European Exchange Rate Mechanism (Hansard, 5 February 1997)

§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, the Government have no intention of re-entering sterling into the new exchange rate mechanism which will operate in stage 3 of EMU linking the euro with currencies of non-participating member states. Membership of the mechanism will be voluntary, and no one can be forced to join.

§ Viscount Waverley
My Lords, I believe that is a completely rational approach. I believe that there are many unanswered questions and uncertainties in this very important question. Not least, how are we going to extricate ourselves if this whole scheme is a failure? What about the fudging of criteria and under-funded pensions? And not least again, how are we going to reconcile ourselves with our disproportionate non-EU trade?

§ Lord Mackay of Ardbrecknish
My Lords, the noble Viscount makes some good points in his questions. Frankly, we do not go into it if it is likely to be a failure. That is the position the Government have taken for some time. We shall enter only if it is in the national interest to do so and only if it is soundly based—in other words, if the convergence criteria have been genuinely and honestly met and are likely to be sustained. The noble Viscount makes a good point about the fact that we have a considerable amount of non-EU trade. It is essential that the competitive position of the whole Union, especially that of the United Kingdom, is maintained in world trade. That will be but one of the very many aspects we shall be considering towards the end of this year and into next when we come to decide what we should do with regard to EMU.

Lord Renton
My Lords, is it not a fact that no decision on a matter of this kind can possibly be taken until we know not only the certainties of our own economy but the uncertainties or certainties of those of our European partners?

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend is absolutely right. There are two quite different aspects. There is the position of our own interest and the position of our economy in relation to 1666 the situation later this year and in the early months of next year, and there is the second and just as important point that the other member states, which may or may not decide to join, must have properly met the convergence criteria. As I have said on a number of occasions, the worst thing for us all would be an unstable euro, which would actually bring huge damage to the economies of all the countries in Europe.

§ Lord Thomson of Monifieth
My Lords, instead of fiddling around with the exchange rate mechanism, would not the Government—and indeed for that matter the official Opposition—be wise to learn the lessons of the past and, if the conditions are right, go into the new single currency at the beginning instead of waiting for two or three years and then joining, which in the past has proved to be the worst of both worlds?

§ Lord Mackay of Ardbrecknish
My Lords, I certainly do not think that we could possibly take a decision to join right now. It is interesting that the official Opposition have come round to that view after mocking me for many months at the Dispatch Box for taking that position. I am not in the least surprised that the Liberal Democrats want to join regardless. They would be anyone's poodle in Europe. This Government will be no one's poodle in Europe.

Lord Bruce of Donington
My Lords, is not part of the trouble that all mechanisms inevitably break down and there are no skilled mechanics in this field able to repair them?

§ Lord Mackay of Ardbrecknish
My Lords, I am not entirely sure where that motor car leads us. One important point is meeting the convergence criteria. The other important point, which I have mentioned on a number of occasions, is maintaining sound economies after the euro has been joined by whoever joins it, whether we do or not. That is just as important as the convergence criteria.

§ Lord Marlesford
My Lords, my noble friend is right to emphasise the importance of the convergence criteria. Clearly, Britain must use all her influence to ensure that countries meet the criteria and do not fudge them. On the assumption that they may well not meet the criteria, would it not be possible to have a two-stage EMU in which the first stage was somewhat like the hard ecu, which had some popularity some years ago? We would certainly stay out of that but it would give the others the opportunity of seeing whether it worked and us the opportunity of keeping our options fully open.

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend makes an interesting point. However, if the convergence criteria were not being properly met by the majority of the member states, it would be better, as the Government have made perfectly clear, to delay the start of the single currency until circumstances were such that one could have confidence in its ability to be sustained.

§ Lord Jenkins of Putney
My Lords, what effect would our successfully joining a common currency have on sterling as an international currency?

§ Lord Mackay of Ardbrecknish
My Lords, I am not entirely sure whether I heard that question correctly. If we do decide to join then sterling would cease to be a currency. The euro would be the international currency in which we traded.

§ Lord Peston
My Lords, I apologise to the noble Lord for missing his opening 10 seconds. Is he aware how upset I am? I for one have never mocked him at any time and he has really hurt my feelings. As the noble Lord rightly said, there are technical questions involved here. Can he confirm to your Lordships a view that he has expressed before; namely, that it is still the view of Her Majesty's Government that we could exercise the right to join EMU even though we do not meet the Maastricht criteria of being two years within the exchange rate mechanism? I know that the noble Lord has been asked that question before, but can he tell us that the Government's advisers have not shifted their position on that view?

§ Lord Mackay of Ardbrecknish
My Lords, our position on many of these issues has remained firm over very many months and years, unlike the shifting position of the party opposite. Perhaps I may be both helpful and consistent and make it perfectly clear that the operation of the ERM has indeed changed since Maastricht. The treaty refers to the observance of the normal fluctuation margins. At that time, as the noble Lord, Lord Peston, knows, the treaty was dealing with margins of 2.25 per cent., which are no longer followed. It has now been agreed that the issue is to be decided by Heads of Government when they meet early in 1998 and not before.

§ Lord Peston
My Lords, that is where we differ slightly. Can the Minister confirm that were we to decide that it is in the national interest of this country to join EMU the question of the ERM will not be brought into play? Is that how Her Majesty's Government see the question at this time?

§ Lord Mackay of Ardbrecknish
My Lords, yes, I believe that that is the position. If, in the next Parliament, the Government decide that it is in the British interest to join, in that event we do not believe that the question of membership for two years of the ERM beforehand would have any relevance.

§ Lord Ezra
My Lords, in answering the question of my noble friend Lord Thompson of Monifieth the Minister misrepresented totally the view of the Liberal Democrats. Our view is that we should maintain an open mind—which we thought was also the Government's view—and that if the situation were such that we could join then we would do so. My question relates to the Question on the Order Paper, which is not about monetary union, but the exchange rate mechanism. On the assumption that we do not join in the first phase, are the Government working out the arrangements with the euro currency if we refuse to join the exchange rate mechanism?

§ Lord Mackay of Ardbrecknish
My Lords, I am delighted to hear from the noble Lord, Lord Ezra, that the Liberal Democrats have joined my train on this particular issue. As regards what will happen if we do not join, we shall obviously have a close relationship with the countries that did join and formed the euro. I imagine that we would then have a normal exchange rate relationship between sterling and the euro.