ERM: Effect of Membership (Hansard, 17 December 1991)

§ The Minister of State, Department of Transport (Lord Brabazon of Tara)
My Lords, the Government keep all aspects of economic policy under review. It is possible that without the anti-inflationary creditability gained by ERM membership, interest rates might have to be higher.

§ Lord Monson
My Lords, I thank the noble Lord for that not wholly unexpected reply. Does he not agree that real interest rates of 6.4 per cent.—21 times higher than in the United States—sustained over a long period are without precedent, and that the cost is being borne by those who are losing their jobs, the owners of small businesses which are going to the wall and those whose houses are being repossessed? Is it not the case that because of our membership of the ERM, the unemployed, the bankrupt and the dispossessed are effectively paying the price of German reunification?

§ Lord Brabazon of Tara
My Lords, I do not agree with anything that the noble Lord puts forward in his supplementary question. His Question assumes, without saying so, that we would have to devalue to get interest rates down to the figure he quotes. It is quite clear that outside the ERM the Government could not have let the pound fall by cutting interest rates. A firm exchange rate would be part of an anti-inflationary policy whether we were inside or outside the ERM.

§ Lord Harmar-Nicholls
My Lords, is not the message from this Question rather confusing? Was it not the City that urged the Government to join the ERM when some of us were telling them that it was not such a good idea? Who are we to take heed of in the light of the Answer to this Question?

§ Lord Brabazon of Tara
So far as I recall, my Lords, the City was urging us to join the ERM, the CBI was urging us to join the ERM and, in the end, even the party opposite was urging us to join the ERM.

Lord Bruce of Donington
My Lords, is the noble Lord aware that when we joined the exchange rate mechanism we put too high a value on the pound? The pound is grossly overvalued on the exchanges at the present time and thus causing accumulating damage to the volume of our exports. To maintain the rate of exchange within the ERM we are forced to keep interest rates up in order to hold hot money here. The results of high interest rates are already with us in terms of continuing deflation in this country which makes 1931 look like a peaceful dream. Those high rates are responsible for bankruptcies, unemployment and homelessness.

§ Lord Brabazon of Tara
My Lords, the noble Lord is wrong, although I admit that he was not one of those who favoured joining the ERM when we did. The rate at which we joined—the central rate of 2.95 deutschmarks—was close to the average real rate over 1185 the past decade. Since joining the ERM, in the year to the third quarter the value of our exports to EC members has risen by 8 per cent.

§ Lord Bonham-Carter
My Lords, does the noble Lord agree that had we not joined the ERM, inflation, which has gone up this month, would have gone up even further?

§ Lord Brabazon of Tara
My Lords, since we joined the ERM inflation has more than halved. It is now within 0.1 per cent. of the German inflation rate. Early next year, we should have an inflation rate lower than that of Germany—the first time that has happened for many years.

§ Lord Barnett
My Lords, I speak as one who has always been in favour of joining the ERM and who agrees with the Government on the issue. However, in view of the fact that the Government do not blame membership of the ERM for the present high interest rates, does that mean that they accept that their management of the economy is responsible?

§ Lord Brabazon of Tara
My Lords, since joining the ERM, interest rates have come down on eight separate occasions by 4.5 per cent. To industry that is worth something in the region of £6 billion; to the family with an average £30,000 mortgage it is worth £70 a month.

§ Lord Stoddart of Swindon
My Lords, I should first like to congratulate the noble Lord the Leader of the House on the fact that the digital clocks in the Chamber have been repaired. However, is it some sort of omen that the colour of the figures has changed from a greenish sort of blue to red?
To return to the Question, is the noble Lord not aware that by joining the ERM and sticking so closely to the limits, we have lost all flexibility in dealing with our monetary policy? Does he not recognise that what we have done is to go back to the gold standard which caused such trouble and the depression of 1929–31? Does he further recognise—and will he agree—that unless something is done, that is precisely, as my noble friend said, what will happen over the next five years?

§ Lord Brabazon of Tara
My Lords, I am afraid that I cannot agree with anything that the noble Lord said for the reasons given in my previous answers. Whether one is in the ERM or not, one still has to have disciplines against inflationary pressures. They must be there whether one is within or without.

§ Lord Peston
My Lords, noble Lords seem to have the advantage of me. I must confess that I have not seen this great work of economics by Greenwell Montagu or the other City experts. Has the Minister read the documents? If so, can he tell me what they say would happen to the inflation rate if the interest rate was lowered to 7 per cent. and what they say would happen to the rate of exchange? I find the whole matter quite mystifying. I should like some enlightenment on what it is that we are supposed to be discussing.

§ Lord Brabazon of Tara
My Lords, so would I. I understand that the forecast mentioned in the noble 1186 Lord's Question has not been published; it has merely been spoken of by an economist at Greenwell Montagu. There is no published document to which one can refer. However, I understand that reference is made to the need to devalue to achieve this rate of interest.

§ Lord Peston
My Lords, it is bizarre that we are spending valuable time in your Lordships' House discussing an unpublished piece of hearsay. I believe that the Minister said that the implication in the Question was devaluation. But is there any inflation indication in the hearsay? In other words, whatever the gossip is, can we hear all of it so that we can prepare for it in the future?

§ Lord Brabazon of Tara
My Lords, I do not table the Questions; I merely try to answer them. I have no further information on what has been said. The noble Lord must ask the noble Lord, Lord Monson, what he knows.

§ Lord Desai
My Lords, can the Minister confirm what his right honourable friend the Chancellor of the Exchequer said the other day; namely, that the Government intend to move to the narrow bands? Further, can he tell the House how soon that is likely to happen?

§ Lord Brabazon of Tara
My Lords, I can confirm that my right honourable friend merely repeated what he had said on earlier occasions: that it remained our longer-term intention to move to the narrow band and that there was no question of devaluing the pound as part of a move to the narrow band.

§ Lord Callaghan of Cardiff
My Lords, as there is no intention of devaluing, and as we wish to stay in the exchange rate mechanism—at least, most of us wish to do so—what is the Government's policy for overcoming this real depreciation of sterling against the deutschmark by over 20 per cent. since 1987? How does that affect our competitiveness?

§ Lord Brabazon of Tara
My Lords, on the one hand I am being advised that we should devalue in order to make us more competitive against the deutschmark; on the other hand the noble Lord rightly says that we should not devalue to make ourselves more competitive. Since we joined the exchange rate mechanism we have, by and large, been steady against the deutschmark.