the 12 and the commitment that exists to move together as the 12; secondly, the immediate questions that face us as we try to chart out the progress to which we are all committed beyond stage one; thirdly, the longer term.

If all one read were press reports one could be forgiven for believing that the opinions of the British Government diverged absolutely from those of the 11 other member states. In fact we are agreed on a great many matters. The treaty already provides for regular and detailed co-operation on economic and monetary matters. On 11th November Henning Christopherson, Vice-President of the Commission, was quoted in the Independent on Sunday as saying, We already have many of the components of the EMU. What we are going to do now is add the last bricks to the building". As my right honourable friend the Prime Minister said in another place on 30th October, Britain intends to be part of the further economic and monetary development of the Community and believes that next year solutions will be found to enable the Community to go forward as 12. We have all signed up to Stage I, which began in July. We all agree that the overriding objective on monetary policy must be price stability. We all agree that excessive budget deficits and monetary financing must be avoided. And we all agree that there should be arrangements beyond Stage I which would come into existence as soon as possible after ratification of the necessary treaty provision.

That there is common ground cannot be doubted; that we are committed to the process should not be doubted either. We have often repeated our commitment to the progressive realisation of economic and monetary union. I am sure your Lordships will again welcome those assurances.

What, then, are the next steps in the process? The report of my noble friend's committee concludes that it, is of paramount importance to the United Kingdom economy to be at the forefront of steps towards monetary union". That is a laudable conclusion and one with which we fully concur. That is why the UK has produced the only comprehensive proposal for the next steps in the process. We would vigorously contest the conclusion in the report of my noble friend that the Government's hard ecu scheme is not viable as it stands. Its technical viability has not been seriously disputed by our European colleagues. Politically, we believe that an approach along our lines is the only viable way of moving beyond Stage I while encouraging convergence.

Our approach allows the 12 to move ahead together, working with the grain of the market rather than attempting to distort the market by imposition. We shall pursue our proposals at the intergovernmental conference which opens in Rome next month. Despite some pressures to the contrary the IGC will set its own agenda as promised at the European Council in Strasbourg last December. It is only by keeping our eyes on the road ahead and not by gazing into the distance that we shall achieve the progress we all wish to see. The original Delors Report, published last year, has been compared to a Chinese painting: great detail and clarity in the foreground and lofty peaks in the background, but a vast area of mist in the middle distance. Our immediate task is to clear away that mist.

Lastly I deal with the longer-term position. My noble friend's report argues that a single currency will bring substantial economic gains. There is no doubting the savings that would arise through an end to transaction costs and exchange rate risk within the Community. But a single currency will also have major costs. My noble friend mentioned the cost of losing national control over monetary policy. However, he did not mention the cost of jobs lost and localised depression if the transition to the single currency were anything other than gradual and market-led, nor the cost of paying, in effect, compensation to those peripheral states which demanded it to mitigate the disruptive effects of a single currency regime on their economies.

It is only right to tell the House that the answers I received from a number of members from those countries when I questioned them on a single currency without such compensation were quite revealing. Although it is the opinion of my noble friend's committee, it is not the opinion of this Government that the benefits of the proposals we have before us for a single currency outweigh those costs and disadvantages.

My noble friend's committee wisely concluded last year that the most effective way to decide on the right form of eventual economic and monetary union would be by waiting for proof that Stage I was a success. Stage I has been going for only five months, and we are still in the process of adjusting to a new environment. Stage I, as defined by M. Delors, will not be complete until the single market is achieved and all Community currencies are in the exchange rate mechanism. The Greek and Portuguese governments have given no formal commitment as to when the drachma and the escudo may join.

Like my noble friend, we believe that we need to wait for proof of success before defining final objectives. Moreover, we agree with the conclusion of my noble friend that monetary union should not be imposed before sufficient economic convergence is assured or before full preparations are complete. But, without defining the final structure, we believe we can still move ahead to the next stage by establishing a European monetary fund to manage the hard ecu. People would begin to use the common currency. The market would then decide whether or not the common currency should become the single currency. It certainly could do so if that is what peoples and governments choose.

The key is not to decide now on what the market will tell us soon enough. The eminent Deputy Director General of the Bank of Italy, Dr. Padoa Schioppa, who was so closely involved in drafting the original Delors Report, wrote recently that, In a modern democratic society … existing arrangements … can be changed only when a current of public opinion develops, followed by political and legislative initiatives". He went on to say that, Whether or not the ecu's potential is realised depends primarily on private action". We must not run ahead of public opinion. Clearly we need to think hard about how to gauge that opinion. Recent debates in another place made it abundantly clear that the democratically elected representatives of the British people would not support the imposition of a single currency. The speed of progress on monetary issues must run with the market, and with market opinion, rather than against it. There is no need now to bind ourselves to a final destination. The Community's best interests will be served by setting up new economic and monetary arrangements for the next steps which will be dynamic and evolutionary.

Let me turn to political union. I am glad to say that the Government fully share the main elements of the committee's analysis and wholeheartedly endorse the majority of its recommendations on political union. As my right honourable friend the Secretary of State recently said, the Community does not stand still. It is debating continually for the mutual benefit of all our citizens whether the Community should develop its role in existing or new areas. The forthcoming intergovernmental conference on political union is part of that process.

We shall be seeking reforms that will make the Community more efficient and more accountable while preserving its liberal, open and market-oriented principles. We agree that the Community must move forward together, by consensus, towards a future which may include new member states but which will always respect the identities and institutions of the nation states within it.

We see considerable scope in the IGC for reforms which will make existing Community policies more effective. People in this country, as anywhere, will only put their trust in institutions and laws in which they have confidence. In the preparations for the IGC, the Government have therefore already proposed a number of improvements to the working of the Community's institutions, several of which are also identified in your committee's report.

First, there is a need for balance between the institutions. The founding fathers of the Community established a structure which has stood the test of time and adapted remarkably well to the demands made of it, not least in the face of the dramatic events of the past year. We should be careful not to upset that balance by strengthening any one institution at the expense of another. Like your committee, the Government do not want the position of member states to be weakened by giving the European Parliament substantial new legislative powers, or significantly extending qualified majority voting.

The balance must also be kept in defining the areas in which the Community may act. We must have a clear division of responsibility. The Community should not become involved in areas which are more appropriately dealt with by member states. This is what is meant by subsidiarity. We should welcome a clear reference to that principle in the treaty.

Secondly, where there is a role for the Community, it must work effectively. I am glad the committee share the Government's long-held view that the Community's financial accountability needs to be reinforced. We have also argued, like the committee, that the roles of the Court of Justice and the Court of Auditors should be strengthened. We must ensure that the Community's laws are not only passed at the Community level but put into effect at the national level. At the last count, only 20 of 107 single market measures requiring transposition into national law had been implemented in all member states. The joint leaders, the United Kingdom and Denmark, each have less than 20 to implement. At least one other country has not even implemented half. Once in force we need to be sure these laws will be respected. At the end of last year there were still 82 judgments by the Court of Justice not complied with by member states. There are none against Luxembourg, only one against the United Kingdom and 26 against the current presidency. We have therefore made a number of suggestions on this which have already attracted support and will be taken up in the IGC itself.

Thirdly, we must ensure that the Community is properly accountable for its actions. In this respect, I strongly agree with the committee's recommendation on the need for partnership between national parliaments and the European Parliament.

There are two pillars of accountability: the European Parliament, which monitors Community legislation and the Commission's activities; and Ministers in Council, who are each accountable to their national parliaments. If the countries of the European Community are to work more closely and effectively together, their national parliaments need to be more involved in the Community's life.

The Government welcome the Conference of National and European Parliamentarians (sometimes known as "Assises") to be held in Rome at the end of this month, and which will be attended by eight of your Lordships, five of whom are members of the committee that drafted this report. This will be an important meeting. I hope it will be able to suggest ways to take this partnership forward.

Finally, recent events have illustrated the value of the existing political co-operation machinery, which enables member states to co-ordinate their foreign policies. We believe it can be made more effective and have suggested a number of improvements to that end. There is also clearly a case for examining whether it should not cover a wider range of security issues, even though defence itself must continue to be co-ordinated through NATO. But I think all member states are agreed that, as the committee emphasised, they must retain the right of independent action where necessary.

I congratulate the committee on its thorough and lucid report. Although, as I have made clear, the Government do not agree with all its conclusions, it provides us with an excellent opportunity to debate these issues, which are of fundamental importance to the future of this country. Discussions here and in the Community will be long and hard; but that is the right way to do things in a democratic community. Indeed, debate is the lifeblood of democratic institutions. We shall arrive at a better outcome as a result. I am confident that the full and constructive part that the Government intend to play in these negotiations will enable the Community to continue its progress on a sound and successful basis.

The noble Lord, Lord Cledwyn of Penrhos, asked us to play such a constructive role in Europe. I would only say, "as if we have not". I can say from my own experience that every negotiation in which I have taken part, representing whatever Ministry, has been nothing if not constructive. In addition to what I have already said, the House will know that the United Kingdom played a leading and successful role in the last IGC, which agreed the Single European Act and opened the way for completion of the single market. We championed the cause of agricultural reform in the future financing negotiations which was successfully concluded with the introduction of budgetary stabilisers in 1988. We shall lead the way again in putting forward proposals for a more efficient and accountable Community. I firmly believe that once again we shall achieve a successful outcome that will benefit both Britain and the Community.

4.45 p.m.

Lord O'Brien of Lothbury

My Lords, like the noble Earl, Lord Caithness, I hope I may claim to be a loyal observer of the rules of this House, which moves me to say in advance that I apologise if it proves impossible for me to stay to the end of the debate. I do not think an ex post facto apology is easy to contrive in this House.

I was privileged to be a member of the committee which produced the report we are debating today. As a member of the committee I congratulate our splendid chairman on the way he led us through this very difficult subject. I also congratulate him on his excellent speech today which said almost everything, leaving very little for the rest of us to say, but we must do our best.

As we found while we were considering this subject, from the written and oral evidence given to us by Ministers and officials the committee's conclusions are—perhaps I should say "were"—at variance with the views of Her Majesty's Government. Indeed, the noble Earl, Lord Caithness, has today confirmed that some of our conclusions still are at variance with the Government's views. However, the pressure in Europe to attain the goals of economic and monetary union and in the end some sort of political union are relentlessly increasing. As so often in the past, I am afraid that it is the United Kingdom which is the laggard. Perhaps in future we shall not be.

We cannot deny that this country was late in joining the Community. There may have been good reasons, but we lost opportunities to take part in decisions which eventually proved to be of great importance to us; for example, the common agricultural policy, which we wish could be very different from its existing form.

Some seven years ago I was chairman of a committee which considered entry into the exchange rate mechanism in furtherance of European monetary union. The report of that committee, which was debated in your Lordships' House, recommended early entry into the ERM. The Government did not reject that conclusion but merely said that they intended to enter the ERM but only when the time was ripe. Repeatedly over those seven years when asked the same question the Government have stated that they intended to enter but that the time was not yet ripe.

Of course in the end the time became overripe and the Government joined the ERM but in circumstances which were most unpropitious, with difficulties in the United Kingdom which probably need not have arisen had we entered at an early date. That is another example of the attitude taken by the Government to European affairs, which I hope in the future will change and they will be taking part rather than dragging others backwards.

Incidentally, I am one of those who believe that this Government have brought immense benefits to the country over the past decade or more. I fear the erosion of those benefits if other hands were to take the tiller. But until today I despaired at this Government's ineptitude in European matters. Not all the arguments are on one side but, as I say, I look for improvement.

Today I want to confine my remarks to the proposed single European currency, monetary union and the proposed European monetary authority or central bank. From the evidence given to our committee—I realise that in the past week things may have changed, and one hopes for the better—it was quite clear that Her Majesty's Government were firmly opposed, as the late Prime Minister herself made all too evident, to a single European currency in the foreseeable future. Vague references were made, which have been repeated today, to the possibility of such a development in the far mists of time. But they carried little conviction. The opposition of Mrs. Thatcher did nothing to support the credibility of the Chancellor's proposal for a hard ecu to supplement the 12 separate currencies of the Community member states until such time as it might replace them because of its superior attractions.

Several noble Lords welcomed the hard ecu proposal. I entirely accept that there is much to be said in favour of an evolutionary approach, but I doubt whether evolution into a single currency is likely to come about within a reasonable time after the flotation of a so-called hard ecu. Leaving aside the present ecu, which has achieved a modest, useful existence as a unit of account, I do not see a new hard ecu circulating side by side with existing currencies as a medium of exchange in day-to-day transactions—that is to say, the money in people's pockets.

The growth in its use would depend very much on whether the local currencies were continuously depreciated by inflation. Assuming that the aim of eliminating anything but marginal inflation in Europe is to be achieved, why should people desert the currency they know for some new fangled ecu, especially if in the UK it did not have legal tender status, as the noble Lord, Lord Ezra, said just now? That is a recipe for chaos and very unlikely to lead to the emergence of a single European currency.

We all regret the long decline in the international status of sterling, which was still a proud currency on the gold standard when I first entered the City. Like many others, in more recent years I have done my bit in trying to nurse and support sterling. I do not see it ever again being strong enough on its own to hold a place with the strongest currencies in the world. I believe that before too long, even if perhaps not in my lifetime, sterling should be absorbed into a stronger European currency, standing on equal terms with the US dollar and the Japanese yen. We must not be bewitched by our own great past but intelligently and realistically face the future.

If we are to have a single European currency, I do not see how we can avoid having a European monetary authority. Whether it would be a bank or a reserve board making use of more independent national central banks would be a subject for discussion. All central bankers yearn for more independence; some believe that they have more than they really have. Only two important central banks have real independence—the US Federal Reserve Board in Washington and the German Bundesbank. Both are in this happy position for special reasons. As we all know, federal government in the USA is based on the Founding Fathers' belief in the division of powers. They feared the over-mighty. Hence the independence of the Fed, subject only to regular accountability to Congress.

In Germany where, incidentally the US as occupying power had much influence in the early post-war years, the haunting nightmare of the terrible inflation during the period of the Weimar Republic after the First World War has guided them into giving the Bundesbank responsibility for maintaining the value of the currency, with the independent authority enabling it to do so. What a good job the Bundesbank has made of it.

As we know, things are different here. But talk about giving increasing independence to the Bank of England has been growing in political circles. Mrs. Thatcher found some attraction in the idea when she spoke to me on the subject before she came to power many years ago. So also did the noble Lord, Lord Joseph, and, more recently, Mr. Nigel Lawson and Mr. Michael Heseltine. My own cynical view is that such ideas flourish only while the proponents have no power to put them into effect.

But if monetary union in Europe with a single currency is ever achieved, an independent European monetary authority would undoubtedly be required. Monetary policy, which needs day-to-day attention and not infrequent modulation and adjustment, certainly could not be run by a council of finance ministers meeting in Brussels once every three months. The inevitable trading of short-term political objectives would make a coherent and long-term monetary policy impossible.

I see nothing inherently undemocratic in the parliaments of the European countries freely delegating such responsibilities for monetary management to an independent body accountable at regular intervals to those who gave them that authority. No doubt mistakes would be made; even central bankers are not super-human. But the politicians make mistakes all the time partly because short-term political aims so often clash with the needs of long-term economic management. Such management in support of a single European currency, which would be the sole medium of exchange among 12 or more European countries, would be a highly complex task requiring great skill. It would not be quickly organised and put into operation, with due regard to the wide differences in economic prosperity in the many European countries. While momentum must be maintained a blind rush would be disastrous.

Willing, as I believe we must, the eventual achievement of a substantial degree of European unity, perhaps we may take some comfort from the success of our American cousins. They have a country almost as large and as heavily populated as Europe, with just as wide differences of prosperity. Their society is a much more recent creation than the ancient peoples of Europe from whose peoples they sprang. They have the advantage of a single language. Nevertheless, their monetary policy covers all that sub-continent and the responsibility for it rests largely with an independent authority. Need we be all that afraid of following their example?

4.59 p.m.

Baroness Serota

My Lords, although as chairman of the European Communities Select Committee, I always attend debates on our reports, it is only on rare occasions that I feel the need to add to the excellent work of the six specialist sub-committees which undertake such thorough inquiries into Community proposals and then report to the House on those which raise important issues of policy and principle.

But this particular inquiry into economic, monetary and political union, prior to the two intergovernmental conferences in December, was, as the noble Lord, Lord Aldington, has explained to the House, undertaken by an enlarged Sub-Committee A of which I became a member in view of the constitutional and scrutiny issues involved.

First and foremost, I must join with all other Members who have spoken so far in this debate in thanking the noble Lord, Lord Aldington, for the way in which he chaired what was undoubtedly a difficult and time-consuming inquiry. The skill and the courtesy with which he presided over our 21 sessions, through a long hot summer, and questioned a large number of distinguished witnesses were quite outstanding. I know that all Members of expanded Sub-Committee A would like to join with me in thanking him for all he contributed to what I believe—as I think this debate has already shown —has been seen on all sides of the House as a most valuable report, whether noble Lords all agree with its findings or not.

My purpose in speaking in the debate is to focus the attention of the House on some specific issues which are dealt with in Parts 6 and 7 of the reports, which deal with the basic principles which should underlie the deliberations at the intergovernmental conference on political union and the practical changes now needed to improve the working of the Community's existing institutions.

When the sub-committee was set up last May and its forward programme was planned, none of us could have envisaged that the report would be published at a time when both the parliamentary and public debate would be so heavily concentrated on the arguments for and against economic and monetary union and the ultimate goal of a single currency. I was very glad to hear my noble friend Lord Cledwyn stress the need for us not to overlook at this moment of time the importance of the issues for the future of the Community, which the noble Lord, Lord Aldington, mentioned to us in the context of political union; namely, the democratic legitimacy of its actions, the accountability of institutions, the role of national parliaments and the European Parliament and the principle, which I personally consider to be of basic importance in determining the balance of powers between the member states and the Community's institutions, subsidiarity, which the noble Lord, Lord Aldington, mentioned early on in his introduction to this debate.

It is not a word that rolls easily off the tongue, however frequently one uses it. But as we pointed out in paragraph 24 in Part 2 of the report on definitions, it has been in use for a considerable time and has a very respectable history. It is not an example of Eurojargon, but is of course much more familiar in those member states which have written constitutions, such as the Federal Republic of Germany.

At present it only appears in Article 130R of the Single European Act in the following terms: The Community shall take action relating to the Environment to the extent to which the objectives referred to … can be obtained better at Community level than at the level of individual Member States". The emphasis then is on the effectiveness of the resultant action.

Otherwise, says our report, it is a purely political principle which could be used when deciding to propose Community legislation or when formulating such legislation. After considering all the evidence we received on this subject, including that of Sir Leon Brittan, who defined "subsidiarity" as, you do at Community level only what needs to be done at Community level", the committee concluded that the principle of subsidiarity cannot be defined as a precise measure against which to judge legislation, since the test of subsidiarity cannot be wholly objective or indeed consistent over time. We came to the conclusion that, properly used, it should determine not only whether Community legislation is necessary or appropriate at all but also the extent to which it should regulate or harmonise national divergencies and how it should be enforced. For these reasons, the committee recommended that subsidiarity should be added to the objectives set out in the Preamble to the Treaty and perhaps also to the principles in Part 1 but that it should not be justiciable before the European Court of Justice.

This view is widely but not universally shared. For example, the Institutional Affairs Committee of the European Parliament and their rapporteur, Valery Giscard d'Estaing, are recommending that the principle should be enshrined in the opening articles of the Community treaties, with provision for Community legislation to be challenged in the European Court of Justice as being outside the limits of Community powers.

Last Tuesday week, when the noble Earl, Lord Caithness, was opening the debate on the Address, he said on behalf of the Government: We believe that subsidiarity must be a major element of IGC reform. This will ensure a clear division of responsibilities, leaving to national governments everything that does not need to be done in common."—[Official Report, 13/11/90; col. 202.] Once again today he referred to the Government's position on this issue and, as I understood him, he said that there should be a clear reference in the treaty to this principle. But I still feel a need to ask, and perhaps to ask the noble Lord, Lord Hesketh, when he comes to reply at the end of the debate, what specific decisions the Government have come to in view of the importance we all attach to this principle? Are they in fact in favour of the committee's recommendations which I mentioned a moment ago in paragraphs 165 and 216? How do they think the principle should be defined and how indeed should it be applied?

Turning to the question of national parliaments and their role in Community decisions, which have already been mentioned by a number of speakers in the debate today, I should perhaps first draw your Lordships' attention to the fact that the report includes at appendix 7 a brief note on the way in which the European Communities Committee goes about its work. The key to our scrutiny system, both in this House and in the other place, is the Government's undertaking that they will not, except in special circumstances, agree to any proposal in the Council of Ministers until scrutiny by the committee has been completed.

As the note points out, there may be a need from time to time to adapt the committee's working methods to take account of changes in the Community, not least the increased pace at which decisions have been taken since the Single European Act has been implemented. This has led us to send letters to Ministers on urgent matters where there is insufficient time for a full inquiry, and these letters are all published in due course.

But it is a tribute to the wisdom and the foresight of those who set up the committee in this House in 1973 and 1974, following the Maybray-King Report, that so few changes have been needed. The terms of reference have stood the test of time: the key to effective scrutiny has been careful selection and flexibility and of course the immensely hard work of the 80 or so Peers who man the sub-committees' inquiries, assisted by the clerks in the Committee Office and their supporting staff.

So far as I know, no other House of any other national parliament is so fortunate in terms of the time which its Members devote to Community matters—some 3,000 Peer hours in a Session on our last count. I was delighted to hear the praise which has been extended to their work today, and I am sure that I can express the gratitude of all noble Lords who take part in our deliberations for the very kind words that their work in the sub-committees has also received.

There are many encouraging signs though that parliamentary scrutiny of Community proposals is being given much greater priority now in all 12 member states. Now, for the first time, there is a scrutiny committee or similar specialist body in every national parliament. A year ago this month representatives of those committees met together for the very first time in Paris as the result of an initiative by M. Laurent Fabius, President of the French National Assembly. Since then, we have met in Cork and in Rome following the pattern of the presidency of the Council of Ministers. These regular meetings have provided a useful forum for contacts and exchanges of experience between those who in committees with very different parliamentary traditions all have a similar job to do; namely, parliamentary scrutiny of EC proposals.

The noble Earl, Lord Caithness, referred in his speech to the forthcoming conference of the parliaments of the 12 member states and the European Parliament which is to be held in Rome next week under the presidency of the Italian Government. The United Kingdom delegation will include some eight members of your Lordships' House. This will be a unique opportunity for members of national parliaments and Members of the European Parliament to meet together to discuss economic and monetary union and political union in the run-up to the two intergovernmental conferences. From the outset our Government have supported that initiative for this Parliament has much to contribute both in terms of its democratic traditions and its long experience of systematic and detailed scrutiny of Community proposals.

Those two developments, and the many bilateral contacts we have with our opposite numbers in member states and the European Parliament where our clerks regularly visit the Plenary Sessions that take place every month, convince me of the wisdom of the report's conclusions, which were unanimously agreed and which the noble Earl, Lord Caithness, appeared to endorse in his speech, that: there must be a partnership between national parliaments and the European Parliament, based on mutual understanding and respect. But a senate of national parliamentarians is not the answer". There are those who would argue that the European Parliament, given adequate powers, could alone remedy the Community's democratic deficit. I do not agree. Ministers in the Council of Ministers represent national interests and must remain answerable to their national Parliaments. My noble friend Lord Jay, in his usual forthright manner, argued before the committee that Ministers should be just as accountable for decisions taken in Brussels as they are for those taken in Birmingham. I am convinced that it is no coincidence that the countries with the most developed scrutiny systems, the United Kingdom and Denmark, are consistently at the top of the Commission's league tables for the implementation of Community law.

I would have wished to comment on certain other aspects and recommendations in the report, particularly those relating to the more efficient working of Community institutions and the financial scrutiny of Community expenditure. I should also have liked to go more deeply into the need for the full and speedy implementation of Community legislation by all member states once decisions are reached. However, we have a long list of speakers today and it includes many noble Lords who were the members of this or previous relevant committee inquiries. I have no doubt that they will deal fully with all those issues in their speeches.

I should like to conclude by expressing my personal belief, based on my experience as chairman of the Select Committee, that this country, with its unique and long-standing parliamentary traditions, has a vital role in building a democratically accountable and outward-looking Europe. I hope that this report will assist all concerned in the forthcoming intergovernmental conferences to achieve that objective.

5.12 p.m.

Lord Cockfield

My Lords, the report before us is a remarkable one. I pay tribute to my noble friend Lord Aldington, to the noble Baroness, Lady Serota, and indeed to all members of the committee for the most exhaustive and authoritative analysis of the issues involved and, above all, for the clarity of their conclusions. Perhaps I may refer briefly to the speech made by the noble Lord, Lord Cledwyn of Penrhos. I greatly appreciate the tribute he paid to my right honourable friend the Prime Minister.

The Prime Minister and I have not always seen eye to eye on many of the important issues which we are debating today. I should just like to say that I look back with nostalgia to happy days of years gone by. There is one other point in the noble Lord's speech to which I should like to refer. He mentioned the merging of the sovereignty of the Kingdom of Wales with the Kingdom of England. Of course, in those days there was no United Kingdom. But for that merger of the sovereignty of those two countries, we would still have had immigration officers on Offa's Dyke and we would have been deprived of the most distinguished contributions that the noble Lord makes to our debates.

I have addressed your Lordships on many occasions recently on the question of monetary union. Therefore, I do not wish to traverse the same ground again in any detail. I shall only say that monetary policy was brought within the ambit of government control in this country in comparatively recent years; namely, during the time of the Labour Government of 1945–50. Today we have two eminent members of that most distinguished Administration present in the Chamber. I can quite understand them still holding precisely the same views as they did 44 years ago. I am only a little surprised that some of my noble friends and right honourable friends have emerged as born again Keynesians and supporters of vintage Labour Party policy. The report is so categorical on the question of monetary union and argued with such detail and conviction that I hope it will now put the issue beyond doubt.

Interestingly enough, on the very same day that the report was published, Dr. Pöhl was making a speech in London. The important point to remember is not that Dr. Pöhl is President of the Bundesbank but that he is also chairman of the committee of governors of the central banks of the European Community. On that occasion, he said that the single currency was really now a matter of fact and no longer a question of argument. In the light of all that, I hope the hard ecu proposal will now be quietly buried.

It is not a question of arguing as to what are the merits or demerits of the proposal; quite simply, its time has long since passed. Ten years ago it would have been an interesting and even valuable contribution in building a bridge between the old EMS and a single currency. However, 10 years have come and gone and times have changed. Eleven of the 12 member states are now determined to go ahead with a single currency. In my view the time has come for the Government to stop flogging what is in fact a very dead horse.

There is one other comment I should like to make upon the matter. I do so because, unfortunately, the same point re-emerged in the speech made by my noble friend Lord Caithness. I refer to the way that the Government are still talking in terms of a single currency being imposed on this country. There is no way in which a single currency could be imposed on this country. It is a simple point of Community law. It does our position in the Community no good that, on such a point, we are still using rhetoric which is quite untrue and inaccurate and which could indeed be said to be misleading.

The other point which causes me some concern is the fact that a decision has now been taken that stage two should start in 1994. The Government have objected to that proposal. However, I still find some difficulty in ascertaining precisely what is their objection. At one time they seemed to be saying, "We do not really know what stage two comprises". All I can say is that everyone else seems to know. All the major problems have been identified and solutions have been proposed. We have even reached the stage where the draft statute of the European central bank has been agreed by the governors of the central banks of the European Community. The Governor of the Bank of England has put in a general reserve as he was instructed to do by the British Government. That alone indicates that our own Government must have known what it was all about.

The alternative possibility is that the Government are trying to argue that you should take all the decisions first and then you should fix a date. However, no one ever proceeds in that way; indeed, the Government themselves do not proceed in that way. In the Queen's Speech we were given a list of Bills that it was proposed to present to your Lordships' House and to another place. We were given a date by which those Bills were to be adopted by Parliament; to wit, the end of the present Session. At the time of the Queen's Speech no one had seen any one of those Bills, still less had any decisions been taken by either House of Parliament. The Community has never proceeded in the way that the Government suggest. If your Lordships turn to the Treaty of Rome you will find that the customs union, which was the Community's foundation stone, was to be completed by a date specified in the treaty itself. There were not tens or hundreds but thousands of decisions to be taken. Nevertheless, the treaty specified the date and that date was adhered to.

When I launched the 1992 single market programme I followed the same procedure. The first thing I did in January 1985 was to say to my colleagues, "We must fix the date of 1992 as the date by which this programme is to be completed". And because we fixed the date, which was agreed by the heads of government at Milan a few months later, we were able to put in a discipline to ensure that the programme was kept on course. That is why the single market will be achieved by the date now specified in the Single European Act. Incidentally, that Act followed the launch of the 1992 programme. It did not precede it. That is why the date of 31st December 1992 will be achieved. The position at the time that we agreed the date was that the preparatory work was far less advanced than the preparatory work on monetary union is advanced today.

Perhaps I may turn from that subject to the much more general question of economic and monetary union and political union. Perhaps one of the most valuable things the committee does is to debunk—perhaps I should use a more polite phrase—or defuse the arguments which centre upon the use of terms such as "sovereignty", "federation" and so on. Those terms mean such different things to different people that much of the debate is sterile and gets one nowhere. We have now to settle down to the hard task of deciding what should be done.

On subsidiarity, my views do not coincide entirely with those expressed in the report. Subsidiarity has become the popular catchword of the moment; too often it tends merely to be a substitute for thought. It is a philosophical concept, more valuable in intellectual or theological disputations than as a guide to decisions. It cannot be treated as a principle to be applied bluntly and rigidly.

My experience in the Commission indicated clearly not just how difficult it is to draw the line in the first place, but that subsequently the line shifts so easily. That proved to be the case in the instance of the new approach to standards. I shall not go into that matter in detail, but we started on the subsidiarity principle of devolving responsibility to the member states. We then found that trade and industry were demanding that we took it back at Community level and operated upon the basis of European standards rather than upon the principle of mutual recognition.

There is another important point here. While it would often be far better for member states to legislate themselves, and there may well be a consensus that they should legislate, nevertheless, in practice, they will not do so. That may be because they do not trust one another. None of them will legislate unless certain that the others will. That is sometimes because they expect domestic resistance to legislation; sometimes it is due to manifold and ill-defined other reasons. That is a situation that we meet time and time again. I can say only that, for all the reasons that I have given, it would be a serious mistake to incorporate subsidiarity into the treaty. To do so would open up endless opportunities for sterile argument. The committee takes that view to the extent of saying that subsidiarity should not be justiciable, but it then attempts to compromise by proposing that it should be incorporated in the preamble to the treaty. I do not agree with the committee. That device has commonly been used in directives. I can say from practical experience that it provokes endless argument and dissension and provides a basis for opposition and obstruction.

I do not propose to say much about the substance of political union. When I went to the Commission in 1985, I would not join in arguments or debates on political union. I then took the view that we would see economic union in my lifetime and that I should work to achieve it; but political union we would not see in my lifetime, and I was only too happy therefore to leave it to a future generation. Unfortunately, events have moved faster than I had at that time anticipated. If we are reluctantly forced to deal with political union, we must deal with it. I do not believe that there is any future in the kind of approach illustrated by the Spinelli treaty of European union, despite the fact that it was favoured by the European Parliament. Your Lordships will remember that it was the subject of a special report by your Lordships' committee in 1985.

I believe it more likely that progress will be made by specific increases in Community competence from time to time. That is the way that the Community has always developed. We started with the Coal and Steel Community; we then had the Economic Community and the Atomic Energy Community. We had the launch of the European monetary system in 1979. In 1986, we had the Single European Act which extended or confirmed Community competence in particular areas and also provided a legal basis for political co-operation on foreign policy, although in a somewhat semi-detached form.

As each successive step forward is taken, it paves the way for the next development. That is the way I believe that political union is likely to be achieved. We may well see at Rome next month an agreement to clarify or extend Community competence in the field of foreign policy. Technically, foreign policy is not a Community competence at all. It is detached from it but we may at Rome see it brought formally into Community competence. We may also see Community competence extended to defence and security matters.

I want to make a brief comment upon institutional issues. In many ways, to whom we delegate power is just as important as what powers are delegated. Community institutions reflect the doctrine of the separation of powers; that is, one has an independent executive, a separate legislature and an independent judiciary. It is a sound principle. Many of our present troubles in this country are due to the erosion of that principle. We should not make the same mistake in relation to the Community. Thus it will be a grave error to subject the Community to control by the European Parliament. The Commission is one of the institutions of the Community which, under the terms of the treaty, enjoys its own functions and its independence. The powers of the parliament are inadequate. But they need to be strengthened in relation to the Council of Ministers, not at the expense of the Commission.

The history of the Community is one of development and progress: sometimes faster, sometimes slower, but never completely coming to a halt and most definitely never going back. That is the Community we joined, and that is the Community whose laws and decided policies we were bound by the treaty of accession to accept. We now see this process of development carried forward. The matters considered in the report of your Lordships' Select Committee are an important illustration. It is not simply our obligation to participate; it is very much in our interest so to do.

5.30 p.m.

Lord Cromer

My Lords, I rise with great diffidence as I am not a familiar figure in this House. With even greater diffidence, I apologise for not being able to remain for the completion of the debate. I wish to take the opportunity of adding my compliments and respect to our chairman for the admirable way in which he organised the report. It was an extremely educational, interesting and enjoyable way of passing the hot summer.

I wish to touch on a couple of points. So much ground has been covered that it is difficult to avoid being repetitious. I shall do my best. The British are traditionally experienced in the practical field of international payment systems where they are deservedly renowned for having created a high standard, although much of it is now bygone history. The gold standard and the sterling area have passed. But the system took much construction and running which we were rather good at.

It was practical British banking leadership which led to the creation of the Bank of International Settlements in 1930 and which fortunately exercised a disproportionately large influence on the creation of the International Monetary Fund at Bretton Woods. That ended with a distinctly American overtone, but the British influence was considerable.

It so happens that because I was available at various times as the UK executive director of the IMF and later as a director of the Bank of International Settlements I was conscious of the advantaged position of the United Kingdom as a respected leader in practical international monetary affairs. We had more experience than most of our colleagues. In 1964 the Community set up what later became known as the central banks' governors committee. It was difficult from my point of view as we had walked out at Messina and were not members of the Community. I was rather averse to this group of bankers meeting without my being present. I had to take the necessary action to make sure that we were not embarrassed by not being included. There was no difficulty about that.

As a result, I naturally received invitations over the years to participate with bankers and academics in seeking, within international, entirely European, groups, a European payments system. Those meetings took place at different venues and under a number of different guises. Our prime quest was to evolve an international unit of account as an enduring store of value or, if that is preferable, numeraire —a benchmark and a currency of exchange. In those days we used to refer to it as a Europa, sometimes a European unit of account and many other similar variations.

We went so far as stimulating what became known as the Werner Report and even created a "snake in the tunnel", alleged by some to be a tribute to Basle as a leading railway junction in Europe. It was not a great success, but it was an attempt to get the European monetary system into a controllable form. Then we dabbled extensively in baskets of currencies of various compositions and shapes but never arrived at a pattern that met our criteria.

We were, however, always unshaken in our firm belief that no one national currency would enduringly provide the stability we sought. After all, the dissolution of sterling as the instrument of the gold standard and the disappearance of the dollar as the international standard of measurement increased our belief. That continued right up to the devaluation of sterling in 1967. Roughly 60 per cent. of world trade was reckoned by the Bank of England to be carried out in sterling. However, the dollar was the unit of currency. It confirmed our belief that a national currency was not the ideal basis for an international system.

So we come to the present, and the ecu. I do not find myself wholly in agreement with the noble Lord, Lord Cockfield, in his remarks about the hard ecu. I do not believe that the basket ecu has the qualities that are necessary. There is little disagreement among us that the final goal is the single European currency. But what will that currency be defined as? The question remains. It must be solved practically, not only in terms of what is academically acceptable but also of what is acceptable in the market. This is one of the great challenges and will remain so. I wish I knew the answer; perhaps some noble Lord will provide it. The basket ecu is a fairly wobbly item: it is not the ideal standard to set for the future.

Finally, perhaps I may touch on monetary sovereignty. I should say en passant that monetary sovereignty cannot be claimed on borrowed money. I did as much borrowing in my day as anyone in this House on behalf of the Government. That does not create sovereignty until it is repaid. A certain loss of sovereignty was inherent from time to time in our drawings from the International Monetary Fund. Thus to take a high position on monetary sovereignty—I am not talking about political sovereignty, which is different—is rather artificial.

The suggestion in our report of evolutionary progress towards the single currency is the goal we should keep in front of us. Certainly, for the administration of the currency—whatever it may be—I share the views that have been expressed about the desirability of a politically independent monetary authority or central bank. I do not like the term "Eurofed"; we use the words "monetary authority". My noble friend Lord O'Brien referred to the Federal Reserve System as being a child of the founding fathers in the United States. In that case the gestation period was rather unusual because the Federal Reserve System came into being in 1908 by which time the founding fathers had been underground for some time. However, that has very little to do with the future that we are trying to achieve.

5.40 p.m.

Lord Murray of Epping Forest

My Lords, I must ask for the indulgence of the House as I have a long-standing speaking engagement in Essex this evening and I regret that I shall not be present to hear the whole of the debate. However, it is in no conventional spirit that I add my congratulations to those already offered to the noble Lord, Lord Aldington, for the way he steered the committee gently but very firmly to an agreed conclusion. Indeed, I believe the noble Lord is in danger of reintroducing the word "consensus" into the British political vocabulary. I for one would be heartily delighted at that.

Several speakers have made reference to the way in which this report debunks and dispels mythologies such as sovereignty. One piece of mythology which has dogged debates about Europe has taken the form that the Community monetary authority will in some way come to dictate Europe's economic priorities and objectives, whatever the elected representatives may want or think. That concept may be expressed in the phrase, "The European central bank rules okay". However, that is not all right, in my opinion. That position is not desirable and I do not believe that it would happen in practice.

In his evidence Dr. Pöhl rightly and understandably laid great emphasis on price stability. He referred to the contribution that the Bundesbank had made to the achievement of that objective in Germany. He laid great emphasis also on the need for independence of a European central bank. That idea has been echoed in debates, not least in the debate here today. We should remind ourselves of what Dr. Pöhl said at paragraph 65 of the Select Committee's report where he made it clear, that the Bundesbank recognised the limits of its responsibilities, namely monetary policy. Political and economic objectives—such as full employment—had to be taken into account, whether by a central bank, ECOFIN, governments, employers or trade unions". That was underlined by the present Governor of the Bank of England in the evidence he gave. He said on page 21 of volume II of the Select Committee's report, with reference to the Bundesbank: I know that it is required to exercise monetary policy with a view to price stability and to exercise it free from intervention by central government, yet nevertheless it is required within that prime responsibility to have due regard to the elected government's economic policy". The conclusion drawn by the committee is set out in paragraph 83 of the report. We were interested in, if not preoccupied by, the German model as a possible indicator of the way in which we might establish this kind of institution within a European context. It is right that we should reflect on and learn from the German experience and that we should acknowledge the important part played by the Bundesbank in helping to create a climate of price stability in Germany.

We have been reminded this afternoon that the Bundesbank had the enormous advantage of preaching to the converted. Experience of inflation after two world wars meant that German trade unionists were more willing than British trade unionists to make their actions conform to the achievement of price stability. The noble Lord, Lord O'Brien, reminded us of that point. However, we should remember that that price stability, and the contribution made by German trade unions to it, did not come mainly from wage restraint but rather from the acceptance of industrial and technological change, training, retraining and modifications in working practices, all in the context of the principle of social partners working closely together in industry.

That principle is too often derided in this country, at least on the Benches opposite, and dismissed as corporatism. In short, the German achievement of price stability has not merely been a matter of monetary policy.

How effective a European central bank would be in promoting price stability would depend in part on the powers written into its constitution and in part on the toughness of its chief officers in practice. However, what the European central bank does will, at the end of the road, depend on its judgment of what it can do without provoking an undue reaction from national governments, national parliaments, the Commission or the Council of Ministers. The impression I received from listening to Dr. Pöhl was that he was as well versed in the art of the possible as any of your Lordships.

I would expect a European central bank to give not only national governments but also banks, employers and trade unionists a hard time. If any of my friends are apprehensive about coming under the hammer in that way, I must say that I would rather be exposed to that kind of continuous and predictable pressure than be subjected to sporadic invasions by the faceless men of the International Monetary Fund. I would also regard steady pressure from an institution of that kind as preferable to sporadic lurches by governments of either party into wage restraint as a means of extricating the nation temporarily from a crisis only to sow the seeds of the next crisis. Indeed, the recurrent resort to pretty crude wage restraint has given incomes policy in Britain an unnecessarily bad name.

Paragraph 86 of the report underlines the need for economic as well as monetary co-ordination. The report does not dot all the "i"s and cross all the "t"s of economic monetary union, but it opens up genuinely clear new options for Britain. The report offers the means by which we can develop a strategy—or even a plan if that is what we would choose—for achieving a better life for the citizens of the European Community. That is the test of this report and of all that will be achieved in the coming intergovernmental conference.

5.48 p.m.

The Earl of Bessborough

My Lords, I am very glad to follow the noble Lord, Lord Murray of Epping Forest. On more than one occasion we have travelled together to Brussels when the noble Lord was a member of the economic and social committee. The noble Lord was the most important leader of trade unions in this country. I was most impressed by the fact that he was very European minded. I thought of him as a good European even though we may not have agreed on everything.

I wish as briefly as I can to endorse fully the conclusions and recommendations in Parts 8 and 9 of this admirable report on which the noble Lord, Lord Aldington, and the members of his committee, as well as the first-class clerks and specialist advisers, should be warmly congratulated. I was not a member of the noble Lord's committee, but I nonetheless managed to attend some of its meetings. I was particularly struck by the distinguished composition of the committee, which included no fewer than two former Governors of the Bank of England, whom we have just heard.

I listened to many most distinguished witnesses whom I happen to know. They included my right honourable friend the Foreign Secretary, Mr. Douglas Hurd, and the present Governor of the Bank of England, Mr. Robin Leigh-Pemberton, who I thought was sympathetic to most of the recommendations made by the committee. I was particularly impressed by the President of the Bundesbank, Dr. Karl-Otto Pöhl, Sir Leon Brittan, the European Commissioner, and my noble friend Lord Cockfield. I agreed with a great deal of his evidence and also with much of the evidence given by the noble Lord, Lord Jenkins of Hillhead, among others, and M. Trichet the Directeur du Trésor in France.

Ever since the publication in 1970 of the Werner Report, which has already been mentioned, I have been favourably inclined to the concept of a single currency for the EC, and, more recently, eventually for an enlarged European Community. For some 12 years, since I sat in the European Parliament, I have advocated it. Like my right honourable friend Mr. Nigel Lawson, the former Chancellor of the Exchequer, and Sir Geoffrey Howe when he was Foreign Secretary, I have been even more convinced during the past five years of the need for a single currency if we wish a united Europe to be a major power in the world. I say that not merely because I am half French and have many relations and friends in other member states. Surely a Europe completely united economically and monetarily will be stronger than a series of relatively small independent sovereign states. Strength and power must reside in union and must contribute to the effectiveness of the 1992 single market. This must be a case of the whole being greater than the sum of the parts.

On more than one occasion in your Lordshps' House and elsewhere I have stressed the benefits of a fixed exchange rate regime and even a hard ecu. However, I agree with the statement in paragraph 189 of my noble friend's report that those benefits are far less than the substantial gains which would derive from a single currency, which is much favoured by industrialists trading with the Continent and by tourists.

I agree too that the benefits of a single currency should outweigh fears about the loss of national control expressed in paragraph 75. I therefore agree with many in your Lordships' House and in another place that the sooner we agree to a single currency and go along with the other 11 member states of the EC the better, even if we all have separate problems in that connection. I feel that we must now take the plunge.

I agree too that the hard ecu scheme is not viable as it stands, although it is certainly a useful step in the right direction which should benefit us in the transitional stage. I also agree with what my noble friend Lord Aldington said about convergence and that highly controversial word "subsidiarity".

However, on the question of a European monetary authority and/or a European central bank, it appears that not all experts, even in France, are in agreement. I have just read a book by Mr. Bernard Schmitt L'ECU et Les Souverainetés nationales en Europe—The ECU and National Sovereignties in Europe—which I recommend to your Lordships, even though I do not agree with all that Mr. Schmitt writes. He is one of the best known French authorities on the question of international monetary policy. He considers the setting up of a central bank similar to the Fed in the USA Utopian and that realism must entail a rejection of the idea of supranational money. I do not agree with him on that point. Nevertheless, I believe that it is a book which those of your Lordships who are interested in the subject should read, even though we may not agree with everything that he says, although some people in this country do.

I wonder whether a committee of governors of the central banks would be able to perform the role of a central bank or monetary authority and be concerned in the transitional phase with the proposed European Monetary Fund.

Above all, I consider that we should not remain out on a limb in Europe, with the result that we would not be able to play a full part in developing the overall benefits of monetary union in some form. I agree very much with all that the noble Lord, Lord O'Brien, said on the subject.

I sincerely hope, therefore, that all members of Her Majesty's Government, present or future, and of our party, as well as those in other parties, will agree with the report's recommendations in Part 9. That is not to say that, like others, I do not greatly admire what our Prime Minister has done to make Britain great again in Europe and the world.

I have stated more than once in this House that I do not believe that the loss of sovereignty argument is valid. By joining other international organisations such as NATO and the International Monetary Fund we have already severely curtailed our freedom for independent action. I hope, therefore, that at the next intergovernmental conference Her Majesty's Government will go along in principle with a majority of the other 11 member states.

I agree very much with the report's recommendations on political union. However, in this ease I accept that member states must also retain same right of independent action in foreign affairs. I have already referred on other occasions to the success of European political co-operation in which considerable progress was made when my noble friend Lord Carrington was Foreign Secretary and chairman of the EC Council of Ministers.

Above all I hope that we shall go forward with our 11 partners to full economic and monetary union. I agree that that should eventually lead to the establishment of a common monetary authority, as described in paragraph 194. I believe that if we had joined the Exchange Rate Mechanism earlier that would have been beneficial in controlling inflation and reducing interest rates. Between you and me, my Lords, I do not believe that a closer connection with the deutschmark can do anything but strengthen sterling.

Again I should like to pay tribute to my noble friend's report and to all those who helped him draw it up. I fully support the recommendations.

6 p.m.

Lord Cobbold

My Lords, I should like to add my congratulations to those of other noble Lords to the noble Lord, Lord Aldington, and his sub-committtee for the production of a first-class report. Its coverage of economic and monetary union is the clearest and fairest exposition of this complex subject that has emerged since, if I may say so, the Select Committee's earlier report last December. There are many speakers this afternoon and I wish to touch on only three issues related to monetary union: sovereignty, convergence and the form that a single currency might take.

The report's definition and analysis of the sovereignty issue is masterly. The only point that I feel was not perhaps directly addressed is whether Parliament has a sovereign right over the creation of money in the first place. There can be no question but that Parliament has the right to tax and the right to borrow, but it is at least debatable whether Parliament has the right to lend itself money by running the printing presses.

For those who believe that politicians cannot be trusted with the management of the money supply—and history supports that view—it is essential that central banks, like the judiciary, should be independent. However, if I may presume to say so in the presence of two former Governors of the Bank of England, in this country the sovereignty question in the monetary field is about independence of the Bank of England. Once the principle of independence is accepted at the national level, it is less of an intellectual jump to envisage a merging of independent central banks within the Community.

With regard to convergence, it is sensible for an advanced degree of convergence to be achieved before the adoption of a single currency. But there is a danger that the call for convergence is used purely as a delaying tactic. I support the view noted by the committee in paragraph 90 that, convergence will be most effectively secured once a single currency is in place, with no more pain than if the struggle is drawn out". I for one hope that the process will be shorter rather than longer. I believe that there is a risk, particularly after the political changes that are taking place this week, that the momentum for a single currency may now accelerate and that business will demand fairly fast progress in this area.

In any event, since a single currency at stage three will take a number of years to introduce once the decision is taken, it would be advisable to commence the process while economies are still converging. Convergence without the single currency locking mechanism, were it ever achievable, might well be followed by resumed divergence.

I turn to the question of what form a single currency might take. In the recent evidence that I submitted to the Select Committee, I suggested that the public might not welcome the introduction of an esperanto currency such as the ecu. Since then, we have heard already in this country cries of, "Save our pound". The committee states in paragraph 87 of the report that it sees, no objection to the proposal that national currencies should be redenominated into round numbers, which could then be printed on one side of a banknote or a coin, with the single currency denominated on the other". That is indeed a desirable solution, provided that it involves only a small change in the perceived value of the familiar currency unit. Too large a change in value would destroy the consumer acceptability that is sought.

I would turn the proposition round. Is it not possible to line up the new single currency with existing known values? The three principal currencies of the EMS are the deutschmark, the French franc and the pound. Together they account for 62 per cent. of the weighting of the ecu and, if East Germany is included, 56 per cent. of the population.

The pound has recently entered the exchange rate mechanism at a central rate against the mark of 2.95 and against the franc of 9.89. An adjustment of only 1.7 per cent. in the case of the mark and 1.1 per cent. for the franc—well within the narrow 2.25 per cent. band—would put those central rates at round numbers three and 10. At 10 francs to the pound a franc is the same as a 10 pence piece. If it were not for decimalisation, a mark at three to the pound would be equivalent to six shillings and eightpence. Unfortunately, a decimal pound is not divisible by three. However, most people can handle without difficulty a mental conversion of three to one.

In my written evidence to the committee I put forward a suggestion based on the probability that the deutschmark would need to be revalued within the system before exchange rates were finally fixed. That may still prove necessary and the proposed scheme is still valid. If, on the other hand, further major realignments can be avoided and we manage to get to stage three with existing relationships, a consumer-friendly solution would be to consolidate the £1, three mark, 10 franc whole-number relationship and to fix the value of the new single currency ecu in direct relationship to one or other of the three currencies.

The mark may seem to be the obvious choice. At the moment the ecu is worth close to 2DM. However, a case can also be made for the ecu to be fixed at £1, which happens to be the largest monetary unit in Europe. There would then be three marks to the ecu, and 10 francs. For the British and the French there would be little change. The Germans would receive one new ecu for every three deutschmarks. Such an option would obviously have great appeal to the City of London and is one that the British delegation at the IGC could actively pursue in the national interest. There are other variations for such a scheme and several of the other EMS currencies might also be fitted in with only minor adjustments to their existing central parities—for example, the Spanish peseta at 200 to £1.

The important point is that the opportunity to enhance consumer acceptability by making use of such round number relationships between Europe's major currencies should not be missed. Where practical the new should be created to match the old rather than the old redefined to suit the new. In all other respects I fully support the conclusions of the report.

6.7 p.m.

Lord Jay

My Lords, this afternoon I speak with diffidence as a non-member of such an eminent committee. I should like heartily to applaud all that has been said about the clarity and lucidity of this report. I fully agree with one of its conclusions; namely, that these issues are well worth discussing in the House.

Economic union and monetary union are phrases which in themselves could mean almost anything or nothing. However, in practice what appears to be proposed as a settled aim under economic and monetary union is a single currency and a single monetary policy controlled by a single more or less unaccountable central bank.

First, why do we want a single currency? It seems to me that a strange fallacy has grown up recently, to the effect that by adopting a single currency a country can somehow abolish a current account payments deficit. But it does not do that. What a single currency would do to a weak economy would be, first, apparently conceal the deficit and, secondly, convert the debtor country into a more or less depressed area, eventually sucking its population elsewhere if those conditions continue.

Producers in such a country would find that their costs were too high and would contract or close down. People would be put out of work and depressed conditions would arise. That is what happened in Northern Ireland over the past 50 years, and interestingly enough is visibly happening in East Germany at the present time. There, unemployment has already reached something like 20 per cent. Therefore I wholly agree—it is a pleasure sometimes to agree with the Government—with the statement of the present Chancellor of the Exchequer as recently as 11th November on television that a single currency imposed—that is the word he used, but I do not think the word matters much—on our currency would mean massive unemployment in the present condition of the British economy.

Secondly, it is true that to manage the single currency we are faced with a plan for a Euro-fed, independent central bank which Dr. Pöhl believes should be wholly free of political control. Since it is sometimes a good thing to consider the real world, in evaluating that issue I should like to remind noble Lords of what happened on 16th March 1939. On that day, Hitler, having seized Prague and the Bank of Czechoslovakia, in the name of the bank put his instruction to the Bank for International Settlements that £12 million of gold deposited there should be returned to him in Prague. At a meeting of the Bank for International Settlements a few days later, Mr. Montagu Norman assented to that arrangement and the BIS duly handed over the gold to Hitler. Some wit made the comment, BIS dat qui cito dat.

However, when the British Foreign Secretary was asked about it in Parliament he said that he knew nothing about what had happened. When Mr. Montagu Norman was asked by the press whether he had consulted the British Government, he said that politicians should not interfere with central banking. I believe that that incident is worth recording. According to the report, the noble Lord, Lord Cockfield, is wholly in agreement with that sentiment.

Lord O'Brien of Lothbury

My Lords, if the noble Lord will allow me to intervene when he is talking about this incident of the Czechoslovak gold, I wish to point out that the gold was deposited formally with the Bank for International Settlements in those far-off days. The Bank of England merely held it on behalf of the Bank for International Settlements as a depositor. It had to obey, and did obey, the instructions of the people who deposited the gold with it. I cannot tell you to what extent the Governor at that time consulted the Government, but as a banker he was absolutely obliged to comply with the instructions of the people on whose behalf he held the gold. It was their responsibility to decide whether that gold should properly be returned to Herr Hitler rather than to the original Czechoslovak owners.

Lord Jay

My Lords, I am very glad to have that confirmation of the account that I gave of the incident. The upshot was that the Government were not consulted and Hitler obtained the gold. That is not in dispute.

However, there is an even more fundamental objection to a supranational central bank. In a modern economy there is almost always a standing dilemma between high employment, on the one hand, and stable prices, on the other. If one has no incomes policy, one is usually forced to choose between either a rising price level or rising unemployment. That is the most fundamental decision that any modern government have to take other than the choice between peace and war.

However, on this issue central bankers—worthy and distinguished characters as they all are, as we can see by looking around the House—a re inevitably biased. Dr. Pöhl has rather condemned himself by saying that there is no need for political control because stable prices will be the sole aim of the central bank. The implication is that employment or unemployment does not matter. Indeed, we have hardly heard the word "unemployment" mentioned in the debate until now. It is no disparagement of central bankers to point that out. Like all of us they have their occupational party line, shall we call it? It is no criticism of them, but such bias is highly important when one considers how much authority one should put into their hands.

The truth is that central banking is too important a matter to be left to central banks. If one has a supranational authority, either it is unaccountable or, in so far as one tries to make it accountable by direct elections or other devices, one is inevitably moving towards a loss of status as a sovereign independent nation.

It is not only sovereignty that is now regarded as a legal restriction that is at stake but the fundamental reality of self-government and independence. It is not simply the right of Parliament but the right of the electorate that is at issue. We have hardly heard mention of the electorate and the ordinary people of the country. That issue cannot be fudged. It is a merit of the report that it does not attempt to do so. The status of a sovereign independent nation, as the report points out, is legally defined. It is adjudged by the United Nations when anyone applies to join.

Those who do not wish to retain this country's status as a sovereign independent nation should realise that if that concept were applied to Britain, this country would not merely cease to be a member of the Security Council but would cease to be a member of the UN, while about 120 other nations—one need not enumerate them—would still be members. Those who wish to retain our essential independence and self-government should say so clearly and also accept that in that case a line must be drawn somewhere in handing powers away from the British Government and the British Parliament.

I gathered from his speech last week that the noble Lord, Lord Jenkins of Hillhead, who is not with us now, would be averse to going quite so far as that. He said that he did not wish to see an analogy of the United States in Western Europe. There is also something curiously outdated about the spectacle of the EC at this stage seeking closer and tighter centralisation, when all over the world other societies are seeking independence and a loosening of bonds and Eastern European states are joyfully breaking away from years of centralised authoritarianism. Indeed, even the Soviet Union is being forced to decentralise in order to survive. Surely what we need politically is a wider and looser Europe embracing the EFTA countries to start with—many of them would be willing to join—the liberated ex-communist states at some stage, and perhaps others, in a freely associating society, and not a narrow, exclusive, would-be super power in Europe.

If one insisted on more enforced centralisation, as with a single currency and a supranational central bank, one would surely make it far harder for the EFTA countries and the ex-communist countries to join. Therefore I believe that in the forthcoming intergovernmental conference the UK should stand firm against extreme and authoritarian proposals but—I emphasise this—should not try to veto other countries in the Community from going further in that direction if they wish. I believe that talk of a two-tier Europe is extraordinarily misguided and misses the point. It would be much truer to talk of overlapping or concentric circles of countries.

Finally, it is time—since we have gone as far as we have —that the electorate were consulted. Parliament surely has no right to barter away essential constitutional liberties which are the property of the electorate rather than of Parliament. So far the electorate has been misled rather than consulted. We should remember that in Mr. Heath's original White Paper which was presented to Parliament in 1971 he said categorically that in joining the EC: There is no question of any erosion of essential national sovereignty". The pamphlet circulated to all electors in the 1975 referendum under the name of the noble Lord, Lord Jenkins of Hillhead, and others recommending a yes vote stated: All decisions of any importance must be agreed by every member". The other yes pamphlet—there were two yesses and only one no—circulated by the Government under the name of the noble Lord, Lord Wilson, stated: The Minister representing Britain can veto any proposal for a new law or new tax if he considers it to be against British interests". It is interesting to note that the latter pamphlet, which some people may have forgotten, stated: There was a threat to employment from the movement in the Common Market towards an economic and monetary union. This could have forced us to accept fixed exchange rates for the pound … This threat has been removed". In view of what was said by my noble friend Lord Cledwyn about possible referenda, it appears that if those pledges given at the previous referendum are to be honoured the electorate, as well as Parliament, must be consulted again.

6.22 p.m.

Lord Plumb

My Lords, I join with other noble Lords in thanking my noble friend Lord Aldington for the thorough research that he and his committee carried out in producing the report on European economic and monetary union and on political union. The fact that so many of its conclusions have already been fully vindicated by events is a tribute to the quality of his work.

I fully support my noble friend's views on the democratic procedure, the future development of the European institutions and their relationships with national parliaments in particular. We should remind ourselves of the importance of next week when, for the first time formally, there will be the gathering in Rome of the representatives of this House, of national parliaments and of the European Parliament. I hope that we can obtain a better understanding than has obviously been the case hitherto.

I speak with knowledge as a past president of the European Parliament in paying tribute to the courageous lead given by my noble friend Lord Cockfield. Without the pioneering effort that he made in steering his report on economic and monetary union through the Commission, the European Parliament and the Council, we should not have made the progress that we have thus far.

The recent European Council in Rome has proved that there is broad support among our Community partners for creating a single European currency by the year 2000. We can now be in absolutely no doubt that Continental member states are serious about this. The prospect of finding ourselves outside a European currency union, therefore, is very real. It is a prospect that I view with the gravest misgivings. The potential damage to the status of the City of London as the principal centre for financial business in this time zone, the risk of our losing foreign investment which has come here because we are part of the European single market, and the probable difficulties for British business in competing in that market through a currency barrier are all extremely grave.

There has been some talk of a single currency being imposed upon us. The fact is that the real argument is whether we choose to exclude ourselves and the costs to us of so doing. But while I regard the process of European monetary union on the Continent as unstoppable I think it wrong not to consider the very positive advantages for this country in accepting this process; indeed, there is still all to play for in determining the precise form which it takes.

I feel that we have been fighting the wrong battle of late. We cannot prevent the Continentals proceeding down this path. Rather than harbour this illusion we should analyse the benefits which monetary union could bring us and determine that we so influence the course of the forthcoming intergovernmental conference that monetary union, when it comes, is of a form that fully suits our national interests.

What are these advantages? As the committee clearly describes, a single European currency is the obvious next step from the completion of the single European market. Savings on transaction costs and the greater commercial certainty brought about by a currency union are acknowledged even by opponents of EMU. The possible savings are assessed, for instance, at some £20 billion annually for the European Community, Businessmen, travellers and tourists will benefit. I submit that that creates employment rather than the reverse. The member states of the European Community already conduct the great majority of their trade with each other, the basic pre-condition for a successful currency union. Intra community trade will increase after 1993, thus increasing the benefits flowing from a single currency.

But the single European currency is not just a question of saved costs and the abolition of exchange rate uncertainty. More important are the European monetary arrangements that will accompany the single European currency. We should certainly welcome these arrangements. By definition, devaluation of the British currency against Continental competitors will be impossible; this must restrain inflation and will rule out the "fool's gold" of competitiveness pursued through devaluation.

That is not just theory. Those of our Community partners who have been members of the exchange rate mechanism have already experienced some aspects of these benefits, albeit in an imperfect form. In the fields of my own experience, in agriculture for example, I have long witnessed the debilitating market-distorting consequences of the parallel so-called "green currency" system. For farmers, our entry into the exchange rate mechanism and the abolition of the green pound is greatly to be welcomed.

Again, in commercial banking the expansion of ecu-denominated lending is an indicator of how powerful are the pressures for greater currency stability. The committee has rightly concentrated much of its attention on the controversial question of central bank independence. I have long found it incredible that so many people seem to view with scepticism the notion that monetary policy is of such fundamental importance for the health of the economy that it should be removed from the direct political arena. It is difficult to believe that this country has benefited from the subordination of its monetary policy to political control which, after all, dates only from 1946 when Mr. Attlee nationalised the Bank of England. An independent European central bank would allow government to supplement their programme of privatisation by denationalising British monetary policy.

We now realise how absurd it is for British Gas to be ruled from Whitehall and Westminster. It is no less absurd for monetary policy to be decided by Ministers and their officials. We know that the role of central government needs constantly to be scrutinised and frequently to be pruned back. I should personally regard it as a great triumph if the defence of the currency and therefore, incidentally, of personal savings were taken out of the political arena.

A European central bank drawing up its membership from all the countries of the Community, but independent of either national governments or the European Commission, is precisely the kind of Europe that Britain is trying to build. It is a Europe based on sound monetary conditions and minimal intervention from governments or the Commission.

This is the point where the question of monetary union becomes linked with the question of political union. There is no doubt that the form of institutional arrangements which we devise for monetary union will have a tremendous influence upon the manner in which we propose to conduct other areas of common interest whether it be securing the single market, the environment, or formulating common foreign or eventually even security policies.

The benefits of a single European currency for this country are not merely economic. We must not forget the political desirability of binding a united Germany irrevocably into the Western European camp. Herr Kohl will not always be in power, and we have today a perhaps unique chance of ensuring that a maverick Germany will never again pose a threat to the peace of Europe. The European Community is founded upon the pragmatic sharing of sovereignty. Germany's enhanced economic and political weight in the new Europe should make more rather than less attractive the prospect of an increased British share in German sovereignty.

Where does all this leave us now in the run-up to the negotiations of the intergovernmental conferences? If I were to identify the one thing which is absolutely crucial and which the report of my noble friend Lord Aldington has made abundantly clear, it is that we will only be able to influence the debate on European monetary union if we say now that we share our Community partners' ultimate objective to create a single currency to go alongside the single market. If we do this, we will be able to bring our full influence to bear on the timing and detailed form of the process to create that single currency. And our full participation in the discussions on European monetary union will allow us also to influence effectively the debate on European political union.

After all the controversies that we have had on these matters, I am convinced that only this can restore our credibility with our partners and secure the true interests of the nation in the crucial negotiations which lie ahead.

Lord O'Brien of Lothbury

My Lords, before the noble Lord sits down and with the consent of my noble friend Lord Harris, perhaps I may remark on the noble Lord's proposition that the Bank of England became a creature of government only in 1946. The shareholding of the Bank of England, which had previously been in private hands, became the shareholding of the government, the Treasury Solicitor. That made very little practical difference to the position of the Bank of England which remained a confidential adviser of government and the implementer of monetary policy. It is true that in earlier years there was an attempt at independence as the noble Lord will see if he reads the correspondence between the late Lord Cunliffe and Lloyd George in which Lord Cunliffe was unsuccessful in his bid for independence.

Lord Plumb

My Lords, I thank the noble Lord, Lord O'Brien. If my proposition provoked that response, then it was well worthwhile.

6.35 p.m.

Lord Harris of High Cross

My Lords, I readily join others in paying tribute to the Select Committee for its clear and instructive report. In measuring its contribution, there may be value in starting from two propositions which may carry wide agreement at the outset. The first is that the basic purposes and principles underlying the Treaty of Rome are so simple and sensible that it is difficult to see how any student of history or politics could seriously dissent. My second proposition is that implementation must give rise to testing judgments on complex, practical details which are bound to divide people of equal good will. The tragedy now unfolding is that a truly historic movement for increasing co-operation should look likely to prove so divisive in our own country and also threaten to aggravate divisions between and within our EC partners.

I should like to follow the noble Lord, Lord Ezra, in looking back to the visionary purpose of the architects of the EEC. As he said, their aim was so to unite the warring nations of Europe that a repetition of 1914 or 1939 would be impossible to contemplate. Their solution was to supplant the national socialism of Hitler and Mussolini by the international liberalism of my old friend Adam Smith. Neither Germany nor Italy could have armed for war without the central planning, protectionism and subsidised industry necessary for self-sufficiency in all essential supplies. Thus the Treaty of Rome aimed to prevent any repetition of economic autarky, which Adam Smith had denounced two centuries earlier as mercantilism.

If the purpose of the Treaty of Rome was plainly political, its primary method was economic. By entrenching freedom of trade and mobility, the resulting international division of labour would intensify true economic interdependence between nations as the surest guardian of peace. At the same time, it was the best way to spread prosperity among countries with widely differing natural and acquired endowments. As a bonus, free trade would diffuse power and buttress civil liberty. It upset me to read in the report at page 45 that this lofty liberal ideal was rather contemptuously dismissed by the noble Lord, Lord Jenkins of Hillhead, as nothing more than what he called "a Europe of packages".

Many hotly-disputed Euro-issues would be on their way to resolution if the partisans on both sides would pay attention to the following text from Adam Smith's Wealth of Nations. As I have said before, the trouble with this House is that it does not look backward often enough. Smith said in 1776: Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire". There you have it. It is precisely in this spirit that the promise enshrined in the Treaty of Rome offers the best of both worlds; that is, the economic and the political. The removal of barriers to trade, investment and mobility ensures nothing less than complete economic integration just as though the nations of Europe were indeed part of a single empire. However, at the same time, we preserve the advantages of political decentralisation and democratic accountability among otherwise independent governments.

I found most helpful the Select Committee's three definitions of sovereignty, of which the third best accords with common understanding; namely, The extent to which a state had a power of effective or unfettered action". In that sense, by completing the single market on the timetable settled by the noble Lord, Lord Cockfield, we have in effect agreed voluntarily to sheathe part of our sovereignty in the cause of economic disarmament. But in all other respects separate nations would retain their national sovereignty. However, that national power is denied its destructive outlet in war and is diverted to peaceful competition in the marketplace. That was the dream.

A long line of classical economists from Smith to Keynes and Milton Friedman have emphasised that competition requires a strong framework of law and institutions to prevent distortions from vested interests ever seeking special privileges. We know that all short-sighted producers naturally prefer a monopoly in what they sell and competition only in what they buy. That is why I underline that we need in Brussels a strong central, if you like, federal authority to police competition, check subsidies and prevent the future re-emergence of restrictive or monopolistic practices.

Strictly speaking, beyond such a commission for competition, full economic union and total economic integration require no further central or federal institutions except a court with power to impose fines for transgression. The danger of multiplying political and social initiatives without end is that they would be the product of the same, often shady, shoddy, opportunistic and nakedly nationalistic power play we recently witnessed over quite trivial cuts in the totally indefensible common agricultural policy. Every vague, starry-eyed, fashionable proposal for further advances in political or monetary union therefore demands the most earnest and searching scrutiny.

It is a neglected liberal principle—alas often neglected on the Liberal Benches—that where trade unites, politics divide. When politicians seek to steamroller national differences by imposing policies, using majority voting—artfully called harmonisation—the method employed includes inevitably more than a dash of double-dealing in the name of compromise and phoney consensus. The long-term result is less likely to be unity and harmony than the division and mistrust of the CAP, multiplied tenfold or even a hundredfold.

Beyond paying tribute to Margaret Thatcher for her magnificent stand on principle in this as well as other matters, I prefer to avoid politics. M. Delors is plainly a lifelong socialist who brings a strong personal commitment to Euro-centralism in his advocacy of the social charter and not least monetary union. I am arguing that neither is necessary for the success of the single market. The contrasting liberal logic, consistent with Adam Smith, points to allowing competitive evolution as the best discovery procedure for determining the pace and direction of progress to fit each nation's changing circumstances.

Turning to EMU, on which I had my say in the debate on the Queen's Speech, I must add that any remaining remnants of seduction were tarnished when I read in paragraph 83 of the Select Committee Report that the Eurobank would have "price stability" only as its main objective but also other guidelines including—I assure the noble Lord, Lord Jay—"a high level of employment".

I was further disturbed by the evidence of the noble Lord, Lord Jenkins, on page 47, throwing some doubt on the famous independence of the Bundesbank. Still more revealing was the memo by Mr. John Stevens, MEP, on page 142, saying that even if our Community partners believed that the move to a single currency would be "disruptive"—his word—they would go ahead because of what he called "the German political imperative". I did not like the sound of that. He implies that weaker members like Greece and Portugal have been bought off in their opposition by the promise of still more cash from the enlarged structural funds. Others will be driven on by nothing more substantial than the vision of EMU as a symbol of political integration. There is enough mischief there to keep the snakes in the snake pit.

Mr. Stevens predicts that progress would not be delayed by loose ends and unsettled major issues, even on matters like the extent of a common fiscal policy, because of what he describes as the "steely resolve" to advance to political union.

On page 144 of Mr. Stevens' evidence comes the stripping away of the final veil of principle: It is all completely consistent with the way in which Community policies so often advance, namely by leaving unresolved problems in the air which demand resolution by further initiatives". We must ask where that process will lead us.

I conclude by saying that I predict no happy outcome to this restless pursuit of the European holy grail. In the Select Committee report and elsewhere we are witnessing a descent from the original principles to political opportunism, made worse by the inevitable clash and compromise between 12 versions of short-term national interest.

Mrs. Thatcher has for the moment been punished for struggling to keep alive a noble vision, which the noble Lord, Lord Jay, presented from the Labour Benches—a vision of an open, liberal and expanding association of free self-respecting peoples, with their distinctive national structures and local loyalties. If Mr. Heseltine or some other pretender now leaps aboard the Euro express he will find himself in for a bumpy ride through hostile country on fixed tramlines heading fast towards the buffers. It is a journey on which he will find a surprising number of enthusiasts for the single market, in both the main parties and none, will not wish to travel with him.

6.45 p.m.

Lord Barnett

My Lords, I find myself in total disagreement with the noble Lord, Lord Harris of High Cross. I am not sure whether my noble friend Lord Jay would agree with what was described as the "liberal" element of the debate.

I apologise to the House that due to a long-standing commitment which I cannot cancel I shall sadly miss some of the debate at the end. I simply wish to concentrate briefly on economic and monetary union. I can be brief because I largely agree with the Select Committee. I should like to congratulate the noble Lord, Lord Aldington, along with all the other congratulations that he, my noble friend Lady Serota and the committee received on its excellent report. Even those who disagree with it found it clearly expressed.

This much I concede to my noble friend Lord Jay, who seemed to be agreeing to some extent with the Prime Minister. The Prime Minister was right in not wishing to pre-judge the inter-government conference but she was wrong to assume that the inter-government conference would settle all the issues in stone for all time. Even the next one or the one after that will not do anything remotely like that.

What those of us who agree with the report, and I hope members of the committee and the Government, are saying is that we agree with the central objective but that it will be a long path before we arrive at the objective. The committee brings that out clearly, and I shall say a word or two about that later. But I should like, first, to say something about what might be called the non-issues, and sovereignty is the first matter I should like to take up. The noble Earl, Lord Cromer, had a lovely description when he said, understandably as a former Bank of England governor, that it was difficult to have national sovereignty over a huge debt. We need to pay some attention to the people to whom we owe the money.

I would put it another way as well. In paragraph 10 the committee referred to a remark of Judge Edwards, who said that it is a dangerous distraction. That must be true. Indeed, the committee quote John Biffen, who was never known as a great European. He said that the issue of sovereignty raises the temperature unnecessarily. Of course it does, and the Prime Minister did us all a disservice by raising the temperature unnecessarily in Rome.

The only national economic sovereignty available to us as a country, outside economic and monetary union, is the freedom to have a living standard even lower than we already have in comparison to our major competitors in the European Community. I know some believe that we did very well in the old siege economy days living well outside the European Community. But that is not a view that I have ever held and it is not a view that I hold now. I believe the facts clearly dispose of any sense in that argument.

Equally, the next non-issue that I wish to take up is the question of economic and monetary union now. As paragraph 200 of the Select Committee's report brings out, we are not talking about economic and monetary union now. The committee says, and we all agree, that it should not be imposed "before sufficient economic convergence". The committee had difficulty in finding a definition of "sufficient". I have difficulty, as does everybody else, in understanding how we can achieve economic convergence among 12 sovereign states. Indeed, I hope there will be even more member states by the time we reach that stage. Therefore, I can understand why the committee could not give us a clear definition. Nobody can.

Indeed, another paragraph of the report states: As yet there are too many imponderables". The report quotes the President of the Bundesbank, Karl-Otto Pöhl (presumably called the "supreme ogre" in the Community) as saying that he, too, could not see us moving fast along the road until there was greater economic conversion. Therefore, the recent arguments in Rome about stage two are another non-issue. Again, as the report brings out, stage two simply prepares the way for what eventually will be, if we agree the objective, economic and monetary union. However, there is a long way to go before we get to that stage.

Perhaps I may also dismiss at this point the concept of consulting the people, as it is called. Here again, the Prime Minister and my noble friend Lord Jay seem to be in agreement on the need to consult the people. My noble friend knows that I have always had the highest regard for him while largely disagreeing with his views, particularly on this subject. Even if we agree the principle of a referendum at this stage, I must ask: what would the question be? Would it be: "Should there be a single currency?" But that is to put the cart before the horse. The fact is that we shall not have a single currency before we have greater economic convergence and economic and monetary union.

Equally, there is the question of the hard ecu. I am inclined to agree with the noble Lord, Lord Cockfield. At one stage it might have been possible to see it as a possible road towards economic and monetary union, but one cannot forget what has happened. John Major, the Chancellor, said he saw it as a road leading to a single currency. His cricket bat was broken, so to speak, shortly afterwards by the Prime Minister; and given all that has happened it would be a waste of time at this stage to pursue that aspect much further in the Community.

The real issue—and here I hope the Government will be able to give us an assurance—is whether we as a nation want to be part of an economic and monetary union and, thereafter, of a single currency. My answer is, yes, but like the Select Committee I recognise the huge problems about the date when we actually get there. Therefore, in a sense I agree with the Prime Minister. In another context, I would join an exchange rate mechanism. I would join an economic and monetary union, but the time is not yet right, and nowhere near right. There are huge problems before we reach that stage.

Let me say at once that I also agree with the Select Committee. When we reach that stage, or before that, I would certainly want to see some democratic accountability. We have had contributions from two former governors of the Bank of England who, not surprisingly, are perfectly happy that governors of banks are accountable to themselves because they know they are always doing the right thing. As a politician I am not so certain. I should like to see some degree of accountability.

The Select Committee said—I am paraphrasing in the cause of brevity—that there should be some power to have national parliaments involved. I very much agree with that. I also happen to agree with the Prime Minister on something else that she said. I would not want to give too much power to a European parliament. The problem with the European Parliament as it now exists, and is likely to exist for some considerable time no matter how directly and democratically elected, is that it largely has the power to spend money while national parliaments have the powers, responsibilities and duties to raise money. In those circumstances, to pretend that you can leave it entirely to the European Parliament must be wrong. I should much prefer to bring national parliaments more into the mainstream of accountability.

Lord Jay

I am glad to hear that.

Lord Barnett

My noble friend agrees with something I have said which is good to hear.

Lord Jay

On that point may I ask my noble friend a question? If most of these are non-issues, and if it is all so far away in the distance, why do we have these intergovernmental conferences?

Lord Barnett

My Lords, I thought I had made that clear; certainly the committee has done so. We must have a central objective of where we are going; otherwise what on earth are we doing? I agree with that central objective and that is why I say that these are non-issues.

Indeed, in paragraph 18 the report gets to the heart of the problem on this question of a central monetary authority. It refers to, how far the need for a central Community monetary authority can be reconciled with governments' desire"— the report was not referring only to the British Government but to all governments within the Twelve— to retain an influence over economic policy. I do not want to see national governments give up all influence over economic policy, though I recognise only too well—I only wish that others would, too—that the extent of our sovereignty over our own national economy is, to put it mildly, distinctly limited in the modern world. Therefore, while I want to see some accountability to national governments, I recognise that there will be and must be a central monetary authority.

I conclude by returning to the central question of whether we want to be genuinely involved in the discussions, and part of the discussions, on the objective of economic and monetary union and a single currency. To some extent there is a chicken and egg argument. The noble Lord, Lord Cockfield, referred to what he did by fixing a date, with which I wholly agree, of 1992 for the single market. That concentrated our minds and without that date I doubt whether we would have got there. He was quite right in that respect. However, I do not believe that we can fix a date for economic and monetary union for the reasons I have already given. Nor should we say that we will have what is called the "big bang" theory of a single currency in advance. That is not the right way to do it. The correct way is to achieve economic and monetary union with much greater economic convergence. A single currency will then almost automatically evolve of itself, because it would be absurd if we did not have a single currency in such a Community.

I know that there are some people, like my noble friend Lord Jay, who sincerely in the first place never wanted to join. They now tend, as my noble friend did today, to put up bogies and then knock them down. With the greatest possible respect, to talk in that way primarily ignores Britain's true position in the real world. That is why I strongly support the recommendations in the committee's report. I hope that we can put irrelevant arguments behind us and play an active, positive and constructive role in the Community. That is the only effective way in which Britain can play a serious part in world economics.

6.58 p.m.

Lord Carr of Hadley

My Lords, before I comment on the report, I must add to the praise already given to my noble friend Lord Aldington for his role as chairman of the sub-committee conducting this inquiry, and to our clerk and advisers. This year has been my first experience of participating in a scrutiny of European Community affairs by your Lordships' House. It has been an honour to be so involved and it was a pleasurable and stimulating experience, particularly the inquiry leading to this report. I am sure—though it is not necessary to say this—that all Members of your Lordships' House understand that the high degree of regard which I believe our committee's scrutiny has achieved, not only in your Lordships' House but far beyond it and outside the shores of this country, is due more than anything else to the skill and dedication of those who chair the inquiries and those who serve the inquiries as clerks and advisers.

One of the problems in debating European Community affairs is that the discussion is bedevilled by big words such as "federalism" and "sovereignty" which stimulate strong emotions far more than they stimulate reason. Different people give them totally different meanings. Therefore, I believe that one important part of the report is the way it has most carefully defined some of the big words which keep on cropping up.

Perhaps I may strongly add that, keen European that I am and have always been, I most definitely do not support and have never supported the concept of a single unitary state; nor does the report support such a concept, or foresee it. When people fear this they must face up to and come to grips with some of the spectres or ogres that bedevil these discussions. They are nothing more than nightmares. There are some very prominent people in Europe who hold these views. I do not believe that there is a party (nor individual leader in any of our European democracies) which would win power if it were to come out in support of such a concept. Though no one can say what may happen in decades or centuries in the future, the single unitary state is a false bogy at the moment.

My noble friend has set the overall scene dealt with by the report so fully, comprehensively and valuably that I wish to concentrate on one subject only—that is to say, the single currency. I propose to do so not by posing as an economic or financial expert but as a politician. I do not apologise for that. I use the word in the broad sense. I believe that the task ahead of us is above all a political one. It is part of what someone once expressed most graphically as the endless adventure of governing men. I disagree with some of the analysis of my noble friend Lord Cockfield. I do not disagree with him at the intellectual level but because I feel that, if we are to bring this ship home to port, the intellectual argument has to be moderated to some extent by deep political considerations.

The whole weight of evidence leads to the conclusion that, if we are to maximise the long-term benefits of the single market, then we need a single currency. You cannot have that without also having a single European monetary authority. I do not doubt that that is what the weight of evidence shows, and I believe that that conclusion is backed up by considerations of common sense. Economic benefits are very important. They are very much wanted and appreciated by the people of our own and other countries. However, they are not the only factors that matter in life. The economy is made for man and not man for the economy.

I do not seek a single currency at any price. It would be in the interests of Britain in particular and of Europe as a whole to seek seriously and with determination to find ways to bring it about which are both economically effective and socially and politically acceptable. What are the essential requirements for doing that? Above all, we must not try to proceed too fast. We must rule out any approach towards the "big bang" way of doing it. There are several reasons for this.

First, the purely technical problems are considerable. For that reason alone there has to be an adequate, and possibly defined, amount of time in stage two to design, set up and test the component parts before we move to stage three. Therefore, no date should be given to the beginning of stage three, let alone the end of it. There may come a time, for the reasons given by my noble friend Lord Cockfield, when it will be necessary to set dates. That is a considerable way off so far as stage three is concerned.

Secondly, for economic, political and social reasons, we must have time to achieve greater convergence between the economies of the different member states before we come to the single currency. Some argue that establishing a single currency is the essential instrument for achieving convergence. I see force in that argument, but it is a dangerous overstatement and misreads the economic and political factors with which we have to deal. There will come a time when convergence is near enough and the introduction of a single currency will be the necessary instrument to bring the matter to a final conclusion. If you apply that force too soon, then I have little doubt, and certainly very much fear, that it will almost certainly lead to sharp increases in the differences in employment opportunities and living standards between different parts and within different countries in the Community. In the end that could make the whole concept politically and socially unacceptable, and could indeed kill it. Therefore, we must make further considerable progress in a long convergence before we leap into stage three.

Thirdly, we need time to narrow what has been described as the democratic deficit in the way in which the Community's affairs are presently conducted. The report before us makes proposals to that end. That is essential if the achievement of the economic goals is to win the acceptance and confidence of the peoples of Europe. If the customer is always right it is the peoples of Europe who are the customers for what we are doing. That requires action in relation to the European Parliament, and proposals about that are contained in this report. Even more importantly, it requires action by national parliaments. Although it is perhaps difficult and delicate to say so as a Member of your Lordships' House, this matter requires much more progress in another place.

Perhaps I can say this more easily than some of your Lordships. For a long period I was a Member of the other place, and I have many colleagues who are in the same position. For a short time I was the Leader of the other place. Therefore, I understand only too well the difficulties, but I believe they can be surmounted if the will is there. It is necessary for both Houses of Parliament to realise that the social and economic affairs of Europe are now among the most important issues that need to be dealt with in the interests of the people of this country and the constituents whom Members in another place represent. Therefore, the other place must give these matters priority not only in the amount of time devoted to them but in the prominence dictated by the time of day at which they are discussed and reported. That is of the greatest importance.

Thirdly, it is necessary to pursue the idea of subsidiarity. Although I heard and understood the reasons for the remarks made by my noble friend Lord Cockfield on this subject, I think it is necessary to write this matter into the preamble of a future statute. Finally, it is only if we follow this careful, thorough, step-by-step approach that we shall assuage the fears and win the confidence of many people—and not only in this country—on the surrender of sovereignty which is involved.

I agree strongly with the report's conclusion that the pooling of United Kingdom sovereignty with that of other states on the issues of economic and monetary union need not jeopardise parliamentary sovereignty. It will not do so provided we take the time and care needed to work out and define the terms of reference of the new European monetary authority and its procedures for accountability to the Council of Ministers, to the European Parliament and, particularly importantly, to national parliaments as well. That is of special importance so far as Britain is concerned. At the risk of appearing to repeat myself, this applies above all to the proceedings and concerns of the other place.

In conclusion on this vexed, emotive question of sovereignty, let us remember three things. What really matters is our country's effective influence in the affairs which affect our lives; and increasingly in the modern world that may be achieved by pooling some aspects of sovereignty with that of other states.

Secondly, we ought not to exaggerate, let alone romanticise, the sovereign independent power which we have exercised in these matters over recent decades. If I am honest, I cannot remember in 26 years as a Member of another place, or even as a Cabinet Minister, being much consulted, or my advice, let alone my approval, sought very much in advance about decisions on monetary policy. They are by their nature taken more or less in secret. That is unavoidable. So let us not romance about the amount of control we have had, and therefore about the amount we shall be losing. More often than not we are reacting to other people's actions in the present world.

I would rather have these matters settled by a proper monetary authority, with proper terms of reference and proper accountability, on which we have proper representation, than always be reacting to something which is done by the German Bundesbank or in other countries. I believe that Europe as a whole would he on more equal terms in monetary affairs with the United States and Japan, and that we should be on more equal terms as a member of that grouping than we are at the moment.

Finally, as the report makes clear and as my noble friend Lord Aldington stressed, there is a very big difference between the sovereignty involved in the EMU and what would be involved if we had to consider putting foreign affairs within the competence of the European Community. Then we really should lose national sovereignty and that is not something which we ought to do. We must make a success of our affairs in Europe; we must be in the vanguard and not in the rearguard of these events, and I believe and hope that this report will help to that end.

7.12 p.m.

Lord Roll of Ipsden

My Lords, the report we are debating today matches perfectly the importance of the issues with which it deals. From a medium and long-term view there is none as vital for the future of our country. The noble Lord, Lord Aldington, and his committee deserve our congratulations and gratitude for a masterly document. It is particularly noteworthy in that it presents, very objectively and clearly, all the various views that can be held on these complex issues and yet it is not a bland document. It comes to quite clear-cut conclusions. I say at once that I agree wholeheartedly with the committee at least on all crucial points. The report comes at an opportune time, just before the opening of the intergovernmental conferences on monetary and economic union and political union. I propose to confine myself to the former.

Now that the long-playing Whitehall farce "The Ripe Time"—or was it "The Right Time"?—is off the boards, I hope that we shall not again be involved in semantic acrobatics; for example, as to whether monetary union is to be imposed. I hope that the noble Lord, Lord Cockfield, in last week's foreign affairs debate and again today has put this red herring firmly where it belongs. It has often been said—for example, last week in the economic debate by the noble Lord, Lord Jenkins of Hillhead—that we have disadvantaged ourselves enormously in our relations with Europe by always being late.

Before the Macmillan Government took their historic decision in 1962 to seek membership of the Community there were, as your Lordships may well imagine, the most intensive and detailed studies in Whitehall on the possible consequences of such a step, including particularly the common agricultural policy, which was at that time just being debated inside the Community and which we regarded, I think rightly, as the main stumbling block.

In sending forward our report to Ministers I said: We must not suppose that we can square the circle. A solution which pleases everyone is out of the question. But our best chance of making the best of it lies in influencing the Common Agricultural Policy before it is completely settled". I ended by quoting the obvious: If it were done when 'tis done, 'twere well it were done quickly. Alas, it was not possible then. I had hoped that the Government's endorsement of the objective of monetary and economic union in the Single European Act, and in so many solemn declarations since, had shown that we had at last learnt our lesson. I am not sure that that is so.

I had also hoped that by this time some of the more extravagant attacks on the Community and its aim of monetary and economic union would have ceased, including the personal attacks on President Delors. I should like here to join in the tribute which the noble Lord, Lord Cockfield, paid to him last week. I first had dealings with M. Delors when he was French Finance Minister and I fully endorse what the noble Lord, Lord Cockfield, said. To hear some people, M. Delors is a rabid, red revolutionary. It should be remembered that the remarkable turn-around in French economic policy, and subsequent economic performance, which started in 1983 was very largely his work.

Although the noble Lord, Lord Cockfield, and my noble friend Lord O'Brien of Lothbury have, I think successfully, dismissed the hard ecu proposal, it deserves a few more words since it still seems to be the centrepiece of the Government's policy. As an analysis of possible monetary arrangements it belongs to a very long series of similar efforts; and those with an antiquarian interest in these matters may like to compare it with, for example, the proposals made by Alfred Marshall over 100 years ago and the many discussions on the gold standard, the gold exchange standard, a standard based on commodity indices and many others, including Bretton Woods; though it should be remembered in regard to Bretton Woods that the dollar, the basis of the Bretton Woods system, is a real currency, legal tender in its own country and, as it is still the major transaction currency, widely accepted everywhere else.

In the form presented by the Government it resembles—though it is, I believe, analytically inferior—a proposal produced by our most eminent living economist, James Meade. To my mind, the essential point is that it is not a proposal for the further development of the European monetary system nor for the creation of a common or eventually a single currency, but rather for the setting up of a separate and separately managed standard which may or may not in time act as another, thirteenth, currency according to whether it is used alongside national currencies—a point dealt with by my noble friend Lord O'Brien.

These national currencies have the great advantage over the ecu not only of custom but also of being legal tender and they are used by everybody. We know that in at least one important quarter the view has been expressed that the hard ecu would not be much used. Thus neither its use as a parallel currency nor its use as a standard for exchange stability is really guaranteed. That being so, I find it extremely difficult to see why it should be called evolutionary.

This proposal must above all be judged not in terms appropriate for sophisticated discussions in the classroom but as a diplomatic move; and its purpose was clearly diplomatic both domestically and internationally. As the noble Lord, Lord Cockfield, said, had it been made after the collapse of the first Community attempt at monetary union, the Werner plan, and certainly before the adoption of the European monetary system in 1979, there might have been some inclination to consider the creation of an outside unit of account which would also somehow have been made to act as an increasingly common currency and standard of value. That might have had some virtue to be discussed. Even then, I suspect it would not have lasted long.

But it came after the EMS and its essential mechanism, the exchange rate mechanism, had been going for more than 10 years. These were and are instruments internal to the Community, to its currencies, its monetary policies and its monetary institutions. Moreover, the Community had decided to move towards the achievement of the agreed goal of monetary and economic union by building on the existing system and mechanism. We belonged to the system but not to its operating mechanism. Only very belatedly did we accept that mechanism in principle; and then we delayed putting it into operation. We also subscribed to the objective of monetary and economic union but had shown—to put it mildly—little enthusiasm for it.

Therefore, is it surprising when we belatedly produce this new proposal—which in the words of its authors involves monetary control being exercised simultaneously both at national and community level with no indication of how this duality is ever to work while it lasts or whether it will be made to disappear over time, and with no commitment that we accept the ultimate objective—that it is firmly rejected by the Community and particularly by those who have most experience with successful monetary management.

In my view, Bundesbank President Dr. Pöhl has quite rightly pointed to the confusion and potential conflict of policy to which the proposal would lead. Nevertheless, it is worth remarking parenthetically that this proposal was most courteously received by our partners in the Community, which is very much in contrast to what has been said in some quarters in this country about the Delors plan. Indeed, I remember some people describing it as infamous. I checked the definition of the word in the dictionary in case I had missed something and found that it was defined as "vile" or "abominable". Those are certainly not words which any of our partners have used about the hard ecu proposal.

When you add to that central flaw the many other unanswered questions, such as whether or not the ecu would, or indeed could, become legal tender, or how the objective of price stability, which the European Monetary Fund was to secure, was to be measured and achieved, I am not surprised that the committee of the noble Lord, Lord Aldington, in its report unequivocally concludes that the hard ecu is not viable as it stands.

Suggestions have been made for hardening the existing ecu. That is perhaps what the committee had in mind when it stated that the hard ecu could help with preparation for monetary union. That is one aspect of the committee's conclusions about which I am not convinced. I am delighted that my noble friend Lord O'Brien has a similar view. However, be that as it may, it would in any case be absolutely essential, first, that the ultimate objective of monetary union should be clearly reaffirmed; secondly, if there is to be a process of hardening the ecu, that it should not be in the hands of a newly created institution but firmly in the charge of the European Committee of Central Banks—the forerunner of a future European central bank; and, thirdly, that it should be regarded only as an adjunct to the other aspects of the progress towards a single currency.

Whatever details the Commission's plans may need to undergo —and without a doubt they will have to undergo some—its essence of reliance on the narrowing of exchange margins with the ERM, increasing collective management to achieve this objective, and simultaneous progress in convergence of economic policies (which narrower exchange margins will themselves facilitate) must remain the basic next steps.

When we joined the ERM, at a time and in conditions now regarded as far from ideal, it was stated that we hoped to move soon into the narrow band of exchange margins. That may not be so easy; nor indeed may it be easy to keep pace with our partners in the progress towards the start of stage two. From every point of view, not least the position of the City of London as a premier financial centre, it is highly desirable that there should be no delay, or, if there must be some delay, that it should be as short as possible. However, if it proves impossible to avoid some delay we should nevertheless join whatever projects emerge from the intergovernmental conference even if our economic circumstances at the time oblige us to seek for ourselves a device, well accepted and much practised in the Community, for a short delay in working it out. If the Government's optimistic forecasts of economic developments, especially on inflation, prove right, perhaps any such delay can be avoided.

As for the single currency, in some quarters it is regarded as an unacceptable surrender of sovereignty. I shall not go into the more arcane philosophical aspects of sovereignty. But if on any particular issue the practical question is whether we need to preserve an absolutely unfettered right of national decision-making, I think that this, for a trading country such as ours, is not one of them. As the noble Lord, Lord Carr of Hadley, pointed out, we do not have it now. I cannot understand why those who argue all the time that you cannot buck the market should think otherwise. Even the Tudor monarchs had experience of the constraints which we now call Gresham's law.

The single currency is certainly some, or perhaps many, years away. However, it is one example of the need—precisely when you look some years ahead—to be prepared to think afresh. Let us take another example. In 20 years' time, which is not so very far away, the four leading countries in terms of gross domestic product will be China, with over 6 trillion dollars and somewhat ahead of the United States; Japan, the Soviet Union (if it survives as a union); and Brazil. No single European country will reach even 1 trillion dollars. The four largest European countries taken together will only just be ahead of Japan; nor are the demographic trends favourable to Europe.

We in this country still possess great social, moral, political, intellectual and indeed material resources. But is it not crystal clear that we cannot hope to use these to the best advantage for ourselves or to deploy them to the advantage of the world, except within the indispensable framework of Europe? And this, for many years to come, must mean the Community.

Our decision in regard to European integration is, I think, the single most important example today of the vital necessity to develop new mental attitudes. The great mathematician, Alfred North Whitehead, who left Cambridge, England, to become a great philosopher in Cambridge, Massachusetts, said what I believe to be the last word on this supremely difficult task. He said: The task of free society consists first in the maintenance of the symbolic code; and secondly in fearlessness of revision … Those societies which cannot combine reverence to their symbols with freedom of revision must ultimately decay either from anarchy or from the slow atrophy of a life stifled by useless shadows". Throughout its history, this country has shown an extraordinary aptitude to achieve just that combination. We must not fail now.

7.27 p.m.

Lord Butterworth

My Lords, as a member of the sub-committee, I wish to join all those who have expressed thanks to my noble friend Lord Aldington. I should also like to congratulate him on so skilfully presiding over the production of a report, the character of which may well permanently have shifted the British argument in this area.

I confess immediately that I may not be prepared to go quite as far as the report goes in certain respects. However, many of the major tenets are undeniable. First, on the evidence we received, it would be difficult logically to deny now that the benefits of a single currency are the natural complement of a single market. Secondly, although some of the comments made on this aspect today were somewhat equivocal, Britain is now fully committed to the progressive realisation of economic and monetary union.

I recognise that a single currency may well be the ultimate solution. My problem is that so many decisions still need to be taken before the single currency can be established. I refer to decisions required to complete the single market and to identify all the stages which are necessary to complete monetary and economic union. In my view it would be politically irresponsible to appear to be accepting all those changes even before we know what most of them will mean.

We clearly need experience of the single market before we can, with confidence, commit ourselves to a single currency. Most governments in Europe would seem to assume that the single market has already been organised: the truth is that much still remains to be done.

We need to take all the difficult decisions which will make the single market a success; otherwise it could so easily fail. Our report refers to problems of insurance. Other difficult areas are the movement of animals and plants, political asylum, drugs, firearms and public health regulations. Moreover, many Community regulations need to be pruned. They are inhibiting free flow within the market.

Next, we must identify the decisions that need to be taken to achieve stage two. Convergence has already been mentioned. Our report states that the switch to a single currency should be undertaken only after "satisfactory convergence". But what does "satisfactory convergence" mean? How much convergence is satisfactory? Unless we can recognise what amounts to "satisfactory convergence" we may launch the single currency prematurely and do great damage to the weaker currencies.

Do we agree with countries joining the new single currency seriatim; that is to say, when each country considers that it has achieved "satisfactory convergence"? Again, there is a view prevalent in Europe that sufficient convergence can be achieved only by direct assistance being given to some of the poorer member states. The Delors Committee Report hinted that the increased structural funds could be used for that purpose, but the Commission immediately distanced itself from the opinion. The possibility of financial assistance is a factor in the expectation of a number of member states. Reference in Community documents to "economic and social cohesion"—they are words to look out for—is Euro-jargon envisaging the possibility of setting up funds for that purpose. We then need to know what powers individual countries must be prepared to surrender to the centre. How can anyone talk about the length of stage two before we know what is to go into it?

One of the functions of the IGC will be to recommend what powers should be surrendered to the centre if a single currency is to be launched successfully. Monetary powers to be surrendered to the new central bank may not be difficult to identify and would probably not cause any political problems. However, the economic powers that would need to be surrendered to the centre are a different matter. Here the centre does not mean the central bank; it means the Council. As our report points out in paragraph 68, the Delors Committee Report implied that tight controls would be necessary on member states' freedom of action in fiscal and budgetary policy.

The Commissioners' March 1990 paper seemed to reject that approach and suggested instead that "binding procedures"—whatever that may mean—would be sufficient. The problem is of course that irresponsible action by national governments, such as running heavy budget deficits, could undermine the viability of the single currency. Recently, some member states, such as Germany and the Netherlands, have made it clear that they would not consider joining unless the Council had express power to set clear limits in that area. An economic power of that sensitive kind goes to the heart of an individual government's political responsibility to its legislature and ultimately to its electorate. What would happen over the Budget if the Chancellor of the Exchequer confessed to the other place that he could not deal with the problem because the power had already been surrendered to Brussels?

At the moment we are so far away that governments do not need to commit themselves wholly to a single currency, especially when there is no agreement as to what the next stage should comprise or what powers it is necessary to surrender to the centre. The purpose of the IGC is to identify those problems and to make recommendations. They can then be debated in the House and elsewhere. Once agreement has been achieved amendments to the treaties can be drafted for presentation to individual national parliaments.

If one reflects upon the steps that must be taken—the completion of the single market to make it a free competitive market and the identification of the stages within stage two—there is much to be said for some kind of evolutionary approach to enable the European Community to have experience of each stage as it works progressively towards a single currency. The difference between the two courses, as I have tried to describe them, is not great. The advantage of the evolutionary course has the merit of being consistent with the democratic accountability of the governments involved.

7.38 p.m.

Lord Greenhill of Harrow

My Lords, all members of the committee are grateful to the noble Lord, Lord Aldington, for his magisterial chairmanship of it, and to the noble Baroness, Lady Serota, for her calm oversight of all that we were doing. As one of the least qualified members of the committee, I shall speak simply and briefly. Most of the technical aspects of the problems have already been brilliantly discussed.

I wonder how much the importance of the coming IGC is understood by the general public. Over the past two decades and longer, British Governments, political parties and the media have paid inadequate attention to the trends in Europe and have nourished our traditional lack of interest in what goes on across the Channel. We must add to that the language problems and the memories of some people of the 1940s years of disaster.

Contrary to the view of some noble Lords, it is by no means all our fault that we have missed part of the journey of the famous European train described by the noble Lord, Lord Cockfield. The ticket office was shut on us by a vindictive General de Gaulle; and that simple act was well understood by the public here.

President Pompidou relented in due course, but not until the requirements of his government on agriculture and other matters had been met. I hope that in the coming months a special effort will be made to explain to the British people what is at stake. I hope that a majority in all parties can come to agree on where our interests lie. This report will, I think, contribute to that understanding.

I was particularly struck by the remarks made by the noble Viscount, Lord Eccles, and the noble Lord, Lord Jenkins of Hillhead, in recent speeches. They are two statesmen who do not usually agree on Europe. On 13th November, the noble Viscount said: I wish that the major political parties could agree on the main objectives … Our negotiators, whoever they are, will not obtain the best deal for Britain unless they are supported by a manifest consensus at home. This is a great issue; it is much greater than party politics".—[Official Report, 13/11/90; col. 226.] The noble Lord, Lord Jenkins of Hillhead, had the same thought in mind. He said on 14th November: I become increasingly convinced that the two party politics in this country have served the vital question of our relations with Europe remarkably and almost impartially badly".—[Official Report, 14/11/90; col. 348.] It is easier to agree with these two noble Lords if one sits on the Cross-Benches, but even the most ardent party man must admit that there is more than a little truth in what they say.

The Aldington Committee was an all-party affair. If its advice is accepted by all parties, our negotiators will be in a much stronger position. I have confidence that the isolation for which we are mocked will diminish when reality rather than the rhetoric of the Community is faced.

Great emphasis has been laid on the supposed unity of the 11. They may share a vision, but, when realities are faced, as we have seen recently on agriculture, automobiles and insurance, there are marked national differences. I recognise just how difficult it is to ask for unity between our political parties at this time, but the cost of disunity will be high.

Perhaps I may make one further point on an entirely different subject—the enlargement of the Community. The report did not elaborate on this; I do not think that it was in the terms of reference. The committee reminded us that the Community remains open to new members. Do all the present members have any wish to enlarge the Community? Personally, I have doubts. I am assured that I am mistaken, but I have met several significant Europeans over recent times who agree with me. What, for example, is to be made of M. Delors' recent statement that his objective was a unitary state with the Commission as the executive and the Council as senate? This suggests to me that his unitary state does not include any country other than the existing members. His proposed objective appears to me to make the entry of several desirable partners difficult, if not impossible.

The policy of Her Majesty's Government is, I believe, aimed at an enlarged Community. I hope, like the noble Lord, Lord Jay, that as soon as possible it will include the Scandinavians. From a democratic and historic point of view they are as reliable as, if not more reliable than, some of the existing members. They are the largest trading partners of the Community. I hope therefore that Her Majesty's Government will continue to prepare for enlargement.

I return for a moment to my original point. At this critical time it makes little sense that our national interests in this vital area are the subject of party bickering. Is there not enough common ground on Europe between all the parties to give our negotiators in Brussels significant support and to secure in this country wide public agreement across party lines? Is this too much to hope for? I am afraid that it may be.

7.46 p.m.

Lord Bruce of Donington

My Lords, I have been in political life for a long time. Taking up the point raised by the noble Lord, Lord Greenhill of Harrow, I can hardly remember a week in the past 50 years which was not a critical time of one kind or another.

The report we are discussing this evening seems to me to be based on two assumptions which so far as I am aware were not articulated in the committee itself. Thanks to the courtesy of the noble Baroness, Lady Serota, and the chairman, the noble Lord, Lord Aldington, I was able to attend almost every session of the committee. The two assumptions which were not articulated were, first, that the European Community itself, taken as an entity, has so far been a resounding success. To disagree with that assumption immediately invites one to be a heretic.

As your Lordships know, on certain matters I am a heretic. Nevertheless, from the record, what is the success which is assumed? The gross domestic product in the Community as a whole over the past 10 years has been markedly below that of Japan and the United States. Inflation over the Community as a whole has been higher than in both Japan and the United States. Unemployment has been much higher in the Community than in either Japan or the United States.

The Government, with an adjusted figure of 1.7 million unemployed, boast of their success against wider and greater unemployment in Europe. That unemployment has oscillated between 11 million and 15 million over the past 10 years. That does not take into account quite a large number—almost 1 million—of migrant workers who have since departed from some of the EC states and gone back to their own countries without being included in the unemployment figures.

I do not wish to embarrass noble Lords who may not have thought of these figures previously, but they are valid. They show that the dream of the European Community in terms of economic progress lies more in the realms of propaganda, financed considerably from funds provided by the member states as well as by organisations such as the European Movement.

Some noble Lords talk of the single market as being the end of the whole process of the freeing of trade within Europe. However, they forget that ever since 1972 we have progressively moved towards a single market for about 90 per cent. of the goods and services provided by this country. All we have been seduced into believing is that the achievement of the single market represents a goal which in point of fact should already have been achieved in any case. All that this talk amounts to is a shifting of the goal posts. They know quite well that the Common Market as an organisation has not lived up to its original expectations. Therefore they shift the goal posts and declare that in 1992 when the single market arrives everything will be all right.

These are weighty matters. I regret that the noble Lord, Lord Jenkins of Hillhead, is not in his place at the moment. However, in his valedictory speech to the European Parliament he remarked rather regretfully that up until then the European Community had merely comprised of the Common Market plus a few peripherals. Those were the words he used and he was right to say that.

It is not often realised that at present the European Community is largely concerned with the common agricultural policy. According to the Government's own figures, the common agricultural policy has resulted in the average British family of four paying £17.50 a week above normal world prices for its food. The common agricultural policy is the biggest protectionist racket that has ever been devised by any bureaucracy. It goes completely against the much lauded sentiment of free enterprise and right into the realms of protectionism. By its continued existence, despite a 30 per cent. reduction in subsidies dated back to 1986, the common agricultural policy is still a bar to the proper achievement of the General Agreement on Tariffs and Trade. Such an agreement would be a valuable achievement if we could obtain it. It would free world trade to a far greater degree than is the case at present.

I am sorry to have to speak somewhat expansively about this matter. I would be glad to be contradicted. I suppose that some noble Lords who have listened to me before will consider my remarks to be old hat. They will say, "We have heard it all before. This is the referendum argument reproduced all over again". However, it is nothing of the kind; it is a plain objective statement of fact which I challenge anyone to refute in detail.

Many of my best friends are bankers, including happily my bank manager. However, the second basic assumption that lies behind the report is that bankers are somehow the final repositories of all human wisdom and that banks are solid, impartial institutions that can be relied upon to look after one's investments. I have been in politics a long time and I well remember the exploits of Montagu Norman and others. I have had the benefit of reading Cabinet minutes under the terms of the 30-years' rule and therefore I know what a mess Montagu Norman and his cohorts and supporters got us into in that era.

I am not saying that the City of London does not perform excellent functions. I am sure that in facilitating and financing commercial transactions and in dealing in currency futures and a whole host of other banking functions the institutions of the City of London perform a perfectly good and respectable task. However, we seem to presume that what is good for the City of London, which includes banks, insurance companies and syndicates, trusts and other such institutions, must be good for the remainder of the country. I do not know where that idea came from, but it seems to be assumed that what is good for the City is good for the rest of Britain. However, one should try to tell the tenth of the population living at or below subsistence level that the banks are good for them and see whether they believe that.

There is an identity of view between the banks, the other financial institutions and the Conservative Party itself. At Lord Mayors' banquets a polite welcome may be given to Labour Chancellors of the Exchequer and a coded language of reproof may be used in so far as it is consistent with politeness, but the parties have nothing in common with each other. The financial institutions and the City have nothing in common with the Labour movement as I knew it and as I know it today. Therefore the idea that bankers are the final repositories of wisdom in this matter is complete nonsense. Some 90 billion dollars a day travel across the exchanges in currency transactions. However, are those transactions beneficial to the country as a whole? They certainly benefit that section of the population that can be identified with the City of London.

Your Lordships will probably have seen an article in The Times the other day that appeared on the day we entered the exchange rate mechanism. The article described a couple of foreign exchange dealers in their early twenties who arrived at their offices in the afternoon just as the announcement about the exchange rate mechanism was made. They took up their positions in front of their screens and watched the screens for a couple of hours without making any changes. They then walked off with £600,000. They gained that money simply by watching their screens. They said they were going to buy yachts and one or two other odd items and that they wanted to have a good time abroad. I do not begrudge them that, but anyone who suggests that that activity has anything to do with the production of valuable goods and services in this country ought to have his brain examined. It does nothing of the kind. Among other things it adds to the money supply and to inflation.

Let us not hear talk of bankers being mystically capable by virtue of their profession—noble Lords should note that it is not by virtue of their honesty or their integrity—of maintaining the financial balance in this country. However, if one reads bank reports published over the past few years one discovers that debts have been incurred in developing countries. The banks have had to write off a lot of the money deposited with them after the OPEC explosion which they subsequently lent to other countries. Nevertheless the assumptions that I have mentioned have been made.

Those remarks bring me to the exchange rate mechanism itself, which we have now joined. It is reckoned to be the precursor to economic and monetary union. In 1986 our trade with other countries was roughly in balance. There was a slight deficit but nothing very significant. Since that time the balance of payments deficit has soared. We are told that the responsibility for that lies with ordinary working people who have been demanding too much in wages, and other such nonsense, whereas it has been due to the appreciation and progressive overvaluation of the rate of exchange. Since the second and third quarters of 1986 the pound has become overvalued by some 20 per cent. against the deutschmark, 25 per cent. against the yen and 50 per cent. against the US dollar. That has not been due to any action taken by ordinary working people in this country. It has been due to the activities of the experts on whom we are now supposed to rely.

Much has been said this afternoon about the necessity for convergence. The use of the term varies; some have referred to convergence in inflation rates, others have referred to convergence without any qualification and the rest have talked of economic convergence. To my mind economic convergence means that, broadly speaking, ordinary people, who have not taken part in the discussions and who probably would not understand the somewhat complex and technical language of the report, can have a reasonable standard of life without the risk of permanent unemployment hanging over their heads. There has to be a gradual narrowing of the gap between the rich and the poor. There has to be a growing convergence socially and in ordinary economic terms.

We have had some 10 years of this Government. Far from there being more convergence, we have not even achieved convergence or anything approaching it in this country. So it is in Europe. I was for some time president of the regional affairs committee of the European Parliament as well as being a member of its budget committee and economic and monetary affairs committee. The poorer regions of the Community have become poorer and the richer regions have become richer. That is still happening.

What does a single currency mean? It means that we have a fixed rate of exchange. No matter what happens within the country, no matter what misfortunes, no matter how its occupations vary and its economics change, one is tied to that rate of exchange. So it is with the ERM. All that has really been done is that we have kidded ourselves that in fixing the barometer we have also fixed the weather. That is nonsense.

We ought to look at the whole matter afresh, casting aside our occupations, our connections, our social positions, our personal wealth, our personal associations and everything else. We ought to think in terms of the people of this country and what we want for them. There is nothing that I would wish more than that there should be co-operation between all the nations of Europe, as independent states with their own cultures and customs. I am all for anything that can expedite that. I should like to see free trade between them. However, I fear that we may be going astray because we have ignored the end of the Cold War.

The Cold War has changed the whole face of the world. As a country, instead of withdrawing into fortress Europe, with all the agriculture rackets to which I have referred and fraud on a massive scale, we ought to be looking to the wider world. We ought to make it possible to co-operate freely with all the countries that are prepared to accept the social market to which I have referred on previous occasions and, above all, with our own Commonwealth.

I am distressed by the fact that at the time when we joined the EC—and I do not wish to turn that clock back—we seemed to adopt a defensive posture as if there was nowhere else for us to go. There was no positive dynamism about our action. It was as if it was a hopeless step and there was nothing else for us to do. At the same time we ditched the Commonwealth. I bitterly resent that. Many of us know well what happened, for example, to New Zealand. New Zealand lost 10,000 of her men who came over to this country of their own accord to fight against an undesirable form of Mittel Europe. They paid with their lives. Yet when it came to joining the EC we entered into arrangements which have now culminated in New Zealand being denied one of the most important outlets for her survival, the export of her sheep. Those exports have now been reduced to one-tenth of their original level and the country now faces distress.

I do not wish to be jingoistic, but it seems to me that there is something wrong here. We ought to take a wider vision of the world, not for the sake of the world as a whole, although we live within it, but for the sake of our own people, with whom there should be considerable ties. We are a great people. We have contributed much to the culture and law-giving of the world. We should not, by default, cast that away in favour of a regime imposed by a bureaucracy in Brussels.

Lord O'Brien of Lothbury

My Lords, before the noble Lord sits down—what a loss he is to the other place!—it is not my place to take him up on his attack on the banking system, but perhaps I may be allowed to question his remarks about the late Montagu Norman. I worked with Montagu Norman for many years and was his last private secretary at the bank. He was by no means the ogre the noble Lord portrayed. Philip Snowden, the Labour Chancellor of the Exchequer, was one of his dear friends. Philip Snowden left to the bank the casket in which he received the freedom of the City of London. If the noble Lord cares to read the book written by Andrew Boyle, who never knew Montagu Norman, he will get a much better picture of what he was really like.

Lord Bruce of Donington

My Lords, I unhesitatingly agree that the late Montagu Norman was a man of the highest possible integrity. I would not wish to impugn his integrity in any way. All say is that his judgment, like that of Philip Snowden, was not the last word in logic, reason or correctness.

8.8 p.m.

Lord Bridges

My Lords, like other members of the ad hoc committee presided over by the noble Lord, Lord Aldington, I should like to say how much the committee owes to his guidance and leadership. The document we have before us bears the stamp of his leadership. As others have said, it owes much to our excellent clerk.

It is my hope that the document will lead to something that I believe we need at this point, namely a more informed debate in the nation at large about the issues which are presented by the two intergovernmental conferences. I have been greatly dismayed in the past six months to observe the manner in which these important issues, which concern so much of the future of our country, have been the subject of judgments that are sometimes instinctive and sometimes prejudiced. They are very rarely based upon an informed knowledge of these very large issues.

It is not the least virtue of the report that it provides a collection of facts, gives a careful balance of opinion and suggests some judgments. I hope that it will serve not only your Lordships but the nation at large in the days to come.

Perhaps I may be permitted one further observation on this. I do not believe that, confronted with decisions of such gravity, any other nation in Europe would have indulged in the superficial opinions that we have had cast before us in the past few months. They are difficult subjects but I believe that the citizens of this country deserve rather more guidance than they have received from some quarters in both the political world and the world of some newspapers.

Unlike most other speakers in this debate who have concentrated on the issue of economic and monetary union, and unlike the noble Lord, Lord Bruce, who with his characteristic eloquence and vigour took us down byways some distance away from the theme of the debate, I should like to speak of one aspect of political union that is the subject of one of the two intergovernmental conferences; namely, the activity known as European political co-operation. I agree with the committee's opinion on this subject which is stated on pages 56 and 57 of the report. However, there are some matters that merit a little further examination.

My starting point is agreement with the committee's view that in general at these conferences we should look for evolutionary rather than revolutionary change. That applies to the future of European political co-operation. Above all, we should aim to ensure that any changes to the treaty which may emerge in the next year or two should accommodate the future needs of the Community. I am confident that that is the right approach. I suggest that we might do well to encourage some expansion of the subjects at present covered in European political co-operation so as to permit discussion by member states of the topic which I would define broadly as political security; that is to say, the boundary between foreign affairs and defence.

I should make it clear that I do not seek to transfer additional formal competence to the European Community. I do not propose that the Community should act together in this field, but I suggest that we need to discuss some of the issues in that way. Perhaps I may give the House some reasons for these opinions. The profound and very welcome changes which have taken place in Europe over the past year or so will make it more necessary than ever that the nations of Europe, both East and West, take collective decisions about the way in which we secure peace throughout the European Continent. Happily we are moving away from the confrontation of two armed alliances to a more relaxed situation. The treaty on conventional arms in Europe and the charter of the CSCE, which was signed in Paris this week, mark a watershed in European political affairs. We can now expect an accelerated decline in the number of armed forces in Europe and their equipment.

However, the situation is still extremely uncertain. New tensions, long buried in some instances during the Stalinist ice age, are beginning to appear. Let me mention a few examples. The state of affairs in Yugoslavia illustrates how a new nationalism, which has been concealed from our view for perhaps a generation, now threatens the stability of the Yugoslav state. We shall have to find the right solutions to problems of that kind. Put another way, the era of ideological confrontation, which it seems has now just ended and which was accompanied by much tyranny and repression, from another point of view was an era of stability in international relations. The aspirations of new nationalism which are now emerging throughout Europe will produce different kinds of tension.

Agreements for the future security of Europe will have to be reached on a pan-European basis. It will be very important for the nations of Western Europe which are members of the European Community to discuss such issues together and to prepare a common approach, using for the purpose the machinery of political co-operation. I believe that that will prove much the most effective way of defending our interests on questions involving the political future of Europe.

I suggest that the intergovernmental conference on political union should be encouraged to consider some marginal expansion of the work done in political co-operation for that purpose. That should include the ability to cover broad issues involving matters of defence and security. It would not make sense to exclude those issues or to allow one or more member states to prevent the proper discussion of such vital questions on the grounds that the treaty does not extend so far.

Another reason for reaching that conclusion is that none of the existing organisations is ideal for the purpose which I described. It is true that the CSCE is now to be established on a more permanent basis, with its own offices and secretariat, which it has never had before. But with 34 signatories it is much too large and its membership much too disparate to be appropriate for the purpose. Some people would like to use the Euro-group in NATO. I personally have nothing against that notion but we need to understand the objections of some EC member states, either existing members or those who may join the Community in future years, who would be unwilling to take part in political discussions under the NATO umbrella. NATO will continue to play an essential role in European security issues as the vital hinge between Western Europe and the United States. But I do not think that that is an altogether appropriate place for the formulation of policy by the West European member states themselves.

Recently the Italian Government suggested making greater use of the Western European Union as it has been used during the Gulf crisis to co-ordinate the movement of naval vessels on patrol in the Gulf. But I doubt whether WEU would be an appropriate organisation for the purposes that I described; nor do I believe that the Western European Union could in some way be subsumed within the European Community. We need to remember that the WEU treaty was the precursor of NATO and that the obligation on its members to come immediately to the aid of a member state which is the object of external aggression is in fact more binding than the terms of the NATO treaty itself. Also, in other respects the WEU treaty shows signs of its age. I do not believe that WEU would be useful. The transfer of WEU obligations to the Community would mean endowing the Community with formal and binding commitments in the area of defence, which seems to me and perhaps to most other people to be going further than we need or should go at this stage.

For those reasons I feel that the committee is right to suggest, as it did in paragraph 176, that: it will be in the interests of the Member States to find a way of discussing relevant security issues in EPC meetings". My plea is that we should recognise the profound change that is taking place in the nature of European political affairs. We should equip ourselves with the right piece of machinery for dealing with that situation. The states of Western Europe will need to take counsel together in the broadest possible way. That is how I see European political co-operation developing in the future and I hope that the intergovernmental conference will take the opportunity to acknowledge that need and to point the Community in the right direction.

8.20 p.m.

Lord Selsdon

My Lords, I stand before you in a slightly more pragmatic way as a trader. For almost all my working life I have been involved in trade and the financing of trade—the financing of British trade in yen and of foreign trade in ecus. I have been dragged around the conferences in Europe discussing the "Europa" and the ecu, and working out new mechanisms. All in all I have come to the conclusion that the hard ecu is a good thing.

Certain doubts have been expressed about the desirability of the hard ecu, or indeed the wet and whimpering ecu that sits in its basket. The noble Lord, Lord Roll, took us back 100 years and reminded us that other systems did not work in those days. However, out of deference and respect to the noble Lord, Lord Aldington, who has drilled me and so many in your Lordships' House over so long a time, I must return to the days of William of Wykeham. At the time when he founded Winchester he was a great proponent of currencies. At that time the écu de la couronne was launched. It was a very solid, hard ecu. Indeed it was certainly harder than the ecu that was launched in 1339. travelled alongside other currencies and in substitution for them. In the 14th and 15th centuries came the noblest of all, the golden ecu of the sun—l'écu d'or au soleil. That too financed trade and, based upon a gold standard, travelled happily alongside various currencies and in substitution therefor.

Six hundred years or more later we find ourselves in a position where, regrettably, finance and politics are seeking to usurp the first place of trade. It is as though the army and the air force tried to demolish the Royal Navy. Trade comes first and with it the financing of trade. Within the countries that now comprise the EC, or the Europe of the ecu, we have many disparities in trade. The United Kingdom is more dependent upon foreign trade than any of the other members. But if we move, as we would all like, towards a common currency, we are told that at some time in the distant future there will be a stage three. As my noble friend Lord Caithness said, the foreground and the background are painted, but the middle ground has yet to be taken.

Thus those noble Lords who seem to reject or oppose an initiative taken by Government to fill in the middle ground in a perhaps more pragmatic way than Jacques Delors with his excellent report has managed to do need to think a little. The convergence, about which noble Lords have already spoken, is difficult to achieve when one has the existing membership divided logically, and regrettably, between the high inflation and the low inflation countries. To seek to bring those together too quickly will cause serious pain and unemployment among the high inflation countries. We shall see a division with perhaps on the one hand Germany, France, the Netherlands, Belgium, Luxembourg, Denmark and maybe Ireland and on the other ourselves with Italy, Spain, Portugal and possibly other members who join.

We must recognise too that it is not the Community of today which we are considering when thinking of the years ahead but a broader Community which will include many other countries with different currencies, different exchange rates and different trading patterns. To accommodate all those countries in plans today is difficult indeed. Inevitably there will have to be an intermediate stage. Stage two and stage three, may be followed by stage four, stage five and stage six. They may continue for ever as we develop and finance follows trade.

Our own trading pattern is not yet determined for the future. One has seen in a few short years that 50 per cent. of British exports have gone to the EC. We are told that by 1992 those exports will be home sales. The pattern becomes stronger as one recognises that the greatest trading bloc in the world at the moment is the current EC. What does it lack? It lacks a hard currency. We have been brought up to recognise the value of the gold standard, of Bretton Woods, and of various other attempts. Perhaps with some regret some of us are nervous about the movement towards a deutschmark standard and have fears about the ability or the desire of the Bundesbank to administer the economy of Europe. Thus, inevitably, we feel there should be some form of currency. The ecu, which is already translated into different languages and has been around for a while, is a logical one. To have a weak ecu is to admit weakness and demonstrates a rather wet attitude when it is perfectly possible to have a strong ecu which we may call the hard ecu.

While the proposal of the Government is that the hard ecu should run alongside existing currencies, it is also in substitution for them, as is appropriate, so that gradually a transitional period can take place without the pain and suffering that would inevitably arise from the differing inflation rates. The danger is that if we move too quickly to stage three the pressure on the ERM within the 2¼ per cent. band will be so great that the system will break up and much that we have achieved today will be thrown away.

I believe strongly in the hard ecu for another reason, one which the noble Lord, Lord Aldington, will appreciate. I went to the same school as the noble Lord, and the noble Lord, Lord Jay, although, unfortunately for me, at a different time. I was in the same house as the noble Lord, Lord Aldington, although also at a different time. A Wykehamical colleague, a banker for whom I have much regard, conceived the hard ecu. It was not just a government idea. It was thought out carefully by the banking system over a considerable period of time. Perhaps the Government used it as a stalking horse to demonstrate some political commitment towards Europe, as the noble Lord, Lord Carr, said. But it is not a bad idea and it has been quite well received in the economic and financial centres of the continent of Europe by our European partners.

It is difficult for me to conceive of a stage where Europe does not have a hard currency. Indeed if we do not have that hard currency, our future difficulties will be very great indeed. In moving towards the third stage, we need a second stage. I believe that the hard ecu in the form proposed has a very real role to play. If the original ecu —the golden ecu of the sun which was based upon the gold standard, and the gold standard itself that served us so well—can be replaced today by a hard ecu, it will be no more than a return to a gold standard. It is hard, and it is the best. The ecu of the basket is wet and weak. I prefer the hard ecu.

8.28 p.m.

Lord Benson

My Lords, I wish to speak to only two points in the report. First, perhaps I may draw the attention of the House to paragraphs 166 and 167. They repeat, as has been done many times in the past two years, the need to overhaul the resources and the objectives of the Court of Auditors in the Community. I do not propose to develop the point any further tonight because we shall debate it next week. However, I urge the Government to take note of the continued requests for action to be taken on those lines. I hope that they will be able to tell us something about it on Wednesday.

My second point relates to wider issues. Every now and then a fever overtakes a country or a continent. There are numerous examples in history. Many influential people in Europe have been infected with the fever of European unity. I agree with the report that nothing will stop it and this country must and can play its full part.

Let us see where the fever has taken us so far and where it is likely to lead us in the future. At present the Community comprises 12 member states representing 320 million people speaking nine languages. A form of government organisation has been set up in Brussels which bears little resemblance to representative democratic government. The operations of the Community and the 12 member states are riddled with fraud. For years past up to 70 per cent. of the Community budget has been spent in distorting the whole agricultural industry of Europe and, to some extent, of the world. Therefore, there are some defects in the foundations on which this great enterprise is built.

Perhaps we may now look a little further into the future. Some influences in Europe believe that the Community should be contained within the 12 member states. However, the report makes it clear, and a great many people believe, that the fever will extend into wider fields. Indeed, negotiations are already taking place in those areas and they will continue and become faster.

If within the next 25 years the Community is joined by the seven EFTA states and the six Eastern European countries we shall have a body comprising 25 member states, representing 450 million people and speaking 16 to 20 different languages. We shall be led into some form of monetary union and a single currency. Neither of those processes has yet been properly thought through. Political union will follow and some federal government will be set up in Brussels. We shall seek to govern by remote control the daily lives of up to 450 million people in an area stretching from Crete to John o' Groats and from Lisbon to Stockholm.

At the same time, up to 25 bankers will be set up in another capital of Europe, probably 200 or 300 miles from Brussels. They will be charged with the task of maintaining single stable prices. The evidence given by the bankers was refreshingly frank. They made it clear that they wished to be autonomous. They desire security of tenure so that they cannot be dismissed from office. They expressed great unwillingness ever to be infected or touched by the decisions of the political parliament sitting in Brussels. I hope that the House will forgive me if I stifle a gasp of incredulity at some of those proposals.

But what will happen then? I suggest that the fever will abate and the relentless lessons of history will point the way ahead. I believe that this great edifice will crumble at the edges and eventually disintegrate. The reason for my belief is that whenever a community reaches a certain stage of sophistication it finds government by remote control repugnant. The whole trend of social development is in favour of devolution into smaller units whose communities can be masters of their own destinies.

At the time of the First World War the British empire was a dominant factor in the world; it was then probably the dominant factor. It now lies in tatters. The Spanish, Portuguese, Dutch, French and Belgian empires have suffered the same fate and for the same reason. During the past 12 months we have watched the Soviet Union and its satellite countries disintegrating. In the 1950s, after a series of intergovernmental conferences, we sought to impose a federal government on a huge chunk of central Africa comprising many thousands of square miles and many millions of people. After a further series of intergovernmental conferences the whole structure collapsed within four or five years.

We in this country should be particularly sensitive to this trend of history. During the 1920s the Republic of Ireland seceded from the United Kingdom because it found remote control from London repugnant. We have only to look across the banks of the Tweed to find a clamour from Scotland for devolution. If that takes place, Wales will follow. We see that Quebec is seeking to distance itself from Canada. The Basques are trying to detach themselves from the Government of Spain.

This fever of European unity is a virulent disease. I believe that it will be dispersed by the remedial forces of history. It is difficult to know when this will take place but I believe that it will be during the second half of the next century. I do not know whether the House of Lords will exist at that time. If it exists at all it will probably have a different structure from that now prevailing. But whatever the form of government that exists I suggest that it will have before it a Select Committee report written with the same clarity and conviction as this report explaining beyond peradventure that Europe must be unbundled. There is only one sadness: that no one in this Chamber will be alive to reap the harvest that we are now sowing.

8.36 p.m.

Lord Briginshawe

My Lords, I too associate myself with the congratulations offered to the noble Lord, Lord Aldington. The Government are in disarray over Europe. Each of the two main warring factions in the Conservative Party offer a so-called strategy for our relationship with our Community partners. Both plans, I am afraid, seeks to obscure the fact that this Government are irretrievably out of step with developments within the Community and both plans offer no credible path forward.

I draw your Lordships' attention not only to the manifest flaws in the Conservative party's approaches but also to the more significant realities that we should recognise as we plan the basis of our European co-operation. Two smokescreens have been emerging. The first we may call the little England approach. Apparently, there is to be a two-track Europe with Britain left adrift to pursue an independent economic strategy which will guarantee our future prosperity. We are invited to take as read at least three fundamental misconceptions. There is as well a thinly veiled appeal to nationalism which is dangerously unpatriotic and which seeks to confuse important issues by equating superficial symbols of national identity with self-determination.

I watched with some interest a news feature on a little village in central France. Its inhabitants were concerned, we were told, about their future prosperity in a more unified Europe. The name to be given to the currency used as one of the methods of engineering that prosperity did not, however, worry them. I suspect that the villagers of central England have the similar sense to separate things that matter from those that do not. The idea that calling a currency by another name acts to undermine our sovereignty is disingenuous. A pound that will buy only one apple where an ecu can buy two in some ill-thought-out twin-track exercise is no demonstration of national pre-eminence.

Another limb of the little Englanders' approach is their reverential attitude to what they call free trade. There is, of course, no such thing as free trade, nor has there ever been. There are no perfect markets. At the risk of sounding too technical, what are commonly known as "transaction costs" always intervene. Moreover the historians who inform us that our prosperity in Victorian times was based on a laissez-faire trade philosophy are the same historians who neglect to mention that our imperial armies and navies saw to it that those who underpinned our ability to compete were forced to supply on terms favourable to us. Thankfully, we can no longer reduce our transaction costs in such a manner. Such was the cost of free trade then as it is now. Markets are always shaped and engineered. If soft loans have replaced strong navies the effect is still the same. The idea, therefore, that we can somehow compete internationally as an individual nation in a world of trading blocks is one that has truly had its day.

The final misconception in this particular approach is that the Community should swiftly be enlarged to welcome Eastern European nations into membership. I am far from convinced that the idea is even put forward in good faith. Certainly no one with even an ounce of sense could seriously propose that nations like Poland or Hungary could be ready for the disciplines of membership in the next decade. Our own problems, nearly 18 years after joining the EC, are weakening this Government by the hour. Imagine then the instability that would be caused by hasty invitations being sent out to Eastern Europe from Brussels. So transparently inept is such a proposal that when I say that the real purpose behind the plan is to apply a brake to developments taking place from within the existing membership, I am neither the first to make such a comment nor am I being controversial.

Let us imagine, for a moment, that the little Englanders won the day. It is 1995 and Britain has opted for a twin-track approach. The relationship with the Community will have remained, constitutionally and economically, as it is now. However, our European partners will have, in the meantime, forged closer links, all converging on Brussels. A big Englander, let us say British Airways, has decided that it wishes to take a stake in a German airline. The success of that acquisition would revolve around the application of competition rules made in Brussels. In such a scenario, it is inevitable that there would at the very least be a comparative decline in our ability to influence any decision made. It is verging on dishonesty to pretend that our national interests could be protected. The weight of a committed, participating administration behind any such strategy on the part of one of our international players is absolutely essential.

I turn to the second smokescreen emerging from the Conservative Party. Partially visible, there is the outline of the so-called hard ecu parallel. The idea has attracted little or no support in Europe and has gained barely minimal credibility. For a party that has championed itself as a scourge of bureaucracy, an idea that relies on a European monetary fund owned and run by all the central banks of the EC states and then gives the fund not one but two roles as a treasury authority and disciplinary authority is choice to say the least. It will not work and should be abandoned before it embarrasses us further.

It is time to expose the fundamental weaknesses in the Conservative Party's attitude towards the EC. These are weaknesses that neither of the arguments I have spent time assessing can conceal.

On the one hand, the Conservatives view the run-in period to monetary union far too narrow as a process of economic management. Monetary union is not only designed as a mechanism for stabilising currency differentials and making banking and trade transactions more efficient. Monetary union has a fully social context. Europe is a social as well as economic community. We harmonise both in order to create conditions for Europe to compete internationally as a trading block and also, just as important, to provide for better standards of living for all the inhabitants of the community. It is because the Conservatives refuse to recognise this that we fall further and further out of step.

Europe has accepted that the socialist principles which are the engine of social democracy are those best suited to the needs of the present and the near future. Intervention by government in industry, whether at a national or supranational level is healthy. That is beyond dispute. Also beyond dispute of course is the notion that government should manage industry. Once a matter of historical necessity, it is an idea that has served its purpose.

Harmonisation then means two things. First, it demands that national economic apparatus are brought together on a European basis so that we can compete internationally. Secondly, it means that at the same time as we take steps to compete externally, we also take internal measures to ensure that those who help create this economic trading block are justly rewarded. They should expect to receive the same value attached to their work, whether they happen to live in southern Spain or northern Germany. If the price of an apple in Ipswich is to be the same as the price of an apple in Heidelburg, we should not expect the inhabitants of either to possess less purchasing power than the other.

Some might seek to insert some rather complex economic irrelevancies into this equation. They ask what if apples cost more to sell or produce in Ipswich than in Heidelburg? The correct response to the assertion is that in the main these things will iron themselves out. For example, there may be more elderly persons living in Heidelburg. Ipswich would therefore return the subsidy that it effectively received in apples by contributing proportionately more to welfare provision. Of course, in such a context, the precise terms of monetary union are absolutely crucial.

This leads to the other great weakness for which the Government are responsible. It is said that there is no such thing as a free lunch. The only way that we can ensure that monetary union benefits the ordinary British citizen as much as the ordinary German one is to justify our right to equality by competing as an industrial nation. I spoke last week on our pressing need for investment in education to create an infrastructure which will supply us with the raw materials of future competitivity. Indeed, investment is an urgent necessity not just in the medium term for education, but in the shorter term for industry. The failure of the Government to build a competitive economy is the real reason why they are frightened of deepening our relationship within the EC. Monetary union exposes the Conservative Government for what they have failed to do.

I hope that I have added to the debate on this subject. I conclude with three brief points. Monetary union is not to be feared. Monetary union can only happen when there is in place a radical investment strategy that has begun to bear fruit. This is likely to be in five to six years' time rather than in two or three. Social harmonisation should proceed as an integral part of the process of monetary union.

8.50 p.m.

Lord Thurlow

My Lords, as the noble Lord, Lord Aldington, is not present I shall not add to the chorus of congratulations in which I should otherwise have participated. His work was extraordinary. However, I should like to join in the many tributes paid to our remarkable clerk, whose drafting—I know a little about drafting—has been very fine indeed.

I endorse all the recommendations of the report. I hesitate to bring the hard ecu section into the debate because it is above my head. I am prepared to accept the view of my colleagues. I should like to refer briefly to the main topic of the hour; that is to say, the single European currency. I agree with the noble Lord, Lord Barnett, that this issue is a dangerous distraction. The noble Lord, Lord Butterworth, referred to the issue as dangerous and as if it were a commitment. However, in our report we referred to it as a goal. A goal is quite different from a commitment.

The notion that monetary sovereignty is bound up with a national currency is, as I am sure most noble Lords will agree, an illusion. The pound sterling has long ceased to be a currency of sufficient international weight on its own. Twenty-five years ago I had the rather tiresome experience of leading a financial delegation to Australia to ask on our bended knees for Australian support for the arrangements to be made under the Basle agreement. In order to demonstrate to us how weak the pound sterling and London had become, we were kept hanging around for weeks as the Australians deliberately refused to make up their minds until the highest monetary authority in this country went out secretly to Australia in dark glasses. I believe that secret mission has never been disclosed.

I should like to refer briefly to the European Parliament. The noble Baroness, Lady Elles, is present so I do so with diffidence. In my view the European Parliament is bound to increase its influence over the years and become a more effective instrument of scrutiny, of supervising administration. It will probably be a very long span of years. I have no doubt that the logic of events will force the European Parliament into that increasing role and will force the other institutions of the Community to accept such an increasing role.

The committee's recommendations in relation to the European Parliament are modest, but they are forceful. It is especially important that the British Parliament should develop a warmer relationship with the European Parliament. At all costs, we must avoid sliding into a second tier as a second-class member effectively shut out from the inner councils of the Community that determine policy. That could be disastrous for our national economic and financial interests.

We need to remain within the inner ring to establish a position of influence. We must show that we share the creative vision of our common goals, and that we wish to contribute constructively to the creation of the best framework for enterprise and innovation. Unless we are seen to be co-operating constructively in further improvement of the framework and institutions we shall effectively be relegated to a second tier and have little influence in matters that will be of great moment in determining our own interests. That could lead to a downward spiral for us. We already have ground to make up. There can be no illusions regarding the serious difficulties that confront this country. We have slipped relatively backwards in our competitive power and must build up.

The conditions for effective progress were recently defined in striking terms in the new book by Michael Porter of the Harvard Business School on the competitive advantage of nations, in which he puts all the emphasis in maintaining or regaining effective progress on to innovation and enterprise. We made strides in those directions in the past 10 years, but there is a long way to go. We can best advance our interests and gain the acceptance of the basic principles that we regard as sound by co-operation in the top European league. If we slide into a second tier the framework within which we are locked will increasingly be changed to our disadvantage and developed in directions that could prejudice our future.

We must co-operate. But our co-operation must be aimed at making the European Community and its institutions more efficient and more accountable. We must be vigilant in insisting that nothing should be done centrally that can be done as well or better nationally.

8.59 p.m.

Baroness Elles

My Lords, with others in your Lordships' House I congratulate the chairman of the committee which produced the report before the House. I also congratulate the clerk and the special advisers. The report, however, deserves more than that. We owe a great debt of gratitude to my noble friend Lord Aldington and the clerk, William Sleath, as well as to the special advisers, who produced a report which is a monument to clarity and breadth of vision. That is supported by the fact that so many distinguished witnesses came before the committee, including the Foreign Secretary. It is a sign of the importance of the subject matter both for the United Kingdom and for Europe as a whole.

The report should be studied not only with regard to its recommendations, all of which I warmly support, but also against the background of the current political situation inside and outside the Community. This week we have seen a gathering of 34 nations and from their backgrounds over the past 15 years one realises that radical changes have taken place in many of them since the signing of the original Helsinki Final Act in 1975.

I take this opportunity of paying a deep tribute to my right honourable friend the Prime Minister. These radical changes, both in the Soviet Union and Eastern European states have been largely due to her own perception, persistence and determination to bring about change in oppressed nations. It is also true to say that in Paris on Tuesday a charter was signed, to which the noble Lord, Lord Bridges, referred. It has been hailed as heralding "a new era of peace and unity".

However, we have become sceptical of such treaties and it may well end up as so many treaties in the history of Europe have done unless it is bolstered, strengthened and cemented. A lesson can be learnt from the Treaty of Rome., which has relied for the past 40 years on economic and social progress, practical measures and closer economic and political cooperation based—I insist on this—on perceived national interests. No member state has given way on its own national interests in order to arrive at a common position. It is also based, of course, on a strong security policy in an alliance with the United States and Canada within the framework of NATO.

If the Paris charter is to endure, the above conditions must apply gradually to the whole of Europe. Just as it is now unimaginable for the Twelve ever to go to war with each other again—I cannot understand how the noble Lord, Lord Benson, who is not in his place, can refer to that as a virulent disease when for the first time in European history there has been over 40 years of guaranteed peace between our nations—so surely those are the principles that should guide the European Community along its way.

If we are to contribute to political and economic progress throughout the whole of Europe, we must take measures which will consolidate the Community itself. The EFTA countries and the new democracies of Eastern Europe will not want to join just a free trade area. They practically have that already. They will want to be part of a system, as they have already declared, taking part in decision-making as Greece, Spain and Portugal wanted after their experience of totalitarian regimes. They will want a system which will retain their national pride, based on economic advantage and, above all, the guarantee of a democratic political system. Therefore, if the vision of Europe stretches from the Atlantic to the Urals—a vision of the future of Europe which I believe is shared by many people of all persuasions—it is essential for us to build successfully on a stronger, more effective and more efficient Community.

The second point which I should like to stress before referring to one or two aspects of the report itself relates to Britain's role in shaping the Community. It is not soft words which protect Britain's interests. People in this country do not always seem to be aware of the admiration and respect in which our Prime Minister is held throughout not only the member states of the Community but practically everywhere else in the world. She is by far the best known and best respected of all European politicians. That is precisely because she has always stood up for the interests of Britain and has always eventually reached agreement with other member states. It is well known in the corridors of power in Brussels that many people have hidden behind the skirt of Mrs. Thatcher in order to conceal their own disagreement which, eventually of course, emerges. All those who, over the years, have teen involved, whether at high or low level, in the formation and adoption of European Community law will know that those who are the furthest away from the objective at the outset win the most battles. They give attention to detail in the knowledge that the results will be applied in national law. It is well known—one or two noble Lords have already referred to this fact—that those who speak loudest with the rhetoric of Europe are the worst at applying and implementing law in their own national systems. Many others who fail at the last minute, despite clamouring for European sovereignty and the giving up their own national sovereignty, are the most resistant to agreement when it comes to the crunch. I can give several examples and I know that my noble friend Lord Plumb is well aware of matters such as insurance, aspects of energy policy, television directives and many other issues where Britain has led the way and reached a satisfactory conclusion. In many cases it has been thanks to Britain that agreement has been reached.

As leaders of the proponents of a single European market, we should surely not think it illogical to foresee that at some stage one will arrive at a single European currency, whether by achieving fixed exchange rates or by the process, or modification of the process, proposed by my right honourable friend the Chancellor of the Exchequer—the hard ecu. Many noble Lords have spoken with great experience and wisdom on that matter.

It may be of interest if I point out the results of a recent public poll taken throughout member states on how many people would want a single currency. Surprisingly enough, in the United Kingdom 37 per cent. are already in favour of a single European currency and 58 per cent. in favour of a central bank. The figures for other countries varied. In Germany and Luxembourg, for example, the figure was over 70 per cent. but in Denmark it was 31 per cent. Considering the lack of interest and discussion in the press on these matters it is surprising to see such a high figure for the United Kingdom. Incidentally, the lowest concern to the British people was loss of sovereignty. However, there must be clear conditions if we go down that road.

In practice, the question of imposing a single currency simply does not arise. There has been no amendment to any of the treaties that have been concluded without it first being debated and voted upon in both Houses of our national Parliament. We need only think back to the long debates, amendments and discussions we had on the provisions of the Single European Act before that was adopted. Firm criteria must be established in regard to the policies and powers of any central control system. As we know, and as we have been informed again this evening, central bankers have already met and are drawing up draft statutes for such a central bank. Therefore, there is nothing secret about that. The details are available and can be studied and discussed.

Criteria must be laid down with particular regard to the state of the economy. Many noble Lords have discussed the convergence of the economy, the difference in interest rates and rates of inflation. I shall not labour those points. It is quite clear that some conditions must be laid down before one can advance to a single currency. I agree with many noble Lords who have said that it is idle to fix a date now. In the history of the Community many dates have been fixed for transitional periods. So far, the one characteristic has been that, as far as I can remember, none of the dates has been honoured. The only date which I hope will be honoured is the end of 1992, fixed by my noble friend Lord Cockfield for the creation of the single European market.

If we contemplate a wider Europe, the thought of having six or seven new currencies from EFTA and at least three or four from Eastern Europe is enough to convince one that over 20 currencies operating in a single market would be a nightmare. Perhaps it is too sensible and reasonable to be a reality for the world in which we live, but it would be far simpler to have one single currency; for instance, the ecu.

The economic strength of the existing Community is already diluted in relation to the dollar and the yen. Yet for some time we have been the world's largest trading bloc whether in commodities or services. Therefore, why should world trade, including the price of oil, be dominated by the dollar? It will no longer be dominated by the pound, the French franc, the Italian lira or even perhaps by the deutschmark, although there is every chance of it being dominated by the ecu which would raise the standard of Europe in terms of world trade and the economy. If we are to contemplate a wider Europe the present institutional structures are clearly inadequate. They must be made more efficient and effective and subject to greater scrutiny and public accountability.

I shall confine my closing remarks to one or two points concerning the European Parliament which the noble Lord, Lord Thurlow, mentioned. I also wish to comment on a remark made by the noble Lord, Lord Barnett, who referred to the powers of the parliament concerning the expenditure of the Community budget. The fact is that contributions to the budget are laid down by treaty. The parliament has no power to increase that amount except by a margin agreed with the Council of Ministers. It can only amend about one-third of the whole of that budget which is known as the non-obligatory sector. The total budget amounts to about £36 billion which is approximately the amount that United Kingdom local authorities spend in one year. Therefore, I do not believe that anyone can accuse the European Parliament of having vast powers over the expenditure of the Community.

It must be clear that the competence and the facility to scrutinise the ever-increasing discretionary powers of the Commission are essential. For example, concerning external treaty making, the adoption of secondary legislation or anti-dumping procedures, there is in many instances no public scrutiny. That is clearly unacceptable. As more matters are dealt with at European level, it must be quite clear that in proportion democratic control must be increased.

It is also necessary to scrutinise more effectively Community expenditure which is largely carried out by the Commission. Here the budgetary control committee of the parliament needs strengthening and reinforcing. It requires a larger staff. It must also have a more responsible role in amending draft legislation. After all, it is the only elected body representing the views of the people of Europe. About 50 per cent. of the amendments tabled and voted on by the European Parliament are already adopted by the Council. There are still many aspects where the views of the parliament are not sufficiently taken into account.

The opportunity must also be given for MEPs to work more efficiently and to be sited in Brussels near the Commission and the Council, preserving Strasbourg as a meeting place for political debates and ceremonial occasions. It has already been mentioned but I think the point should be reinforced, strengthened and repeated. As decisions are increasingly being made at European level, national parliaments must be involved in the debates before the decisions are taken. It is up to the national parliaments.

I plead with another place that it should look with more favour on MEPs and be prepared to work with them. They are representing the same electors and we have the same interests. Members serving in the European Parliament are representatives of the people of Britain as indeed are the Members of another place. It would be infinitely better for our country if both sets of parliamentarians were to meet, possibly within the ambit of select committees on the relevant subjects for which they are respectively responsible.

I thank again my noble friend Lord Aldington for a report containing a great many recommendations which I fervently hope the Government will take to the IGC meetings and draw upon for inspiration and guidance.

9 14 p.m.

Lord Seebohm

My Lords, if the noble Lord, Lord Aldington, will forgive me, I shall keep my compliments short in view of the lateness of the hour. Nevertheless they are very sincere. It must be over 20 years ago, when I was employed in the international money business, that I and my colleagues came to the conclusion that a common market did not make any sense without a common currency. We were very relieved when, a few years later, Great Britain joined the Common Market and was committed to monetary and economic union. The problem then, as now, was how and when to achieve it.

The economic gains are obvious, although opponents of the idea say that transaction savings will be minimal. Nevertheless, the savings from a common currency, from the point of view of trading within the Community, will be absolutely enormous. There is no doubt whatever that the stimulus to trade when all prices and transactions can be quoted in the same currency will be quite amazing.

There is enthusiasm for this from all those concerned with wealth creation, and I was surprised that the noble Earl, Lord Caithness, said there was no general enthusiasm for a common currency. In the world that I live in, I find that there is enormous enthusiasm for it. I do not know when it will come, but I think we all agree that it must be the ultimate goal.

Those who object seem to do so solely on the grounds of loss of power, which they cloak under the more impressive word, "sovereignty". Nothing that has happened in the last three decades has convinced me that the power-seekers—that is, the politicians—have shown that they are capable of managing a money economy. I go further and say that they are not fit to manage the economy, and want to cling on to it in order to continue to mismanage it, by which I mean having the power to devalue and to inflate as they have regularly done in the past.

The noble Lord, Lord Jay, was emphatic on this point. I do not think I need to follow his arguments at length, but he seemed to assume that, unless one can devalue and inflate regularly, there will be unemployment and a stagnating economy. That appears to me to be absolutely absurd. The conclusions that I draw from all this are that the sooner we return money management to the central bankers and take it away from politicians the better, and that a European central bank system will be of enormous value to the Community, including this country.

There is an extraordinary feeling entertained by the Prime Minister about the sanctity of sterling. This question has already been dealt with by the noble Lords, Lord Thurlow and Lord Cobbold. The noble Lord, Lord Cobbold, submitted a very interesting memorandum, which appears right at the end of the volume on evidence. It is well worth reading.

So far as coins are concerned we need not bother at all, because they do not enter into the international exchange, except at the level of tourism. So I do not think that coins need to have the EMU value on one side and the pound on the other. We can retain them more or less as they are now. But, having said that, I am in full agreement with the recommendation that one must wait till stage one is successful. Our entry into the ERM is still experimental and no one knows at this stage whether Great Britain has entered at the right rate. France took three or four years to settle down and, certainly, we shall not be secure until inflation is down to, say, 3 or 4 per cent.

So, having stated my case for a single currency and a European central bank system, I agree that the method of getting there and the timing is still an open question. But various choices are appearing. The hard ecu might work as a temporary measure, though there are a lot of objections to it. But I rather favour following Sir Michael Butler's suggestion of pursuing the ERM route gradually, hoping that the margins will be reduced to a point where a move to a single currency will be almost an overnight matter.

While I doubt whether it is wise for a date to be fixed now, I am a great believer in fixing date targets as soon as appears practicable; otherwise, nothing is likely to happen. After all, it was not until after—thanks to the noble Lord, Lord Cockfield—a deadline of 1992 was fixed for economic union that things really began to happen.

I turn now to the question of sovereignty. By joining the ERM, we have already given away about 50 per cent. of our power of manoeuvre. Of course the rate is adjustable in theory, but that would be contrary to the undertakings at entry. If we move to the hard ecu, we shall have surrendered the balance of our so-called sovereignty.

There is one other aspect of the single currency which has received little attention. I refer to the fact that the balance of payments disappears as an exchange rate problem. As Sam Brittan put it, the balance of payments between Sussex and Normandy would be the same as between Sussex and Yorkshire. Similarly, the balance of payments with countries outside the Community would then be the responsibility of the Community as a whole.

Finally, I should just like to mention the political union. Here I am 100 per cent. in agreement with the Bruges Group and trust that the principle of subsidiarity will be rigidly observed and that Community regulations are confined solely to those matters which are patently better carried out by the Community than by member states in co-operation.

I was most interested to hear the remarks made by the noble Lord, Lord Benson. However, I sincerely hope that he is wrong. We are living in the twentieth century and not the twenty-first century. We must proceed as best we can with what we are doing. If the Bruges Group policy, as I call it, is followed, perhaps bureaucracy at the centre will not in fact prove to be too much of a menace. These days, contrary to the experience in, say, central Africa, the advances we have made in information technology, in satellite television and in travel make the situation completely different as regards harmonising the Twelve. In conclusion, I should like to say how strongly I support the report. It is a splendid job of work.

9.21 p.m.

Lord Geddes

My Lords, it has been a great honour to be a member of the ad hoc sub-committee under the esteemed chairmanship of my noble friend Lord Aldington. He steered us, and extracted information from witnesses, with the same supreme skills and finesse with which he opened the debate this afternoon. We all owe him a great debt of gratitude, as indeed we owe our clerk, William Sleath, and our advisers.

So much of the discussion about EMU has in the past focused upon the negative aspects: what will happen if Britain does not participate? What about loss of sovereignty? Why should we abandon sterling? Instead, I urge concentration upon the positive benefits of EMU. I suggest that the objections raised are no more than political sensibilities which as we know—it is to be hoped—from our reading of Jane Austen should not be allowed to overrule political good sense.

What can be said of such political sensibilities? There has been, and I am sure there will continue to be, much use of such phrases as, "loss of monetary sovereignty" and, "loss of unilateral control over economic policy". I am convinced—I believe that the report supports this conviction—that the use of such phrases in that context is at best misleading and at worst a distortion of reality.

My right honourable friend Mr. Tebbit put a somewhat rhetorical question in another place on 14th November. In an interjection to Mr. John Smith of the Opposition he asked whether there were circumstances in which he would be willing to give up Britain's unilateral control of its own economic policy. In the context of EMU, sovereignty or unilateral control—call it what you will—was lost long ago if indeed it ever existed.

The report considers that point at considerable length. The evidence given by the noble Lord, Lord Jenkins of Hillhead, on the subject was particularly significant. He said that the House of Commons was deluding itself if it thought that it had control over monetary policy. It did not in his day —by which he meant when he was Chancellor—and he did not think it had in anyone else's day. He continued by pointing out that monetary policy, interest rate policy and exchange rate policy were the supreme field in which one could cling on to the shadow of sovereignty although the substance had flown out of one's grasp some time previously.

As the report points out and as has been mentioned by several noble Lords today, the word "sovereignty" can be used in several senses. The report offers three definitions. We must not allow the emotional overtones which it necessarily raises to cloud our judgment or to lead us to believe that which is not the case. The sense in which the word is correctly applied to EMU is defined by the report to be political rather than legal; that is, the extent to which a state has the power of effective or unfettered action. In that sense—here I warmly support my noble friend Lord Carr of Hadley—sovereignty can be, and has been, pooled in many areas as diverse as limiting fishing rights and the constraints imposed by the ERM.

To make any sense at all, surely European economic and monetary union must inevitably result in a single currency. The sooner the Government come off the fence and make that statement the better. My noble friends Lord Caithness and Lord Selsdon understandably favoured the case of the hard ecu in itself. My noble friend Lord Butterworth somewhat less understandably took the same view. I say "somewhat less understandably" because he was a member of the committee who was at sharp variance with the committee's findings.

I hope not to delay the House too long, but in that context paragraph 78 of the report states: But suspicions will persist for as long as the United Kingdom resists acceptance of a single currency as the goal… Moreover, the Committee consider that the hard ecu would have little chance of wide acceptance unless it were seen as the forerunner to a single Community currency. If the Government accepted this goal, it would then be able to champion the hard ecu as the best way to prepare for the ultimate introduction of a single currency". The so-called abandonment of sterling is yet another emotional rather than substantive issue. The report makes the proposal, which I wholeheartedly endorse, that in the fullness of time national currencies should be redenominated into round numbers which could then be printed on one side of a banknote or coin, with the single currency denominated on the other. In that way the pound could and would be retained. However, progress towards a single currency must and should be via long and meticulously detailed planning. United Kingdom decimalisation was given such planning and it was brought in with remarkably little fuss, bother or distortion. The same can be achieved for a single currency.

The general objections raised are of form and not of substance. Much of the apparent reluctance felt by the people of this country to commit themselves to Europe is, I am convinced, attributable to a woeful lack of knowledge and the bad press consistently given to the EC, not least by the Government themselves.

My noble friend Lady Elles mentioned the results of a survey carried out throughout the 12 EC countries. She mentioned the statistics. Across the board, 61 per cent. of all people questioned were in favour of a single currency, whereas in the United Kingdom the figure was 37 per cent. only and that for Denmark was 31 per cent. My noble friend drew a slightly different conclusion from the one I drew. I suggest that we should ask ourselves why the people of this country have such divergent views from those of all our European neighbours except Denmark. I submit that the reason is largely to be found in our political attempts to camouflage the real arguments with the emotional rhetoric of national pride and sovereignty, to which I have already referred. Much more needs to be done to improve public awareness and understanding and to remove the old prejudices which are proving so harmful and damaging to our industrial progress.

The Government have a responsibility—I was tempted to say a duty—to change both their real and perceived stance on Europe. Again, I quote from paragraph 188 of the report: This Committee has consistently argued that the best way to maximise the influence of the United Kingdom is to show by word and deed that Britain in no way dissents from the Community's agreed objectives". Cricketing analogies are much in vogue at the moment. If I may presume to follow the fashion, I suggest to your Lordships that if we wish to score runs it is quite important to be on the batting side.

The Eurocrats themselves are by no means blameless in the context of public awareness. There needs to be more obvious control and accountability. Here I mention just two institutions, the European Court of Justice and the Court of Auditors, already often mentioned today, and the extreme importance of giving them the ability, both in financial terms and in terms of personnel, to do their job so that justice can not only be done but be seen to be done.

Much has already been said on political union. I shall therefore restrict myself to one specific which has only received an airing today from my noble friend Lady Elks. I endorse the necessity for deciding on one location for the European Parliament. The report found that the parliament is heavily handicapped by the requirement to travel between Brussels and Strasbourg, with many of the staff living in Luxembourg. Inevitably, as my noble friend said, this adversely affects efficiency, quite apart from involving additional and unnecessary expense. It would undoubtedly be sensible if all legislative proceedings were concentrated in Brussels, thus granting MEPs the opportunity of taking a greater part in scrutinising the other Community institutions.

The time has arrived when a positive approach to Europe in general and EMU in particular must be adopted as a matter of urgency. The committee concluded that the United Kingdom could only remain outside a monetary union at substantial economic cost. Failure to be at the forefront of the negotiations will almost inevitably mean that London will lose the chance of being the operational centre of a European central bank, with all its attendant benefits.

I sincerely believe that we have exhausted our European partners' patience and indulgence. We must seize the opportunity of the intergovernmental conferences to put that right. The present difficulties being experienced by the Conservative Party, of which I am proud to be a member, came to a head specifically on the subject of the EC. The credibility of this country with our European partners was clearly strained after the Rome meeting in late October.

We have had, and I think have taken, a golden opportunity today to show that this House at least—with one or two noted exceptions—supports both the theory and the practice of the EC as outlined in this report. Our 11 partners in the EC need us and we need them. Within a week, the Conservative Party will have a new leader and the country a new Prime Minister. The intergovernmental conferences are only three weeks away. May that Prime Minister send the right—by which I mean positive—signals to our partners in advance of 14th December and may he not only give the right impression but also take the lead during those conferences and thereafter.

9.35 p.m.

Lord Grantchester

My Lords, I wish to start by expressing my admiration for and appreciation of the noble Lord, Lord Aldington. I also admire the concise and clearly expressed report which he and his committee produced with the aid of their support staff. As I am speaking rather late in the debate, I should be most unpopular if I did more than make a few observations which I hope have not been expressed before.

It is clear from the report that monetary union follows on from economic union as night follows day. The entire policy of economic union in Europe is based on the premise of a level playing field. That is an in-phrase which may or may not be in the report but which is bandied about before sub-committees week after week. However, it is no good considering economic union when the 12 member states can from time to time, by adjusting their interest rates and their monetary policies, alter the terms of trade for their own benefit.

Monetary union is now before us and is presented in the report as a desirable measure in the interests of a combined trading Community. There is no difficulty in approving monetary union but problems arise when we consider how to attain it and, when we have attained it, what controls we shall place over the Community institutions involved. Those are the two crucial questions which are not really dealt with by the report except in relation to the hard ecu. However, that is only relevant to the establishment of the single currency and is not really part of the present debate, which concerns whether or not we want monetary union.

We are facing the conversion of 12 national currencies into one European currency. I do not believe that that is entirely the simple process that the noble Lord, Lord Cobbold, suggested. We start with 12 currencies, some of which are more exchangeable than others, and each of which is subject to market forces and dealers' appreciation of the rise and fall and the background of the relevant national market economy in the immediate short term.

The United Kingdom has oil and gas reserves and a large international exchange system in London. Other countries have other assets and liabilities such as national debts and international loans and liabilities. We shall need to devote a lot of thought to achieving one currency out of that tangle. As the noble Baroness, Lady Elles, said, at the end of the day we shall need an Act which authorises the exchange of our currency (against the background of the exchange of the other 11 currencies) into the Community currency. It is that factor which we should now concentrate on. It is only right and proper that the Government should emphasise to the business world and to the population generally that this is the stage that is now being embarked upon. The Government should emphasise that people will not simply find ecus in their pockets instead of pounds in, say, a week's time, but that a great deal of background work will now be required over a long period of time.

On that point, mention has been made in the debate of the suggestion of a convergence of values. When mentioned in the report, that does not mean, as some noble Lords have suggested, the equalisation of wealth within the 12 member states, or if it does that should be made abundantly clear at this stage. I suspect that it means nothing of the sort. I believe that the phrase is being misused to frighten people off the idea.

Having achieved the second stage, and in due course having overcome the problems of the establishment of the Community currency, we shall then have a level playing field. We shall have that because the central bank will exercise interest rate and monetary control in the interests of the Community as a whole and not, as now in this country, for the benefit of our community here. That is a significant difference in practice which will emerge. Exactly the same position applies to other powers which are now being transferred to Europe, such as merger control. The Commission should exercise its merger control operations in the interests of the Community as a whole.

Those limitations mean that, if there is to be political control, that political control should be exercised by a democratic Community organisation and not by the national governments and elected authorities of the 12 member states. It has been suggested—by the noble Lord, Lord Barnett—that the governments of the 12 member states will exercise control over the central bank. I do not think that that is right. I believe that the control has to be exercised on an entirely different basis. That should be made clear.

The one remaining point that I should like to make is that if we accept monetary control on the basis of the doctrine of the level playing field there will also be control over direct and indirect taxation throughout the Community, partly through the necessary market forces but probably by the means of further community directives. I know that that concept is not being bandied about at present, but if one establishes a level playing field and one has a single currency and there is also transferability of money and of labour, then the labour and the money will move to those places where the most profit is to be made. Therefore it is no good one member state thinking that it can exercise its taxation policies, for example, for the equalisation of wealth within its boundaries. That would immediately cause an outflow of capital and an outflow of labour. The Community would then step in and say that it wanted a level playing field and that taxation must be organised and laid down within bands.

I hope that I have issued a note of warning that we are going down a path which is leading into future difficulties and other matters which are far more complex than are mentioned in this report.

9.45 p.m.

Lord Stoddart of Swindon

My Lords, although I commend its diligence and congratulate the Select Committee on a well written report, nevertheless I cannot welcome it. In my view its recommendations compromise the remaining freedom and independence of the United Kingdom. Too much power has already been ceded to institutions outside this country and not under the control of the British people. Too many decisions are being taken which are not in British interests but in favour of countries whose interests are inimical to ours.

The noble Lord, Lord Geddes, might very well consider those words to be emotional rhetoric. He will hear some more in a moment. I was most concerned to hear him say that the patience of our European partners is exhausted. I felt a nasty, cold clamp over my heart when I heard that phrase because the last person whom I heard use it was Adolf Hitler before he launched his Blitzkrieg on Poland. I must tell the noble Lord that I do not care two hoots if the patience of our European partners is exhausted. It is right and proper for the Ministers of this Government—of any British government—and in particular the Prime Minister to stand up for British interests no matter how much that may exhaust the patience of our European partners. I hope that future Prime Ministers will do that in the same manner as the present Prime Minister, who has been so shamefully deposed today by the Tory Party.

Having got that off my chest, I must say that so far membership of the EC has brought only high costs in economic terms and few, if any, benefits. In his speech my noble friend Lord Bruce of Donington described how we have reaped very few benefits from the EC, and so far as one can see there have been no benefits at all. We have been told of the benefits of trade. The only way in which there is any benefit in trade is when one makes a profit. At the moment, and indeed for the past 10 years at least, we have been making a loss. Therefore there has been no benefit of trade. Last year our loss was £15 billion; this year the loss will be about £14 billion. That is not a benefit. It is detrimental to this country. Therefore, my noble friend Lord Bruce was right to draw that fact to your Lordships' attention.

In political terms our membership of the EC has done little to enhance Britain's influence abroad and in some ways has diminished it. Furthermore, as we are now experiencing, the EC issue is causing severe political stresses and strains at home, splitting asunder the Tory Party and threatening to cause it permanent damage. I do not care particularly about that but I am sure that noble Lords opposite feel that that is not a good thing. Nevertheless that issue has caused the damage at the present time.

My party, the Labour Party, while enjoying for the moment the spectacle of the Conservative Party at war with itself, is no more united over the European issue than its opponents. When Labour attains office at the next election, the Euro-conspiracy will cause havoc in its ranks too, as the Euro-fanatics try to force a Labour Government along the path of destroying Britain as a nation state and creating instead a monster Western European super-state through federation or a unitary state, complete with an overbearing centralised government. That is some emotional rhetoric, is it not, my Lords? I hope that the House enjoyed it. There is more to come!

If the movement towards ending our nationhood emanated from the grassroots, from a demand by the people of this country for complete integration into a Euro-state, it might have some respectability. But it does not come from the grassroots. It does not come from the people in this country. The demand is from a select group of people in high places whose self-interest takes first place over the real interests of Britain and her people.

It is not surprising that there is no groundswell of opinion in favour of the moves recommended by the Select Committee. Ordinary folk are confused about the issue. As we have seen in the debate today, many people are themselves confused. God help the British people; they cannot help but be confused under the circumstances. They hear conflicting evidence.

Let us take the ERM. Before we entered the exchange rate mechanism, the British people were told that we must do so if interest rates were to fall and inflation to be reduced. Nobody told them before entry that the long-term consequences would be lower living standards and higher unemployment. Certainly the fact that the economic crisis was caused by our de facto membership of the ERM since 1985 through the shadowing of the deutschmark by the pound was hidden from them.

Now that Britain is locked into ERM, it is being made clear every day to ordinary people that it is they—not the bankers and others in the City who forced ERM upon us—who must bear the adverse consequences and cost of ERM membership. The Chancellor in his broadcast a week ago last Sunday made it absolutely clear that the British people will bear not only the cost of ERM but the cost of a single currency and EMU. Working people in Britain will be made to pay the price in both economic and political terms.

We are now being told that if we do not proceed along the lines proposed by the Select Committee and others we shall be isolated in Europe. That really is rubbish. Other European countries cannot afford to isolate Britain. With a trade deficit of £15 billion they need us more than we need them. Let us make no mistake about that. However, perhaps a little more isolation from the EC might help us re-integrate with the remainder of the world. After all, 53 per cent. of our trade is still with the remainder of the world outside Europe. There is a big world outside the EC and we ought to remember that. This concentration on the EC is helping to lose us markets elsewhere.

Lord Aldington

My Lords, that really is rubbish, if I may say so.

Lord Stoddart of Swindon

My Lords, it is not rubbish. It is far too easy to say, "There is Europe, there is your little market. Concentrate on that. Don't worry about anyone else". The wide world consists of 5,000 million people, not 330 million people.

We have heard of convergence. The report refers to convergence. Convergence is a wonderful thing. The word rolls off the tongue more easily than ERM or a single currency. But what is convergence? We have not attained it in this country yet. There is no proper convergence between Northern Ireland and the United Kingdom or between Scotland and England. There is depopulation in those two countries because convergence has not been attained. How are we to attain this convergence? How much is there to be? What will it cost? At the present time we contribute about £2.2 billion to the EC. Are we to contribute a lot more? Some estimates have put our future contributions at much more than that. We need to know the answers to those questions.

In the last analysis—this must be fully understood and it matters not whether we are in the EC or out of it—if this country is to be successful there are no panaceas. There is no panacea in the ERM and no panacea through the EMU or a single currency. If we are not to be depopulated and impoverished there is only one cure for our ills; it is to pull ourselves up by our own bootlaces. That means taking the actions necessary to do so and for a British Government to put our economy right. It can be done no other way and it is about time that we started to do it.

What of the view of the people? As things stand they will not be asked for their opinions. They will not be allowed to decide the issue any more than they were allowed to before Britain was dragged into the EC in 1973 by Edward Heath. Instead, the vital decisions will be taken by a Parliament which so far has shown itself all too ready to cede its decision-making powers to institutions alien to our traditions and by methods which bypass any democratic process. But Parliament has forgotten that in the last analysis it is a mere trustee of the people's sovereignty and not the owner. It is not Parliament's to give away. In this context it must be seen as an amazing paradox that, at the same time as the countries of Eastern Europe have demanded and obtained a return of their nationhood after 40 years and in the Soviet Union after an even longer period the constituent republics are demanding independence, our Parliament should be contemplating measures to undermine our nationhood and compromise our independence.

One of the problems for the people of this country at present is that there is no political party articulating firmly and clearly its fears about and basic opposition to EMU and political union—although the Labour Party has serious and important reservations. A cross-party consensus is developing among those opposed to the present direction and speed of European integration. It will increase as time goes on, but that may not prove to be enough. There is a danger—people may laugh at the suggestion—that a new political party might emerge, perhaps of the extreme Right or even of the extreme Left. It may be a British independence party or, as the Scots do not like the idea of a British independence party, perhaps for the first time ever an English National Party.

I believe that such a development would be unfortunate and undesirable. But if those who, on the one hand, swear allegiance to Her Majesty, her heirs and successors, continue, on the other hand, to undermine the integrity and independence of Her Majesty's realm to the extent that there may be nothing left for her or her heirs and successors to rule, it might be the only course left to save the country that we serve and love. The noble Lord, Lord Aldington, said "Good Lord!", but I believe in what I have said and I hope that he listened carefully.

10 p.m.

Lord Monson

My Lords, I am delighted to follow the noble Lord, Lord Stoddart of Swindon. No doubt I shall pick up one or two of his themes. I join other noble Lords in congratulating the members of the Select Committee on the hours of hard work which they obviously must have put in. The report is well written and well produced. Its conclusions are perhaps another matter.

I do not wish to say too much about the EMU, given the time of evening and the technicalities of the subject. However, a second potential big lie must be smartly knocked on the head before it has chance to take root. The first big lie was that before the advent of the modern nation state the whole of Europe was a haven of peace, tranquillity, harmony and brotherly love and that only the formation of the EC after the war, to supersede the supposedly wicked nation state, has prevented a third world war. That is absolute nonsense. If I had an hour to spare, I should develop the theme in great depth.

The second big lie is that it was Mrs. Thatcher's robust defence of British self-determination in the face of creeping federalism which led to her becoming electorally unpopular. That is the precise opposite of the truth, nowhere more forcibly demonstrated than in a MORI poll published in the Sunday Times on 18th November.

The poll set out the political consequences of each of three options. If Mrs. Thatcher remained Prime Minister with, by implication, no change in policies, the Labour lead would be 9 per cent. If Mr. Heseltine replaced Mrs. Thatcher and initiated the major modifications of the poll tax which he had publicly promised, the Conservative lead would be 1 per cent. However, if the poll tax were to be abolished with, by implication, no change in the leadership, the Conservative lead would leap to 10 per cent.

In other words, it is not suspicion of federalism and other forms of Eurofanaticism which made Mrs. Thatcher unpopular among the public at large; quite the reverse. It was the wretched poll tax. In other words, the continuation of Mrs. Thatcher in office, shorn of the poll tax incubus, would have given the Tories a lead in the polls 10 times greater than that resulting from Mr. Heseltine stepping into her shoes.

Of course outright abolition of the poll tax is now difficult and perhaps impossible. If it could have been made swiftly less of a burden upon those earning less than the average wage, perhaps with the shortfall made up from higher taxation of those who have done so well out of the abolition of the domestic rate—by limiting tax relief on mortgage interest to the standard rate of tax or something along those lines—Mrs. Thatcher would almost certainly still have been in office in 1991.

It is too late for all that now. However, the point I wish to make is that it is not Europe—as it is usually misdescribed—which has dished Mrs. Thatcher. Indeed, the opposite appears to have been the case: her attitude as regards that seems to have been popular. It is the poll tax or, at any rate, the unfair manner in which it impinged on the lower paid.

As to the EMU, there are many conflicting views among the experts as to its precise economic benefits. The noble Lord, Lord Aldington, cited the Cecchini Report. That report envisaged a growth in GDP of between 5 and 7 per cent. as a result of EMU. If that forecast is correct, it may well be worth throwing caution and tradition to the winds. On the other hand, the Treasury is much less optimistic about the advantages of joining the EMU. If the growth in GDP were to be only of the order of 1 per cent., the consequential disadvantages of joining might well outweigh the advantages.

There are respected economists and others who believe that the EMU would be positively disadvantageous, as currently envisaged. They include Sir James Goldsmith. The fact that Sir James got out of equities totally in August and September 1987 proves him to be a man of acute intelligence and uncanny foresight. I suggest that that demonstrates that EMU should be approached with extreme caution.

I turn to political union. Perhaps I may first ask why unity is automatically assumed to be a self-evidently desirable objective. Unity has nothing to do with friendship or co-operation. I have a great many friends and I co-operate with a great many people. But I do not want them living in my house; still less do I want them to tell me what to do in my life.

A dozen years or so ago a well-known journalist wrote in the Daily Telegraph that post-war West Germany had about as much personality as an airport lounge. We face the danger that Western Europe as a whole may end up with about as much personality as an airport lounge. Diversity is surely more interesting than unity.

Why is there the determination for unity at all costs? The answer clearly lies in history. In an excellent speech on this subject last week, the noble Viscount, Lord Eccles, pointed out that we were the only country in the EC to have something like the Battle of Britain Sunday about which to feel proud. Continental countries have either been occupied by foreign powers or have been dictatorships. As Sir Fred Catherwood pointed out in his evidence to the committee at page 187 of Volume II: For almost all [member states] the war was a failure and the Community has been a success. For Britain the war was a success and … the Community has seemed a failure". Moreover, fully half of the EC countries are 19th or 20th century creations—Belgium, Luxembourg, Germany, Italy, Greece and the Republic of Ireland. Many of the other countries have centuries of creative achievement to look back upon in the fields of science, engineering medicine and architecture as well as in painting, literature and music. However, they have a good deal less to be proud of in the realm of government; in other words, in the political sphere. For example, France must face the excesses of the French Revolution and the fact of widespread collaboration during World War II. The Danes, who were formerly sceptics like ourselves, are now scared stiff by the idea of a united Germany.

I must therefore suggest that the noble Lord, Lord Cledwyn of Penrhos, missed the point when he remarked that it cannot be true that Britain is right and the other 11 wrong on all issues—I hope I copied correctly what he said. Of course that cannot be true. In the main we are right from our perspective and the other 11 are right from their perspective, and rarely the twain shall meet. Their perspective is formed by geography as well as history. Their very location turns them inward and gives them perhaps a subconscious hankering for the recreation of the Holy Roman Empire. By reason of history as well as geography we are essentially Atlanticists, as are the Portuguese, and we will always remain Atlanticists to a considerable degree. It is difficult to exaggerate the hostility and suspicion of the Continent towards Japan, despite its relatively small population of 122 million people. There is a similar hostility towards the United States, with a population of 227 million, as well as to Canada, Australia, New Zealand, and so on.

I love France. I go there frequently and have a good many friends there. It is the place I should most like to live if for any reason I could not live in Britain. But it must be said that while they generally much regret the killing of the Portuguese photographer, the majority of the French fully support the action of their government in sending their secret service to sink the "Rainbow Warrior". They greatly resent the fact that on that issue, as on many others, the British support the New Zealanders rather than the French. The French consider our attitude to be not communautaire, and that it brands us as bad Europeans.

It must be faced that for most Continentals the EC is almost a religion. Any fundamental criticism of it is heresy and about as welcome as a bevy of carol singers in Saudi Arabia. That is why all talk of Britain being able to influence events by jumping on the train is fanciful in the extreme. We would not be able to apply the brakes singlehandedly or to jump off at a moment when the train is trundling along in order to alter the points and switch us on to a different track. I am not talking about the gravy train—we are discussing one aspect of that next Wednesday and the other aspect is properly condemned in paragraph 146 of the report—but about the semi-sacred mystery train setting off to an unknown destination in pursuit of what my noble friend Lord Harris of High Cross termed the Holy Grail.

Nothing better illustrates this than the naive assumption that had we joined the Common Market at the outset it would have prevented the excesses of the common agricultural policy. The CAP had virtually nothing to do with economics and everything to do with politics. It was a piece of social engineering designed to keep inefficient peasant farmers on the land for fear that they would otherwise drift to the cities and form a potentially revolutionary proletariat who would vote for communists or other extreme Left-wing parties. Faced with that situation, Britain's advice would have counted for almost nothing. That is not my analysis, it is a matter of historical record.

We should look with extreme suspicion at any suggestion of giving more powers to the European Parliament. One reason is that given by the noble Lord, Lord Barnett. I am glad to be able to agree with him on at least one issue: that the European Parliament can vote for spending but has no responsibility for raising the money on which that spending is based. Another reason, as I pointed out on an earlier occasion—

Baroness Elles

My Lords, did I hear the noble Lord say that the European Parliament was responsible for raising money in the European Community, or did I misunderstand what he was saying?

Lord Monson

My Lords, indeed it is not responsible and that is the whole problem. The European Parliament can vote for spending but does not have the responsibility for raising the money. It has the power to vote for spending in an irresponsible fashion.

Baroness Elles

My Lords, with respect to the noble Lord, the European Parliament has no power over spending. It has the power to amend one-third of the budget which is proposed by the Commission and agreed by the Council of Ministers. The power of the European Parliament is extremely limited in regard to expenditure.

Lord Monson

My Lords, perhaps I should have referred to indirect spending; in other words, the European Parliament can vote for policies which will cause member states of the EC to incur expenditure which, in the absence of resolutions or directives emanating directly or indirectly from the European Parliament, they would not have otherwise incurred. The taxpayers of the country concerned would not have had to fork out for those expenditures.

Another reason, as I have pointed out on earlier occasions and as the noble Lord, Lord Cockfield, will remember, is that because of the allocation of seats in the European Parliament Britain could be outvoted on a matter affecting our vital interests by a coalition of smaller countries whose total populations are less than 53 per cent. of our own. I know that the noble Lord, Lord Cockfield, said that that came about because of a deal done many years ago, and I accept that, but it does not make it any more palatable.

I was delighted to see that Mr. Andrew Duff—who nobody can accuse of not being a Euro-enthusiast—in his evidence to the committee said he believed that, Seats won must match broadly votes cast". That is on page 263 of Volume II. Then again, the Financial Times—nobody could possibly accuse that paper of being inimical to the EC in any way—in its issue dated 27th October painted a vivid picture of the European Parliament. It described a visit to the European Parliament of Virgilio Barco, the drug fighting president of Colombia. The article states: Barco was perplexed to find half his audience wearing black arm bands and waving home made cardboard tombstones for people allegedly murdered by the Colombian Government". The article later described the chamber: The left side is dotted with youth and colour. A German Green with spiky hennaed hair in a multicoloured kaftan kisses a like-minded Dane". The Financial Times did not say whether the Dane was of the same sex as the German or the opposite sex. It continued: Near her a British leftie in a rugby shirt yawns over the sports page of the Guardian". I know that there are also many splendid and hard-working members of the European Parliament, but to what extent should our future be in the hands of German punks in multicoloured kaftans?

Paragraph 143 of the report speaks of, the spectre of arbitrary and unnecessary intervention from the centre", implying that there is a great deal of fuss about nothing and that the "spectre" is not to be taken seriously. That is not so. Why should the people of one country have the right to interfere in the shooting seasons, the speed limits or the degree of water purity of any other country? Why should any outside or foreign body prevent the British Government from building a road across Twyford Down or building another road through a wood in order to complete the East London crossing? It is every concern of the British. We have every right to object and I do not like some of these proposals myself. However, these matters are not the business of anybody else in any other country.

I deplore the extension of the TGV line through virgin country from Montélimar to Avignon, and Aix-en-Provence to Nice. I greatly sympathise with the people of Provence in their opposition to the construction of this line. But in the final analysis it is their business and absolutely none of mine. Therefore, I totally oppose the proposal for the extension of majority voting to environmental matters except in those rare instances such as acid rain, pollution of the oceans and smoke pollution, where the consequences transcend national frontiers.

10.16 p.m.

Baroness Seear

My Lords, until one hour ago I intended to begin by saying that there had been remarkable uniformity in the support and praise for this report. However, recent speeches have led me to believe that there is more diversity of views in your Lordships' House than the earlier speeches had suggested. It will not surprise your Lordships that we on these Benches who claim to be the Stone Age Europeans and totally undivided supporters of the EC from its inception welcome this report wholeheartedly. I shall not take up too much time congratulating the noble Lord, Lord Aldington, and his team because everybody else has done so. I am sure he will accept that our enthusiasm and gratitude are great. They have been much enhanced by the speeches made in the last hour, which have shown how great is the need for clarification of the kind that this report has given us.

There are a number of points raised in the report. Among those who support it in general terms there is a great deal of agreement about those points. The rejection of the hard ecu, with the exception of the support for it from the noble Lord, Lord Selsdon, has been widespread. The reasons given for the rejection have been extremely helpful to those of us who find the intricacies of the currency arguments not too easy to unravel.

There is widespread agreement that there is a need for more democratic control over the developing institutions of the Community. Those views have been very well and valuably expressed and discussed in the report. I believe that all of us will agree that this is a very important feature to which great attention needs to be given.

There are those of us who believe that the institutions of the Community must be developed and that enlargement will come. At the same time there must be a deepening of those institutions. There must also be concern about the democratic element. As the report has stressed, these measures have to be achieved in two directions; namely, in greater links between the national parliaments and the institutions of the Community and in more detailed suggestions about the way in which the Houses of Parliament and the MEPs can have closer contact. Those proposals are valuable and need to be followed up and put into practice as soon as possible.

There should be more power for the European Parliament, though there is considerable diversity of opinion about how much power it should be given. Those of us who are in favour of the report in general terms believe that the parliament needs to be strengthened and made more democratic.

In making the parliament more democratic, one step that could be taken very quickly, and taken unilaterally by the Government in this country, is to change the voting system to the European Parliament so that at least it would be more democratic in its representation of the voters of this country. If that was done, it would be more in line with the requirements of the treaty, which have always laid down that elections for the parliament should be on a common basis. But that is, as it were, in parenthesis. There are developments for the increased democratisation of the Community which we would all very much support.

The points raised by Members of your Lordships' House who have, to some degree at any rate, if not totally, supported the report, have centred around the question of sovereignty, and also around the way in which power is to be distributed throughout the Community and throughout the nation states within the Community. This is another aspect, I suppose, of the issue of sovereignty.

I must say that as I listened to the noble Lord, Lord Benson, I could not believe my ears. When he described to us the edifice from which we would be retreating, or rather the edifice from which our great-grandchildren would be retreating, in 50 years' time, I could not begin to comprehend that that was the kind of organisation we were building. There is no suggestion, as I understand it, of a great super state with strong central powers which will dictate not only to the Twelve, but to all the other countries which are likely to join together. It would be a ludicrous conception, and I am quite certain that it is not the conception that was held by the members of the committee of the noble Lord, Lord Aldington, or by any of the rest of us who are greatly in support of further developments inside the Community.

But we have to think in more detail about how power is to be distributed. There are clues given in the report in terms of interpretations of the idea of subsidiarity. The noble Lord, Lord Cockfield, said that too much can be made of the idea of subsidiarity, and it has been said—I forget whether the noble Lord himself said it, but it has certainly been said on a number of occasions—that people who do not wish to see the Community develop hide behind the idea of subsidiarity to halt the kind of development which is necessary.

However, there is more to it than that. We need to know what decisions are to be made and at what level. It is not only a question of what decisions are to be made by the parliament, by Brussels and by the Council of Ministers; of how power is to be distributed at that level; and what decisions are to be made by national governments. Also, surely, in the Community of the future, especially if it is enlarged, there are likely to develop regional areas, perhaps regional groupings, which will themselves want to take decisions in respect of their own affairs.

We see this happening inside the United Kingdom. In Scotland, there is an urgent demand for more control over their own affairs. The noble Lord, Lord Cledwyn, never loses an opportunity to tell us how important it is that the Welsh should be able to control what goes on in Wales, where something is relevant only to Wales. You have only to look across into continental Europe. There are problems to be settled with the Basques, the Catalonians and a whole variety of other groups who will demand that they have control over their own affairs. If the freed countries of Eastern Europe join, either directly or in some associated status, they, too, will make demands of the same kind. I was recently talking to an enthusiastic politician from Slovenia. He could not wait to get away from Belgrade. In the future, those regional groupings will be part of the Community, whatever kind of shape it takes. We too must think in such terms. We must consider the huge question of how power is to be distributed.

I absolutely agree that we cannot here and now say how that power will be distributed. In contradiction of the nightmare put forward by the noble Lord, Lord Benson, that what will emerge is a highly centralised state trying to control by diktat throughout the whole European Continent, we can emphatically say that that would be madness and that it would receive no support. Moreover, it is not what any of us who have supported the European idea for decades have been working for. We cannot make that point too clear.

The most disappointing speech, although perhaps not unexpectedly so, came from the noble Earl, Lord Caithness. The impression of the Government's attitude which we were given was that in reality what they want, and what they should always have settled for, is a free trade area. They see the Community as an economic community giving opportunities which arise through a large unified market; and that is the beginning and end of the matter. That is why the Government have been so unwilling to take the lead in going along with the development of the European Community along the lines which have been suggested and which are supported by the noble Lord, Lord Aldington, and his report.

The idea of the single currency, having received widespread support in other areas, was turned down out of hand by the noble Earl. His attitude towards those who criticise the Government and towards those who support the development suggested by the noble Lord, Lord Aldington, was condescending and patronising.

I have no doubt that the noble Earl's speech was written before today. Perhaps this is indeed an historic day on which to be discussing the Future of the European Community and our place in it. Whatever one may feel about the changes which have taken place today, it must be true that this gives us an opportunity for a new start in our relations with the European Community. Whoever it is who goes to Rome he will perhaps not be hamstrung by the decisions and statements which have come from the Government in the past. It is to be hoped that what we heard today was in every sense yesterday's speech.

One of the problems which we face is that the European Community is a totally new conception. There is no precedent in human history for the Community. We are always trying to find parallels where there are no parallels. We set out to create something which is new in terms of the way in which human beings organise themselves as nations and as communities. However, as we set out, we do not know where we shall arrive. We should do much better if we accepted that uncertainty as part of the conditions under which we are working. It is a little like Christopher Columbus setting out to find the East Indies and in fact discovering America. It was a much greater achievement than he anticipated and one which was totally unexpected.

Because this is a new concept, the language we use to describe it is never quite right. I much regret—and I speak now more for myself than for my party—that the word "federal" is so much used. It conjures up in people's minds a picture which is false to the Community. On hearing the word "federal", the vast majority of people in this country think about the United States of America. The United States was made up of people who had voluntarily abandoned the old world and deliberately, and of their own volition, set out to reate a new country and a new nation. Nothing could be less like that than the European Community, which is the coming together of old cultures. They come together because they see a common interest and a common benefit in so doing. That has never happened before in human history.

It is not surprising that we are confused. Let us not confuse ourselves further by using misleading language. As it is so difficult for us to know precisely where we are going, it is equally difficult for us to know the route by which we shall get there. As we struggle with the objectives and with the route, and as we work at the constructive conflicts that that journey involves, we shall learn what it is we are trying to create and the best way to create it.

10.30 p.m.

Lord Williams of Elvel

My Lords, we have come to the end of a long day's debate. I, as others have, congratulate the noble Lord, Lord Aldington, and the committee on their report. He must be feeling somewhat less shy at the end of today than he proclaimed himself to be earlier this afternoon.

I want to stress, as did the noble Lord, Lord Carr of Hadley, that this is possibly the most important issue in politics that we shall continue debating during the 1990s. The noble Lord was right to say that Members of another place should recognise, if they do not already recognise, that these are matters which affect and will affect their constituents directly, and that it is therefore of supreme importance that both Houses of Parliament take an intense interest in what is going on and what will develop over the next few years.

I have only two small criticisms of the committee's report, and I offer them in the friendliest possible spirit. The first is that in view of the paragraph on convergence—I shall come to convergence later—I was disappointed that the committee did not take evidence—I understand that it was under considerable time pressure—from the Portuguese, the Greeks, the Spaniards and the Danes—a Dane did give evidence but I understand that he was speaking for the Commission. Their countries are those on the periphery of the Community which may have a word to say about convergence if we go right through to the EMU single currency.

My other slight criticism is that I believe that the operation of the monetary compensation allowances—the green currencies—in the Community might have given us some insight into how a common currency might work, because the monetary compensation allowances have had to be devised as a form of regional policy, and a form of regional policy will have to be devised with a single currency. I shall return to that point later. They are slender and small criticisms only, which I offer in the friendliest possible spirit to the noble Lord and his committee.

I say to the noble Lord, Lord Hesketh, who is to follow me, that I appreciate the difficulty in which the noble Earl, Lord Caithness, and the noble Lord find themselves. I say that sincerely because they must respond for the Government, and yet within one or two weeks we shall have a new Prime Minister, a new Cabinet and a new Government. It is extremely difficult to make any commitments on behalf of any new Government which may be in office only two weeks from now. Whatever the noble Lord says, we shall have to take it with the due qualification that I am sure he would impose.

I intend to deal more with economic than with political matters, although the two cannot, as the report rightly points out, properly be separated. The noble Lord, Lord Harris of High Cross, was too emphatic when he said that he knew nothing about politics and was dealing with economics only. These are matters of politics and economics and it is a great mistake to try to separate the one from the other.

It was a year ago only—on 18th December, 1989—that your Lordships debated the Select Committee's report on the Delors Report. On that occasion, we from these Benches said that, first, we were in favour of British entry into the exchange rate mechanism, but on the basis that there would be tough negotiation about the rate. We would not jump in blind. Our support was on the basis that the swap arrangements inside the mechanism would be increased to accommodate sterling, which is the second most highly traded currency in the Community. It was also on the basis that there would be emphasis on a growth pattern, a co-ordinated economic system within the Community.

The first two conditions—tough negotiations and swap arrangements increased—were not envisaged by the Government. They jumped in blind at the wrong moment and there was no attempt to increase the swap arrangements. However, the third condition, which is tantamount to mutual surveillance of economic policies, is starting to appear, if it is agreed. We are pleased about that. The second point we made in that debate from these Benches was that we did not regard the Delors model stages two and three as necessarily the right model for the future. We thought that both stages had serious disadvantages.

The problem that most exercised us in that debate and still exercises us today is the so-called independence of the central monetary authority. The noble Lord, Lord Cockfield, rightly pointed out that one of the services the report had done us was to demonstrate that a number of the buzz words used were simply a substitute for thought. I tend to think that the word "independent", when we talk about a European central hank, is one of those words.

If we consider the status of the Bundesbank, it does not take long to see, if I can rely on Mr. Schlesinger, who is the vice-president of the Bundesbank and to whom I talked the other day, that on only two occasions in the past 30 years has the Bundesbank gone against the advice of the finance ministry in Bonn in any of its actions in raising or lowering interest rates. It was quite clearly shown by the chancellor of the Federal Republic that when push came to shove on re-unification, the Bundestag could remove the independence of the Bundesbank by a simple vote. That was pointed out. The result was that the Bundesbank went along with something it had not advised. Furthermore, Dr Pöhl is quite right when he says that the Bundesbank pays attention to the generality of economic and financial policy of the Federal Republic. It is quite proper that it should do so.

My noble friend Lord Murray of Epping Forest made an important point. It was that we cannot simply separate monetary policy from fiscal policy and from social policy. They all go together. There must be some method of accountability imposed upon whatever monetary authority runs the monetary unit, the single currency or whatever we get to: it must have some democratic legitimacy. I put it like that because it is an important concept. It is not simply accountability to the Council of Ministers; somebody must control it democratically.

We do not think that government control of monetary policy started in 1946. I have a difference of opinion with the noble Lords, Lord Cockfield and Lord Plumb, on that matter. Governments have always been interested in monetary policy. After all, Mr Churchill put us on the gold standard in 1925. If that is not government interest in monetary policy, I do not know what is. As regards a European central bank, if I may use that catchphrase, one of the points on which we insist is that there must be some strong political control, not just accountability.

I join with the noble Lords, Lord Cockfield and Lord Roll of Ipsden, and the noble Baroness, Lady Elles, in complaining about the phrase "imposition of a currency", which I believe the noble Earl, Lord Caithness, used three times in his speech. There is no means of imposing a currency on the United Kingdom. Such a proposition would have to pass through your Lordships' House among other institutions and be subject to a vote taken in Parliament. However, I recognise that the debate on the single currency has moved on since we debated the measures of the Delors Committee almost a year ago. The debate has moved on in two respects: first, it has moved on because the political momentum has moved forward and gained pace and, secondly, because the Government have produced a hard ecu plan.

I do not intend to spend a great deal of time discussing the hard ecu plan because the noble Lord, Lord Cockfield, effectively put that to bed. Further, the noble Lords, Lord Roll of Ipsden and Lord Selsdon, pointed out that it would perhaps have been acceptable as a separate standard. I believe those were the words that were used. That might have been the case 10 or 15 years ago, but unless it can be demonstrated that it is not just an illusion or a trick produced by the Government and that it would lead quite quickly to a single currency, it does not seem to me to have any political merit as regards the discussions that are taking place. Until now no one has managed to demonstrate the contrary.

However, the single currency argument which has moved forward has brought us up against the problem of convergence. Here the report is eloquent. As I have said, it is sad that evidence was not given by some of the countries in the Community whose people I would have thought would be most disadvantaged by a move towards either irrevocably fixed exchange rates or a single currency, for example, the Greeks, the Portuguese and perhaps the Spanish. Perhaps Dr. Pöhl thinks we are on the fringe of those in the Community who might be disadvantaged by moving in that direction.

My noble friend Lord Briginshaw pointed out that the Eastern European countries would fall into the category of those who are not even near the edge of being convergent with us. When we talk about convergence I assume we mean upward convergence rather than downward convergence; in other words we are saying that we would all like to reach up to the highest level rather than drag the German economy, for example, down to the average level. I imagine that is right, but the point has not been hitherto stressed in the debate. As the report quite rightly points out, convergence is not just a question of convergence on inflation. It is convergence on all kinds of economic parameters. There may be a trade off between a slightly higher inflation rate and a slightly lower unemployment rate. We may have to consider all these matters.

I am glad that at paragraph 92 the report sets out the possibility of what I call staggered entry. The report suggests that it might be possible to create something which was relevant to a number of countries at one particular time. However, until convergence was further advanced other countries might not wish to join immediately but would perhaps like to join within a set timetable. We would resist the idea, as other noble Lords have done, that one should impose absolute dates when this should happen. The date at which states wish to join in monetary union will depend on how well they do. The noble Lord, Lord Carr of Hadley, made that point and I support him.

I now return to the monetary compensation amounts. If EMU is to hold together, it will certainly require substantial transfer of resources from one country to another, either in the form of the structural funds or in the form of a rather more developed regional policy. There are obviously serious imbalances in the European economy and if we enter monetary union too fast the whole thing will fall apart because of those imbalances. It is better to make haste slowly, to try to get the thing right and to try to make sure that there is a system to stop the Scots, the Welsh, the Galicians or the Catalonians suffering just because of a haste to enter monetary union.

It is the Federal Republic of Germany that will be in the firing line. Will the German economy, which will be the dominant economy in Europe in national terms over the next few years, be able to sustain not only the reunification of Germany but also the substantial transfer of resources to the poorer members of the Community which will have to take place? I have very serious doubts on that point. The Germans quite rightly believe that German reunification is the most important item on their financial agenda. Not just billions but trillions of deutschmarks are being poured into East Germany. There is not much point in asking Germany to take part in an EMU which includes the development of the structural funds and a regional policy involving inter-country transfers if it is so concerned about the reunification of Germany and the financial investment which that involves.

We have to ask ourselves how that will operate. There are many questions to be answered. Noble Lords have put some of those questions, and there will be others which have to be answered before we can form a final view. No doubt the shape of those questions will come out in the two IGC conferences which are about to take place. However, it is perfectly clear to me and to us on these Benches that the other members of the Community will go ahead on the basis of their own timetable. We cannot be left behind. The problem we would then have to face would be not whether EMU is or is not desirable for us but to what extent an EMU which left us out would leave our economy in an impossible position. It is the recognition of that inevitability which should spur us to participate actively in shaping the course of events.

It is just as important to ensure that our own economy moves out of its present weak position. That will require long-term policies to be put in place which are quite different from those of the past few years.

In principle, to adopt the words of the noble Baroness, Lady Elles, we believe that it is in our national interest to join actively in the process towards EMU. In principle we have no objection to a single currency on the assumption, as my noble friend Lord Barnett said, that it is a long way off. It will not happen tomorrow. We must obviously wait to see what form of single currency emerges from the discussions. But if we want to be part of it - whatever it may turn out to be - we must put our own house in order first, and that we can only do ourselves.

10.47 p.m.

The Minister of State, Department of Trade and Industry (Lord Hesketh)

My Lords, we have had an interesting and thoughtful debate this afternoon. However, if I were a betting man and had been asked before the start of the debate in your Lordships' House today whether or not we should be discussing the "Rainbow Warrior" or carol singers in Saudi Arabia I should have lost my money.

I, too, should like to pay tribute to the work of the committee chaired by my noble friend Lord Aldington. The committee's report reflects months of hard and productive labour. The committee has taken evidence from nearly all the key players in the EMU and political union debate. It has travelled to Europe. Through the course of the summer and early autumn it has had to contend almost daily with new developments in a continually shifting debate. Whatever happens in the course of the intergovernmental conferences which begin on 14th December, I am convinced that the report will be an important reference work for many years to come.

There is much in the report with which the Government can agree. We agree that member states should retain control over budgetary policy and that there is a need for greater economic convergence. We agree that the next stage of the EMU process is of key importance; and that the single financial area should be completed. On the political side, we agree that there is a need for a pragmatic and consensual approach which will improve the efficiency of the Community. We also recognise that Community institutions should be democratically accountable, and that the principle of subsidiarity should be clarified at the IGC.

But we cannot agree with the main recommendation of the report—that the Government should accept the goal of a single currency. The imposition of a single currency would involve a considerable transfer of sovereignty over national monetary policy to a European central bank. I do not believe that this would be acceptable to this Parliament. Indeed, it was decisively rejected in another place.

Moreover, we do not believe that the Community is ready for a single currency, for economic convergence among the 12 member states remains a long way off and we must consider their relative economic performance, as my noble friend Lord Selsdon pointed out in his notable speech.

Inflation ranges from 3 per cent. to 22 per cent; short-term interest rates range from 8.5 per cent. to 19 per cent; long-term interest rates range from 9 per cent. to 24 per cent; budget balances range from a surplus of 1 per cent. of GDP to a deficit of 17 per cent; and unemployment, which is a good measure of labour market inflexibility, ranges from 1 per cent. to 16 per cent.

For as long as such substantial divergences in the economies of member states exist, a move to a single currency and a single monetary authority for the Community would represent a massive leap in the dark, with potentially disastrous consequences.

It is true that the imposition of a single currency might suppress some of the differences between these widely differing economies—for a short time. But this would only be at the cost of rising unemployment in countries, especially in southern Europe, whose economies were not sufficiently flexible to adjust. That is not just the view of the British Government. Listen to Karl Otto Pöhl, President of the Bundesbank, speaking in Munich in September: As long as divergences between EC countries exist—as today—it is hard to conceive how the exchange rate can be given up as a policy mechanism". Dr. Pöhl, of course, has first-hand experience of monetary union. Following the union of the German economies, Dr. Pöhl is having to cope with running an integrated German monetary policy, at a time when the Eastern German economy is completely out of kilter with the Western half. And Dr. Pöhl has pointed out quite bluntly that the price of German economic and monetary union will be paid for—and these are his words— either in terms of unemployment or in expenditure of public funds to prevent the worst". So what could be the consequences of a premature move by the European Community to a single currency? There are four main possibilities, the first of which the noble Lord, Lord Williams of Elvel, pointed out to your Lordships. There would be demands for increasing transfers from the well-off northern member states to their poorer southern partners to compensate them. Taxpayers may well not welcome that, least of all in Germany where the full cost of its monetary union is only now becoming apparent. Even on present policies, the Community by 1993 will be spending £14 billion on structural policy. And all the evidence suggests that budgetary transfers are not an effective way of avoiding unemployment in the longer term.

Secondly, the "independent" central bank could succumb to the inevitable political pressure and relax monetary policy. This would cause a significant increase in inflation and deteriorating economic performance right across the Community. Thirdly, there could be an ever-increasing flow of migration from the member states with less flexible economies as people go in search of jobs and prosperity. Fourthly, as the real costs of monetary union become apparent to governments and electorates, the monetary union could break up under the weight of increasing social and economic tension. That would set back the cause of closer economic integration by decades and would be enormously damaging to the Community both internally and in the eyes of the world.

We believe that the facts are plain. Many member states will continue to need to use monetary and exchange rate policies to adjust to differences in economic circumstances. Moreover, so long as those circumstances remain as different as they are now, different counrtries' economies will react differently to unexpected shocks. They need flexibility to deal with such shocks. And the costs of losing that flexibility could be devastating.

However, if the costs of a premature move to a single currency are considerable, what are the benefits of a single currency? The publication of the Commission report One Market, One Money a month ago continues the important debate on the benefits and costs of EMU.

That report, however, clearly exaggerates the reduction in transaction costs that would flow from a single currency. It does so by referring principally to the more costly methods of transferring money around the Community. There are cheaper mechanisms already available. Significant cost savings can certainly be made in the relatively short term without taking the drastic step of moving to a single currency.

Nor does the Commission report take sufficient account of financial liberalisation and technological change. Those are both likely to reduce transaction costs significantly in the years ahead, whether or not a currency union takes place.

We must not forget that transaction costs will by no means disappear with a single currency. Banks would still incur costs in transferring money from one country to another. One has only to look at the experience of the United States. Clearing cheques between different states is still an expensive business, despite America's long and distinguished history of a single currency.

The costs of a premature move to monetary union could clearly outweigh the limited benefits. I again quote Karl Otto Pöhl: The alleged savings in transactions costs are not in the least convincing As Dr. Pöhl also said: John Major … is quite right to point out that a joint monetary policy can be very much more expensive than the conceivable saving in transactions costs". It is against that background that the Government have put forward an alternative, evolutionary approach—the hard ecu and the European Monetary Fund. We have proposed a new common currency, to be introduced alongside national currencies. The hard ecu would by definition be a highly stable, anti-inflationary currency. That is because it would never devalue against the strongest currency on realignments of the exchange rate mechanism.

We have proposed a new institution—the European Monetary Fund—to manage the hard ecu. The EMF would issue hard ecu only in exchange for community national currencies. Its own operations therefore would never result in an increase in the Community's monetary base.

We believe the hard ecu would become widely used. It will provide a secure store of value for savers and the low rate of interest—associated with a strong currency—should prove attractive to borrowers. It will provide a good medium of exchange for intra-Community trade and could become widely used by businesses and tourists. In time, if peoples and governments so choose, it could develop into a single currency. But we believe that that is not a decision that we should take now.

Perhaps I may turn to some of the points raised by noble Lords in the debate. From the remarks made by my noble friend Lord Caithness, the noble Baroness, Lady Seear, deduced that the Government were interested only in a free trade area. With the commitment that this country already has to 1992, and from my experiences at Brussels, I am clear that we are a member of a body that is a great deal more complex than simply a free trade area; and it will continue to become more integrated.

The noble Lord, Lord Thurlow, referred to the fact that the currency of sterling had become very weak. However, the noble Lord, Lord Bruce of Donington, claimed at the same time that the currency was far too strong. Not for the first time and not for the last, I suspect that if I am in between the two the Government may have got it right.

The noble Lord, Lord Briginshaw, said that there was no such thing as free trade. He may be right. One thing is certain, however: the road to protectionism is also the road to ruin.

The noble Lord, Lord Bruce of Donington, felt that he might be committing an act of heresy when he rose to speak in your Lordships' House this afternoon. I listened with great interest to his speech. I fear that if he were in a position of suitable strength I should be the first that he would take to the stake to burn. However, what happened to this country in the decade of the 1980s must be remembered. His figures for Europe may well be correct but it must be remembered that the United Kingdom enjoyed a period of unprecedented economic growth within the Community.

My noble friend Lord Carr of Hadley rightly drew your Lordships' attention to his time as a Cabinet Minister when he was not made privy to every piece of financial information that came from the Treasury. I can assure him that little has changed.

The noble Lord, Lord Butterworth, was right to point out that a single currency could damage other and weaker currencies. I agree entirely that it would create demands for massive transfers from structural funds, to which I referred earlier.

The noble Lord, Lord Greenhill of Harrow, raised the question of European expansion; the acquisition of more states coming into the Community. He inquired about the Government's commitment to expansion. If there are others who desire to come into the Community—I believe that he was referring to the East—the Government support that proposition.

The noble Lord, Lord Cromer, was intriguing about the question of what currency would come into being. It is important to note that the advantage of the hard ecu is that it is a currency which can be brought into being quickly as compared with EMU, for which as yet no one has given a date.

The noble Lord, Lord Harris of High Cross, pointed out that by 1776 Adam Smith had clearly set out the definition of a supreme and successful common market. I was grateful to the noble Lord for drawing that to the attention of the government spokesman.

The noble Lord, Lord Jay, referred to the 1939 Bank for International Settlements and to the £l2 million in Czechoslovakian gold. There was then some disagreement between the noble Lords, Lord Jay and Lord O'Brien. However, the noble Earl, Lord Bessborough, moved on to the subject of the sovereignty of our nation. He pointed out that this country had historically signed many treaties. It is true that more than 500 years ago we signed a treaty with Portugal. I suspect that his belief that all treaties meant an end to sovereignty would be disagreed with by the Government today.

The noble Lords, Lord Harris of High Cross and Lord Jay, described each other as economic liberals. I shall read Hansard to see whether I can find more elucidation. I heartily agree with the warnings given by the noble Lord, Lord Jay, about the potential dangers of a premature move into a single currency. I am grateful for his support.

The noble Lord, Lord Cobbold, agreed that convergence was needed for monetary union but argued that it must not be an excuse for delay. I point out that the UK's proposals, which could be put into practice shortly, would promote convergence today.

Much was made of the Bundesbank. As was pointed out by the noble Lord, Lord Williams of Elvel, for my education, only twice in its history has it acted against the advice of the Bundestag. It is important to remember that what is often offered to your Lordships as an example of financial freedom and independence is today paying a substantial price for German unity.

The noble Lord, Lord Barnett, argued that economic monetary union should not happen now but that we should commit ourselves to the final objective. If a single currency is a long way off—perhaps decades away—why should we commit ourselves to a blueprint of a central bank whose shape we do not know?

I was interested to hear the remarks made by the noble Lord, Lord Seebohm, suggesting an independent central bank which would have a monopoly of monetary rectitude. During the past decade Japan has had one of the lowest inflation rates in the industrial world and its central bank is probably the least independent in the world.

The noble Lord, Lord Cledwyn, asked about a reintroduction of the GLC. I draw your Lordships' attention to the development in the eastern part of our great capital city in Docklands, the commitment to the new Underground railway and the link to the Channel Tunnel as examples of the infrastructure which is taking place and which will be required for this country and this capital to be the financial capital.

The noble Lord, Lord Cledwyn, also referred to a merger between England and Wales. I draw his attention to a takeover when Henry Tudor returned from Wales. If there had been a Monopolies and Mergers Commission then, would it have succeeded?

The noble Lord, Lord Benson, referred to a fever taking control in Europe and government by remote control. I listened to his argument with interest. I hope that what he believes may happen will not happen. My noble friend Lord Selsdon made an excellent speech. He not only acknowledged the hard ecu but pointed out that versions of it in various shapes and forms had existed for some 600 years.

The most interesting remark in the debate was made by the noble Lord, Lord Williams of Elvel. It is always an advantage for me to gain clarification. The noble Lord, Lord Williams, gave me clarification this evening, so when next I travel to Europe I can tell those who are interested that the Labour Party is committed to political control of any European bank.

This Government's objective is evolution and not revolution. Also, we do not wish to interfere.

11.5 p.m.

Lord Aldington

My Lords, I shall be brief in closing the debate because I took up rather too much of your Lordships' time earlier. I thank all noble Lords who took part in the debate. I am grateful for all the kind observations made about the report and the committee and also for the flattering but quite unjustified remarks made about me personally.

As I stressed at the beginning, these reports are part of the scrutiny process of Parliament. They are part of the system of accountability of the Community and particularly of the Council of Ministers to national parliaments. Therefore, to have a speech such as the one given by my noble friend Lord Hesketh is of enormous value. It completes the process. I should like to thank him for that, even though I sharply disagree with him on what he says is one nub, but not the only nub, of our report; that is, the acceptance by Her Majesty's Government of the goal of the single currency which every other nation believes it is committed to as a goal.

My noble friend gave selective favourable quotations of President Pöhl. However, I remind him that if he looks at the evidence he will find that President Pöhl told us that he believes that every member state is and has been committed to the single currency as a goal. I must say, as I said in my introductory statement when I tried to lay the carpet, that it appears to me that we have all been committed to it since we entered the Community in 1972. That is what economic and monetary union means. If it meant economic union only, it would say that. However, I shall not go over that again.

I wish to declare my position and that of the committee less one, because I observed one defector in the course of the debate. We still strongly recommend to the Government that they should continue to look at this matter if they are to continue to play, as the whole House wants them to play, a leading part in working out the next stages towards full monetary union.

I say that because some noble Lords here this evening do not believe at all in the Community. They have no interest in a report like this, the purpose of which is to strengthen the Community, its efficiency, its effectiveness and democratic accountability. I understand that the noble Lord, Lord Monson, the noble Lord, Lord Stoddart, who wagged his finger and face at me, and the noble Lord, Lord Bruce, do not like the Community at all. We have got that message but I do not believe that that helps the discussion on this subject, the purpose of which is to strengthen the Community for the future. It is also to remind your Lordships and the country of the step-by-step approach on which the Community has thrived ever since it started and of the great benefits that can come to Britain, and the people of Britain, if we steadily continue with the process of strengthening the Community and its union.

I once again thank your Lordships. I hope the House will accept the Motion which I moved earlier today.

On Question, Motion agreed to.

House adjourned at eleven minutes past eleven o'clock.