§ 3.4 p.m.
§ Lord Hesketh
My Lords, with the leave of the House I shall make a Statement on sterling's entry into the exchange rate mechanism.
Your Lordships will know that, with the agreement of our Community partners, sterling has now entered the exchange rate mechanism of the European Monetary System. With effect from today sterling has become a full participating member of the system.
The Government have long made it clear that sterling would enter the ERM when the time was right. We have judged that the time is now right and I should like to explain our decision and how it fits into the Government's wider economic strategy.
As the Chancellor said in his Statement on Friday, it has become increasingly clear that the Government's sustained policies of high interest rates and firm budgetary control are now reducing inflationary pressures in the economy. Monetary growth has fallen sharply to within its target range. The growth of demand has slowed. The rise in oil prices will continue to feed through for some time but the prospect is for a substantial reduction in inflation during the coming year, both in absolute terms and in relation to inflation in other European countries.
10 It is this evidence which justifies a reduction in interest rates. The Bank of England's minimum lending rate has been reduced from 15 per cent. to 14 per cent. and bank base rates have followed suit.
However, a tight monetary policy remains essential to bring inflation down. A substantial reduction in inflation is the most important of our economic policy objectives and will continue to be so. Monetary policy will therefore remain tight.
A firm exchange rate is a vital part of this policy. The decision to join the ERM has been taken to reinforce our framework of monetary discipline. As the Chancellor has made clear on many occasions, ERM membership will be no panacea for the UK economy. It is not a soft option.
Sterling now has a fixed central rate against each of the other ERM currencies. The central rate against the ecu is £0.696904 which translates to a central rate against the deutschmark of 2.95, slightly above the market level when the decision to enter was announced on Friday. Sterling is now trading in the upper part of its band.
Sterling is able to move by a maximum of 6 per cent. above or below the central rates. Our choice of the wider 6 per cent. margins will allow sterling to settle into the system and it follows the precedents of Italy and Spain.
The decision has only minor agri-monetary consequences which will be considered by the appropriate committee of the Community on Wednesday. Further details will be made available after that.
A broadly stable exchange rate with our main European trading partners will be of great help to both British businesses and ordinary people. ERM membership will make the United Kingdom an even more attractive prospect for companies overseas making decisions on where to locate their factories and offices. This inward investment will continue to be good for employment and growth. It is also an important consideration for inverstors and institutions, both here and abroad, deciding whether to hold their funds in sterling or other currencies.
ERM membership will also provide an important signal to British companies that they must contain their costs. For they can now be even more certain than before that if they allow their wage and other costs to go up too fast, they are not going to stay competitive as a result of a weaker pound. This is the key message of ERM membership for those engaged in pay bargaining this autumn and subsequently.
Companies and employees must take this message on board. If they do, then I am sure that ERM membership will strengthen their prospects of success as we approach 1992 and the single market. If they respond positively by strictly limiting increases in pay and other costs, this will help to bring down inflation more speedily, improve our competitiveness and sustain employment. Should they fail to respond positively, there is no doubt that the cost of reducing inflation would be much heavier, particularly in terms of unemployment.
11 Membership of the ERM should also remove any lingering doubts about our approach to negotiations on economic and monetary union. We shall play a full and positive part in these negotiations which begin at the Intergovernmental Conference in December. We shall continue to argue against the Delors plans for a single currency and for the proposals that the Chancellor first set out in June for an evolutionary and market-based approach, centred on the creation of a new European Monetary Fund and a new common currency, the "hard ecu". These proposals have already attracted a good deal of interest, and we shall aim to build on that position.
To sum up, the Government believe that sterling's membership of the ERM will reinforce the counter-inflation policies already in place and will help to provide a good framework for a resumption of soundly-based and non-inflationary growth.
§ 3.9 p.m
Lord Bruce of Donington
My Lords, the House will wish to thank the Minister for making the Statement. I wish to add to the remarks that have already fallen from the lips of my noble friend Lord Donoughue by offering our congratulations to the Minister on leading for the Treasury in respect of matters such as this. We hope that he will have a series of very happy landings inside or outside the ERM.
We welcome wholeheartedly the cut in interest rates to which the noble Lord has referred. We should have preferred a greater cut in interest rates. High interest rates have inflicted and continue to inflict terrible damage on British industry and business and have been a crippling burden on home buyers. The House will be aware that the Statement refers to the minimum lending rate being reduced. Perhaps the noble Lord is well aware, as I am sure are your Lordships, that in practice that means that until now a very large number of businesses and companies have been paying 17 or 18 per cent. for the facilities granted to them; that is now reduced to a range of 16 or 17 per cent. That is still a very onerous burden indeed and it needs to be relieved with the utmost speed. We on these Benches have repeatedly pressed for that relief over the past year.
In the current circumstances joining the exchange rate mechanism was quite inevitable, because there has been such a long period of dithering within the Government. There has been so much uncertainty, not only in the City but in industry and indeed throughout the population. There have been the to-ings and fro-ings of Sir Alan Walters—the friend of the family— the disagreements between the former Chancellor of the Exchequer and the Prime Minister and, really, the country as a whole had not known in which direction the Government had decided to go. In fact it has been claimed as a virtue of the Chancellor of the Exchequer that he has—I quote the term which has been used—"engaged in masterly inactivity". That has been claimed as a virtue by the party opposite. I was always taught, both in the army and in business, that any decision is better than no decision. At last we have had a decision, which is good.
12 At the same time we are entitled to ask what has happened to the Madrid conditions laid down by the Prime Minister and insisted upon for so long by her. What has happened to the condition that UK inflation should converge on the European mean? At present inflation is running higher than 10.6 per cent. It will probably be announced at the end of the week or very shortly that inflation is running somewhere between 10.6 and 11 per cent. compared with the European average among those countries already in the ERM of some 3.9 per cent. What has happened to the Madrid conditions? What has happened to the will and iron determination that that particular condition should be complied with?
In company with your Lordships I listened and watched very carefully the Chancellor of the Exchequer in his famous interview with Mr. Brian Walden on Sunday. I have taped a record of that. I have had the opportunity also of reading his article in the Sunday Express. No reason is given for the abandonment of that condition, except that Mr. Major said that we can no longer take the historic figures for the rate of inflation. What is "historic"? I suppose that since 10.6 per cent. is now a fortnight old it is therefore historic. He did not say that there was any regard to "actual".
In fact the entire decision was not taken on that basis at all. Joining at this time and in this way is the action of a cornered government, a government surrounded by the effects of their own economic incompetence. That is the reason, together with the proximity of the Conservative Party conference. Last week there was gloom and the prospect of the Conservatives having very little to say at their forthcoming conference. Now there has been a shot in the arm, however temporary that may be. Quite clearly the timing of the decision to enter on Friday last was dictated by pure political expediency and nobody in their right mind in the country has any illusions about that.
Dealing with other parts of the Statement, I observe that the noble Lord said that sterling is now trading in the upper part of its band. We entered at 2.95. According to my own bankers about half an hour ago, the banks are buying at 2.97 and selling at 3.16. We are getting very near to the top.
We note the Government's admonition to British industry about containing its costs. We note also the implicit accusations as regards British industry that so far it has not been doing its best to contain them. However, the Government have not taken into account the effect upon British industry, particularly the export industry, of the high exchange rates. I venture to suggest that the grossly inflated exchange rates at which we shall now be exchanging pounds for deutschmarks or for dollars has a far greater effect than any effective restraining of costs within individual factories or enterprises. The Government still have to address that problem.
In addition to making further inroads upon our efforts to exports goods, it will make imports cheaper. Over these months of grossly inflated exchange rates, imports have already been effectively subsidised by
13 our high rates of exchange. That will continue. There will be a continued incursion into the British market over the next few months and, indeed, years—a process which has been in operation ever since this Government have been in office. There has been a progressive erosion of our trading effort and a deterioration in our balance of payments.
For a while the Government may exist in what we believe, will be a quite temporary state of euphoria. The chickens will come home to roost a long time before many noble Lords opposite anticipate that they will. In the meantime, I have only one question to ask the noble Lord.
Lord Bruce of Donington
And for the convenience of the House I gave him notice of it in advance. I ask for an unequivocal assurance by Her Majesty's Government that the step of entering the ERM is merely a completion of the process of entering the EMS in 1978 and that it does not commit us in any way to economic and monetary union. We should like an unequivocal answer to that question.
§ Lord Ezra
My Lords, I shall be brief. I should like to start by saying that we from these Benches whole-heartedly welcome the step which the Government have taken to join the exchange rate mechanism. It is probably a subject about which we in this Chamber have asked more questions than any other. I may say that I had a few more in reserve which I am happy now to set on one side.
We couple our whole-hearted welcome of the step taken, with a regret that we did not join earlier. We feel that in much the same way as was expressed in theFinancial Times this morning by the former Chancellor of the Exchequer. He stated that 1985 and any year after that would have been a far more effective time to join the exchange rate mechanism, and that our inflation rate, in his opinion, would now have been lower.
That having been said, at least we have taken the step to join. As has been made clear in the Statement and as was made clear by the present Chancellor of the Exchequer in a television interview yesterday, this step is not regarded as a panacea for our problems. It means that our Government will not now be able to rely exclusively on the interest rate weapon to deal with the problem of inflation, because of the impact that changes in interest rates could have on the value of the currency in relation to the band within which we have to live.
My first question to the noble Lord therefore concerns what other measures the Government now contemplate using to deal with the continuing problem of inflation. For example, if the recent cut in interest rates and possible further cuts lead to a growth, a rebirth in credit, would they then seek directly to introduce controls on credit which so far they have avoided?
As the noble Lord, Lord Bruce, referred to it, I too would like to turn to the question of economic and monetary union. I remind the noble Lord, Lord Bruce, and indeed the House, that as a country we are 14 committed to the objective of the progressive realisation of economic and monetary union. I am referring to the Single European Act of July 1987. Can the noble Lord tell me whether the Government still keep to that very firm commitment in the Treaty? If they do, can we take it that the interesting proposal put forward by the Chancellor of the Exchequer for the hard ecu can be taken as an alternative route to ultimate economic and monetary union rather than as a way of holding up its realisation? We should be reassured on these points because there seems to be some difference of emphasis in remarks recently made by the Prime Minister on the one hand—who seemed to hold that in no circumstances would we move towards a single currency or a single European bank —and on the other hand the Chancellor of the Exchequer who, in the interview yesterday to which I referred, made clear that his attitude was one of greater flexibility. Is there a single policy on the part of the Government or are there two policies? If there is a single policy, the House will be interested to know which it is.
§ Lord Hesketh
My Lords, I shall attempt to be brief. The noble Lord, Lord Bruce of Donington, raised the point also raised by the noble Lord, Lord Ezra, regarding the Government's intentions. The Government's intentions could not be more clearly stated than by the fact of our having gone into the ERM.
I must remind the noble Lord, Lord Bruce, that the Government believe that there is, between partners in Europe, the opportunity for discussion. That is represented by the inter-governmental conference that commences in December. It would be foolish for me to predict the outcome of those discussions and the choices that will lie before those in Europe within the ERM, but the commitment is there. The commitment is also there in the Treaty, as the noble Lord, Lord Ezra, pointed out.
I must rebut two points made by the noble Lord, Lord Bruce. First, he accused the Government of dithering in their timing. The Government have always said that they would choose the best time to go in and would do so when that time came. The time is right. The noble Lord, Lord Bruce, believes that the advent of the Conservative Party conference provided the timing. There is no more reason to believe that than that the Chancellor of the Exchequer took the advice given to him on Monday in Blackpool. It is not true.
As everyone who has studied the ERM will confirm, in some ways it is a tough regime. It is a decision taken by a confident government. I promise that in the days when it is remembered who decided to go into the ERM, it will be said that it was a Conservative Government that did so.
§ 3.36 p.m.
§ Lord O'Brien of Lothbury
My Lords, perhaps I may ask the noble Lord whether he is old enough to 15 remember a report made to your Lordships' House by a Committee of your Lordships of which I had the honour to be chairman seven years ago? It recommended the immediate joining of the ERM. Would he not agree that if earlier opportunities to join that system had been taken we should not be joining it in the unfortunate circumstances in which we find ourselves today, and that those circumstances could have been avoided by the disciplines of belonging to the system?
§ Lord Hesketh
My Lords, I am aware of the noble Lord's connection with the report and that his knowledge of these matters is considerably greater than mine. I also point out that the decision was eventually taken in a positive way and, I believe, in a beneficial way for the future.
§ Lord Boyd-Carpenter
My Lords, is my noble friend aware that the House as a whole is grateful to him for making the Statement on this important matter and for making it, if he will allow me to say so, with such force and clarity? Is my noble friend also aware that many people outside—and I believe inside —your Lordships' House approve of the 6 per cent. margin involved in that decision? Although several of the major countries in Europe have a lower margin, 2 per cent., is my noble friend aware that it seems prudent, at any rate at this stage, to give us this degree of flexibility?
Is he also aware of the fact that the strong pound which was somewhat criticised by the noble Lord, Lord Bruce of Donington, has the enormous advantage of enabling us to import the raw materials of our industry at a considerably cheaper rate than would otherwise have been the case, and that there is a great deal to be said—far more than has been said so far—for maintaining a strong pound? Is he aware that a weak pound would expose the Government to perhaps proper criticism? The fact that this decision is taken now—at what seems to me to be a very well-judged time—will enable the pound to be maintained as a strong currency for a considerable time.
Will my noble friend make clear that although the reduction in the interest rates at home of only 1 per cent., to 14 per cent., is small, it is a cautious first step and that the Government could not rule out further substantial reductions which would be of the greatest assistance both to industry and to the consumer?
§ Lord Hesketh
My Lords, I am grateful for the remarks of my noble friend. I should like to draw to the attention of your Lordships one salient point that he made. A strong currency is no bad thing. It is worth remembering that the West German economy has not suffered by reason of having a strong currency. My noble friend is also correct to make the other points that he did regarding the future. I am grateful for all that he said.
§ Lord Jenkins of Hillhead
My Lords, perhaps the noble Lord will accept that I, with a certain proprietary interest in the matter, gratefully welcome the decision. When hesitation has become a way of life 16 for 11½ years it is better to bring it to an end than to pursue arguments regarding exactly what is the best moment. Nevertheless, will the Minister also accept that the view that this week is a uniquely favourable one, as opposed to most of the 600 weeks which have gone by since the inauguration of the EMS since 1979, is a view that defies rational economic analysis? That is particularly so when, during this decade and a little more, we have suffered unnecessarily violent sterling fluctuations, unnecessarily high interest rates and a manifest diminution of influence in Europe as a result of our teetering on the brink.
§ Lord Hesketh
My Lords, as I remarked to the noble Lord, Lord Jenkins, when I saw him earlier today, my first reading before coming to the House today was his own article which appeared yesterday in the Independent on Sunday. I felt that that put me in a better position to appreciate the subject, and I am grateful for that.
§ Lord Barnett
My Lords, is the Minister aware that I unreservedly welcome the Government's decision at last to join the exchange rate mechanism? I equally welcome the change in the condition laid down in Madrid to that of a prospective rate of inflation. However, will he accept that if the expectations about the prospective rate of inflation are not realised, we shall be heading for very serious economic conditions? Therefore, will he give the House an indication of the Treasury view on when we can expect to meet the original Madrid condition that our inflation rate should be that of the average in the Common Market?
§ Lord Hesketh
My Lords, the noble Lord, Lord Barnett, engages in that attractive practice of hoping that there is a fixed answer to a fixed point on a future timescale and on which the Government are willing to tie their neck and arms. However, I must counter the first point made by the noble Lord concerning Madrid. The conditions of Madrid mostly have been met in regard to the free movement of capital, the single market, competition policy and the liberalisation of financial services. I believe that it is generally accepted when one speaks to many businesses across many fronts that there has been a reduction in the volume of business. As I pointed out earlier, there has been a reduction in inflation of a substantial nature in various areas, be it on new construction orders, housing costs, motor car sales—the list goes on. Those figures give the Government confidence that inflation is coming down.
§ Baroness Elles
My Lords, is the Minister aware that those of us who have represented British electors in another assembly on the Continent, and those who still do, warmly congratulate the Prime Minister on having decided to enter the ERM? Is the Minister further aware that all those companies trading with the Community—and our export markets consist of eight of the nine top countries in the Community—will warmly welcome the possibility of having non-volatile sterling in relation to the firms with whom they trade on the Continent?
§ Lord Hesketh
My Lords, I am grateful to my noble friend for her remarks. She is right to draw to the 17 attention of your Lordships the fact that among the many advantages the ERM will provide stability and certainty for British exporting companies in Europe.
§ Lord Stoddart of Swindon
My Lords, does not last Friday's decision to enter the exchange rate mechanism spell a defeat for the Prime Minister and also a defeat for the philosophy of market forces? Will the Minister tell the House whether the entry decision will be taken by other European states as an indication that the British Government will now agree to Stages 2 and 3 of economic and monetary union? If interest rates are reduced quickly, will he also say how demand in the economy is to be contained and how unemployment levels will not rise? Will the Minister further state whether public expenditure projections will be in any way affected by our decision to join the ERM?
§ Lord Hesketh
My Lords, as regards the demands and conditions referred to by the noble Lord, Lord Stoddart, to be perfectly frank he would be better off asking Thomas More. With regard to the further stages of the EMU, I made it quite clear in making the Statement that alternatives lie ahead and that the first discussion of those will be at the intergovernmental conference in December. Therefore, the position is not cast in stone; and I cannot give him a reply which is hand-chiselled into timber.
§ Lord Hesketh
My Lords, on the basis of the reception of the Government's decision over a very wide front, I believe that there is broad acceptance of it. However, the fact that we intended to enter the ERM at a suitable time was made clear by the Chancellor of the Exchequer long before the Summer Recess.
§ Lord Cledwyn of Penrhos
My Lords, perhaps the Minister will take the House a stage further and say what policies the Government intend to introduce to take advantage of the new situation created by our membership of the ERM. Further, following on what was said by the noble Lords, Lord O'Brien and Lord Ezra, is the Minister aware that the country will take the view that the Government committed a grave error of judgment in not taking this step seven, or even five, years ago? Does the Minister agree with the view expressed today—and in the past few days—by his right honourable friend the former Chancellor of the Exchequer, Mr. Nigel Lawson, that this country could have been saved a great deal of suffering had the Prime Minister and the Government accepted his advice five years ago?
§ Lord Hesketh
My Lords, if the noble Lord's party had been in power as recently as 1985 there would have been no possibility of this country joining the ERM in any circumstances. The previous Labour Administration had the opportunity to take this country into the ERM before 1979.
§ Lord Stoddart of Swindon
My Lords, before we complete questions on the Statement, perhaps the Minister can tell me who this fellow Thomas More is of whom I should ask questions rather than him.
§ Lord Hatch of Lusby
My Lords, there is one question originally put by my noble friend Lord Bruce, and repeated by others, that the Minister has not answered. Why is it, if it is not for the convenience of the Government at the Tory Party conference, that the condition in the Madrid statement of reducing our inflation rate to a figure approaching the average for our Community partners has been missed out? The Minister has repeatedly talked about the inflation rate for different sectors being reduced; but that, surely, is just a cop-out. The inflation rate for the country is 10.6 per cent. How can that be equated with the statement made at Madrid that we would not join the ERM until our inflation rate had fallen to approximately that of our European partners?
§ Lord Hesketh
My Lords, I assume that the noble Lord is suggesting that rather than showing ability in anticipation, we should await reaction and not become a member of the ERM. That is the position on which he stands at the moment. The Chancellor believes that inflation is falling substantially and in line with what we required at Madrid, as I have said on a number of occasions.
§ Baroness Seear
My Lords, will the Minister inform the House what was the attitude of the Labour Party when in power and had the opportunity to join the ERM?
§ Lord Hesketh
My Lords, I believe I am correct in saying that the Labour Government were opposed to joining.