Lords Sitting of 24 September 1992

Preamble
The House met at half-past two of the clock, having been called together by the Lord Chancellor, in pursuance of Standing Order No.14: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Norwich.
Noble Lords—Took the Oath.

Economic Policy
2.37 p.m.
The Lord Privy Seal (Lord Wakeham)The Lord Privy Seal (Lord Wakeham) rose to move, That this House takes note of the economic policy of Her Majesty's Government.
The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper.
I am pleased to be able to open this important debate on the recent events affecting the United Kingdom's economy. I hope your Lordships will agree that the Government were right to ask for the recall of Parliament to discuss these issues. The Government welcome this opportunity to hear your Lordships' views.
We are holding this debate because of the effects of the recent extraordinary turbulence and massive speculative flows in the foreign exchange markets. We have ourselves suspended our membership of the ERM. But we are not alone in being buffeted by extraordinary turbulence. The Italians have had to put up interest rates, to devalue the lira by 7 per cent. and to suspend their ERM membership. The Spanish have had to devalue the peseta by 5 per cent. and have reintroduced exchange controls. The French, assisted by the Germans, have had to intervene heavily in the exchange markets and put up interest rates by 2 percentage points. The Irish punt and the Danish krone have both been on their ERM floors. The Irish have tightened exchange controls. Greece has put up interest rates, as have others outside the Community.
The principal cause of this instability has been that for some time there have been large flows out of the US dollar, which offers low interest rates (around 3.25 per cent.), into the German mark, which offers unusually high interest rates (around 8.9 per cent.) because of the Bundesbank's attempt to dampen the unforeseeably powerful inflationary effects of the costs of German reunification. Those flows placed a considerable strain on the ERM and on other currencies, the most striking effect being the 500 per cent. overnight interest rates introduced by the Swedish authorities.
The tensions were exacerbated by injudicious comments in regard to realignment and by speculation surrounding the future of the ERM and the Maastricht Treaty. Speculation became greater as last weekend's French referendum approached. The difficulties have not disappeared now that the referendum is over.
There are three steps a government can take to defend its currency. It can make statements of intent. It can intervene in the markets. And it can raise interest rates. The Government did all of those. We repeatedly made clear to the markets that we were prepared to take every necessary step to defend the pound. Covert intervention in the foreign exchange markets was superseded by overt intervention by the Bank of England. The Government announced a programme to borrow 10 billion ecu-worth of foreign currency—of which around half has been drawn down—to support that intervention and to signal to the markets their determination to defend the pound. Finally, last Wednesday, matters came to a head.
When the pound failed to rise above its ERM floor, interest rates were increased, first by 2 per cent., and then by a further three. Sterling, however, continued to fall. In those circumstances, the Government again had three options. They could raise interest rates further. But the last interest rate rise had left the market unaffected, so clearly that would not have worked. They could devalue. But, as the Italians demonstrated, that would merely have left sterling equally exposed at a new parity.
The third option was to suspend Britain's membership of the ERM, and, in view of the exceptional circumstances, that is what the Government did. They had done their best to support the pound with every means at their disposal but, when that proved impossible, they acted to safeguard Britain's interests by withdrawing from the mechanism.
The events of the past two weeks have been dramatic and understandably they have led to questions in regard to our economic policies and priorities. I would not want to underplay the significance of the UK's suspension of its ERM membership. But I do not see that we could readily return to the mechanism without dealing with the problems that have been thrown up. It is worth stressing that ERM membership, supported by tight control over public expenditure, has always been seen as an important tool for helping to bring about the lasting defeat of inflation rather than a policy objective in its own right. It has been a means to an end, not an end in itself and, while the means may have changed, the end certainly has not.
Many have questioned our continuing commitment. Some have even sought to portray recent events as an opportunity to re-order our priorities, downgrading the pursuit of low inflation in order to ensure a rapid return to growth.
I should like to make it entirely clear that those views do not in any way reflect the Government's thinking. The achievement of permanently low inflation remains at the very heart of our policy, and monetary policy will be set with that objective clearly in mind; and monetary policy will continue to be supported by a firm fiscal stance, which will be bolstered in future by the new arrangements that we have agreed for determining public expenditure. Nothing that has happened in the past few days diminishes the importance for our future prospects of

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securing that objective. In considering the matter I invite your Lordships to reflect upon our post-war history.
As your Lordships are fully aware, the fact is that persistently high inflation is bad for an economy, and our acceptance for many years of inflation above the levels of our main competitors did great damage to our economy. The record shows that for virtually the whole of the post-war period we have suffered more from inflation than have other major economies.
In the 1950s and 1960s our inflation rate was reasonably stable, at around 4 per cent. While low enough not to be seen as a major problem even that rate of inflation was high by international standards. Inflation averaged less than 3 per cent. in each of those decades in both Germany and the United States, and in both decades our rate was above both the EC and G7 averages.
If our performance in the 1950s and 1960s was worse than that of competitor nations, our performance in the 1970s was nothing short of disastrous. In the mid-1970s inflation was allowed to reach a peak of no less than 26.9 per cent. Over the whole of the decade inflation in this country averaged 13.7 per cent., and the damage which that did to our economy is incalculable.
The public recognised that failure in 1979 and voted for a government that put as the central plank of their economic policy the conquest of high inflation because the history of the post-war years had shown that a good inflation performance is vital for strong sustainable growth in output and in prosperity.
Backed by a clear mandate to take the difficult steps that were required in order to defeat inflation, the Government acted decisively. Monetary policy was tightened and firmer control applied to public expenditure. The resulting adjustment was a painful one, but by the early part of 1983 the inflation rate was back below 5 per cent. With that firm foundation the economy grew at an average rate of 3.3 per cent. from 1981 to 1988, which was faster than in France, Germany or Italy. Neither was the supply side neglected. Tax cuts were introduced which greatly enhanced incentives, and there were important and overdue reforms to the labour market.
As your Lordships will recall, on 18th October 1987 stock markets around the world experienced their worst crash since 1929, and it was feared that that might lead to a 1930s style depression. There was no post-war precedent from which to gauge what effect that would have on modern economies. Our response, as in other countries, was to allow some easing of monetary policy, and in that we were supported by the opposition parties.
With hindsight it is clear that the impact of the stock market crash was smaller than we feared. In common with most other industrial countries we loosened monetary policy too much in response. It may also be that the effects of financial deregulation were underestimated. As a result, some of our hard-won progress in eliminating inflation from our economy was lost. At its peak in the out-turn of 1990, RPI inflation reached a peak of almost 11 per cent.
As inflation rose the Government were forced rapidly to tighten monetary policy. Between 1988 and 1990 interest rates were raised from 7½ per cent. to 15 per cent.
In the wake of that development there was a widespread consensus among politicians, academics and others that ERM membership would help Britain to restrain its inflationary tendencies. It would send a signal to employers and employees that if costs, and especially wage costs, rose faster than in their competitor countries, British industry would rapidly become uneconomic because there would be no devaluation to bale it out. It would also, it was hoped, enhance Britain's anti-inflation credibility with the markets, allowing interest rates to fall faster than would have been possible outside the mechanism. Finally, British industry was keen to have greater price stability with its principal European partners.
Our membership of the ERM has helped to bring down inflation from 10.9 per cent. to 3.6 per cent., producer output price inflation has fallen to a level not seen since 1969 and, crucially for our competitiveness, average earnings growth is now at its lowest level for 25 years.
During our time in the ERM we were able to cut interest rates nine times, by a total of five percentage points—cuts which reduced industry's interest bill by £7 billion a year and cut payments on a typical £30,000 mortgage by £85 a month.
One measure of the ERM's success is that the gap between UK and German (three-month) interest rates fell as low as a quarter of one percentage point. By comparison, over the past 20 years, United Kingdom interest rates have on average had to be 44¾ per cent. higher than those in Germany.
Overall, a combination of lower inflation and interest rates alongside rising incomes for those in work and renewed productivity growth have laid the foundations for a sustained and durable recovery.
Even so the recovery has proved elusive and I am very much aware that it remains a very difficult period for many businesses and individuals. Some of us feel that the gloom of recent months may have been overdone, and has sometimes threatened to undermine fragile business and consumer confidence. For example, recent figures show that non-oil GDP rose in the second quarter of this year. Manufacturing output increased in each of the first two quarters of this year and retail sales rose in the second quarter. The Society of Motor Manufacturers and Traders estimates that new car registrations were up on a year ago in the key sales month of August. Manufacturing investment, which would normally be expected to lag behind an upturn in activity, showed an increase in the second quarter, as did total business investment which has remained well above the level it fell to during the last recession.
My right honourable friend the Chancellor of the Exchequer has acknowledged that in recent months the strains on the ERM caused by the wide divergence between American and German interest rates might have kept monetary policy tighter than was necessary to bring continued downward pressure to bear on inflation. Until the extraordinary speculative flows of

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last week forced the UK as well as Italy to suspend ERM membership, he concluded that it was worth persevering in order to gain the long-term benefits of exchange rate stability and anti-inflationary credibility.
Our first task, then, is to ensure that inflation does not take off again. We start from a strong base, since our membership has helped to limit inflationary expectations within the economy and to reform the ratchet system of pay bargaining.
In the meantime, monetary policy will be guided by a range of indicators. We have had a target for MO growth for several years, and have successfully kept MO within its target range for over two years now. The other monetary aggregates will be kept under close scrutiny, as will other indicators such as asset prices, especially house prices; as of course the exchange rate itself will be.
In the light of these indicators, the Chancellor decided on Tuesday that interest rates could come clown another one percentage point to 9 per cent. That is six points below their peak in the autumn of 1990. It is the first time that base rates have been in single figures since the summer of 1988.
But no one should conclude from this further cut in interest rates that the Government are going soft on their commitment to defeat inflation. We are not going to fritter away the gains we have made under the ERM. Neither, as my right honourable friend the Chancellor of the Exchequer has made clear, are we going to see those gains eroded by thoroughly irresponsible fiscal expansion. Recent events have made firm control of public expenditure more important than ever.
We have made clear that we will return to the ERM, but only when certain conditions have been fulfilled. There has to be greater international co-operation on monetary policy. Britain and Germany must be closer to the same stage of the economic cycle, and German interest rates must come down. The ERM must be reformed; and the turbulence in the currency markets must have come to an end. To discuss these and other issues, the Prime Minister, as President of the European Community, has called a European Council meeting for October.
Whatever the outcome of deliberations in the months ahead about how best to proceed with the Maastricht Treaty, completion of the single market will in itself ensure that European economies become increasingly interdependent. The price we would pay if we failed to match the inflation performance of our partners in the future would be even greater than the considerable price we have paid in the past.
Our policies in the months ahead will continue to be driven above all by our determination to secure an inflation performance that matches the best achieved by our competitors. Nothing that has happened in the past two weeks has altered this. I beg to move.
Moved, That this House takes note of the economic policy of Her Majesty's Government.—(Lord Wakeham.)
2.55 p.m.
Lord Cledwyn of Penrhos: My Lords, may I first thank the noble Lord the Leader of the House for his opening speech? We warmly welcome this opportunity to debate the state of the economy and its short and longer term prospects after the chaos of the past fortnight. No one derived any satisfaction from that turmoil except perhaps those who made money out of it.
The noble Lord has put up a brave defence but, I regret to say, not a convincing one. The Government had been warned throughout the summer that trouble was looming but they disregarded the advice they received and ignored the warnings. The crisis here was not the result of some uncontrollable random effect. It was the direct consequence of the economic policies of the Prime Minister and the Chancellor of the Exchequer.
Since the general election there has been an absence of a clear economic policy. The economic turbulence referred to by the noble Lord which has badly shaken this country is a direct consequence of that. The Government's economic policy can be described as a policy of drift or, less charitably, as a paralysis.
There has been a paralysis of action. Nothing was done to tackle the growing monetary pressures which engulfed us or to deal with the fundamental weaknesses of the real economy.
Secondly, there has been a paralysis of ideas. Instead of using the months of June, July and August to develop a coherent approach to tackling the recession, those Ministers who were available at the time relied on slogans which had no relevance to the worsening condition of our economy.
It is a sad story for, as everyone in this House knows, the approaching monetary storm had been clearly visible since the election, when we were told that a Conservative victory was all that was needed to bring recovery. That victory on 9th April 1992 was a defeat for Britain, for it led to the grinding reality of continuing recession and the worst economic crisis for decades; it led to the devaluation which the Prime Minister and his senior colleagues swore they would never accept, a disorderly and unplanned devaluation preceded by the loss of a large part of our foreign currency reserves. The 15th and 16th September were indeed black days in the British calendar.
The sad fact is that, despite all the clear warning signals and the continuing recession, the Government did nothing and appeared to be blind to the gathering clouds. It has been said, and no doubt it will be repeated in this debate, that the difficulties were not the Government's fault but that Germany in general and the Bundesbank in particular were responsible for them. Is that true?
I take it that we must accept that our monetary difficulties have been made worse by the disruptive impact of German unification. We were also caught in the backwash of the speculative currency flows between the dollar and the deutschmark, about which we have heard so much in recent days. But those are not the reasons for our problem. It is the lack of coherent political leadership, both in the formulation and the execution of monetary policy, which is

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primarily responsible for our plight today. The Government cannot pass the buck. The buck stops on the Cabinet table in No.10 Downing Street.
Furthermore, the presidency of the European Council gave the Prime Minister and his senior colleagues an outstanding opportunity to provide leadership in Europe at one of the most crucial moments in recent history. It was an opportunity to lead concerted action for recovery throughout the Community, and to make the case for co-ordinated monetary action to get interest rates down and at the same time to stabilise the European monetary system.
The Prime Minister was provided with a unique opportunity to act; but I regret to have to say that nothing emerged. Nor does it help to blame the president of the Bundesbank for our monetary problems. It is the job of central bankers to be bankers; it is the job of prime ministers to provide leadership. The Prime Minister and the Chancellor have dithered in a crisis, and leadership has been conspicuous by its absence. That is the reality of the position. That indeed is the tragedy which faces us.
However, we must look beyond monetary matters to what in the longer term is more important; namely, the state of the real economy in Britain at present. That is the real economy of production, of jobs, of mortgages—to which the noble Lord referred as though there were no problem—and of businesses large and small. All this is relevant to our debate today. The House knows that, at a time when production has been stagnant, unemployment has been rising, mortgage repossessions are still at an all-time high and record business failures are creating what one leading industrialist has called "an economic desert", the Government have done nothing. They have taken no action to encourage business investment. There are nothing but cuts in training when we are faced with the paradox of rising unemployment accompanied by the shortage of skills.
It is plain beyond doubt that, if we are to draw some benefit from the collapse of the Government's failed economic strategy and the devaluation of the pound, then the policies of inaction and neglect must now be changed. Britain must set a new course if we are to survive as a leading industrial and commercial nation. The Prime Minister was provided with a unique opportunity to act; but I regret to say that he failed to grasp the opportunity.
In addition to new measures to get people off the unemployment registers and into real training, there must be a new initiative to provide retraining and new business opportunities to the highly skilled men and women who have been paid off from the aerospace and engineering industries. We cannot afford to let the talents of those people go to waste. The neglect of housing and infrastructure investment must be replaced with a strategy for growing government investment. As the trade unions, the CBI and others have said in recent weeks, private industry must also be provided with new incentives to encourage companies to invest their way out of recession.
We welcome the emergency meeting which the Prime Minister has called and which is to take place in
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a few days' time. We must hope that the Government will take initiatives there and in Edinburgh to launch a new programme of European co-operation to attack recession and unemployment throughout the Community. Europe must not be allowed to fragment in the face of the speculators. I read this morning in two or three of the newspapers that those currency speculators made £2 billion in a few chaotic days. This is the time for the Community to work together to defeat the speculators and create a new stable framework upon which a sound, long-term strategy for growth and for jobs can be based. That must be our objective at the present time.
The noble Lord referred to the question which people have been asking over the past 10 days or so: when do the Government propose to re-enter the exchange rate mechanism? The Government entered the ERM at the wrong moment and Britain has now been catapulted out of the ERM after spending huge sums of public money in a useless struggle to stay in the ERM. It was useless because it became obvious on Tuesday,15th September, that it was virtually impossible to keep sterling above the ERM floor. In this struggle the Government spent a huge sum out of our £25 billion foreign exchange reserves. We cannot afford that. It was one of the most costly misjudgments of the century. It has been argued that it was totally unnecessary because the devaluation of the Italian lira over the weekend gave the Government the opportunity to take action, however distasteful it might have been at the time, without losing a huge part of our reserves. But when shall we re-enter? How long shall we be out? The noble Lord has not answered the question. When the noble Earl, Lord Caithness, winds up the debate perhaps he will enlighten us.
We have read a great deal about the various alternatives recently. I noted over the weekend that Sir Leo Pliatsky, whom we know and respect, advised that the Government should not rush back into the ERM but should be prepared to return,
"at a realistic rate if they want to maintain the development of Europe".
That seems to me to be a sensible reaction.
Perhaps I may refer briefly to the Maastricht Treaty whose future seems uncertain at present, mainly because of the Danish vote. The treaty needs the ratification of all 12 members. However, it seems that that cannot be achieved in time. I shall again be grateful to the noble Earl if he will tell us whether he believes that Britain can meet the deadline.
We do not wish to see the collapse of the treaty, although we should like to see some changes, notably in respect of the Social Charter whose omission we deplore. I hope that the Minister can tell us when we may expect to see the reintroduction of the Bill. We shall of course need to look at the Bill very carefully when it emerges to see precisely what amendments or changes are proposed.
There are those, including some of my noble and honourable friends whom I respect, who advocate a referendum. I must confess that I was never a referendum enthusiast. It is not part of our constitutional practice and we have had only two

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referenda in our history. Too many of them would not only be unnecessary; they would erode the authority of Parliament and the House of Commons in particular. Hitler used them to destroy what parliamentary democracy existed in Germany at the time. Let us pause to see how matters develop before we contemplate that unpredictable course.
I supported Britain's entry into the Community because I believed that it was the best way to secure a lasting peace and stability in Europe after the great wars of this century and of the past. We must not he unreasonably pessimistic, because the Community has achieved a great deal since its inception. But the events of the past few weeks have shaken people's faith in the Community. We have to face that now and face it seriously. The vote in France proved that. There has been a lack of understanding and a lack of co-operation. The machine appeared to break down, temporarily we hope. But unless it is repaired the Community will be undermined and possibly destroyed in the longer term.
These are critical times for Europe; in Bosnia and neighbouring regions dreadful crimes are being committed; in Eastern Europe and Russia democracy itself is on trial, and stability is essential; in Somalia and other African countries millions are in the deadly grip of starvation. Those are the huge problems which challenge the world. This is not a time for quibbling and carping between our Government and other European leaders. It is a time for inspired leadership to which people everywhere will respond. Let us hope and pray that it will be forthcoming.
3.10 p.m.
Lord Jenkins of Hillhead: My Lords, we have before us the spectacle of a disintegrated government policy. But we also have the spectacle of a disintegrating western world—the world of eastern Europe is already in a state of near shambles—and that is a still more serious matter. It is on that subject, at any rate to begin with, that I propose to concentrate.
We are in grave danger of having our destinies determined not by the so-called bureaucrats of Brussels, not by the voters of France, not even by the Bundesbank, but by 100 or so anonymous currency speculators. Indeed, we are now moving into a position in which everything from the shape of Europe to the cost of a mortgage can be determined by them. I have in the past—even when I held the responsible office and was much discommoded by uncomfortable speculative pressures—always been sceptical of phantasmagoria about the gnomes of Zurich. I thought that they were not so much hobgoblins from Switzerland but rather nervous treasurers of multinational companies trying not to make exchange losses out of the follies of governments.
But in my view that benevolent picture is no longer tenable. They have become more like packs of predatory animals which, once their excitement has been aroused, must always have a victim and swoop relentlessly from one target to another. Aided by considerable mismanagement in both cases, they have
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gobbled up the lira and the pound. I profoundly hope that they will he unsuccessful in their attack on the French franc.
As most analysts have pointed out. there is no sense in that attack. The French economy is, if anything, in rather better shape than the German economy. But there is often no rational basis for currency speculations. The idea, which has been sedulously propagated during the past few days, not least by the noble Baroness, Lady Thatcher, in Washington, that, once a country's currency is floating, it has a sublime control over its own destiny, tempered only by the need to march in harmonious step with the calm judgment of sagacious market forces, bears absolutely no relation to the reality of what happened in particular to sterling outside the ERM during the early years of the noble Baroness's Administration.
Between the end of 1980 and the beginning of 1985 the pound/dollar exchange rate varied between 2.46 dollars and 1.05 dollars to the pound. The idea that our comparative competitive positions, or relative purchasing powers, had moved at all in a way that was in line with those lurches is manifestly wrong. The two extremes were produced by overcompensation for speculative misjudgments and in no way reflected underlying reality.
Meanwhile during that period the ERM bloc enjoyed relative stability, although the same countries certainly had not clone so in the 1970s. Then the fluctuations between the deutschmark and the French franc were greater than between either of them and the dollar. During the mid-70s—the seven-and-a-half year period between the effective end of Bretton Woods towards the end of 1971 and the beginning of the European monetary system in early 1979—there were fewer sinews of order in the world currency markets than at any time since 1945, except possibly during the past few days. That was a had period altogether. There was the first serious check to growth since 1945, the beginning of the return to mass unemployment and the sprouting of the great inflation. But it was perhaps worst for Europe in comparison with the other two main economic blocs and it was in sharp contrast with the 1960s. The currency instability for Europe was internal and not merely transoceanic, as with the United States and Japan.
It was out of those circumstances and thoughts that the European monetary system sprang. It worked very well, at any rate during the first 11 ½ years when we were outside. There were quite a lot of smoothly effected changes of central rate—small devaluations, if you like—for about the first five years. There were then occasional changes until 1987, which gave some flexibility and eased the settling in.
The date which we ultimately chose to join has always defied rational explanation, except perhaps in relation to internal Conservative Party dispositions. When we joined the system it was 139 months old. At least 130 of those would have been better months in which to join than the one we chose of October 1990. It was rather the same as with joining the Community itself in 1973, although the date of choice was not much within our control. In both cases we missed the good years and came in only for the rough ride.

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The harness of the deutschmark rate of 2.95 always fitted us somewhat uncomfortably and when the strain came we fell out. There were a number of major mistakes made before and during that Wednesday of sad farce. First, I agree with the noble Lord, Lord Cledwyn of Penrhos, that it was a mistake not to go for an adjustment of parity when the Italians did and to spend such a high proportion of our reserves on defending what had then become the indefensible. It is of course nonsense to suggest that using the reserves to buy pounds is the same as consuming real resources. Reserves so expended could not equally well have been used, say, to finance a large railway investment programme. Also reserves so expended tend to come back eventually. However, they can take a long time to do so; they can take an uncomfortably large number of years to do so. Furthermore, they come back minus the percentage of the devaluation and to that substantial extent the loss is real money.
Secondly, the Government have suffered the most appalling and central defeats both for their home economic and foreign policy strategies. In his speech on 10th July, which the Guardian so thoughtfully printed this morning, the Chancellor of the Exchequer not only nailed himself to the mast but scuppered in advance any alternative strategy which he may at this moment be trying laboriously to outline in another place. Leaving the ERM or varying from the deutschmark 2.95 rate, he said,
"would certainly be the end of the battle with inflation".
He said that we would have surrendered and quite soon interest rates would have to rise again to a much higher level than they are today. There was a great deal more in the same vein.
That speech alone, when followed by last week's events, would have made it not only proper but wiser for him to have followed the honourable example set in 1969 by the noble Lord, Lord Callaghan. However, it is not only the economic policy of the Chancellor and the Government as a whole, but also the European policy of the Prime Minister which is badly mauled. I believe that the Prime Minister genuinely meant to put us at the heart of Europe but the economy that he inherited from the noble Baroness, Lady Thatcher, and also from his own stewardship—the long years of untrammelled power, the years of the so-called economic miracle—just was not up to it. We had only to read about yesterday's combination of news about the real economy—a massive balance of payments deficit which is moving even higher in the depths of a recession and the closure of yet another major plant in a technologically advanced industry—to realise how deep is our plight.
There was one last flick of the old British Adam in the tail of our inelegant devaluation. As soon as we had been forced into it, the Government sent a high official to Brussels to propose that the whole ERM mechanism should be suspended and that others who had lived with it satisfactorily for eleven and a half years before we deigned to enter should be forced to put the mechanism into suspense because of our brief and inglorious membership. That proposal was rejected but for us to suggest it after that short
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membership cannot have failed to arouse in others the sad thought that things go better without us than with us and that there is much to be said for a variable geometry or two-speed Europe from their point of view. In the circumstances, we cannot be wholly surprised that the Germans show more enthusiasm for helping the French franc than they did for helping the pound sterling.
Some may welcome the concept of a two-speed Europe, although there is no doubt that we would be in the slow lane rather than the fast lane. However, it is a complete negation of Mr. Major's policy. Sadly, I am beginning to believe that some element of a two-speed Europe is inevitable.
One of the general European lessons of the four months of setback, for such there have been, through which we have passed is that totally rigidly fixed exchange rates without a single currency is a state of unstable equilibrium in which there is little chance of surviving for 10 years or more.
The natural assumption is that these events have put back the timetable for monetary union well into the next century, if not indefinitely. However, we may find that the core countries—particularly if France fights off successfully, as I hope and believe it will, the present attack—draw the opposite conclusion and prefer to go faster. If that is so, we should not obstruct. We should compare their experience with ours during the period, brief I hope, when sterling is discovering with which combination of interest and exchange rates it can live.
A fundamental issue for the European Community is to hold and strengthen the essential sinews of unity in an increasingly chaotic world which almost brings nostalgia for the stability of the Brezhnev years while recognising, as it must, that bureaucratic centralism has become unpopular.
The fundamental issue for Britain is to recognise that far from rejuvenating our economy, the 1980s left it almost on its back: the great oil bonus frittered away; a manufacturing base so attenuated that I doubt it has the strength to turn the corner of a post devaluation J-curve; public services, many of which are a disgrace to an allegedly first world country; and even the private service sector, the alleged jewel in the crown of the 1980s, enduring a swathe of bankruptcies in the unending recession. Until it is recognised that, economically, we have for some time been on the wrong road for Britain, I tremble for our future in or out of the ERM.
3.26 p.m.
Lord Howe of Aberavon: My Lords, I have some hesitation in troubling your Lordships for a second time so soon after my first appearance in your Lordships' House. I am all the more hesitant in the company of no less than three ex-Chancellors of the Exchequer, all of whom are senior to me and are political opponents. Certainly I cannot subscribe to the views with which the noble Lord, Lord Jenkins, closed his speech but I believe our occupation of that post tends to give us a common insight into certain matters. I do not mean that we come to share a homogenised, sexless, amorphous Treasury view but

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rather I believe that we come to share a certain sense of sceptical realism. I am glad to say that that has been adopted by the present Chancellor of the Exchequer who, in his important speech on 10th July, said that he would not regard any economic dispute "as a matter of religious faith".
Speaking personally, I feel amply qualified to take that ecumenical, if not agnostic, view because I must confess that in my time I have subscribed to most of the available faiths. First, as "Minister for keeping down prices", as I was affectionately called by my right honourable friend Sir Edward Heath, I put my faith and weight behind statutory prices and incomes policies. Several colleagues on both sides of the House, including my noble friend Lord Cockfield, shared the experience of testing that proposition to destruction. During my time as Chancellor of the Exchequer, our policy rested firmly upon monetary discipline, upon foundations firmly laid by the noble Lord, Lord Healey, and which were consolidated thereafter by myself, in concert with my noble friends Lord Lawson and Lady Thatcher, in the medium-term financial strategy.
Finally, there came the period when it was felt necessary to move away from the increasingly uncertain and confusing monetary guidelines in favour, after some delay, of the exchange rate discipline of the European monetary system. Of course, the House will have noted that each one of my three Conservative successors in the Treasury has been persuaded of the wisdom of that policy, as was the First Lord of the Treasury, my noble friend Lady Thatcher, at a time when neither my noble friend Lord Lawson nor I had any responsibility for economic policy. As my noble friend Lady Thatcher told the party conference in the following week,
"we had long been committed to joining the ERM"
and we did so at that time because it would, as she said.
"reinforce our own financial discipline against inflation".
Incidentally, it also enabled interest rates to be cut by one full point on the eve of the party conference.
What should we conclude from that history of our country's progress—if that is the right word—through three different frameworks of economic discipline under successive governments? I offer three propositions. First, intellectual, indeed political, fashion may swing between all three as the grass momentarily appears to be greener on the other side of the valley. Secondly, the practical truth is that we need to achieve, as other countries achieve, the strongest possible combination of all three: namely, a firmly disciplined monetary policy; responsibility in collective bargaining (though not, of course, a statutory incomes policy); and commitment to exchange rate stability. In so far as convergence between all three is lacking there remains the need—this is the most difficult part of all—for some means of adjusting parities without unduly eroding discipline. That is the position the Government were in until just over a week ago.
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The noble Lord, Lord Healey, may recall the first time that we debated the EMS together in another place in November 1978. He will forgive me if I quote myself from that time. I said that,
"the Chancellor is right in saying that he was talking not about a system of fixed exchange rates but about a system of more stable exchange rates, which in the early stages … will inevitably involve some changes in parity".
I went on to say that,
"we need … proper and workable arrangements [for these to be] undertaken … with sufficient frequency to avoid the forces that in the end destroyed Bretton Woods, but not so often as to destroy the credibility of the main commitment to increasingly stable and non-inflationary economic performance".—[Official Report, Commons,29/11/78; cols.483–4.]
That is much more easily said than done, even then. The difficulties are certainly greater today. But I am very far from being convinced that these factors argue against the system—on the contrary.
Of course last week's events are a very serious setback not just for our own country but also for Europe and, as I believe, for the wider world economy. But I do not believe that they destroy or even seriously diminish the case for a European monetary system and for the degree of stability that that aspires to achieve, for it is my conviction, as it was of those who founded and managed the Bretton Woods system, as well as of those who later started the EMS, that citizens and businesses alike do look to governments not only for stable money at home but also for as high a degree as possible of international exchange rate stability. That is not an illegitimate objective. It is just that which the EMS/ERM has increasingly succeeded, for the past decade and more and until very recently, in providing for its member currencies.
So why has it now run into such trouble? I offer several reasons. First, the anchor currency, the deutschmark, has itself been generating exceptionally real interest rates because the German authorities, and not they alone, seriously underestimated the costs of unification and continue to overestimate the extent to which they could or should be shared, by means of monetary policy alone, with their partners in Europe.
Secondly, the authorities on the other side of the Atlantic have at the same time been pressing hard and on almost every front in the opposite direction, with a huge and still rising fiscal deficit; and with interest rates as low as they could possibly be. Therefore, not surprisingly, there has been a flight from the dollar itself which has created fearful tensions for and between the European currencies.
Thirdly, there has been the introduction into this economically tense situation of an unforeseen and unnecessary deadline—that is, the fixed date of the French referendum without any or sufficient attention being given to its effect on the European economic partnership. That fixed date provided a most inviting one-way bet for currency traders. In the closing days there may well have been no interest rate high enough to shield a currency under serious challenge.
Finally, it must be acknowledged that we British have made our own sad contribution to the problem. I am not now referring to the difficulties of the past few days before our withdrawal from the exchange rate mechanism. What I really have in mind is our longer term hesitation to take our place within the

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system and, in particular, in the ERM. I put it quite simply like this: if it was right for us to take our place in the ERM at the time when my noble friend Lady Thatcher decided that it was just two years ago, when inflation was at almost 11 per cent. and interest rates at 15 per cent., then would it not have been wiser still to have done so at one of a number of points—at the latest from 1985 onwards—when inflation and interest rates were far lower and much more closely convergent with the performance of our most successful European partners?
Had we decided to take the decisive step of joining the ERM at an earlier stage, then it is my belief that the consequences could well have included the following: we in the United Kingdom should have far more safely secured the counter-inflationary, fiscal, and monetary stability, and the other great economic achievements (I repudiate the noble Lord in that respect) that we had been able to make during the first half of the 1980s, thanks to and under the leadership of my noble friend Lady Thatcher herself.
We should have been able, if necessary, to readjust without drama at a later stage, as our partners had and have been able to do, our initial choice of parity within the mechanism. We should have been able, as more experienced streetwise members of the system, to play a more effective role in all the discussions on monetary union which in due course inspired the Delors report and all that followed. The system itself, not just Britain, would have gained in experience and stability and would have been better placed to avoid the damaging turbulence of recent weeks.
What then of the future? It is certainly very clear that recent events are anything but a cause for rejoicing. There are those who see us as having been "liberated" and set free to pursue a "British" economic policy, with apparently almost unlimited freedom to set our interest rates where we wish and to let our exchange rate go where it pleases. I echo here the point made by the noble Lord, Lord Jenkins of Hillhead. It is hard to believe that anyone who has taken part in or shared the experience of economic management at any time during the past two decades can take so cheerful a view and can really believe that in one bound we are free.
I remind the House of just one example taken from my own experience in 1981. In March of that year, at the time of my notorious or celebrated Budget—according to choice—the pound stood at 2.43 dollars and the base rate came down to 12 per cent. Within six months, by 16th September, the pound had come down to 1.76 dollars. The alarm bells were ringing so we raised interest rates by two points to 14 per cent. By the end of that month, on 1st October, almost on the eve of the Conservative Party conference, we raised them by two further points to 16 per cent. If those are the joys of freedom then no wonder that others should look for a different approach.
The great risk is that the authorities, but much more probably, public opinion, might be tempted to believe that we should be more secure by having returned to flying by the seat of our pants. Such a course would be perilously close to that which the
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Chancellor, in his 10th July speech, dissected and dismissed under the graphic title of "cut and run". On the contrary, I remain convinced—and I hope that the Government do as well—that the exchange rate mechanism, with some adjustment certainly, will be seen to remain the only serious framework for monetary discipline available to the United Kingdom government.
Floating, on whatever terms, outside means that we should be more, not less, exposed. Too much advice to the contrary may come from folk who are are used to considering the management of the dollar, which is very different from the management of the pound sterling. For some time the European area is likely to remain effectively a deutschmark zone whether we are in or out of the ERM. We need to be a part of that as the way to exchange rate stability, which is desirable in itself, and as the foundation for long-term non-inflationary growth. That is the only way to bring our influence effectively to bear on crucial decisions about the economic policy of the entire continent and as a guarantee of Britain's wider influence within Europe as a whole. The establishment of a Franco-German monetary system could all too easily lead to a Franco-German Europe—the one conclusion that those who have had a clear vision of our country's true interests have long struggled to avoid. Therefore, for all those reasons I remain convinced that we need to rejoin the exchange rate mechanism as soon as prudently possible, and to do so within months rather than years.
Perhaps I may make three final points. The first relates to the other half of the entire contemporary debate, the handling of the Maastricht Treaty. I express my conclusion quite simply—that it remains above everything else in Britain's interest that we should not end up as the only country responsible for failure to secure ratification of that treaty. Her Majesty's Government must never allow themselves to lose sight of that point. If Maastricht fails, it must not do so because of Britain.
Secondly, the hugely growing scale of transactions on the foreign currency exchange markets—and, according to a report from the Bank for International Settlements contained in last Saturday's Wall Street Journal, the volume of transactions doubled between 1986 and 1989 to 640 billion dollars per day—makes the task of holding fixed but adjustable rates progressively more difficult. Therefore, the theoretical case—and it will become more than theoretical—for a single European currency grows stronger by the day. Meanwhile—we are not at that point yet—our practical development of policy needs to be conducted with that in mind.
Finally, and perhaps the widest conclusion of all, we should surely be looking for world economic leadership that can strive now to match the needs of the increasingly interdependent world economy. It is difficult to believe that the leaders of the Marshall/Acheson era who were "present at the creation" would have been content to leave present problems unaddressed.
I close by reminding the House that within half a dozen years of the collapse of Bretton Woods, in a

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lecture at Colombia University in June 1977, that "arch-monetarist"—and I use the labels without being overwhelmed by respect for them—the former Chairman of the Federal Reserve, Arthur Burns (the teacher of Milton Friedman and one can scarcely be less "Keynesian" than that) called for,
"the re-establishment of a rule of law"
for the governance of international financial policy.
If, in his view and in mine, the world stands in need of such rules then so, too, does Europe. We have come a long way since 1978 in building a unique structure of monetary discipline for our continent. We cannot and must not allow that achievement to be lost. We cannot and must not allow Britain to be sidelined within that system. We must strive for and secure Britain's proper place within the European partnership.
3.42 p.m.
Lord Callaghan of Cardiff: My Lords, I have much in common with what has been said by the noble Lord, Lord Jenkins of Hillhead and the noble and learned Lord, Lord Howe of Aberavon. If we are not on the same side of the House, we can certainly all display the same wounds and weals from our past.
As I do not wish to rehearse what I had intended to say (which, frankly, would simply repeat much of what has been said), perhaps in the course of my remarks I may be allowed to widen the scope of what has been said a little even if my remarks are not particularly focused on today's debate because it seems to me that Britain and Europe have arrived at one of those rare moments in politics when the decisions that we take and what we do in the weeks ahead will influence the course of European history for years to come.
The present debate is not only about the future of the exchange rate mechanism; it is not only about the speculators; it is not even about the Government's lack of competence in handling our affairs—important though those things are. The issue is more significant. In my view, in what we do about the ERM and in what we do about the Maastricht Treaty, Parliament is about to play its part in the decisions that will determine the future of this old, war-torn Europe of ours, such as whether our countries go forward together or whether Britain, by standing on one side, chooses a course because of our power and influence that will lead to a divided Europe, to shifting alliances, to the resurrection of old and virulent nationalisms and perhaps even to attempts in due course to redraw disputed boundaries or even worse.
That in my view is the final issue that we face in discussing the mechanics of our economic policy. It has come to a head in most unpropitious circumstances, brought about by over-ambition in Brussels and by the failure of European heads of government to confront the real difficulties of the Maastricht Treaty when they were negotiating it, and by the worst economic recession and the highest unemployment in Britain for 60 years. There could not be a worse combination of circumstances in which to ask our people to take a broad and enlightened view for the future.
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Even worse because the British people had been misled by Ministers, the currency devaluation of last week came like a clap of thunder. We had been told so often that the pain of bankruptcies, the repossession of homes and the loss of jobs were bringing inflation down and were transforming our economy into one of the strongest in Europe. Indeed, it is only a few weeks ago that a Minister (I believe that it was the Prime Minister but I have not been able to check that) declared that if we hung on a little, sterling could replace the deutschmark as the benchmark currency in Europe. What a vain and empty boast it was! We can only conclude that Ministers deceived themselves as well as us by swallowing their own propaganda. And so it came as a greater shock when nemesis and the speculators struck, when the pound was devalued and the cornerstone of the Government's monetary policy crumbled within 24 hours.
We are now watching in the fluctuating battle to save the franc how even a healthy economy and a perfectly strong currency becomes a potential victim when a mass of free-flowing capital is thrown against it. The pound was much more vulnerable than the franc because, in my view, from the start of our Membership of the ERM the Government had over-valued the pound against the deutschmark, and in doing so had also indirectly over-valued it against the American dollar. There cannot be one of your Lordships who has an American friend who has visited this country this summer who has not been told by him how out of line our prices have been.
The Chancellor was warned and said that he knew better. Indeed, he was saying only 10 days ago that he knew better—and now the truth is out. Our membership of the ERM was crippled from its very beginning by over-valuing the pound. Mr. Major must accept full responsibility for fixing a central rate of 2.95 deutschmarks to the pound which, under pressure, drifted down to 2.78 just before last week and which now, in an unsupported market, stands as low as 2.55—a devaluation of some 14 per cent.
The speculators have had a killing. It is they who tipped sterling out of the ERM bed; but few will or can deny that the present market has now set a more truthful exchange rate than that which existed a month ago. The Government must address themselves urgently to the scandal of speculation. This is not just the work of the barrow-boys whom we see on the screens. They are only the front men, representing and dealing on behalf of the most respected banks and institutions in society, the people with big brass nameplates in the City of London, on Wall Street and in other financial centres. They are the people who are doing this damage to the international monetary system. They have been able to make a killing during the past few days because of the decision in the early 1980s to abolish all controls on the free movement of capital across frontiers and because modern communications make it possible to effect the transfer of hundreds of millions of marks, francs, dollars or pounds in a micro-second. I must not make this just a case of reminiscence but when I was Chancellor a quarter of a century ago, it was possible—and indeed central banks succeeded—to curb the speculators

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because there were capital controls at that time—and I see that Spain yesterday reintroduced a set of capital controls once more—and because modern technology had not reached the stage it has now. But even then we saw that this situation would come and we were only thankful that it did not arise while we were there.
Something must be done because what is happening is a scandal, and the governments concerned, in my view, should begin discussions with the financial institutions at once to find a solution. One or two of the best minds in financial circles in New York are already beginning to turn their attention to this, and they are right to do so. What solution can be found I do not know, but I will make my own simple suggestion. It is that the institutions should take note of the people's anger over what has happened. The foreign exchange activities and dealings should be kept separate from other activities and it should be quite possible to track them and to determine the amount of profit. Then those deals could be taxed separately with an excess profits tax of about 100 per cent. That coupled with the impact of public opinion would soon slow the dealings down. It would not stop them, but it would slow them down and some of the practitioners involved might then be put to more socially useful work.
That aside, as I say, something must be done. The lesson now being re-learnt by Ministers is that stable exchange rates can be achieved only if the economies of competitor countries are broadly in balance over the long run. Ours is not. We are weaker than our principal competitors, and if last week has any benefit it is that the illusion of something different has been swept aside. Of course the noble Lord, Lord Howe, is absolutely correct when he talks about the fallacy believed by some people about the freedom of sterling outside the exchange rate mechanism. The Chancellor is going to have a more difficult task than he has had so far to balance our lower interest rates against the exchange rate. I heard an important industrialist on the radio this morning calling for a 6 per cent. interest rate. I fear he is bound to be disappointed unless the Government are willing—and clearly they are not—to allow the pound to drift downwards to a much lower value than it has already on the exchange limits.
In my view it is urgent—and I support what has been said by my two predecessors in this debate—that the Government should begin fresh discussions at once with the other members of the ERM to put forward any changes that they wish to see. I do not know what those changes are, but I believe there should be a realignment of currencies against the deutschmark in order to return to some kind of stability. As soon as that is done, and preferably in weeks rather than months—certainly in months and not years—Britain should re-enter the exchange rate mechanism. But for heaven's sake let us learn from the mistakes of last time and do not let us overvalue our own currency, nor join at the worst possible moment.
There is a long hard road ahead for Britain before we recover and Mr. Major could do worse than listen to some of the proposals that have been put forward by my colleagues in the other place, Mr. John Smith
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and Mr. Gordon Brown, who have reiterated and hammered home time after time the need for more investment, for more and better education and for more training. All these things are long range but they should be tackled. After all, it was the Prime Minister himself who said recently,"There is no easy way out." Devaluation is not an easy way out. I was arguing that 30 years ago, and I have never felt any different about it. I agree with him: it never was a soft option. It just brings a different set of problems which are just as difficult.
I would say in passing, what a damning statement that was from the leader of the party which has had charge of our affairs for 13 years and which we were told had achieved an economic miracle. When I heard the noble Lord, Lord Wakeham, attempting to defend the indefensible I thought he might have summed up his speech with a quotation from Rudyard Kipling. I jotted the words down as I heard him. He might have said:
"It was our fault and a very great fault
And now we must turn it to use;
We have forty million reasons for failure,
But not a single excuse."
Let him weave a sampler and hang it over the bed of the Chancellor of the Exchequer so that he can read it every night.
The Maastricht Treaty is an elaborate, indeed an over-elaborate, text that has given its critics plenty of ammunition with which to attack its central purposes. One saving grace was that the Prime Minister quite rightly insisted on a separate protocol, giving Britain the freedom not to move to the third stage of economic and monetary union without a separate decision by Parliament. Its detailed timetable was, and always has been, quite unrealistic. Nor is it possible for some member states to live up to the prescribed conditions set down in those articles in the Maastricht Treaty on such matters as ratios of debt or of convergence within the specified time limits.
However, having said that, the sceptics who would prevent Britain from ratifying the treaty are wrong. They underestimate its importance, as the noble Lords, Lord Howe and Lord Jenkins of Hillhead, said, both for Britain and for the rest of Europe if only as an expression of political will. It is not possible to understand the determination of the German and French leaders to go ahead with or without us until we recognise the hunger of the demand to establish a permanent settled order in the centre of Europe. And why, my Lords? It is because those leaders profoundly—and in my view rightly—believe that the long-term peace of Europe requires not only mutual military arrangements and trade agreements but also economic, monetary and political unity.
I have said to your Lordships on previous occasions, and I must continue to repeat it, that 80 million Germans now reunited are powerful and free for the first time since World War II to choose their destiny and to shape ours. If Maastricht is rejected, their leaders will once again face the historic dilemma that has dogged their foreign policy for a century: should Germany look East or should Germany look West? All the German political parties have chosen to look West and in doing so have given Europe its best

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long-term chance for long-term peace. The present generation will persist in a policy that ties them closely to the West, and they will persist irrespective of whether or not Britain is there.
However, Britain will be severely disadvantaged if we stay out. We shall be weakening the prospects of peace on the Continent. If and when the Government, as I hope they will, present this treaty to the House, believing as I do that the logic of events will assert itself when the over-ambitious terms of the treaty become obvious and the deadlines cannot be met, then for these reasons I shall vote in favour of the treaty. The political leaders will have to take into account that many of the citizens of France and Germany, as well as here, do not wish to march to the federal drum; but at the other extreme neither will the Balkanisation of Europe, nor even its division into two, be tolerable. In the words of Denmark's Prime Minister, the treaty "must be clarified"; but it is frankly feeble of British ministers to shelter behind little Denmark.
Let me conclude. The British people are looking for a clear statement of the Government's intentions. Mr. Major is going to require great sensitivity and imagination if he is to overcome his party difficulties and hold the members together, but it is clear where his duty lies—that is, to put the treaty before Parliament. I have no doubt that that is the course which the post-war architects of Europe would have followed. Churchill and Macmillan both possessed a deep sense of history. Attlee and Ernest Bevin both had an intuitive sense and understanding, arising from their wartime experience, of what was needed. All these men comprehended the tides of history. Alas!, for 10 years this country was led by a Prime Minister who, whatever her other qualities, showed little evidence of understanding either Europe's history or its present needs.
Our present Prime Minister is still an unknown quantity but I trust he will see that Britain's interests and Europe's long-term hopes are one and that his objective of placing this country at the heart of Europe requires him to ratify the treaty and to hold to that course. Then I believe that Britain will be marching along a path of long-term prosperity and peace with the rest of our fellow Europeans.
4 p.m.
Lord Ezra: My Lords, I rise to speak with some hesitation, following on the important speeches of three former Chancellors of the Exchequer, with one more to come, and a former Prime Minister. My own experience has been in the management of businesses in the public and private sectors and I therefore propose to confine my remarks in this important debate to measures which I believe should now be taken to stimulate business activity.
In doing that, I believe that we have to recall, as indeed has been mentioned in previous speeches, that the basic problem of the British economy over a long time has been the difficulty of combining growth with low inflation. More often than not the two have diverged. The most recent example has been what happened in the late 1980s when there was a considerable expansion of demand fuelled by excessive
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credit. This led to the largest balance of payments deficit in our history and a substantial increase in inflation. As a result, as we well know, the Government have had to take emergency measures in the past two years which have had a marked deflationary effect. Inflation has in fact been brought down but at the cost of a deep and continuing recession.
That is why from this side of the House we have continually and strongly advocated measures to offset this adverse impact on the economy. In particular, we consider that more should have been done to stimulate productive investment in both the public and the private sectors.
Now that we have temporarily withdrawn from the ERM there is greater freedom to take measures to combat the recession, such as the recent cut in interest rates, but the risk of inflation has been heightened, as the noble Lord the Leader of the House made clear in his remarks. The worst solution would be to stimulate another consumer boom such as we had in the late 1980s, as that would lead us into another major balance of payments crisis and renewed inflation. My noble friend Lord Jenkins of Hillhead pointed out that even in a recession the latest balance of payments figures are running at a very high rate indeed, at double the rate forecast by the Treasury for the year as a whole. What is needed is not another consumer boom but measures to stimulate exports, taking advantage of the lower value of the currency, and to increase productive investment. At the same time, as has been very strongly emphasised by all previous speakers, we must continue the fight against inflation.
Taking those three factors together, I would recommend the following specific measures. First, I believe that there should be an urgent review and expansion of export services in order to make sure that British industry takes full advantage of the reduced value of the currency to maximise exports. That, after all, is the greatest single benefit we can get from an otherwise undesirable proposition. Secondly, measures should be put in hand to stimulate investment in the private sector, particularly through a substantial increase in investment allowances, something which has been pressed for for a long time. Specific fiscal incentives should be given to investment which has a positive impact on the environment. For example, homes with a high energy efficiency rating should benefit from lower stamp duty or other fiscal alleviation. In the public sector, productive investment in the infrastructure should certainly not be reduced in spite of the pressure to reduce public expenditure and, if at all possible, should be increased. That applies particularly in the housing sector, where more funds should be released to local authorities, in the transport sector, where more investment should take place in the railways, and in training for industry and commerce, as emphasised so vigorously by the noble Lord, Lord Cledwyn.
At the same time as these measures are taken it is vital that there should be credible steps to continue to control inflation. Recent events have shown that determined and brave words are not enough in matters of government financial policy. Therefore, if

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we no longer have membership of the ERM to help us to combat inflation, something needs to be put in its place. I recommend that a specific mandate should be given to the Bank of England to establish and maintain price stability. The Government would of course remain in ultimate control of the economy but this mandate of the Bank of England could be reported on every three months so that we could all know how the matter was being handled.
By this combination of measures we could relaunch growth where it is most needed—namely, in exports and productive investment—and at the same time demonstrate that the continued control of inflation was being taken seriously.
4.8 p.m.
Lord Cockfield: My Lords, this is a sad occasion. It is entirely wrong and counter-productive to try to dress up defeat as victory. What has happened in the past seven days is a defeat not just for the Government's economic policy; it is a defeat for the country, it is a defeat for the European Community and it is a defeat for the world as a whole. We need to look at matters in that context.
Our own record of financial management and of looking after our own affairs has not been a happy one over a long period of time. Both parties share full responsibility for that. I shall go back no further than 1967 when Mr. Harold Wilson, as he then was, was Prime Minister for the first time. The pound as it then existed was described by Harold Wilson as "the pound in your pocket", but when one put one's hand in one's pocket one discovered that the pound was hardly there any more. That pound is now worth 10 pence. If we continue down the road that we have been travelling over these past 25 years under the guidance of governments of both parties we shall end up before long with a pound that is worth tuppence. We have to find some way of dealing with that situation. The one thing that is completely useless is rummaging through the dustbin of history and recycling the policies which have been tried but have failed and have been discarded not once but several times in the past. The saddest aspect of any debate of this kind is how often the remedies offered are remedies of proven failure, not possible failure but of hard proven failure.
A great deal of new thought is required in this field and a great deal of co-operation among individual countries. That matter is of importance to the European Community because Western Europe is the best forum for co-operation. As the Community expands, either formally by taking in new members or informally through agreements such as the European economic area or new agreements with the countries of Eastern Europe, so that the area of co-operation extends, that will be one of the major new forces of stability.
I should like to comment briefly on the subject of the securities markets which was mentioned by the noble Lords, Lord Callaghan of Cardiff and Lord Jenkins of Hillhead. A great change has taken place in those markets in the last few years. It is all very well to say that one cannot buck the market, but the
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market that one ought to he expected not to buck should be a genuine market. The securities markets are no longer genuine markets. They are not dealing with real money; they are dealing with slips of paper that bear absurdly large figures which are written on the slips by frenetic young men or with similar figures that appear on computer screens. They have discovered that any figure only marginally above zero, if multiplied by adding sufficient noughts, ends up with a profit of £15 million, or whatever the figure was that the young man was boasting that he had made. Occasionally one of them comes unstuck, which is the story of BCCI. If that is the case, it is not the frenetic young man or the directors of BCCI who have to pay; it is the unfortunate depositors in the organisation.
That is not the only example. Figures have been quoted of transactions that have gone through which no longer bear the slightest resemblance to the trade flows or to the flows of investment money. It is all very well to say that the markets ought to reflect the real world; of course they should, and to the extent that there were errors in economic policy in this country one must expect them to have been reflected in the markets. However, most of what was reflected in the markets had nothing whatever to do with the real world. It is as though we had decided that we were not going to hold general elections in the future; we were going to take the odds quoted by Ladbrokes and decide the outcome of the election in that way. That is exactly what is happening in the currency markets of the world.
We can blame ourselves about the position of the pound if we wish to, or we can say that it is no fault of ours but the fault of somebody else. However, if one looks at the French franc, the French economy was very much stronger and there were no grounds whatever for the attack which was made upon the franc. It was simply that the speculators, having got the bit between their teeth, were determined to run with the carrot that was dangled in front of them of £15 million by lunchtime. That problem must attract the attention of finance ministers in this country, in the Community and in the greater world.
I should not like anyone to think that I am critical of bankers; I am not. However, it will be within your Lordships' recollection that not very many years ago laundering the proceeds of drug trafficking was regarded as a perfectly legitimate activity, in the same way as insider trading was regarded as a perfectly legitimate activity. There are now extreme sanctions against people who launder drug money. Those sanctions have not only been supported by the United Kingdom in the Community but we cited our own legislation on the subject as a pattern for Community legislation.
Taking the securities markets by the scruff of the neck and making them behave properly is entirely in accordance with the philosophy of this side of the House as well as in accordance with the philosophy, or non-philosophy, of the other side of the House.
I should like to comment briefly about the Treaty of Maastricht. I have stated previously that the importance of the treaty has been greatly overstated. That is one of the reasons why there is a serious

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division of opinion in this country. I entirely understand why our own Prime Minister represented it as a victory, game, set and match. It has therefore been represented by the anti-European lobby as a dragon that they, clad in the armour of St. George—if they could only find where it was—are going out to slay. Therefore, one gets a totally unnecessary polarisation of opinion.
The fact is that all of the important policies in the Maastricht Treaty are already part of Community law or Community policy. The Maastricht Treaty is a very useful, valuable treaty which ought to be ratified. It dots the "i"s and crosses the "t"s in order to make the administrative arrangements to set up the institutions required for the single European currency. The Single European Act specifically contemplated that that should be done under Article 236 of the Treaty of Rome. The Maastricht Treaty was merely an afterthought.
The first thing that went wrong with the Maastricht Treaty was the battles that occurred at the time of the Rome summit in 1990. That summit led to the political assassination of Mrs. Margaret Thatcher, an incident that will no doubt be very much in the minds of some of your Lordships. At that time there were very, very wide-ranging and, some people would say, wild ideas in circulation. However, the first draft of the treaty that was produced by the Luxembourgers cut most of that out; the Dutch then had a go at it and created another row and produced another version, which took even more out. Finally, the treaty was agreed with the best efforts of our own Prime Minister. I will not say that everything that was left was taken out, but a great deal was taken out which from the point of view of this country was regarded as objectionable.
It is a great pity that safeguards of this kind were not given at that time to the Danes. When we drafted the Single European Act in 1985 a whole raft of special provisions were inserted to protect the Danes. They all concerned matters to which we in the United Kingdom objected very strongly. They wanted high environmental standards and absurd matters of that kind to which we felt we ought not to agree. However, the Single Act safeguarded the Danes on these points. When we obtained the safeguards for ourselves in the Maastricht Treaty it is a great pity that corresponding safeguards were not put in for the Danes. I believe that if they had been there would have been none of the trouble that we have experienced.
I should like to say a final word about the single currency. If the Maastricht Treaty is not ratified that will not stop the single currency going ahead. because the legal base of the single currency is in the Single European Act which was ratified in 1985. About that there is no question whatever.
Two things are likely to happen. First of all, it will be less likely that all the countries will come together and will do so by 1999. We shall see a spreading out of the process over a greater number of years, with the strong coming in and the weak following afterwards. Secondly, we must bear in mind that there is already an embryonic single currency in Europe. Germany itself, France, Belgium, Holland and Luxembourg already form a de facto single currency with the
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deutschmark. Sweden, Austria and, until very recently, Finland belong to the same group. If Maastricht fails, what will happen—and there is an exact precedent for this in the so-called Schengen agreement on the freedom of movement of individuals—is that that central group will become more cohesive and a number of other people will join it. That is the biggest threat to this country because, if there was a single currency from which we were excluded, the pound sterling would become par excellence the speculators' counter. That is just the kind of thing that on the experience of the last few days we must at all costs avoid.
I hope very much therefore that we shall see the treaty ratified. I believe that a delay of some months in the ratification is of no importance whatever. The single Act itself was six months overdue by the time it was ratified—on that occasion it was the Irish not the Danes, but it is always someone—but it did not in the end make any difference at all. It went ahead. There may as time goes on have to be some alleviation of the timetable. That is not without precedent. If you read the Treaty of Rome—and I realise that very few people have—you will see that the single market was due to be completed at the latest—I underline the words at the latest—by 31st March 1973. It will be completed just 20 years behind the set date. I am sure that we shall need to do very much better in the case of the single currency. I am sure it is in the interests of this country to do better in the case of the single currency and I hope that we throw our weight behind it.
4.24 p.m.
Lord Healey: My Lords, I regret to admit that I am the fourth former Chancellor to address you this afternoon, but you will be delighted to hear that I am the last, at least in this debate.
I do not think that the noble Lord, the Leader of the House, set out to entertain or instruct us in his speech this afternoon, but it is a pity that he did not choose to offer one word of apology from the Government for breaking all their promises and reversing all their policies less than a week after a solemn public undertaking by the Prime Minister not to do so. The noble Lord, Lord Cockfield, provided a refreshing contrast by admitting that we face an abysmal situation for which the Government—and not the first government since the war—must take and admit responsibility.
We are debating the Government's economic policy. If we look at the situation as it is today, we have to admit that the Government have brought us the longest recession since the 1930s and that there is now no sign of recovery. Indeed, the Chief Economist of the CBI said the other day that he did not think we should get recovery until 1994. Yet, although we are bumping along the bottom of a slump, we are running into a balance of payments deficit this year of £12 billion, twice what the Government predicted only a month or two ago. Our fiscal deficit looks like being at least £40 billion, many more times what the Government predicted two years ago. Unemployment

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is racing up towards 3 million and may well touch 4 million even on the Government's unrealistic figures by the time recovery starts.
Yet the Chancellor has consistently refused to face the facts. In every one of the last five Treasury forecasts, he has forecast a sharp upturn in the coming year, although the reality has been a steady decline. This week we had the most disturbing figures published by the Stationery Office comparing British economic performance with that of our European partners. On investment and output in the last few years we have been far below the Community average; in consumption and prices, far above. Only yesterday the Government published figures which showed consumer spending up although output was flat and investment down.
The fact is that in the first 13 years of the Government we have become by far the weakest of the major economies in Europe. The catastrophe that hit us last week was due to the fact that, although we were the weakest economy of the larger economies in Europe, the Prime Minister took us into the exchange rate mechanism at a rate which was unrealistically high without in advance consulting his future partners about whether the rate was reasonable, although they were obligated to support it by the terms of the ERM. He told us—I quote his words two years ago—that the ERM is the modern-day gold standard under another name
"with the deutschmark as anchor".
He knew what he was doing all right, but he had not the slightest idea what the consequences would be. He chose a moment to put us in the ERM when it was already clear that the cost of German unification and the failure of the Bonn Government to raise taxes to cover that cost was bound to compel the Bundesbank to raise German interest rates.
Even in the last month or two the Prime Minister refused every appeal from his colleagues in the exchange rate mechanism to join in a general realignment involving the weaker currencies. Mr Ciampi of the Italian Central Bank apparently told people at the airport—he is quoted in today's Financial Times—that all the others begged him to do that and the German Bundesbank offered a bigger cut in interest rates if there was a general realignment. Instead, he chose far too late, when we came under irresistible attack, to raise interest rates to 15 per cent. That is 12 per cent. in real terms—above the rate of inflation and for small businesses it is equivalent to 17 or 18 per cent. That was a recipe for total economic disaster. On top of all this he spent between £10 billion and £15 billion on intervention. Then he lost his nerve, took us out of the ERM and that night tried to get a Treasury official to pull down the pillars of the ERM as a whole with him. As I said earlier, he has broken every promise. According to his own words, he has betrayed the future of our own people, yet we have not had a word of apology. Indeed, I watched the Prime Minister on television last week telling us after we had floated and were already 10 per cent. below the level at which we entered the ERM,"Oh no, we have not devalued".
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We now have the Chancellor telling his friends in the Conservative Party that he never believed in the ERM at all in fact and he is delighted that he is now free to pursue British interests. If that is what he really thinks, surely he should persuade Her Majesty to make Dr. Schlesinger an honorary Knight of Great Britain and reward him for giving us this freedom of which the Chancellor is now so proud, instead of loading him with abuse. I am bound to say that I agree with the noble Lord, Lord Jenkins. I cannot see why anyone should believe a word that the Chancellor of the Exchequer now tells us. His credibility is destroyed. It would be far better if he left his office than continue to saddle us with a man responsible for our finances and economy who cannot be believed.
Well, the Chancellor has taken some steps to try to put things right. Since then, he has cut interest rates by 1 per cent. and let the pound fall, I guess, nearly 15 per cent. up to the moment at which I speak, and it may fall further. But every other element in the policy which has reduced us to the state that I have just described remains in place, except the anti-inflation policy. There, he has gone back to reliance upon monetary instruments which failed during the 1980s and which were abandoned by the last but one—is it?—Conservative Chancellor for that reason. For the reasons which the noble Lord, Lord Cockfield, explained, if he wants to protect us against inflation, there is no doubt that he will be compelled before long to raise interest rates again.
I believe that the cut in interest rates and allowing the pound to float in the consequence of this catastrophe is a sensible short-term measure; but it is not enough by itself. The United States is still locked in recession after seeing the dollar fall to half its value a decade ago and interest rates touching zero more than once in the past few years. But it has not pulled the American economy out of recession, nor will it. That is one reason why President Bush will lose the forthcoming election.
The new policy of the Government—that is, if it is new—will be as great a failure as the old unless they take other steps: to cut consumption, to increase investment and training and give massive spending assistance to restore our crumbling social and economic infrastructure. I agree that that will mean an increase in taxes, unless the Government make deep cuts in our defence spending (which is staying higher than that, for example, of Germany as a percentage of our GDP) and reverse the multi-billion pound bribes which were given to the electorate before the election to make the poll tax and the council tax more acceptable. Above all, the Government must rely upon consensus: they must cease saying that "consensus" is a dirty word. The noble Lord, Lord Cockfield, was quite right to say that we should not go back to policies which are proven failures. But that mix of policies has been a proven success in the two countries which are our most formidable competitors; namely, Germany and Japan.
Meanwhile, I fear that we face an appallingly difficult situation in relation to the European Community and our place inside it. We are already in a second tier, along with the Mediterranean countries,

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and we shall be unable to return to the exchange rate mechanism, still less move to any sort of European monetary union and single currency, unless we adopt the changes in our economic policy which I have described.
I suspect that the noble Lord, Lord Jenkins, was right in what he said in an article in the Independent this week in which he noted that ever since the war there have been spurts of advance in the European spirit. He said that he thought that this last spurt, whether or not Maastricht survives, is just about due to splutter into a culvert round about now. I fear he may be right on that point. The referenda in Denmark and France and current opinion polls in Germany, as well as in Britain, suggest that there is now no enthusiasm among our peoples for that political and economic union to which this country pledged itself when the previous Prime Minister forced the Single European Act through Parliament under a Guillotine Motion.
What lessons can we learn? I ask that question because if we do not learn from our mistakes, we shall continue to make even worse mistakes. First, obviously every politician knows that it is very dangerous to move too far ahead of public opinion. Choosing how far you can move in advance and keep the public following you is one of the most difficult tasks in politics. The second lesson—which, after all, was preached about by the Germans and by economists long ago—is that you cannot have a European monetary union or single currency without a degree of economic convergence which is guaranteed by a single political authority. That has always been the point on which the German Government have insisted right through these discussions. But none of the European Governments is ready for this at present.
In his television debate during the referendum campaign, President Mitterrand specifically rejected the idea that France should ever submit its foreign policy to decision by a majority of other European Governments. He specifically stated—and, I fear, stretched the truth more than a little—that the European Central Bank envisaged under Maastricht would be under the control of the 12 European Governments. That is something which the Germans would always reject and, if the French persisted in that view, it would guarantee the rejection of European monetary union.
Yet, it would be catastrophic to draw the lesson from all of this that European unity is now impossible, still more unnecessary. The single market is vital to this country as it is to all the other 11 countries in the Community and equally vital to the countries in EFTA which want to join the Community. A united Europe is the only hope visible to the countries of Eastern Europe. Here I agree very much with what my noble friend Lord Callaghan said on the matter. Whether we like it or not, I think that it may be necessary to accept that Europe's advance will proceed at several speeds in the immediate future or we may even have some sort of Europe á la carte. That
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is what the Danes clearly want. They want to be able to pick and choose which elements of the Maastricht Treaty they will carry out and which they will not.
My noble friend Lord Callaghan was so right to point to the wider perspective. We are living in a world of colossal uncertainties. All the predictions that we make now about the Common Market or the single currency may be thrown into ruin in the coming years by events in Eastern Europe or what used to be the Soviet Union or even in the Middle East or on the other side of the Mediterranean Sea. What I find most depressing is the fact that the Chancellor of the Exchequer should have chosen this very moment deliberately to excite the worst form of xenophobia in Britain, egged on with passionate shrieks from the previous Prime Minister on the other side of the Atlantic who actually committed us to political and economic union by forcing through the Single European Act. It is not good to see a British Chancellor behaving like the poor man's Le Pen. I believe that that is a politer description than the one used by the Italian Prime Minister who compared him publicly with a "tot in a tantrum".
The attacks on Germany in particular are grossly unfair. It is the only country in Europe at present which is getting to grips with the problems left by the end of the cold war. It is spending £100 billion on assimilating the 18 million in Eastern Germany; it is giving more assistance to Poland, Hungary and Czechoslovakia than all the other members of the Community put together; and it is taking 100 times more refugees from Eastern Europe than Britain. Moreover, even on the question of the ER M, where its views have been an open secret for many years—indeed, the previous president of the Bundestag, Karl Otto Pohl expressed them publicly before we joined in 1980—last week Germany spent more money defending the pound than it has so far spent defending the franc. Yet the Chancellor gives no hint of those facts in all his public speeches.
Finally, I want to say a word in regard to two fundamental issues, one of which has already been raised by several speakers. One of the worst things that happened in the Western world is that political cowardice has led governments consistently to refuse to raise taxes when it is clearly necessary to do so. That failure to raise taxes, to promote economic growth in our own country and to assist other countries in travail, as the Americans did at the end of the First World War, is one of the reasons that the whole of the Western world has suffered from unusually low growth in the past 13 years. It is a cowardice which exists not only in this country but also in Germany and, above all, in the United States.
The last problem—I am glad it was raised so often in this debate—is that of speculation. As the noble Lord said, it is the fact that exchange rates and interest rates are determined by a Mafia of gilded young lemmings in the dealing rooms of the banks, financial institutions and corporations who treat money as grains of rice with no reference to the underlying flows of trade and production which it has always been supposed to represent. One thousand billion dollars a day can cross the exchanges in micro-seconds in

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search of speculative profit—a far greater sum than all the pooled reserves of all the countries in the world. Most of that money—95 per cent.—crosses the exchanges not to finance trade or investment, but to win profit for the institutions and of course for the dealers themselves whom we saw defiling our screens more than once last week.
The question is how we can control that. It is interesting to note—the noble Lord, Lord Cockfield, referred to this—that the countries which still hold capital controls have survived the flood; Ireland, Portugal and Spain are seeking to do so. The American Treasury Secretary, Mr. Brady, suggested that the world finance ministers and bankers should get together now to find ways of controlling it. Several people referred to the desirability of that. However, nobody except my noble friend Lord Callaghan suggested how that might be done.
I am glad to say that Mr. Felix Rohatyn—the New York banker who may well become the next Treasury Secretary should Clinton become President—put forward concrete and specific proposals. It is therefore just possible, in spite of the folly of governments, that we may yet be saved.
4.43 p.m.
The Earl of Perth: My Lords, I rise to speak having had the privilege to hear no fewer than four former Chancellors of the Exchequer, not forgetting the noble Lords, Lord Jenkins and Lord Cockfield, who have such specific knowledge of Brussels and the European Commission.
Around two months ago I wrote a letter to The Times which was published. In that letter I urged that we should seize the opportunity to readjust—I used that word; the catchword now is "realign"—the European currencies with Germany. I felt that the situation was becoming totally out of hand and that it would be reasonable for the European countries to approach Germany and say,"We want to realign". I am sure that Germany would have said,"Fine, you are quite right. We are in a somewhat special position and would welcome it".
I took special care that my letter should be seen by the Government, whether by the Chancellor or even the Prime Minister. However, I received no answer. I am not surprised. That is perhaps the way of governments. It seemed to me that either pride in their policies or obstinacy was the reason that they were not prepared to contemplate any change. They felt that the only action they could take was to fight it out on the ground at the present time; fight it out regardless of the enormous suffering that was inflicted on many of the European countries' economies as a result of the wrong levels of currency being imposed.
We know what the outcome was. It was a week of total chaos and farcical behaviour in the markets of this country. Ministers are to blame; clearly the Treasury is to blame; and officials and advisers should all be made to consider their positions. It was a mess. We saw the exchange rate going up and down like a
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yo-yo. In the 60 years during which I have taken a special interest in banking I have never before seen that happen.
There is a lesson to be drawn from that. Those are monetary matters. The Bank of England is the best equipped to handle them. But no; our Bank is tied to the Treasury, to the Government. It is nowhere near having its own say. I wonder why we cannot follow the example of America with its Federal Reserve or Germany with its Bundesbank. Perhaps it is because the officials think they know best. I make a strong plea that the question of the urgent denationalisation of the Bank of England be considered.
I well understand and entirely agree with the Government that at all costs we must fight inflation. However, there are limits beyond which one cannot go. I was interested to hear the Leader of the House say that perhaps we have been too severe. I cannot remember his exact words but the general tenor was a veiled apology for the policy over the past several months or even year.
The Government should stick to their own role in economic matters. They should be concerned with tough budgets; with economic policy generally; with training people in industry who for one reason or another have found themselves unemployed; and with the services, which are so important these days. They should worry about pay levels. Although I am a great supporter of the police I was rather distressed to read that there was to be a 6 per cent. settlement of their pay. That seems to me to be too high in the light of the present inflation rate. Those are areas in which the Government can take action. If the Government were to stick to their last in relation to those matters and leave other matters to the Bank of England, giving it broad guidelines but stopping at that, I believe that we should all be much better off.
I now turn briefly to the European situation. We have heard from speakers such as the noble Lord, Lord Callaghan—whose speech on the subject of the Maastricht Treaty was of great significance and should be studied by one and all—of the importance of our going ahead now and not at our leisure, at a time when we consider that it would be nice to do so or conditions are right, but now that the Prime Minister is President of the Community. We should drive ahead not only in respect of the Maastricht Treaty—where perhaps there may be a need for one or
two small changes—but more importantly in relation to the question of currency.
The Government, and many of your Lordships, have said that they would like to make changes which would enable us to re-enter the ERM. I read that Sir Edward Heath had said that that is not enough. I agree. We can tinker with the system, but I believe that we should drive for one single currency. I know that that involves difficulties, but it would be more worth while to do that rather than tinkering with the ERM and facing the same difficulties with the next currencies which may be attacked by the speculators, who will say,"This is wonderful. Now we have another chance". Let us be brave and go forward on the basis of a single currency now, if only to outwit the currency speculators.

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We should take this opportunity to denationalise the Bank of England. These days privatisation is a shibboleth, but I believe that we should consider very carefully before we, for example, denationalise coal. I understand some of the reasons for doing so, but the consequences are so appalling in view of the present level of unemployment that I believe that we should wait. There is no great urgency.
To sum up, I say humbly, in view of the great speakers who have spoken before me, that we should consider the position of the Bank of England and try to ensure that the Government are concerned with their economic policies but not with certain administrative details. Secondly, I do not believe that we can reform the ERM, although it would be nice if I were wrong. Therefore, we should aim for what I believe to be the right and ultimate object, namely, a single currency.
4.53 p.m.
Lord Boyd-Carpenter: My Lords, the debate has shown, if it were necessary for it to be shown, the enormous contribution which your Lordships' House can make to the discussion of important public affairs. The debate so far has produced speeches based on enormous experience in the operation of our economy and in coping with the immensely difficult problems which have to be faced in its management. We have heard so far from four former Chancellors of the Exchequer. Faced with that inflationary input, mere former Chief Secretaries or Financial Secretaries are devalued almost beyond belief. Nevertheless, it is an indication that your Lordships' House musters enormous expertise on the difficult subjects which really matter.
I regret only that so far no mention has been made of what is perhaps the most important economic problem of them all—the completion of the Uruguay Round of GATT. So much depends upon a proper development of GATT, from the point of view not only of the trade and economy of this country but the trade and economy of the world. It is a great pity that our own recent troubles of the past few weeks have tended to obscure discussion and thought on that subject. Therefore, I hope very much that when the noble Earl replies for the Government—I suppose some time a little after midnight—he will be able to say something about the Government's intention, notwithstanding present difficulties, to insist on progress being made with the GATT round.
There is no doubt that there is obstruction in Europe. There is no doubt that France does not want any progress at all to be made on the GATT round and is very happy with the immense over support for agriculture. Therefore, it is very important that in this country we should not allow our concern and preoccupation with our immediate troubles to blur our determination to ensure that a successful conclusion is reached. One hopes very much that in that we shall have the assistance of the United States, whose views on the subject I believe on the whole to be close to our own.
I want to refer to only one other matter. I do so with some diffidence. It is the suggestion that sooner
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rather than later we should revert to ERM membership my noble friend Lord Howe, in—I hope I may say—a most impressive speech, urged that that should be done. However, he ignored the great question as to why, if the ERM is such a sound system, the disaster of a fortnight ago occurred. A system which is vulnerable to speculation and to such pressures and which can produce such disastrous consequences as we faced a fortnight ago is surely a system not to be re-adopted without a great deal of further questioning.
On that point I ask the noble Earl, when he replies, to also give an indication of the cost to this country of the finance which it is thought had to be raised in the attempt to retain ERM membership, even though in the event it failed. Figures of billions of pounds have been quoted, which I hope are an exaggeration. I believe that it is owed to your Lordships' House to be told the cost of that forlorn hope operation. That information is immensely relevant to the question of whether or not we should re-enter the ERM. If we have had to pay, as I am inclined to believe we have, enormous sums in a forlorn effort to try to remain in the ERM that is surely a warning against taking on similar obligations in the future.
I should like to pursue further the principle involved. Is it wise to have the exchange rate of your currency fixed in line with another currency or currencies and to a considerable extent outside your control? Is that beneficial? The noble Earl, Lord Perth, tended to dismiss that point and said that a common currency probably makes more sense. To a considerable degree I agree with the noble Earl, although I believe that a common currency is a very long way off and that it raises serious questions, such as that of sovereignty, which would have to be considered. After all, the power to issue currency has been almost the classic definition of sovereignty for a thousand years or more. To surrender that power to a European authority would be a tremendously serious decision to take. However, such a decision is, on any view, a long way off.
What we have now to consider is the suggestion, which has been influentially supported by my noble friend behind me and hinted at by the Government, that we might revert to the ERM. I wonder whether that is right. Is there not a great deal to be said for an exchange rate which fluctuates in accordance with the working of the economy? After all, if there is a bad balance of trade—a trade deficit—and one has a freely moving currency, the exchange value of that currency goes down. Surely that is exactly what one wants, because at the same time it will make exports more attractive and competitive and make imports more expensive so that the population is discouraged from purchasing foreign goods. That has a righting effect on the economy. Surely that is one of the advantages of the freely moving exchange rate, which we operated for a great many years.
I hope that Her Majesty's Government will be very careful about plunging again into the ERM. We have had a sorry experience of it and I believe that it has done us no good. I believe too that a freely moving exchange rate, moving in accordance with the

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developments of our own economy—resisting if necessary the efforts of speculators, of which a good deal has been said—is a much more sensible and self-regulatory system.
I stress that view, which I know is widely held. There was a very sensible leading article along those lines a few days ago in The Times. There is a great deal of opinion in this country which has now moved away from the too easily accepted concept of the ERM and toward the idea of a freely moving currency. I do not expect the noble Earl to give a definite answer today but I hope that he will at least indicate that the Government are not pinning their intentions to the idea of necessarily at some time reverting to the ERM. I hope that it is at least open as to whether or not we are to have it back. My own hope is that we shall not.
5.3 p.m.
Lord Bruce of Donington: My Lords, it is for me a most daunting task to participate in a debate following the very cogent interventions of no fewer than four former Chancellors of the Exchequer, including one Prime Minister and a former Chief Secretary to the Treasury. I am afraid that the only qualification I can offer as even a remote basis of comparison is that I entered politics in 1931 as a young Conservative and left the Conservative Party following events very similar to those which took place last week. At that time we came off the gold standard after having said in the election campaign that we did not intend to do so. It precipitated a good deal of thinking.
Not for the first time I find myself in considerable agreement with remarks that fall from the lips of the noble Lord, Lord Boyd-Carpenter. Whether one likes it or not, if one is to operate within a world system of the supremacy of market forces, sooner or later, whatever system may be in existence across the exchanges and whether or not formal rules continue to exist, currencies will ultimately tend to reflect the economic strength of the countries that issue them. There can be very little doubt about that.
It would not have been unbecoming for the Government to offer some apology this afternoon for what has taken place over the past week. The noble Viscount, Lord Whitelaw, was always at his disarming best in your Lordships' House when, every now and again, he rose and said,"I made a mistake. We all make mistakes, don't we?" But this afternoon we have had no apology whatsoever for what must be regarded as a catastrophic series of events that has taken place since we joined the ERM in October 1990. As many noble Lords may recall, I warned against that course at the time. I regret to say that events have proved that the warnings I then offered and have often reiterated, like many of my colleagues in all parts of the House, have been fully justified. However, apologies by government are less important than the injuries that have been done to individual citizens. Within the closed atmosphere of Westminster we often tend to regard political matters as though our own personal views, fortunes and reputations are somehow involved and of overriding importance.
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I am quite sure that noble Lords will appreciate that entering the ERM at an over-valued rate (with the benefit of hindsight that is now agreed upon even by the Liberal Party) was a great mistake. Following that decision, unemployment in the United Kingdom has increased by over 1 million, there have been numerous repossessions of houses and there have been bankruptcies galore. There has been rapid deterioration in the social services and the whole infrastructure, while beggars once again are to be seen on the streets of our big cities and even tuberculosis is beginning to reappear. Those are the consequences of economic policies for which Her Majesty's Government must bear sole responsibility. They have had all the power. They cannot blame the trade unions, which they have stripped of most of the powers of which they had previously complained. They cannot blame the ordinary people because the ordinary people of our country have played little part in this at all. The Government can only blame themselves.
In the course of the remarks made by the noble Lord, I noticed that he said that the situation was somehow all due to "turbulence". For the moment let us forget the turbulence that has been caused in the lives of millions of our citizens over the past two years. Let us return simply to the word "turbulence". My noble friend Lord Callaghan effectively demolished that argument. In point of fact, the turbulence and the dealings complained of are conducted in the back rooms (or prominent rooms) of the banks of this country. They are separated from the ordinary operations of the bank by what is called a Chinese curtain. The so-called teenagers or youngsters who operate the foreign exchange markets are employed by the banks. They are instructed by their large clients, including the banks themselves, unit trusts, insurance funds and the corporate treasurers of large companies in the United Kingdom, who give them standing instructions to make as much as they can out of the money that is held. Therefore, oddly enough, the pressures on the exchanges which are dismissed with the word "turbulence" emanate in the main from those very institutions whose managing directors and chairmen periodically go to functions with the Prime Minister and the Chancellor of the Exchequer to applaud adherence to the Government's policies. That is exactly what has happened.
The cost of the operations that have taken place can be exaggerated. Reference has been made to a figure of £2 billion profit made by the banks. I would venture to doubt it. I do not believe that the figure is as large as that. Indeed, money spent in supporting the pound or other currencies is in exchange for currencies which then have to be sold at a later date. There is not an absolute loss. The loss to the United Kingdom may have been about £750 million—it was certainly not £2 billion—and a sizeable proportion of that sum has gone to the banks themselves.
Quite clearly something has gone wrong. When I listened to the explanations that fell from the lips of the noble Lord, Lord Cockfield, I was a little amused. However, the idea that the movement of money across the exchanges at 10 times the amount that is normally required for trading is quite a good figure, but it

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represents the movement of capital. One of the basic tenets of the European Community—it is one of the first acquis—is that there must be complete freedom of movement of capital. However we may dress up the way in which we shall prevent the speculation to which both noble Lords referred, it will represent the reimposition of some form of exchange control—the same exchange control which, when he was Chancellor of the Exchequer, the noble Lord, Lord Howe, abolished almost immediately on taking office, at the same time as hiking the rate of interest up to 17.5 per cent. If the noble Lord were here, I should have reminded him that one of the greatest devaluations that ever occurred in this country, that of 40 per cent., took place during the two years when he had charge of that aspect of our affairs. He was the largest devaluer.
So much for the past. What of the future? The noble Lord, Lord Ezra, made a number of suggestions with which I found myself in considerable agreement. Certain members of my own Front Bench in another place with whom I sometimes find myself in agreement have also made excellent suggestions as to what can be done. But surely the first thing that has to be done is to reassert the primacy of democracy in the United Kingdom. I do not wish to reopen too many arguments on the subject. However, I remind noble Lords that the democratic control of our own affairs is one of the pillars upon which our constitution now rests. We should not part with it lightly. Yet what has happened?
I can give a somewhat ironical example, addressing for the moment my own Front Bench. My own party in another place advocates for perfectly good reasons the abolition of the House of Lords because it is a non-elected body responsible to no one. I believe that the underlying argument is unassailable. There are countervailing factors. The House of Lords has very few powers. Such powers that we exercise are very wisely exercised. I venture to suggest that the country has benefited greatly from time to time by our interventions and indeed by the contributions that we make to the national debate even though we acknowledge that the other place must have the power. How incongruous it is, therefore, that a party whose official policy is still the abolition of your Lordships' House on the basis that it is undemocratic and unelected should nevertheless express itself in favour of a Maastricht Treaty—if one can interpret the ambiguities which exist—which contravenes every canon of democratic representation. It is a little odd, to say the least.
Maastricht places a vital sector of economic policy under the control of a so-called independent group of bankers—bankers, of all people, after the history of the past half century! It proposes that great segments of decision should be determined not by democratic vote or reference to the people, nor even by the people's elected representatives, but by those so-called independent people; that is, people of independent minds. One cannot stop ordinary politicians denigrating and lowering the status of their own profession. The function of politicians is to determine policy, and to take the responsibility of it for those who elect
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them. That is why I hope that when the issue is considered, as it must be, we shall look again at those provisions of the Maastricht Treaty which constitute a direct infringement of democracy in our countries and indeed in Europe.
It will be difficult because we have not been quite so open with our fellow countrymen as have the French. The French distributed about 43 million abridged editions of the Maastricht Treaty, explaining what it was all about. To date in the United Kingdom about 1,700 copies of the treaty have been sold; and I am prepared to gamble that a very large number of Members of Parliament—not, of course, those in your Lordships' House—have not even read the treaty upon which they invite the comments of the British people.
If we are to proceed in accordance with our traditions, surely the Government, since they do not feel inclined to have a referendum, could at least ensure that an independent and authentic summary of the treaty is delivered to the doorstep of every voter so that each is in a position to exercise his influence on his Member of Parliament. If there cannot be a referendum, should the Maastricht Treaty come before the other place, let us hope that the Government will have the decency to give Members of Parliament a free vote.
5.20 p.m.
Lord Hailsham of Saint Marylebone: My Lords, if one thing emerges beyond doubt from the debate it is that this is no time for party politics. The divergence which has emerged from the different Benches of your Lordships' House more than justifies the remark made by my noble friend Lord Boyd-Carpenter that it has been strongly supportive of the valuable part which debates in this House can make to a serious and important national situation.
It is odd that not so many months ago we were talking about the peace dividend which everybody would enjoy as the result of the break-up of communism. What kind of a dividend has it been and why has it been delayed? There is, as it were, a Marxian contradiction between the suppositions of the political parties and the facts of economic life. The facts of economic life are that the strength of economies is due largely to factors outside the power of individual governments. It is far more important to realise that than to realise anything else. Whatever a government of this country can do, they cannot alter the fact of the rate of interest at which the Germans are borrowing money, for perfectly understandable reasons, owing to the fragmentation of post-communist eastern Europe. If the Germans must borrow money at 10 per cent. we cannot borrow it at 5 per cent. Equally, nothing in this world that a government of this country can do can alter the fact of the American deficit. Being half American I believe that the deficit is something of a scandal but we cannot alter it. It will continue to affect our economy adversely and indefinitely into the future.
There is a third factor which I doubt we can alter but which is very much within the province of the government of this country. When earlier this year the

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Chancellor of the Exchequer came to the House of Commons with his Budget he proposed to borrow £28 billion this year. The noble Lord, Lord Healey, in his contribution this afternoon, put the figure at £40 billion, which is something of an increase. All the same, it is odd that coming from the same Benches but from different orators one has the suggestion that we should now invest in our infrastructure on an unprecedented scale. I sympathise with that aspiration because obviously there are things which badly need to be done. However, I was led to believe by my banker that one cannot invest an overdraft. That is exactly what is being advocated by the suggestion that we should invest—I use the word in inverted commas—a large sum of money in addition to the £40 billion.
But something else is odd about the situation and about this debate. We have been around this merry-go-round many times before; there is an element of dé já vu. There was, after all, a paper pound during the Napoleonic wars. When I was an undergraduate an economics don—I think a Professor Cannan—wrote a book called The Paper Pound. After the Napoleonic wars we went on the gold standard. That was not a bad arrangement and it lasted for more than 100 years. When before the First World War my father took my mother to the continent of Europe in the summer he did not bother with travellers' cheques or about what currency they would be accepted in. He took a bag of sovereigns and half-sovereigns. When he wanted foreign currency he would buy a newspaper across the counter in a shop in Paris and be given 25 francs to the pound because the French were on the same standard. Whether that was a single European currency I do not know. It appears to me to be very similar although the theory was that they had francs and we had pounds sterling.
The First World War was an economic as well as an international watershed. We then returned to a fluctuating currency such has been advocated by my noble friend Lord Boyd-Carpenter. In the case of the defeated power, which was then Germany, that led to a worthless currency. I cannot help thinking that recent German policies are somewhat moved by the traumatic experiences of those days. However, a currency which fluctuated entirely according to the whims of the economic facts of life was not a great success or boost to the world economy.
I believe that within limits it is desirable for a concerted attempt to be made to stabilise currency wherever possible. No one could be more critical than I of speculators, who have been much described in this debate. But in the long run the speculators can speculate only about an uncertain situation. One cannot ignore those facts of life either.
I am sure that in the circumstances the Government were perfectly right to attempt to stick to the ERM. It was a bargain and we tried to stick to it. However, I do not doubt for one moment that, as my noble friend Lord Cockfield said, at the rate at which we tried to stick to it we suffered a defeat. We were right to do our best and we were driven off it in circumstances outside our control. The pound has not been devalued—that involves a conscious decision on someone's part and
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to call it devaluation is to pay a compliment that it does not deserve—but it has floated down and I am sure that it is good to let the pound float a little further before we try to stabilise it again.
I wish to make only one other point because I am a minnow speaking among Tritons in this debate. The suggestion that we should hold a referendum about the Maastricht Treaty is one of the silliest ever made. Those who seriously put it forward, whether from my party or the party opposite, need a cohort of caring men in white coats to examine their mentality. We had the Danes—oh dear, they said "no". In an earlier debate this year I was told by the noble Baroness, Lady Seear—and she is nearly always right—that that answer, which had a majority nationally of about the same as my son took the constituency of Grantham at the general election, was largely influenced by the fact that the Danish Liberal Party, with an uncanny instinct for shooting itself in the foot, advised its supporters to vote "no" on the grounds that the treaty did not go far enough. The French have since completely destabilised the international scene by having a referendum which I can say resulted only in a tiny "oui".
The reasons are not far to seek. Economic problems do not go away because one holds a plebiscite about them. Democracies, like Heinz products, come in about 57 varieties. But the one variety of democracy which has always failed is democracy by plebiscite. It has failed since the days of ancient Athens and will continue to fail. As the noble Lord, Lord Cledwyn, reminded us earlier, in the case of Germany after Weimar a referendum led to a dictatorship, as it has often done in history.
However, there is an even more certain reason why the Maastricht treaty could not be made the subject of a referendum. We have a system of representative democracy. I believe that referenda are inconsistent with representative democracies. However, whatever view one holds about that, one must say that the question must be one to which an absolute yes or an absolute no is a rational answer. In a referendum there cannot be more than two possible answers, and they must be unqualified. The noble Lord, Lord Bruce of Donington, suggested that there should be a simplified version of the treaty. I should not like to be the man who tries to simplify it. About 300 pages of complicated, turgid parliamentary draftsmanship can hardly be reduced to a single sheet of notepaper. The answer is certainly neither yes nor no in the sense that one is either for it or against it. I am in favour of ratifying the treaty but the answer to the treaty can only be,"yes, if" or "no, but" or "yes, but" or "no, if". It is impossible to have an absolute "yes" or "no" answer. The folly of asking for a referendum in those circumstances seems to me to be almost beyond belief.
I thank your Lordships for your careful attention to my ridiculous speech.
5.30 p.m.
Lord Stoddart of Swindon: My Lords, one can always tell when the Government are in trouble because the noble and learned Lord, Lord Hailsham, says that we should not make the issue a party political

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matter. One then knows that the Government are in trouble. However, let us make no mistake, it is very much a party political matter. While I did not expect a speech of contrition from the Leader of the House when he opened the debate, neither did I expect a history lesson which was rather less than objective, to say the least. Indeed, one has to look at only one or two of the items he mentioned. For example, he said that inflation had been reduced. We know that inflation has been reduced but at what enormous cost to our economy and to people who have been unemployed. He told the House that interest rates had been reduced, which is patently untrue. Real interest rates have clearly increased and because they have increased, they have done considerable damage to economic recovery. Before we joined the ERM, the real rate of interest was 3.5 per cent. When we came out of it, it was 6.4 per cent. In other words, real interest rates have nearly doubled as a result of our membership of the ERM.
To those of us who opposed entry to the ERM, what happened last week was inevitable. We realised that it would happen, which is why we did not wish to join. Unfortunately, that failed experiment has done extreme damage, particularly to the manufacturing industry and to our competitive position. It has been a disaster for thousands of firms which have gone bankrupt and for the additional 1 million people who have been thrown onto the unemployment scrapheap. For them, it has been a disaster and has been two wasted years. Indeed, if the shadowing of the deutschmark at three deutschmarks to the pound is taken into account, it has been four wasted years. How my heart goes out to those 3,000 people who were made redundant by British Aerospace yesterday; to the 950 who were made redundant by Rolls-Royce and to the 2,000 Ford workers who were made redundant today. The ERM is to blame for their misfortunes; let us make no mistake about that.
How sad it is to remember the phrases used by the Prime Minister not so long ago. He must regret speaking at all. He said that if it is not hurting, it is not working. What an insult is that to the unemployed, as it is when the Chancellor of the Exchequer says that higher unemployment is a price worth paying for lower inflation.
The past two or three years have been very bad years for this country. As I said, I believe that joining the ERM at a level of 2.95 deutschmarks to the pound was a disaster indeed. Even more worrying is the talk of re-entering the ERM at some time in the future. Some would like us to re-enter the ERM next week, but perhaps they will tell me at what rate that re-entry should be. At what rate next week, the week after, or in a few months' time, shall we enter? Shall we be given any guarantee that if we enter at that rate, after three months or two years that rate is still valid? That is one of the problems of fixed rate systems; namely, that they cannot adjust to the circumstances of any given time.
It was interesting that when the Chancellor of the Exchequer announced that Britain was leaving the ERM, he said that in terms of monetary and interest rate policy he would now do what was right for the
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British economy. We all heard him say that. Why on earth has he not been doing that up until now? Why has he suddenly decided that he will now do what is right for the British economy? In whose interests has the policy been operating up until now? He must remember and the Government must remember that they have been elected and put into positions of power to represent British interests and not the interests of the Germans, the USA, or French interests. They are elected to represent British interests and that is what the Chancellor should be doing.
I believe that the Chancellor's attitude arises from a pathetic faith in our so-called partners in the EC. Indeed, in all the "hype" it has been forgotten that they are not our partners but our competitors. We forget that at our peril. They may be political partners but in terms of business and trade, they are our competitors. Our Government should realise that and in future should put British interests above all interests.
Perhaps the British Government should stop worrying about being at the heart of Europe and give priority to keeping Britain's industrial and economic heart heating and beating firmly. Our Prime Minister should take note of the contemptuous treatment of him by the German Chancellor and the French President.
Quite rightly in my view, our Prime Minister, following the French referendum, decided that, as President of the European Council, there should be a meeting of the council after there had been time for due consideration of the French referendum result. But before that could take place the French President and the German Chancellor had a meeting of their own. I believe that that was an insult. It indicates that they are going to stitch up their policy and attempt to impose it on the conference which is being called by the Prime Minister.
But this economic debacle is not just a failure of government policy. It is a failure which rubs off on all those who clamoured for entry into the ERM at the absurdly high rate of 2.95 deutschmarks to the pound. I fear that they too are guilty men in this regard. We need now to forget fixed exchange rates which if they work at all cannot do so without causing recession and slump unless accompanied, as so many people have said this afternoon, by strict exchange controls which I understand will be banned when the single market comes into operation next year. They are almost banned now I believe.
The fact of the matter is that it has been shown that fixed exchanged rates do not work unless they can be accompanied by strict exchange controls. I do not believe that this or any other government within the European Community is going to accept that. Government policy should now concentrate on pulling Britain out of recession by encouraging growth and enterprise.
Low inflation must be part of government strategy; but it must be balanced with the needs of the total economy and not take precedence over everything else. That has been one of the mistakes that the Government have made up to now. I remind them and noble Lords on that side of the House that one of the

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great reasons why we have had this problem is the lack of credit control. I and many of my colleagues were urging the Government to prevent the obscene credit boom which took place three years ago and which unbalanced the whole of the money and banking system.
We need to encourage investment in industry by making it more attractive to investors to put their money into manufacturing industry rather than into building societies. We need to encourage the people of this country to be industry-orientated investors because therein lies our real future. That must happen if we are to take full advantage of the devaluation of the pound—call it what you like—to a realistic and sustainable level. The demand for British goods will expand abroad and at home as export prices become cheaper and import prices become dearer. Clearly, there is need for a sustained period of low interest rates to encourage large and sustained investment in saving existing productive capacity from further contraction and to encourage new investment.
The Government must immediately set out what their policy is and what it is to be. This is urgent. They should explain clearly how that policy is going to be made to work. They will need all the help that they can get from both sides of industry. They should encourage both sides to talk together and with them. There is a need to put aside chimerical illusions about European economic and political union and never mind about a slow-speed and fast-speed Europe. We need a fast-speed Britain. That is what we should be working towards. We should be concentrating on uniting our own people in the fight to preserve and improve their standards.
Before I sit down, I wish to mention the Maastricht Treaty. I had not intended to, but as so many people have done so I felt I should not be left out. Unlike the noble and learned Lord Lord Hailsham, I believe that we should have a referendum on the Maastricht Treaty. It is a question of unity. Despite what the noble Lord, Lord Cockfield, said, the treaty involves fundamental questions including whether we are all going to be made citizens of a new European union. In those circumstances, and because there are to be further transfers of power from this Parliament to the institutions of the Treaty of Rome, we are altering our constitution to a very great degree. If we are to make it stick and if those in favour of the Maastricht Treaty wish it, they must get the wholehearted consent of the people because, in modern terms, the sovereignty of this country belongs not to Parliament but to the people. It is their self-government and not ours which is at stake.
If we wish to unify opinion and if the Government want to have legitimacy in this matter, there is only one way to do it whether we or the noble and learned Lord, Lord Hailsham, likes it, and that is to consult the people. The people of this country are well educated and intelligent. They are just as capable of making up their minds as we are in this place and as are the elected representatives in another place. On this occasion we should give the people the opportunity to have a say.
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Perhaps I may say to my noble friend Lord Cledwyn, whom I very much like and respect, that I wish that he could persuade his colleagues on the Front Bench in another place for once to take note of the grass-roots opinion in this country because, according to opinion polls,80 per cent. of the people would like a vote on the Maastricht Treaty. They would like a referendum. For once, let the Labour Party lead opinion. Let it support the ordinary people of this country in their call for a say in the future of their country.
5.48 p.m.
Lord Benson: My Lords, I believe that the basic reason why we were forced to devalue was because our economy was low in comparison with that of other nations. We have devalued before and that was the reason on those occasions. Unless we can strengthen our economy we shall go on devaluing in the years to come.
Some parts of our economy are in good shape. We have the transient benefit of oil; invisibles and exports are productive; agriculture is efficient and tourism is strong. But the whole basic foundation of the economy of this country rests on manufacturing industry. That has been the mainstay for the past 150 years and if that is diminishing it will bring down, and has brought down, the whole economy.
There are three problems. The first is that for the past 40 years our share of available markets in manufacturing goods has diminished disastrously. The result is that the manufacturing base in this country is now too low to sustain the economy.
The second point is that the average standard of productivity of manufacturing industry in this country is below that of our competitor nations and is exacerbating the situation extremely. The third reason is that this Government, like predecessor governments to one degree or another, do not accept that our manufacturing strength has diminished and are unwilling to introduce policies to correct the situation.
There are many people to blame for the humiliating diminishing of the strength of our economy—management, the workforce, the City, the institutions and many others, but the one institution which has the power and the responsibility to correct the situation is the Government—and they have failed to do so. When the Government were re-elected in April of this year, it was to be expected that in the first Queen's Speech thereafter they would expose to the public our declining economy and the policies that they had in mind to correct that position. That did not happen. The gracious Speech made no reference to trade, industry, commerce, manufacturing, the balance of payments, exports, employment or unemployment. There were no defined policies for the future. When the Address was debated in the House, the Government's answers were equally unconvincing.
I was so disturbed by that situation that I took the liberty of writing direct to the Prime Minister to voice these anxieties. I pointed out that such views were held by persons and organisations of unquestioned authority, knowledge and responsibility. There is no secret about the correspondence between the Prime

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Minister and myself. If any of your Lordships would care to read it, it is available and I have copies with me for that purpose. What emerged from that correspondence was the point that I have emphasised so much already—that the Government do not admit that our manufacturing industry has diminished. They are not prepared to make any change in policy to correct that situation. In that correspondence I stressed how our political and economic position had been declining year by year. Unhappily, by the chance of fortune, only a fortnight after the correspondence closed, we had to devalue—apparently much to the Government's astonishment.
Unless the Government are in a position to inform themselves rather better than they have in the past and unless they are prepared to throw off the shroud of complacency which envelops them, the future of this country and the survival of this Government are in peril.
I conclude by asking certain questions that I have asked before in the House and which have never been answered. How will the Government enlarge our manufacturing base? How will they stimulate new industries? How will they revivify those parts of our industry which have diminished or faded? How will they be able to improve our productivity so that we can compete on equal terms? How will they restore our economy to its erstwhile strength? Unless the Government can give convincing answers to those questions, there is no use contemplating going back into the exchange rate mechanism. It merely means that history will repeat itself in two or three years' time.
5.54 p.m.
Lord Joseph: My Lords, we have heard a chorus of giants of experience and analysis today. They have all spoken in favour—I think every one of them—of a return to the exchange rate mechanism—
Noble Lords: No!
Lord Joseph: My Lords, there has been a chorus in favour of a single currency to which the exchange rate mechanism is intended to be a preparatory stage. The ERM is a stepping stone to economic and monetary union, which means a single currency with a single central bank. Yet of the giants of experience who have spoken only my noble friend Lord Boyd-Carpenter and the noble Lord, Lord Healey, spoke of what would accompany EMU. They alone reminded the House, as I do, that a single currency and a single central bank presuppose a single central government. Governments, including our own, have been less than eager in explaining to their electorates the implications of the single central government which they seem to have accepted in the terms of the treaties that they have signed.
I know that many shrewd business and financial experts, including I now see from the newspapers Mr. Pal, favour a single currency. We have heard the noble Lord, Lord Jenkins of Hillhead, say that among the other advantages of a single currency there might be at least some resistance to the waves of speculation. I accept that a single currency might bring more
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growth and more stability, although I ask noble Lords to realise quite how much resentment there would be in the backward parts—I use the word "backward" in economic terms—of a large area under a single government. We can witness that in America today, and I believe that the position would be even fiercer in Europe. However, there has been precious little reference in this impressive debate to the concept of single government that lies behind the ERM and EMU.
I pay credit to our Prime Minister for securing at Maastricht the option for this country of excluding itself from a single currency, but I am very glad that the noble Lord, Lord Healey, and my noble friend Lord Boyd-Carpenter have reminded us of the single government element in what we are discussing. I thought that the noble Lord, Lord Healey, was quite unfair in criticising my noble friend Lady Thatcher for drawing into the limelight some of the key issues that her fellow heads of government were apparently willing to ignore. The fact is that, given the implications for our electorate of a single government, we need not only a debate in this House but a huge debate in the country. For there to be a debate of any significance, we need what the Americans took for granted at the end of the 18th century—a heavyweight convention—to analyse where power would come from. I should have thought that most Members of this House would believe that the decisions should come from the individual countries. Such a convention should analyse which powers and which functions should be transferred by the agreement of the individual countries, their parliaments and peoples to a central government and which should remain with the national authorities.
Your Lordships will easily remind yourselves of the quality, the weight and the intellectual authority of that remarkable group of delegates who gathered in Philadelphia in, I think,1786. In my view, governments and the Commission have been downright frivolous in their treatment of the huge issues involved in moving towards a central government. The political union across a wide range of conditions and circumstances could be explosive; and while I am ready to grant for myself that a single currency might improve economic conditions in the area, a single government could well offset any advantages from that economic improvement by the horrendous political resentments that could be created if the move to a single central government were not fully explained to and accepted by the electorates. Incidentally, I cannot remember which noble Lord made reference to Churchill, but I do not believe that Churchill favoured a single European government. He was, as was de Gaulle and as is the noble Baroness, Lady Thatcher, a strong supporter of L'Europe des patries but so far as I can recall not of a single European government.
In the meanwhile we float, and I believe that we should continue to float at least as long as we explore, consider and debate whether we want to be part of a movement to a single central government, and, if so, under what conditions. And while we float I believe we should take back into use the middle-term financial

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strategy that my noble friends Lord Howe and Lord Lawson together evolved in the 1980s. Of course it is imperfect, of course it is difficult to understand and of course it needs judgment; but basically it is the method that the Bundesbank uses and we admire the Bundesbank for its relative achievements in controlling inflation. So let us not scorn the middle-term financial strategy as an element in our economic policy. I blame myself personally for not reacting strongly when in my last two years in the Cabinet the Government of which I was part abandoned that middle-term financial strategy.
I turn to two final points. Whatever happens, we desperately need, as the noble Lord, Lord Benson, says, to secure the expansion of United Kingdom business. For many reasons we have manufacturing and service sectors which are too slim and too thin, however excellent parts of them are, to provide the jobs and the rising prosperity that we all want. Where I disagree with the noble Lord, Lord Benson, is with his view that this desirable expansion, the deepening and thickening of British business, can be achieved by the Government. Most of the reasons behind the decline in British business have come from long-standing cultural and attitudinal causes. There are a limited number of things which the Government can do, and I would join with the noble Lord, Lord Benson, in urging the Government to study them and carry them out; but the larger changes will take time and they will involve all these different attitudes and cultures, including the anti-trade snobberies that we have allowed to grow up over the decades in this country—under, alas, both governments. I am introducing here a partisan point of view, but I believe that the Labour Party has been more guilty than other parties in stoking those attitudes. This is not a minor factor: it entirely deserves a place in the agenda, as the noble Lord, Lord Benson, said, which should now be in front of Ministers.
I have two suggestions. The first is that we surely should review the burdens of the capital gains tax. We have a far fiercer capital gains tax than many competitor countries. We need to encourage, not discourage, the entrepreneurs who are the creators of jobs. Germany, for instance, has a fiercer capital gains tax than we have but it lasts for only six months. I think that is right, but at any rate it is a relatively short period, and after that there is no capital gains tax.
Secondly, it seems to me that we should encourage the entry of likely entrepreneurs. The people in this country have benefited from the arrival of many entrepreneurs from among the Indians, the Pakistanis and the Ugandans, for instance. We have gained from the job-creating achievements of many entrepreneurial Jews; but, oh dear me, we have missed the opportunities offered such as welcoming migrants from Hong Kong and in recent years from Iran.
Above all, I urge the Government and this House to consider the political aims—a single central government—that accompany the single currency concept which has been so widely applauded by noble Lords this afternoon.
6.6 p.m.
Lord Monkswell: My Lords, I am glad to follow the noble Lord, Lord Joseph. I applaud and agree with his remarks that the economy of Britain should float. The unfortunate thing of course is that Britain is sinking. If we look at a whole range of indices of the position of Britain we can see that we are in fact sinking. The indices I would pick are those that reflect on real human beings and their situation in society. We can see a rising level of poverty; we can see a decline in housing standards and also in our education system, compared with our competitor nations; we can see a rise in suicides; but, above all, we can see a rise in unemployment. This Government have presided over massive increases in unemployment virtually since coming to office in 1979, and it is unemployment which is dragging this country down—unemployment which will prevent our floating successfully on the economic seas of the world.
I am rather intrigued by the Conservative spokesmen who point to the economic record of the early 1980s and then to the economic record over the last few years and say that it has been successful. I am reminded of the doctor's phrase when he said that the operation was a success but the patient died. If we carry on with the operational attitude, the operational economic policy of the Government, this country will die.
I have picked unemployment as the most significant indicator of economical wellbeing in this country. Why do I pick unemployment? It is because unemployment brings death, debilitation, demoralisation and destitution; death through individuals committing suicide because they are rejected by society and they have no value to society; debilitation because those who are unemployed suffer poverty and ill health psychological and physical ill health—as a
direct result of unemployment. As for demoralisation, we need only to look at society, where anti-social acts and criminal behaviour are endemic and where the crime rate escalates year after year after year.
The way we run our economy directly affects employment and unemployment. On the front page of most of today's papers is the news that 3,000 skilled workers at British Aerospace are to be made redundant. We are called here to take note of the economic policy of Her Majesty's Government. The big question has been asked: what policy? Do they have a policy? The only policy I can perceive is the one which states that we must have sound money. That may be all very well for the people with money, but what about the vast majority of British people who work for a living, who want to work for a living, or who are living in poverty because of low wages, low unemployment benefits or low state pensions? The Government of Britain should look to the benefit of all the British people and not just those British people who have wealth.
The Government's policy has brought us to the stage where this country is living beyond its means. Earlier in the debate we were given the figure for the balance of payments deficit of £12 billion. That approximates to £240 for every man, woman and child in this country. It means that we are spending more

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than we are earning. It means that we export less than we import. The rich get richer and the poor get poorer. Industry suffers and throws people out of work. But we could do things differently. By increasing taxation we could reduce the overall demand in our economy that sucks in imports we cannot afford. When I say "by increasing taxation" I do not mean the kind of taxation increases in which this Government have indulged. I say that advisedly because, although the Conservative Party portrays itself as the party of reducing taxation, it has in fact significantly increased taxes over the past 13 years for the vast majority of the British people. It has reduced taxes for the rich but the British people are paying more in taxation now than they were in 1979. We should reduce the taxation burden on the low-paid, the unemployed and pensioners. We could do it in various ways. We could either directly reduce taxation or we could increase the benefits on which the poorest members of our society depend. We must increase public expenditure in those areas that will improve the competitive performance of this country—whether through education and training, infrastructure development or support for industry—and not spend money on those areas that result in imports.
One of the ways in which we can help our economy is by cutting our defence expenditure and diverting that money into long-term beneficial economic activity such as education and training and support for industry and the public sector generally. We should reduce interest rates for long-term investment in the British economy, and to ensure that a favourable import-export balance is achieved we should reduce the value of the pound. All of those actions are needed but only one of them has been decided upon—it was forced on the Government—over the past week or so. I refer to the reduction in the value of the pound. I hope that the Government will take on those other aspects of policy which might help to get us out of recession.
There has been talk in the debate so far about the Maastricht Treaty. It is a wide-ranging and significant treaty for the European Community but I shall touch on only one aspect of it as we are talking today about the economic policy of the Government. One of the fundamental flaws of the Maastricht Treaty, which was negotiated by the Government and which is dedicated to the concept of sound money as opposed to the benefit of the human beings in our society, is that it incorporates the attitude that an economy should be judged by financial and monetary indicators and not by the real advantages and benefits delivered to human beings in our society. That is why the treaty will not survive the present economic holocaust.
I should like to bring one point of principle to bear. Before the treaty was negotiated it was agreed that the unanimous agreement of all member states was needed before it could come into being and that all member states had to agree it individually. In practice Denmark rejected it. At that point the British Government should have said "That is the end", but we have tried to breathe life into the cause. To my mind that is not the way the British Government should operate. The economic policy of this country is
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interdependent with the economic policies of the other major economies of the world. The economic policy of the European Community must adjust to ensure that the actions of the European Community benefit the peoples of Europe. We can see the same problems of economic policy present in the United States where a monetarist government say that they cannot increase taxation. The rich must be protected against the demands of a majority of the population.
Earlier in the debate someone said that in the European Community we are all competitors—every country in the European Community is a competitor of ours. Surely the whole point of the European Community is that we should work together to resolve the manifest problems facing all our peoples. The Government of this country should operate on the basis of the good of all of the people of this country. We should not have one group in society—whether in the South East, Scotland, Wales, the North East or the North West—competing against another. Let us try to harness the talents of all our people. Let us eradicate the scourge of unemployment that debilitates action. Let us plead with the Government to adopt policies that will eradicate unemployment.
If the Government will not adopt those policies, then they should go and make way for a Government that will.
6.22 p.m.
Earl Russell: My Lords, I do not blame the Government because they devalued or, as the noble and learned Lord, Lord Hailsham of Saint Marylebone, prefers it, because they were devalued. The rate had become unsustainable partly because we entered at too high a rate and partly because we are now the only economy in the EC with negative growth. What I blame the Government for is that they did it so incompetently.
I do not believe that we have appreciated the shock that was created in the outside world on the day of the three interest rate changes. A great many people, some of them with no interest in politics, will remember for the rest of their lives what they were doing on that day.
During our party conference I chose to listen to the waitress who was serving me coffee. She stated,"If this is going on, I will have to get another job as well as the one I have got, already." If the noble Lord, Lord Monkswell, chooses to remind me that she was one of the fortunate ones, I will agree with him.
The last time that interest rates were raised by 5 per cent. in one day was on the outbreak of the first world war. I do not know the last time that they were changed three times in one day. I should like to know, and I have given the noble Earl, Lord Caithness, notice of the question.
During that day the Prime Minister and the Chancellor reminded me of the unsuccessful 16th century politician who was described as being like a tennis player who could not read the play and who was ever running after the ball. Now that they have done it, they are setting out to persuade us that Pobbles are better without their toes.
I regret to say that during this century we have had a good deal of experience of sterling crises and we have

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seen much that is familiar. Last Thursday Downing Street issued a statement saying,"We do not like to use the word 'crisis'". Someone, at least, had reminded them not to say "What crisis?"
There is a great deal in common between the present situation and 1931,1967 and 1976. If we can accept that, it might serve to advance the economic debate in this country by reminding us that we all live in glasshouses. It also suggests that it might be useful to look at those crises to see whether or not we can find any common factors between them. I think that we can. In all of them there has been an element of incompetence. Fighting beyond the last ditch is not a political activity. There are a great many political tombstones which bear the epitaph,"The man who said 'never'" I cannot help but wonder whether the Prime Minister's speech of 10th September may in the end be inscribed on one of those.
There is inevitably an element of paranoia my noble friend, Lord Jenkins of Hillhead, has reminded us of the Gnomes of Zurich. Looking at the ticker-tape reports of what the Prime Minister has just stated in another place about the Bundesbank, I wonder whether he is about to commission research on the northward migration of gnomes.
It is no good blaming the exchange rate mechanism. It is rather like going out to the crease, taking guard, being clean bowled and blaming one's bat. There should have been an orderly devaluation with the lira.
The Bundesbank, having spent some £60 billion on the exchanges, was perfectly entitled to say that it was not going to throw good money after bad. There is an instability in an exchange rate mechanism which is not present in a single currency. It is worth remembering that there is precedent in this country. In 1603 England and Scotland had an exchange rate mechanism which the Scots, with great canniness, fixed at too low a rate. In 1707 we had a single currency and I do not think that we need regret it.
The next common factor is that there is always a brute fact which is too big for politicians to deal with and which they have not fully absorbed. On this the noble and learned Lord, Lord Hailsham of Saint Marylebone, spoke with great wisdom. The cost of the end of the cold war is something that we are nowhere near absorbing. I did not speak about a peace dividend. The only time that I was asked directly about the matter, I took my answer from Mr. Asquith: "I have waited and I have seen". I thought that the noble Lord the Lord Privy Seal was a little unwise to describe the consequences of the end of the cold war as unforeseeable. Some people foresaw them the day that the Berlin wall came down. A good many other people have foreseen them for a year or more. To say that the consequences were unforeseeable suggests a view that is not up-to-date with the way in which the world is changing. It is a case of running ever after the ball.
Exchange rate crises happen when throughout the world we are in need of new economic thinking. Politicians steer the ship but economists make the charts. When a ship, as the QE2 recently did, runs
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aground where she should not have done so, one possibility, as seems to have happened in that case, is that she is navigating by out-of-date charts.
In 1931 we were up against the limits of classical economics. The theory that the labour market cleared if the price of labour was reduced, was clearly not working and was not accurate. In 1967 and 1976 we were up against the problems that Keynes did not live long enough to tackle. Extraordinary though it is to remember, inflation was never a significant problem during the lifetime of Keynes, at least not in this country.
We are now seeing the collapse of the new series of ideas commonly referred to as Reaganomics. In 1980 George Bush described them as voodoo economics. He was more right than he knew. They have certainly put the hex on him. When I read last week that United States business is now busy giving its money not to Bush but to Clinton, I think that we are entering a world of new economic thinking.
As the Prime Minister has often stated, there is a world recession as well as a problem in this country. That is no excuse for him. He was the first one to go down with chicken pox. He cannot claim that he caught it from the others. Nevertheless, it is an epidemic. We will not understand what needs to be done without looking at the matter as a global problem.
As nearly every noble Lord who has spoken realises, there is a major problem with the exchange rates that has been with us since the collapse of Bretton Woods. Some people would say that it is a problem from which Bretton Woods has given us a temporary respite. The reason is that the exchange rate is the point where the free market and the sovereign state collide. The free market has a tiresome habit of not stopping at national boundaries. Therefore, between the free market and the state there is always a potential enmity.
One cannot simply blame the markets. The markets are doing what markets have to do. However, in this situation, where there is a conflict of power, the balance of power has arguably been tipped too far towards the market and away from the state.
The Government have always thought that they can have an equal commitment to the free market and to the sovereign state. Therefore, it is not surprising that the exchange rate, where the two principles collide, should be where it has quite often come into difficulties. and indeed that this should be the weak spot in the Government's vision of Europe.
As I understand it, the Government's vision of Europe is a vision of a single free market of sovereign nation states. That vision is a contradiction in terms. Either they have to decide, as we on these Benches do, that they are prepared to give a qualified allegiance both to the nation states and to the free market or, if they give an absolute allegiance to one, they have to decide which. It cannot be both. I do not pretend for a moment to have an answer to the problems of exchange rates. I shall only ask the Government whether they are giving careful study to yesterday's

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speech by the US Secretary at the Treasury. Although I do not think that it had the answers, it did seem to me to address some of the questions.
The next thing that we need is less obsession—and I use the word advisedly—with inflation. I am not one of those to whom the noble Lord the Lord Privy Seal referred who want to downgrade the fight against inflation. I want to upgrade other things to go with it. I do not complain when the Prime Minister says that he loathes inflation. I would like to hear him say that it is not the only thing that he loathes. If it is correct that the free market does not stop at national boundaries, we should recognise that zero inflation in one country is an impossibility. The last time we had zero inflation without a slump was when we were last in office. I assure your Lordships that next time we are in office we shall not follow the mistake of the man who hit a six over the top of the pavilion at Lord's and ruined the rest of his career trying to do it again.
The countries in which free market economics have had most influence are perhaps Britain, the United States, Australia and Canada. I wonder whether it is a coincidence that those are now the only countries still left with negative growth. There is sense in the conventional definition of inflation as too much money chasing too few goods. However, if the measures to reduce the amount of money equally reduce the amount of goods, you do not end up reducing inflation. That is why these endless efforts have not wrung inflation out of the system.
Not enough attention has been paid not only to the human consequences of unemployment, on which the noble Lord, Lord Monkswell, dwelt, but also to the sheer, crude economic consequences in particular for the public sector borrowing requirement element. According to an unofficial estimate quoted in the Independent two weeks ago, the Treasury thinks that it accounts for all but £5 billion to £10 billion of the present public sector borrowing requirement.
I see this of course through the social security functions. It is a bit like the view of the battlefield from the casualty department; it is not always the most inaccurate view. My noble kinsman Lord Henley told me in May that 19 per cent. of households at present draw on means-tested social security benefits. That is a colossal weight for the economy to carry. The social security budget as a share of government spending has gone up and up. Attempts to reduce it by petty meannesses which cause hardship far out of proportion to the money that they save do not solve the problem. Only a substantial reduction in unemployment will do that.
More seriously, we have had an 18.3 per cent. fall in the yield of corporation tax. There are technical factors in that which I am sure the noble Earl, Lord Caithness, will explain to us at length later, but that also shows a sickness—and often a mortal sickness—among the geese that lay the golden eggs. This is where the anti-inflationary policy does grave harm to the real economy. There are rigidities in social security policies—I shall not go into those; my noble kinsman has heard me speak about them many times—which are making it harder for people to get into work. These micro-economic issues need attention. In any century
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there are things you have to say to get a goverment to do something. Hitherto it has always been that it gets down inflation. I think that "It gets down unemployment" should get into the list.
If these things are not done, economic growth will not resume. If that does not happen, I have spent the first half of my adult life learning that we are not in the same league as the United States. I accept that that was necessary. I do not see that it can be otherwise. What I do not want to do, because I do not think it is necessary, is to spend the second half of my adult life learning that we are not in the same league as France and Germany.
6.36 p.m.
Lord Boardman: My Lords, I approach this problem in three phases—the past, the present and the future. As regards the past, it is relevant only if we can draw some lessons from it. I believe that we can certainly draw a lesson from the exchange rate mechanism. I was a supporter of that—I make no bones about it—for a variety of reasons; but there were, and are still, three important rates affecting business, commerce, industry and the like. There is the rate of taxation, the rate of interest and the rate of exchange. Of those, rapid movements in the rate of exchange have the most dramatic effect upon trade and industry and lead to inflation, as has been mentioned by many noble Lords today. It may be, as the noble Earl, Lord Russell, has just said, that when we entered the exchange rate mechanism the rate was too high, although certain trading figures, particularly with Germany, rather suggest that that was not so. However, the fault in the system which has certainly been exposed is the weight of money that is available to attack the system and to defeat the Government's plans or intentions of maintaining the stable rate that they seek.
I believe that my noble friend Lord Cockfield attacked the banks. At any rate, he referred to the weight of money that is transferred. I agree with him that it has no relationship to the amount of credit that crosses the exchanges. There is a vast flow of money which seems to become available for those attacks on a particular currency. Whether that be right or wrong is not for me to argue here today, but I think that my noble friend Lord Cockfield was probably wrong if he said that it was the fault of the banking system. However, I shall not flog that point.
When that weight of money is set against a system and at the same time there are rumours in the market, particularly if those rumours come from such authoritative sources as the Bundesbank, it is inevitable that it becomes impossible to defend the rate of a currency. The noble Lord, Lord Healey, was highly critical of the Chancellor of the Exchequer for having said that he would defend the rate and then not doing so. I found it rather strange coming from the noble Lord when we have had so many examples, from Chancellors on the other side of the House in the other place, of pledges firmly given which have had to be revoked because of the changes that they made. If you are set to retain a stable rate, you have to say,"That is what we intend to do", not,"We'll do it

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unless something happens". I defend entirely our Chancellor of the Exchequer for trying to save the rate. He did it in the only way that was possible but at the end of the day he was faced with a system that was flawed.
So much for the past. Perhaps I may turn for a moment to the present. It is quite hopeless to try to fix a rate in the present climate, certainly until the current financial fervour or tumult has died down; but there are quite a lot of things that should be done now. First, I welcome the relief from some of the restraints that have been imposed upon the British economy by maintaining the exchange rate at the level that existed before. I welcome particularly the reduction of 1 per cent. in the interest rate and I sincerely hope that without causing inflation a further reduction can be made in the near future.
Secondly, it is necessary to take measures to control the inflationary pressures that inevitably arise from reductions and changes in the exchange rate. That means cuts in public expenditure. Here I make a special plea that in cutting public expenditure they do not take the easy course of just rolling over capital projects. I know that that is the easiest way to make figures for the current year and next year look less, but it is damaging to the economy. I am quite sure that my right honourable friend the Chancellor of the Exchequer will have that very much in mind.
Monetary policy must be strengthened. I know how difficult it is to get accurate measurements. The measurements which were applied in the early part of the 1980s were fairly effective; indeed, I believe that my noble friend Lord Joseph referred to the mid-term financial strategy. While there were a good many errors which appeared in some of the figures supplied, I think that it was helpful in applying a policy which restrained inflation and one which I certainly hope will be pursued with the modifications and improvements that have been developed in the meantime.
I share the thoughts of my noble friend Lord Boyd-Carpenter—like him, I was once a Chief Secretary to the Treasury—that we should be extremely cautious about relying upon going hack into the ERM to contain inflation. I believe that much more work needs to be done. We have to see how in fact those attacks from large sums of money which are flowing around the world can be restrained. That is just one thing that would have to be carefully worked out before we could accept going hack into the ERM. But there are other restraints which, as I said, were effectively applied in the early part of the 1980s and which I hope can be perfected. I certainly hope that work is being carried out on them at present.
As regards the future, well, a great deal depends on what happens elsewhere. For example, will the franc, with the vast vocal and financial support of Germany, withstand the pressures that are apparently being put upon it at present? There is a whole variety of issues which must be allowed to settle down before any firm future plans can be put into operation. I believe that we must retain the freedom to control our own fiscal policy and our own interest rates so that we meet our domestic needs while at the same time restraining and
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curbing any inflationary pressures which might otherwise arise. That is not an easy task but it is one to which I hope that all the best financial brains in the Treasury and elsewhere are being applied.
I shall raise briefly a point which I do not think has been mentioned during the debate but it is one which has been much mentioned in press comment. I refer to the independence of the Bank of England. I disagree with the view that the Bank of England should be made independent. It is a solution alluded to by a number of financial correspondents. Very often the Bundesbank is pleaded as an example. I believe that that is a very poor example to give. Quite apart from the different conditions which apply in Germany and here, the proof of the Bundesbank's independence has been faulted from time to time. Indeed, one has only to recall how Chancellor Kohl wanted a particular rate of exchange between the East German mark and the West German mark as it then was and Karl Otto Pail and the Bundesbank went for a different rate. One knows that the German nation succeeded in getting its way. That is but one example and there are others. Therefore I hope that we do not use the Bundesbank as an example of complete independence from political control.
In any case, so many economic decisions are really political decisions. It is very difficult to have a major economic decision which does not have very large political undertones and political actions which need to be taken. I should be most reluctant to see those decisions—perhaps branded "economic" but clearly having very large political implications—left to one unelected body. Of course it is absolutely right that the Governor of the Bank of England should advise the Government as strongly as he feels appropriate on the action to be taken in certain circumstances. If the Government neglect to take that advice and the issue is of sufficient importance, he also has the right to resign. The consequence of that upon the Government will clearly be very serious. In practice I believe that the threat of resignation by a Governor of the Bank of England would be sufficient to make most governments sit up and think very carefully about whether they were doing the right thing.
The Government have a very difficult task before them which arose as a result of the financial conditions about which we are all aware. I believe that there are many strengths in the economy at present. Many of the indicators are pointing the right way. I also believe that they will come through these difficulties. I wish them well in their task.
6.45 p.m.
The Earl of Longford: My Lords, a cat may look at a king, and as a former chairman of one of the smaller clearing banks I follow with respect the former chairman of one of the greatest. Incidentally, I gather that the noble Lord was chairman of the bank of my noble friend Lord Bruce. I hope that he is no longer in the position to control Lord Bruce's account in view of some of the remarks he made earlier. It is years since I was admitted to a bank parlour, so I do not know whether they are now rubbing their hands with glee because this has been one of the most profitable

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weeks in their existence or whether they are bemoaning the national state. I am not up to date in regard to their present state of mind.
I shall speak more briefly than most noble Lords, although no speech has been prolonged. I shall deal with one issue only and one which I do not think has been dealt with today—that is, unless it was mentioned when I left the Chamber just now to strengthen myself before speaking. I refer to the question of the treatment of the social services—I take the phrase in the widest sense—in the immediate future. There is a threat hanging over them. These days The Times is most enjoyable. It cannot be called a lackey of the Government, but for no particular reason it has come out pretty strongly for what is called "a reduction in public expenditure". Of course, that means a cut in the social services or at the very least a reduction in the planned increases. To me that is quite unacceptable. However, I understand the thinking behind it; namely, that if we are to have growth we need increased inequality of wealth in the country. That doctrine was applied in the 1980's and, whether one thinks that that is a good or a horrible idea, no one can doubt the fact that inequality of wealth in this country was much increased during that time.
I see that the noble Lord, Lord Cockfield, who is a financial expert, is looking at me wondering what figures I shall produce. I shall produce but one set of figures. However, I shall not take my stand on any particular figures because the facts are so well known. The figures supplied to me, which derive from government statistics, are as follows. Broadly speaking during the 1980s the average income of the average citizen increased by 30 per cent. in the course of 10 years. That is not very remarkable. It did not increase any faster than before. But, nevertheless, it was a reasonable increase. However, the average increase of the poorest 10 per cent. went down by 6 per cent. Even if one wants to say that those figures are not quite right or that they decreased by only 5 per cent. or 4 per cent., no one doubts that Thatcherism (the doctrine applied in this country during the 1980s) was based on the idea that there must be much more inequality of wealth. Some people may think that is okay and that it is a good idea. There are people who think that the Thatcher era was miraculous; indeed, I believe that it was called a "miracle" at one time, although I do not think that that phrase is used so freely now. At any rate, people who think of those years as miraculously successful say,"That proves it. That is what we had—an increase in the inequality of wealth". I do not want to blame the noble Baroness, Lady Thatcher, for having invented Thatcherism. She made it explicit.
My noble friend Lord Bruce earlier confessed that he was a Conservative until 1931. Older Members of the House may recall that I worked in the Conservative research department between 1930 and 1932. My noble friend Lord Bruce seems to have left a little more promptly than I did. I hung on for a year or two and then did something else for many years.
In those days we took Thatcherism for granted. It was not expounded; it was assumed. It was a whole
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philosophy of progress. It was voiced in a leading article in The Times in a way which made us all happy. It said,"Unfortunately, wealth is like heat. The only way it is unequally distributed is if it performs what the physicists call work". In our office we wanted to pin that up on the wall—metaphorically at any rate.
That was the official Conservative doctrine up to the war. The war came and with it a great sense of national purpose. A new unity was formed. After all, we had those enlightened statesmen—some of whom are sitting opposite. Apart from those present today, I refer to the late Lord Butler and Lord Stockton, who spoke a different language. However, the country found itself under the control of the older ideas, ideas that would have appealed to Mr. Neville Chamberlain when I worked as his bottle washer.
That was Thatcherism, the doctrine of the 'eighties. The question now is whether or not the country is to be asked to revert to such doctrines. In the recent general election the Conservatives came before us with a smiling face and what they called "caring Conservatism". We all know that Mr. Major is a nice man and the general idea was that the Conservative Party was a party of "niceness"; of decency, and that they were all good chaps. That was the situation presented to the public. By a fairly narrow majority the public voted in favour of the new caring Conservatism.
In the present Dunkirk situation will we say,"We have suffered a disaster but there may be other glories to be expected from it"? Is the country to revert to Thatcherism? Is that what we are being asked to do? When speaking of cuts in public expenditure, it can only mean reducing the social services and increasing the burdens on the poorest and weakest members of our society, which will be totally unacceptable by any Christian or ethical standard.
6.54 p.m.
Lord Skidelsky: My Lords, although I am the twentieth speaker in this afternoon's debate I hope to be able to make one or two observations which have not been made in the distinguished contributions we have heard hitherto.
Full analysis of the recent events will have to be left to historians. I attribute most of our recent troubles to the fact that the Government never made up their mind what they wanted out of the exchange rate mechanism. On the one hand they wanted to use it to beat down inflation; on the other they wanted to make sterling a permanent part of a fixed exchange rate system to underpin the single market and Britain's place at the heart of Europe.
The charge against the policy, made most forcefully by the noble Lord, Lord Jenkins of Hillhead, is that by taking sterling into the ERM at the wrong rate and at the wrong time the Government endangered the ERM and with it our hopes of a liberal Europe. I do not accept the charge of noble Lords opposite that the policy has been a complete failure. We have come close, albeit at great cost, to achieving the major goal of price stability. If that achievement can be sustained it is an inestimable boon. With inflation still going

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down and many key prices actually falling it means that recovery now carries less risk of again stoking up inflation.
I have always believed that it is much easier to maintain price stability than to acquire it. Once acquired it should not be sacrificed as it was in the mid-1980s. I therefore welcome the Government's commitment to low inflation as an essential prerequisite of recovery, though we will need to ask how they propose to fulfil that commitment.
All that is on the credit side and it is important. When I look at the debit side I am appalled by the wreckage, both to our economy and to the financial system of Europe. The fault line running through the Government's policy was summed up by the Chancellor's statement on 10th July when he said.
"The way to success is to adjust your costs to your exchange rate, not the other way round".
I believe that view to be both theoretically and practically flawed. By deflating the economy one can always make prices fall. But one cannot make costs fall as fast as prices. A deflationary policy brings down prices by bankrupting business and raising unemployment. That was pointed out many years ago. However, it does not,
"adjust your costs to your exchange rate".
That is the reason the exchange rate instrument is liable to break in one's hands when holders of sterling realise that the hurting is not working or not working fast enough. Since sterling joined the ERM at the central parity of 2.95 deutschmarks it has been overvalued by the only test that matters—Britain's ability to pay its way at a normal level of activity.
Over the past two years we have had a large and growing current account deficit at an abnormal and growing level of unemployment. Evidently consumer demand in the economy has not fallen as fast as the destruction of manufacturing capacity. There was never any prospect of foreign or even British holders of sterling waiting long enough for the medicine to work. A currency whose value could he maintained only by interest rates high enough to ensure a continued net inflow of capital is a weak currency, liable at any time to speculative attack for whatever reason. It is no accident that of the three major European currencies it was sterling which broke first.
There is much wrong theory in that idea. I do not particularly blame the Government for holding it. It has been a fashionable theory in economics that the balance of payments is a purely monetary affair. I hope recent experience discredited that view. Inflows of "hot money" can temporarily balance a country's external account. But unless there is an improvement in the fundamentals—in a country's competitiveness—that money will flow out again as easily as it flowed in. That is what happened last week.
A number of speakers referred to the problem of speculators. It is a major problem and makes fixed exchange rate systems much more difficult to maintain. But it is ridiculous to draw the conclusion that a single currency with a single government on top of it is the only way of dealing with the problem of speculation. That would really be to give speculators control over our political future. The main lesson is
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not to have a single government but to fix national currencies on rates which reflect the competitive power of their economies.
As the noble Earl, Lord Russell, sagely remarked. history has a habit of repeating itself. The overvaluation of the pound in 1925 helped to destroy the gold standard. By overvaluing sterling in 1990 we endangered the future of the ERM. The pressure on sterling has been transferred to the franc. It is an open question whether the European financial structure, so painfully constructed in the 1980s, will survive the strain.
I am appalled at the reflex action in many quarters, though not in this House, of blaming the French and Germans for sterling's fall. Certainly we alone are not to blame for turning what should have been a flexible instrument of policy into a straitjacket. But is it not a fact that the Bundesbank has consistently pressed for a realignment of sterling and other currencies within the ERM? Is it not a fact that the devaluation of sterling was on offer? I have not yet heard a satisfactory answer to that question.
Devaluation gives us a breathing space, but we must remember that the benefits of devaluation depend largely on what happens to wage behaviour in this country. The next year will show how effective the industrial reforms of the 1980s have been in creating a flexible labour market. I should like to ask my noble friend Lord Caithness whether he is persuaded that wages per unit of output will remain stable as output and prices recover. Does he think that the Government have a role to play in keeping them so?
The benefits of devaluation will also depend on what happens to other currencies. I welcome the Government's determination to rejoin a reformed ERM at an appropriate parity as soon as possible or, as may well be the case, to help reconstruct it if it collapses. I should like them to go further and seek an agreement to keep the exchange rates of the main currency groups, including the ERM, steady against each other.
I agree with the view that has been expressed this afternoon that it is madness for us to float sterling except as a strictly temporary measure. Unlike in the 1930s, we are in no position to organise a currency-cum-trading bloc of our own. We did that in the 1930s, but where is that bloc today? Apart from that, do we really want protectionism,"dirty floating" and all the other beggar-my-neighbour devices familiar from the past to be added to the outbreaks of nationalism already taking place in Europe?
The ERM remains the best currency club for us, the best hope for a prosperous Britain and the best hope for a liberal Europe. Next time let us try to make it work.
7.1 p.m.
Lord Elton: My Lords, your Lordships are debating a Motion to take note of Her Majesty's Government's economic policy. Of necessity recent events have focused the attention of that debate on Europe. With my noble friend Lord Boyd-Carpenter I ask your Lordships to remember that it takes place in the context of a stalled, if not a failed, GATT round and

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that we are in a stagnant world economy. In the long term that is probably a more dangerous situation even than the waters we face in Europe at present. I hope that Her Majesty's Government will never take their eyes off that battle or cease their efforts to free world trade for, while our prosperity may depend on it, in other countries people's lives depend on it.
However, at the moment we are primarily concerned with the ERM and our recent departure from it. I am no expert. I would observe only that that mechanism has two functions. One, as my noble friend Lord Joseph rather anxiously reminded us, is as a prelude to a single currency and a single bank. I do not wish to follow him or my noble friend Lord Boardman into a debate on the desirability of that except to observe that if the Germans can separate their national bank from their political machinery it may also be possible to do that in Europe and there may not be a necessity to have only one political institution controlling one central bank.
That is not my concern. The more pressing matter is the need for a system such as the ERM, the gold standard, M3 or any of the other mechanisms mentioned by my noble and learned friend Lord Howe earlier to hold governments of all colours to long-term policy objectives which can be painful in the short term. The nature of democracy is to put a premium on policies which bring short-term comfort. They often bring long-term pain, but the premium lies in the prospect of being re-elected because the pain has been postponed. Democratically elected governments are therefore in need of some such benchmark and a commitment to some such restraining target. In my view my right honourable friends the Prime Minister and the Chancellor of the Exchequer were right to pursue such a commitment until it ceased to be viable. They could only do so wholeheartedly, and statements of the order made by my right honourable friend in Glasgow were necessary if an honest attempt was to be made.
The question now is whether, in concert with our European partners, we seek to repair that mechanism. It is odd, is it not, that so many Euro-sceptics, whose fears focus on the power of the deutschmark, tell us about the dangers—and even the shame—of submerging the pound in a European currency while few, if any, point out the corresponding and possibly greater advantages to us of sinking the deutschmark at the same time and in the same way? It may be that the French and even the Italians, who have had that as their objective for a number of years, are wiser in that than we are and bound on a safer course.
We as a people will not recognise that wisdom, nor any of the many virtues and strengths of our European partners, for as long as we as a people are heavily under the influence of the British press, and the British tabloid press in particular. The hideous shortcomings of that press in dealing with home affairs should not blind your Lordships to its deep and apparently bitter prejudice in European affairs.
It is a prejudice which left the activities and even the presence of our French allies in the Gulf campaign virtually unnoticed; a prejudice which reported a restraining environmental directive from Brussels as
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though Britain had been savagely and unreasonably singled out for isolated humiliation and left readers in ignorance of several moves made against the Portuguese, the Italians and, if memory serves, the Germans in exactly the same terms at the same time; a prejudice which leaves any Briton whose knowledge of Europe comes only from the tabloid press to imagine a fantasy continent peopled by ogres and buffoons in which the saintly and intelligent British are the only heroes. Only when British football fans go to the Continent and behave as they do at home does he get a momentary glimpse of life as it really is and an inkling of the way in which we must be seen by a great many cultivated and peaceable people living on the other side of the Channel. Let us hope that their press is more objective than ours.
That power of our press to slant and distort has not yet been sufficiently diminished by television. Some of us wait impatiently while it continues its assault on some of the central standards of our society and some of the central institutions of our state for a proposal from Calcutt for their diminution by law.
My noble friend Lord Tebbit sensibly said—outside the Chamber—that our progress towards a more coherent Europe, and with it a single currency, should not get ahead of British public opinion. We need not only to agree but to reflect that that opinion is heavily influenced by newspaper coverage which is heavily biased. Any new approach to the ERM—and I believe that in the fullness of time such an approach must be made—must be made in the context of public opinion which is properly informed. It is the function of politicians to provide that information in an intelligible form and to find means to get it across. That is no small task and will take no little time.
Within that information must be not only the points cogently made by my noble and learned friend Lord Howe of Aberavon but a reminder of the point from which all plans for the European Community sprang. They sprang from the European Coal and Steel Community. That community set out to integrate those industries which between them had fuelled and armed two world wars in which millions of people were killed. Behind both those wars was the evil spirit of nationalism. If noble Lords doubt that that spirit is alive today they have only to look at Serbia and Bosnia where rivers of blood are again being spilt in its name. They should remember that when thinking of saying no to a cohesive Europe and when our own Prime Minister seeks to bring that closer.
Your Lordships should remember also that we were driven out of Europe once before. That was at Dunkirk. We were not content to remain at home then; neither should we be now. Having lost this battle we must once again make certain that we win the war, the war within the greater war of GATT.
7.8 p.m.
Lord Jay: My Lords, those of us who for the past two years have been arguing that fixed exchange rates cannot work and that in the case of the United Kingdom the 20 per cent. over-valued rate of 2.95 deutschmarks to the pound could only cause high

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interest rates, intense deflation and ever-rising unemployment must tonight refrain from quoting their past speeches, despite the strong temptation to do so.
To force a fixed over-valued rate on a weak economy is simply to convert what should be a gradual readjustment into a violent political upheaval such as we had last week. It is the over-valuation which makes a currency vulnerable to speculative attack. At the same time, to hand over our fortunes to speculators by decontrol of finance and abandonment of exchange control and expect fixed exchange rates to work is a flat contradiction. It is very easy to denounce speculators but without exchange control there is in the present world no effective way of controlling or restraining them.
The proof that sterling was overvalued at 2.95 DM—here I agree with the noble Lord, Lord Skidelksy—was the fact that the United Kingdom suffered from a balance of payments deficit and rising unemployment at the same time. The right exchange rate is one that enables a country to maintain a sustainable balance of payments and something like full use of productive capacity. Therefore if, as we do, one suffers from both a £12 billion a year balance of payments deficit and heavy unemployment, by definition the rate is over-valued. Incidentally, let us remember that the right rate now will not necessarily be the right rate in two years' time.
I believe that there are two reasons why the Government have been so persistently wrong—as apparently have even its Treasury experts—in the past two years. First, they failed to realise the harm done by a large and obvious payments deficit. An over-valued exchange rate is a tax on exports and a subsidy to imports, so that as long as it is in force the deficit tends to get worse and unemployment continues to rise, as we have seen in the past week. Secondly, I believe that the Treasury forgot that each rise in unemployment cuts the spending of those who lose their jobs and therefore gives rise to a further group of unemployed people. As a result of those miscalculations, the story of 1925 to 1931, which we have already heard tonight, has been repeated almost precisely. I say in passing that there was some justification for the parity we went back to in 1925 because that had the authority of John Locke as long ago as 1694. There was at least an historic tradition. The figure chosen in 1990 was simply plucked out of the air on the spur of the moment.
Nevertheless, the 1931 and 1949 lessons have a good deal to teach us. The right policies were at least followed after the adjustments in the exchange rate. The present Government have done a good deal of harm by wild, scaremongering statements to the effect that an adjustment of the exchange rate would lead to headlong inflation, ever higher interest rates and general chaos. Indeed, their prediction that it would lead to higher interest rates has already been contradicted this week by the 1 per cent. cut that we received from the present Chancellor immediately after the change in the exchange rate. After 1931, interest rates were decisively reduced, beginning with
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the War Loan conversion in 1932 and, let us remember, bank rate stood at 2 per cent. for the rest of the 1930s. There was no sharp rise in price levels. The exchange rate soon stabilised at lower levels (at which the speculators were glad to come in), which corrected the balance of payments deficit and gave us five years of housing boom and indeed real growth. The 1949 devaluation again led to no sharp rise in prices—almost none in the first 12 months—and gave us the easier conditions of the 1950s by correcting the balance of payments and also the wider balance between the dollar and sterling areas.
Similarly, the fall in the sterling exchange rate in 1985 and 1986 was the main cause of the two or three years' actual rise in real growth that we had in 1987 and 1988. The Government have also done harm with their wild fiction before the change about a free falling exchange rate, runaway inflation and so on. If we lower the exchange rate, some import prices will rise; but that is surely in many ways desirable. What is basically wrong with our economy now is that we are importing too much, in particular of manufactured consumer goods. If we cannot restrain that by selective import controls, as once we did successfully, we can only do it by letting the price of imports rise, to some extent the higher the better. In fact, by lowering an over-valued exchange rate, we abolish both the subsidy to imports and the tax on exports.
Another major blunder of the Government has been to turn one single economic aim—that of lower inflation—into a sort of obsession, to the exclusion of all other goals. To my mind balance, not obsession, is the art of economic policy. One can have zero inflation by having 50 per cent. unemployment. Indeed, one can have zero inflation by having zero employment, zero production and zero consumption. That simple arithmetical fact shows how absurd it is to make fighting inflation the sole aim of all economic policy.
We must restrain rising price levels; but, if there is no incomes policy, a gradually rising price level is simply the inconvenience that must be accepted to achieve international solvency and reasonably full use of capacity. Therefore the right policy now, as I see it—this is very greatly over-simplified—is first to let the sterling exchange rate fall to a level that the markets will sustain and certainly not above 2.60 DM to the pound and let the Bank of England smooth out the short-term jerks and jumps. That is an art at which it has shown itself very successful over a great number of years.
Secondly, interest rates should be brought down decisively, not just to 8 or 9 per cent. but to more like 6 per cent., before the end of the year. As my noble friend pointed out, real rates are still exceedingly high.
Finally, in the now inevitable reconsideration of Maastricht, above all we must retain in the hands of national governments, at any rate for the foreseeable future, the maximum possible control over the exchange rate of their own currency and therefore over the livelihood of their own people. The loss of that has wrecked the Government's economic policy over the past two years and done a great deal of damage to British industry which it will be hard to repair. Whatever we think of the result of the French

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referendum—a "yes" vote, incidentally, of only about 35 per cent. of the electorate—it was certainly not a vote, any more than was the Danish vote, for handing over to Brussels even more powers of economic self-government.
Finally, having escaped from the crippling straitjacket of the ERM, if only by good luck, for heaven's sake let us not gratuitously walk in again.
7.20 p.m.
Lord Brabazon of Tara: My Lords, for several years until about two years ago I had the privilege of answering the same Question time and again. It was: when will we join the exchange rate mechanism of the European monetary system? The Question was normally asked by the noble Lord, Lord Ezra. It was a Question that I enjoyed answering. It enabled me to play a totally straight bat mainly because I did not know the answer—and it is always easier to reply to a question to which one does not know the answer rather than one to which one knows the answer but does not wish to give it. With respect to the noble Lord, Lord Ezra, it was perhaps a rather naive Question. I am afraid that your Lordships would be kidding yourselves if you thought that entry to the ERM would ever be announced to the House at Question Time. I am sure that the noble Lord knew that.
However, the Question had serious value. It was to find out what support there was for joining. Membership was supported from all sides of the House. The Liberal Party had long been in favour; the Labour Party came around to it and was certainly in favour at the end; and many noble Lords on this side of the House and on the Cross-Benches were also in favour. Membership was also supported by prominent business leaders, bankers, industrialists and the CBI. There were exceptions: the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Stoddart of Swindon, stand out as two such exceptions. There were also exceptions on my own side of the House.
Two years ago the time became right and we joined. Unfortunately, history has shown us that the time was anything but right. Let us be clear about what we really joined. It was the exchange rate mechanism of the German monetary system, a wholly-owned subsidiary of the Bundesbank. Just as the Germans were faced with the problems of reunification and the inflationary pressures from that, we and others within the ERM were beginning to feel the effects of recession. I do not blame the Germans for their actions. We would have done exactly the same if we had faced the same circumstances.
Despite the weight of learned opinion on the ERM, I must admit to having had some doubts about it. The phrase,"You can't buck the markets", has been much used in the past few days. I prefer,"Market forces will prevail", but the message is the same. Any form of fixed or semi-fixed exchange rates between widely divergent economies is bound to have difficulties.
Secondly, we appeared to be joining to make us look better Europeans, whatever that means. That is not a good reason for doing something as important as this. It is certainly true to say, as my noble friend the
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Lord Privy Seal said, that during our membership in the last two years inflation has fallen from nearly 11 per cent. to the same as Germany's at about 3.5 per cent. and is falling and interest rates have come down from 15 per cent. to 10 per cent., although the differential has widened unfavourably. The ERM undoubtedly has had responsibility for that but the recession has also had its effects and all the credit cannot be given to ERM membership.
As we all know, last week the pressures became too much and despite all the proclamations that we would not devalue from my right honourable friend the Prime Minister and the Chancellor, strongly supported by the leaders of the Labour and Liberal Parties, despite the threat of a rise in interest rates to 15 per cent.—which, thank goodness, did not work—and despite massive intervention in the markets, we were forced to leave the ERM and devalue—and devalue we did; let us not call it anything else.
I certainly do not blame my right honourable friends for having repeatedly said that we would not devalue and for then having done so. One has to continue to say that one will not do so because the moment one stops saying it devaluation will take place anyway. However, I found the call from the Leader of the Opposition, that not only should we hold our parity but should also cut our interest rates rather naive. Just how we could have achieved that on the back of a tiny 0.25 per cent. cut by the Bundesbank I am not quite sure.
We now have to make the best of the situation. But let us not get too euphoric over the consequences. Just as I remember saying at the time that the ERM would not be a panacea for all our ills, or indeed a free lunch (as the present phrase is), neither is a floating pound and devaluation. We shall still be influenced, just as is the dollar outside the ERM, by German policies and interest rates, and indeed forces elsewhere in the world. We now have a much more realistic exchange rate, in particular against the dollar. I believe that our export industries are already competitive and will be made more so by a lower exchange rate. That should help the balance of payments in time. Unfortunately, some of our best export markets are also in heavy recession at present. But conversely, those exporting to us are also unlikely to be able to pass on the full increases. Inward tourism, in particular from the USA, should also benefit since there is no doubt that the 2 dollars to the pound exchange was causing great difficulties. The stock market has risen strongly, in particular with regard to those companies with large overseas earnings; and that is good for confidence. But above all we have been able to cut interest rates, and I hope we shall see further falls as conditions allow.
I am very pleased to hear my noble friend the Lord Privy Seal reinforce the absolute priority of not taking risks with inflation. Of course devaluation brings with it inflationary pressure in higher prices for imports. We have already seen a price rise in petrol, for example, although fortunately there is no great pressure on the oil price at present. I hope and believe that this devaluation is different from previous ones in that there are very few inflationary pressures—indeed the opposite at present.

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The fall in mortgage interest payments will help to bring down the RPI, although I still believe that mortgage interest payments should be outside the RPI. When at some golden time in the future interest rates have to be raised to damp down an overheating economy, the immediate effect is to raise the RPI while the real effect is the opposite. I hope that that suggestion can be considered.
We are also fortunate that these events are happening at a time when the public expenditure round is taking place. It is vital that the Government keep the tightest possible lid on public expenditure and the consequent PSBR. We must try to get back to a balanced budget because government borrowing is at the expense of borrowing by commercial companies, which are the wealth producers of the economy.
The squeeze must be on current account expenditure. A freeze should be the norm for public sector pay. I was horrified to see that those responsible for the education of our children, the teachers, put in a claim for a 16.5 per cent. rise. What an example of economic naivety to set to our children. That particular paper should be sent back marked "nought out of ten". The Secretary of State for Education should say that if they come back with a figure of 1.65 per cent. he might talk around that figure.
Within the total of public expenditure, priority should be given to capital expenditure. Top of the list, perhaps not unexpectedly, I put roads because they generate the best and quickest benefits for our businesses. But capital expenditure on hospitals, schools and housing would also give a welcome fillip to the construction industry. Again in the transport field, capital expenditure by British Rail and the Civil Aviation Authority—and I emphasise in the case of British Rail that it is capital expenditure, not revenue support—which can be shown to generate a cash return should be taken out of public expenditure controls altogether. The Treasury will no doubt be horrified by that suggestion. But at this time when it is no doubt having to rethink many issues, perhaps it could add that suggestions to its list. I believe that that is something that the markets would accept, and would indeed welcome the extra expenditure on the infrastructure.
During the hours and days that follow our leaving the ERM, the first message from the Government seemed to be that we would rejoin as soon as possible. I for one was very glad that that message became less clear as the days went by; and now re-entry seems to have been put off until conditions allow and reforms to the ERM are made. I believe that the events of the past week—they are not yet over—have shown the present ERM to be fatally flawed. I do not believe that we should rejoin it in its present form. From that it follows that the concept of monetary union, a central bank and a common currency as envisaged in the Maastricht Treaty also falls. For that and other reasons I shall not therefore be able to support the Maastricht Bill if it reaches this House in its present form. However, I hope I am right in thinking that my
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right honourable friend the Prime Minister has this afternoon in another place set some new conditions for the Bill.
Let us not forget that one of the reasons businessmen wanted entry in the ERM in the first place was to bring some stability to exchange rates, an essential element when planning trading and investment decisions abroad. They now want to see markets calm down again. In conclusion, we want a strong and stable currency, a currency that is wanted in the world because it is backed by a strong economy, a low tax economy, an economy with tight control over government expenditure and a balanced budget. We now have the opportunity to achieve those goals and we should do our best to do so.
7.30 p.m.
Baroness Platt of Writtle: My Lords, nobody wants to see repeated the events of last week, just as we do not wish to see repeated the hurricane winds of a few years earlier. As a little girl I did not understand my father's favourite saying,"It's an ill wind that blows nobody any good", but in adult life I realise how wise he was.
At the time of Maastricht I admired the standpoint of my right honourable friend the Prime Minister, wresting as much subsidiarity as he could from other national leaders set on rapid European unification. Public opinion in Europe is now proving how right he was. I am a convinced European but I believe that the rate of unification was too fast. Thankfully, the Danish vote slowed down that headlong rate in its tracks. The French have voted yes but the vote, with its divided nature, shows doubts in the minds of some half of the voters about whether the treaty fulfils their national aspirations. Again, that should highlight the need for a slower and more measured rate of progress towards unity in Brussels.
We all ratified the Treaty of Rome with high hopes of free trade and, above all, of ensuring peace rather than the terrible wars which throughout history have riven Europe with hatred, taking with them the flower of our youth throughout the nations. No one wants to return to those bellicose years. So much is at stake that we must stay together. I continue to support wholeheartedly my right honourable friend the Prime Minister in his honourable attitude, particularly in his presidential capacity, in attempting to stay with the ERM for as long as possible, as we had promised. However, many adverse outside events prevented that and now we are free to reconsider the matter. I am glad that the Prime Minister has stated clearly that we shall not hurry back and that Maastricht will not be imposed without time for reconsideration to allow voluntary Danish participation. We must also stick to our policy of enhancing subsidiarity to the full. I was interested to hear the Germans now talking about unity in diversity.
I believe that this new situation will allow a much-needed deceleration in the rate of unification. Perhaps Europe should consist much more of clubs of like-thinking nations following their own preferences within the overarching European Community, as suggested recently in The Times. Those common

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loyalties would gradually develop in an evolutionary manner, which would ensure greater strength and endurance, and the more successful clubs gradually attracting new members. In recent years the trouble has been the over dominance of Brussels, going against the grain of national characteristics. In future Europe needs to work with the grain but more slowly. That will lead to much stronger international bonds in the longer term which are more able to stand up to the occasional hurricane forces of the winds of change that are part of human existence.
As UK Limited we must now plan ahead to retrieve our economic strength as quickly as possible. We must reduce our budget deficit and bring our balance of payments into credit. We must continue with our policy of keeping down inflation and also reduce as soon as possible the number of unemployed people. We stand high internationally in our skills in exporting our goods hut we fall down in our high ratio of imports. That results in our balance of payments deficit.
It is with some diffidence that I speak this afternoon as a minnow among Tritons, as my noble and learned friend Lord Hailsham said. Nevertheless, I wish to make a particular point that I believe is at present of great importance. The Treasury puts together capital and revenue and always concentrates its policy on an annual basis. Like my noble friend Lord Brabazon, I believe that capital and revenue should be separated. Any prudent firm or organisation has to consider how much capital investment it can afford in one year to bring down overheads or to increase efficiency and revenue in future years. That needs time and a longer-term strategy of investment.
I believe that the Government should redirect Treasury policy towards longer-term aims. Fiscal incentives to firms to invest in high technology machinery will reduce future operating costs and make us more competitive in the sale of our products both at home and abroad. I am not recommending civil servants second-guessing successful industrial policy. Small firms are struggling today and need tax allowances to encourage them to invest in new machinery in the year in which they make the capital expenditure. In that way the Inland Revenue could also take its pickings but in succeeding years as profits rise—that is, if the risks were successful.
If arrangements of that kind are not made our manufacturing industry will not be taking risks and exercising the entrepreneurial flair that we need to reduce our balance of payments deficit and at the same time reduce unemployment. We did not need the "QE2" to go to Germany for repair, which will cost us £30 million. We needed a courageous entrepreneur in the UK to hire unemployed ship workers to keep the necessary time schedule and win the contract.
Recently our family has tried unsuccessfully to buy a British hammer and deep freeze. It has had to persevere to buy a British-made non-stick frying pan. My noble friend Lady Faithfull and I unwillingly have our hair cut with Japanese scissors. "Why not Sheffield scissors?", your Lordships may ask. The design of Sheffield scissors is not sufficiently modern and would exhaust the fingers of a hairdresser. Why
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do we not compete more vigorously in a growth trade and find out what the consumer wants in order to capture the internal markets so that we do not need to import these bread and butter products?
Sir Basil Feldman does a good job in his Better Made in Britain campaign. He does not support buying British for the sake of it. He organises exhibitions of current imports, including price, after-sales service and other quantified information, so that manufacturers here can be fully aware of the competition and meet it head on. Such schemes need more encouragement.
We need to modify Treasury policy so that we act in a longer-term manner to encourage, by fiscal methods and otherwise, a far more entrepreneurial competitive mood in our country. In the short term lower interest rates and a lower pound internationally will help but manufacturing industry needs to see strong Government encouragement of entrepreneurial investment. A fiscal incentive would give that signal strongly.
Furthermore, there is too little competitive attitude in our schools. The Young Engineer for Britain competition and the Young Enterprise and Neighbourhood Engineers schemes, backed by my right honourable friend the Prime Minister, the Engineering Council and the DTI, will help to encourage able young people to see the excitement and challenge of a career in a competitive and forward-looking manufacturing industry investing in new technology. It is an urgent matter and cannot be left to chance. We must all take more positive steps to change our anti-industrial attitude in Britain—that includes the media—so that we can regain our economic status in the world. I hope that we shall use our present freedom from ERM dominance to develop further those policies with the utmost urgency.
At this point I must apologise to your Lordships. I must leave before the end of the debate but I shall read Hansard with diligence.
We have a window of opportunity when time is on our side. We must grasp it. Public opinion in Europe is moving our way against the dominance of a Brussels bureaucracy. In due time Maastricht can be made to form the core of a new agreement but it must be amended towards subsidiarity. Meanwhile, we must enhance the entrepreneurial flair and economic strength of our own manufacturing industry to the benefit of our country.
7.40 p.m.
The Earl of Halsbury: My Lords, I address your Lordships this evening with a rather tired sense of dè jâ vu, a phrase over which I have no monopoly since it has already been used by my coeval friend, the noble and learned Lord, Lord Hailsham. We have both been through it all before and long ago.
I came of age in 1929 when anyone not yet an octogenarian would have been a schoolboy or perhaps even unborn. The storm cones had been flying all summer—agricultural prices had been steadily dropping, the stock market had been unjustifiably booming and then, in October, when I was just 21

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years and three months with my career ahead of me, came the crash. There was frenzy, panic, hysteria and suicides. Millionaire stockbrokers and bankers were jumping out of the windows above Wall Street onto the pavement where they accumulated like autumnal leaves in Vallombrosa. Half of the M2 in the USA went out of existence in due course.
We went off the gold standard with an overvalued pound in 1931. That was the first of the devaluations in my lifetime. On average they occur every 20 years—1931,1949,1967 and now 1992. We devalue what is overvalued. Winston Churchill set the stage for the first of them as he was advised and accepted the advice of Montague Norman who told him to return to the gold standard at its pre-war value.
The gold standard was all right as far as it went. It was not universal. The Chinese had a silver standard and because they collared and cornered all the silver in the world, that led to the opium war but I shall not go into that in any detail. The trouble with gold as a standard was that the production of gold did not keep pace with the overall value of the production of goods. It was not produced at the same percentage rate as goods. Therefore, it was permanently deflationary.
Another of my old coeval friends, the noble Lord, Lord Boyd-Carpenter, mentioned floating exchange rates. In our youth they were known as purchasing power parities. That is all right except that to preserve balance, the imbalances of trade must be invested long term by the creditor country in the debtor country, and there is no way of ensuring that that happens.
The storm cones were already flying when Parliament last sat. Dollar interest rates were dropped and deutschmark interest rates were raised in the same week. "Watch it, we are in for a crisis", I used to say to as many friends as I could buttonhole and who would listen to me. I said that we have four options: we can follow the dollar; we can follow the deutschmark; we can do nothing; or we can float. I do not know whether the noble Lord, Lord Cledwyn, asked those questions but if he did not say,"Watch it", as I did, then his speech this evening was a kind of natural history museum-piece of being wise after the event.
The media, bless them, have discovered Roosevelt and his famous dictum:
"You have nothing to fear except fear itself—.
However, I was there when he said that. I heard it on the evening news and it was a live matter. However, he did more than utter dicta; he acted. He set up the "New Deal". He sponsored the Tennessee Valley Authority with borrowed money—one may like to call it printed money—to produce capital assets for the nation, which earned a return in due course. Roosevelt was a cripple in a wheelchair but he was a president who presided.
There is all the difference in the world between borrowing money to pay the house books and borrowing money to build a house. One is current expenditure and the other is an asset for the next 100 years. Every issue in the City of London finances the expansion of industry with borrowed money at some level of gearing. If your Lordships do not believe me,
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perhaps they will ask the noble Lord, Lord Desai. Although he is not in his seat at present, he is to speak later. I know that he agrees with me about that.
Here we stand with a part-worn out, part-collapsed housing stock, schools, hospitals, prisons and so on. Let us rebuild them. We need newer and better. We should modernise and spend for a future return. With an abundance of water in the North West of the country and a shortage of water in the South East, we need to build a giant canal through the Pennine chain; it would be a gigantic enterprise. We are embarked on a joint European project to build a standard fast reactor as a model for the future. Let us go build it and put our plutonium stocks to good use instead of burying them. When wages are paid for useful work, rather than dole to the unemployed, money will be injected into the high street and thence to their suppliers. The suppliers will then take more men and women into employment and pay them wages to do useful work. Instead of deteriorating downwards, the situation will snowball upwards in terms of positive feedback.
So much for Roosevelt and the past; what of the present? We cannot run a trade deficit of £1 billion per month indefinitely, owing money to the rest of the world. It leaves us too vulnerable to raids by currency speculators on the foreign exchange. Those people are a neurotic bunch of parasites liable to attacks of hysteria at the drop of a pfennig. Compared to the days of my youth when foreign exchange dealing was tied to trading in goods and services, the volume of purely professional transactions is fantastic—10 times that of genuine trade finance.
The foreign exchanges, as described by the noble Lords, Lord Bruce of Donington and Lord Cockfield, are run by teams of youngsters with computer keyboards and display screens doing sums in arbitrage and the futures market. That enables them to play at bulls and bears: buying what you cannot pay for or selling what you have not got, waiting for a rise in the one to sell out or a drop in the other to buy in. One such youngster who is vaguely related to me told me that he expects to be burned out at the age of 35. He asked me what I thought he could do thereafter. The honest answer was,"Nothing", but I tried to say that kindly.
Your Lordships have heard what those youngsters do and what the exchange mechanism does to them. What do they actually do. They undertake stock arbitrage. You buy de Beers in London with sterling, sell them in Johannesburg for krugerrands and sell the krugerrands for sterling in London. If that is done quickly enough—that is what the computers are for—and the conditions are right, a small profit can be made. As the noble Lord, Lord Bruce, said, when that is multiplied, the dealer may end up with millions. What a pity that those bright youngsters go in for that sort of parasitic occupation instead of going into industry.
Revenons à nos moutons, messeigneurs. I follow the noble Baroness, Lady Platt, in asking what is wrong with our trade that it is in deficit. The figure is £65

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billion over the past six years and at the current rate of £12 billion per year, it would be £72 billion over six years according to last month's figures.
For most of my life our industries have in fact failed to pay for their imports with exports, but the invisibles have secured us a favourable balance which we invested abroad, although most of those investments were liquidated during the war. Now the invisibles have gone into deficit too. What is wrong with our industries that we cannot make commonplace things competitively? Why cannot we make them for ourselves? I would like to have a list of what it is alleged that we cannot make for ourselves. Why does such and such an automobile manufacturer, or whoever, make automobiles, or whatever, in Spain in order to sell them in Britain when once upon a time they were made in Britain in order to sell them in Spain? What is wrong with us that we put people off in some sense or other unless they are Japanese, who are content to invest their favourable trade balance with us? If they can manage our labour force, why on earth cannot we manage it?
Ever since the war I have listened to politicians and academics nagging at industry as being slow, unprogressive, unimaginative, soft and so on. My noble friend Lord Benson came rather close to that in what he said today. What effect does one suppose that has on the youngsters who could be the next high fliers when they mature? Highfliers like to work either for or with other highfliers. It stimulates them. They keep one another up to the mark. If they see some sector of the market being nagged at, will they want to enter it?
For me industry, which means making things, has been a happy home all my life. But my grandchildren do not feel that way. They do not want anything to do with it. Why not? I believe that a contributory factor was the recruitment to academe following the expansion of our universities. I believe that many recruits were anti-manufacturing and prejudiced their students somewhat against it.
Adam Smith called the English a nation of shopkeepers. That is a quotation which is usually ascribed to Napoleon Bonaparte, although in fact an Italian observer of the European scene had voiced it a little while before. I have always dated the start of the Industrial Revolution from 1750 when Abraham Darby's first blast furnace for making cast iron with coke was blown. That ushered in the age of cast iron engineering. One hundred years later Prince Albert's Great Exhibition promoted Britain as the workshop of the world, which it was. But wherever we succeeded others followed and that cannot be stopped. We cannot stand still. We cannot lay on our oars or rest on our laurels. But it does not follow that, because that is so, we necessarily acknowledge it and pick up the challenge.
So tired, we revert to shopkeeping. I have nothing against shopkeepers. They provide an essential service which depends on manufactured supplies which are either made at home or abroad. Therefore, all I can do is to respond in kind to the quotation from Kipling made by the noble Lord, Lord Callaghan, who ended his speech with one:
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"This was none of the Lord's good pleasure For the spirit God set in Man is free But what comes after is measure for measure And not some God who afflicted thee. As was the sowing so is the reaping Now and ever more shall be. Thou art delivered to thine own keeping Only thyself afflicteth thee".
7.55 p.m.
Lord Harmar-Nicholls: My Lords, it is always exhilarating to listen to and follow the noble Earl, Lord Halsbury. He was in top form this evening. The only part of his speech which bothered me a little was when he gave us that rosy picture at the beginning with all the tunnels, bridges and wonderful ideas. I wondered where all the money was coming from to pay for it.
The Earl of Halsbury: My Lords, borrow it!
Lord Harmar-Nicholls: That is right. People will only lend money if they feel that it is going to be spent on something which will produce a result reasonably soon so that they can have a share of it. That is how things work.
I have heard pretty well all of the debate until now. I was most impressed by the speech made by the noble Lord, Lord Benson. He was practical and came within a realm which I understand. He said that we should not bother our heads all the time with short cuts, charters, mergers and international arrangements. He said that the only way that we can get back to anything like the level of success that we used to enjoy is by getting down to it and working ourselves and thereby producing the results. We should also make our own decisions. Most of the comments we have heard have tended to tell other people what to do.
The purpose of the recall of Parliament, as I understand it, was for Parliament—of which we are a part, although the other place is the most important—to make up its mind what Parliament can do and what should be our choice. We cannot do all the wonderful things which would provide the answers. All we can do is set the climate in which the people who can provide the answers are encouraged to do so, and we should get on and do just that.
The noble Lord, Lord Stoddart, reminded us that we cannot have a plebiscite to find out what our next moves should be because our parliamentary system does that since we are a parliamentary democracy. I accept that. I prefer a parliamentary democracy. The theory is that the representatives of the people do their homework and get down to dealing with all the problems. They can make a decision from deeper knowledge than the individual can and they will get on with it. But I wonder if we do that. Parliament has that scope but it is not doing the job.
Instead of being wedded to the Whips in making and confirming decisions which have been made, Parliament should really do its homework and act. I was interested to discover the other day that on 28th October 1971 the House of Commons approved by a vote of 356 against 244, a Government resolution which stated:

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"That this House approves Her Majesty's Government's decision of principle to join the European Communities on the basis of the arrangements which have been negotiated".—[Official Report, Commons,28/10/71; col.2076.]
They merely voted blindly for that. In my own Government party, because we took some trouble to have a look at the possible consequences that might flow from the decision 38 of us voted against the resolution. We felt that there was very good evidence to show that the negative results that would follow from joining the Community as a result of the negotiations would, when everything including the common agricultural policy and all its sections, was taken into account, result in a move towards eliminating this country as a separate country and a separate power. However, that matter was not examined by the House and there was a big majority in favour. As I have said, there were only 38 of us in the Government party who went into the Lobbies and voted against the resolution.
We felt that the long-term dangers had not been fully examined. The Government had examined the long-term dangers and had come to a different conclusion. There is nothing wrong with that. I do not want them to feel that they have to be dictated to by the Back-Benchers any more than I want the latter to be dictated to by government on issues like this when the general health and freedom of the nation is involved.
But what did the Government do when those arguments were being put forward to try to persuade the House of Commons not to support the resolution so easily but to look at the effects that it could have upon sovereignty and upon our general independence? We were told that all the dangers that had been pointed out by the sceptics were nonsense. The Government said,"That can't happen. We've got the veto and when things are being negotiated the veto can stop such awful things happening". But it did not take us long to find out that the veto was a dead letter. The veto was replaced by majority voting and much of the way in which we live and organise ourselves is now being decided not at home but by people in other parts of the Community who do not have the same reactions or desires as we have at home.
It is up to Parliament to make decisions on the problems that we shall face in the future. If there is to be no referendum, fair enough. If parliamentary examination is being claimed to be just as effective and to go into things just as deeply, then let us see to it that Parliament gets down to it and does just that.
The question before us at the minute is whether or not we shall introduce and vote on the Maastricht Bill. It is quite clear that the Maastricht Treaty is an extension of what was the original intention of the Treaty of Rome and is intended to get us to what for want of a shorter expression, we can call "a federal Europe". That is what it boils down to. One can use all sorts of other descriptions, but the aim is not to have 12 separate nations with individual freedoms to make the decisions which they must live with and live by. The aim is that, at the best, we shall have only a one-twelfth say in what happens to our taxation and the way in which this country is run. It could well be
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argued that, if we have a good case, we shall be able to persuade the other 11 and we shall then have not just a one-twelfth say but will carry with us the people we have persuaded.
However, it does not take a professor to know that by and large with people as they are—and it is ridiculous to think that people are not as they are—the decisions that are made by other nations will he made on the basis of whether they get anything out of them. The reason why the recent referendum in Ireland was overwhelmingly in support of Maastricht was that the Irish wanted the cash. They are the ones who get a lot and we are the ones who provide the cash. Matters are getting to such a level that I am beginning to wonder whether we can afford this. Even if the theory worked, we would have only one-twelfth say.
When I say,"Remember the promised veto which encouraged us to join the Community", I am not suggesting that we can do any more now than honour the Treaty of Rome. We have gone too far and we are committed to it. However, to go any further and to carry Community powers out of the realm of economics and into the realms of politics and social and political living will be madness. To support Maastricht at this stage would be to take a further step outside the European "Economic" Community and towards the merger that would bring us to the point that I call "centralism".
I want Parliament to understand that. If Parliament says that it does not mind that and if it does not see in it the dangers that I fear as regards our way of life and the general desires of this country, all right, but let us not accept Maastricht simply because a government or party have said so, and because the Whips must be obeyed without thought. If Parliament is not prepared to do that, we must have a referendum—not that I am in favour of referenda in general. But it is essential that Parliament should do its job if its scrutiny is to replace the referendum.
Why do I tie a vote on Maastricht—if the legislation is brought back—to the absence of the veto? We are already being prepared for Maastricht. We are told that all the dangers that we say will flow from allowing the Maastricht Treaty to go through and from its becoming an adjunct to the Treaty of Rome do not matter because we have subsidiarity. We are told that our Prime Minister did a great job by including in the Maastricht decision as it stood an amendment stating that priority must be given to anything that could be done by the nation itself being done by that nation. They called it "subsidiarity".
If anybody can prove to me—and I have read and examined the provisions and if any of Maastricht's authors can put their hands on their hearts and say that they believe subsidiarity means that the individual nations themselves can decide what should be left to them and that those decisions cannot be interfered with by the European Court of Justice or subjected to any other amendment, then subsidiarity will, indeed, mean something in terms of defending ourselves from the giving up of powers that we should retain at home.
However, Maastricht's "subsidiarity" does not even begin to say that. When Maastricht's authors are examined, they make it perfectly clear that, while

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subsidiarity is the general purpose at which they are all aiming, at the end of the day a nation's decisions can be overturned by the other countries of Europe, and eventually by the Court itself.
Therefore, I beg both Houses to remember the lesson, which is that the dangers that were clear in the Treaty of Rome were discounted because we were told that a veto existed that would make it possible for us to resist the dangers that could be clearly seen. It is the same with Maastricht. We should not be fobbed off with the subsidiarity idea—nor with the idea that Maastricht does not mean what it clearly does mean. We shall not be doing our duty if we replace our powers as an elected democratic parliament and do not put the issue out to a referendum.
We must honour the Treaty of Rome up to the point that we have reached so far. The thing that made me suspicious and bothered me the most was when one "E" was removed from the title of what was the EEC—the "European Economic Community". When Parliament was persuaded to pass that legislation, we were told that all the benefits were based in the economic sphere—
Lord Williams of Elvel: My Lords, I am most grateful to the noble Lord. In saying that we should honour the Treaty of Rome, would he also say that we should honour the Single European Act, which was passed by both Houses of Parliament?
Lord Harmar-Nicholls: My Lords, most certainly. We are committed to the Single European Act under the treaty. I do not want this nation to run away from its legitimate obligations. I am saying that, in conforming with the obligations which we are prepared to honour, we should act within the terms of the treaty that we signed but we should not go any further nor allow the treaty to be diluted because of the way it is administered once we have accepted it. I believe that some good could perhaps come from concentrating upon improving the economic under-takings that we have gained from the Treaty of Rome. However, anything which impinges one inch further upon our sovereignty or which affects our social outlook and interferes with our individual politics should not be accepted.
The noble Lord, Lord Cockfield, who is always well versed in these matters said that there was nothing in Maastricht that could not be done under the Treaty of Rome without Maastricht. If that is so, why do we want Maastricht? I cannot understand explanations of that sort on the one hand and, on the other hand, enthusiasm for enforcing Maastricht. If, as a result—certainly I will give way to the noble Lord.
Lord Stoddart of Swindon: My Lords, I am much obliged to the noble Lord for giving way. I am interested in what he has just said. He is clearly demanding democracy within Parliament. In those circumstances would he agree that, unlike the position on the Treaty of Rome and the Single European Act, which were forced through the House of Commons on a guillotine, this time there should be a wide-ranging and long unguillotined, discussion within the House of Commons?
Lord Harmar-Nicholls: Certainly, my Lords: I thought that what I was saying was that if, where individual sovereignty and way of life are concerned we are not going to have a referendum—I do not want to go to a referendum—but are going to operate a parliamentary system as a better alternative, it is up to the people who are elected to Parliament and to those who sit in this Chamber as part of Parliament to apprise themselves of all that is likely to follow.
I am not frightened of this business of a first-and second-class community. If we preserve our individual freedom we have to let others have theirs and if other parts of the Community want to join together to do things, let them do that. If they say that we should become second-class and no longer first-class, then all I would say is that in such a case I hope they will not expect us to go on, by our subscription, paying a first-class fare if we are to be relegated, as it were, to second-class carriages. If that were to be balanced, the money we should save would go some way towards producing the improvements that the noble Earl, Lord Halsbury, suggested could be attained.
My advice to my friends in the Government who, I understand, have called Parliament out of recess because they want to ascertain the mind of Parliament in lieu of having to go to a referendum or any such alternative is that they should take account of the general feeling in the country, which, so far as Europe is concerned, is that we were to some extent duped by having the veto power dangled and then given up almost overnight. I believe that people resent more than I can possibly describe the idea of being led further along that path by a word called "subsidiarity" which would be the result of bringing Maastricht back and getting parliamentary approval.
8.13 p.m.
Viscount Caldecote: My Lords, I was always in favour of joining the ERM because I thought it provided a stable exchange rate which was helpful to industry. I believed it provided a spur to industrial efficiency and competitiveness because companies could not then expect to pass on increased costs into export prices by devaluation. I also believed that it was a valuable deterrent to inflation. I still believe it was right to go in. Perhaps we went in at too high a value of the pound; but that is not the major issue.
Unfortunately, many people regarded entry to the ERM as a prop to the economy, which of course it was not. It was a challenge to industry to improve performance and to grow with low inflation. Many companies, large and small, rose to that challenge and they have been making a full contribution to the strength of our economy; but alas! too few. Overall, United Kingdom industry—I emphasise "overall" because there are very many first-class companies in this country and top class in the world—has failed to meet the demands and the requirements of United Kingdom purchasers. The balance has been met by imports. Earnings for services will never put right that imbalance.
Therefore even in the recession we built up large deficits on current account and they have continued to this day. Worst of all, misguided economists have

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advised and persuaded governments that such deficits did not matter. They have talked about them being balanced by capital flows, and as many of your Lordships have made clear tonight, those capital flows around the world have got quite out of hand. In company terms, similar advice would lead directors to ignore a loss year after year on the profit and loss account because the cash outflow could be balanced by capital injections. To continue that policy for long would obviously be the road to disaster and the share price would soon reflect the market views of that policy.
Such was the reaction in world markets to our long-continuing deficit on current account—a fall in the perceived value of sterling. In times past devaluations, steadily or in dramatic steps, have resulted each time we have been in this sort of trouble as the pound took the strain. Those devaluations gave only temporary respite, as other noble Lords have pointed out. As rising costs and inflation rose again, the cycle was repeated with a further depreciation of the pound.
The facts must be faced. The United Kingdom economy, and particularly our manufacturing industry, was not strong enough to withstand the rigours of a fixed exchange rate imposed by entry to the ERM because we do not produce competitive products in sufficient volume and value. That is the problem which has to be solved, and until it is the old economic cycle of boom, inflation, recession, devaluation and boom again, will be repeated indefinitely. The objective of sustained economic growth and acceptable levels of unemployment will elude us for ever. What is more, until we are on the way to solving that problem of increasing the output of manufacturing industry, it would be folly to return to the ERM, as the noble Lord, Lord Benson, indicated.
In all the hectic discussions and the welter of words in the past week or two regarding how to sustain the sterling-deutschmark exchange rate and the like, is it not amazing that the question has never been asked, so far as I know—it has certainly never been answered—as to why is the German economy and the deutschmark so strong? The simple answer is that since the last war the deutschmark has never been devalued, and that is because the German manufacturing industry has been strong and the value of goods produced by German manufacturing industry has exceeded the value of goods purchased in West Germany. In 1991 (the latest figures that I could get) the balance of trade in Germany was a positive £8 billion, compared to ours of a negative £13 billion. That is a difference of £21 billion per annum. Can you wonder, my Lords, that the pound was weak in relation to the deutschmark?
Of course the achievements of German industry have been greatly helped by the action of the Bundesbank in controlling inflation, and by Germany's trade union structure. By comparison, in the United Kingdom under Conservative Governments of the past 10 years or so, we have made enormous strides and there have been great achievements. In the early 1980s under the leadership
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of my noble friend Lady Thatcher, we removed the stranglehold of the trade unions, making industry much more competitive and restoring the spirit of enterprise. But, alas! those splendid achievements were not exploited and followed through. The talk was all of medium-term financial strategy, monetary aggregates and control of the money supply, with hardly a mention of increasing product supply. Neither the Government nor the Prime Minister herself shared the anxiety which was widely expressed about the situation of manufacturing industry. Concern was often expressed in your Lordships' House about the need to increase investment and output. The dangers which were forecast by the report of a committee on overseas trade in 1985—the committee chaired by my noble friend Lord Aldington—were ignored, as were the recommendations of the report of the Select Committee on Science and Technology on Innovations in Manufacturing Industry in 1991.
At our peril, we have forgotten that the primary responsibility of financial institutions is to channel money into providing resources which will create wealth through added value in manufacturing industry. To make money and earn foreign exchange by manipulating money is valuable too, but of secondary importance. As a result of our failure to appreciate the pivotal importance of increasing the value of the output of manufacturing industry to meet our needs, we have built too much of our economy on the shifting sands of money value instead of on the solid rock of added value in manufacturing industry. I hope that my noble friend Lord Cockfield, who is not at present in the Chamber, will agree with me on that. So when the swirling currents of world market forces swept around us, part of our economic foundations crumbled away. Now we are up against the urgent need, first, to stabilise our economic base and then to move forward from firmer foundations, as there is no doubt we can if we make better use of our resources.
The extent of the task before us is brought into sharp focus by the August balance of payments figures. Even in this deep recession the deficit is still running at the rate of £12 billion per annum. In the past three months, excluding oil and erratic items, exports were 0.5 per cent. higher than a year ago, but imports were 4.5 per cent. higher. I hope that my noble friend who is to reply will not deal complacently with those alarming facts.
In the past few days too we have seen the sad situation in British Aerospace with the loss of thousands of jobs. It is ironic that a little country like Taiwan, which was part of the third world not so long ago, from its strong manufacturing base which it has built up over the years is able, willing and keen to invest in a division of British Aerospace. How much better if our financial institutions would make long term investments in British Aerospace and other manufacturing companies from the profits they made in selling sterling to the Bank of England in the recent crisis and thereby contributing to the weakness of sterling.
This morning on the "Today" radio programme the President of the Board of Trade was asked what

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should be done for manufacturing industry. He replied,"We must get the economic climate right with low inflation and low interest rates". Of course that is correct—it is a necessary condition for growth—but all too clearly it is not sufficient.
During much of the 1980s the climate was right for UK industry. It was right for investment and expansion. Productivity and profitability greatly increased. But compared to our main competitors, UK industry paid out in dividends a far higher proportion of profits. We did not invest enough in new and improved competitive products and processes. The evidence is clear. A moving and serious piece of evidence comes out of a recent study by Coopers & Lybrand. A sample of 460 of 1,500 major companies indicated that one third of those UK manufacturing companies had introduced no new product or process technology since 1989. How could they possibly be competitive in world markets in such conditions?
Clearly, market forces and incentives for high profits have not stimulated the increased output needed to sustain non-inflationary growth. That is industry's task, but in total—I emphasise again "in total" because there are many splendid companies—industry has not been up to it. I say to my noble friend Lord Joseph that that is the reason why action by government is sorely needed. Government can no longer escape some responsibility. The first essential step is for government to accept and declare unequivocally the need to increase the output of UK manufacturing industry. That will only come through higher investment. There is no short cut, as some people now seem to advocate, through stimulating consumption. That would bring back inflation until British manufacturing industry is able to supply the needs of this country. We would suck in imports and put ourselves into an even worse position than we are in now.
Already a vast home market is available to British manufacturing industry. It is a much easier market than the export market. At least half the deficit could be met from products manufactured by United Kingdom manufacturing industry if only we invested more in new competitive products and processes. That would provide work for thousands, perhaps millions, of people who are now unemployed.
The next step is for the Government, the City and industry to consult together in order to identify and remove the obstacles to achieving greater output. Already they have received some sound advice, and more sound advice has been given by your Lordships today which may answer some of the questions posed by the noble Lord, Lord Benson. Then, laying aside all dogma related to market forces and picking winners, the action required must be put in hand by government in consultation with industry. It is a difficult problem. Consultation is needed with all the people involved. Let us get round the table and see what needs to be done and then do it. An encouraging step forward in that direction is the establishment of the CBI's National Manufacturing Council which is looking at these problems in a broad way. For the first time the CBI has come forward and has recognised the vital importance of manufacturing industry through
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the formation of this national council. I am told that one of the main subjects for discussion at the CBI conference in November will be manufacturing. God bless it! I hope it is successful and I hope that it will bring changes in the outlook of industry. Above all, I hope it will bring changes in the outlook and action of the Government.
1 hope that my noble friend who is to reply will confirm Her Majesty's Government's full support for the CBI's initiative and for every other initiative designed to stimulate greater output for manufacturing industry as well as accepting that the Government themselves have a vital pro-active part to play. Above all, I hope that my noble friend will not be complacent about the vast problems which beset us.
8.27 p.m.
Lord Desai: My Lords, we are asked to take note of the Government's economic policy. I do not know which economic policy we should take note of. At present there is not one. At present there is not a policy because anything the Government may say about their commitment to fighting inflation, or anything else, is not credible. People are still in office who said things only 10 days ago on which they have not only completely gone back but have gone back without a hint of an apology—indeed with celebration. Not only do they no longer abide by this policy but they did not even believe in the policy when they were affirming it. They have caused misery, as many of my noble friends have pointed out, and now they say that they did not even believe in the policy they advocated.
For a long time I have been an advocate of entry into the exchange rate mechanism. I do not mind saying that. At no stage did I think it was sufficient. I thought it was necessary. I shall explain in a moment why I thought it was necessary. The exchange rate mechanism which we joined was not as rigid and inflexible as the Government pretended it to be. The Government chose to regard 2.95 as a figure they would nail themselves on. It has been six months—even longer—since we on this side of the House asked them to consider a realignment—a co-ordinated realignment. We were denounced. We were told that realignment is a weasel word for devaluation and that the Government were not devaluationists. If I am to believe the noble and learned Lord, Lord Hailsham, we have not devalued yet but are somewhere else. I am glad to know that.
We said that there should be a co-ordinated realignment and an attempt to use our presidency to push the Community towards reflation. Those policies were advocated and they were possible within the structure of the ERM. The Government chose to wrap the straitjacket of the ERM more firmly around themselves than they needed to. Indeed, they chose to wrap it around themselves until the Sunday before the Norman disaster on the Wednesday. They chose to do so because they falsely thought that giving a signal that they were going to discipline would help. Of course it would help. The market somehow thought that it knew better. The market knew that during the past 13 years of Conservative government promises have been made and rhetoric has been used in relation

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to anti-inflation, control of money supply and control of public spending. The performance has been abysmal. That is the only word for it. If one looks at the numbers carefully, as I have done professionally, there is proof that the money supply has not been controlled. We have changed targets from MO to M1 to M3 to M4, back to MO and so on. The goalposts have been moved in order to prove that we have achieved targets.
Inflation, when it did come down—although it came down after having been doubled in the first instance by the incoming Conservative government of 1979—was controlled only because commodity prices in international trade fell and we had a bonus. We deluded ourselves that it was due to our achievement. You cannot say that you have controlled inflation until you have low inflation at full employment. If you do not have low inflation at full employment and if you do not have low inflation with balance of payments equilibrium, you cannot say that inflation has been controlled. The economy has only been temporarily deflated. Once deflation is let go, inflation will come back.
Therefore, it was incorrect to say that we had controlled inflation. The market also saw that before each election, in 1983,1987 and 1992, there were pre-election bribes. Look at the IMF statistics that were given before each election. The fiscal stance of the Government was loosened. Bribes were given. That was all done under the rhetoric of "No U-turns". Perhaps they were pirouettes, not U-turns. The market knew that ultimately the UK Government were not capable of committing themselves to a sustained policy framework for longer than two years.
The paradox on this occasion is that fiscal profligacy was practised before the election. Noble Lords will remember the Budget. It was a Budget in which, despite £28 billion of PSBR, more money was given away. It was given away in a way which did nothing to revive the economy. There was a tax cut of the most trivial kind. It was a straight election bribe. It would have been better to have put money into the infrastructure.
After the election, with a good majority and no election in prospect for four years, the Government ran and scuttled, not for the purpose of an election but merely to win applause at a party conference due to take place in a fortnight. I can see no other reason why they scuttled and ran. In June, July and August we could have built up reserves. We could have negotiated realignment. We could have agreed to do things which are possible within the ERM. We could have taken a more active fiscal stance to give the signal that we were serious about doing something about the recession. None of that was done. The Government pretended that they did not need any other economic policy except for daily assertions that "We shall not devalue".
Then the danger came. In early September, what did the Chancellor do? He went to the Treasury saying that he would do whatever was necessary to defend sterling. He did not say that he would increase interest rates. He was reluctant to increase interest rates. I
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remember saying during a debate on the gracious Speech that the Chancellor would have to take interest rate variability if he wanted exchange rate stability. He cannot put interest rates up and down and hope not to crash with the exchange rate.
However, I believe that the way of living in a fixed exchange rate system was not learned. We chose a version of the fixed exchange rate system which was even sterner than required. We should not be surprised that given a policy of reluctance to raise interest rates and reluctance to give proper signals—and indeed the wrong signals—that we have crashed. Let us not blame the Bundesbank for the situation.
The noble Lord the Lord Privy Seal referred to injudicious comments. I think that he was hinting at a statement made by Helmut Schlesinger. Remember that when the ECOFIN conference took place in Bath a good opportunity was wasted, if I may say so. Whatever happened at that conference was confidential, but soon afterwards the Tory tabloids informed us that Norman Lamont had told the Germans where to get off, that he had forced them to cut interest rates or not to raise them. If confidence is broken one way, it will be broken another way. Those confidences that go with the grain of the market will win and those that are not credible will not win. It was not credible for the UK Chancellor to tell the German Bundesbank to do this or that. Nobody can believe that. Markets are not stupid. People have a lot of money at stake.
Many noble Lords have spoken about speculation and the ugly spectacle on television of young people making £50 million. I did not have time to watch television so I do not know about those things.
Deregulation imposes a kind of discipline that those who believe in the market should remember. The Government deregulated the market; we did not. Secondly, we must remember that the markets do not have loyalty to any nation. Professor Hayek may say that that is the secret of the success of capitalism.
The Earl of Longford: My Lords, does the noble Lord agree that companies feel that they have to do the best thing they can for their shareholders?
Lord Desai: My Lords, it is statutory to do so. We are worried that in gambling £15-£20 billion the Government may have incurred a loss of £650-£700 million. We are worried, of course. We did not want the Government to lose money. Why do they expect that the companies want to lose money just because the Chancellor does not know his mind? Should people lose money because the Chancellor cannot get his facts straight and because the Treasury cannot forecast the economy? It is wrong to blame the speculators.
The 500 per cent. interest rate that Sweden has imposed is not very high if one thinks about it because on a daily basis it comes to approximately 1.5 percentage points. The profit to be made in day-to-day trading is much more than 1.5 percentage points. Perhaps it should be the case that on certain kinds of transactions the interest rate should be 500 per cent. and on other kinds of transactions there should be heavy money for speculation and light money for real

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production. Perhaps we can make a distinction. Perhaps we can use a tax rate, as suggested by my noble friend Lord Callaghan.
Let me not dwell on the sorry past. The question is, should we go back into the ERM? Some of my noble friends have passionately stated that we should not. Memories are short. People almost pretend that flexible exchange rates did not cause recessions, cycles or inflation. Between 1971 and 1990 this economy lived under flexible exchange rates. Does anyone remember that to be a great harmonious period without recession, inflation, unemployment or destruction of the manufacturing industry?
The exchange rate alone is not the problem. You must look at the package of policies along with exchange rates. There must be a fiscal policy, an investment policy and a structural policy. While we have devalued, we have neglected some of the very important things that the noble Lord, Lord Benson, and the noble Viscount, Lord Caldecote, mentioned. We have pretended that the state cannot do anything and have therefore damaged the economy.
We need a reformed exchange rate mechanism in which we acknowledge that we shall have a system of currencies. It currently lacks a proper central bank, a proper discipline of international co-operation and therefore a lender of last resort. The Bretton Woods system had a lender of last resort. When that lender of last resort ran out of money the system collapsed. The Bretton Woods system also had a disciplining authority in the IMF which told people when to devalue and when not to devalue. We do not have either of those things currently in the ERM. When, at the special meeting in two weeks' time, the Prime Minister investigates the fault lines of the ERM there should be a restoration of a flexible system, a proper central bank and proper rules of when and when not to change the exchange rates.
8.41 p.m.
Lord Harding of Petherton: My Lords, I should like to reinforce the words of those of your Lordships who have spoken of the importance of keeping inflation low or non-existent.
Governments can only create and keep intact the right conditions for prosperity and an increased standard of living for all. The important words are "the right conditions". The right conditions as regards inflation have so often not been maintained in the past 40 years and we have all seen and felt the ill effects. When he was Chancellor two years ago, the Prime Minister took us into the ERM. I believe that he was quite right to do so. Until recently we have benefited greatly by being anchored to the deutschmark, the value of which the Bundesbank is constitutionally bound to maintain. I believe that we could have continued to benefit had a more flexible approach to the ERM been adopted by the governments of the EC. We may or may not have joined at too high a rate, as some of your Lordships have stated. I am in no position to judge. The important thing was that until a week ago the rate was held within the 6 per cent. band and more often than not was within narrower limits. That has brought much pain to people and
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businesses with high borrowings as interest rates have had to be kept high, but that does not mean that the policy was wrong.
The trouble has come in recent months because of the costs of German reunification, the collapse of the US dollar and the way that the ERM became completely inflexible. The exchange rate mechanism, as I understood it, was not meant to be a completely rigid system. Realignment was supposed to happen when currencies came out of line or when interest rates had to be kept too high in order to sustain them. The cause of this inflexibility was the unwarranted belief among some of our partners in the European Community in the too-hasty establishment of a single currency. The idea was, and still is, that if currencies were permanently fixed a common currency would be easy to implement. That idea is fatally flawed.
A single currency may be possible now for a small number of countries tied to the German economy. In the long term it may be in Britain's interests to have the same currency as others in the European Community. Indeed, it may be very much against our interests not to do so. However, at the present time or for the foreseeable future, I do not believe that it is either realistic or desirable for Britain to join one. I hope that the Government will rejoin the ERM or something similar in the not-too-distant future. I do not think that the Chancellor will find it easy to manage the economy and to keep inflation down with a floating pound.
However, the rules must be clear. Realignments must be allowed when currency levels become unsustainable and not be made a matter of pride or prejudice. Also, proper support must be available for currencies in temporary trouble because of panic on the currency exchanges.
I am a firm supporter of our membership of the European Community. So much of our trade is with its other members and there can be no doubt that our future lies at the heart of Europe. I believe therefore that on monetary matters we must co-operate with our European partners. However, the Government must convince our partners to be realistic and practical in these matters. They must be persuaded that the vision of a common currency, and indeed of political union, must be put forward into the future. The voters in the Danish and French referendums may help to persuade them. The important objectives for the Community are genuine free trade among its members and with the outside world and steady, non-inflationary growth. For us British the emphasis must be on growth being non-inflationary as we have erred so much in this respect over the years.
Whether the pound is floating or in the ERM, I hope fervently that the Government stick to their word and get inflation down very low and keep it that way. Only then will we be able to hold our heads high and ensure the future prosperity of this country.
8.46 p.m.
The Earl of Onslow: My Lords, there is almost no greater amusement than the sight of egg on the faces of the mighty. Some may think that I refer to Her Majesty's present advisers. I admit that there is a little

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there, but a supersonic U-turn will soon dislodge that. However, Her Majesty's loyal Opposition have been covered in vast quantities of egg. They urged us to join the ERM only because they thought that it would irritate my noble friend Lady Thatcher. It was rather unfortunate from that point of view that my noble friend Lady Thatcher and my right honourable friend the Prime Minister shot their fox for them, so they were in effect left to call for action.
We all know what the meaning of the word "action" is. It is a lack-of-thought word. It means, "Do something. I am not quite sure what, but do it so that I can sound important on television". They tried to suggest a conference to persuade the Bundesbank to disobey its own rules. The only constructive and well-thought-out criticism of the Government has come from their own Back Benchers and a few perceptive outside economists. That Her Majesty's Government have been brought round to this point of view shows the Conservative Party at its agile best, leaving the Opposition floundering like a water-logged Rhine barge.
A German Minister said the other day that the future for Europe was either Maastricht or Sarajevo. That is hysterical nonsense. Western Europe, and certainly Germany, are far too sensible and mature for that sort of behaviour. However, it is a great pity that Germany does not have more confidence in herself because she would then not feel the need to cling to the false comfort of European unity as Linus clings to his blanket.
Certainly Western Europe does not need such a chimera. We need a climate that will allow us to trade, to make money, to reform the CAP, to make GATT work and to have the fastest introduction of the European single market as possible. Above all, we do not need 20 per cent. tariffs on Austrian motor cars such as have just been imposed or the trade barriers and tariffs which have been imposed on all the items that the Eastern Europeans can sell us. What have we done? We have cut out their produce and given them vast quantities of aid. That is a waste of everyone's money and of their business.
The Bundesbank knows perfectly well that if one puts too much money into any given economy inflation will occur. German inflation has been kept at zero since the war more or less by doing exactly that. If inflation occurs, interest rates rise. Since Chancellor Kohl made Germany pay too many good deutschmarks for rotten ostmarks, Germany's inflation has risen and its interest rates are consequently higher than we would wish them to be. That is what is causing the present crisis. The currency crisis is perhaps a deutschmark crisis; not a franc, lira or sterling crisis. If the deutschmark had been allowed to float upwardly by itself and had not attempted to drag everyone else with it, the banks of central Europe would not have had to behave like Mr. Maxwell, supporting their own share prices and consequently giving large donatives to the money markets.
However, good appears to have come out of the situation in that Her Majesty's Government are now basing their essential anti-inflation policy on internal
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monetary conditions instead of fixed exchange rates and other people's monetary conditions. In parenthesis, I have always thought that having the Bundesbank control our money supply because we were too wet to do it was pathetic.
German industry may not necessarily be far from the summit of its power. My evidence for that is purely anecdotal but I think telling. It is noticeable that BMW has expanded its manufacturing capacity not in Germany but in North Carolina because American labour costs are lower than those in Germany. The European manager of one of the big Japanese car companies told me that in his view the German unions were becoming like those in England during the 1960s and 1970s; the social security costs and holiday entitlements were exorbitant; and, furthermore, in the very near future the British car industry would be by far the most efficient in Europe. A South African business friend of mine involved in the components industry both here and in Germany totally agrees with that view. An American acquaintance who has just bought a high-tech company in Wales has just told me that the skills there are as good as any in Silicon Valley in California.
There has been a sea change in union attitudes and a new and more vibrant management ethos which I suspect was largely brought about by Japanese inward investment and dire necessity. Provided that Her Majesty's Government keep their eye on the anti-inflationary ball (light government, sound money and low government expenditure—and please let the Treasury differentiate between capital and income because most other people have to) the prospects for this country are actually rather exciting, especially as inflation has now been altered in effect to include asset values. By that I mean that if one had come into this country two years ago with a sack of money, one would have been able to buy rather more in goods and services than is the case at present. Therefore, for the first time ever since the war the value of the pound internally has actually increased; for example, houses are cheaper, stocks and shares are cheaper, land is cheaper—all assets are cheaper.
A noble Lord: What about food?
The Earl of Onslow: My Lords, food has stayed static, if one balances it all together; for example, the price of corn has not changed since 1985. It was then £105 a tonne ex-farm and it is £105 ex-farm now. Therefore, it has not changed. That applies to most agricultural produce ex-farm. However, what Sainsbury's does is perhaps a different matter altogether.
While in Parthia, the Emperor Trajian ran out of a librum, sesterces, denarius or two, so he made the mint master, who for some extraordinary reason of Roman regional planning found himself at Lyons, place upon the face of the same libra, sesterces or denarii the figure duo instead of unum: net result inflationary boom, followed by bust. But at least he was trying out a new policy. Surely by the time my noble friend Lord Lawson printed pounds to enable us to hold down the value of the pound to three deutschmarks we should have learned the lesson. After all, my noble and

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learned friend Lord Howe knew it. He did not print money and he brought down inflation from 20 per cent. to just over 3 per cent, even though at the same time the pound depreciated markedly against both the dollar and the deutschmark. If we can keep our inflation at or near zero, British industry can do what is required of it, possibly for the first time since it began to lose its competitive edge not in the 1960s but in the 1860s. For example, Kitchener complained in the Omdurman campaign that the engines which were being built on the Tyne were late and that he could get better ones from Germany. So we have heard much about this for a long time.
In 1987 Sir Alan Walters forecast what would happen. Let it also be remembered that he advised Sir Edward Heath and was sacked by him in 1972. He must be the only man to be sacked by two Prime Ministers for being right on both occasions. He has been uncannily correct ever since. At the same time most of the economic business establishment has wittered on about fixed exchange rates and in so doing nearly forced Mr. Lamont to take the title and Christian name Sir Stafford and the Prime Minister to adopt the new first name of Harold. But now they have a chance to re-adopt their own first names and bring back real prosperity. They of course would be immensely helped in this task if they could be persuaded to make the Bank of England independent, with Sir Alan or a clone of his as governor, and to appoint Tim Congden chief Treasury mandarin. But above all they must never forget the lesson that Trajian learnt in Parthia.
8.55 p.m.
Lord Butterfield: My Lords, I should like to begin by saying that if the noble and learned Lord, Lord Hailsham, and the noble Baroness, Lady Platt, both felt that they might be minnows in this debate, what about me? I feel a mini-minnow. However, I am on my feet because I wish to make two points as regards the subjects about which we have been talking: one from the point of view of the young and the other from the point of view of the elderly.
However, before I begin, I hope that the noble Earl, Lord Caithness, will not mind if I do what he will be doing presently which is to make some complimentary reflections on some of the remarks made by speakers in the Chamber today. For example, I thought that it was very brave of the noble Lord, Lord Cockfield, to stand up and say that we are in fact facing a very serious defeat. I must confess that I have felt like that over the past few days. I was very pleased when the noble Lord, Lord Elton, made the point that we suffered a serious defeat at Dunkirk and we were out of Europe but that we were able to get back in again. I think that that attitude must be encouraged.
The noble Lord, Lord Ezra, pleased me because he made some suggestions based upon industry and the world of work. He put forward points which we might pursue in order to try to get back on our feet. Of course, the noble Lord, Lord Joseph, always pleases me. He talked about the need for something comparable to the conference in Philadelphia when the Americans wrote their famous constitution. He
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spoke about the absence of our grasp of exactly what is subsidiarity. He did not precisely make that point, but I think that it was behind what he was saying about subsidiarity and perestroika. My mind was immediately carried to the difference between the school and the houses, although in my kind of world it would be the difference between the university and the colleges. I am sure that there must be some talk among the philosophers about the business of giving your sovereignty away and probably being shown lessons from history about how that has been successfully done in so many of our institutions.
I am no economist and I am not really in a position to make any recommendations as regards what to do; indeed, I do not think that I can even make the diagnosis very accurately compared to many noble Lords who are very experienced in the fields of government and economics. But what I really wanted to do was to speak about what I know two groups of people very much hope will be priorities in the Government's policy.
First, perhaps I may speak about the elderly. I have been concerned about the medical care of the elderly for 20-plus years. In fact, I was one of the people who began to tell the other professors, "We must take geriatrics seriously because there will be so many of them and it would be enlightened self-interest if we professors got ready for our old age".
The destruction of the savings of the elderly in this country between the 1970s and today has been appalling. I can assure the House that whenever we asked patients in the out-patient departments of our great hospitals to take off their clothes, when they took the money out of their pockets the people who had hardly any were the elderly; not so the young and often not so the students. I was personally shocked by the penury to which so many elderly people seem to have been brought by the destruction in the value of their money.
I hope that the noble Lord, Lord Monkswell, will not be cross when I say that we are all conscious of the need for generous thought and concern in regard to the unemployed and the whole educational problem. But I hope that the Government will, as they say, stick to their guns and continue to give anti-inflationary measures a high priority in their forward planning.
Noble Lords who visited the Library and looked at a copy of the Daily Star today, would have seen a poor grandmother with a horribly bruised face. The press are making a great fuss about physical attacks on the elderly by young people in our society. I am simply appealing to the Government, through your Lordships' House, not to savage the savings of the elderly in the future. That will be an immense help to the spirit of our industrial activities and may well be a great encouragement to the young people who are looking for work; they may feel that when they find employment, the money they receive is what one might call "real" money.
Today we have all had an opportunity to talk of Maastricht. I live in Cambridge and see many young people. Cambridge people—the cognoscente from Cambridge—will be delighted to hear that I was having dinner in the new Hawk's Club on Monday

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night. It was obvious from talking to the young men, both during the dinner and at the bar afterwards over drinks, that they are keen that this country does not lose the chance of being part of what I believe the Prime Minister called the "core" of Europe. There were many people from abroad—South Africans and Australians. All could appreciate that the young people hope that we are now in a position where any wars will be small ones which can be managed by the United Nations.
My other policy priority that I wish to bring to the attention of the House is the hope that the Government can re-jig the Maastricht Treaty in such a way that it is acceptable. I believe that the noble Lord, Lord Joseph, was right. It will probably take a great deal of philosophical discussion to find a way to make it work. The mere idea of translating all the words in the first Maastricht Treaty, mimeographed on green paper just to obtain the correct translation and the correct feel for the different words, will take some extremely clever people quite a long time.
Those are my points. They are perhaps small ones. They are more aims than specific recommendations for policy. Nevertheless, those two aims reflect what I believe the young are striving and hoping for and what the old deserve.
9.3 p.m.
Lord Marlesford: My Lords, if there has been one theme in the debate today it has clearly been that of inflation, coupled of course with what we should do in regard to Europe following last week's events.
Since the war Britain's record on inflation has been abysmal. It has been one of endlessly abandoning policies, often without good reason. I agree with what the noble Lord, Lord Desai, said in that regard. One of the reasons is that for a long while people regarded unemployment as a greater evil than inflation. It is perhaps understandable that the Labour Party should take that view and less discreditable than that the Tory Party should—after all, the Labour Party was formed as the political wing of the trade union movement. It is understandable that employment should be a top priority.
In the Tory Party that view came from two sources. One was misplaced guilt about the pre-war situation and the second was a misreading of pre-war history. Somehow it was believed that if unemployment went up the Tories would lose the election. The person who put me right in that regard was the noble Lord, Lord Callaghan. Just before the 1983 election I said, as a journalist, that I imagined the Tories would lose the election given the current rate of unemployment. The noble Lord told me, "Read your history about the inter-war periods and what happened then in regard to unemployment and elections".
At any rate, we are generally agreed that inflation is the main cause of unemployment and that one of the main components of inflation is wages. That has given Britain a peculiar inflationary psychology which is not shared by our main competitors—the Germans, the Americans and the Japanese. It is the view that
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everyone has the right in some magical way to immediate compensation for whatever inflation has taken place. Then one argues from that point on.
Let me take a simple, current and, I believe, relevant but depressing example; the Ford Motor Company. I would argue that the Ford Motor Company is probably one of the less well-run—one could even be tougher than that—companies in America. For years their British subsidiaries were much less productive than other overseas subsidiaries. I remember being told that by Robert McNamara, who was once the head of Ford.
The unions, understandably, have a schizoid view of the matter. On the one hand they exult in the fact that they are able to obtain large wage awards and show a lot of muscle. Many noble Lords will remember how Ron Todd exulted in the fact that he was able to prevent 2,000 jobs going to Dundee because the manufacturing activity would have been carried out by the engineering union rather than his own. Yet the Transport and General Workers' Union officials had a shrewd idea of reality. I remember speaking to some of them as a journalist at the 1990 Labour Party conference at Blackpool. They were worried about the future at Dagenham and Halewood. I had the impression that, had they been given an ultimatum by the company, they would happily have settled for zero provided the jobs remained intact.
What happened? In October 1991 Ford negotiated a two-year pay deal. The deal involved a 5 per cent. increase between 1991 and 1992 and for October 1992 to October 1993—starting next month—the increase would he the rate of inflation in the 12 months to October 1992 plus 0.5 per cent., or 5 per cent., whichever was the greater. Is it therefore surprising that this week 10,000 workers at Dagenham and Halewood have been put on short time? Also I saw from the tapes this evening that some 1,500 workers have been sacked.
The obvious reaction of the unions is to demand interest rate cuts to compensate. That is precisely what the Government should not do. It is something of a geographical paradox that the British are an undisciplined people. The devaluation which has followed from the inability to sustain the discipline of the ERM has created a dangerous situation. I should like to ask my noble friend when he replies to give an indication of the Government's estimate—and many different figures are given by different economists—of the effect of devaluation on inflation. If the devaluation is 10 per cent. how does he expect that to feed through into prices?
I believe that the Government's aim should be to keep down pay rises for everyone, with a zero norm. With inflation at 3.6 per cent. and very high unemployment, a reduction in real wages of 3.5 per cent. is, to coin a phrase, a price well worth paying for being in a job at all. The Government could impose that on its own employees. I do not believe that there would be riots in the streets or much public sympathy if people went on strike in order to resist such a solution.
The Earl of Onslow: My Lords, perhaps I may be very rude and briefly interrupt my noble friend. Has he noticed that the Government have just given the police an increase of 6 per cent.?
Lord Marlesford: My Lords, I had not. I am sorry to hear it.
The private sector presents a particular problem. There can be no direct control. However, the message must be clear. I suggest that the message should be that reductions in interest rates will be dependent upon the rate of increase in earnings. That must be one of the disciplines, in the short run at least, to replace the ERM.
More is needed. I believe that there should be rigorous control of public spending. Some proposed mega-schemes should be postponed. I suggest as a candidate the proposal to spend £1 billion on building an extra lane round the M.25. That is not the best way of spending the money in the present situation. I was particularly moved by what my noble friend Lord Caldecote said about industry and I would much prefer to see the restoration of the three-year period 100 per cent. capital allowances, which would encourage industry to invest.
We now have an excellent tax environment, thanks very much to my noble friends Lord Howe and Lord Lawson. I find it rather depressing to hear Members of the party opposite talk about the failed policies of the past and higher taxes, as did, for example, the noble Lord, Lord Healey—he of the 98 per cent. marginal rate. Who wants to go back to that, or to exchange controls? Nor do I agree with those who believe that the speculators should be punished in some way. That view has been put forward by speakers on both sides of the House. The noble Lord, Lord Desai, and I seem to agree on that issue. They merely did what they were intended to do. At least if they operate from the United Kingdom the chances are that the Government get back 40 per cent. of their profits in tax, which would not be the case if they operated elsewhere.
I turn now to the ERM. Does it really work? The concept of mutual support by central banks clearly did not work. The problem is that we do not know what the obligations were. What was the deal? I asked the Library whether the European Communities Committee of your Lordships' House had studied the ERM, but it has not produced any such study. I believe that the Treasury Select Committee of another place looked at the ERM but I do not believe that it studied its workings. We do not know exactly the implications and obligations and therefore cannot understand how it was that last week the Germans appeared to fail to support the pound.
Some covers have been lifted. On Thursday I met a group who on Wednesday had met representatives of the Bundesbank in Germany at a very high level. That group received two messages. First thing on Wednesday morning the message was that Herr Schlesinger was not to be said to be wrong but merely unauthorised. The second message was that the Bundesbank was unhappy about having to spend so much money supporting the lira and did not intend to
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make the same mistake twice. Is it surprising that by lunchtime currency dealers regarded it as a one-way bet to short sterling?
Clearly we cannot rejoin the ERM in the short term. In what other ways can we move forward? The Prime Minister used to talk about the hard ecu but we do not hear much about it now. I should like to ask my noble friend to remind us of the situation in relation to the hard ecu. I always thought that a very sensible idea, but I should be inclined to start something of that kind extremely cautiously. Why not allow some monetary authority in Brussels to issue ecu notes which would have to be fully backed by deposits of currencies in the appropriate proportions'? Then at least if they were made legal tender in all countries of the Community they could gradually be used, if only by tourists—let us not be very ambitious—to start with.
Where does all that leave Maastricht? Obviously it has lost a lot of its charm, not only in Britain. Part of the blame must go to Mr. Delors. A former colleague of mine who was the Economist's man in Brussels 20 years ago recently revisited that city and the Commission. He was very depressed by what he found. They were the same faces. The people were balder and fatter and had been promoted but they had not moved on for 20 years. There was a very inward-looking feel about it.
Criticising Mr. Delors, the analogy that I would use is that of two fishermen: a wise fisherman and a foolish fisherman who each catch a big fish. The wise fisherman plays it carefully, lands it in his net, gets it on to the bank and holds it up in triumph. The foolish fisherman tries to lift the fish out of the water on the end of his line and—plop!—it swims away. The triumphalism which Mr. Delors showed in the wake of the signing of Maastricht greatly antagonised people.
But I believe that Maastricht was a very good deal. It gave Britain some extremely good advantages: no social charter and no obligation to go into EMU until it suited us—things that other countries now wish they had. Also, as a country we have something of which other countries are jealous: we have attracted enormous amounts of foreign investment, particularly Japanese investment. That is a very hopeful sign and I hope that my noble friend Lord Caldecote will feel that there at least there is great scope. I have spoken about the Ford Motor Company. What a contrast there is with Nissan.
If Maastricht fails we shall not be in such a good negotiating position to get a good deal. The Germans helped us then. Will they help us now? We had leverage over Mr. Delors, who wanted to be reappointed to the presidency of the Commission, and were able to use that.
I have one final thought. For centuries the fault line in the political geology of Europe has lain between France and England. After a sleepless night, thinking about what I might say this evening, I was in a kind of dozing dream and saw in my mind's eye a vision of Mr. Delors standing with two other Frenchmen, who were rather spectral figures, both wearing funny uniforms, one man tall and thin with a long nose and the other short, squat and rather aggressive. One was

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saying to the other: "Well. mon cher, you will soon have the chance of putting the English back where they belong—on a misty island in the Atlantic".
That is why I do not want us to miss the opportunity of ratifying Maastricht. I shall support the ratification if it gets to this House.
9.17 p.m.
Lord Kagan: My Lords, during the Recess I visited Eastern Europe and the USA. Noble Lords might be interested to hear their perspective on us as they see it. The Eastern European economy is being rolled up like a carpet by German industry and German businessmen. It is being done quietly, efficiently, and thoroughly. The Germans have a great advantage because there are millions of highly trained East Germans whose second language—learnt from the age of seven—is Russian. They have worked with the Russians and know the Russian temperament. It is an ideal army of economic occupation. Nobody can match that.
Moreover, they are natural partners. After all, the Russians have what the Germans need: oil, coal, ferrous metals and all the raw materials that we had as a monopoly. Now they have them too. However, there is one difference. I do not know the cost of producing a barrel of oil from the North Sea but I know that the recent strike in the Siberian oilfields, in which the Germans are now 50 per cent. partners, resulted in a settlement in which wages doubled from £2 to £4 a week. That is the competition that we face.
In the military field the Germans, through East Germany, have taken over Russian technology. That includes ready-made MIGs and expensively trained pilots. When the EFA contract came up and our Government tried hard to persuade the Germans to continue with it, and even reminded them that they had paid a massive amount of money as deposit, the Germans simply said,"Keep the change; we get it for free in the East". That is the reality.
My noble friend Lord Callaghan asked: which way is Germany oriented'? Does it look West or East? He quite rightly pointed out that with a war torn, divided Europe, with a resurge of nationalism, it could one day become survival by peace or war. Admittedly, the last war was started deliberately. The next war may start accidentally. But the result will be no different. Therefore, the noble Lord's question is vital.
While in Lithuania I had the opportunity to have interesting talks with various East German technocrats who now operate in West Germany for the West Germans. I raised the question asked by the noble Lord, Lord Callaghan: which way do the Germans look for their future? The answer was, "Emotionally and culturally we look to the West; we like the West. But economically and industrially we look to the East. Indeed, in order to be able to afford your democracy we need the East and its opportunities because you in England live beyond your means, but we wish to live within ours. We will not tolerate inflation".
Germany made an offer which the eastern countries could not refuse. They are natural partners. Germany has what the East needs; and vice versa. Against that,
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we have to export cars to France and Italy. They make cars to export to us. It is a rather odd and unnatural relationship. It is a competitive rather than complementary relationship. In other words, we could well become surplus to each other's requirements. I hope that I do not view the matter too gloomily. We resent Germany's patronising attitude. They are winners, but they are not modest, elegant winners. Bismarck's dream 100 years ago—German resources, science and organisation with Russian raw materials and labour—is slowly coming true. It suffered a hiccup with Hitler. He tried rape; but Kohl tried seduction and it is working.
When an eight-stone boxer goes into the ring against a 16-stone boxer, no matter how fair the referee is or how much they abide by the rules they do not look alike when they leave it. My noble friend Lord Cledwyn pointed out that democracy is on trial. From the eastern perspective, dictatorship is evil but democracy looks feeble. Those people believe that their choice is which side of the parapet to fall off. With the tentative steps to a market economy and democracy in Eastern Europe, a few have fared exceedingly well and are better off but the masses are in misery.
When I was in Lithuania, I telephoned an old friend with whom I went to school 60 years ago. The man has two degrees. He was for five years a top level librarian of the United Nations. He said that unfortunately he could not come to see me because his pension of £2 a week does not stretch far enough for him to pay the bus fare, which is a farthing. That is a very explosive situation.
I return to what was said by the noble Lord, Lord Joseph. He said that our problems are due to our attitudes; that is, our willingness to involve ourselves and the extent of our commitment. I repeat that if an eight-stone boxer and a 16-stone boxer go into the ring together and are subject to the same laws they do not look alike when they come out. It is no use our blaming the Germans or anyone else. It is we who must pull up our socks if we want to be slotted into the right place. At the end of the day what matters is not what we say but what we do. The specific gravity of our efforts will decide our place in history. Any government or any party which hide behind other facts are misleading the people.
The noble Lord, Lord Benson, put his finger on our problem. No government have dared to ask the right questions; namely, those relating to the erosion of the industrial base, industrial relations, the them and us attitude and so forth. Europe is a fact; it can be a good fact and it can be a cruel fact. The question is not whether but how we shall fare in it. So far British politicians have not dared to ask the questions.
There has never been a mystery about what is the right thing to do. I remember a previous Prime Minister once saying, maybe in confidence, "Well, there is no mystery about what is the right thing to do except that if you do what is politically right it is economical suicide and if you do what is economically right it is political suicide. You can take your pick". That was the story of In Place of Strife and of the winter of discontent. The noble Baroness, Lady

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Thatcher, continued in conviction politics even when she offered to compromise and gave the good girl's answer of "The answer is not 'no' but 'not yet—. We all know what happened to her—though that is to the advantage of your Lordships' House.
The only way is to take out of the political arena the questions of industry, economics, education and training. They are national problems and persuasion alone will not solve them. As regards those matters at least we cannot afford to enjoy the luxury of ritual adversarial debate and the scoring of points while the Germans operate as "us" and we operate as "we and them".
The Dutch have proved that it can be done. They have had the same problems as we have had. They have had to learn to live without an empire but they have got through. That it can be done in this country has been proved by the Japanese; Nissan is flourishing. It has also been proved by Toyota and Mitsubishi which are running factories in Britain with well-trained British labour and British management. Therefore, it is no use saying that it cannot be done; we have a choice if we wish to take it. Some measures may not be palatable but if we cannot get what we like we shall have to learn to like what we have got.
History may not wait; it is impatient. It may be five minutes to midnight and perhaps I may join the noble Lord, Lord Jenkins of Hillhead, who said that he "trembles for our future in or out of the ERM".
9.30 p.m.
Lord Wade of Chorlton: My Lords, as many noble Lords will remember, the opening phrase of The Tale of Two Cities is:
"It was the best of times, and it was the worst of times".
That is an extremely appropriate sentence about which to think today. It is the best of times in the sense that our technology, our abilities, our opportunities in the single market, the opportunities of GATT and the opportunities of a world which embraces trade and where trade has a great opportunity to increase make it the best of times. And yet, it is the worst of times in that I have never come across more despair among so many people and more feelings of helplessness as regards how to revitalise their businesses which they have seen disappear. Possibly the most critical factor is the great reluctance on the part of those who have wealth to do anything with it because there is a tremendous lack of confidence and knowledge about how the future will unfold for them, for their families and their businesses. Under those circumstances, people wish to keep what they have and hold on to it. Those who have nothing as a result have no chance of filling their coffers. Therefore, there is a division: there are great opportunities and yet there is not the will or the movement to grasp them.
To speak at this stage in a debate means that nearly everything that can be said on the subject has been said. Therefore, I shall tell your Lordships a little story about two companies, company A and company B. For a long time company A has been a successful business. It has built up assets, is well run and is able to pay an extremely satisfactory dividend which has maintained a high share price.
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Company B is running through a more difficult period. It has had some internal problems and a change of management. However, a new chairman takes over who looks closely at company A. He believes that the success of company A's share price has been that over the years it has maintained a high dividend. Therefore, the new chairman decides to make a policy which means that company B will pay a high dividend. He embarks on that policy without realising that the assets and the profits were not there to support that level of dividend. He encourages the workforce and says that that dividend must be paid out and that if that is what the company seeks to do, then the company will improve. Of course, as we all know it did not and could not improve. The money keeps going out and the profits are not going in until the day is reached when the bank manager calls in the chairman of company B and says that unless drastic action is taken, the company will be made bankrupt.
Therefore, the chairman decides to take a more detailed look at company A. He studies how, over the years, company A has been able to maintain that high dividend. The chairman of company B changes his policy and says that the dividend will be reduced and costs will be reduced drastically. His first action is to get rid of all the major managers and administrators and concentrate on productivity. He cuts out all purchases of unnecessary literature and political donations stop immediately. He stops all other factors which have drained money from the company and concentrates on production. He uses all the assets to upgrade the production and improve productivity. He installs the latest technology.
Slowly the company begins to change. The employees see that the new policy means the growth rather than the decline of the company and they become more enthusiastic about the future. One day the chairman is able to go to his employees and say that he wishes to pay a certain level of dividend. He says that if that is paid, the rewards for the employees will increase accordingly. Suddenly the motivation of the workforce changes. Instead of working for a declining industry, they realise that they are working for a prospering company.
In a short time company B is able to pay a dividend equal to that of company A only to find that previously company A had made an extremely unfortunate takeover and had taken over a company which had used up all its assets. Therefore, at the very stage at which company B was beginning to be successful, company A starts to go through an extremely difficult period and company B takes command.
It would he naive of me to suggest that there is any relationship between those two companies and what we might be going through at this stage. It would be equally naive to think that the simplicities of a company are in any way related to the enormous complexities of a country.
In my view there is one close relationship. It is a point which has been emphasised by the noble Lord, Lord Benson, my noble friend Lord Caldecote and particularly by my noble friend Lord Brabazon of Tara. It was also emphasised by my noble friend Lord

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Marlesford. If one is in difficulties, the first thing to be done is to concentrate on putting the problems right. I have not yet heard a Minister say that the development and the priorities of our industries are number one and that within this Government we will put all our efforts and abilities into the creation of wealth. We must deal with that single issue which has a tremendous impact on all of us who are struggling and trying to maintain our businesses, our employees and our assets to a time when things will move around. The very knowledge that the Government are making that a priority would make an enormous difference to the feeling of the nation.
These points have been emphasised. I would like to see our economy strong enough to play a full and important part in Europe. It would be wrong and impossible for us actually to run the business of the country isolated in any way from all the other countries in Europe. We will not get the benefit of a single market unless we are clearly determined about Europe. We cannot sleep in comfort in our beds unless we have the knowledge that our children and grandchildren are safe from the dismal possibility of war and internal strife which could happen again. We have seen all the signs that the people who create wars are present today as much as they ever were. All they want is the opportunity to come to the fore.
For all those reasons it is absolutely imperative that we are part of Europe, but that we are not part of one hit of it without realising that we also have to balance with the other parts. I believe that one of the errors has been to go into Europe with one side of our economy without realising that we have to change all the other parts to make it really work. This matter is not just for governments alone. Many of the problems that have enabled them not to give economic growth priority have been due to the pressures which have been brought to bear on governments by people who have now taken their priorities from that subject.
How many times in this House have I heard people ask government to do things which will drain away more of our capital? They ask government to give priority to issues which are far removed from economic growth, the employment of people and the creation of wealth. Not only has there to be a determination by government to give such issues that priority, but there has to be an equal determination on the part of the whole nation. Until we achieve that level of economic growth which makes us strong in Europe, we should all play our part in making that happen.
I hope, pray and believe that one of the main purposes of the debates today in the two Houses is to get over to the people of Britain the serious position that we are in. It is one which cannot be blamed just on governments or even events, but on the general view in Britain that there is another way. The truth is that there is not another way. If one has to do something one has to work at it. One has to create wealth which makes it possible for people in old age to be looked after; for those with social problems to be looked after and for education to be right. There are many other factors which we all know and believe are
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really our priorities. To achieve them we first have to create the wealth. I hope that from this day that will become a determining factor in the thinking of everybody in Britain.
9.39 p.m.
Lord Griffiths of Fforestfach: My Lords, this has been an excellent debate, confirming once again how fortunate we are to have in this House Members of such wide experience. We are asked today to take note of the economic policy of Her Majesty's Government and, as the 36th speaker and speaking before those who will reply to the debate, I can assure your Lordships that I shall be brief.
This debate is occasioned by the events of last week. None of us in this House would wish to underestimate the significance of those events which were reflected in the rather sombre way in which the Leader of the House introduced the debate. I believe that in the context of last week's events we now face a choice—either we can accept defeat, emphasise the negative, stress the uncertainty and point to the problems of credibility or, accepting the floating pound, we can ask, "What are the opportunities and how can we capitalise on them?"
I should like to emphasise three opportunities which I see. The first is that the events of last week offer us greater freedom with interest rates. Mention has been made in this debate time and again of the serious recession from which we are suffering in this country and of the pain in human terms which it extracts, such as unemployment, the despair among the young who are leaving school without jobs, house repossessions and failed businesses. Already with a floating pound interest rates have come down by 1 per cent. I cannot see how anyone can say that that in itself is anything other than valuable. This is not the freedom to be reckless, but I believe that with a floating rate it is possible to pursue an anti-inflation policy outside the ERM with lower interest rates than we could have had within the ERM. I strongly disagree with those who argue that a floating currency is necessarily a devaluing currency or an inflationary currency. Both the United States and Japan have floating currencies with lower rates of inflation than either ourselves or Germany. Indeed, even Germany, whose record on maintaining low inflation is so much admired, has itself a floating currency because it is the anchor currency of the ERM.
We should not forget—despite the modesty of the noble and learned Lord, Lord Howe of Aberavon, in saying so—that during his period as Chancellor of the Exchequer in the first half of the 1980s inflation was reduced successfully even though the pound was outside the ERM. While the reasons for inflation picking up in the late 1980s are complex and, as was said earlier, reflect deregulation and the state of the world's equity markets, I feel that we cannot avoid accepting that one factor which led to that inflation was the policy of shadowing the deutschmark in 1987 and 1988, after which inflation took off so spectacularly as a result of money and credit being increased.

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We know how to control inflation outside an exchange rate mechanism by controlling monetary growth, by controlling public spending and by allowing interest rates to reflect the capital markets. But that does not mean that life outside the ERM is easy. I would not suggest that for a minute. I have no doubt that those who have the responsibility for implementing an anti-inflationary policy much prefer the simplicity of a single exchange rate objective. I doubt whether there is any one single measure of money, credit or asset prices, which the Leader of the House mentioned earlier, on which we could target with complete confidence that in doing so inflation will finally he beaten.
In having that problem we are, however, in no different position from the governments or the central banks of Germany, the United States and Japan. By judging those various indicators and, above all, as the Leader of the House again mentioned, by allowing interest rates to be raised when necessary as well as to come down, I believe that we can permanently reduce inflation. However, what gives me more confidence is that what is crucial is not the technical aspect in economics; it is the political will to keep inflation low. I think we should take heart in this House that on leaving the ERM both the Prime Minister and the Chancellor have stressed that keeping inflation low is the overriding objective of policy and that interest rates will be raised if necessary.
Within that commitment, the most attractive feature of life outside the ERM, as I said earlier, is the possibility of interest rates coming down when appropriate and therefore kicking off and helping that recovery. The increased freedom we get in this way is not great; I accept that. I also accept the advice and the wisdom which have been offered by a number of ex-Chancellors that there should be no excuse for a cut-and-run policy or a dash for growth and that the freedom which we get is not great. But, that excepted, we still must realise that we get extra freedom from the policy which we are at present pursuing.
The second opportunity that we have from the events of last week is the freedom to reflect and to think a little more about the ERM and about how much of a hurry we should be in to re-enter. It seems to me that the crisis last week was fundamentally a crisis of the ERM itself and not one of British government policy. It is not as if this Government had suddenly pursued a policy of reckless spending or creating an enormous amount of money or credit in a short period of time, after which a devaluation was necessary. If that had been so it could have been said that the crisis last week was a crisis of government policy. I do not think that that is so.
The ERM, as the noble Lord, Lord Jenkins, mentioned earlier, is not a fragile system. In the first years of its existence it was very robust. It has been in operation for a long time, but it is a system of semi-fixed exchange rates which have neither the strength of a single currency nor the strength of a floating currency. Such a system is always vulnerable to countries pursuing divergent policies. Your Lordships will remember that back in Bretton Woods
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days the dollar and the system could not take the strain of the fiscal burden of the great society and the financing of the Vietnam war.
I believe, in exactly the same way, that the ERM has proved incapable of taking the quite unexpected fiscal burden of German reunification. These strains have shown the fault-lines within the system. The system has a number of technical defects but the main one is that it always favours Germany in terms of adjustment and that whenever there is a problem the deutschmark will never be revalued or devalued but every other country will have to adjust its domestic policy to conform with what Germany is doing. I believe that in this respect joining the ERM has been good for bringing inflation down. What worries me—it is particularly worrying if you look at the relative performance of France and Germany over the past seven years—is that the ERM is not necessarily a good system for assisting recovery.
I believe we should not underestimate the challenge of reforming the system, which is what the Prime Minister and the Chancellor have said they would like to do, because only if the rules governing the intervention of central banks within the system and the immediate targets of German monetary policy are changed so as to take into account other economies will we really be able to repair these fault-lines. However, the problem there is that that risks inflation rising in Germany. My fear therefore is that for a country like ours it would be unwise to contemplate re-entry into the ERM until we are absolutely convinced that these fault-lines have been repaired.
I sincerely hope that this concern with the mechanics of monetary policy does not dominate our public economic debate in the coming months. I heard about this crisis last week in Asia. I believe that Europe is at present one of the least attractive areas of the world economy. The United States, with Mexico and Canada, is forming a free trade area. The countries of Asia, which are by far the most dynamic part of the world economy, are not concerned with forming a special monetary union. What they are concerned with is lower taxes, deregulation, better investment in people, more access to markets and so on. As a result their economies are booming. If Europe is to succeed—and I was very impressed by the speech of the noble Viscount, Lord Caldecote—we have to beat Asia at its own game, given the wage levels that exist there.
The events of last week also give us the opportunity to reconsider the Maastricht Treaty as it presently stands. We know from last week that we can no longer consider the ERM a robust mechanism. In view of the misgivings which so many people in different countries of the Community are expressing about the move towards political union, it would he a great mistake to press on regardless with the ratification of the Maastricht Treaty. One market does not require one money. The challenge we face in Europe is how to build a common framework in which trade and prosperity can be encouraged and common institutions built up through which co-operation can be pursued and conflicts resolved. It would be tragic for Europe at this moment to retreat into protectionism,

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capital controls and competitive devaluations. The strength of Maastricht is that it offers a political vision of a community of nations pursuing peace and prosperity, but as yet a significant proportion of the peoples of Europe are not convinced that their best interests are served through such a monetary and political union.
I believe very strongly that the alternative to Maastricht is not narrow nationalism; it is an alternative vision for Europe which stops short of union but which allows and encourages co-operation among its member countries. I believe that the real challenge which follows from the events of last week is to make such a vision, whether of a radically reformed Maastricht or of an alternative to Maastricht, a practical reality for this country.
9.53 p.m.
Baroness Seear: My Lords, the noble Lord, Lord Elton, rightly reminded us that the subject of today's debate is the Government's economic policy and that this, despite the excitement and anxieties of the past week, is something wider even than the issue of the ERM. As we consider the Government's economic policy in this wider framework, we surely have to recognise that we are confronting a world in economic turmoil. No one knows what the economic developments in the Commonwealth of Independent States will be; but no one I meet is sanguine about the prospects. It is a world in which the Eastern European countries are equally in a state of great uncertainty. It is also interesting that when so many countries want to join the European Community those in it—in our case at any rate—seem to be having such surprising doubts about it.
There are overwhelming problems in the third world. The noble Lord, Lord Callaghan, was equally right to remind us that economic policy is only an aspect of the wider political policies of which economic policy is a very important part, but only a part. I have always thought that it is a pity that we abandoned the term "political economy", which links together the political and the economic, and that that division has perhaps had a very had effect on the thinking about policy in this and other countries.
I was delighted that the noble Lord, Lord Boyd-Carpenter, reminded us of the Uruguay Round. If we fail on the Uruguay Round, the repercussions of that over the years will be much more serious than the repercussions from what happened last week.
Therefore, it is very important to see the issues that we are discussing today in their true perspective. Since these questions are so widespread and so important, it is surely right that this country, with its experience, its traditions and its political wisdom—because, despite what has happened recently those things surely are true—ought to be in a position in which we can help to shape and direct what is going on so that we can make a real contribution to the solution, or at least to the amelioration of the hideous problems with which we are surrounded.
Unfortunately, last week to a considerable extent, for the time being we kicked ourselves into touch when
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we got out of the ERM and when we presented such a pathetic picture to the world at large in the handling of our own economic problems.
The Government have stated, and no doubt will state again, that they had no option but to come out; that there was no alternative. That is a familiar phrase that we do not wish to hear repeated too often. However, my Lords, is that really the position? Is it not to a large extent the Government's own fault that they got into this position?
A number of noble Lords have stated that it was wrong to go in at such a high rate, and nobody has dared to challenge that statement. My Lords, are we certain about that position? The pound has been greatly overvalued against the dollar and nobody denies that fact. However, a recent study produced through the National Westminster Bank showed that so far as concerned purchasing power parity, the pound was spot on for the European countries in the Community. We are all assuming that that was not so. I am not saying that it was not too high but I am saying that to put so much of the blame on to the position of the pound is greatly to overstate the case. It is far truer to say that our difficulties have arisen because we allowed our own economy to get into such a lamentable state.
I should like to reinforce everything that has been stated about the importance of increasing the wealth-creating sections of the country and of backing manufacturing industry. We on these Benches have stressed that fact again and again. Members of other parties have also had good ideas, but my noble friend Lord Ezra has been a leader in emphasising how essential it is that we should build up manufacturing industry. That is something that today nobody is going to deny. The battle of the importance of manufacturing industry appears to have been won. The Government could have taken the advice of those who said, from the days of the Aldington Report, that that is what should be done. They have not done it. We are now where we are and what can the Government do now?
It follows that we must put resources into the wealth-creating sector and money into the infrastruc-ture—railways, housing—and, above all, training. If we do not, what will happen is what has happened again and again; namely, if we succeed in increasing output and productivity, we shall run out of the supply of skilled people. That has happened in the construction industry every time we have begun to recover from a slump. They always find that, if there is a I per cent. increase in GNP, they run out of the people that they need for the wealth creation of the industry concerned.
It is absurd at the present moment to cut the money in training to the TECs. I implore the Government to look at that again and to make sure that now, as we begin to work for recovery in the wealth-creating sector, that the people who will he needed in those skilled industries are there. The TECs will tell you that they do not have the money to do the job. I see that it was reported in the press last week or at the beginning of this week that the money for training and bringing back women into the market will be cut.

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There will be other reductions which will make it more difficult to meet the manning requirements that will certainly exist if the recovery that we in this House all want to see in manufacturing industry is available.
The money must go into investment. Investment allowances must surely be restored and opportunities given for industry to develop. The extra spending must come in that direction and not through the encouragement of consumer spending. There is every danger that the Government will fall for the temptation of trying to get markets going by the easy route of encouraging consumer expenditure. If that is the way it goes, it will breed disaster. Furthermore, can we not think again about giving to the Bank of England sufficient independence to establish and maintain stable money?
Many noble Lords (although not, I am glad to say, so many as might have been expected) have criticised what the Germans have done in contributing to the difficulties of the present time. There is only one serious criticism that one could make of the Germans: that the German Government did not listen to their independent central bank when they went for one-for-one for the mark at the time of unification. That was the start of the inflationary pressures inside Germany which have required the Germans to keep their interest rates so high. That, rather than what they have done in the past few weeks, is the biggest contribution that the Germans have made to the weakness of the European economy. They had an independent central bank and they defied it for political reasons. I beg the Government to ensure that if they want stability in this country and in all the difficulties of the present time they mean to be able to control inflation, they understand the importance of stability in the economy and will give that amount of independence to the Bank of England.
However, let us remember that coming out of the ERM and floating the pound is fraught with dangers. If we can control consumer expenditure and direct the resources into the wealth-creating sector, we may avoid the great dangers of floating. They are not inevitable, but they are extremely probable. What will happen? We shall suck in imports. We have done it every time. We never succeed in being able to satisfy internal demand by internal manufacturing. I would be the last person in the world to suggest that we should do that by artificial protectionist means. There is a real danger that, as the value of the pound falls, the price of imports goes up and our balance of payments deficit worsens.
If that happens, what will follow? The pound will fall still further and, in order to protect it, the Government will then be forced to raise interest rates
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again and the last state will be worse than the first. There is every likelihood that that will happen. Doing what the Government are doing at present will bring a temporary easement of the position, but it may make it much worse in the future unless drastic action is taken to ensure that that does not happen.
Finally, we need to get back as soon as we can into the exchange rate mechanism in some shape or form, however that can be done. We need to do so if we are to continue to play our part in Europe. But the exchange rate mechanism is only an intermediate measure and an imperfect one at that, as I think we all agree. What was happening last week? What is it a reflection of? The real position surely is that we have not got this into our systems and into our way of thinking. We now operate in a global economy with a global financial market. We now have the technology in that global financial market to be able to move millions of capital across national boundaries in 10 seconds. That is what we are up against. As I said, it is a global economy and a global financial market. That cannot possibly be handled on a purely national basis; indeed, it needs something far wider than anything that can be done at the national level if we are to deal with a global economy equipped in the way that it is now equipped. You cannot put the genie back into the bottle. It is there. People know that.
As other speakers have said, those speculators (those bankers) about whom we have had much to say were doing the job of bankers in a global economy. What we must do is to adjust our mechanisms and the way in which we work to meet the requirements, the threats and the opportunities of a global economy. To do that, we need to work with other countries. We need an independent central bank—that is, an independent bank at a European level, dominated not by the Germans alone but by the governors of all the banks of the Community countries. That at least will give us more independence as well as more control than we have at present either inside or outside of the ERM and the working of the Community.
Moreover, sooner or later we must have a single European currency. If we had had such a currency it would not have been possible for the speculators to sell pounds against deutschmarks because we would not have had separate pounds and deutschmarks. We would have had only one currency and that would have spiked their guns in a way nothing else could have done. We must wake up to the changes that have taken place. They have been most rapid. It is very difficult for people to adjust to them. But unless we do so, the kind of measures that we took last week, although they may give us a temporary respite, will be no recipe whatever for success in the future.
10.8 p.m.
Lord Williams of Elvel: My Lords, we are now coming to the end of our debate. It is my task to speak for the Opposition on some of the points that have been made by noble Lords both this afternoon and this evening. If your Lordships will permit me, I propose to divide my remarks into four sections: first, I think that your Lordships have conducted something of an inquest into what happened; secondly, I think that your Lordships have analysed the present situation—that is, where we are now; thirdly, there are the policy options which are open to us; and, fourthly, I believe that we should discuss what is the preferred option among those policy options.
In his very amusing contribution, the noble and learned Lord, Lord Hailsham, said that this was not a party political matter. Therefore, at the outset, and in order to contribute to the view of the noble and learned Lord, I propose to argue that the Government have been grossly incompetent and financially naive and that they have deceived the electorate. I regard that as a wholly uncontroversial and non-party political remark.
Well, here we are. We have had a long, interesting—and, at times, very stimulating—debate. We have heard some notable contributions from notable and experienced former Chancellors of the Exchequer. If I may say so without impertinence, I thought that the noble and learned Lord, Lord Howe, made one of the major contributions that I have heard in this House during my time here.
Let me come first to the inquest. Why did it happen? There are really two major points. One is the long run point and the other is the short run point. As my noble friends, Lord Healey and Lord Callaghan, and indeed others, pointed out, in the long run the United Kingdom economy has been maintained over the past decade in a way which, as was pinpointed with great perception by the noble Lord, Lord Benson, and the noble Viscount, Lord Caldecote, abandoned what was our original strength—manufacturing—and relied on North Sea oil and revenue from the financial services sector. That was clearly expressed in debates held in this House in the mid-1980s. What has happened is that the balance of payments deficit is now running at around £1 billion a month; the public sector deficit is around £40 million. The economy is basically weak. When one has an economy which is basically weak one must expect investors not to want to invest in that economy other than at a high risk premium, which is a high interest rate.
So much for the long run problem. The short run problem was that the Government did almost everything which, according to the book, would provoke a speculative run on the pound. The book is extremely simple. First, one says, "We are determined to defend the parity in this fixed exchange market, the ERM. We will die in the ditch and defend the parity". One then announces that one has borrowed £1 billion or 10 billion ecu. One announces that one is determined to return from holiday and defend the position. One then goes on a sound bite of 20 seconds outside 11 Downing Street saying,"We are absolutely determined to defend the parity in the ERM come
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what may", by which time every dealer in the world will be hanging on to his telephone saying, "There's going to be a devaluation".
Anyone who has dealt with foreign exchange markets knows that that is the classic signal for a devaluation, which is what happened. We are told all that had Cabinet support. I have no doubt that the noble and learned Lord sitting on the Woolsack threw his tri-cornered hat up into the air when it was announced that rates would be increased to 15 per cent. in order to defend the parity. However, anyone with an inkling of financial sense knows that interest rates of 15 per cent. mean the Government have run into a panic. Interest rates of 15 per cent. mean an increase of 0.1 per cent. per week. When one makes the arithmetical calculation on that basis the profit from a devaluation is enormous. That was where the short run policy went wrong. Wednesday of last week was a spectacular example of how to provoke a run on sterling.
What is the present situation? The noble Lord, Lord Harmar-Nicholls, summed it up extremely well. We are committed to the single market. We are committed to the Treaty of Rome. We have no way of avoiding that other than by parliamentary revolution and repealing the European Communities Act. The single European market comes into effect on 1st January next year. As the noble Lord, Lord Boyd-Carpenter, pointed out, more than half our trade is now with the European Community. Our economy is intimately linked with the Community. There is no way in which we can withdraw from that link.
In our view, that link requires a fixed, semi-fixed or partially fixed exchange rate. I should be grateful if the noble Earl could answer my point. I do not see how a single market of the kind envisaged in the Single European Act and which will come into effect can work unless there is some form of currency stability. I do not see how people can sell across a currency frontier. Therefore, in the long run the floating rate solution does not seem to be compatible with the single European market.
The noble Lord, Lord Boyd-Carpenter, and the noble Baroness, Lady Seear, quite rightly pointed out that there are imperatives elsewhere. I would be among the first to say that in our economic policy the Uruguay Round is an imperative of the highest order. I support what the noble Lord, Lord Boyd-Carpenter, and the noble Baroness said. I hope that the Government, disregarding in a sense what has happened in the past week or so, will continue to make every effort to ensure that the Uruguay Round comes to a successful conclusion. That is vital.
What options are now open to the Government? As the noble Lord, Lord Griffiths, said, there is the option of the dash for growth—lower interest rates and high consumer demand. I believe that that would be a mistake. I do not believe that the right way to go about curing our present problem is simply to stimulate consumer demand and hope for the best. The noble Viscount, Lord Caldecote, and the noble Lord, Lord

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Wade of Chorlton, explained much better than I can exactly what should he done, and I do not intend to repeat their prescription. I agree with it 100 per cent.
We can no longer ignore the fact that our manufacturing industry, our wealth creating sector, has been run down. We must make that a major priority if we are to be able to pay for those things which we want to pay for and if we are to rejoin the ERM at any reasonable rate in the future. The noble Lord, Lord Wade, and the noble Viscount, Lord Caldecote, said that very clearly.
My noble friend Lord Bruce quite rightly pointed to the social effects of what had happened under the ERM regime. We have had high unemployment and a high rate of home repossessions because of the exchange rate policy and the need to keep sterling within its bands. I very much hope that when we eventually rejoin the ERM the Government will pay attention to the wreckage that resulted from the previous experiment of joining at a high rate, at the wrong time and with an economy which was not strong enough to support it.
The options which we prefer would be, first, to recognise the weakness of the United Kingdom economy. We must be frank about that. It is no good saying that it is a strong economy. It is not a strong economy. A balance of payments deficit of the type that we have and a PSBR deficit of the kind we have are indicators of a serious economic problem in this country. I do not wish to hear from the noble Earl when he comes to respond the usual Treasury brief that everything is for the best in the best of all possible worlds. Frankly, it is not. Until we recognise that and start to take measures of the kind which the noble Viscount, Lord Caldecote, and the noble Lord, Lord Wade, started to advocate, we shall not return to what we believe to be the proper position: a strong United Kingdom economy within a reconstructed ERM, where the parity of the pound can be supported by the economic base of our own country.
I have tried to summarise what various noble Lords have said and indicate what we feel to be the right way forward. But finally I have to ask some fairly serious questions about the competence of Her Majesty's Government in managing our affairs. Last week we were the laughing-stock of Europe. We threw away hundreds of millions of pounds in a futile attempt to save the Cabinet's collective face. We behaved like spoilt children in trying to put the blame for our stupidity on the Germans. All that happened during our presidency of the Community. It is without any doubt the sorriest tale in the whole of modern politics.
What has happened since? Have the Government apologised? Have heads rolled? Has a new team taken over? Not a bit of it. We have the same collection of dreary failures as before. One minute they swear by the seven gods that they will die rather than leave the ERM and devalue. The next minute the same people leave the ERM without a hint of a blush of shame, let alone resignation. It is simply not good enough. The electorate in April deserved better than this.
The plain fact is that the main casualty of the whole affair—I say this as solemnly as I can to the noble Earl opposite—has been the Government's own credibility.
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That has vanished. It has disappeared. Nobody believes any longer what this set of Ministers says. And why should they? This Government will never again be trusted on policy. That is the true price of last week's shambles. It is a price not just for the Government and not just for the Tory Party. It is a price—heaven help us—that the whole country will have to pay.
10.23 p.m.
The Minister of State, Department of Transport (The Earl of Caithness): My Lords, I am extremely grateful to all noble Lords who have taken part in this long debate. I am even more grateful to those of your Lordships who have taken part and stayed to the end. It has been a very interesting debate, with a wealth of expertise, again showing what a useful place your Lordships' House is. I have to say to the noble Lord. Lord Healey, that after today's debate it is certainly not a mausoleum. It is a place which is full of constructive ideas and wisdom.
Inevitably there has been much reviewing of what has happened in the past couple of weeks. The noble Lord, Lord Williams, criticised what the Government have done. He did not of course bother to explain to the House what his party would have done in a similar position. The crisis would have happened the day after the general election had his party won power.
My noble and learned friend Lord Howe said that we should have entered the ERM earlier. I put it to him that he is wrong. Between 1979 and 1985 the average inflation rate of the ERM countries was higher than that of the non-ERM members such as ourselves. It was only in the later 1980s that the ERM's anti-inflationary discipline became apparent. However, after late 1987, because of what was in retrospect too great a reaction to the stock market crash, and because of the unforeseen effects of financial deregulation, our inflation rate was rising. It would have been quite wrong to have joined the ERM until our inflation rate was set to fall again and converge with that of our European neighbours. It was only in late 1990 that that condition was met.
I join with what my noble friend Lord Boardman said, which was also noted by the noble Lord, Lord Bruce of Donington, and the noble Baroness, Lady Seear. I was surprised by the number of noble Lords who not so long ago in debates in this Chamber which I attended had been saying that we must go into the ERM quickly, we must go into the ERM now, but who now say with the wisdom of hindsight—as did the noble Lord, Lord Williams—that we entered at far too high a rate. At the time we entered the ERM, with the deutschmark at 2.95, it was an appropriate level for ensuring that inflation was brought down, which has happened. It was also the market rate. Perhaps noble Lords opposite want to buck the market. More relevantly, it was approximately the real rate that had applied for 25 years.
British industry, British exporters, did not think that the pound was overvalued. It did not prevent our increase of exports to the European Community countries. During the period in the ERM our exports continued to grow healthily, up 6.8 per cent. The noble

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Lord, Lord Williams, is at the opposite end of the spectrum from the right honourable and learned Member for Monklands, now Leader of the Labour Party, who at the time welcomed our entry into the ERM. He did not question the rate then and indeed he has recently said that he would not have changed the rate.
The noble Lord, Lord Cledwyn of Penrhos, suggested that it was clear on Tuesday 15th September that sterling could not stay in the ERM. That was not the case and the Government, I believe, would have been irresponsible to have given up their ERM membership without trying two out of the three most powerful tools at the Government's disposal: intervention and changes in interest rates which, as my noble friend the Lord Privy Seal explained at the beginning of the debate, we carried out.
The noble Lord, Lord Healey, believes that we should have devalued within the ERM at an earlier date; but perhaps he did not take full account of what happened to the lira when it devalued. It, too, was forced out of the ERM within a very short order.
The noble Lord, Lord Desai, came up with yet a different idea: that we should have raised interest rates sharply, as did Sweden, to curb the speculation. Our overnight rates went up to 180 per cent. last Wednesday, but that was insufficient to stem the tide. In those exceptional circumstances even more extreme action than we took would not have had any impact. I believe that my right honourable friend the Chancellor of the Exchequer was absolutely right in not being prepared to take more draconian interest rate action with consequences for business and mortgages in almost certain knowledge that pressures in the market would not have abated. Suspension of our ERM obligations was the only sensible action to take.
Exchange rate policy inevitably raises issues which involve a major role for governments as well as central banks in all countries, and that includes Germany. That was evident in the EMU negotiations, and indeed is reflected in the Maastricht Treaty.
To the noble Baroness, Lady Seear, I say that I do not believe that the pressures in the exchange markets over the past few weeks would have been any less had the Bank of England been independent. Nor do I believe that we would have had a greater success in getting inflation down over the past two years. What matters is the policies pursued, not who makes the decisions. On the issue of a central bank, I noted with pleasure what my noble friend Lord Boardman said.
The noble Earl, Lord Perth, the noble Baroness, Lady Seear, and the noble Lord, Lord Jenkins of Hillhead, stated that all the trouble that we have suffered over the past couple of weeks would not have happened had we moved to a single currency earlier. That does not take into account the fact that the underlying difficulties caused by lack of convergence in European economies would have remained. A common monetary policy could not simultaneously meet the needs of members in different stages of the economic cycle or members affected differently by one-off shots such as German unificiation. I agree with
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my noble friend Lord Joseph that recent events are ample justification for the Government's prudent policy; that we cannot decide until much nearer the time whether a single currency would be in the UK's best interests, let alone whether a single European government should be contemplated.
My noble friend Lord Boyd-Carpenter asked how much we had lost or gained in the past couple of weeks. As he knows from experience, the result of a long-standing convention is that the Government's policy is never to reveal the intervention figures. However, I confirm what my noble friend the Lord Privy Seal said: that we have so far drawn down only half of the 10 billion ecu loan programme announced on 3rd September. Gain or loss on this transaction will depend entirely on future evolution of the exchange rate.
As the noble Lord, Lord Jenkins of Hillhead, reminded us, the use of foreign exchange reserves for intervention is not money down the drain. It represents a transfer of assets between foreign currency and sterling. The sterling acquired last week can either be used to replenish the reserves or to reduce the need to sell gilts to fund the PSBR. Any loss incurred depends on the rate at which those funds subsequently buy back foreign currencies when we replenish the reserves. For example, many of the deutschmarks in our reserves were acquired in earlier years at a cheaper price than that at which they were sold last week.
My noble friend Lord Cockfield emphasised the role of market speculation and his remarks were taken up by the noble Lord, Lord Bruce of Donington. The noble Lord has been consistent on this as he has been on one or two other policies. It was interesting to note that the noble Lord, Lord Desai, differed with the noble Lord, Lord Bruce. Market speculation was an inevitable corollary of free markets. The distinction between investment and speculation is not as great at it seems. How long does one have to hold an asset in a particular currency until it ceases to be speculation and becomes an investment? But it is only because of the fundamental strains in the ERM that speculation had the effect that it did. Contrary to what my noble friend has said, those strains have been felt by France too, as M. Sapin, the French finance minister, made clear some weeks ago when he called for monetary relaxation in Germany.
The noble Lord, Lord Bruce of Donington, correctly pointed out that preventing speculative flows would involve reintroducing exchange controls, which would of course drive abroad the financial business now done in London. I believe that we must work out how the ERM can be adjusted so that the strains which have caused speculative flows do not recur. In reply to the noble Earl, Lord Russell, we will of course take account of what our American friends have to say on this subject.
The noble Earl also asked a question to which I believe he knew the answer. He asked when interest rates were last changed three times in a single day. Of course, the answer is never but presumably, rather

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than change them three times, the noble Earl would have preferred us to have changed only once and left interest rates at 15 per cent.
As we have discussed, the Government suspended UK membership of the ERM as a result of unprecedented currency flows last week, but we have made it clear that we will rejoin when conditions permit. The noble Lord, Lord Cledwyn, asked me when that would be. Obviously I cannot give him a firm date. Not only do we need to wait until the extreme market volatility of recent weeks has died down but we also need to reflect carefully on the lessons of the past few months before rejoining. We also need to consider the experience of other countries affected by the recent turmoil. In particular, the difficulties caused by conflicts between monetary policies appropriate to economies at different stages of the economic cycle need to be addressed and the operating mechanisms of the ERM need to be reviewed. As my noble friends Lord Brabazon and Lady Platt of Writtle said, we do not want a repeat of the past two weeks. I agree with my noble friend Lord Griffiths that before we re-enter we must make sure that the fault-lines are fully erased.
Whether in the ERM or out of it, neither situation is a panacea or a soft option. The Government's policy is clear. They remain determined to achieve permanently low inflation for it is abundantly clear that only by matching the inflation performance of the best of our trading partners shall we be able to compete in world markets. Let us not forget that even now over half our exports are to countries which have lower inflation than we do. As the noble Lord, Lord Kagan, reminded us, we need to compete with Central and Eastern Europe. I go further than that in agreeing with the noble Baroness, Lady Seear, that we need to compete world wide.
Inflation is damaging to individuals, particularly to pensioners, as the noble Lord, Lord Butterfield, rightly reminded us. It is also damaging to business. It clouds the information carried in the price mechanism and thus inhibits the efficient allocation of resources. It adds to the uncertainties already facing business and encourages investment and long-term planning.
Low inflation offers UK business the stable environment in which it can flourish. Too often in the past we have allowed inflationary pressures to escalate, forcing us to choke off growth in demand and output in order to bring inflation back under control. That must not and will not be allowed to happen this time and the events of the past two weeks have done nothing to change that.
Low inflation is not an alternative to economic growth but a precondition for sustainable growth in the future. The very significant falls in inflation which we have achieved so far are the bedrock on which growth will be built. With producer price inflation and that important ingredient of which my noble friend Lord Marlesford reminded us, earnings growth, both at their lowest level for a generation, with retail price inflation reduced sharply and with the continuing strong downward pressure on inflation at all levels of the economy, there is the prospect of further falls to
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come. Add to that the record levels of productivity, renewed growth in manufacturing and business investment, car registrations in August up on the previous year and lower interest rates, it will be seen why we believe that the conditions for recovery are firmly in place.
We are fully aware that this has been a difficult period for many businesses and families. The boom of the late 1980s was accompanied by rapid debt accumulation. The resulting financial adjustment has necessitated for many households a period of retrenchment. Consumer demand has been and remains weak; and there may yet be some difficult months ahead.
However, it is important not to overdo the gloom. Several recent indicators suggest an improvement in the real economy. Non-oil GDP showed an upturn in the second quarter, as did retail sales. The prospects for a return to economic growth will be reinforced by the cut in interest rates which has followed our suspension of ERM membership.
A number of your Lordships drew attention to the industrial and manufacturing base for the prosperity of this country. I noted that the noble Lords, Lord Benson, Lord Stoddart, Lord Jay and Lord Ezra, the noble Earl, Lord Halsbury, and my noble friends Lord Caldecote, Lady Platt, Lord Onslow and Lord Wade spent some time discussing that issue and they asked how the Government would help. I agree with the view of my noble friends Lord Joseph, Lord Harmar-Nicholls and Lord Harding of Petherton that there are a limited number of ways in which the Government can effectively-and I underline the word "effectively"-help those sectors. We have seen Labour Governments attempt to intervene in and even take over large swathes of industry with, at best, unhelpful results.
The key role for the Government is to establish a macro-economic framework and climate in which business can prosper. Government policies are aimed at just that. Low taxes allow businesses to re-invest the money made and low inflation gives industry an environment of sound money in which to do business. We are committed to reducing the share of national resources taken by the public sector and keeping a tight rein on public spending. That is the right climate for business growth.
Let us not forget the achievements of British business in what recently has been a difficult world background. Manufacturing output grew in the first two quarters of this year and consolidated that in July. It was my noble friend Lord Caldecote who mentioned the 1980s. As regards those years it is worth remembering that the productivity growth in United Kingdom manufacturing was the highest among industrialised countries during those years. It is now at its highest ever level. Business investment has recently been growing at the fastest rate since the war. It rose by 45 per cent. in the three years to 1989 although it has of course fallen back recently. The benefits of that investment should stand us in good stead. During 1990 a record number of businesses

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were operating. That is the latest year for which we have full figures. They show the number of businesses to be one-third up on 1979.
Despite the difficult trading conditions throughout the world which the noble Baroness, Lady Seear, called "economic turmoil", British exports are still performing well and are currently at near record levels. If the noble Lord, Lord Williams of Elvel, had been anywhere near right in what he said, the UK share of world trade in manufactures would not be estimated to have risen over the past three years.
I agree that we must not be complacent and we certainly are not. What has been achieved under the difficult circumstances of the past few years is, I believe, a great tribute to British industry and should be recognised as that. So let us view the prospects for UK industry in positive terms backed by the Government's proper role in setting the framework of low inflation, low taxes and, as my noble and learned friend Lord Hailsham reminded us, a level of public spending which we can afford.
The noble Lord, Lord Cledwyn, asked about the cutting of training expenditure even when unemployment was rising. The noble Baroness, Lady Seear, also raised the question of training. The employment department will spend almost £2.7 billion in 1992– 93 on training, enterprise and vocational education. That is two-and-a-half times in real terms as much as was spent in 1978– 79.
The noble Lord, Lord Ezra, and my noble friend Lord Marlesford said that capital allowances should be increased. If we did that we believe that it would distort decisions which would lead to lower quality investment. I point out that allowances for plant and machinery already are more generous than commercial depreciation. We believe that it would involve high extra cost to generate little extra investment.
Talking of public sector investment, I say to the noble Lord, Lord Ezra, that it will rise 9 per cent. in 1992– 93 and that the recession has not been allowed to hinder long-term investment programmes. Inevitably, the noble Lord, Lord Williams, reminded us of the good things that the Labour Party promised before the election and which he still adheres to. We ought to remember the consequences of what he promised; namely, the tax increases which he did not mention this afternoon—these would have crippled the wealth creators, the very people he thought that he was trying to help—a minimum wage, which would have thrown the low paid out of work; and trade union laws which were drawn up in Transport House.
I agree with the noble Lord, Lord Williams, that that would have created jobs. It would have created jobs in France, Spain and Germany. It would not have created jobs in Britain. The noble Lord raised the question of GATT, as did my noble friends Lord Boyd-Carpenter and Lord Elton. I believe that it was the noble Earl, Lord Halsbury, who reminded us of the recession in the 1930s. A consequence of that was the massive decline in world trade and a consequence of that was GATT.
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As the House knows, my right honourable friend the Prime Minister has been working extremely hard to bring to fruition this very important subject. It is not a subject which grabs the headlines or which everybody understands. We believe that it is a most important subject and I agree with noble Lords absolutely on that. I remind them of the key role that my right honourable friend has played in the past, is playing now and will continue to play in the future to obtain an agreement.
I do not want to dwell on the question of Maastricht because I am sure that we shall return to that, but the noble Lord, Lord Bruce of Donington, mentioned something on Maastricht with which I agree—that the Labour Party's policies are never consistent.
We have had a useful debate this evening. Let me recap that we intend to rejoin the ERM as soon as conditions permit. We remain committed to our objective of permanently low inflation and are determined to ensure that monetary conditions remain sufficiently tight to secure the Government's inflation objective. To this end we will continue to target MO growth and will monitor other monetary aggregates, assets prices, including house prices, and of course the exchange rate itself. I cannot too strongly stress tonight that we will take no risks with inflation. Interest rates will continue to be set so long as they bear down on inflation, and the cut in interest rates made earlier this week was made only after a careful assessment of these indicators. We will also continue to maintain a firm grip over public expenditure.
To conclude, I put it to the House that the Government are right to continue to bear down on inflation. Thus far, domestic commitments to control inflation have allowed some loosening of monetary policy since we suspended our ERM membership. No doubt the cuts in interest rates already secured will help the recovery along its way. This Government's policy of setting out to build a low-inflation economy with sustainable growth was right whatever the recent difficulties. The Government are right to continue that policy now and in the future. It is the right policy for Britain.
Lord Williams of Elvel: My Lords, before the noble Earl sits down, will he respond to the point made by my noble friend Lord Healey that the Government were, in fact, offered a realignment within the exchange rate mechanism before the withdrawal on Wednesday, and refused? Is that the case?
The Earl of Caithness: My Lords, there are a number of points to which I have not replied today as is usual in a debate of this length and complexity. There will be a number of points on which I shall be writing to noble Lords.
On Question, Motion agreed to.

River Usk Barrage Bill [H.L.]
Bill withdrawn.
House adjourned at twelve minutes before eleven o'clock.