Lords Sitting of 20 January 1999

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Chichester.

Teenage Conceptions
Lord Northbourne Lord Northbourne asked Her Majesty's Government:
Whether, in 1997, the conception rate for 13 to 15 year-old girls rose by 11 per cent. over the figure for 1996; and, if so, what action they propose to take to reverse this trend.
Lord Hunt of Kings Heath: My Lords, I believe the figures to which the noble Lord refers may be those first published by the Office for National Statistics in March 1998 relating to conceptions in England and Wales. For 1996 those showed a rate of 9.4 conceptions per 1,000 girls aged 13–15—an increase of approximately 11 per cent. over the 1995 rate of 8.5 per 1,000.
Lord Northbourne: My Lords, I am grateful to the noble Lord for that Answer. Does he agree that every child, boys as well as girls, by the time they reach the age of 14, ought to have a clear picture of the grim realities of single motherhood and of the problems that flow from it, both for the mother and the child?
Lord Hunt of Kings Heath: Yes, my Lords, there is a case for effective sex and relationships education in schools. But it is also important to help children prepare for parenthood. The noble Lord will be interested to know that a joint working group of the Department of Health and the Department for Education and Employment is examining the approach that can be taken in this area, particularly in relation to schools.
Baroness Lockwood: My Lords, do the Government have any plans for assisting girls in this age group in schools; for example, through the school nursing system where numbers, I am led to believe, are declining?
Lord Hunt of Kings Heath: My Lords, the whole area of sex and relationships education in schools is an important issue. I am the first to acknowledge the important role of school nurses in providing the right kind of support education to young people in schools. I also acknowledge the role of teachers and health visitors. There are examples of very successful projects where health visitors have entered schools to provide the right kind of support to teenage girls.
Baroness Knight of Collingtree: My Lords, will the Minister assure the House that the Government will not pursue the tactic of making contraceptives, including the "morning after" pill, widely and readily available to very young girls without informing their parents, who
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are after all responsible for the well-being of their daughters? Is he aware that evidence indicates that such a tactic does not cut back, but increases, early pregnancy?
Lord Hunt of Kings Heath: My Lords, I am sure that no one in this House could possibly condone under-age sex. It is worth making the point that the great majority of girls in schools are not sexually active. However, a minority are. We must recognise the need to provide education, advice and, where appropriate, contraceptive services to young people.
On the more general issue of the availability of sex and relationships education in schools, evidence indicates that well-designed education, far from encouraging sexual activity, plays a key role in delaying sexual activity and improving the uptake and appropriate use of contraceptives, with the consequent avoidance of sexually transmitted infections.
Baroness Masham of Ilton: My Lords, will the new committee that is to examine these matters also take account of the European figures? Other parts of Europe have a better record than the United Kingdom in this matter.
Lord Hunt of Kings Heath: My Lords, that is an important issue. If we examine the rate of teenage conceptions in this country as compared to other countries in Europe, we find that our rate is twice that of Germany, four times that of France, and seven times that of Holland. There are lessons we can learn from other countries, not merely in relation to the availability of family planning services and education in schools but also in regard to relationships between parents and children. In some other countries there are more successful approaches to discussing these issues.
Lord Stallard: My Lords, the Minister referred to the question of education. Does he accept that one reason for the problem is the constant under-rating of the need for Christian education on these and other moral issues in schools throughout the country together with the Government's failure to curb the proliferation of pornographic and foul language programmes on television and the many hundreds of magazines that are available to youngsters?
Lord Hunt of Kings Heath: Yes, my Lords, when one examines the availability of magazines such as those suggested by my noble friend and the peer group pressure that young people are sometimes under, one realises the tremendous challenge that we face in trying to reduce what is a very high teenage conception rate in this country. As regards a proper programme of sex and relationships education, we encourage schools to provide that education in such a way as to have due regard to moral considerations and the value of family life.
Baroness Young: My Lords, is the noble Lord able to give a breakdown of the figures to show whether it is possible to establish how many of these young girls

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are repeating a cycle of deprivation and are themselves the daughters of young mothers? In addressing that point, will he emphasise the importance in all sex education—or personal and social education, as it seems to be called today—of stressing to young people that a marriage is the proper situation in which to raise a family and that that is a very positive attitude to put forward to young girls?
Lord Hunt of Kings Heath: My Lords, I agree that marriage provides a strong foundation for raising children, but I believe that many other kinds of relationships can be equally successful. To 13 or 14 year-old girls, concepts of marriage may seem rather remote. I believe that it is necessary to deal with the issues in the broader context of support and counselling about relationships.
With regard to the noble Baroness's first question, I do not have figures available to show the relationship, but I will see what I can find out. Certainly, I believe there is some evidence that the cycle of deprivation in which young girls have children can be passed on from one generation to another. That is one of the key elements of the work on which the Government are focused.
Lord Hughes of Woodside: My Lords, I accept much that my noble friend Lord Stallard said. However, in these difficult matters of ethics and sexual conduct, will all those concerned with sex education bear in mind that Christianity is not the only religion practised in this country and that there are many people of no religion who have strong ethical and moral codes? Perhaps we should be a little broader in our concepts.
Lord Hunt of Kings Heath: Yes, my Lords, I very much agree with that.

Rail Freight Proposals
2.45 p.m.
Lord Cadman Lord Cadman asked Her Majesty's Government:
Whether they consider that Railtrack plc's apparent lack of plans for the provision of "piggyback" freight facilities in the context of the upgrading of the west coast main line will undermine their policies in respect of the transfer of freight from road to rail.
The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Lord Whitty): My Lords, the Government remain committed to the development of rail freight to help ease congestion on the roads and reduce pollution. So far as "piggyback" is concerned, my colleague, John Reid, the Minister of Transport, had a useful meeting with the chief executive of Railtrack in November at which the "piggyback" scheme and other rail freight upgrade proposals were discussed. All would require significant amounts of government grants. No
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formal proposals have been received from Railtrack. Officials are exploring with Railtrack various aspects of the alternative schemes.
Lord Cadman: My Lords, I am grateful to the Minister for that reply. Bearing in mind that the Government are committed to raising the cost of road fuels by considerably more than the rate of inflation, does the Minister not agree that the market for this kind of traffic is likely to increase rapidly in the future? How do the Government intend to ensure that Railtrack's stewardship of our railway infrastructure more appropriately reflects the demands to which it is likely to be put?
Lord Whitty: My Lords, it is the case that over the past few years the situation for rail freight has improved significantly after a long period of decline. The figures for last year and the first half of the current year show a 16 per cent. increase in freight kilometres, which is a healthy trend. The intention of the Government, in pursuit of their integrated transport policy, is to give the strategic rail authority the objective to promote the transport of freight by rail. In the meantime, as my right honourable friend the Deputy Prime Minister has announced, the shadow strategic rail authority will be able to make a start on strategic planning to this end.
Lord Berkeley: My Lords, in asking my question, I declare an interest as chairman of the Piggyback Consortium and the Railfreight Group. My noble friend the Minister suggested that some Government grant might be available for the "piggyback" upgrade. If the grant were sufficient to cover the majority, or the whole, cost of the upgrade and Railtrack still failed to implement it, what action could the Government take? Would he recommend any further legislation in the absence of any pressure that the Government might put on Railtrack?
Lord Whitty: My Lords, in terms of future legislation, much will depend on the way in which this House deals with an announcement to be made later today and whether we are able to introduce in this Session the legislation for a strategic rail authority, which would deal with much of this issue.
As far as the current position is concerned, Railtrack investment is regulated by the Rail Regulator in line with the network licence, which specifically obliges Railtrack to maintain, renew and develop the rail network in a way which meets the reasonable requirements of train operators and others. The question of whether a body having paid for the whole of an investment constitutes a reasonable requirement and failure by Railtrack to respond to that therefore constitutes a breach of that condition is a moot point. It will be a matter in the first instance for the Rail

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Regulator. I therefore believe that it is important that we move on to new legislation to deal with this situation and set up the strategic rail authority.
Lord Newby: My Lords, in view of the level of profits which Railtrack is declaring, is the Minister satisfied with the level of investment currently being undertaken by Railtrack?
Lord Whitty: My Lords, I am not entirely satisfied with the amount of investment and we are discussing in detail with Railtrack a number of investment proposals particularly geared at dealing with the pinch points and the lack of capacity on certain of our strategic routes. That includes the capacity for rail freight.
Lord Davies of Oldham: My Lords, does my noble friend agree that unless investment in freight facilities on this line is produced rapidly there is a great danger that freight will suffer as much as passengers do at present?
Lord Whitty: My Lords, yes. However, capacity on the railways is available for both freight and passengers. The west coast main line, on which some noble Lords will have experienced some difficulty, is also one where we wish to increase freight capacity. The two do not necessarily move in parallel; there is a degree of competition. At present Railtrack is unable to meet all of those requirements. The strategic rail authority will be a major tool that is available to the Government to achieve those ends.
Lord Brabazon of Tara: My Lords, if there is a rationing of capacity between freight and passengers on the west coast main line or any other line, which would the Government rather see: more rail freight or more passengers carried?
Lord Whitty: My Lords, we should like to develop the track in a strategic way that meets both objectives.

Police Stations: Lay Visiting
2.50 p.m.
Lord Graham of Edmonton Lord Graham of Edmonton asked Her Majesty's Government:
Whether they have in mind any change to the system for lay visiting to police stations to satisfy the public that those in custody are being treated fairly.
The Minister of State, Home Office (Lord Williams of Mostyn): My Lords, lay visiting is a fine example of community involvement in local policing. There are no proposals to change the important independent role that lay visitors play as part of the range of safeguards and protections for people in police custody. I would like to take this opportunity to wish the National Association for
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Lay Visiting every success. Its inaugural National Lay Visiting Awareness Day was launched this morning by my colleague Kate Hoey.
Lord Graham of Edmonton: My Lords, I am grateful to my noble friend for his reply. Is he aware that from time to time there are press reports which are critical of both police stations and police officers in the course of their duty? Is my noble friend satisfied that the present system cannot be improved by providing national coverage to ensure that a fine service is available uniformly across the country? In particular, is he satisfied that there is a uniform standard of achievement before someone is qualified to be a lay visitor?
Lord Williams of Mostyn: My Lords, my noble friend makes an extremely important point about uniformity and the achievement of national standards. Last month an admirable Home Office research study entitled Lay Visiting to Police Stations was published. That is out for consultation with everyone who wishes to be involved, not least the national association that does such admirably good work.
Lord Cope of Berkeley: My Lords, can the Minister do his best to ensure that with the increasing public awareness to which he has just referred the public will get the whole picture following reports of lay visitors, including the great deal that our police have to put up with from aggressive and violent people, drunks and drug-addicts in order that the rest of us should be protected?
Lord Williams of Mostyn: My Lords, I sympathise with the police in having to deal with aggressive behaviour. I believe that lay visitors are an extremely important public safeguard not only for those in police custody but for the honourable, honest policemen in our society who are in the overwhelming majority.
Baroness Gardner of Parkes: My Lords, speaking as the mother of someone who was a lay visitor for many years in her twenties, can the Minister tell the House the minimum age at which someone can become a lay visitor and if there is any age ceiling? Further, is there a time limit? As I understood it, a person could serve for only a fixed number of years.
Lord Williams of Mostyn: My Lords, I do not have those details but I shall research them. Certainly they will be part of the consultative process. I believe—I do not know—that 18 is the youngest age. I do not know whether there is a retirement age, although I am informed that that is becoming the vogue in various quarters. I shall research the matter and answer fully the question posed by the noble Baroness and place a copy in the Library.
Lord Graham of Edmonton: My Lords, is the Minister satisfied that there is no shortage in any of the areas covered by the lay visiting scheme? I understand that there is a geographical spread. Inevitably, some

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areas will be well supported and others not. I am sure that those outside the House will be enormously grateful for the kind words that have been said about the system. Can special attention be paid to making clear to those outside the House that the purpose of the lay visitor is to reassure the public as much as to make sure that the police and Home Office do their job?
Lord Williams of Mostyn: My Lords, my noble friend is right. One tends to have greater coverage in built-up urban areas. Rural areas are less well served which is probably an obvious consequence of the fact that police stations tend to be much more remotely situated in such areas. That is certainly an aspect that is contained in the Home Office research study which was published in December 1998 and will undoubtedly be part of the discussions that will take place in the next month or two.
Earl Ferrers: My Lords, is there any information to indicate that where there is a lay visiting scheme in police stations those stations are run differently from or better than those where there is no such scheme?
Lord Williams of Mostyn: My Lords, I do not believe that that kind of specific conclusion can be drawn. The importance of the scheme is that it is voluntary and entirely separate from the Police Service and Home Office. Its key characteristic is that police officers and police stations do not know when visits are likely to occur. I do not believe it can be said scientifically that where a scheme works well the police station is necessarily run better. It is a very important safeguard for the public and police alike.
Lord Avebury: My Lords, is the Minister satisfied that an adequate number of persons belonging to ethnic minorities are appointed as lay visitors, particularly in those areas where the population predominantly comprises minorities?
Lord Williams of Mostyn: My Lords, I am not. That is an aspect which will be discussed in the next month or two following the publication of the report. It is very important that there should be full representation by ethnic minority, religious background and gender for those who undertake this important work.

Child Abuse
2.56 p.m.
Lord Hylton Lord Hylton asked Her Majesty's Government:
What means they are using or planning to increase the number of prosecutions for abusing and exploiting children under 18; and when they expect to publish a national plan concerning child abuse.
Lord Williams of Mostyn: My Lords, the Government are committed to do everything they possibly can to deal with those who sexually abuse and/or exploit children. There are a number of
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initiatives. The noble Lord, Lord Hylton, will be aware from his particular interest in this matter that recently the Government issued draft guidance on children involved in prostitution. We are implementing additional measures to assist child witnesses to give evidence in court. We are developing the details of the national plan and will be consulting interested organisations within the next few months.
Lord Hylton: My Lords, I am very grateful for that reply. Can the Minister put a date on when the national plan will emerge? Further, can he say whether the Government are yet able to draw conclusions from the pilot schemes in Wolverhampton and Nottingham where the police, voluntary organisations and others have been working together very closely?
Lord Williams of Mostyn: My Lords, the ministerial group which will deal with the national plan is to meet early next month. We expect therefore the document to be ready for consultation in early March. Very significantly, the pilot schemes have been effective in diverting children who are victims from being treated as though they are victims within the criminal justice system.
Viscount Addison: My Lords, can the Minister update the House on what is being done to curb the abuse of children of 18 and under through the world wide web, particularly in this country?
Lord Williams of Mostyn: My Lords, a large number of organisations carefully monitor the web. As the noble Viscount implies, it is extremely difficult to deal with this particular abuse of children given the advancing technology. There are schemes in place and a co-operative approach between the Home Office and the Department of Trade and Industry in which I have myself taken part.
Lord Milverton: My Lords, is the Minister able to say at what age a child may be asked by the authorities, social workers or the police about this wretched subject of abuse? I ask that question for certain reasons. Does the noble Lord agree that sometimes it is wrong to say that a child should not be questioned below a certain age? I know of a police force where children are questioned by expert people not in uniform but in "civvies"; and they are able to "bring forth" from the child. What age must children be before those people are legally able to question them? It could perhaps be an earlier age than at present.
Lord Williams of Mostyn: My Lords, I am not aware of any statutory regime or uniform police practice which states that a child is too young to be interviewed. One has to take expert advice and consider the circumstances of the individual child. Those circumstances do not always depend on chronological age.

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A number of schemes, one run by the NSPCC—I declare a past interest: I was a trustee—deal with those exact points. How does one interview a young child as part of the investigative process without further damaging that child?
Earl Russell: My Lords, does the Minister agree that one of the most practical forms of help to children who may be victims of abuse is the provision of refuges under Section 51 of the Children Act? Is the noble Lord aware that at present we have only three such refuges in the whole country which nowhere near meet the need?
The Minister's noble friend Lady Hayman in the past gave me a crumb of hope that the number might grow. Can the noble Lord give me any hope that that crumb may one day grow into a crust?
Lord Williams of Mostyn: My Lords, refuges under Section 51 of the Children Act are one possibility. They are not the only one. The voluntary organisations, not simply the NSPCC, also provide refuges for children in an informal, sometimes non-statutory, way. The answer is not always to take the child away from his family circumstances. That may be grievously damaging. The issue is to deal with every child complainant as an individual who is not simply a small adult but who needs to be dealt with in a tender and careful way.
Baroness Masham of Ilton: My Lords, I refer to the answer given by the Minister to my noble friend Lord Hylton. Will the noble Lord say that young girls aged 15 or 16 may be kept out of prison when they fall into prostitution and drug abuse, and have other treatment?
Lord Williams of Mostyn: My Lords, no one wishes to see a child of 15 or 16 in custody for anything. However, in some circumstances our experience of life is such that some children, for their own protection as well as in the public interest, have to be taken into custody. However, we must ensure that the custodial circumstances—they would not of course be prison—need to be therapeutic and rehabilitative. In the not too distant future I hope to be able to make a more specific announcement, as I promised last year.
Lord Cope of Berkeley: My Lords, can the Minister tell us what co-operation we are receiving from the authorities in the European Union? After all, it is not solely a national problem.
Lord Williams of Mostyn: My Lords, the noble Lord is right. It is an international problem. The ramifications extend way beyond Europe. We are developing closer co-operation between police forces and our colleagues in Europe. It is a continuing process. I am heartened to be able to say that it is developing well. But we must not limit our horizons to Europe alone. Notoriously, there are countries where children are abused unfortunately by nationals of this country.
Lord Wise: My Lords, is the Minister aware that the voluntary organisations' consultancy services are unable
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to carry out police checks because their funding is limited? Organisations have to use the Department of Health consultancy services which have proved unfortunately to be somewhat unreliable on certain occasions.
Does the noble Lord agree that charitable organisations should be given access to police checks in place of the VOCS? I declare an interest. I am privileged to be chairman of the Welsh Trust for the Prevention of Abuse.
Lord Williams of Mostyn: My Lords, undoubtedly the noble Lord puts his finger on an important matter. It has been made quite plain that the Home Office is determined to disseminate information as widely as possible relating to those who may be a danger to children. As regards the investigation of these matters, I expect a report from the inspectorate of police to deal with these wider questions.
Lord Hylton: My Lords, will the Government urge, encourage and make it possible for local authorities to use their ample powers under the Children Act to prevent child prostitution and provide ways out of it for those who become so involved?
Lord Williams of Mostyn: My Lords, yes. I think that we have given every such encouragement. The draft guidance on children involved in prostitution was sent out as recently as 29th December of last year. Every organisation which has any connection with children has an extremely important part to play. That consultative and co-operative approach is the way to protect children.
Lord Craigmyle: My Lords, I am pleased that the Government now accept that the best defence for children is to live in families within marriage. Will the Government make it possible in future for such families to be taxed at a rate which will not make it more attractive for the family to split up thereby exposing the children to greater risk?
Lord Williams of Mostyn: My Lords, I know of no causal connection between the rates of taxation and incidents of child abuse.

House of Lords Reform
3.5 p.m.
The Lord Privy Seal (Baroness Jay of Paddington): My Lords, with the leave of the House, I should like to make a Statement about the White Paper the Government are publishing today about reform of your Lordships' House. Copies of the White Paper are now available in the Printed Paper Office, together with the Bill which my right honourable friend the President of the Council has presented in another place.
This White Paper marks another significant step in the Government's overall objective to improve the institutions of this country, so that they fulfil their functions in the new century with energy and effectiveness.

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We want to create a modern Parliament for a modern Britain.
The reforms that the White Paper introduces will form a vital part of our constitutional reform programme. It makes clear how a revised second chamber could play an important role in the new constitutional settlement.
The outlines of the Government's proposals on reform of this House have long been familiar. They are threefold: the removal of the right of hereditary Peers to sit and vote in the House; reformed arrangements for nomination of life Peers; and the establishment of a Royal Commission to consider longer-term reform.
The White Paper confirms that all hereditary Peers will cease to have an automatic right to membership of the House. It also confirms that hereditary Peers will be given the right to vote in Parliamentary elections and to stand as candidates for election to the House of Commons without having to disclaim their peerages.
There will be no change in the position of life Peers. They will remain unable to vote in parliamentary elections, and unable to disclaim their titles.
There are no changes proposed in the Bill to change the position of either the Law Lords or the Church of England Bishops.
The White Paper also confirms that if, when the Bill reaches your Lordships' House, there is consensus in favour of an amendment to allow continued transitional membership of the House to some hereditary Peers, the Government are minded to support such an amendment. But I must make it clear that whether the Government are able to support such an amendment depends a great deal on the extent to which the normal conventions of this House about the Government's legislative programme in general are being observed. The Government have always made clear that we prefer to proceed by consensus. In this spirit we are prepared to accept this proposal if it indeed enables reform to proceed by consent. It is not a concession to be extracted by pitched battle. Indeed, pitched battle will jeopardise the proposal.
The White Paper proposes historic change—change which has been discussed throughout the 20th century. The Bill which my right honourable friend has presented in another place completes parliamentary reform first suggested in 1911. Today, the Bill to abolish the right of hereditary Peers to be Members of Parliament has finally been introduced by this Government. A fundamental anachronism can be removed as we reach the millennium.
The presence of the hereditary peerage has weakened the legitimacy and effectiveness of our second Chamber. It has weakened it for two main reasons: because the principle is wrong and because the results are unbalanced.
First, the principle. Nobody suggests we should today select Members of one House of Parliament, the House of Commons, as we did in the 18th century; why should we select the Members of the other as we did in the 15th century? Society, and politics, have moved on and your Lordships' House must, however reluctantly, move with them.
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Secondly, the results. The hereditary peerage gives one of the two major political parties in this country a three-to-one built in majority in this House over the other. No votes by the electorate at a general election change this; the Conservative majority in this House continues untouched and untouchable.
The hereditary peerage, taken as a whole, is unrepresentative of today's Britain; unrepresentative economically, socially, by gender and ethnic origin. As a result, because of their predominance, the House suffers disproportionately from a political and social imbalance. This, too, is no longer acceptable.
Once the hereditary peerage is removed, the Government will move to rapid, full-scale reform of the House of Lords. There will be a period of transition with which the White Paper deals in detail.
There have been many wild and, frankly, ridiculous assertions about the character of the transition House. The most often reported is that the House will be one created exclusively by this Government and dependant on patronage by this Prime Minister.
I would remind your Lordships that approximately 500 life Peers will remain in the transitional House; life Peers appointed by eight successive Prime Ministers over the past 40 years. Even without a single hereditary Peer there would still be a Conservative majority over the Labour Party. Nonetheless, this Government and this Prime Minister intend to reduce the Prime Minister's powers of appointment. For the first time ever, the Prime Minister has publicly pledged himself not to interfere in the detail of nominations from other party leaders, provided that they have been given a clean bill of health on propriety grounds. And for the first time ever, the Prime Minister will relinquish, entirely, his power to make recommendations for Cross-Bench Peers. This will be passed to an independent appointments commission.
The appointments commission will be encouraged to seek nominations from many sources, including members of the public. It will extend the range of interests and types of people represented in the House. The appointments commission will consist of members of the three main political parties and independent members, who will form the majority and provide the chairman.
From before the election, the Government have always made clear the view that no political party should seek a majority in your Lordships' House. But on the basis of the manifesto, we would be entitled to seek numbers 40 per cent. in excess of those of the Conservative party. However, at present, we plan only to move towards broad parity with them. We shall also ensure a fair representation for all other parties and for the Cross-Benches. The Government intend that the principles of a broad parity and proportionate creations for the other political parties and the Cross-Benches should be maintained throughout the period of the transitional House.
Taken together, these proposals significantly reduce the Prime Minister's powers of patronage compared to those of his predecessors. The resulting House of Lords

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will be a better House, more representative than the existing one and better equipped to play its part in the constitution.
I want, finally, to say a little more about the longer-term. The Government announced on 14th October that we would be establishing a Royal Commission to consider options for longer-term reform. I am now pleased to be able to tell the House that the noble Lord, Lord Wakeham, has accepted the Prime Minister's invitation to be the chairman of the commission. It is obviously important that there is senior representation on the Royal Commission from the House of Commons and I can tell the House that another senior Privy Counsellor, the right honourable Gerald Kaufman, has also agreed to serve on the commission. The remaining members will be announced shortly.
The commission's terms of reference are set out in the White Paper. They are:
"Having regard to the need to maintain the position of the House of Commons as the pre-eminent chamber of Parliament and taking particular account of the present nature of the constitutional settlement, including the newly devolved institutions, the impact of the Human Rights Act and developing relations with the European Union:
to consider and make recommendations on the role and functions of a second chamber; and
to make recommendations on the method or combination of methods of composition required to constitute a second chamber fit for that role and for those functions;
to report by 31 December 1999".
These terms of reference are deliberately non-prescriptive. They are intended to stimulate public debate as well as giving the Royal Commission its remit. The Government have not indicated their own preference in the White Paper. However, the two final chapters of the White Paper set out a number of issues which the Government think the Royal Commission will find it useful to address.
There are three issues which I want briefly to draw to your Lordships' attention in the Royal Commission's terms of reference. First, the terms of reference defeat the accusation that the Government's proposals for constitutional reform are piecemeal. The Royal Commission's work is explicitly set in the context of other constitutional developments, most notably the newly established devolved institutions.
Secondly, they ask the Royal Commission to consider the role and functions of the second Chamber as a preliminary to considering its composition. Contrary to common assertion, the Government have never maintained that wide-ranging reform of composition can be decided in isolation.
Thirdly, the Royal Commission has been given a demanding timetable. This is evidence of the Government's wish to maintain the momentum of reform of the second Chamber. We believe the timetable is achievable. After all, this debate has been taking place for most of this century. There is no need to undertake extensive gathering of evidence before any work can be done on the analysis of the issues. It is analysis and judgment which are most important.
However, we must make clear that the timetable does not provide an excuse for delaying stage one reform until the Commission has reported. The Government
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believe that we can make no long-term progress until the hereditary Peers have gone. We are keen to maintain the momentum of reform, but for that momentum to be maintained the process must begin now.
The package of measures announced in the White Paper sets out the Government's approach to the radical and historic task of reforming this House. Although radical in its intentions and effect, it is a careful and considered approach. It starts with the most immediate and urgent reform of the rights of the hereditary peerage. It identifies the path to longer-term reform.
House of Lords reform is modernisation for a purpose. It is not just the historical objective of getting rid of hereditary Peers. It is not just a constitutionalist interest in improving the mechanics of government. It is about modernising government to get better government; because better government means better laws, and better laws mean a better Britain.
3.17 p.m.
Lord Strathclyde: My Lords, I thank the noble Baroness the Leader of the House for making the Statement today. Will she accept that there is a deep sense of disquiet and regret in this House about what she has announced, not because we want always to be as we are and where we are—we do not—but because the role of this House has also been to ask of governments deep and detailed questions about Bills and policy? Time and again it has fallen to this House to press for precise answers on behalf of the people of this country. So is this ancient House not entitled to be treated with the same courtesy as we have asked for others? Are we not entitled to know where in the long run we are headed?
The most depressing aspect of the announcement today is that we have seen no clear vision of the future of this House of Parliament. To say that it is modernisation is simply not enough. I ask myself whether the Government are even remotely aware of the far reaching consequences of the course they have begun today. Today marks the beginning of the end of the delicate balance between the two Houses of Parliaments which has served this country well. It will do so in ways which will be entirely unpredictable, for one consequence of a genuinely reformed House of Lords will be a more powerful second Chamber, something which we on these Benches would support. What is the Government's thinking on this? This is not a complicated matter; it is a broad question of principle. Do they want to see a more powerful House or do they intend the reverse?
In the terms of reference that the noble Baroness announced in the Statement, what is meant by the phrase,
"Having regard to the need to maintain the position of the House of Commons as the pre-eminent chamber of Parliament"?
We welcome the fact that the Government have listened to some of the many concerns raised in this House over the past 20 months. They have accepted a Royal Commission, which previously had no place in their plans. They have accepted the fact that there should not

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be a wholly-appointed "quango House", something which their manifesto proposed. They appear to accept now that there must be movement towards a genuine second stage of reform, although I regret the fact that there is still no guarantee that it will take place, and no timetable. The Government are groping forward but their long-term policy is still a sea of fog. That is no way to reform Parliament. Indeed, of all the ways to reform Parliament that they could have chosen, the one they are following is simply the worst.
The Government's motives and intentions are negative and nothing that has been said today justifies the removal of the hereditary Peers before the Royal Commission reports. What are the Government so afraid of in the year ahead?
The Government owe it to this House and to the people of this country to make their policy clear. It is sheer constitutional vandalism to tear down a structure that is working well and to offer no ideas on what will be built in its place. That is not a responsible way forward. I trust that the noble Baroness will undertake, on behalf of the whole Government, to present evidence to the Royal Commission on the Government's preferred long-term proposals. Perhaps she can confirm that they will do so before the Bill is read a second time in this House.
We congratulate my noble friend Lord Wakeham on his appointment, although we regret that that appointment and other proposals were announced in the press before being reported to Parliament. However, a chairman does not make a commission; nor does an inquiry make policy. The Government have had 20 months in power and nearly 20 years in opposition to think about this policy. Will the noble Baroness tell the House when the other members of the commission will be named and how many there will be? Will she confirm that the Royal Commission will take evidence in public and from the public? The public have, as yet, been given no say in the future of their Parliament.
It is highly regrettable that a Royal Commission was not appointed last year. If it had been, perhaps today we could have been legislating on a genuine cross-party reform for a stronger and more independent second Chamber for this Parliament. If the Government are determined to plunge on with this half-baked, half-way House, will the noble Baroness say what consideration they have given to guarantees that there will be a stage two?
I turn to the appointments commission. We on this side of the House will want to examine the ideas carefully and sceptically. Will the noble Baroness confirm that under these proposals the Prime Minister will determine the precise party balance in this House and decide how many independent Cross-Benchers the commission will be able to appoint?
We on these Benches do not oppose reform but we oppose these half-baked and self-seeking proposals masquerading as reform. We will also question gimmicks masquerading as solutions. Of course, we will look at the idea of so-called "people's Peers", but real "people's
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Peers" would be Peers elected by the British people, not nominated quietly by individuals. Does a mainly elected House remain on the Government's agenda?
We have not had time to study the Bill formally read in another place and published a few minutes ago but it is clear that the proposals in the Bill would create an entirely nominated House of Parliament, something we would implacably oppose. Will the noble Baroness explain to the House why the proposals put forward by the noble Lord, Lord Weatherill—proposals that the Government support—are not in the Bill which means, therefore, that another place is denied the ability to debate them in Committee?
Why the threats? What are the normal conventions that the Government are so afraid might be broken? The Government say that they wish to see consensus. Do they feel that the Bill commands any form of consensus? If not—and I think there is none—why do they say that that is what they want? As for "pitched battles", how will we know when we have fallen into a pitched battle? Will the noble Baroness let us know?
The Statement says that the Bill completes parliamentary reform. I thought that it was the whole intention of the Government's proposal that this is a stage one leading to a stage two. I wonder whether the noble Baroness will clarify that.
I hope that the noble Baroness and, indeed, the whole House will understand that when we oppose the Bill, as we shall with vigour, we do so not only because of what is in it but because of what is not in it; that is, any coherent vision of the future of Parliament.
There will be difficult weeks and months ahead—difficulties unleashed by the reckless way in which the Government are dealing with the question of changing Parliament. I hope that in those months we may be spared trite and facile denigration of this House and its Members. I have always felt that abuse was the first refuge of those without an argument, just as the sound bite is the resort of those without a strategy.
This is a solemn occasion, the first step on an uncertain road that will take us we know not where. It will see the expulsion of Members of this House who have given great and selfless service to this country for little or no reward. The Government today are asserting their massive power; but in the manner of their doing so they will reveal the true balance between form and substance in their make-up—how much there is of opportunism and how little of statesmanship.
Will the noble Baroness understand that that is the test she and her Government will face over the coming months? Can she assure the House that she will be ready not only to listen but to take on board ideas that this House, in all its experience and wisdom, may propose for the better working of a free Parliament? Today is a sad day for Parliament. It is not a day for rejoicing.
3.26 p.m.
Lord Rodgers of Quarry Bank: My Lords, I think I can be a little more generous to the noble Baroness the Leader of the House in so far as she has made the Statement first in your Lordships' House, a rare experience when most Statements are first made in

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another place. I hope that that view, at least, will have the endorsement of noble Lords on all sides of the House.
Beyond that I give the Statement, the White Paper and the prospect of the Bill a broad welcome, not least because much of what the White Paper and the Statement contain are thoughts first pioneered from these Benches. For those who dare to doubt that, I refer to a debate in your Lordships' House in July 1996. I remember on that occasion proposing an independent appointments commission. The then Leader of the House, the noble Viscount, Lord Cranborne, and the then Leader of the Opposition in this House, the noble Lord, Lord Richard, looked at each other and shook their heads as if to say, "What a naïve suggestion—only an indication of how far the Liberal Democrats are out of touch with the real world." Here it is, in the White Paper and in the Statement—thank you very much, indeed.
There are other respects in which we find echoes of what was said on that occasion. Certainly, it was argued then that there could be nothing that constrained the prerogative of the Prime Minister as exercised down the ages. I accept, subject to what I shall say further, that the White Paper and the Statement indicate constraint on the powers of the Prime Minister. I greatly welcome that.
I welcome the appointment of the noble Lord, Lord Wakeham. He has not been known in recent years for pushing out the radical frontiers of politics, but he is well liked in this House and well known as a fixer. If he can fix this one, we shall all be surprised as well as delighted.
I believe that the Government were a little heavy-handed in their threat—and I would call it that although the noble Baroness will have to deny that it was any such thing—that the Weatherill proposals would succeed only if Peers behaved themselves. I am still a little uncertain about the Weatherill proposals and, in particular, one aspect of them. It would be helpful to know the method by which hereditary Peers are to be selected. Will they remain hereditary Peers during their remaining tenure in this House or will they become life Peers for that period? It would be helpful to know what the Government have in mind.
I should like to ask the noble Baroness three other questions. This is not the occasion on which either to repeat the debate which we had last October or to anticipate the Second Reading of the Bill which will come here after it has been to another place. The first is the reference to "proportionate new creations".
The noble Baroness will be familiar with a sentence which has occurred in documents to which the Government have previously given their assent. The sentence is that following their removal, we should move, over the course of the next Parliament, to a House of Lords where those Peers who take a party Whip more accurately reflect the proportion of votes received by each party in the previous general election. May I assume that still to be the policy of Her Majesty's Government?
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The second point refers to the terms of reference of the Royal Commission. The terms of reference mention role and function, but they do not include powers. Am I to assume that "role and function" embraces the idea of powers or have the Government in mind in some way that the Royal Commission should be constrained in its considerations and recommendations by no change in the balance of power between the other place and the second Chamber? I express no view on the matter, but I should like to know what the Government have in mind.
My third point, which follows from the second, is that chapters 7 and 8 of the White Paper, to which the noble Baroness drew the attention of the House, seem slightly odd. The White Paper is otherwise fairly bland—I take no exception whatever to that—but in chapters 7 and 8, it seems to point the Royal Commission in one direction rather than another. Will the Leader of the House—because I am sure that that is what is in her mind and that of the Government—assure the House that chapters 7 and 8 should not be seen in any way to inhibit or constrain the Royal Commission within its terms of reference which, as I have already said, I assume to include the question of powers?
Finally, we should welcome the prospect that there will be a final settlement. Inevitably, that will be for the time being, but that time being may be a long period. We should all welcome the prospect that there will be a settlement within the next five years. That is the assumption I make on the basis of the Statement and the White Paper. Will the noble Baroness the Leader of the House confirm that she and the Government anticipate that the interim stage will be over, and the legislation to establish the new House will be through, within a period of five years? May we look that far ahead but no further for the new life which the second Chamber will eventually have?
3.33 p.m.
Baroness Jay of Paddington: My Lords, I am grateful to both noble Lords who have spoken for what the noble Lord, Lord Rodgers, described as a broad welcome. However, I hope that I shall not be misunderstood when I say to the noble Lord, Lord Strathclyde, that although he says that neither he nor his Benchers are against reform, on the basis of what he said today, you could have fooled me.
However, let us turn to the details of some of the points which were raised by both noble Lords which were important and extremely relevant to how we proceed in relation to both the White Paper and the Bill. Both noble Lords raised legitimate questions about the functioning of the Royal Commission. I am glad that both noble Lords welcomed the appointment of the chairman, the noble Lord, Lord Wakeham. As I said in the Statement, the other appointments will be made very rapidly. I hope that they will meet with equal favour in your Lordships' House.

On the question of evidence and the mechanics of the Royal Commission, it will be for the noble Lord, Lord Wakeham, and his colleagues to establish the precise form that they take. But we have laid down the

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timetable clearly in the White Paper. For the reasons which I gave in the Statement, we believe that a judgment and analysis of issues which are already in the public domain are required, rather than the necessity for a great deal of primary research.
The noble Lord, Lord Rodgers, asked whether the terms of reference of the Royal Commission constrain it as regards the breadth of its inquiries; in particular, in relation to the powers of your Lordships' House. I am more familiar with the White Paper than anybody else in this House can be and I do not suggest for one moment that noble Lords who have spoken already need to be so familiar with it. However, a section in chapter 7 of the White Paper states that we feel that there are a number of fairly clearly delineated methods of establishing the role and functions of the second Chamber and the membership which is dependent on those roles and functions. Therefore, we prefer the Royal Commission to stick to that remit.
One reason that that has been made explicit in the White Paper is because your Lordships will know better than many others that one has only to pick up a daily newspaper nowadays to find yet another, what I would call, "free-flowing approach" to reform of your Lordships' House; for example, there have been suggestions that the membership of your Lordships' House could be arranged by methods equivalent to the jury system or something of that kind. Therefore, the chapters at the end of the White Paper have laid down fairly precise boundaries for those areas which we believe that the Royal Commission could most usefully explore in seeking to answer some of the questions which are raised.
The noble Lord, Lord Strathclyde, asked me about evidence. Although there is always a case for unique activity, the Government would not normally expect to give evidence. However, I imagine that the political parties will be expected to do so and will take every opportunity to make their positions widely known and understood.
The noble Lord, Lord Rodgers, asked whether or not the terms of reference are to encompass powers as well as roles and functions. One reason that we were careful not to open up the rather difficult area of powers was because that may lead to precisely the free-flowing stream of consciousness discussion about the powers of Parliament which are not established anywhere in our unwritten constitution. One suggestion in the White Paper, for example, is that the Royal Commission might look at the possibility of codifying some of the conventions which are now established in relation to your Lordships' House and its relations with the House of Commons. That may be a possible area for useful exploration.
The Royal Commission was one area which both noble Lords wanted to pursue. Another was the nature and make-up of the transitional House. As regards the question of the appointments commission, there is no way that anybody reading the detail of the establishment of the appointments commission as an NDPB (a non-departmental public body), with all the restraints
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that that has relating to the Nolan Report and other aspects of our public life, could possibly see it as anything but genuinely independent.
The appointments commission will have total control, if that is the appropriate word, over the nomination of the Cross-Bench Peers, which is a very substantial and important part of our arrangements. It is suggested in the White Paper that that may be a way of looking in the long-term at the appointment of other life Peers.
I was about to return to the issue of numbers within the House and so I am grateful to the noble Lord, Lord Strathclyde, for reminding me about that. That depends partly on the form of the stage 1 Bill which my right honourable friend the President of the Council has introduced in another place today. If an amendment such as that originally floated by the noble Lord, Lord Weatherill, is acceptable to your Lordships' House, and if the Government accept that amendment, the numbers will be rather different from what they would be were all hereditary Peers to leave immediately.
Both noble Lords suggested that I had been "threatening". I hope that my tone of voice was not threatening. I normally try to be conciliatory and proceed by consensus. But my noble friend the Chief Whip and other business managers—and I am sure that the noble Lord, Lord Strathclyde, will have drawn from his experience in that role both in government and in opposition—will understand only too clearly what we mean by the passage of legislation through the "normal conventions of this House". I am sure that the noble Lord will be able to detect when we reach a state of "pitched battle", as I put it rather colloquially, or the usual friendly and very constructive relationships in the usual channels which normally exist in this House.
As to the passage of the Bill and whether or not the amendment suggested by the noble Lord, Lord Weatherill, or some arrangement of that kind, should have been on the face of the Bill, and the reason that it is not, that can be precisely derived from what I have just said. If this Bill—and we have an example of this in the recent past—has to be subject to the enactment of the Parliament Acts, it would be fruitless for the Government initially to produce a Bill in the House of Commons which contained that specific provision.
The noble Lord, Lord Strathclyde, was ominous in his concerns about the future of Parliament. Again, I can only say with the greatest possible courtesy that when he has had more time to read the detail of the White Paper, particularly the final chapters wherein many questions of broad, long-term constitutional concerns are addressed in a way that I hope he will find satisfactory, he will find that many of the issues of which the Government have been accused in the past few months—for instance, not thinking about the long term; not taking a view about the possibilities of reform—are answered in a way which makes a great deal of sense without in any way trying to undermine or prescribe the important work which will now be conducted by the noble Lord, Lord Wakeham, and his colleagues in the Royal Commission.

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Finally, the noble Lord, Lord Strathclyde, spoke about disquiet. I suspect he will find that most people feel that this kind of progression towards an appropriate parliamentary institution which deals properly, effectively and legitimately with the major issues which face this country, is something for which, at the turn of the millennium, this country will be grateful.
3.42 p.m.
Lord Wakeham: My Lords, will the noble Baroness the Leader of the House accept from me that, in my view, the terms of reference of the Royal Commission are sufficiently wide to allow us to look at these issues in the round? It will certainly be my hope to seek to get as much consensus for them as I can.
Baroness Jay of Paddington: My Lords, I am grateful for that intervention by the noble Lord, Lord Wakeham. Perhaps I may formally say how much the Government appreciate his great kindness in giving up an enormous amount of time—as I am afraid it will be—in the next few months to undertake this extremely important task. I am grateful that he feels that the terms of reference are sufficiently wide to enable him to do the job properly and we look forward to many constructive and, as he rightly said, co-operative discussions on the detail.
Viscount Cranborne: My Lords, I am grateful to your Lordships, particularly as I intervene with due diffidence from the Back Benches for the first time during my career in your Lordships' House.
I add my congratulations to my noble friend Lord Wakeham on his appointment. His experience in both Houses—as Chief Whip in another place and indeed as Leader of your Lordships' House and a former Leader of another place—will make it all the easier for him to understand the importance of the relationship between the two Houses with a reformed upper Chamber. Will the noble Baroness confirm that she regards that relationship as one of the pivotal areas which must be considered by a Royal Commission?
Will the noble Baroness also accept that we on this side of the House, as my noble friend Lord Strathclyde said, would infinitely have preferred that reform of your Lordships' House should have happened in one fell swoop rather than in two stages? The reasons given by the noble Baroness for failing to undertake that "one fell swoop" reform appear to be increasingly specious. In view of the fact that she appears, thankfully, to be in a considerable hurry to proceed to stage two, in marked contrast to the sort of atmospherics that she was giving off only three months ago, will the noble Baroness explain to the House the reason for that change, particularly as she was quoted not long ago as saying that in her opinion stage one should be allowed to bed down until such time as the effects of devolution could be felt, which would enable us to be able to consider the effects of devolution in the context of a stage two reform? Can the noble Baroness explain to the House what has changed in the past three months to make her change her mind?
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Finally, can she confirm that it is still the secret objective of the Government to see a stage two which envisages an overwhelmingly nominated Chamber?
Baroness Jay of Paddington: My Lords, I am grateful to the noble Viscount, and particularly grateful for the helpful words in relation to the appointment of the noble Lord, Lord Wakeham. I am sure that, with the general help of noble Lords around the House who wish to proceed by consensus, we shall do so. As I said, I am particularly grateful to the noble Viscount for underlining that point.

The noble Viscount spoke of the need to regard the question of the relationship between both Houses as pre-eminent. Again, if he had had the opportunity to look at the terms of reference of the Royal Commission, he would find that that is made explicit. When the noble Lord, Lord Strathclyde—I apologise to him for not referring to that point in my reply to him—asked what was meant by that, I believe it is all too clear that the House of Commons must remain the pre-eminent Chamber. That is something that we are asking the Royal Commission to take as a given, in the pursuit of its wide-ranging discussion on the terms of reference which, as the noble Lord, Lord Wakeham, said, are sufficiently wide to allow a general debate and a general consideration of the broader issues.
The noble Viscount referred to the "atmospherics" of my remarks. I am in some difficulty in being able to establish precisely what those atmospherics are. Again, if he were to look at the precise details of the terms of reference of the Royal Commission, he would see that perhaps the tense is marginally more in terms of the continuing present than the future. The terms of reference which ask the Royal Commission to look at the roles and functions of the second Chamber in the context of the constitutional settlement, particularly as it relates to the devolved institutions, appear to be consistent. However, I am afraid that I find difficulty in being consistent with atmospherics because I am not precisely sure to what he refers.
The Lord Bishop of Chichester: My Lords, perhaps I may make three brief points on the document before us. First, I wish to express our appreciation for the kind remarks made in the document in relation to the contribution of the bishops to the work of this House. Secondly, we look forward to offering our own comments and contributions to the work of the Royal Commission when it comes into being. Thirdly, I want to make it quite clear, as I have done on previous occasions, that we would welcome the expansion of religious representation in this House to include other faiths, not only Christians.
Baroness Jay of Paddington: My Lords, I am grateful to the right reverend Prelate for those words. As I said in my original Statement, there is no intention in the transitional House, and certainly no understanding in the terms of the Bill, that there should be any difference in the representation on the Bench of Bishops during that period. He is right that in relation to the general discussion of the work of the Royal Commission

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it speaks of the possibilities of embracing a wider faith and a different cultural approach to the citizens and subjects of this country, which I am glad to hear he feels is appropriate.
The Earl of Longford: My Lords, is the noble Baroness the Leader of the House aware that many noble Lords who have been here a long time are concerned about the future of our unique staff under the proposed arrangements? Will they be halved? What will happen to the staff? Can the noble Baroness give us any reassurance.
Baroness Jay of Paddington: My Lords, I am grateful to the noble Earl for raising that question. I am sure that the extremely effective and illustrious members of staff of your Lordships' House will be delighted to hear that they have such an important advocate on their behalf. Of course, there will be over 500 life Peers plus a representation of hereditary Peers—if we retain them in the transitional period—who, I am sure, will use the offices of the staff with the same enthusiasm as at present. The staff may be grateful for slightly more free time.
Baroness Young: My Lords, does the noble Baroness accept that there are many of us who agree with my noble friend Lord Strathclyde that this is a very sad day for the House? That is a view shared by a great many life Peers, not just hereditary Peers. We should place on record our gratitude for the amount of work carried out by the hereditary Peers—often unsung, unnoticed and, unquestionably, unpaid. Whatever the new House becomes, if it is founded predominantly on life Peers, it will be quite a difficult proposition.
In the noble Baroness's interview on the "Today" programme this morning and again in her Statement this afternoon, she failed to say that hereditary Peers have agreed to reform of the House, and did so in 1968. It is very important that everybody, not only in this House but also outside it, should understand that point.
The important reform brought in by the late Lord Wilson when he was Prime Minister was accepted by Conservative Peers when my noble friend Lord Carrington was Leader of the Opposition, but it was lost in another place. Having had that experience, it is hardly surprising that a lot of people are sceptical about whether or not stage two will work.
My second question this. Although we are all agreed that at long last a Royal Commission is to look at stage two, none of us will be satisfied—indeed, we will fight to the end to achieve it—unless we have a copper-bottomed guarantee that we will have a stage two. Otherwise, the Statement and the White Paper will be seen simply as a very bad transition, a so-called reform of the House of Lords, dressed up in the new buzz word "modernisation", whatever that might mean. That would see a very important constitutional reform, affecting people throughout the United Kingdom, carried out in a manner more reminiscent of a sixth form debate than a serious constitutional proposal.
Baroness Jay of Paddington: My Lords, I have said on many occasions, and I am delighted to repeat today, that everybody acknowledges that there are some members of the hereditary peerage who have not only made major contributions to the work of the House but have also often played an important part in national affairs in general. I do not believe that anyone has denied that in the appropriate context.
The noble Baroness draws attention to the need to proceed rapidly to stage two. I believe we would be in disagreement about the relevance of the hereditary peerage in a second Chamber of the 21st century. It is precisely because we on these Benches are unwilling to foresee that as a long term prospect that we will wish, particularly in light of the theoretical amendment to retain transitionary rights of hereditary Peers to sit in your Lordships' House, to move rapidly to a point at which that becomes unnecessary. The fact that we have given the noble Lord, Lord Wakeham, a very tight timetable in which to report to the Government on his findings under the Royal Commission must suggest to your Lordships that we would hope to move to a second stage as rapidly as possible. I am sure that noble Lords are more able than I of working out the parliamentary and annual arithmetic of the number of months between that and the next general election.
The noble Baroness says that in the past hereditary Peers have agreed to this type of reform. If the noble Baroness feels that that is right, and that it was merely obstructed in another place, it is surprising that the former government and the party of which she is a member made absolutely no effort in l8 years to move forward on reform.
Lord Lester of Herne Hill: My Lords, can the noble Baroness the Leader of the House clarify one important matter? As I read paragraphs 19 and 20 of chapter 7, the relationship between the senior judiciary and this House as a legislature in respect of separation of powers is considered to be within the terms of reference of the Royal Commission. However, to make specific proposals as to some alternative final court is not within the terms of reference. Have I understood that correctly?
Baroness Jay of Paddington: Yes, my Lords.
Lord Weatherill: My Lords, I forbear to mention the arrangements the noble Baroness has made concerning the 91 hereditary Peers who are to remain as an interim measure. However, I pay tribute to the noble Viscount, Lord Cranborne, for his part in helping to bring that matter to fruition.
I have two brief questions. I have not had time to read the White Paper, which has only just been put into my hands. First, when will the commission to nominate independent Peers be set up? Secondly, is it within the remit of the Royal Commission to look at the number of Members of Parliament in the other place, bearing in mind devolution for Scotland and Wales?
Baroness Jay of Paddington: My Lords, the answer to the noble Lord's second question is simply no. I hope I have understood the question correctly. Composition of the membership of a reformed House

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of Lords is not related to the composition of the membership of the other place at all. The timing of the establishment of the appointments commission will depend on the passage of the stage one Bill through both Houses of Parliament. If it were to proceed smoothly, there is no reason why the appointments commission should not be set up in the course of this year.
Lord Gifford: My Lords, may I congratulate the noble Baroness the Leader of the House on a truly historic Statement which announces the end of an unjust privilege. As a hereditary Member, I and my few hereditary noble friends have always respected the Members of this House, the work of this House and the procedures of this House, but we have found the institution of the House to be profoundly unjust. I said so in my maiden speech in 1965.
Is consideration of the name of the new second Chamber within the terms of reference of the Royal Commission? Would it not symbolise the historic significance of the reform announced today if the new second Chamber were to be a House of Senators and not a House of Lords?
Baroness Jay of Paddington: My Lords, I am grateful to my noble friend for his remarks about the position of himself and, I am sure, other noble Lords who are hereditary Peers. As I have had the opportunity to say before in your Lordships' House, I have found in conversation with noble Lords on these Benches who are hereditary Peers that their approach is similar to that expressed by my noble friend. The question of the name of the reformed House is not in the terms of reference, although I am sure that the noble Lord, Lord Wakeham, and his colleagues may be inspired.
Lord Campbell of Alloway: My Lords, perhaps I may ask a very simple question. Can the noble Baroness the Leader of the House confirm that there will be no substantive enactment of reform until the Royal Commission has considered the matter? Can the noble Baroness also confirm that there will be no such reform until a joint Select Committee of both Houses has considered the report of the Royal Commission and the considerations of both bodies fully debated in this House and the opinion of the nation taken in a referendum? Can she further confirm that all representations as to the reform of the powers, constitution and composition of this House will be put to the Royal Commission?
Baroness Jay of Paddington: My Lords, as the noble Lord, Lord Wakeham, said, the Royal Commission obviously has within its terms of reference a very wide remit, together with an ability to take evidence and make judgments on a large number of issues. I imagine that the noble Lord, Lord Campbell of Croy—
Noble Lords: Alloway!
Baroness Jay of Paddington: My Lords, I apologise to both noble Lords. One is sitting in front of the other;
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I apologise to both. The noble Lord, Lord Campbell of Alloway, speaks of substantive reform. I suppose he is referring to the long-term reform of the House—what we call colloquially "the second stage". It is of course the case that the purpose of the Royal Commission is to advise us in that respect. So there is absolutely no suggestion that any change would be made before the Royal Commission reported.
Lord Monkswell: My Lords, although I welcome enthusiastically the Statement made by my noble friend, perhaps I may refer to the proposed amendment in the name of the noble Lord, Lord Weatherill. Would my noble friend consider consulting with her right honourable friend the Prime Minister as to whether it might be useful for that amendment to be considered on the basis of a free vote in both Houses? That would enable it to receive across-the-board endorsement rather than being perceived as a creature of the party political machinery.
Baroness Jay of Paddington: My Lords, my noble friend makes an interesting suggestion. I shall be happy to raise the matter with my right honourable friend. I am not quite sure precisely what my noble friend expects would happen in this House but to suggest that the Government could drive through anything on the basis of their massive majority in this House would be a little extraordinary.

Business of the House: Debate, 25th January
4.2 p.m.
Baroness Jay of Paddington: My Lords, I beg to move the first Motion standing in my name on the Order Paper.
Moved, That Standing Order 38 (Arrangement of the Order Paper) be dispensed with on Monday, 25th January to allow the Motion in the name of the Earl of Onslow to be taken immediately after proceedings on the Social Security Contributions (Transfer of Functions etc.) Bill [H.L.].—(Baroness Jay of Paddington.)
On Question, Motion agreed to.

Business of the House: Debate this Day
Baroness Jay of Paddington: My Lords, I beg to move the second Motion standing in my name on the Order Paper.
Moved, That the debate on the Motion in the name of the Lord Taverne set down for today shall be limited to five hours.—(Baroness Jay of Paddington.)
On Question, Motion agreed to.

European Single Currency
4.3 p.m.
Lord Taverne Lord Taverne rose to call attention to the significance for the British economy of the introduction of the euro, and to move for Papers.
The noble Lord said: My Lords, the launch of the euro is one of the most important world events since 1945. It means the creation of an economic bloc which is likely, in time, to rival the United States. It is already a bigger trading bloc than the United States and its total GDP is only slightly lower. Within the next 20 years, probably sooner rather than later, the euro may well become a currency which is as important as the dollar. Europe is also likely to develop a huge capital market as the cult of the equity takes root and as privately funded—
Baroness Farrington of Ribbleton: My Lords, I wonder whether I could respectfully ask those noble Lords who are in the process of leaving the Chamber to be a little quieter. It is proving impossible to hear the speech of the noble Lord, Lord Taverne.
Lord Taverne: My Lords, as I was saying, Europe is also likely to develop a huge capital market as more and more people take to the cult of the equity and as many states are forced to expand greatly their commitment to privately-funded pension schemes.
So I start with a proposition, which must surely be hard to contest, that the euro bloc will be an economic colossus. Next, our own economic future is intimately intertwined with the fortunes of the euro. The euro bloc is by far our largest trading partner. We share with it common laws about trade, competition and other economic activities. Moreover, most of our biggest companies are deeply integrated into the economic fabric of the single market. Therefore, the decision whether we should join this bloc, and, if so, when—or indeed, for that matter, whether we stay out—will have momentous consequences for this country.
Some argue that the prospects for the euro are uncertain, even bleak; that the British economy is not ready to join, or is not compatible with the economies of our European partners; or even, whatever the economic arguments, that joining would mean an unacceptable loss of sovereignty.
I do not contend that those arguments have no substance. They are the views of many eminent people whom I respect. But when we faced the choice as to whether we should become party to the Schuman Plan, when we faced the choice about whether we should join the common market when it started and when we faced the question of our relationship with the European monetary system, arguments were also advanced against joining at the start which seemed credible and reasonable at the time. Yet, in retrospect, most would now admit that those arguments were mistaken. That is especially true of our failure to join the common market at the start—a failure for which we paid a heavy price because we had to accept a common policy for agriculture and fisheries which was set and determined before we entered. As we delayed, the cost of entry rose.
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As Hugo Young points out in his excellent book, This Blessed Plot, in each case the pattern of argument is much the same. First: "It will never happen". Then: "It will never work". Then: "Even if it works, it is not good for us". Eventually we join, after the shape of new institutions or developments has been determined without our participation and without any regard to our special interests.
Is the pattern being repeated again, in this, perhaps the most important decision of all? I see that the noble Baroness, Lady Thatcher, has taken her place in the Chamber today. I recall that she said that EMU was impossible. She called it, "Cloud-cuckoo-land". Nearly all the sceptics told us that the euro would never happen, or that it could never start on time. Now they say that it will fail, or that it is not for us. One should perhaps treat with some caution the forecast of those whose forecasts have been proved wrong, wrong and wrong, time and again.
Of course EMU is a risky venture. No one can guarantee that it will succeed. But as with the Schuman Plan, the common market and the European monetary system, the sceptics under-rate one vital element: the importance of the political will of our European partners. It was political will that enabled EMU to start on time. It was political will that enabled Italy, Spain and Portugal to qualify against all the odds. Moreover, it is the undoubted political will of its members to make EMU succeed, which is the most persuasive reason for believing that it will succeed and that it will be a bloc of low inflation and financial stability.
It is most improbable, for instance, as some of the sceptics predict, that nations which made the most strenuous efforts to qualify will now suddenly go for reckless spending and high deficits. Sceptics also predict that the new swing to the left in Europe will undermine financial stability. It is therefore noteworthy that both Oskar Lafontaine and Dominique Strauss-Kahn do not believe that you can create jobs by deficit spending. They have made it clear that they prefer the Clinton-Greenspan mix of tight fiscal policy and a looser monetary policy to the Reagan-Volcker mix of high deficits and high interest rates.
Further, with the new transparency of prices within EMU competition inside the euro bloc will be intense. This will be a powerful force for liberalisation and a powerful spur to future prosperity.
But even if the euro is likely to be a success, it is still argued that it does not suit us, that the risks are too great. Of course there are risks if we join, much the same risks incidentally as there are for Ireland, Spain and Portugal. However, they decided to join and take the risks, and for good reason because there are great rewards to be won which outweigh the risks: a stable currency, the prospect of lasting low inflation and low interest rates, increased investment and, above all, the prospect of influencing the future of EMU.
There is a curious lack of national self-confidence among the sceptics. They assume that the odds will always be stacked against us. That is a pessimism which is in no way justified by experience. Our economy may make up some one-eighth of the total of the Union's

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GDP, but our influence inside the Union has been disproportionate. Whenever we have played an active and constructive part, the Union has developed in ways we can applaud. Thanks, among others, to the noble Baroness, Lady Thatcher, we made a major contribution to the start and the development of the single market. We have been on the winning side in the crucial battles for world free trade, budget reform and enlargement. Thanks to qualified majority voting we have secured some reform of the agricultural policy, and the prospects for more radical reform of the agricultural policy are now better than they have been previously. If we were part of EMU we could be confident that our voice would be powerful and that it would be effective.
On the other hand, what happens if we stay out? The pound outside the euro bloc will be highly vulnerable. The launch of the world's second largest currency in the middle of our largest trading area is bound to put strains on the pound, especially if the relationship between the euro and the dollar is volatile, as it may well be in the early years. Our industry will face costs which its competitors will be spared. Meanwhile integration inside EMU is likely to accelerate.
I agree with the sceptics that the euro has profound political implications, although, unlike them, I do not know exactly what forms these will take. No doubt there will be—indeed there already has been—much talk of a move to more federalism. I suspect, on past experience, that the rhetoric will be more evident than the reality. In any event those who call themselves federalists in Europe favour a decentralised Europe, a long way removed from the monster centralised European superstate with which sceptics frighten the children. I think they would find few Frenchmen, for instance, who would tolerate a European superstate which stopped the French from living their own lives.
There will be, I suspect, more qualified majority voting agreed among the 11. So far qualified majority voting has worked very much in our favour. But of course if we stay out, its extension among the 11 would not take account of any special interests that we may have. There may well be more tax co-ordination and tax harmonisation among the 11. I am at present rather doubtful whether this will happen. I am doubtful whether it is necessary. I certainly regard the technical obstacles as formidable, particularly in the field of corporation tax and particularly as regards the structure of taxation.
There will almost certainly be pressure for more accountability and democracy. However welcome this will be, clearly we have the strongest interest in having a say in the changes in institutions and procedures which might come about. Surely the vital point is that the form of integration, the future shape of euroland, would be decided without us if we stayed out. The "euro-X committee" will increasingly take the economic decisions that matter inside the Union. If we stay outside, we shall have observer status only. The essence of our sovereignty, the power to control our own future, will be substantially diminished if we stay out, and enhanced if we join.
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I believe that the Government realise the dangers of isolation. They do not want Britain to be left as an observer on the fringes of the euro bloc. However, their policy so far has been timid and equivocal, very much in the traditional mould of British policy towards Europe. Of course there are good prima facie reasons for caution. Our economic cycle is somewhat out of whack and we are not yet sufficiently convergent. We all know the arguments. But convergence will not come about by accident. We could well converge by accident, perhaps early in the next century as we come out of recession or a slow down, and then we could pass like ships in the night. Real convergence means following an active policy to achieve convergence, as Spain, Italy and Portugal did to qualify for membership. They did not join only when they converged. They converged because they were determined to join. The way to achieve convergence is to announce our intention to join by a certain date as soon as possible. Setting a date will enable markets to adjust, as they did with the other EMU states. The declared intent would become a self-fulfilling prophecy.
However, a policy of continued prevarication without a firm commitment, whatever the many expressions of good will, is a dangerous policy, especially if doubts grow about our eventual commitment. The pound will be vulnerable for the reasons stated. Our long-term interest rates would almost certainly be higher. Our economy would suffer and with it the standing of the Government. The chance of winning a referendum would be correspondingly prejudiced. What is more, it is likely that the eventual price of entry will go up, as it has done before.
In time as EMU grows more close knit, some might well become less enthusiastic about having us in, especially if we have periods of what some might regard as "uncompetitive devaluation". We may well be required, as a price of entry, to abandon our budget rebate. We may well be required to join formally in a narrow band of the new ERM for two years before entry. That is all possible.
Meanwhile the position of the City as the financial centre and capital of Europe would begin to erode. No doubt its present status can survive if the markets expect that we shall join EMU soon, but it would be unlikely to survive if we stay out for long, or if markets take the view that our membership can be indefinitely delayed.
It is not perhaps surprising that in a recent opinion poll only 5 per cent. of opinion in the City agreed with the policy advocated by Mr. Hague. Indeed what is the real alternative to joining? This brings me briefly to examine the view that you can somehow be pro-European Union but anti-EMU. Some 10 years ago that might have been a tenable proposition; today it is not. EMU is now the core of the European Union. It is likely that Denmark will decide to join perhaps next year or the year after. Even Sweden, it now seems, is likely to follow. In both countries opinion has changed dramatically since the advent of the euro. Greece, as the Financial Times put it yesterday, is racing to qualify.
Therefore there is a real possibility that we shall in time be left on our own, isolated, a second-class member of the European Union, cut off from what the rest regard

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as the Union's central project. We and they would move in opposite directions, growing further and further apart. Then we might well find that the existing advantages of the single market begin to fray.
Some sceptics offer a clear alternative. They want us to abandon the Union altogether. That is the clear aim of the noble Lord, Lord Shore, who has been against the Union almost as long as I have been for it. It also seems to be the present aim, more recently adopted, of the former Chancellor, the noble Lord, Lord Lamont, to whose maiden speech we very much look forward. I believe there is a certain logic in that view. I would regard our exit from the European Union as deeply damaging for economic and political reasons. But, in a way, to be out makes more sense and may make for easier relationships with our fellow Europeans than to be half in, half out, perpetually seeking to stop our European Union partners from doing what they want.
In my view the choice is clear. We should join this great venture of world importance as soon as we can. If I am right, we need a lead from the Government and we need it now. The Government are popular and I think mostly—with some reservations—deservedly so. But they will not be so popular forever. Now is the time for the Prime Minister to speak out bold and clear. If he does, I have little doubt that the people will respond and, as in 1975, the referendum will result in a resounding "yes". My Lords, I beg to move for Papers.
4.20 p.m.
Lord Grenfell: My Lords, I rise to express my very deep thanks to the noble Lord, Lord Taverne, for introducing this debate. His consistent and rigorously argued support of the idea of a single currency has commanded my respect over a very long period of time. Like him, I look forward to hearing the maiden speech of the noble Lord, Lord Lamont of Lerwick. I share the profound satisfaction of the noble Lord, Lord Taverne, at the successful launching of the euro. I welcome it as wholeheartedly as did the noble Lord, Lord Cobbold, in his very spirited letter to The Times.
This is certainly a unique and momentous event in Europe's history. It marks not, as the eurosceptics would have it, the end of a Europe with which Britain can live, but the beginning of a Europe which can live better with itself, Britain included, and with the rest of the world.
We chose not to join the single currency in the first wave on the ground that our position in the economic cycle was too distant from that of the continental economies to make convergence possible within the timeframe. We were also waiting for some hard evidence that joining would be in our economic interest. The caveat on convergence was not unreasonable, but the caveat on entering before our economic interest was established was always, in my view, somewhat questionable. How long would it take before the Treasury could declare on the evidence of the single currency's performance that it was safe to join? Our economies might already be diverging again by the time that proof was established—passing as ships in the night, as the noble Lord, Lord Taverne, put it. I can
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only hope that when our economy does come close to convergence, the Government will make that leap of faith which eleven other countries were prepared to do when they joined in the first wave.
In light of what we have been hearing from Ministers in recent days, I do not doubt that the Government favour our eventual entry; the "if" has given way to the "when". I look forward to the publication of the Treasury's national changeover plan and hope that our experience of dealing with the euro as an outsider will permit the period between a referendum giving the green light to become an insider and the actual introduction of notes and coins to be much closer to three years than four.
We are committed to a referendum, but I have difficulty in seeing the setting of a target date for entry as incompatible with that democratic process. The final word still remains with the people, but in the meantime, an unambiguous declaration of government intent, supported by a target date, would greatly assist business, industry and the financial sector, not only in their own preparations, but in the conduct of their affairs with countries already in the eurozone.
The problems and disadvantages facing Britain as a non-member of the eurozone are, in my opinion, mostly manageable, provided that there is a firm expectation within the EU membership that we will eventually join. Undermine that expectation—as the Conservative Opposition's official policy undoubtedly would—and our situation as an "out" would be that much more difficult. The importance of maintaining a stable sterling/euro exchange rate cannot be underestimated in light of our trading relationship with our European partners. If the currency markets believe that Britain will go into the eurozone, sterling should move gradually towards the rate at which markets expect it to be tied to the euro, thus avoiding the kind of volatility that might be expected in the absence of such expectations.
The single currency is now a fact of life, and only those who dislike it in principle will not want to see it succeed in practice. But this does not mean that those of us who wish it well do not see problems ahead. For example, there are fears that excessive appreciation of the euro against the dollar could slow economic growth and increase unemployment among the Eleven. Herr Lafontaine has, happily, retreated from his position that this calls for explicit exchange rate target zones in the face of strong opposition from ECB President Duisenberg and US Federal Reserve Chairman Greenspan, who see such global target zones as muddled in principle and unworkable in practice. The European Central Bank is insisting, however, that it will not follow a policy of benign neglect towards the exchange rate, which will remain one of several indicators influencing its monetary policy. That is surely right. The concerns of Messrs. Lafontaine, Strauss-Khan and others—and now also of the Japanese—can surely be met through the timely intervention of central banks as and when strong appreciations or depreciations need to be counteracted.
The lopsided structure of fiscal and monetary policy under the Maastricht Treaty is another immediate concern, as your Lordships' European Select Committee

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pointed out in its recent report. There is always the danger that the rules of the stability and growth pact relating to fiscal deficits will prove too tight. The problem is an immediate one, given continuing signs of significant economic slowdown in the eurozone, with estimates of only 2.4 per cent. growth in the last quarter of 1998. Under the pact's very tough rules, there are circumstances in which even the most modest countercyclical fiscal policy could not be implemented unless sufficient headroom had not already been created by higher taxes and lower expenditure.
That that is incompatible with slow growth and rising unemployment is blindingly obvious. The solution surely lies in the revision of the stability and growth pact to allow governments a more flexible fiscal response to particular economic circumstances, provided that over the economic cycle as a whole a mandated average level of budget deficit is respected. I see no reason why agreement to amend the Maastricht Treaty to accommodate that change cannot be reached. But there will be little or no gain from such a change if governments for their parts fail to implement the supply-side reforms necessary to ensure more flexible labour, product and financial markets.
I am not one of those who believe that the European Central Bank is hell-bent on imposing a permanent deflationary bias on the eurozone in its pursuit of price stability. Its co-ordination of the concerted interest rate cut by the eleven cental banks on 3rd December suggests it is capable of a more flexible, politically sensitive approach than its strict price stability strategy might otherwise call for. But the corollary surely is that governments must co-operate more closely over national economic policies in general, and fiscal policies in particular, if the relationship between the ECB and national governments is to work meaningfully and effectively for the Union as a whole.
That brings me finally to a crucial question for Britain. Are we clear about where the Union is headed? We ought to be by now. The introduction of the euro is a potent spur to further economic integration, measured in growing trade and investment in the euro area. What will naturally follow from this is closer economic policy co-ordination as the countries of the eurozone become more interdependent. But integration does not mean centralisation; it does not mean a single state; it does not mean a single tax rate, as eurosceptics would have you believe. The right to pursue national interests within the parameters of the co-operative endeavour which is the European Union is as strong in Paris and Bonn as it is in London and Stockholm. France has its own national interest in mind in resisting co-financing of agricultural subsidies; Germany has its own national agenda when it calls for more tax co-ordination.
But let us be very clear on one point. Economic integration was never meant to be an end in itself. It is the necessary first step towards deeper political integration. If Britain does not have the stomach for that, then it is better that it remains outside. Personally, I welcome deeper political integration. If the new eurozone is to be a great economic power—or a Colossus, as the noble Lord, Lord Taverne, put it—as I believe it will be, then coherence in its policies is a
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sine qua non. That does not mean stifling competition among states; it means setting sensible, equitable ground-rules. For the great challenge facing the European Union, now that economic and monetary union has arrived, is the democratisation of its structures and institutions. Martin Wolf put it starkly in a recent commentary in the Financial Times:
"European integration has, in short been a benevolent élite plot in which a cartel of executives has operated alongside unelected bureaucrats to secure the economic integration of the continent. But what has by now emerged is a proto-federation without many of the requirements of a democracy".
So that is the real challenge: the democratisation of the European Union. Can we turn it into a true democracy which retains its internal diversity, competition among states, and individual cultural identities? That was the vision of the founding fathers, and monetary union has now brought us to the point where a rigorous process of democratisation must be launched or the whole project will surely fail. There are those who wish it to fail. I am not among them. I dearly want it to succeed, and I hope that our country, our people and our Government will recognise how much Britain has to offer to that endeavour and how much we have to gain by its fulfilment.
4.30 p.m.
Lord Skidelsky: My Lords, we are grateful to the noble Lord, Lord Taverne, for giving us an early opportunity to discuss the launch of the single currency. Whatever our views on whether or when Britain should join euroland, we can agree that the arrival of the euro is a momentous event in European history. We can also agree that it will have important implications for our economy and for the conduct of our economic policy, some of which were pointed out in a characteristically informed and attractive speech by the mover of the Motion, although I must say that it reminded me slightly of those arguments for restoring the gold standard in 1925 when it was said that all Britain had to do was to fix a date and a price and everything in the economy would adjust accordingly.
The line-up of speakers for this debate is a testament to the intellectual and practical knowledge commanded by this House. In particular, we all look forward in lively anticipation to the maiden speech of the noble Lord, Lord Lamont of Lerwick.
I turn to the Conservative case for excluding entry into the single currency until the end of the next parliament. It rests on an assessment of both the economic and the political consequences of monetary union. We believe that monetary union will lead inevitably to fiscal union and then to political union. We do not want Britain to be part of a United States of Europe and we do not believe that the British people do either. I do not think we are wrong about those political consequences. Leading European politicians have repeatedly emphasised that monetary union is a staging post to full political union. Eight years or so—who knows?—but certainly a longish period of time should give us a much better idea of whether we are right about the political and economic dynamics of monetary integration.

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We believe that it is wrong to hold a referendum on joining the euro before the political as well as the economic implications are much clearer than they now are. We do not want the people of this country to turn on the politicians—politicians of any party—and say, "But you never told us that joining the euro meant signing up to membership of a new European state". We believe that a referendum, if and when it comes, should be held in the light of all the relevant facts—and they are not all in yet. Meanwhile, no British government should feel forced to take policy decisions on taxes or on currency matters which pre-suppose that we will enter euroland in two or three years' time; yet that is clearly implied by the present Government's decision to prepare for entry. We on these Benches will never tire of repeating that Europe is a choice, not a destiny, and we must never knowingly put at risk our freedom to choose.
Of course, I do not deny that the emergence of the euro will change life in Britain. It will confront businesses and consumers with a new set of facts to which they will have to adjust. Consumers and firms will benefit from having many of the prices of the goods and supplies that they buy quoted in a single currency. That will reduce inter-European Union price differentials; for example, the price of cars should fall to the lowest euro price quoted in the single market. Firms will be forced to price competitively. That, after all, is what the single market is all about. But none of this requires us to join a single currency.
It is argued, however, that some of the price differentials are due not to lack of price transparency but to differential sales taxes—hence the move to harmonise VAT. There is a theoretical case for harmonising VAT on tradables, whether the tax is levied at point of sale, as is true now, or at source, as the Commission proposes. But in thinking about harmonisation it is vital to bear in mind that the European Union is not the only place in the world in which to invest. If European Union corporate taxes are harmonised at, let us say, Germany's 56 per cent. tax rate, one may well get a flight of production to more business-friendly locations, such as the United States or central Europe. That means a flight from Britain.
Another problem arises from the unlimited demand for equal taxes made by so many European politicians. It is not just that they want to harmonise something here and there which might make the single market work a little better; they want to harmonise the whole range. We are opposed to using tax policies which might conceivably make a single market work better as a stalking horse for qualified majority voting and other moves towards political integration. We must insist on preserving a tax system which suits the customs of our people and the needs of our businesses, always remembering that approximately 50 per cent. of that business is done outside Europe.
We have been fed a great deal of alarmist stuff: that if we fail to join the euro soon, the City of London will lose its status as the world's leading financial centre and business will emigrate to Frankfurt. I do not believe that to be true for a moment. The view of the British Bankers' Association is that the euro would be a
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challenge to the City of London, but that is only to say that the City operates in a competitive international environment—it always has and it always will. What keeps it pre-eminent are a critical mass of financial institutions, an abundance of skilled workers and a sound regulatory system. London possesses those attributes regardless of the dominant currency, which is currently the dollar. What all experts do agree on is that the City's position will be threatened by the Commission's proposal to levy a withholding tax. That is a tax levied on the interest and dividends received by a foreign investor. It would raise the cost of financing bond issues in London. There would be every incentive, therefore, for international lending and bond-issuing business to move to financial centres where there is no withholding tax, such as Switzerland and various off-shore islands. Of course the Commission wants to stamp out tax evasion. That is perfectly right. No one wants profits to be based on providing safe havens for tax dodgers. But there will be no gain in tax collection if businesses move out of the European Union altogether. The Government say that they are against the withholding tax. But are they prepared to stand up for the interests of the City? We look for deeds, not words.
The last and most serious topic I want to address is the impact of the euro on our currency. The crucial point is that, if Britain intends to join the euro soon, the Government will have to decide very quickly at what rate they want to fix the pound to the euro. But it is surely inappropriate to make a decision of that kind until we have a much clearer idea of what the euro's long-term relationship with the dollar is likely to be. The main reason is that half of Britain's trade is with non-European Union countries and is denominated in dollars, a fact to which the noble Lord, Lord Grenfell, did not refer. That makes the pound/dollar exchange rate as important for British traders as the pound/euro rate. In the hyperbolic press comments which greeted the advent of the euro it was somehow assumed that all Britain's trade is with the European Union. In fact, a much higher percentage is with non-EU countries than is true of the average European Union member. Britain has always been a global trading nation, dependent on world economic links and conditions and not merely European ones.
It is widely expected that the euro will appreciate against the dollar, not just because of temporary euphoria but also because the rest of the world will no longer have to finance America's 300 billion dollar current account deficit. Countries will have the choice of holding euros or dollars. If we fix the euro/sterling rate now, we run the fundamental risk of sterling being misaligned with the dollar; our trade with "dollarland" will suffer, and we may well be forced into another ERM-style fiasco. In short, the gains from fixing the rate now are relatively small, but the risks are very great. Fixing to the euro now would also make a nonsense of the Bank of England's price mandate. Money supply and prices would be hostage to the fluctuations between the euro and the dollar.
I wish to put some specific questions. Is it the Government's intention to join the euro in the next two or three years? Will they agree that in order to prepare

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for joining they must have a currency policy? Do the Government have a currency policy? What do they think the relationship will be between that currency policy and the inflation target mandate that the Chancellor has only recently given to the Bank of England? Those are serious questions, and they will not go away. We have eminently sound reasons for waiting to see what are the politics and economics of monetary integration. I trust that this debate will give the Government an opportunity to disclose their intentions more fully than they have done so far.
4.41 p.m.
Lord Cobbold: My Lords, it is indeed right that this House should have the opportunity of debating the euro during the first month of its existence. Therefore, I too thank the noble Lord, Lord Taverne, for raising the subject today. I also very much look forward to the maiden speech of the noble Lord opposite which we shall hear shortly.
It is difficult to overstate the importance of the euro to the British, European, and indeed global economy. The launch of a single currency by 11 European states is, as the noble Lord, Lord Taverne, has already said, an important and unprecedented event in world terms. It is probably the most important event in Europe since the Treaty of Rome. Coming at the end of a century—indeed, at the end of a millennium—during which the tribes of Europe have been locked in almost continuous mortal conflict, it is a bright light for peace and economic progress—and, let us hope, a pointer towards a more mature mode of cohabitation for the peoples of Europe in the third millennium.
Sadly, we the British did not have the confidence or the courage to join the venture. Today, we are focusing on the significance to the British economy of that decision.
The most obvious potential impact is on the City of London and our financial services industry. The City, together with the Bank of England, has played a very important and positive role in the implementation of the euro and in the detailed arrangements for payments and contracts.
The City is confident that it can retain its pre-eminence. But there has certainly been a considerable upsurge in competition from Frankfurt and Paris; and there must be some risk of erosion of the City's dominance of certain markets. We have seen some of this in the derivatives markets, where London has lost its preference for a London-based reference rate, LIBOR, in favour of the euro rival, EURIBOR. As stated in today's Financial Times, the London derivatives exchange (LIFFE) is fighting back and is changing its contracts to a EURIBOR base to regain the business.
The Stock Exchange is struggling to find a new role in the euro markets. Competition is fierce and we shall see many changes in the months to come.
The UK retail banks are perhaps the most obvious cases of potential competitive disadvantage. Unlike their counterparts in euroland, the British banks cannot use the strength of their domestic deposit base to compete
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throughout the euro area. However, on the whole, I think the City is right to be confident, although its worst enemy is complacency.
The most significant impact on the British economy of the euro is the one that is most difficult to assess. Those who are against our joining the euro claim that, by staying out, we retain control of our monetary destiny and have the freedom and flexibility to adjust monetary policy to suit our specific needs. But just how much freedom can we expect to have in the increasingly global economy? We are a sophisticated but small economy, suspended between two economic giants with whom we have to trade to live. About 40 per cent. of our economy is exposed to foreign trade, compared with around 10 per cent. for both the US and euroland. In other words, they will not have to worry about us, but we shall most certainly have to pay attention to them.
To prove ourselves and to remain attractive to inward investment, we shall have to be stricter than strict. We shall have to perform as well as, or better than, our giant neighbours in achieving stable growth. Given that sterling, although small in comparison with the euro and the dollar, is still a trading currency with an open and relatively deep market, we shall have to persuade the currency speculators of our good intent if sterling is to avoid becoming the plaything of the world's currency hedge funds.
To be successful, it seems inevitable that we shall have to pay a risk premium on our interest rates. Short-term three-month sterling interest rates are currently 2½ per cent. higher than those for the euro; 10-year government bonds are about ⅝ per cent. higher. How those differentials evolve in the future is critical in assessing the price that the British economy will have to pay—the price of freedom, one might say.
But let us not be pessimistic. It is a fact of life that we have not joined the euro. Whether we like it or not, the next two or three years will demonstrate to the world and to ourselves whether we can survive profitably on our own. We shall also see how the euro works in practice and whether it will produce the benefits that are claimed for it.
We should, of course, maintain a public policy of wanting to join, as indeed the Government have so far stated. If, by the end of this Parliament, the euro has led to a resurgence of growth and employment, to booming equity and bond markets in a massively expanding capital market, to industrial rationalisation and a thriving small business sector—and if we in Britain have had to pay a significant risk premium on our interest rates and have begun to see foreign investment passing us by in favour of euroland—the euro will sell itself to the British people. Indeed, it must sell itself to them if we are ever to have a realistic chance of joining. There is not much point at present in mounting an expensive propaganda campaign to try to persuade the British people of the importance of the euro. For some time to come, it will hardly touch their lives. Of course, it will affect business, but business is well capable of managing its affairs.
If none of those things happen, the Euro-sceptics will be triumphant. No doubt the Tories will be on the rampage again and little Britannia will feel very pleased

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with herself. I do not believe that that is very likely. I think we shall find it very difficult to steer our little ship through all weathers.
I believe that we shall find ourselves knocking at the door of euroland—and at that point we shall face a new set of problems. Will the price of entry have gone up? Shall we have to sacrifice the hard-won rebate of the noble Baroness, Lady Thatcher? Shall we have to spend two years' apprenticeship in the new ERM? Shall we or the markets be able to agree a sterling/euro entry rate that is acceptable to both sides?
I repeat what I said earlier: the euro is a step towards a more mature mode of cohabitation for the European peoples than the bloodthirsty rivalry of the past. We should therefore wish it well. But it does raise political questions as to how Europe is to organise and manage itself in the next century. It highlights the weaknesses and the democratic deficit of existing structures and institutions.
Europe will require visionary political leadership in the century to come. There is a need for institutional reform—that is perhaps even more important than the reform of your Lordships' House—but that is a subject for another day.
4.49 p.m.
Lord Lamont of Lerwick: My Lords, I am grateful for the opportunity to address your Lordships' House for the first time. It is very nearly 27 years since I made my maiden speech in the House of Commons on the Third Reading of the European Communities Bill. It must have been a terrible speech indeed because it has been both quoted and extravagantly praised in Sir Edward Heath's autobiography. I shall try to do better this time, although I am sure that some of my noble friends will prefer the first speech to the second.
The noble Lord, Lord Taverne, has drawn our attention to the launch of the euro. The fact that the euro has been launched and has existed for 20 days without accident tells us little except that certain European politicians have shown great determination and great willpower in pressing ahead, sometimes even ignoring public opinion in their own countries.
The noble Lord, Lord Taverne, placed great emphasis on influence. When I hear the word "influence", to misquote Marshal Goering, I sometimes feel like reaching for a gun. "Influence" is the word that has been used again and again to justify every step towards European integration that otherwise did not have immediate attraction. Giving up the right to set our own interest rates in exchange for a one-in-11 opportunity to set the interest rates of the euro does not seem to me to be the bargain of the century.
The euro will have influence on us, but we are not without consequence for euroland. Britain is euroland's biggest customer—bigger than the USA and Japan put together. We affect them, too.
Some supporters of the euro believe that its continuation for a few years will make it inevitable that the British people will conclude that we have to join the euro. However, it may work the other way round, when
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in a few years' time we discover that the world has not come to an end and that we have continued to prosper, even though we have not joined the euro.
Some British companies will use the euro as some today use the dollar. Perhaps British companies will have the best of all worlds: they can use the euro in the market of euroland and at the same time be based in a country which is able to devise its interest rates for its own economic conditions.
We are often told that euroland will give us lower interest rates. As the Russians put it, "There is no free cheese except in a mousetrap". There is no guarantee that euroland's interest rates will always be lower than ours. Currencies get the interest rates they deserve. Sterling will earn its interest rates as the newly independent Bank of England gains credibility—and I wholly applaud the decision of the Government to give independence to the Bank of England.
One day we may have interest rates suitable for a really good currency, where 10-year money costs well under 3 per cent. I am not referring, of course, to euroland, but to Switzerland. There is no interest rate premium there. That is a country outside the ERM, outside the European Union, not intending to join the single currency and which sets its own interest rates for its own economic conditions—and has achieved a very low level of interest rate.
What matters more than anything else is not getting the lowest rate of interest regardless of economic conditions, but getting the right interest rate. The euro will be accompanied by a single rate of interest calculated by an assessment of some average of the different conditions in the different countries of euroland. I have no doubt that it will be a strong currency and that it will produce a low rate of inflation—that is, measured on an average basis, with some countries above and some below. But for most of the countries, most of the time, judged from their viewpoint, the rate of interest will be wrong for them most of the time.
In recent years there has been a remarkable convergence of inflation as the different countries of Europe have prepared for the arrival of the single currency. But let us not forget that that convergence was achieved by divergent means: by different rates of interest. To achieve the same rate of inflation as Germany, Italy had to have much higher interest rates than Germany.
The imposition of a single interest rate across euroland will recreate different rates of inflation again. Differences between national economies will become accentuated. In inflation-prone countries, inflation will rise and, in the weaker economies, recessions may last longer. Instability, rather than stability, is likely to be the outcome. Because of its dependence on, and sensitivity to, short-term interest rates, Britain is more likely than any other country in Europe to suffer from that instability. I believe that the Pennant-Rea Committee estimated that if Britain were in the single currency, something like 40 per cent. of the effect of interest rate changes in euroland would be felt by the British economy.

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Professor Feldstein of Harvard University has somewhat provocatively observed that he believes that the euro will increase the risk of war in Europe. Even by my standards that would be going a bit far! His underlying point is that the euro will increase tension and friction between individual countries because they will have incompatible and irreconcilable expectations from common institutions.
I know that a maiden speech should be non-controversial. I can join the noble Lord, Lord Taverne, in welcoming the euro because its launch has been accompanied by a mass of declarations making it abundantly clear, to anyone in this country who did not know, what the euro was designed to achieve. Mr. Lafontaine, Mr. Fischer and the Chancellor of the German Republic have all reminded us that the purpose of the euro is to bring political union further forward.
The British Government are alone in maintaining that economic and monetary union is solely a question of economics. I want to be fair to the Prime Minister. His exact formulation is that there is no overriding constitutional bar to joining the single currency. But that does not take us very far. There is no overriding constitutional bar to ending Britain's independence. It is time to be franker about what the single currency is about and what it is intended to achieve.
I should like to address the points made by the noble Lord, Lord Grenfell, and touched on by the noble Lord, Lord Cobbold, about the political future of Europe. I do not believe that British institutions are incapable of improvement; but, if we are to transfer more power to other institutions, we ought at least to satisfy ourselves that they are better or that Britain will be better governed as a result. It is difficult to abandon the nation state because the nation state is inextricably linked with democracy.
Last night William Hague, the Leader of the Opposition, quoted from the book by David Landes, Wealth and Poverty of Nations, in which he describes the advantages that Britain has had because of always being a nation:
"A nation [is] not simply the realm of a ruler, not simply a political entity" [like the single market but] a self-conscious, self-aware unit, characterised by common identity and loyalty and equality of civil status".
That is the basis on which a minority accepts the decisions of a majority in a democracy. Europe is not a nation. A nation is not created by handing out free plastic blue and yellow flags to 1,000 people on 1st January in front of the Charlemagne building. That is not a European risorgimento; it is a PR stunt.
Europe, I fear, will never be democratic because it is not a nation. Where there is no democracy, there is no accountability; and where there is no accountability, there are the kinds of problems that, tragically, the European Parliament refused to confront last week. The issue is not whether political union, which will follow from monetary union, will work for Britain—it will not; it is whether it can ever work for Europe.
4.59 p.m.
Lord Barnett: My Lords, I am delighted to have the opportunity to congratulate the noble Lord, Lord Lamont of Lerwick. I must confess that I had wondered how he would make what is usually described as a non-controversial maiden speech on the subject of the euro. I suppose one can define his speech by saying that it was non-controversial to those who agree with him. He will be interested to know that my noble friend Lord Shore of Stepney was nodding his head throughout. He would not expect me to agree with everything that he said. I agree with him on at least one point: the independence of the Bank of England and support for the Chancellor in that respect. I very much agree with that.
I warmly congratulate the noble Lord on his delivery and the way that he expressed sincerely held views on the topic. It is right that your Lordships' House should hear sincerely held views on both sides of the argument. I am sure that I do not have to convert noble Lords here today to the view that the noble Lord, Lord Lamont, will be heard with great interest in the future on this and other topics. I for my part very much look forward to hearing him again on many occasions in the future.
The case that is usually made against the euro—to some extent by the noble Lord, Lord Lamont, but certainly by the noble Lord, Lord Skidelsky, from the Opposition Front Bench—is not just that we should not join within seven or 10 years. If one analyses it the case that they make is that we should never join. It would be better and more honest if they admitted it. The fact is that any scare story will do to make a case against the UK joining the euro, for example tax harmonisation and the fact that not only the UK but Sweden, Denmark, Spain and many others will oppose tax harmonisation that requires unanimity to achieve it. It is a nonsense to use scare stories of that description. I am glad to see that my noble friend Lord Shore shakes his head. There are certain aspects of tax harmonisation that would be very much in the UK's interest, for example the question of tax avoidance and unfair tax subsidies. It must be in our interests not only to talk about it but to seek to do something about it.
I do not have an obsession about joining. I recognise that there are real risks in the UK being a member of euro and the euro itself. We said so in our report on the European Central Bank where we recognised that the euro might fail. That is certainly a fact that needs to be considered. My noble friend Lord Grenfell mentioned some of the areas where this was a possibility. I shall not repeat them. Fiscal profligacy and excessive budget deficits are certainly possibilities given that member states have tried so hard to become members of euroland. There is also the failure to make the essential structural changes that will be needed. That is certainly a risk which may or may not arise. It will certainly take some time. However, these structural changes will be needed whether we or any other member state is in. Therefore, in our report on the European Central Bank we recognised the risks. We said:
"We do not expect it to be allowed to fail".
My noble friend Lord McIntosh regarded that as a feeble response. I hope that he will go even further in his response tonight. We could have said that it would not

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fail. However, I do not wish to be as dogmatic as that. In the summing-up of the unanimous report of the Select Committee it is said that given the present position it is not likely to fail. We already see that that is likely to be the case.

But if there are real risks to the UK inside the euro there are very considerable risks outside it. There is serious danger, despite the comment of the noble Lord, Lord Skidelsky—this matter was dealt with to an extent by the noble Lord, Lord Cobbold, in his excellent speech—to the banking system and the City of London in particular. At the last count the number of UK and foreign banks was 553. In Frankfurt the number is 194. Can anyone really doubt that if we did not make clear fairly soon that we would be joining the euro that position would not change and some of the foreign banks in London at the moment would not at least contemplate moving? Of course that would happen. (I hope that my noble friend does not mind. I am afraid that I have only nine minutes in which to speak. I shall interrupt him later!)
The same applies to inward investment. We have experienced excellent growth in net inward investment over the past 10 years. For example, in 1988 it amounted to £12 billion; in 1997 it was £22 billion; and in the first three-quarters of 1998 it was £32.8 billion. Can anyone entertain any serious doubt that if we made it clear that we would not be part of the eurozone there would not be a reduction in net investment? Can even my noble friend doubt that that would happen?
Lord Shore of Stepney: Yes, yes, yes.
Lord Barnett: My noble friend gives three "yeses". Perhaps he should have a fourth. I am not surprised that my noble friend takes that view. While I am prepared to recognise risks my noble friend Lord Shore and a few others—he would say more than a few—favour not only being out but staying out for ever. He is at least honest about it. The decisions taken during our period outside, which I hope will be a short one, will seriously affect us because we will have no influence within euroland; nor will we have a voice.
But the real advantage to the United Kingdom is not only as a hedge against the risks of being outside, but the opportunities of being inside. The chances of economic growth without a recurrence of past dangers, for example to the exchange rate, which the noble Lord, Lord Lamont, and I have shared within the Treasury—we do not share much else—are not unimportant. Equally, investment will be helped by the eventual, if not immediate, stability and expansion of trade inside the eurozone.
Comment has been made about lower interest rates as if somehow that would be a bad thing. I cannot believe that anyone imagines that lower interest rates in the UK would be bad for our economy, industry and the City. Of course not. Inside euroland we would be able to have a faster rate of economic growth than anything we have seen before.
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For all those reasons I regret that once again we have missed out at -the start of what the Select Committee described in its report on the European Central Bank as
"an immense and surprising achievement".
I shall repeat what I have said before. I shall keep repeating it until the Government accept it. My noble friend Lord Grenfell said that it would help industry and the City if we at least made clear our intentions. But there is absolutely nothing to lose and everything to gain—because the option would remain open—if the Government said now not only that they agreed with the euro in principle and intended to join, but that it was a matter of when and not if. I hope that this time my noble friend Lord McIntosh will be able to go further than before, which is what I believe he would like to do. He can ignore his brief and say that he agrees with me. If he did so we would become a major part not just of an immense and surprising achievement in the setting up of the euro, but of probably the most historic achievement this century.
5.8 p.m.
Baroness Williams of Crosby: My Lords, first I apologise to the House if I have to leave a little before the end of the debate owing to its delayed start. I have an unchangeable and unbreakable family commitment. I hope that my colleagues in the House will understand.
I took very careful note of the remarks of the noble Lord, Lord Skidelsky, in calling for a full and detailed debate on this subject in the next few months. I fully support that plea. It is rather sad that on a day when we have debated a Statement on the reform of the Lords, which is certainly a matter of moment, followed by a debate on the single currency, which is of equal moment, the media's response to what we have to say is virtually nil. I believe that the media owe it to the British people to pay significant and careful attention to a matter which is so significant for the shape of our future over the next century. This country has suffered greatly from the terms on which much of the debate has been conducted. In many ways those terms shame the capacity of the people of this country to think responsibly and internationally.
First, I strongly commend the excellent speech of my noble friend Lord Taverne. He pointed out forcefully how time and again in this country we have been almost totally sceptical of the ability of our European neighbours to meet their goals and objectives. The euro is as good an example as any. The noble Lord, Lord Lamont of Lerwick, made a clearly important speech. He was among the first of those who have been most sceptical of the capacity of Europeans to achieve their goals. As a careful student of the writings of the noble Lord—he suffers the drawback of us all that perhaps one should never put anything in print—I must quote from the third chapter of his Sovereign Britain published in 1995. It states:
"The biggest casualty of the collapse of the ERM in 1994 has been the Delors vision of Europe; as I see it, a single currency and the monetary part of the Maastricht Treaty are now unrealisable".
That was just three and a half years ago. The noble Lord was not alone in saying that. It was the view of most wise and expert commentators in this country who, as

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my noble friend said, have consistently failed to appreciate the drive and political will underlying the desire of our European neighbours to integrate more closely with one another.
Secondly, I believe that we are only at the beginning of the process. At present, dollar-dominated trade amounts to 48 per cent. of the world's exports. But the volume of exports amounts to only 11 per cent. The opportunity for the euro to become a more significant trading and reserve currency clearly exists. From statements made by the Republic of China, and Japan, we know that they intend to shift a substantial part of their reserves of currency from the dollar to the euro; and that implies a significant increase in the influence of those who run the European Central Bank. Indeed, that would be part of my answer to the noble Lord, Lord Skidelsky. I believe that the euro will gain rather than diminish in influence and power.
We have had a number of criticisms of the euro. I share one which was eloquently described by the noble Lord, Lord Grenfell, in whose wise company I had the pleasure to serve on Sub-Committee A of the European Communities Committee. The noble Lord expressed one great worry about the euro. It is one which I share, along with the noble Lord, Lord Barnett, who presided over that committee with great judgment and wisdom. It is that the provision for asymmetric shocks under the terms of the Maastricht Treaty are not sufficiently flexible. The fiscal and stability pact is extremely strict. Even the Economist on 9th January said that it was a "dangerously tight" fiscal proposal. We should be able to make submissions on that issue. I should like a greater range of movement within the fiscal and stability pact than the tight limits set at present in a period when the world may be facing recession.
We have already heard about the difference in interest rates. Over a cumulative period—if one assumes that it continues, and there is little reason to believe that it will not—it will be a major burden on economic competitive growth in this country.
We have discussed investment. I share the view of the noble Lord, Lord Barnett. I wish to add only two other points, one of which was trenchantly expressed by the former Prime Minister, Mr. Edward Heath, in another place when he said that he believed the failure to join the euro would leave Britain vulnerable to every speculative whim. That gloomy prophecy was all too worryingly borne out when Mr. George Soros visited this country last month and said that he would regard sterling as a very vulnerable currency if it remained outside the euro currency bloc.
The G8 is already talking about new financial rules of the game. The group is worried by the extreme volatility of currency relationships with one another—the noble Lord, Lord Skidelsky referred to that—and the effect of speculative movements of currency on some of the more exposed Asian economies. Does anyone suppose that if the G8 looks again at the financial rules of the game in a globalised world where we still teeter on the edge of recession, the voice of Britain will be heard with anything like the same weight as that of the 11 member states of the euro? It is because I believe
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that the financial architecture of the global economy is likely to be reconstructed over the next few years that I so profoundly regret our absence from this major currency bloc.
I conclude by echoing the remarks of the noble Lords, Lord Cobbold and Lord Grenfell. I cannot think of any better start to the new millennium than for the United Kingdom to throw her weight behind the modernisation, democratisation and accountability of the European Union. We are eminently placed to submit and contribute to such an outcome. It is a vital outcome for the future of Europe and an honourable role for this country. So I join my noble friend Lord Taverne in calling on the Government to take a bolder and stronger position than they have done. I can think of nothing more appropriate for a Government intent on modernising than to recognise that this country too is part of Europe and of a rapidly internationalising world.
5.17 p.m.
Lord Roll of Ipsden: My Lords, my first very agreeable task is to congratulate the noble Lord, Lord Lamont, on his maiden speech. It was a model of its kind, in particular in the observance of the practices and conventions which govern maiden speeches. As the noble Lord, Lord Barnett, pointed out, it was remarkable in its strict obedience of the injunction not to be contentious. We look forward to future speeches by the noble Lord with great anticipation, as from now on he will not be constrained by the same rules as govern maiden speeches.
This is not the first time that the House has devoted itself to a discussion of the euro. Whenever I have had the opportunity to address your Lordships on related matters, I have referred to the euro and expressed views which I held long before the European monetary system came into being, and before the creation of the single currency was on the agenda. I believe that a number of your Lordships will be familiar with my views. I shall therefore be brief and confine myself to only two specific points, and perhaps one general remark.
My first point relates to the European exchange rate mechanism. It has been referred to briefly. The opposition to the euro, and to our joining the euro, has become, naturally, more vociferous, not to say strident, since 4th January when the euro became a fact. One of the arguments which has made its appearance—it is a very old one—is the disaster which our membership of the exchange rate mechanism involved. Yes, indeed, it was a disaster. But those who now produce that argument are guilty of a mild degree of amnesia. What was it that produced the argument that it was a disaster? It was that we went into the exchange rate mechanism at the rate of 2.95 Deutschmarks to the pound, apparently without any consultation with our partners. That was not only a failure of courtesy, it was a very important failure because membership of the exchange rate mechanism put on all its members certain mutual obligations. Therefore our partners had the right to be consulted, but according to the accounts I heard they were not.
What is more, the disaster, the catastrophe, of that high exchange rate was known to many economists and analysts at the time; we did not have to wait for the

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result. The relief which the departure from the ERM brought—for a time it produced a better economic climate in this country—was again proof of where the fault lay. One can argue about the virtues or vices of any system designed to diminish exchange rate fluctuations—economists have a field day on that—but the important point about the exchange rate mechanism was the rate at which we went in.
My second point has been mentioned tonight by a number of speakers, particularly by the noble Lords, Lord Grenfell and Lord Cobbold. It is the position of the City. They both spoke with great experience of the City. I know the place a little, too. For the past 30 years or more I have spent most of my waking hours in the Square Mile when I have not been travelling all over the world on City business.
The City is a remarkable institution. It is very strong and has advantages which have been developed over many years. That has produced not so much in the City but outside, particularly among the opponents of the euro and of our membership, a certain complacency. The argument is, "Well, the City deals in anything. It deals in dollars and in obscure currencies. There is absolutely no reason why it should not carry on perfectly well with us being a member but at the same time doing business". Indeed, that is perfectly true, as I know from my own experience. City houses have done a remarkable number of bond issues for sovereign and corporate borrowers, and borrowers have nominated in euros. But is it possible to imagine that over a period of, say, three or five years these advantages will not erode? There is plenty of evidence, but arising directly out of the existence of the euro and the European Central Bank there are certain arrangements, institutions and payment systems of all kinds, which are of necessity confined to the members of the eurozone. In addition, is it not more realistic to suppose that on top of those inherent constraints which the existence of the euro will put upon its members there will be, as a result, if I may quote the New Yorker a famous comment, "Nothing 'propinques' like propinquity". The propinquity that the existence of the European Central Bank and its council and system produces and the continuous possibility of meeting among the members of the euro zone will of necessity produce a much closer relationship which will be bound to influence the decisions of the European Central Bank, the Council of Ministers and so forth.
While I have no doubt that the City can carry on for quite a while, I am afraid that it is totally unrealistic to suppose that we can continue to command today's position against Frankfurt, even Milan and Paris and perhaps Amsterdam, in the light of developments in the five years to come. The fact that the Stock Exchange in London has already reached an agreement with Frankfurt, which Paris appears now prepared to join, is an example that the City itself, as one would expect from a conglomerate of institutions in the financial services which is used to hedging risks, is aware of the risks and is already taking steps. I believe that if a poll were conducted today in the City one would not find the same complacency as one finds outside it.
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Finally, I want to say a few words about the attitude of our Government. I had the opportunity of speaking during the economic debate on the humble Address. Among other things, in the gentlest possible manner, and with the aid of some verses from Andrew Marvell which he addressed to his coy mistress, I criticised the Government about being so slow in coming out perhaps on the lines which the noble Lord, Lord Barnett, today and on an earlier occasion urged upon the Government.
Since the debate on the humble Address two important events have occurred. First, the euro is now a fact. That has provoked a considerable rallying of the forces against the euro, together with the apparent provision of immense sums of money to sustain the anti-euro campaign. That in itself would be an argument in favour of the Government taking much more energetic steps in the direction of educating public opinion and not waiting, as I said when I previously spoke on the subject, for the media moguls to come round. Incidentally, it is slightly ironic that some months ago one newspaper enjoined upon the Prime Minister, "Don't scrap the pound", when the owner of that newspaper had long since shown his preference for the American dollar. But that is by the way.
The second event that has occurred is that during the past week or two the Government have, much to my pleasure, shown certain signs of developing a more energetic, precise and open attitude towards this. One Foreign Office Minister recently made a forthcoming speech. It is said that the Foreign Secretary is setting up a high level committee which will be designed primarily for the very purpose of encouraging, in a more positive sense, the debate on Europe. If those signs are indicative of what government policy will be, I shall be delighted and I shall stop urging them to do more. I hope that tonight we can have an assurance that that is the case.
5.26 p.m.
Lord Howe of Aberavon: My Lords, not for the first time I have found myself speaking immediately after the noble Lord, Lord Roll. In the light of his immense lucidity and length of experience in this field, I do so with some diffidence. I speak with less diffidence in response to the maiden speech made by my noble friend Lord Lamont. He and I have been partners in various kinds of activity over many years. It must be at least 30 years since we were the joint authors of a paper on the radical reform of the welfare state—and we are still waiting. We are both patient people, which is just as well because the speech he made today powerfully reminded me of what I believe was the most comprehensive and compelling case for membership of the European exchange rate mechanism which he made to the European Policy Forum in July 1992. Both speeches were of uncompromising clarity. It is difficult to detect whether they are now facing the same direction, but they were both of the same high quality. We have lived for 30 years deciding whether we were right in 1968, so history will be the judge of one or other of those speeches and of all of mine.
I welcome the initiative of the noble Lord, Lord Taverne, in launching this debate. He is right, as were others, to emphasise the risk involved in the

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decisions affecting our future in the European monetary union. He was right in commending the case for that. The fact that it is going ahead still strikes some people as incredible. We are bound to be impressed by the will of our partners in sustaining it, as the noble Baroness, Lady Williams, pointed out. It is therefore right to consider it carefully.
However, having done that, one must contrast the sheer strength of our partners' commitment to the project with the lamentable indecisiveness with which our own political debate has been conducted. Once again, the Government of this country, whose sovereign authority some people proclaim so loudly, are failing to influence the economic environment of our own people, even of our own country. The case which I and others have made in support of membership is often misunderstood. We "joiners" are regarded as going in because we are afraid of being left behind. We are often regarded as going in for the sake of influence on other, unspecified matters because we are driven by mere modishness. That is not the case. That is far from being the real point of the argument. The real anxiety is that we are losing influence here and now, as we have done in the past, over our own economic ambience and destiny, and others are gaining. If that is not the lesson of 1957, or the lesson of 1978, what is it? The European setting in which we live, work and trade is being shaped to the advantage of our partners, quite naturally, and so often to our own disadvantage.
We still retain the tendency to think that now, as in the past, we can wait in the illusory comfort of self-imposed exile and decide in our own time and on our own terms what we want to do. If only that was the real world.
In reality, our country's relationship with Europe, and with it our place in the economic and political world, is changing before our eyes as we speak. Our largest trading market—our trade with the Community having risen from 32 per cent. to over 50 per cent. since we have been members—is being subsumed in an economic order in which others, not ourselves, will be calling the shots, and from whose key decisions we have chosen, pro tem, to exclude ourselves. I ask the question: is that a sensible use of this much-lauded sovereignty with which our people have entrusted us here in Parliament and Government? Why should we be so fearful when others are not?
When we look back we can reflect on the fact that during the 1990s, for example, our interest rates were twice as volatile as those in Germany, and sterling has varied by as much as 40 per cent. against the deutschmark. We had to experience, and none more dramatically than my noble friend Lord Lamont, the ignominy and upheaval of our exit from the European monetary system in 1992.
As the noble Lord, Lord Cobbold, pointed out, by staying out now, and perhaps indefinitely, we are losing the prospect of exchange rate stability; the actuality of lower interest rates—ours are still twice those in the eurozone—the actuality of significant saving in transaction costs, and, above all, as pointed out by the
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noble Lord, Lord Barnett, we risk losing our status as a gateway for foreign direct investment in our country as a priority within Europe.
I cannot find it possible to believe that that does not pose a real threat to the City. Again, as the noble Lord, Lord Barnett, pointed out, currently only 5 per cent. of the trading community there now supports the policy of my own party. I understand that. One of my most chilling experiences in the past few years was to speak at the European Banking Conference in Frankfurt in 1995. There were four or five European Finance Ministers present and four or five European Central Bank governors. The Mayor of Frankfurt welcomed us. Eight hundred people were present in the audience and 300 journalists. Helmut Kohl expanded, as only Helmut Kohl could expand, over the whole field of the agenda. The attention of Europe's economic community was focused there. I was the only Briton who spoke. I did not speak in the programme; I spoke as a kind of hors-d'oeuvre to the dinner before the proceedings started. That does not seem to me to be a favourable position for our country to be in.
I speak, I believe, as someone with the unique experience among those present in the House today, of having been chairman of the interim committee of the International Monetary Fund, one of the Finance Ministers responsible for one of the five key currencies of the SDR. Will that prospect be open to British Chancellors of the Exchequer as we become increasingly marginalised, no longer part of this large trading currency with which the rest of our partners are dealing? These are the realities of the world in which economic decisions are being made. I deeply regret that my own party is closing off the option for such a specified period—almost irretrievably if one listens closely to the speech of my noble friend Lord Skidelsky. The arguments are so framed that it is difficult to see how one can reverse one's position easily. In so doing, it has left itself without influence on Government or, indeed, on anybody else. The trouble is that the Government's attitude has not been that much more encouraging.
If ever a government were in a position to make up their minds and to influence events, it is surely this one with the largest parliamentary majority since King Canute, and the largest lead in the opinion polls since they were invented. If they are not in a position to decide, lead, and to persuade on an issue of this importance, which government ever is and ever will be? That is not how my noble friend Lady Thatcher conducted affairs in the 1980s. That is not how we approached the Single European Act. It was not all good. We engaged vigorously in the negotiations and, on balance—with some risks, of course—we came down on the side of British interests. We signed up and ratified. I believe that we need to approach this decision, which is of even greater importance, with much the same confidence.
I listened with interest to the speech of the noble Lord, Lord Grenfell. As I look at him I reflect upon his own political history. I remember him popping up in a conference in Paris, at one time, when he had just joined the Liberal Party saying that he arrived there as a refugee from the Bow Group. I had not noticed until

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now that his political progress, if that is how it can be described, has taken him still further in the direction of refugeeism. The fact that he has travelled so far has not diminished his wisdom, at least not on this issue.
I agree with the noble Lord that the Government should now set a target date for UK entry. There is nothing inconsistent between that and the prospect of a referendum. They should set that date and make it plain that, provided the economics are right, the key question will be put to the British people very soon after the forthcoming general election. As stated by the noble Lord, Lord Taverne, in preparation for that entry the Government should make it plain that our domestic economic policy will be tailored to promoting the necessary degree of cyclical convergence with the eurozone. That is not something that can happen by accident.
In parallel—and here I go perhaps a stage further than others have done—they should consider the introduction in this Parliament of a "paving" Bill designed to remove legal and other obstacles to membership and to the use of the euro. If that was done and the Government used their undoubted authority with that much confidence, Government and nation will have established a clear policy for the years ahead; business would have a specific planning horizon, and the electorate could be prepared by the debate that that would provoke for making a most important choice about the future of our country.
5.36 p.m.
Lord Haskel: My Lords, as pointed out by the noble Lord, Lord Taverne, the euro is now a reality. I congratulate him on moving a Motion to mark this important occasion.
The euro cannot be ignored. I speak from the point of view that our country's economic future lies in Europe. Therefore, it is in our national interest to ensure that the euro succeeds and that we become part of that success. That is why I welcome the Government's practical politics in terms of working with our partners to make the euro a success while, at the same time, making it work for Britain in our own national interest.
I agree with the noble and learned Lord, Lord Howe, that it is in our national economic interest to remain alert and engaged. I do not agree with the noble Lord, Lord Skidelsky that it is in our national interest to close down the options available by arbitrarily ruling out our membership of the monetary union for a number of years. If that policy is intended to provide certainty, I think it is misguided because this is an issue where certainty does not exist.
The Government's macro-economic policies of stability, convergence and flexibility will help to create the right economic conditions for our membership. At the same time, I believe that those policies are right for our economy because they are delivering the low inflation and low interest rates which encourage investment in the real economy.
However, the introduction of the euro gives rise to a number of challenges for British business, not only in the City. Foremost among those is competition. As the euro
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rapidly becomes the standard currency for business throughout Europe, so price differentials will become exposed. Here, I agree with the noble Lord, Lord Skidelsky.
Today's long supply chains and sophisticated financing will ensure that that affects all businesses, not only those which trade directly with Europe. No longer will companies be able to vary their prices from market to market as they have in the past. Prices will have to be standardised, particularly the prices of branded goods. Indeed, the arrival of the euro will challenge some of the existing conventions on pricing.
Noble Lords who travel in Europe and buy the Economist will have noticed the huge variation in price on the cover of that publication in different countries. That is a matter which will have to be standardised. I notice also that in the rapidly growing area of business-to-business electronic commerce, prices are being quoted in euros. That will speed up the impact of price competition resulting from the euro.
As the euro becomes more commonplace in British business, so British business will have to invest more in the euro as a business currency. It will not be a gift, as some have implied. Business will have to invest in dual currency capability and eventual conversion, in pricing, in planning and awareness with customers and suppliers, in training and in rewriting software. To make sure that all that investment is well informed and not wasteful, I welcome the Government's current efforts to make sure that businesses are aware of the issues they will face and so help them to prepare.
But now that the euro has been launched successfully, that is not enough. Further practical problems arise. Business will have to watch interest rates and inflation in euros as well as in sterling. Business will have to watch the harmonised index of consumer prices as well as our own RPIX. Business will have to watch the euro/sterling exchange rate and decide in which currency to trade and in which currency to raise finance in order to avoid speculation and any turbulence in financial markets.
Therefore, business will have to know what the Government are doing to maintain stability in the sterling/euro market. Business will need to know where the Government stand in relation to the euro. The Government will have to be open and clear about that. We have been promised a plan outlining the steps which both the public and the private sectors need to take to facilitate entry into the euro.

I hope that those points which concern business will be covered because it seems to me, as it does, I believe, to my noble friend Lord Barnett, that the continued success of the euro will mean that we shall have to make a decision about joining sooner rather than later.
If the Government are active and open and continue to show the same leadership in taking preparations to the next level, business should view the euro as an opportunity for commercial gain. A negative attitude by the Government will cause concerns about market turbulence. The euro will be seen as a commercial barrier and a difficulty to be overcome.

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However, the greatest danger to British business comes from those who play politics on the issue of the euro. Certainly Europe has not got it all right. Certainly there are constitutional matters which need to be explored and answers found. Certainly there needs to be more democratic accountability in the affairs of the Commission to tackle fraud and incompetence. Certainly there are differences on tax harmonisation, voting and budgeting.
But those are not reasons for distancing ourselves from Europe. We are not alone in those concerns; neither are we isolated on those issues. Our commitment to working with our partners to solve those problems is right. The biggest threat to business comes from those who exaggerate those issues to suit their own agenda—normally a backward-looking agenda.
I hope that the Government will look forward and increase their guidance and support for business as regards the euro. I join my noble friends Lord Barnett and Lord Grenfell in saying that that must include the Government's open and frank views about joining the euro because, increasingly, business needs to know where it stands in order to avoid speculation and uncertainty. I hope that the Government will continue with their sensible economic policies leading to convergence; in return, the Government can expect business to invest in the necessary preparation. That will reduce the risk about which we have spoken because, with all that in place, we shall have the essential ingredients for an informed referendum and a genuine and informed choice about joining the single currency.
5.44 p.m.
Lord Ezra: My Lords, my involvement in the affairs of Europe goes back a long way, right back to 1950. That was the year in which the European Coal and Steel Community was formed and Britain was invited to join. The then Labour government decided against that but a Council of Association was formed to represent the interests of Britain in the newly formed Community in Luxembourg.
I was then at the Coal Board and I was appointed to represent the interests of British Coal on that body. When I was summoned by the director who appointed me he said, "We have appointed you because you speak French and you understand these continentals. But you will not be away long because it is not going to work. We shall see you back here in a few months' time". In fact, I stayed for five years. The initiative taken by Jean Monnet and the founding fathers in 1950 has lasted already for nearly 50 years—and the betting is that it will certainly last another 50 years, if not more.
My noble friends Lord Taverne and Lady Williams have pointed out that at every stage of the development of the Community grave doubts and scepticism have been expressed by people in this country—and yet, at every stage the political will exhibited by our continental friends has prevailed. The concept of Europe—the "construction of Europe" as it is called—has moved step by step until we now see the creation of the single currency.
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In considering the terms of this Motion—namely; the significance for the British economy of the introduction of the euro—we must make up our minds as to whether the euro will be successful. On the basis of past experience, we must assume that it will be so and that our policies should be directed accordingly.
I should like to consider what our policy should be in what I hope will be the relatively short time between the introduction of the euro, which has now taken place, and when we, as a country, join. No doubt the noble Lord, Lord McIntosh, who has been enjoined by several of his colleagues to do so, will tell us later precisely when we shall be joining. But I shall concern myself with the period between now and then. What should our policy be?
There is no doubt at all that our policy should be to work towards the success of the euro. That is in our national interest, whenever and whether we join. That was stated by Mr. Eddie George in a speech in Bruges, a city in which seminal European speeches seem to take place from time to time, on 21st October 1998. He said:
"It is clearly in our national interest to do all that we can to help ensure that the Euro is successful".
What should we be doing in that interim period? I believe that there are three main issues to which we should be addressing ourselves. They all happen to coincide with policies to which the Government are already committed. The first is to pursue macro-economic disciplines: disciplines of fiscal and monetary policy. Those are coincidentally laid down clearly in the Maastricht Treaty. The Government, by taking the step of making the Bank of England independent so that, through its Monetary Policy Committee, it can decide on the rate of interest in the prevailing circumstances of the economy, have moved very much in the direction which is laid down in the Maastricht Treaty and is the way in which the European Central Bank will be operating.
In the matter of fiscal policy, the Government are pursuing also the line which is laid down in the Treaty of Maastricht to achieve the various objectives there established and, in particular, to maintain a low level of public borrowing in relation to GDP. We can say that we are therefore, of our own volition, moving in the same direction as the Treaty of Maastricht laid down and which is now enshrined in the adoption of the euro.
I should like to raise a point on the index for inflation. Our inflation index in this country is to achieve 2.5 per cent., based on our own calculations. Within the European Union, the calculation is based on the harmonised index of consumer prices. On that index, we have achieved 1.4 per cent.; that is below the 2 per cent. rate which the European Central Bank established. It would be desirable if we could come into line with that index.
Secondly, the euro offers a great opportunity for increasing our competitiveness. My noble friend Lord Taverne and the noble Lords, Lord Skidelsky and Lord Haskel, referred to that. There is to be greater competitiveness and greater transparency within the single market as a result of the establishment of the euro. That will fit entirely with the policy on

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competitiveness which the Government recently announced in their White Paper and on which we recently commented in the House.
Thirdly, there is the issue of the City of London, to which many noble Lords referred, in particular the noble Lord, Lord Roll, in his effective speech. We have become used to his effective delivery in these matters. The fact is that the City reacted remarkably well to the introduction of the euro. By a lot of overtime working in the square mile we adapted ourselves to the appearance of the new currency with vigour and effectiveness. There is every prospect that the City can maintain its important position in the financial operations of Europe and the world so long as within a limited time our intention is to join it, as the noble Lord, Lord Roll, and others have said.
I believe therefore that the policies now being pursued in this country, in what I hope will be the short interim period before joining the euro, are entirely in line with the policies we would be pursuing if we were full members. That augers well during the preparatory period before we join.
5.52 p.m.
Lord St. John of Bletso: My Lords, I join in thanking the noble Lord, Lord Taverne, for introducing this debate. However, I must admit that when I read the wording of the Motion:
"To call attention to the significance for the British economy of the introduction of the euro",
I read it as meaning that the debate would be more focused on the practical implications for British business with the introduction of the euro this year rather than what most noble Lords have spoken about today; that is, the advantages and disadvantages of joining up to the single currency and the cost of late entry.
I must also say at the outset that I entirely agree with the noble Baroness, Lady Williams of Crosby, when she commented that it is a pity that this debate is taking place on the day when the fate of hereditary peerages is announced, as it is unlikely that this debate will receive much coverage in the media. I was privileged to be a part of the sub-committee of the noble Lord, Lord Barnett, and also of Sub-Committee A of the noble Lord, Lord Grenfell, on trade, finance and foreign affairs, and feel that it is a great shame that the many excellent debates and reports that come out of this House on European matters are not given a wider audience and wider coverage in the media.
There is no doubt that for British business, even though we are not part of European monetary union, the introduction of the euro hailed the start of a new and exciting era. While it is well known that most British businesses are ill-prepared for the introduction of the euro, I commend the Bank of England for its series of useful publications addressing the practical issues and implications for the introduction of the euro, particularly to the financial services sector. I have also found the series of fact sheets produced by the Treasury on the introduction of the euro and the implications for the UK,
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most useful. For those noble Lords who wish to draw reference, the Treasury has an extremely useful website with all that information.
Whether one is a vehement supporter of the euro, like the noble Lord, Lord Taverne, or a vehement sceptic, like the noble Lord, Lord Shore, the harsh reality is that the single currency is here to stay and will certainly sharpen competition throughout Europe. The advantages of cheaper transaction costs, stable exchange rates and transparent price differences have been well rehearsed by previous speakers.
Clearly the significance of the introduction of the euro to the British economy will vary between sectors and firms, particularly those with large export and import exposure to the rest of Europe. What is certain is that the introduction of the single currency is a strategic, and not just a technical issue for British companies. As many commentators pointed out, European monetary union has been designed to trigger widespread change, and many markets in Europe will look very different in five years time. Despite my view that EMU is largely a political rather than an economic project, I believe that it will bring significant economic benefits. Already there has been much publicity that home owners in Britain will be offered a range of attractive, cheaper mortgages, which will be euro-denominated.
Taking the argument further and broader rather than purely concentrating on the implications for British business, one of the greatest challenges facing the European Union will be the need to reduce unemployment. Certainly for monetary union to be a success in Europe there will need to be adequate labour market flexibility. The single currency will bring with it not just risks, but also rewards. There will be winners, there will be losers. The winners among British companies will be those that make adequate preparations for our joining up to the single currency now. Whether the forecasters are right that we will join in either 2002 or 2003, all sectors of the British economy need to consider the implications now.
Despite the many planning check-lists, notably those prepared by the Treasury in its fact sheets on the implications for British business, European monetary union preparations will not just be about what businesses have to do, but also about how British companies will be setting their objectives for the future. Quite apart from changes to companies' financial and accounting systems, and pricing policies, as well as the information technology permutations, British business will need to raise awareness among its key staff, as well as undergo extensive training programmes for the transition. Companies will also need to reconsider their marketing strategies, particularly where products and services are priced in euros. EMU will make it easier for businesses to organise themselves as pan-European. That will happen through mergers, acquisitions and initiatives such as shared service centres. It is already apparent that more and more businesses will adopt the euro for trade in the United Kingdom. With some large multi-nationals about to adopt the euro as their trading currency, this will affect business right down the chain. However, the concern from recent statistics is that fewer than a quarter of small to medium-sized enterprises in

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the United Kingdom have started to make adequate preparations, even though half of them trade with the other European Union countries.
In conclusion, uncertainty about when, not whether, the United Kingdom joins the single currency, is no reason for inaction. I commend the noble Lord, Lord Taverne, for having given us the opportunity to debate this issue and I look forward to hearing from the Minister about the measures that the Government will take to implement the enormous amount of groundwork carried out by the Treasury, the Bank of England and other organisations for when, not whether, we eventually join the single currency.
6 p.m.
Lord Currie of Marylebone: My Lords, I welcome the opportunity to debate the implications of the euro for the British economy. A number of noble Lords have referred to the risks that the City of London may face if we stand aside from this project.
Initially, I would like to follow the previous noble Lord by emphasising the broader risks to British business from our delay in joining the euro. Over the past few years I have spoken to many companies in the United Kingdom and overseas and three years ago most companies in the United Kingdom and the City of London thought that this project would not happen. One or two years ago they were thinking of this purely in operational terms—a headache, rather like the Y2K problem. Only a few companies—the best—in the UK saw this a year ago as an opportunity for a strategic repositioning of their company in a changed European environment.
I contrast that with what I saw in continental Europe. I visited Deutschebank just under three years ago and I was given its manual for preparations for the euro. It was about 10 inches thick and in a large box. As I do not speak German, I used it to wedge open my door and to remind me of the importance of the issue. Similarly, German manufacturing companies are well prepared and have long thought about this, not in operational terms alone—although that is clearly important otherwise the companies may fall over in their operations and take a hit on the bottom line—but also as a strategic opportunity. Companies considering the issue in that way will benefit.
As regards British business, the problem is that too many companies are considering it as something that is going on out there, outside the British economy that does not affect them. That may be true for a short while, but fairly quickly, we shall see many companies, whether trading internationally or not, being asked to invoice in euros. They will have to face those operational issues quickly.
My concern is that when we join we shall be a number of years behind the competition. In the reshaped competitive battlefield we will be left behind. I believe that that will be damaging for Britain.
We cannot do much about that now, having started from behind. However, we can ensure that continual delays on the issue do not inflict further damage on the position of British business. For that reason, it is
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important that, having missed the first wave, the UK does not stand aside from the euro for too long. Therefore, I join other noble Lords who have called for the Government to commit themselves to the euro more firmly than they have done so far. I hope—not tonight because I do not expect my noble friend the Minister to announce a change to government policy on this occasion—that later this year my right honourable friends the Prime Minister and the Chancellor of the Exchequer will say that the Government are in favour of joining the euro and will commit themselves to a timetable that is not too extended.
There will, of course, have to be a referendum. I believe that is right on an issue of this importance. It is important that we enter this venture with the firm commitment of the British people. But it is also important that the Government put their weight behind the "yes" vote and do so early. There are several reasons for this. If they leave options open, it will be extremely difficult to jump start a referendum campaign soon after the next election. The arguments have to be built up now if the "yes" vote is to be won.
As has also been said, the commitment to join the euro will encourage British business. It will give business the steer that corporate boards need to commit major expenditure to the required preparations. If that commitment is not forthcoming, and if British business, on a significant scale, does not prepare, the danger is that after the British people have said "yes", there will be a further extended delay before we can join because the practical preparations have not been made.
Another point is that such a commitment may help to restrain some of the worst excesses that we can expect to see from the City of London and other financial markets in terms of speculation on the value of sterling. Imagine the next election campaign being fought in the midst of speculation about whether, when and at what rate sterling will join the euro. Every statement from Ministers will be scrutinised for a shift of policy, a supposed split or division, and that will cause sterling to bounce around against the euro and other currencies, causing damage to British business and making the question of ensuring the transition to the euro in the subsequent period more difficult.
There is a great deal to be said for trying to rule out those excessive convergence plays that will otherwise affect us. A commitment to enter will also free the hands of government to consider more fully the preparations required. Those include not just the transition in terms of the nuts and bolts issues of the changeover, important though those are, but also the questions touched upon as to whether the monetary policy objective given by the Chancellor to the Monetary Policy Committee would need to be changed in the period of transition and discussion with our European partners about the transition process that we would envisage for sterling to join the euro. We failed lamentably to do that when we joined the exchange rate mechanism. We should not fall into the same trap again. None of this would take away from the British people the power to express their will on the issue, but it is the Government's responsibility to give a lead and to make appropriate preparations.

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The Government and those who favour entry into Europe will also need to tackle head-on the question of tax harmonisation, raised in the debate by the noble Lord, Lord Skidelsky, who said that the euro will inevitably lead to fiscal union and political union. I do not believe that proposition. It is certainly true that there are voices calling for that, but there are equally strong voices arguing on the other side. We have to recognise that there is a genuine agenda of tax harmonisation and we need to be clear about what that represents. Successive British governments have argued for tax harmonisation—indeed in an upward direction. In some areas, such as excise duties on alcohol and tobacco, we have wished to see other countries raise their tax rates.
It is also worth recalling that the European Union and the single market, which I believe the vast majority of the House supports, were based on an initial, crucial act of tax harmonisation, which was the abolition of a vast disparate range of sales taxes and the introduction of the value added tax system. That was an act of harmonisation of the tax base—not of rates—without which the single market could not have been created. There is a strong case along those lines for harmonising corporate tax bases across Europe to avoid the games that otherwise companies can play to minimise their tax liabilities by moving transactions around the European Union.
That point illustrates the fact that the main impetus for tax harmonisation comes from economic integration, resulting from the single market. The euro will enforce that, but it is the single market that creates the pressure. We are part of the single market. We will be involved in those processes come what may. So whatever our view on the euro, we need an intelligent debate on the issue of tax harmonisation.
I believe that the British people are a sensible and pragmatic people. When the issue is put to them at the appropriate time, I have no doubt that they will look at the smooth operation of the euro—because I think that our European partners will make a real effective "go" of it—they will also look at the arguments on both sides, the weight of the teams arguing on both sides, and they will vote "yes" at that point. I welcome the launch of the euro and look forward to the timely adoption of the euro in the British economy.
6.10 p.m.
The Earl of Caithness: My Lords, I, too, welcome the opportunity to debate this important subject. I am grateful to the noble Lord, Lord Taverne, for introducing it. I can remember many occasions when your Lordships have discussed matters relating to the EEC, the EC and the EU. Clearly there is a wealth of knowledge and experience around the Chamber; indeed, today's debate has shown that to the full.
However, the more that I look back on those debates, the more a common thread has emerged. It is this. The real significance of what we were discussing at the time was seldom apparent then and turned out very differently from what many had envisaged. I have no doubt that that will also be the case today. I recall the
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debate on joining the EEC. Extremely powerful arguments were mounted by the "pro" lobby. I admit to being persuaded that the proposals were, indeed, self-contained moves limiting us to joining a common market. As hindsight has shown, they were not. It was the start of a gradual erosion of the sovereignty of this Parliament.
When it came to the ERM, I recall that many businessmen and those from the City came to lobby my noble friend Lord Lamont and me in the Treasury to persuade us that it was time to join and that, like the noble Lord, Lord Barnett, has argued today, it was time for us to set a commitment date for joining. When we did join the ERM, we all know that it did us no good.
Now we are debating the significance of the euro for the British economy in the shadow of increasingly optimistic reports about its success and with the chances of us participating in it sooner rather than later. The pressure on us to join euroland will undoubtedly increase and it will appear to develop an inevitability similar to that we have seen before. The argument, "If they are part of it we must join them", which, I believe, was one of the arguments mentioned by the noble Lord, Lord Taverne, is a weak one as it obscures rational discussion and the full significance of what is happening.
The euro, the single currency of 11 out of 43 nation states in Europe, is not an economic project. As many of your Lordships have said, it is a political project—and an amazing one at that—which gives us both huge opportunities and huge disadvantages. However, it will have very real economic consequences in every sphere of our lives: jobs, tax rates, growth, investment, mortgages, welfare and NHS spending. There are other noble Lords more qualified than me who have talked, and who will talk, specifically about the economic consequences. But one has only to look at euroland, dominated by France and Germany, to see their higher costs in, for example, unemployment, where the real jobless rate is at least three times as high as in Britain. They are seeking to level the playing field by raising our costs, not by lowering theirs. Many noble Lords have argued that the City is likely to suffer, but if Switzerland can play the role that it does, I do not see why Britain cannot play a similar role by controlling its own economy. No noble Lord has ever given me any reason why that could not happen.
The political results of the euro are of major significance. The euro is a political child born of a perceived need not only for Europe to unify but also a desire in some countries to challenge the United States and its dollar, which have long been resented particularly by the French. Eighty per cent. of the world's financial transactions and close to 60 per cent. of the world's commercial transactions are denominated in US dollars. To some, this needed to be challenged. For them, it was entirely logical that if Europe was to unify and try to play a greater role on the world stage, not only was a single currency necessary, but also nation states should hand over control of their interest rates, exchange rates, and gold and currency reserves, as well as control over tax and spending, to Brussels and Frankfurt.

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Many have not realised—this also tends to be forgotten—that with the euro there is EMU. To many people, EMU stands for "European monetary union", but we all know that in reality, and in truth, it means economic and monetary union. Having been created by political will, I have no doubt that the politicians will fight tooth and nail to make the euro a success and to maintain its success; but with that will come huge unquantifiable and different results for each of the member states involved. It is also a prelude to a single government. I can recall many Ministers of potential member countries telling me that that was never their intention, but it is increasingly clear that it is and always was. Once more, the full significance of what is being proposed emerges only after the event. The significance for Britain is, however, much clearer now. If we join the euro, we shall be setting off on the road to inevitable constitutional changes leading to the extinction of Britain as a self-governing nation.
However, I have a deeper reason for my dislike of the euro for it has an effect on the rest of the world in the same way as it does on Britain. It is as fundamentally flawed as the currencies it replaces. It is a debt-based currency. A new central bank of last resort has been created with all the same deficiencies as the old ones, only on a grander scale. With its appearance of strength, the euro will allow the European banks, supported by the new central bank, to increase the burden of debt in the world—as if there was not enough already. Surely we have witnessed so much creation of debt and its effects over the past decade that we would not invent another debt-based currency. Your Lordships have only to look at what has happened in China, Mexico, Japan, and Thailand, followed by the other tigers in south-east Asia, Korea and Brazil. The burdens of their debt have been adjusted, redistributed and increased rather than being relieved.
If noble Lords think that we have now seen the worst of such currency crises, I contend that this is just the beginning. There will be further defaults with enormous repercussions on business cycles, inflation and unemployment. Further currencies will be devalued, robbing the citizens involved of wealth and making it harder for the poorer sections of those communities to escape from the trap that they are in. More money will be created vis-à-vis loans to the countries in difficulties by lending institutions and the business cycles will continue. The financial bubble will continue to expand, supported by the new central bank, but with a difference. The 11 currencies have been locked on a fixed exchange rate for political reasons, done in a time-scale to meet political not economic objectives, and with the manipulation needed by some countries to meet the criteria for membership of euroland. This will mean that when the bubble finally bursts—as, indeed, it must for it is the very nature of a debt-based monetary system that it is created with the seeds of its own destruction—the bang will affect all of us. The results will be more severe than anything that we have seen to date. When that happens, I fear for the future of our children.
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Had we helped to create a currency based on equity or substance rather than debt, Europe could have been different. It would have had a currency with a stable exchange value and one that was not dishonest to its citizens. We could have begun to reduce the level of debt in the world and to build a collection of assets for future generations. That is something of which we could have been proud. It would have had a positive significance not only for the British economy but also for the rest of the world. On that criteria, the euro has failed.
6.18 p.m.
Baroness Sharp of Guildford: My Lords, like others, I welcome the initiative of my noble friend Lord Taverne in promoting this debate and in giving us this opportunity to discuss this important subject. Like other speakers, I should like to reiterate the degree to which, contrary to many of the predictions, even as recent as a year ago, EMU (economic and monetary union) has now happened. The euro has been launched and is becoming the medium of exchange of business in continental Europe. Within three years it will be in regular use among consumers. We cannot now turn back the clock. The launch has been successful and surprisingly trouble free. While, as all of us admit, there will be testing times ahead, short of financial meltdown the euro is here to stay.
At this point I wish to say how much I disagree with the comments of the noble Earl, Lord Caithness. Any currency is built on debt. It is a fiduciary issue, if you like. The extent to which the euro is built on debt is not greater than that of any other currency. The dollar has been largely held up by the debt of other countries. Europe has taken on the burden of looking after the countries of eastern Europe and helping them to move ahead. I do not think that we can attack it for that.
I wish to explore with your Lordships one aspect of the euro that has not so far been mentioned. As some of your Lordships know, my own area of expertise is in the economics of science, technology and innovation. I am not an expert on financial markets, nor a macro-modeller. My concern is with what some people call the "innovation system"; that is, the interplay between the worlds of discovery and invention, and practical application and exploitation. In a sense my concern is with that hoary old question of why a country such as Britain can be so good at science but so bad at carrying it through to innovation.
In this context I wish to stress two points: the word "system" and the fact that the system is interdependent. There is no simple answer to the British conundrum because a vast number of different factors impact upon each other. But among those different factors one thing stands out; namely, that there are important relationships between the macro-economic climate and micro-economic decision-taking. When the macro-economic climate is positive and optimistic, business feels confident and invests in expansion. But investment also means innovation. When we buy a new computer we replace a 486 with a Pentium. Much innovation comes about with new investment.

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Like many of your Lordships, my job entails talking to people who are involved in these issues. As far as I am concerned, this means the innovators. It is clear that for them Britain's boom-bust economy has been a major factor inhibiting precisely those decisions which are crucial to innovation—risky investments which may pay off handsomely in the long term. In other words, the sheer volatility of Britain's boom-bust economy has reinforced the short-termism of British industry.
That brings me back to the euro. We have heard much in this debate about the pros and cons of joining. However, it is also clear that life outside the euro will be tricky. We face a great deal of volatility. Sterling in effect will become a marginal currency caught as a yacht between two great liners and tossed about in the rough seas of the eddies of the two liners. We face the possibility of far greater volatility in both the exchange rate and interest rates, whereas joining euroland, offers us, surely, what we have sought for so long; namely, the guarantee of a stable exchange rate, lower interest rates and insulation from long-term external risks. The reduction of risk, cheaper capital and longer-term certainties—all of these will help to create an era of confidence for industry, boost investment and boost longer-term decision-taking.
Many of us have had reservations over the years about the euro and about the Maastricht timetable that was announced way back in 1991. Then it seemed to us unlikely that convergence could be secured across so diverse a range of economies. I for one have been surprised at how much has been achieved. As we have stressed, it has been a case of political will creating economic reality. The costs of convergence have, however, been considerable, especially in terms of fiscal stringency and unemployment. It has constrained macro-economic expansion, which in turn helps to explain Europe's poor record of innovation over the past decade.
As has been mentioned by the noble Lords, Lord Barnett and Lord Grenfell, there are dangers that the stability pact may still be too restrictive. However, there has already been a change in European industry as confidence begins to ebb back. For example, I have been immensely impressed by what is happening in Germany, which is now forging ahead with exploiting new technologies such as bio-technology and developing a new venture capital market, buoyed on by the confidence and certainties with which they look to the future.
Now that the elixir which we have for so long craved—a world of low inflation, low interest rates and exchange rate stability—is within our grasp, I do not understand why we continue to procrastinate. I therefore join my noble friend Lord Taverne in urging the Government to take a firm lead on this issue. Let us have at the very least a commitment to entry and a projected date for the referendum.
6.26 p.m.
Lord Harris of High Cross: My Lords, I join others in thanking the noble Lord, Lord Taverne, for giving us
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the opportunity to have this interesting debate. I am in some difficulty because I do not know whether he received my note giving notice that I wished to recall our first encounter at a student union debate at Exeter University, from which I think some lessons might be learned. It was 30 years ago that I moved the motion that George Brown's national plan was no more than a form of necromancy. The noble Lord, Lord Taverne, was then a junior Minister in Harold Wilson's government and his side won by approximately 200 votes to 20.
When I privately recalled the event to the noble Lord some years later, he said with characteristic candour and modesty, as near as I can remember, "Yes, I may have won the debate, but you won the argument". That is roughly my recollection. Of course in the meantime he had broken away from the old Labour Party to become one of the first standard bearers of the Social Democratic cause. Next to the noble Lord, Lord Barnett, and my old friend, the noble and learned Lord, Lord Howe of Aberavon—on this one occasion I almost said Lord Howe of Aberration—there is no europhile I would more earnestly wish to wean away from human error than the noble Lord, Lord Taverne.
From wide acquaintance with market economists in Britain and throughout Europe—in France, Germany, Italy and Spain—I can say without qualification that I do not know one who is enthusiastic for the euro, or believes that it will have a happy history. That is not surprising as euro-phoria is based almost entirely on political hopes and fancies rather than on severely objective economic analysis.
Against that background I suggest to the noble Lord, Lord Taverne, that the failure of the euro is as inevitable as the collapse of the national plan was from its inception in 1965. In a single sentence, both are examples of well-intended, even idealistic projects, based on the same fatal conceit; namely, that ambitious, artificial political constructs can for long prevail against the ineluctable pressures of fluctuating and unruly market forces. Why look at a crystal ball when we can consult our fairly recent memory?
A month or two ago the governor of the Bank of England was asked in a House of Commons Select Committee why he appeared to have let slip that high unemployment in the north was a price worth paying to check inflation in the south. In a diplomatic non-answer, Mr. Eddie George acknowledged that interest rates were a rather blunt instrument. Of course, no single rate can possibly fit the diverse circumstances in different parts of Britain. Some months earlier, a spokesman for the Scottish Nationalists—with whom I have less sympathy—posed exactly the same dilemma when he complained that interest rates were being kept too high for the comfort of Scotland just to suit the booming south-east. I could see the justice of that argument. But what if this blunt instrument of a single interest rate was being wielded not from London but from Frankfurt, to suit we know not whom?
The importance of these little local difficulties is that they remind us that the United Kingdom is itself an example of a single market within a single currency

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area. And yet, despite the advantages of a common language, internal geographical mobility and a roughly uniform tax system, the remaining differences in the United Kingdom impose severe regional disparities. If a single currency and interest rate can cause tensions within the United Kingdom, imagine the intractable, incipient conflicts among the diverse economies of euroland, which is locked into fixed exchange rates and a single interest rate. In a dynamic global economy, where is the adjustment mechanism, the buffer, to absorb the inevitable impact of changing fortunes? If the price of a nation's currency can never move or adjust, the strain will be thrown onto real magnitudes such as output, trade and employment.
Many speakers have conjured up phantom fears of our terrible future outside euroland. If the Monetary Policy Committee maintains the value of sterling, there is no reason whatever to expect that the euro/sterling rate will exhibit the volatility that the noble Baroness, Lady Sharp, referred to as being our recent history. Being able to regulate our own affairs means that our domestic rate of interest will help to achieve euro/sterling rate stability.
For smooth operation, a regime of inflexible exchange and interest rates would require increased flexibility of domestic economies. In Europe it would require the adaptation of employment, wages and working arrangements to unforeseeable changes in natural resources, such as North Sea oil, to changes in foreign trade, such as the emergence of China at some stage, and to unexpected changes in politics and technology such as I cannot even imagine.
These are real anxieties and are not to be brushed aside by the description of the noble Lord, Lord Taverne, of the strong political will that is ruling Europe today. The choice remains as it always was, between flexible exchange rates or flexible domestic economies. Even the arrogant barons of Brussels cannot have it both ways. This is a truism which the rigid political class of the European Union—which was exposed to view last week in Strasbourg—has not begun to grasp. In my view, they are heading at great speed towards a buffer; it will not provide an easy landing.
I conclude by saying that, like the other 200 trading nations who are content to dwell outside of euroland, Britain is also better off outside.
6.34 p.m.
Lord Cockfield: My Lords, perhaps I may start on an entirely non-controversial note by saying how much I agree with one specific point made by the noble Baroness, Lady Williams of Crosby, and repeated by the noble Lord, Lord St. John of Bletso: for some reason best known to themselves, the Government have decided to sabotage this debate by unveiling today their plans to emasculate the House of Lords. This is a Liberal Democrat debate, and at least the Liberal Democrats know what friends are for.
I return to the subject matter of the debate: the euro. The euro has come; it is now a fact of life. We will join—sometime; we need have no doubt about that. Individual countries are no longer masters of their own
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destiny as politicians so much try to suggest. The power of national governments over major international economic events is very limited. Governments are at the mercy of factors over which they have little or no control, ranging from the weather to the activities of rogue bankers and incompetent and irresponsible governments. The best that an individual national government can do is to see which way the wind is blowing and to take maximum advantage of it.
"There is a tide in the affairs of men
Which, taken at the flood, leads to fortune;
Omitted … is bound in shallows and in miseries".
Sadly, we show a much greater propensity to miss the tide than to take it at the flood. What is more worrying is our inability to learn from our past mistakes.
Our relations with the European Union, going right back to its origin in 1952, is a prime example of mistaken diagnosis and failed policies. We are set fair to make an equal disaster in the approach that we have adopted to the euro. Of course, in the end we will join—late and tardy as ever. Even then, the decision will not really be taken by Mr. Tony Blair—still less by Mr. William Hague, even assuming he ever gets a chance—it will be dictated by economic pressures and market forces.
We have lost a great deal already. We have lost the European Central Bank, which has gone to Frankfurt when it should have come to London. We are excluded from the new Euro XI Council, which increasingly will set the economic policies, not just of the present Europe but of a new Europe stretching from the Atlantic to the Russian border. The claim by the Government that they have secured agreement that ECOFIN will remain the supreme economic policy body shows how little they understand Europe. ECOFIN is now little more than a talking shop. Power has already passed to the Euro XI Council—and the longer we stay out, the more we will suffer.
Of course we have problems of adjustment, but to suggest that we could not have done what 11 other countries—many in much worse positions than ourselves—have succeeded in doing is absurd and insulting. Are we really less competent than the Italians, the Spaniards, the Belgians, the Portuguese and even, for that matter, soon the Greeks? If the Government have a genuine reason for dithering and sitting on their hands—and I am trying to be fair to them as I accept that on this issue their heart is in the right place, even if their head has been lost somewhere in the clouds—it lies not in economic circumstances, but in cold-blooded and purely political calculations.
The launch of the euro on 1st January 1999 was a launch at the wholesale level and effectively it concerned only the banks, the financial institutions and large companies. They know on which side their bread is buttered. They had made their preparations and the launch was completely successful.
It is not until 1st January 2002 that the euro comes into everyday use at the retail level and it is over the six months from 1st January to 30th June 2002 that the euro will replace national currencies. It is at that stage and during that period that the ordinary citizen—the man

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and woman in the street, the shopper—will be directly affected. Anyone whose memory goes back to 1972 when decimalisation was introduced will remember the appalling upset it caused, the public reaction, the criticism, the accusations of profiteering and the widespread discontent. But decimalisation was a very minor matter. It was simply the introduction of new decimal pence in place of the old shillings and pence. The pound sterling itself remained in place. In comparison, the introduction of the euro is a gigantic operation with an entirely new currency and a whole different schedule of values. Every single price will be affected. Its introduction will inevitably lead to a storm of criticism—some genuine, much bogus—and it will be some time before all this settles down.
By a genius of timing, or a disaster of timing, whichever way ones cares to look at it, the timing of the introduction of the euro for use by the public coincides with the date the next general election would probably be held. It would be a disaster politically for the government in power—whatever government—for the election to be held at a time when the storm of public dissatisfaction, or indeed anger, was still blowing. It is up to the Government to decide how to tackle this situation. At present they are keeping their heads down, pretending the problem does not exist, hoping it will go away. Unless the Government face up to this, decide on a strategy and publish that strategy, they will bungle the introduction of the euro in this country.
I know that the Government are proposing to issue what they describe as a timetable, but a timetable in itself is no good unless accompanied by a calendar which validates it and shows how this extraordinarily difficult situation is going to be resolved.
I myself, if I may be sufficiently impartial to say this, do not mind the Government getting into serious trouble on this issue. What does matter is that the country will pay dearly for the Government's failure. Enough time has been lost already. It would be a disaster for the country if failure was to crown dithering and incompetence.
6.44 p.m.
Lord Shore of Stepney: My Lords, a suitably gloomy note has been struck in the past few minutes which reflects a great deal of the thinking and articulation that we have had to endure during the past few hours. It is an absurdity to attempt to judge the effects of the euro on the British economy 20 days after its introduction. In that sense the holding of this debate is ill-timed and indeed is almost frivolous. What I find deeply depressing is that once again not only the noble Lord, Lord Taverne, who introduced the debate, but the Government, like their predecessor, have failed to rethink sufficiently their relationships with Europe.
For God's sake, let us get away from the absurd charges and the bandying across the Floor of the House against each other. I am not speaking with any sense other than of friendliness and a wish to co-operate with my European neighbours. Nor do I minimise the important part that they are playing and will play—and
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with my blessing—in the world in which we live. But what we do not seem to be able to understand is that for entirely honourable reasons they are pursuing a different goal from the one that we, the British people—most of them—wish to pursue. That different goal is what they constantly state. But we do not hear it or do not listen to it. They want to create a state. They say it and they have never said it more clearly, more loudly or more persistently than in the few weeks that led up to the introduction of the euro and with the opening of the German Presidency.
Good heavens, I have in my hand the speech made on 12th January by the German Foreign Minister, Fischer, to the European Parliament in Strasbourg outlining the aims of the German Presidency. He said—rightly, to begin with:
"On 1 January 1999 with the introduction of the euro … an important part of national sovereignty, to wit monetary sovereignty, was passed over to a European institution … The introduction of a common currency is not primarily an economic, but rather a sovereign and thus eminently political act".
He went on to say:
"Political union … must be our lodestar from now on; it is the logical follow-on from Economic and Monetary Union".
Herr Fischer was not speaking alone. I ask the House to listen to what a former Spanish Prime Minister has said:
"The single currency is the greatest abandonment of sovereignty since the foundation of the European Community … It is a decision of an essentially political nature. We need this United Europe".
What does Mr. Duisenburg, the President of the European Central Bank, have to say? He said this:
"The process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe".
I finish with what Oskar Lafontaine, the German Finance Minister, has said:
"The United States of Europe has been the aim of the Social Democratic Party [of Germany] all along".
Why do we not face it? That is their will and wish. It is not disreputable at all that they should wish that. But we do not wish that. And because our history and institutions—all the things that make us what we are—are different from those of continental Europe, we cannot and will not go along with this enterprise.
Why do we not face it? Why do not people like the noble Lord, Lord Taverne, my old friend, the noble Baroness, Lady Williams, and my friend, the noble Lord, Lord Barnett, who are frankly crypto-federalists, come out and state what their aim is—that they actually want to create that state and they welcome economic and monetary union because they know that it carries them forward a very long way?
Until we can be honest about the fundamental difference between our continental friends and ourselves, we shall not earn their respect. We shall not be able to engage in honest debate, and we shall find ourselves, willy-nilly, always in a minority, having to use the veto to prevent a common fiscal policy. Of course they are going to have a common fiscal policy. Fiscal union follows economic and monetary union as night follows day. If Britain uses the veto, virtually alone, with only one ally or so, where shall we be then?

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We shall be exactly where the Government feared most to be and criticised their predecessors for being—on the fringes, on the outside, not playing a central part, not giving a lead to Europe. I almost despair of anyone on the Europhile side ever being brought to face what the real difference is. Until they do so, debate is almost meaningless.
However, perhaps I may say a word about the economics. Of course the situation cannot be judged after 20 days. The currency will succeed within its limited terms. It will succeed or fail according to whether genuine convergence has taken place. If the minimum convergence criteria laid down in the treaty were not met, if they were fudged and avoided, then as every year goes by the differences between the real performance of different member states will grow, and the disadvantages of the weaker areas will show in terms of rising unemployment and general dissatisfaction with what has been done, and there will probably be major political disruption inside Euroland as well.
The noble Lord, Lord Cobbold, made an impressive, knowledgeable contribution. But the noble Lord asked whether we can survive if we do not join the single currency. Whether we can survive! Frankly, I wonder where he or I have been over the past 70-odd years. There are 182 separate national sovereign states registered at the United Nations. Until 20 days ago 180 of them each had a separate currency. Gosh, how did they manage it? How could they survive? Now, 11 have come together. That still leaves 169 nation states, each with their own currency. Oh dear, what are they going to do? Are they to give up? What happens to Canada? There are only 22 million people, but somehow Canada still manages to be among the G7. What happens to Australia and New Zealand? They cannot exist. They must give up at once. They must join up with Japan, or whichever is the largest economic neighbour state—just as Canada must join up immediately with the United States in order to survive! What rubbish it all is!
I shall make one final point, and it is my noble friend Lord Barnett who provoked me. It relates to the idea of inward investment being choked off. Britain alone among the member states of the European Union for nearly 18 years was a member of the EMS, but not of the exchange rate mechanism—the inner grouping. During the two years that we were a member, it was awful. Yet, throughout that period, Britain attracted the largest amount of inward investment—much larger than that of any other European Union state.
For heaven's sake let us in future face the real choices that exist between ourselves and the Europeans. Let us face the difference in genuine national objective. And, frankly, let us all be a little more sensible and balanced regarding the economic advantages and disadvantages of the single currency.
6.54 p.m.
Lord Stewartby: My Lords, we have heard a number of robust and powerful speeches. Most have been strongly committed on one side of the argument or the other. I therefore feel rather timid in confessing that
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I have not yet made up my mind as to whether entry to the single currency will or will not be the right thing for this country.
I commend my old friend, the noble Lord, Lord Grenfell, on a most lucid speech, putting the point of view that he represents. I have always admired the noble Lord's independence of mind, since he stopped me in the street in Cambridge many years ago, just after the Suez crisis, and told me that he was cutting a supervision to buy some elicit petrol for a motor car that he was not meant to have at Cambridge. I am glad to know that the noble Lord's independence of mind has continued over the many years since then.
We have heard speeches on both sides of the argument. I very much agree with the noble Lord, Lord Barnett, that there are risks both ways. The choice is not nearly so simple as it is sometimes presented. I wish to make one point, not so much from a political or constitutional point of view, about some of the risks that are inherent in membership of the single currency.
I do not see how the economies of individual member states can fail, at some point, to become sufficiently divergent to find it difficult to correct themselves without more instruments being available to them. If we remove the flexibility of the exchange rate and of interest rates, we remove the two readiest tools with which states have normally tackled imbalances that have arisen. That leaves us with taxation and public expenditure—the budget solution—or possibly more fundamental structural changes such as labour mobility and subsidies from one state to another. The constraints of the stability pact and of the treaty as to the degree of freedom that individual countries might be able to use are not necessarily sufficiently powerful or quick-acting to enable divergences in different economies to be sorted out in such a way that they would be politically acceptable within those states. That is my main reason—a practical one—for being concerned about the risks of membership.
However, there are some measures that we could take. I suggest that we do not have to be completely inactive while we wait and take a view about the future. As the noble Lord, Lord Taverne, will recall, this is the 530th anniversary of the monetary union between England and Burgundy: in 1469 Edward IV and Charles the Bold agreed that they could use each other's currencies, and indeed did so for several years. It is not by any means an exceptional instance. There have been many periods in history when currencies with international qualities have been used domestically in other jurisdictions as part of the normal circulating medium. Obvious examples are the major currencies of the Middle Ages, the florin in western Europe, the ducat in Venice and the eastern Mediterranean, and English sterling on the Continent in the 12th and 13th centuries. A later example was the monetary union in 1865 between France, Belgium, Switzerland and Italy.
It would be useful if we could accept that there will be a considerable amount of activity in euros in this country, whatever decision we ultimately take about our membership. This will start in the business community. I was pleased to read an article in the House Magazine

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recently by the Economic Secretary in which she stated that businesses could pay their taxes and rates in euros, file their accounts in euros, and so on. I must confess that I was not aware of all that. When the currency becomes tangible in 2002 it will inevitably have a degree of use in this country. I see no objection to our welcoming that and accepting that there should be a readiness in this country to use the currency whenever it is convenient. There are many examples where currencies are used in that fashion, as in the case of the dollar, which is used in many countries of Latin America and Asia alongside domestic currencies.
If I may put a rather cynical, political spin on the idea, it seems to me that those who are greatly opposed to British membership of the single currency could find this an acceptable alternative to joining, while recognising the impact and influence of the euro; and those who are anxious that we should join could see it as a valuable step in the direction which they want to take.
I therefore ask the noble Lord, Lord McIntosh, to say whether there are other measures which could reasonably be taken or which the Government have in contemplation which would facilitate this process. I do not anticipate that it would be possible to go as far as making the euro full legal tender, but I believe it would be worth exploring whether there are ways in which the euro, which will undoubtedly become an important part of economic life in the area in which this country operates, could be taken advantage of in our own economy.
7.2 p.m.
Lord Glanusk: My Lords, I too wish to thank the noble Lord, Lord Taverne, for giving us the opportunity to discuss this matter. I must also offer him and your Lordships my apologies for not being able to stay until the end of the debate.
I thought that I would illustrate for your Lordships by way of example what the euro is already doing for one business. I do not believe that that business is unique. I want also to consider the euro by itself as a currency and for the moment to ignore its political overtones.
Until the end of last year, I worked for a small import/export company. I will not take up your Lordships' precious time with a promotional description; suffice it to say it was a mathematical software company. The English office was responsible for selling and distributing the product on behalf of its American makers. We sold it using a range of independent reselling agents throughout Europe.
In traditional British style, we used to stipulate that all agents should pay in sterling. All the difficulties of balancing local currency were their problem. The consequence was that there were a number of differing prices, both below and above the norm, which was established by the international nature of the technical advertising of the product, originating in the technical journals of both the United States and the United Kingdom. This gave customers a very variable view of the product and its quality in the marketplace. It also encouraged the customers to try to set their own prices.
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These price differences were not always based on the actual standards of local support provided by each agent. In fact, the opposite was often the case: the less competent agents charged more and sold less. Not surprisingly, attempts to standardise the selling price were strongly rebuffed as any success in that direction would have been contrary to European resale price maintenance regulations.
By introducing a euro price list and invoicing in euros as soon as possible, a measure of standardisation was automatically introduced and resale price maintenance and the image of the product were restored. The agent must fix the price in his own country on the basis of the perceived added value that he provides. His price variance cannot be disguised as contingency allowances for exchange rate variations because he is buying and selling in euros. Customers are much more aware of the price in neighbouring countries because those prices, as well as all the necessary technical information, are on the World Wide Web.
By using one currency there is only one risk-taker in the chain and no one else in any of the European operations needs to add "just in case" margins to cover the contingency of currency variations. It is to be hoped that that streamlining will be passed on as keener pricing to the customer, although the cynical will say, "Not so".
The euro is here as a currency. If it survives it will transform the day-to-day transactions of most export/import businesses. Whether the United Kingdom should sign up to the political and economic baggage of the single currency I leave to those with more experience than I have.
7.6 p.m.
Baroness Ludford: My Lords, I wish to start by reflecting on the false gods of patriotism and sovereignty that some are invoking to obscure the real national interest in joining the euro. I am not an economist; I speak as a politician. However, I must disappoint the noble Lord, Lord Shore of Stepney. I am not a crypto-federalist; I am a real federalist in the sense that the noble Lord, Lord Taverne, used that word, meaning a decentralised union.
On Monday the Leader of the Opposition, Mr. Hague, warned the Conservative Party not to be the nostalgia party. He defined "Britishness" as being ambitious and self-confident, among other things, and declared that he wanted an open and mobile society.
The battle for the soul of the Conservative Party is at its most exposed over the euro. How can the Conservatives hope to appeal to the modern, multi-ethnic, urban, ambitious, "brassy" and self-confident people of Great Britain whom Mr. Hague says he wants to attract if they rule out the euro for a decade, even if it is successful? Such people know that the spurious arguments put up by the Euro-sceptics about loss of sovereignty if we join the euro make absolutely no sense. Such sovereignty as we still possess in a globalised world—as the noble Lord, Lord Cockfield, pointed out, that is not much—is a tool to be used to further the security and welfare of the nation, not preserved in aspic. We have pooled sovereignty in

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NATO because that is the best way to secure the protection of our citizens. Similarly, the achievement of prosperity for our citizens justifies pooling monetary sovereignty.
The acceptance of the euro by British people and their rejection of "little Englandism" will in the end be on pragmatic grounds of economic advantage—cheap money and protection from a volatile pound. But I believe that there are two other factors that will be influential, one perhaps weighing especially with older people, the other with younger ones.
An acquaintance told me the following anecdote: "My boss is your archetypical traditional Tory businessman and an ardent Thatcherite. However, he shocked me recently with the following remark, 'I fundamentally disagree with the euro when it comes to economics and sovereignty; but when I was four years-old I witnessed London being blitzed and saw many horrific casualties. If the euro can in some way guarantee that those things will never happen again on this continent, then I will live with any economic or other consequences'".
Clearly, that gentleman and I do not see eye to eye on some aspects, but we are at one in believing that a united Europe which delivers peace is an enormous prize, as the noble Lord, Lord Cobbold, also pointed out.
The other factor, more persuasive with younger people perhaps, is that they are becoming used to change in all areas of their lives: technological innovation, flexibility at work, no jobs for life, social mobility and constantly changing fashions and homes, not to mention partners. Such young people, used regularly to upgrading their mobile phones and keeping up with the latest trendy clubs, are utterly unfazed by the prospect that the pound in their pocket will become the euro in their pocket. When they see that Britain's choice is to swap the glorious "national sovereignty" world of high interest rates and high currency volatility, from which we have suffered so much since the war, for the iniquitous "integration" world of low interest rates and nil currency volatility, there will be no contest.
Is it not extraordinary that the party which produced the stricture by the noble Lord, Lord Tebbit, about getting on your bike to look for work, the warning by the noble Baroness, Lady Thatcher, that we must face the brave new world because "there is no such thing as society", and the musings of Mr. Major on an evolving classless society, should be so shy of embracing movement and change in something so practical as the currency we use?
In my remaining time I want to talk about the benefits of the euro in lower costs, particularly for small businesses and individuals, and the costs to the British economy, and especially that of London's, of isolation from the eurozone.
I was astonished to hear the noble Lord, Lord McIntosh of Haringey, state in his rather dismissive reply to me on Monday:
"We have never said that a reduction in transaction costs is one of the principal benefits of European monetary union".—[Official Report, 18/1/99; col. 366.]
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If that is the case, why does the Treasury's pack on "Business Preparations for the Euro" include in question and answer format the following in a factsheet entitled, "the introduction of the euro and the implications for the UK"? It asks:
"Will the euro help my European competitors?".
The answer is:
"The single currency will sharpen competition throughout Europe and it will influence the markets in three important ways".
First, it refers to the removal of exchange risk, and, secondly, to transparent price differences. As an aside, many small firms are forced to publish euro price lists and then bear the currency risk. The Treasury document refers thirdly to "cheaper transactions costs". It says:
"The single currency will allow countries in the eurozone to trade with each other without changing currencies and that will reduce transaction costs. It will cost less for companies to make payments within the eurozone".
I suggest that the Minister needs to come up to speed on what the Government, according to their own printed material, are saying to British business.
The same applies to individuals who go on holiday. British people even now will be affected when they go on holiday. If the Minister wants to win a referendum—I am sure that he does—it may be advisable for him to make an effort to promote the virtues of saving money.
I turn to the impact of exclusion from the euro on the City and the rest of London. The City's official view is that London's position as Europe's premier financial centre is unassailable. I share the appreciation of London's assets, from its relatively enlightened financial services regulatory regime to its critical mass of international banks and its attractions as a cosmopolitan world-class city. There are approximately 250 EU-based banks with branches or subsidiaries in London. One-sixth of the City's turnover originates in other member states. But there is an element of whistling in the dark about official pronouncements. The report already quoted this afternoon that only 5 per cent. of City opinion supports the Conservative policy of a 10-year self-exclusion from the euro shows where the City believes its real interests lie.
There are 250,000 financial services jobs in the City. There are half a million more jobs in London—many in Docklands or other new centres such as Croydon—that depend on the financial sector. That is almost one-quarter of London's jobs. If one adds in the service industries, particularly tourism where a high pound will harm or destroy vital jobs in hotels and catering, one sees that a good number of jobs in London depend on the health of the financial sector.
Even if the risk of the UK and the City being marginalised from the biggest financial event for decades is not felt in London in a spectacular and immediate way, it will be so felt in years to come. The City is at least as well prepared for EMU as other European markets. I congratulate the City on its massive effort over the new year, but the inaction of government damages that.
There is already evidence of disadvantage, such as the loss of the long-term bond market business from LIFFE to Frankfurt, the launch by German banks of tracker

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euro funds, and the GEC-Alsthom listing in Paris. There will be disincentives to foreign direct investment which London's other attractions may not be able fully to overcome.
Londoners will not thank a government who put their jobs at risk by prevarication and lack of resolve. The longer we stay out, the longer the risk. That risk is indirect, through loss of political influence, as well as direct in terms of risk to business. How will we be able to argue as effectively as we would want for financial services regulation to avoid excess bureaucracy, such as against the imposition of a withholding tax which the City strongly believes will deter business from London (and should be dealt with on a bilateral basis between Germany and Luxembourg), if we are excluded from the inner core of eurozone countries and specifically the Euro-XI meetings of finance Ministers?
In conclusion, the Government need to switch from "prepare and decide" to "decide and prepare" because the delay and uncertainty is harming the UK and the London economy. The British public is willing to be persuaded of the benefits of joining. Eighty per cent. of people believe that we will join eventually and the sooner they are given the chance to vote yes in a referendum, the better. All that is lacking is leadership from the Prime Minister and his colleagues.
7.15 p.m.
Lord Nunburnholme: My Lords, first, I congratulate my noble friend Lord Lamont on his speech. I have always considered him to be one of the best Chancellors that we have had. I am also delighted to hear that he agrees with most of my views. I also congratulate the finest speaker that this side of the House has at the present moment. I refer to the noble Lord, Lord Shore of Stepney.
I begin by dispelling very quickly two current myths. The first is that we have to go into the euro; otherwise, we shall lose trade. The assumption is that the European Union will put in place tariff barriers against us. It is not in a position to do so. The trade balance in its favour is £6 billion to £8 billion sterling, apart from the £4 billion that we contribute to the European Union at the present time. Furthermore, if they erected tariff barriers there would be a by-product. Over the past 25 years there has been considerable inward investment into this country, for example from the United States of America and Japan. If tariff barriers were put up, which is what would happen in effect, for example in relation to Japanese motorcars, they would retaliate. The EU can do nothing about it. We do not have to go in. It is a myth and propaganda.
The second myth is that if we are not in the Council of Europe we shall lose influence and we will not be able to bend the results of the decisions of that body. With the Franco-German alliance, which is almost an axis, if we are in we must abide by the decisions of those two governments and we can do nothing about it. We shall be outvoted every time. If we are outside and they want us to do something by way of tax harmonisation, for example, we shall say that that will
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cost us so much and ask what they will give in return. They may say that it is for the good of the EU but we will say that it will cost so much and ask what we can have back in return. If they say that they cannot do anything we shall say, "We are sorry, gentlemen. Good afternoon".

The next point is perhaps very unpalatable, but I must make it. Last week M. Jacques Santer with his bluff, aided and abetted by Pauline Green, MEP, demonstrated, first, the uselessness of the European Parliament and, secondly, the fact that Brussels is a cesspit of corruption. I do not have to give precise examples; we all know them. However, it is endemic in Italy. Apart from anything else, the situation is very unfair to poor people who cannot afford to bribe the judges. Noble Lords who are good Socialists should consider what is happening to the poor people of Italy.
Another example relates to the farmers of Greece and Italy. They have been given farming subsidies by the EU. Unfortunately satellite photographs have proved that some of the crops for which they have claimed have never existed.
If we stay out, we retain our independence and economic flexibility. If we wish to have a competent economy we must be fast on our feet. It is no good going to the Commission and receiving the result three months later. One has to do something within three minutes. I know that from days of old as an options dealer with the Stock Exchange. One had to be very quick.
7.21 p.m.
Lord Beaumont of Whitley: My Lords, I intervene to put a view from the loyal opposition within my own party. I say "opposition" because the stand I take on the euro is against the trend of Liberal Democrat policy; and I use the word "loyal" because I take that stand for essentially Liberal reasons. There is a widespread assumption that all Liberal Democrats are solidly in favour of EMU and a federal Europe. I have heard several people say recently on this subject about my party, "Oh, they're the worst"—a compliment which will be appreciated by my own Front Bench. But that idea of a monolithic Liberal Democrat party is most misleading. Monolithicity is not a notable characteristic of Liberals for the simple reason that it is not liberal.
If I am to support the statement I make that the party is not monolithic on the subject, I would point out that there is a strong Green element in my party. Indeed, when I and others make the claim that the Liberal Democrats are the greenest of the established parties represented in Parliament, I seldom find myself contradicted; and, sitting as I do on the Executive of the "Green Lib Dems", I find myself among a group of people who have irreproachable credentials as Liberal Democrats but who find themselves increasingly opposed to GATT, WTO and the economic side of the European Union.
Before I am dismissed as another eurosceptic whose views are therefore not worth listening to (and I must say that there is a lot of that kind of dogmatic intolerance among Europhiles), I should like to state my

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claim to being a Europhile. As long as I can remember, I have been passionately in favour of closer co-operation within the countries of Western Europe. Some of your Lordships may remember that in 1962 a conference was held in London called "Europe After Britain Joins", organised, among others, by the European Commission with the help of Mark Bonham-Carter, the then Lord Gladwyn, and, to a lesser degree, myself. Indeed, I remember with pride that immediately after Britain's entry, I was one of the guests at a small dinner party given by the European Commission for those who had helped lay the foundations before the other parties jumped on the bandwagon. So, to anyone who would dismiss me as a Eurosceptic tout court, I can display my medals and my scars earned on their side in the dispute.
I would not go back on anything that I then believed. But, along with many others, I was the victim of a con trick. The campaign to get Britain to agree to join centred on the economic advantages, and few of us ventured to murmur that that was,
"not it at all, that is not what I meant at all"
to quote a poet who, judging by his Notes Towards the Definition of Culture would have been on my side of the argument today. Many of us were principally concerned with questions of peace in Europe after centuries of war; and some of us with the revival of the concept of Christendom. But we were told that we could not win a referendum unless we had the City on our side and that just as the European Iron and Steel Community had been a necessary stepping stone to the EEC, so the EEC was a necessary stepping stone to the EU. So we smothered our not very strong doubts and went along with it.
Now I find myself in a union which is more and more dominated by the conventional economics which I increasingly see as irrelevant to the important things of life. I find myself more and more appalled by the bureaucratic restrictions and persecutions revealed week by week by Christopher Booker in the Sunday Telegraph and more and more sceptical of the justifications for them which are put forward. We are told that we must have a level playing field. Why on earth should we have a level playing field? Heaven knows that I am not a subscriber to Ricardoan economics, but I gather that Europe is, and, as I understand the economics of Ricardo and Adam Smith, we should not be in favour of a level playing field; we should be in favour of recognising and using comparative advantage, and that is the opposite of the level playing field.
We now find ourselves being lured into this common currency. Once again it is a stalking horse for something much more important. There is widespread agreement—and hardly anyone ventures to deny it—that a single currency is hardly separable from a federal Europe. To take one simple reason, with a single federal bank and a single currency it will be more difficult to help the economies of outlying regions of Europe without a single central political power base to take decisions which will be unpopular with rival claimants.
I am a Liberal and a Green. I believe in devolution, and that small is beautiful. For all those reasons, not least the first, I am adamantly opposed to a single
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currency. If there is a referendum on it, I shall campaign as strongly against it as I can. What is more, I suspect that we shall win.
"Smile at us, pay us, pass us; but do not quite forget:
We are the people of England [and for that matter of Scotland and Wales] and we have not spoken yet".
I have spent much of my life having the wool pulled over my eyes by those who serve Mammon. But even at the age of 70 it is not too late to see the light. I shall fight for Europe, but it will be for the Europe we liberated in 1945, the Europe of the Council of Europe where I once had the honour to lead the British Liberal delegation, and not the Europe of the Economic Community, the common agricultural policy and uniform VAT. It will be for a Europe which respects and nurtures diversity within its ranks; a Europe of culture, not of economics.
7.27 p.m.
Lord Tanlaw: My Lords, I am disappointed that the noble Lord, Lord Beaumont of Whitley, has changed views as a Whig that we shared at university many years ago. Nevertheless, I am grateful to him for his contribution. The noble Lord, Lord Taverne, drew attention to this important point. The Liberals—the Social Democrats and Liberal Democrats—have been entirely consistent throughout their political time in these parliaments in asking since the 1950s for a quick and clear decision on Europe.
I listened with great interest to the powerful maiden speech of the noble Lord, Lord Lamont of Lerwick, advocating the case for wait and see. However, in declaring my interest and views as a proprietor of a manufacturing export business in this country, I believe that I shall express the worries of hundreds, if not thousands, of other British manufacturers, large and small, which are faced with the problem of high interest rates, and high sterling value plus its possible volatility. If Britain does not join up with euroland very soon, many companies will be faced with economic extinction. Alternatively, they will be forced to transfer their manufacturing businesses to mainland Europe. I totally disagree with the noble Lord, Lord Shore of Stepney. Without doubt, such a stand will discourage inward investment. That will be to our complete disadvantage. I have plants in this country and in Germany and I know that that stand will be to the disadvantage of British plants here—and, if it continues, there will be considerable unemployment.
The other point that has not been put forward in the debate is that other European countries, Germany in particular, will be able to export into this country European goods at a competitive price, which at present deutschmark goods are not, and that will be to the disadvantage of British workers.
The debate is a timely opportunity for the Government to say exactly when they intend to join Euroland and how they intend to go about it. That information is equally important for businessmen as for the Opposition when they are considering how long we should wait and see before going into Europe: 10 years, five years or 20 years? I do not know. It is important for business people to know. As a businessman, which

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I am most of the time, I have to deal with practicalities. It is difficult to deal with some of the "high-falutin stuff" which we have heard from around the Chamber today. It is divorced from reality.
We have listened to more than 20 speeches, but perhaps I may take up a point made by the noble and learned Lord, Lord Howe of Aberavon. He went back in time to King Canute. I want your Lordships to imagine that this Chamber is a time machine and to go back 35,000 years to the onset of glaciation. We would find over the banks of the River Thames perhaps a darkened sky and flecks of snow. The Thames would be frozen. The time of year would be mid-summer. There would be a bonfire around which on one side might be the Neanderthals and on the other side the homo sapiens. They had to make a key decision: whether to go south into Europe or to remain and wait and see whether there would be a change in the weather. Palaeontologists have told us that the Neanderthals became extinct because they chose a wait-and-see policy and did not go into Europe! I said that they were extinct, but having heard some of the speeches today I wonder whether some of their chromosomes still exist in homo sapiens. Some of the cases put forward today were totally absurd and unreal. It is about time that we had something more definite from the Government, or will the Minister say that we must wait and see?
Although I am a manufacturer, my subject is time. One of the other important points which businessmen want to know is when we are going to adopt European time. There will be an opportunity to debate a Bill on that, but what is the Government's attitude? Are they going to put us off again? They must be aware that in 1748 Benjamin Franklin wrote in his Advice to Young Tradesmen,
"Remember that time is money".
If you are going to change the money, you have to change the time. If we are going to adopt European money, why not adopt European time?
The noble Lord who is to reply cannot give an answer because he works for the Department of Trade and Industry, which has nothing to do with time zones. The Home Office deals with that subject, but when asked it says that it has received no representations for a change in time; that all the representations have gone to the Department of Trade and Industry, so that so far as it is concerned, there is no demand for a change to European time. Is it not the moment to consider the absurdity of having one senior Minister for the big hand of time and another senior Minister for the small hand of time; that is, one for the time zone and another for the timescale?
The Government have lost one of my Bills on the timescale and will do nothing with the Bill to be introduced by the noble Lord, Lord Archer of Weston-super-Mare, or will they? Businessmen want to know. We have heard nothing except that there is no demand for a change. Will the Minister say whether the chambers of commerce, the Confederation of British Industry and the trade associations made any representations to him or his department for a need to change to European time? Not to change is most
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inefficient. Will he say that the Government will use their public relations machine to encourage us to go into Euroland, into the market of 300 million which we all want to enter, without any penalties? Will he say whether we shall change to European time?
It is absolutely pointless to put forward a pro-European view, if that is the Government's intention—many people thought that it was—if they do not intend to change to European time. When I spoke to those in the office of the noble Lord, Lord Archer, I was told that he was looking forward to his Bill coming to this House in March. Can the Minister say anything about that? No, he cannot because he has to wait for the Home Office to comment. Can he say whether there is a possibility that the subject of time will come under one ministry, which should be his and not the Home Office? Time and money are related—and it is about time that that was recognised by this Government.
7.36 p.m.
Lord Newby: My Lords, one thing on which all speakers in the debate are agreed is that the introduction of the euro will have a significant impact on the British economy and the politics of Britain and Europe. We on these Benches are grateful to all noble Lords who have taken part in the debate.
The importance of the introduction of the euro on 1st January was not obviously shared by the Government or the Opposition. The Chancellor and his Treasury Ministers chose not to attend the launch because, according to the Treasury, no substantive issues facing Britain were being discussed. That has been a refrain over the decades in terms of Britain's relations with Europe. One noble Lord spoke earlier about missing the tide, which I suspect is an example.
While the Chancellor was choosing not to attend the launch, Francis Maude was in Hong Kong, courtesy of the merchant bank which supplements his meagre salary as an MP. Given the Tory policy on the euro, I can well understand why he wanted to be as far away from Europe as possible, but I thought that that was taking things to ridiculous lengths.
Today we have heard many arguments about why it is in Britain's economic interest to join the euro. We have heard about the benefits of lower interest rates; the automatic ending of exchange risks for 55 per cent. of our trade; and the ending of extreme speculative attacks on the currency such as that which drove us out of the ERM and which many of us fear will be repeated if we remain outside the euro. We have heard about price transparency and reduced transaction costs. We have also heard about the more stable framework for business which the euro will bring and the positive effect it is likely to bring in terms of economic growth and investment. We have also heard about the economic cost of staying out.
Many noble Lords, including the noble Lords, Lord Cobbold and Lord Barnett, the noble and learned Lord, Lord Howe, and my noble friend Lady Ludford, spoke about the potential cost to the City of Britain remaining outside the euro. Although the noble Lord, Lord Skidelsky, suggested that the City's position as the

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pre-eminent financial centre of Europe was not threatened, I believe that that view is complacent. During the short time that the euro has been in operation there has been a loss of business from the City and I believe that that loss will inevitably accelerate unless it is clear that from some near date Britain and the pound will form part of the eurozone.
We have heard about the potential cost in terms of inward investment and the related point made by the noble Lord, Lord Tanlaw, about British businesses transferring their operations into the eurozone if we stay out, and we have heard about our inability to take a full part in international discussions on, as the noble Baroness, Lady Williams, expressed it, the new rules of the game. We have heard too about the problem of our lack of propinquity as the noble Lord, Lord Roll, put it, to the European Central Bank.
Along with those economic costs, we have also heard about the political costs of staying out. Being semi-detached within the EU, has, in our view, over the years cost Britain dearly in terms of our ability to influence the shape of the developing union and also, as the noble and learned Lord, Lord Howe, put it, our ability to control many decisions which affect the economy and society domestically. That political cost will now be compounded for as long as we remain outside, the more so as the three other non-members of the euro zone, Denmark, Sweden and Spain, rush to join, leaving Britain once again in unsplendid isolation.
The principal fact which has been dawning on me over the past three weeks is the speed at which the euro is being adopted, not just within the euro zone but also in Britain. We have begun to see invoicing in euros, staff asking to be paid in euros for mortgage purposes, euros being used in economic commerce, as the noble Lord, Lord Haskel, pointed out, and people opening euro bank accounts.
Like the incoming tide on a low, flat beach, the euro is rushing in with a speed and certainty which, in my view, is threatening to outstrip the action of government and the thinking of opposition and many pundits alike. Standing against the flow are an increasingly waterlogged set of British Canutes. The noble King has been invoked by three speakers during the course of the debate. However, unlike him, the latter day Canutes simply do not accept the inevitability of what is happening around them. They contain several distinct strands of opinion.
The noble Lord, Lord Harris—uniquely, I think—believes that the failure of the euro is inevitable. He also seems to believe that the UK is not an optimal currency area. I am afraid that I disagree with both his analysis and his prognosis. Another strand of opinion is represented by the noble Lord, Lord Lamont, who has never believed or, at the time, did not believe that there would be a single currency; that if there were to be one, it would be unworkable or that if it worked we should not be part of it. He believes that Britain can best fulfil its destiny with the maximum degree of independence from the EU. I profoundly disagree with that view, but I see that it has the advantage of clarity.
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There is also the official Opposition policy, which is, basically, to wait and wait and wait and see. That policy may paper over many of the cracks in the Tory Party but it has clearly not dealt with the problems identified by Messrs. Stevens and Connolly. But, in my view, any logic that it might contain disappears by ruling out membership during the lifetime of two parliaments.
If, for example, the euro was clearly a success in a couple of years' time, the Conservatives would still be committed to waiting at least another five years before being prepared to enter, although, frankly, if they continue to adopt the line of the noble Lord, Lord Skidelsky, in terms of putting up a whole series of economic tests which are, almost by definition, impossible to be met in advance, it seems to me that in reality their policy would be never to join.
The noble Lord, Lord Skidelsky also made the point that Europe should be a choice but not a destiny—that is, that one should retain the option of one's relationship with Europe rather than committing oneself irrevocably to it. In my view, that attitude has bedevilled our relations with Europe. That is why we are not taken seriously in Europe and, if we continue to entertain that view as a nation, we shall never play a full part in Europe and we shall remain frustrated.
There is also a group of people who claim to be pro-European but anti-European currency. I am extremely sorry that a number of the leading exponents of that view within your Lordships' House have been in the Palace of Westminster today but have not been able to find time to join the debate. I believe that that view is the least intellectually credible. The euro is the centre of the European project; it is the single most important thing that Europe is doing. In reality, to be in principle against British participation in the euro makes it impossible to be at the heart of Europe or even to be a credible long-term member of the EU. Incidentally, I do not include my noble friend Lord Beaumont within that group. He has impeccable green credentials, but I would love to be a fly on the wall at any discussion he might have with the German Foreign Minister, his fellow "green".
However, what unites all those policies is the lack of a realistic alternative long-term view for the future. Just how will Britain prosper, either detached from Europe—the Lamontian view—or semi-detached, the Official Opposition view. I had hoped that the noble Lord, Lord Lamont, would have had time to deal with this today. I look forward to hearing his blueprint for the future at some future date.
Certainly, nothing in Mr. Hague's speech yesterday suggested that he had any alternatives. On Europe, the speech was noticeable only for saying that integration had gone far enough and that in advocating further moves towards integration, Europe, in its entirety—those poor misguided fools—was living in the past.
Before David Landes' book becomes a text for the sceptics, anybody who reads it will have found a long description of Britain's relative decline ascribed to the lack of systematic approach to scientific and technological inquiry and how that was translated

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through the education and industrial system into economic growth. I strongly agree with what the noble Baroness, Lady Sharp, said on that issue.
Finally, watching the euro tide rise around their feet are the Government. Their attitude reminds me of that of the reluctant bride. This is, perhaps not so erudite a simile as Andrew Marvell's "coy mistress", who was invoked by the noble Lord, Lord Roll, but a proposition has been made. Secretly, she would like to accept. She knows her family would accept it but is scared of what her friends would think and say, so she prevaricates. She sets conditions while she flirts with her intended but goes coy when a date is proposed. If the Opposition are ingloriously temporising because they do not really want to go in, the Government are ingloriously temporising because they do not have the courage to say that they want to go in.
In this debate we have heard about the benefits of joining the euro and the costs of staying out. We have also heard of the potential costs of going in. However, we on these Benches have no doubt as to where the balance of advantage for Britain lies; we should be in and the sooner the better. It is time for the Government to accept the economic realities, grasp the political nettle, announce a target date for entry and, as suggested by the noble and learned Lord, Lord Howe, introduce a paving Bill in this Parliament. For many years to come we shall bear the cost of any further and unnecessary delay.
7.47 p.m.
Lord Higgins: My Lords, I join with those who have congratulated my noble friend Lord Lamont of Lerwick on his maiden speech. It is fair to say that it was uncontroversial, although, as the noble Lord, Lord Barnett, pointed out, that might depend a little on whether you agreed with what he said. None the less, he made a number of extremely important points, not least that a single rate of interest in euroland was wrong for most countries. More important perhaps, were the points he made in relation to the dangers to democracy of treating euroland or, indeed, the European Union as a whole, as a single state. We shall certainly look forward to hearing from him on many future occasions. We have also had excellent contributions from a number of hereditary Peers. Alas, in the light of the events earlier this afternoon, our opportunity to hear them on future occasions will be severely limited.
One matter upon which all major parties now seem to be agreed is that the issue of a single currency should be put to the people in a referendum. From a strictly personal point of view, I have always viewed referendums as an alien concept, incompatible with our system of representative democracy. However, given the current situation, it is absolutely essential that the issues we are debating today should be put to the people in a way which is, as far as possible, easy to comprehend. My experience of my constituency over some 30 years was that most constituents were inclined to ask their Member of Parliament what it was all about rather than to express any firm view one way or the other. Given the point made by the noble Baroness, Lady Williams,
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that we need publicity on this matter, perhaps we should produce a video of today's debate and circulate it ahead of the referendum.
Be that as it may, there are two aspects of the matter which we have been discussing. The events of 1st January were clearly of considerable significance both to the UK economy now and, of course, in a different set of arguments, in relation to the future. I was not surprised that the events on 1st January went very smoothly. That is the easy part of the job. I noted carefully what my noble friend Lord Cockfield said about the decimalisation experience. In fact, the mechanics of it did not go at all badly. But what is now being undertaken is vastly more complicated. There were undoubtedly some unfortunate effects in relation to inflation resulting from the public's problems in coping with the new currency.
But the fundamental issue here to which we must pay close attention is the fact that those joining the single currency are proposing to give up for all time the major means of adjusting for differential movements in costs and prices. The larger the area is where that single currency exists, the greater the problems are likely to be. The jargon of one size fits all in relation to exchange and interest rates and fiscal policy overlooks the serious problems which are likely to arise if that major economic mechanism is given up over a large area.
Indeed, it is likely to cause either endemic unemployment in certain parts of the area or alternatively there will have to be major transfers of resources from one place to another in order to compensate for it. That is the crucial problem which is likely to have implications both for the European Union generally and for our own country.
I was rather surprised by the opening remarks of the noble Lord, Lord Taverne, when he referred to various countries qualifying. The reality is that with regard to the domestic criteria, a number have not qualified. I believe that eight out of the 11 applicants are still in excess of the deficit. Indeed, in the cases of Italy and Belgium, the figure is something like 120 per cent. compared with the requirement of 60 per cent. The problem with that is that given they have gone ahead, there will be serious strains in Europe which will have repercussions not only for them but also for us. While the noble Lord argues that we should not delay, he overlooks the costs which have been imposed on those who have gone ahead before there has been genuine convergence. That is a point of considerable importance.
In that context, there has been some confusion as regards the distinction between convergence in the sense of deficits being similar, within certain limits and so on and the issue of whether the economic cycle in particular countries should be synchronised. We have rather slid into the view that somehow it would be a good idea if all countries within the European Union were synchronised. It is fairly apparent that if that is so, the size of the fluctuation is likely to be greater than if there were a variation in the state of the economic cycle. I shall be interested to hear the Government's view on the extent to which they believe it is important that our economic cycle should coincide with that in Europe before they contemplate joining.

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Various points of view have been expressed today, but it is not really in doubt that there is clearly considerable pressure for tax harmonisation in the European Union. In that context, the noble Baroness, Lady Williams, complained about the dangerous tightness of the stability pact and the arrangements in relation to that. I share that concern. But clearly there is enormous pressure for moving towards harmonisation of taxes. That has massive implications on sovereignty. The Government's attitude on that has changed considerably. In April 1997, the present Prime Minister was saying that the single currency is not just about economics but about sovereignty as well, a view which has been modified significantly by the Chancellor who has said that the constitutional factor is not an overriding one.
We must remember that the power of Parliament and the power of the House of Commons in particular throughout history has been based on the control of money, the right to raise taxation and control over how it is spent. Consequently, it must follow that giving up powers with regard to flexibility on taxation must have a significant effect on the sovereignty of Parliament. Indeed, that is an issue which cannot be disregarded.
There are other more specific problems with regard to tax harmonisation. The Government's attitude is not clear. My noble friend Lord Skidelsky referred to withholding tax and whether the Government will use their veto if a satisfactory outcome is not reached in relation to that. There are pressures also in the field of indirect taxation, with regard to VAT and so on. I remember my experience in a previous incarnation when I was trying to protect VAT zero-rating, the issues on the sixth directive and so on. They suggest that it is not an easy issue. I am reminded of a remark made by one of my senior officials at the time that, "If the Italians collect it, we will harmonise it". But that was perhaps a rather biased view in the course of hectic negotiations.
One point which I find rather difficult is that made by a number of noble Lords who have great experience in industry and so on; namely, the issue of inward investment. A number of people have said that inward investment will suffer if we do not join, but that has not really been backed up by argument. I listened extremely carefully to the point made by the noble Lord, Lord Tanlaw, but it depended on the assumptions he was making about the relative exchange rate. Nevertheless, it is an important point which we should consider.
The other extremely important issue is the position of the City. I listened with great interest to the points made by, for example, the noble Lords, Lord Roll and Lord Cobbold, who have immense experience in that field. Clearly it is a tremendous challenge for the City but we should not feel that it will be impossible for the City to meet that challenge. To a large extent, it will depend on the way in which the Government support the City on a number of specific issues, some of which have emerged only recently. There was the point rightly made about the move from LIBOR to EUROBOR and also, whether one quotes the euro in terms of sterling or sterling in terms of the euro. In the event, that has not worked out in the way one might have expected.
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It is right that we should be concerned about the City and we must watch the situation very carefully, but in that respect there are a number of important aspects in which the Government can play a major role.
Listening to the noble Lord, Lord Taverne, I was interested to note that while I presume he chose the terms of the Motion, he dealt in a relatively small way with the significance for the British economy and dealt largely with the broader political issues which were touched upon with great passion by the noble Lord, Lord Shore.
The noble Lord, Lord Taverne raised the question of whether it is reasonable to say that one is in favour of Europe but not in favour of a single currency. My own feeling is that if one analyses the problem very carefully, it is not an unreasonable view at all to say that one is enthusiastic about Europe, and in particular, one is enthusiastic about the single market, but the implications of going ahead with the single currency in Europe itself raises problems. We must certainly all hope that the initiative taken in Europe is a success. If it breaks down for the reasons that I mentioned earlier, the implications for the British economy and Europe as a whole will be extremely serious indeed.
Having said that, we must consider whether, on all the merits, it has worked out satisfactorily and whether it is in our interests to join. That raises important questions of timing and there is a strong argument for pursuing the policy which we, on this side of the House, adopted; that is, we should see how it operates in practice and then take a decision on the merits, taking fully into account the interests of Britain.
8 p.m.
Lord McIntosh of Haringey: My Lords, let me be controversial at the outset by congratulating the noble Lord, Lord Lamont of Lerwick, not for the reasons given by the noble Lord, Lord Higgins, but on his magnificent and entirely justified scorn for the convention of this House that maiden speeches should be uncontroversial. It was a controversial speech and a good speech. I just wanted to get that off my chest before I said anything else.
The noble Lord, Lord Cockfield, accused the Government of upstaging this debate by having it on the same day as the Statement on reform of the House of Lords. Not only did we not do that—it was the Liberal Democrats' choice of date—but also they upstaged themselves pretty effectively by announcing today that their leader will stand down from leadership later this year. I do not believe that they will get many column inches—nor will I—for this debate in the future.
The noble Lord, Lord Taverne, described this as one of the most important world events since 1945. I would have agreed with him except that, as he was saying those pregnant words, the Chamber was emptying noisily and rapidly. Perhaps some noble Lords think that their own future in this House is more important than world events. I only suggest that as a possibility.
I have to make two speeches—or perhaps two half speeches; one on the wording of the Motion which concerns the significance for the British economy of the

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introduction of the euro and, listening to the debate, one about government policy and whether or not we should enter EMU. But I shall do both to the best of my ability.
My format for the first half of the speech will be the words of the noble Lord, Lord Taverne, himself. The argument seems to go from, "It will never happen" and "If it happens, it will fail", to "Even if it happens and works, it is not for us". That has been proved to be the case in recent times and in the course of this debate.
In our view this debate could not have come at a more significant time. The launch of the euro 20 days ago marks a dramatic change in the European economic landscape. The repercussions of this historic step will be felt not just by the countries which chose to join economic and monetary union, but throughout the rest of Europe and indeed across the globe. Overnight the introduction of the euro created the world's second largest single currency zone with nearly 300 million consumers, accounting for around one-fifth of global trade and GDP. That is a currency bloc of equivalent size to the United States.
That disposes of, "It will never happen". Now we can look at, "It will fail". A number of noble Lords, notably the noble Lord, Lord Lamont, and my noble friend Lord Shore said—I understand their point—that 20 days is not a test of whether or not the EMU will fail in the longer term. But it is a hurdle which has been successfully overcome which many people said would not be overcome. In fact, the launch of the euro in financial markets across the world could not have gone more smoothly. The markets' verdict on EMU has been positive. In other words, for this stage at any rate, the dog did not bark in the night!
All participating member states have made significant progress toward achieving the stability and convergence needed to join the euro. I acknowledge that some of them had to go to considerable extremes in order to do that, but they have done it. They have shown (because the test is not only meeting the convergence criteria, but also staying with it), that they can stay with it.
That progress on economic convergence has been backed by a strong political commitment to the success of the project. At the European level time and again common ground has been found, agreement has been reached and negotiations have been progressed. So, whether the UK is in or out of the single currency, the euro will make its presence felt. The impact of the euro's arrival will spread to Asia and the United States. Those who choose to ignore its arrival do so at their own risk.
In the UK we are no different. The facts are clear. Britain's economic future is bound up with that of Europe and of the 11 countries of the eurozone. The eurozone is by far the most important marketplace for British business. The eurozone and the UK are each other's largest trade and investment partners. The prosperity of the British economy, both in manufacturing and in services, is closely linked to the euro's success.
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Almost 50 per cent. of total UK trade in goods and services is conducted with the eurozone compared with only 15 per cent. with the US. The noble Lord, Lord Skidelsky, used some complicated statistics which I shall have to read carefully in Hansard, but I suspect that the effect of his calculations was to deny what seems to me to be a self-evident fact. Over 40 per cent. of total UK overseas investment is destined for the eurozone, compared with under 30 per cent. to the United States; over one-third of all UK investment income generated overseas stems from the eurozone. Investment income generated from the United States amounts to only 20 per cent. of the total. Forty-five per cent. of British small and medium-sized companies have trading links, either directly or indirectly, with countries in the eurozone. Indeed, in some sectors such as manufacturing as many as 90 per cent. of firms have such trading links with Europe.
This Government want the single currency to succeed. The strength of our economic ties mean that there can be no other sensible position to take. A successful single currency means benefits for Britain as well as Europe. A successful euro will help to deliver growth, stability and jobs across the European Union, including in Britain. The Government remain fully committed to doing all we can alongside our European partners to ensure the success of the project. That was a priority throughout our presidency of the European Union and will continue to be a priority for the Government in the future.
We need more emphasis on structural reforms to labour, product and capital markets; modernisation of the single market; more work to promote entrepreneurship and competitiveness. These reforms lie at the heart of the Government's agenda in Europe. They are shared by many of our European partners and by business throughout the European Union. They make sense in their own right and they will help to ensure that the benefits of the single currency are realised.
At home we must position ourselves to take advantage of the euro. It is not just another foreign currency; it is much more. It is a fundamental change to the European business environment. The euro will reduce transaction costs—I will come to the noble Baroness, Lady Ludford, in a moment—and exchange rate uncertainty on trade within the eurozone.
Let me pause and make this point in relation to transaction costs. I did not say that they were insignificant; I said that other things are much more important. Transaction costs are limited. The benefits of removing exchange risks between the 11 European currencies is more important than transaction costs, and the transparency in prices with the increase in economic growth and stability to which that will lead is far more important than transaction costs. Of course, they are properly referred to in government publicity to business about the use of the euro and, as the noble Baroness rightly said, in due course they will apply to individuals as well. However, I persist in my view that, although transaction costs are significant, there are many other benefits of the euro which are far more important.

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The euro will make prices more transparent; it will make it easier to compare prices and that will boost competition across the common market. I am fortified in that view by the comments of my noble friend Lord Haskel, the noble Lord, Lord St. John of Bletso, and indeed the acknowledgement of the noble Lord, Lord Skidelsky, that that is true.
Of course it will bring challenges, but it will also bring opportunities. The introduction of the euro may provide for new business and export opportunities as new markets are opened up by the increased openness that the single currency will make inevitable and as it becomes easier to expand business operations across borders.
I cannot overstate the potential impact of those changes. That is why, over the past year, the Government have stepped up work with British companies to ensure that they are fully equipped to do business in euro and able to harness the challenges and opportunities that the euro will bring. During this time we have run a nationwide information campaign to raise awareness of the issues involved in preparing for the arrival of the single currency. We have taken several steps further to facilitate the use of the euro by business, for example, by allowing for the payment of taxes and the filing of accounts in the new currency, and for certain grants to be paid in the new currency.
I am grateful to the noble Lord, Lord St. John of Bletso, for his recognition of the work carried out by the Treasury. I confirm that he is right to congratulate the Bank of England on the guidance that it has issued to the financial community.
It is right that this work should and will continue. Early this year, the Government will publish—as referred to in debate—an outline national changeover plan setting out the key steps which need to be taken by business and the public sector to facilitate British entry into EMU.
To paraphrase Harold Wilson, it is true that the euro is not yet in people's pockets. However, as my noble friend Lord Haskel said, it is the business currency. It is already very much a reality in dealing rooms and on trading floors across the world. The noble Lord, Lord Stewartby, asked us to make a policy of what is sometimes called the "creeping" introduction of the euro. In a sense we do not need to because that is happening without any Government intervention whatever. A number of noble Lords have referred to the introduction of the euro by stealth and without government intervention. That is certainly the case.
Many noble Lords have, quite rightly, referred to the position of the City of London. Already it is the most international of the world's financial centres and it is the world's leading centre for foreign exchange business. It is the principal centre for business in the international bond markets.
I was interested to hear the well-informed speech of the noble Lord, Lord Cobbold, who described the threat to the City of London and the extent to which the City is fighting back against that threat.
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A number of noble Lords expressed the view that, although the City of London is fighting back, it cannot go on forever. The noble Lords, Lord Barnett, and Lord Newby, the noble and learned Lord, Lord Howe, and the noble Baroness, Lady Ludford, referred to that. We believe that the City of London will continue to thrive on the euro because London markets have the depth, expertise and infrastructure to take this major opportunity to build on their pre-eminent position. The success of the conversion weekend reflects the amount of planning and preparation which firms and institutions in London have undertaken. Over the New Year, some 30,000 London staff were involved in adapting systems and preparing for the start of euro trading. London is ready to be the international centre for the euro.
The Government welcome the launch of the single currency. A successful single currency is in our national economic interest, whether or not we join. We wish it well and we are fully committed to do all we can to ensure its success.
Before I move on to the second half of my speech, which will be shorter, I shall say a word about some of the issues raised in the debate, particularly the issue of tax harmonisation. I do not think I can do better than to distance myself moderately from an article by Mr. Kenneth Clarke in the Observer in December, which some of you may have read. He said:
"In reality there is at present no serious or credible euro tax threat to Britain. There would only be so if we elected a government which wanted positively to persuade others to engage in tax harmonisation. Even then it would confront a series of governments flatly opposed to it in principle or practice, including Sweden, Denmark, Spain, Italy and Ireland. A massive new raft of euro taxes is not about to hit Britain. Indeed, there will be no harmonisation of any kind except on British terms".
Mr. Clarke is banged-to-rights.
I do not believe that the threat described of tax harmonisation exists, other than the removal of unfair tax competition, which is a proper objective of all governments, including this one.
Lord Shore of Stepney: My Lords, my noble friend totally misjudges the seriousness of the tax harmonisation initiative. For the sake of giving credence to his optimistic assertion, will the Minister tell us how he distinguishes between unfair tax competition and fair and desirable tax competition? We are already pledged to go along with fair tax competition and we shall agree with our European partners on a whole range of matters involved in that proposition.
Lord McIntosh of Haringey: My Lords, as far as our powers are concerned, the words of Humpty Dumpty will suffice:
"When I use a word, it means just what I choose it to mean—neither more nor less".
If we think it is unfair we shall veto it and it will not happen. It is as simple as that. The failsafe position is on my side of the argument and not on my noble friend's side.
The noble Lord, Lord Ezra, referred to the difference between RPIX and the HICP as a way of measuring inflation. He will have noticed that we are now quoting

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both measures in official statistics. I do not know which one will finally win out. However, we recognise, as we do with labour market statistics, that it is important to have international comparisons.
I turn to the issue of British entry to the euro. I have done a count and not a single speaker spoke in support of the Government's point of view. It was now or never as far as the debate was concerned. I can deal with "never" quite quickly. The noble Earl, Lord Caithness, and the noble Lords, Lord Skidelsky, Lord Lamont, Lord Shore, Lord Beaumont, and especially the noble Lord, Lord Harris of High Cross, spoke on this point. I found the argument of the noble Lord, Lord Harris of High Cross, about market economists rather strange. He said that there were no market economists in favour of the euro. There are lots of economists in favour of the euro and most people involved in markets are in favour of the euro. The noble Lord's category of market economists is a rather strange category in the middle, which does not seem to fit in with anything else.
I counted those who want us to join now, those who want us to announce now that we are joining, and those who want us to announce a date for joining—the noble Lords, Lord Taverne, Lord Grenfell, Lord Barnett, Lord Roll of Ipsden, Lord Haskel, Lord Ezra, Lord Currie of Marylebone and even the noble Lord, Lord Cockfield, Lord Tanlaw, and Lord Newby, and the noble Baronesses, Lady Williams of Crosby and Lady Ludford.
Lord Cockfield: My Lords, I did not say that we should enter now. I was telling the Government what the problem would be if we enter. I asked how they would propose solving it.
Lord McIntosh of Haringey: My Lords, I believe that that is in the category of those who want to enter now, those who want us to declare now that we will enter and those who want us to set a date. I believe that the noble Lord, to a considerable extent, did come into the latter part of that category. I do not think I have misrepresented him.
Lord Skidelsky: My Lords, I am sorry, but even at the risk of prolonging the Minister's speech, can I ask the noble Lord why he thinks that anything I said suggests that we should never enter the euro?
Lord McIntosh of Haringey: My Lords, I am glad that the noble Lord, Lord Skidelsky, has intervened. He said that we should exclude entry before the end of the next Parliament, which I understand to be one of the positions of the Conservative Party.
However, I have to contrast the point of view of the noble Lord, Lord Skidelsky, which is cautious, with that of others. The noble Lord, Lord Higgins, was in fact more cautious. Indeed, he was wonderfully cautious and virtually avoided expressing an opinion at all until the 12th minute of his 12-minute speech. Nevertheless, I have to remind him that Mr. Hague, Mr. Redwood, Mr. Howard and many others are on record as saying that they are opposed to British entry into the single
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currency on principle. Moreover, in an interview in the Observer on 27th November last year, Mr. Francis Maude went so far as to say that, whether or not the euro is successful is not in itself an argument which will affect the decision of whether or not to join. There may be criticism of the Government's point of view—and no doubt there will be—but there are certainly criticisms to be made of the Opposition's point of view, which have been very clearly revealed in the speeches made in this Chamber tonight.
This Government have set out very clearly their position on UK entry. We have said that, in principle, a successful single currency should bring benefits to Britain and to Europe. I put it to your Lordships that that is very different from the position of the previous government and even more different from the position of the Conservative Opposition now. If the single currency is successful and the economic benefits to the UK from joining are clear and unambiguous, then Britain should be part of it. There is no overriding constitutional bar to British membership.
The Government's central economic objective for Britain is to achieve high and stable levels of growth and employment. Britain's economic interests in the single currency need to be judged against that objective. That is the basis for our five economic tests. The tests define whether a clear and unambiguous case can be made for British entry. The noble Lord, Lord Higgins, queried one of them and asked whether we were requiring that the economic cycle should coincide. I should tell him that economic cycles are never going to coincide in that sense exactly. The judgment that we have to make is whether the balance of advantage falls one way or the other. At present, our cycle is clearly so far out of kilter with those of other European economies that the risk is not worth taking. Our position is that we will recommend joining when it is in the national economic interest to do so—something we think possible early in the next Parliament.
Those who want us to declare intent now and those who want us to set a timetable are, in my view, taking a position which is illogical. They are taking the position that the date is more significant than the achievement of economic targets. I put it to your Lordships that, under those circumstances, the present task for government and for business is to continue making the necessary preparations so that we can exercise genuine choice on entry in due course. We have always said that our policy is to prepare and then decide; that is, of course, to make a recommendation on the basis that, as we have always promised, the decision is for the British Parliament and for the British people. That is the only way in which a realistic choice can be presented to the British people, and the Government are on course to do just that.
8.23 p.m.
Lord Taverne: My Lords, the noble Lord, Lord McIntosh, expressed some regret that there would perhaps be no publicity given to tonight's debate. I should not be in the least surprised if that were the case. Economic debates in this House are not reported in the press. Indeed, if it is any consolation, economic debates in the other place are not reported in the press;

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nor are the proceedings of Parliament. Of course, there are occasional parliamentary sketches, which enable commentators to exercise their rather caustic wit. However, the idea that what we say in this Chamber is recorded in newspaper reports is an illusion.
Nevertheless, I have found this to be one of the most interesting of the Euro debates. I say that not just because on this occasion those who are in favour of European monetary union greatly outnumber those who are against it, but because there was perhaps rather less repetition than there sometimes is in such debates. Quite apart from the powerful arguments advanced on both sides, the debate was most interesting because a number of noble Lords spoke from their own experience in a way that was particularly valuable.
Perhaps I may first sound a personal note. I was delighted to be reminded by the noble Lord, Lord Harris of High Cross, of a trip that we both made to Exeter and the debate that we had in the Exeter Union on George Brown's National Plan. I was then a newly appointed Treasury Minister and found myself defending the plan. I do not think that the majority with which I won the debate was quite as enormous as the noble Lord said, but I do remember saying afterwards that I thought he had the better of the argument. That does not mean to say that I became an instant convert to every part of the Friedmanite doctrine and philosophy on economic affairs. I do not share that view as a whole, but I believe that the institute that the noble Lord set up has played a most valuable role and has obviously had enormous influence. It also did a great deal of good in spreading the message for deregulation and in favour of capital markets. However, I do not quite see what that has to do with the European Union.
I say that because, on the whole, the European Union enshrines the principles of competition and capital markets and did not go for the kind of blue-print laid down by the commissariat du plan, which was temporarily fashionable in the early 1960s and on which George Brown's National Plan was based. I believe that the noble Lord, Lord Shore, played a considerable part in the latter.
I turn now to the debate as a whole. I was hoping to hear a little more from those who are hostile to our entry into monetary union about the alternatives that they have to offer. As I said before, the position of the noble Lord, Lord Shore, is absolutely clear: he wants nothing whatever to do with the institutions of the EU. As I understood those noble Lords, what they were saying in effect was broadly, "We don't have to do anything because it will not work". I shall turn later to what the noble Lord, Lord Skidelsky, said. The noble Lord, Lord Lamont, concluded by saying that EMU could not work for political reasons. He made a very eloquent, delightful but controversial maiden speech, which I very much enjoyed.
The noble Earl, Lord Caithness, spread a message of great gloom. The only sort of inkling of an alternative was the mention of Switzerland. I do not think that the UK could ever find itself quite in the position of Switzerland. Apart from anything else, and with no
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disrespect to the Swiss, I feel that, for historical reasons, we have a rather different and greater role to play in the world than has Switzerland.
The noble Lord, Lord Higgins, said that of course it was possible to be pro-European and against, or sceptical about, monetary union. Theoretically that may be possible, but it really depends on expecting the European Union to break down. If one is simply relying on delay, there are dangers—I shall address them in a moment—as has been pointed out by other speakers. The noble Lord, Lord Skidelsky, said, "Let us wait and see what the relations are, for example, between the euro and the dollar; and, in eight years' time, we might then reach a decision". But why eight years' time? Why not six or 10 years' time? The euro is not going to be fixed in relation to the dollar and one will never be sure what the next five years will bring in that respect. Indeed, that is just an argument for postponing the decision for ever.
It seems to me that the official Opposition have not grasped the very real dangers of delay. The only speeches to which I wish to refer are those in which noble Lords spoke from their own experience. Many powerful arguments were advanced in a number of very eloquent speeches. However, I do not think that the Government should disregard the comments made by the noble Lord, Lord Cobbold, and the noble Lord, Lord Roll, about the impact on the City. They sounded a very severe warning that there would be a great danger to the standing of the City and its role as the financial centre of Europe if the decision was long delayed.
I believe that the Government should pay the greatest attention to what was said about the impact on industry by the noble Lord, Lord Currie, who has very special experience through the London Business School. His message was absolutely clear: business is already falling behind and, if we delay much longer, it will fall further behind. Those concerned must know where they are going. The same message was strongly conveyed by the noble Lord, Lord Haskel—
Lord Hoyle: My Lords, as I understand it, it is the convention of the House that the Peer who has introduced the debate merely thanks the speakers and then sits down at the end of the debate.
Lord Harris of Greenwich: My Lords, I say with great respect to the noble Lord that having been in this House for years—nearly 25—I fear that that is not so. The debate lasts until nine o'clock. I am not suggesting that my noble friend intends to speak until nine o'clock, but in terms of the traditions of the House, that happens to be the position.
Lord Taverne: My Lords, I apologise if I have in any way infringed the traditions of the House. I thought that there was time to comment briefly on the debate out of courtesy. I shall finish simply by saying that I am grateful for the contribution made on the subject of innovation by my noble friend Lady Sharp of Guildford. She speaks from wide experience of the subject. The unparalleled experience of these matters held by the noble and learned Lord, Lord Howe of Aberavon, was revealed in his speech. He illustrated the dangers that

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will arise from our total political isolation and lack of influence if we are not part of the main direction in which Europe is proceeding. As I said, I apologise if I have transgressed the rules of this House, about which there seem to be two views. I thank all the speakers who have taken part in the debate. I beg leave to withdraw my Motion for Papers.
Motion for Papers, by leave, withdrawn.

Arms Trade
8.30 p.m.
Lord Hylton Lord Hylton rose to ask Her Majesty's Government what is their policy for preventing worldwide proliferation of small arms and controlling the actions of military companies.
The noble Lord said: My Lords, by way of introduction to this Question after a day of somewhat notable debates, I note that in warfare some things seem to remain constant. For example, during the Hundred Years War of the late Middle Ages the basic unit consisted of three men: the mounted knight or lancer, his man-at-arms to protect him, and a squire to look after both. Today in Lebanon or Chechnya there is still the three-man unit: the bombardier with rocket-propelled grenades, the sniper for long-range protection, and the submachine gunner for closer protection. All their weaponry is light and portable. Indeed child soldiers can carry it into battle. In most of the small wars around the globe the casualties are caused not by missiles or heavy artillery, not by aircraft or ships, but by rifles and machine guns, sometimes supported by mortars and grenades.
At the time of the recent hostage taking in the Yemen, it was estimated that some 50,000 Kalashnikov rifles were in private hands in that country. In Southern Africa there are thought to be about 4 million illegal weapons, some of which are now being used in a crime wave in the Republic of South Africa. In Albania in 1997 up to 1 million small arms suddenly became available. I am glad to say that these facts are well recognised by governments. The United Nations Secretary-General has said,
"It is now vital to stop the cynical trade in small arms to unstable countries".
In June 1997 the European Union launched its programme for preventing illicit trafficking in conventional arms. This was followed in November by a convention of the Organisation of American States. In April 1998 the UN ECOSOC Crime Prevention Commission called for a binding worldwide convention. In June the European Union agreed a code of conduct on arms exports. In the following months the United Kingdom was among the 21 nations who supported the Oslo Common Understanding on Small Arms and the Brussels "call for action"—supported by no fewer than 98 governments—on sustainable disarmament for sustainable development. I emphasise this call for action because it shows that the connection has been made between internal and external fighting and the sustained
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development so essential to meet the needs of the 25 per cent. of the world's population suffering acute poverty.
Given the wide measure of international agreement which I have just mentioned, it might be thought that I am pushing on an open door. My reply is that a heavy responsibility rests on this country because it is one of the larger exporters of armaments in the world, a point well made by Mr. Matthew Parris in The Times of 16th January. Our overseas arms sales reached £5.5 billion in 1997, with much of that going to Nigeria, Saudi Arabia and Indonesia. I am sorry to say that those are all countries with deplorable violations of human rights.
I maintain that we have no cause for complacency. That is why I ask Her Majesty's Government whether they will go beyond the terms of the Department of Trade and Industry's White Paper of last summer. Will they oblige United Kingdom based arms brokers to register, and will they require licences for third party and third country deals? I urge them to refuse licences for transactions which breach the EU code of conduct and to impose criminal sanctions on unlicensed dealing. Then there is the question of UK companies supplying military services and mercenary personnel. When will the official review of this matter be completed? After all, it has been outstanding for nearly a year. Can the Government indicate whether they are likely to follow the model provided by South African legislation? As your Lordships may know, that legislation bans such companies unless they can show good cause for their continued existence. I accept that companies which respect human rights, behave ethically and provide good quality training or protect valuable commodities, for example diamonds, may have justification for existing.
Further, will the Government scrutinise, in the light of the EU code, licensing agreements made by British companies for the overseas production of arms and military equipment? In my view licensing agreements should be subject to the same controls as direct exports. A notorious recent example of a licensing deal was the agreement for the production of assault rifles in Turkey arranged by Hechler and Koch, a subsidiary of British Aerospace. Another example is the Pains Wessex company which is owned by a quoted company, Chemring Plc. Will the Government seek to tighten up and to increase the transparency of the EU code? Will they use the first annual review of the code in June of this year to work for the publication of member states' reports and to ensure that these are sufficiently detailed? Will they propose that Europe as a whole should follow the example of Sweden by arranging parliamentary scrutiny of the arms trade and in particular of arms brokering and production licensing? Will they welcome the establishment here of a parliamentary arms export and control committee?
Will the Government propose resolutions in the European Development Council and the OECD development assistance committee so that development aid, whether bilateral or multi-lateral, may include security projects, for example the collection and destruction of weapons and ammunition, especially in post-conflict situations? I understand that good work of

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this kind has already been done in Mali in West Africa. I hope that other speakers will consider the control of the final use of exported arms. I suggest only that there should be a common EU policy of a stringent kind on this matter.
I turn now to particular cases. I have in mind southern Africa and the Russian Federation. Will the Government support the action plan made by those governments belonging to the Southern Africa Development Community to cope with the large quantities of surplus arms which are the result of conflicts in Mozambique, Angola, Zaire, Rwanda, Burundi and South Africa? Will they and other Commonwealth countries continue to provide training for all relevant agencies in the region, particularly the police, customs, border guards, army and judiciary, with special emphasis on co-operative cross-border programmes.
With regard to Russia and its military exports, I am grateful for the positive tone of the letter that the right honourable lady, Miss Joyce Quin, sent to me from the Foreign Office on 17th December last. I am sure that we all feel for Russia as it struggles with major economic problems and a very large crime wave. May I ask, however, whether the Government will intensify their discussions with the Russian Federation on arms exports, particularly small arms and ammunition? Will they put this matter and the future conversion of Russia's military industry onto the agendas of the OSCE, the Council of Europe and perhaps also the G8?
In conclusion, I would like to pay tribute to IANSA, the International Network on Small Arms, which is made up of some 150 NGOs worldwide. It is moving world opinion in the right direction and I trust very much that our debate tonight will contribute to this movement.
I hope that I have opened up this subject. I look forward to the views of subsequent speakers, whom I would like to thank in advance. I trust that we shall have a very positive response from the Government.
8.41 p.m.
Lord Judd: My Lords, the noble Lord, Lord Hylton, is to be thanked for having raised this significant issue so firmly in the House. His consistent concern with humanitarian issues is exemplary.
At the outset of my own remarks, I should of course declare an interest. I am a former director of Oxfam and currently a member of the Oxfam Association. For the past 15 months I have been chair of trustees of International Alert and I work professionally with Saferworld, the think-tank and research charity concerned with international security issues. What I have to say is largely based on that experience.
When I completed my service as director of Oxfam, I was preoccupied with the effects of conflict. We wanted to get on with the long-term challenges of sustainable economic and social development, but repeatedly we were being diverted by conflict and its consequences. In the world as a whole, more than 50 per cent. of our work was conflict-related; in Africa it was more than 70 per cent. In the Second World War, some 50 per cent. of war-related casualties were
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civilian—a dreadful statistic—but in conflicts across the world today it is some 90 per cent; and 90 per cent. of that 90 per cent. is as a result of small arms. Congo, Sierra Leone, Angola, Sudan and indeed Yemen starkly make the point.
The vicious and cynical use of small arms in the repression of the human rights to which the Government are powerfully committed, is also amply documented. It needs no further illustration in this debate.
For all of us concerned with arms control and disarmament as essential elements in a lasting security policy, strategic weapons of mass destruction—be they nuclear, chemical or biological—must remain of central concern. But we cannot escape the reality that it is, as the noble Lord has emphasised, small arms which are today killing, maiming and bereaving many thousands of the innocent. Recent international measures on landmines have shown that, when the will exists, effective action can be taken. The time is surely overdue to follow the humanitarian response to landmines with equally determined action on small arms.
The Government are to be congratulated on the steps they have already taken. It was their leadership during their presidency of the European Union which made the European Union code of conduct on arms sales a reality. They were also one of the 98 governments to which the noble Lord has referred, which in October 1998 supported the Brussels "Call for Action" to encourage "sustainable disarmament for sustainable development".
Within the European Union, a joint action on combating the destabilising accumulation and spread of small arms and light weapons was agreed last December. The European Union is also supporting the Southern African Development Community Action Programme on Light Arms.
Further afield, there is already talk of extending the European Union's code of conduct to Europe beyond the European Union. There are initiatives within the US to introduce a US code and at the UN to strengthen the global commitment. All this is encouraging, especially the United Kingdom Government-inspired code of conduct. The questions I raise are therefore in the context of a glass half full and filling rather than of a glass half empty and emptying.
First, in order to identify what is going on and why, and where there may be potentially dangerous accumulations of light weapons, and in order to ensure the accountability of governments for what they approve, transparency is obviously essential. It is therefore commendable that the UK Government have agreed to publish their annual report on strategic exports. This will set a good example to governments elsewhere and considerably facilitate intelligent analysis and discussion. I wonder whether my noble friend could this evening indicate when the Government will in fact publish that report. She will, I am sure, recognise that it has been expected for some time.
Secondly, there is the issue of licensing, recently highlighted in an Oxfam report. This is when an arms company in one country issues a licence to a company in another country to produce its weapons. Often the export controls in the second country are at a lower

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standard than in the first country. Furthermore, factories in the second country can all too easily continue to produce weapons after the original agreement has expired. As a result, many weapons designed and initially produced in countries with strict export controls flow to sensitive destinations from countries where they are produced under licence.
As I understand it—this has already been mentioned by the noble Lord—Heckler and Koch, the once-German manufacturer of small arms ranging from automatic rifles to sub-machine guns, is now owned by Royal Ordnance, which in turn is owned by British Aerospace. Heckler and Koch sub-machine guns and rifles have, I believe, been produced under licence in Turkey, Iran, Burma, Pakistan, Saudi Arabia, Mexico and elsewhere. In January last year, as the noble Lord said, it was reported in the defence industry press that the Turkish-licensed facility will be producing 200,000 Heckler and Koch rifles for the Turkish army over the next 10 years. This raises the question of what will happen to existing weapons which are to be replaced. Disturbingly, there were reports last July that the Turkish company had signed an agreement with the Indonesian Police to supply 500 Heckler and Koch sub-machine guns. Obviously it is highly unlikely that either the UK Government or the German Government would have granted a licence for the direct export of these guns to Indonesia under current policy and regulations. But no such approval was required, and the EU code of conduct does not cover such licensed production.
I recognise that this is a highly complex problem, but it does seem to represent a serious loophole in the new European Union policy. I wonder whether my noble friend can assure us that, in order to ensure consistency, it is a challenge the Government will address. Will the Government, for example, ensure that deals to license arms production overseas have to pass the same checks, including reports to Parliament, as have to be passed for direct exports? Will they insist that what are in effect exports via licensed production overseas must require UK Government export licences? And will the Government consider what action can be taken to curb the production of arms from factories where licensed production agreements have expired?
This brings me to brokering. Arms deals can be organised by companies or individuals in the European Union which result in the transfer of arms, security equipment and services from third countries without the weapons touching European Union soil. The European Union code of conduct does not cover this either. Apart from recent problems over the Sandline saga, Bulgaria and Sierra Leone, I think of how Isle of Man-based Mil-Tech brokered arms deals from Albania and Israel to Rwanda in mid-1994. Within the last month it has been reported by the Sunday Times that two British companies, Sky Air Cargo and Occidental Airlines, have allegedly been shipping AK-47s from Slovakia to rebels in Sierra Leone. The DTI, in its recent White Paper, put forward limited proposals to impose controls on the brokering of controlled goods to countries which are the subject of European Union, OSCE, UK or UN
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embargoes, and also to control the brokering of equipment used in torture, anti-personnel landmines and weapons of mass destruction. But it seems to me that, with the majority of brokered deals involving light weapons, these armaments should be specifically covered. If, during its presidency of the European Union, Germany takes steps to deal with brokering, can my noble friend reassure us that this will have the support of the UK Government?
During the Cold War, the countries of Central and Eastern Europe amassed huge stockpiles of weapons, including large quantities of light weapons. Sadly, these have fuelled too many conflicts around the world, sometimes by legal, frequently by illicit, trafficking. Bulgarian, Czech and Polish arms have gone to Sierra Leone, Rwanda, Somalia, Croatia, Cambodia and other grim destinations. As we embark upon enlargement of the European Union, will the Government and their partners use the pre-accession negotiations to strengthen controls in candidate countries before enlargement takes place? Will existing EU members seek ways to enhance the capacity of candidate states to combat illicit arms trafficking? In addition, will the European Union, including the UK itself, be doing everything possible to encourage and help Europe beyond the United Kingdom to follow the example of the code of conduct?
I have referred to the European Union joint action. This underlines the significance of initiatives to promote demobilisation and reintegration of former combatants and to remove weapons from society and reform the security sector. It seems that the funding for this is expected to come from the CFSP budget. But are the resources available from this quarter sufficient for such a potentially enormous task? Would it not be possible for the European Union's development budget to make a contribution without breaching the existing principle that all arms and security issues should remain firmly within the competence of member states? Is it not possible to work for a declaration by the European Union Development Council that it is appropriate to use development assistance for the security issues which have to be addressed if development is to be effective and sustainable?
The noble Lord, Lord Hylton, has introduced a subject with immense ramifications way beyond small arms alone. Last Saturday I was greatly impressed by a significant article in The Times on ethics and the arms trade. It was by Matthew Parris. I commend it to all who may not have had an opportunity yet to read it. It said:
"There are military risks. Last year in a letter signed with other retired military men, General Sir Michael Rose issued a warning against exports to regions of tension and instability. 'Our own armed forces', he said, 'are endangered by irresponsible exports.' Nor is the commercial case as strong as it looks. Our economic performance has been crippled for half a century by the ludicrous share of the West's defence expenditure with which we have burdened ourselves: a better explanation than most for Britain's fall behind the Continent in the postwar economic race. If what we buy for ourselves costs us dear, what we sell to others may be costing more than it yields: 44 per cent. of Britain's government-funded research goes into the military; in Germany the figure is 13.5 per cent., in Japan 5.5 per cent. We underwrite arms exports by £1 billion a year—a subsidy of £12,500 per defence job. Of the £1.7 billion owed to Britain, £800 million is for unpaid arms bills".

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I do not always agree with Matthew Parris and I do not endorse all his conclusions in that article. But I do respect his willingness to challenge. It is important in a democracy. He ended his article with these words:
"We let shipbuilding die because it wasn't commercial; we stopped the slave trade because it was wrong; the arms trade is commercially doubtful and morally wrong. A world to come will look back on munitions shipments to primitive places as we look back on slave shipments from primitive places, amazed that sane men could justify this".
While I believe that, in an imperfect world which still cries out for effective collective security, there must be a place for a responsible arms trade, Matthew Parris nevertheless presents a challenge, even if journalistically oversimplified, which will not go away. It will return to haunt us in one form or another until we have convincingly faced up to it with the right policies, economically and ethically. Greatly to their credit, the Government have begun to do this. I, for one, wish them well and all success in the logical development of the action which now has to follow from their declared commitment.
8.53 p.m.
Viscount Brentford: My Lords, in thanking the noble Lord, Lord Hylton, for introducing the debate, perhaps I may tender my apologies for missing the start of his speech, having underestimated the amount of time by which the previous debate was going to run short. I sincerely apologise.
It is estimated that there are some 4 million illegal small arms weapons swilling around in South Africa at the present time. When I read that, my mind turned to the question of how many there are in Northern Ireland. However, I am not going to be drawn into that question today. As we know, there are enormous numbers of small arms swilling around in the former USSR. The noble Lord, Lord Hylton, has already made that point. From there, they go on to the world market. The Ukraine has been supplying not only mercenaries but also arms to the rebels in Sierra Leone. That seems to be the implication of what I have been reading in the media.
The former Yugoslavia is another problem area. I have heard it said that Germany had armed the Croats; Russia had armed the Serbs; and the USA and Turkey had armed the Moslems. So not only are illegal arms swilling around in the market; nations have to take responsibility for their actions as well.
Last night I had the pleasure of attending a formal Army presentation. It was most impressive, very professional and fascinating. One of the Army officers there made the point to me that the arms trade was closely linked with the drugs trade. I wonder whether we can adequately control the arms trade without trying to tackle more strongly the drugs trade as well.
I happened to watch a James Bond video a short time ago. I think the film was called "Living Daylights"; the hero was played by Timothy Dalton. I am not sure about the name as I was not thinking about the arms trade at that time. In the film the arms dealer would not hand over the arms until he had received a large load of opium from Afghanistan. As far as the writer of the
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script, who I am sure was not Ian Fleming, was concerned, the arms trade was undoubtedly linked to the drugs trade. That adds a complication to this issue.
A much more satisfactory way of dealing with illicit arms was put to me a year ago by one of the Bishops in Mozambique where a scheme for literally turning guns into ploughshares had been set up. He said that if anyone brought in a weapon to a church in Mozambique to be destroyed, he would be handed back a relevant farm implement to enable him to change from being an illegal soldier to a cultivator of the land. That is an extremely practical way of destroying unwanted illegally held weapons.
The regional action programme (RAP) for southern Africa, which was sponsored by DfID as part of the EU programme on combating illicit trafficking in conventional arms, certainly gave me a good deal of encouragement. I wonder whether there are other such RAPs, supported by DfID and/or the European Union. Are others planned for areas of the world where illicit arms are swilling around? There could be advantages if this idea from southern Africa can be translated into other fields, although it may be that the circumstances are not appropriate.
The southern Africa RAP recommends training programmes for all the agencies involved. I am not clear whether DfID and the European Union support that training programme. Training, not only for the lawyers and police but also for customs officers, is a highly significant element in trying to control the small arms trade. I hope that we are continuing our support for that southern Africa enterprise. It recommended the physical destruction of stockpiles of weapons, but that costs money. Again, I wonder whether we are supporting financially the destruction of those stockpiles.
Kalashnikovs may not have the glamour status of an atomic bomb, and much more seems to be taking place in relation to the non-proliferation treaty for atomic weapons than for small arms. However, I am not sure what difference it would make to me whether an atomic bomb exploded beside me or a bullet from a Kalashnikov entered my head. I suspect the result would be fairly similar, and I should move into the next life equally quickly and probably with the same amount of almost negligible pain if the bullet was accurate. I hope that the Government will be able to give us some encouraging information about their contribution to the implementation of that RAP and the other measures that they are taking towards the control of small arms.
If we pay now for the destruction of weapons, I suspect that we shall save larger sums in the future through not having to deal with the results of large numbers of weapons being in circulation. There are so many areas of the world where fighting is presently continuing because people can get hold of illicit weapons. If we can destroy those weapons now, the cost will be infinitely less than having to deal later with unbridled numbers of weapons in circulation. I look forward to the noble Baroness's reply.
9.1 p.m.
The Earl of Sandwich: My Lords, the noble Lord, Lord Hylton has kindly provided us with this opportunity to address the Government during their period of meditation, before they translate their response to the Scott Inquiry, the White Paper, Strategic Export Controls, into legislation.
The noble Lord, Lord Judd, spoke so succinctly and forcefully on this subject that I hesitate to repeat and underline many of his remarks. Like the noble Lord, I have spent years working with aid agencies and can well understand why they are campaigning on this issue with increasing vigour and effectiveness. If you do humanitarian work, you see at first hand the effects of uncontrolled small arms and deadly weaponry. You tend not to be impressed, as some are, by the contribution of these arms to British exports and jobs when you know that they feed the demands of guerrillas, terrorists or irregular national armies, many of which include untrained and undisciplined soldiers. As an aid worker you often come into direct contact, as I have, in hospitals, refugee camps and rehabilitation centres with the effects of ill-used, illegally held weapons which maim innocent civilians and turn young children into demons. No one, surely not even an arms dealer resident in Hove in the United Kingdom, would want to enlarge the theatre of irregular war in places such as Sierra Leone or southern Sudan, where mutilation, kidnapping and reckless killing have become a way of life—much assisted by imported weapons.
This is not new. In southern Sudan and Uganda local disputes among traditional groups that were previously settled with spears have long been transformed by the availability of small arms. But it is spreading. Where there are mineral concessions and other rich pickings, as we know from Africa, arms are never far behind. According to Oxfam, since 1995 the UK has supplied weapons to 42 countries where it works, 27 of them in Africa. Child soldiers are involved in the majority of these conflicts, many against their will. It is now known that during the genocide in Rwanda in May 1994 Hutu militia were using small arms supplied by Mil-Tec even after the imposition of a UN embargo.
The outright condemnation by politicians of unlicensed small arms, even under an ethical foreign policy, is about as pointless as a passer-by telling small boys not to throw stones or paper darts. Anyone can pick them up or manufacture them. Because of the role of brokers and multiple end-users it is of course impossible to control the arms trade, and it is not easy for governments even to monitor an unregulated market.
Yet there are ways of influencing companies, increasing public awareness, tightening controls and developing codes of conduct which can help to avoid the most obvious criminal behaviour, or at least this country's part in it.
We should be glad that it is officially no longer UK policy to permit the export of arms for internal oppression or torture, or for the kind of external aggression sometimes regarded as self-defence. We can assume that in future this even rules out the White
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Knight theory, the support of so-called good guys like President Kabbah unless there is a cast-iron United Nations mandate for it.
But it is a far cry from policy to practice when you know that, on one rough estimate, Britain is exporting a quarter of the world's small arms and that companies like Heckler and Koch are quietly, under present legislation, supplying large quantities of G3 rifles and MP5 sub-machine guns all over the world.
I believe that there is popular support for the new policy set out in the White Paper, Strategic Export Controls, last July. It is directly in line with recommendations arising from the Scott Report and the Pergau Dam saga, and with those events in mind it will be interesting to hear whether the Conservative Front Bench now supports it. Largely as a result of the atrocities daily served up on TV news, and successful campaigning by NGOs such as Oxfam and Saferworld, the public are genuinely more concerned today about the spread of deadly weapons and Britain's role in the illegal arms trade. The handguns and landmines legislation were both products of this popular concern. The anguished search for a means of decommissioning much nearer home, in Northern Ireland, has also concentrated all our minds.
Those are some of the reasons why the Government have responded so positively to the NGOs in joining the Brussels "Call for Action" by 98 governments last October and supporting a range of international measures, notably the EU code of conduct of June 1998 and the EU programme for preventing traffic in conventional arms the previous year. All this is to be applauded. But there is some disappointment among the NGOs about the implementation of the code of conduct, and in particular the forging of a common policy on licensing, confidentiality and annual reporting. Does the Minister expect to see the development of a common EU reporting policy and licensing system in future or will it be left to member states?
The collaboration of NGOs and governments is worth mentioning as it has been critical to successful practice in the field. South Africa is a good example, a country trying desperately to control the circulation of its 4 million illegal weapons, many coming from neighbouring civil wars and supplied by the former regime. It is a terrible irony that this new nation has had to suffer such a deadly boomerang from apartheid, boosting the illicit trade in small arms and causing the crime rate to soar.
DfID and the European Union sponsored a seminar involving several southern African governments, organised by Saferworld and the South African Institute for Security Studies which has led directly to a regional action programme. I think I can assure the noble Lord, Lord Hylton, that this is now supported by the British Government. These NGOs were recently commended by the South African Foreign Minister at the UN as a means of building public support for the South African Government's efforts. It is now essential that the UK and other European Union countries follow this up with technical assistance, training and perhaps an improved licensing system to control small arms. Can the Minister

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confirm that the Government will continue to support this programme over a period of years? The destruction of stockpiles, another action recommended under the plan—perhaps similar to the UNDP's arms bonfire in Mali in 1996 known as the flamme de paix—is also important.
Although our Government are doing these things, they are not yet the angels in the campaign. Countries such as Norway and Canada have taken more initiative than the United Kingdom has. Norway organised the International Agenda on Small Arms and Light Weapons statement endorsed by the UK and 20 other countries in Oslo last July. Norway and Canada sponsored the ECOSOC ministerial briefing at the UN last September at which the Norwegian Foreign Minister launched the UNDP trust fund set up to control, collect and destroy small arms in areas of conflict. Knowing our country's economic interest in small arms and their value to us, are we restrained by economic motives? If we can take a lead in the Security Council in condemning weapons of mass destruction, as the noble Viscount, Lord Brentford, mentioned, can we not be in the forefront of the campaign against the arms trade?
This will mean that we need to learn a little more from our Belgian, German and Swedish neighbours about, for instance, end-use controls. In this country, for example, we have at least four different departments—DTI, MoD, FCO and Customs—each developing their own database, even though the Trade and Industry Select Committee recommended two years ago mutual access and the primary use and expansion of the DTI database. In Belgium and Germany any country on the receiving end of sensitive exports must give an assurance that they will not be re-exported, and follow-up checks are carried out to ensure that the goods are correctly transported and delivered. Surely these matters could be a preliminary to the legislation upon which we are embarking?
I have the following questions for the Minister, which I expect will already be familiar to her. First, as regards end-user certificates, can we not follow the example of Sweden and Belgium in using embassies to authenticate documents and prevent forgeries?
As regards brokering, the controls suggested in the White Paper refer to secondary legislation. Is there any reason why all arms brokering to embargoed destinations cannot be made criminal under primary legislation?
As regards production agreements, under the White Paper there is little control or monitoring of licensed production unless the UK is exporting equipment or technology. Why cannot licensed production be subject to the same checks as exports and require export licences?
Finally, what is being done to improve the existing database and increase the level of parliamentary scrutiny, perhaps preserving confidentiality in the case of sensitive items on the Swedish model, or alternatively through the creation of a Select Committee?
I pay tribute to the Oxfam researchers, especially to the authors of two authoritative reports published last year, Small Arms, Wrong Hands and Out of Control,
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both of which have informed the debate today. I conclude with a quotation from Oxfam's director, David Bryer:
"Until and unless the UK gets its own house in order it is unlikely to be able to influence events elsewhere".
9.14 p.m.
Lord Rea: My Lords, other noble Lords have described vividly how small arms have been the main cause of civilian deaths in the many conflicts that have set back development in the nations of the South in recent years. In Kosovo this week we have seen how even in Europe in the hands of an unprincipled power they can cause quite unacceptable human suffering and grief. But as they are manufactured by many nations, not simply the major industrial powers, the problem of controlling trade in these weapons may be thought by realists or those of a cynical turn of mind to be insurmountable, especially considering the links with the drugs trade referred to by the noble Viscount, Lord Brentford.
However, as my noble friend Lord Judd pointed out, a significant start has been made in building the framework of a control policy. No one suggests that the production and supply of weapons should be banned, which is perhaps a recognition that, in the right hands and responsibly used, there is still a legitimate requirement for some of them. In an ideal world that would not be the case, but we are a long way from that. The problem is that even among nations which nominally adhere to their own national as well as internationally agreed control measures, such as the United Nations arms register and the recently agreed EU code of conduct on arms exports, there are instances of breaches in the spirit and letter of the agreements. The United Kingdom is no exception. It may be held that such agreements are somewhat Utopian as less principled governments who export or re-export weapons will ignore them or make only token attempts to comply.
Luckily, Her Majesty's Government do not take that view; nor do most responsible statesmen in Europe and many other countries, pushed largely by their own constituents who are now becoming much more aware. If regulations can be made to work in the major arms-supplying nations, that in itself will cut down the numbers going to irresponsible or repressive end-users and lay the basis for workable regulation of the trade worldwide.
I said that the UK was no exception to those nations which flout arms control agreements. By that, I do not mean that the Government deliberately break self-imposed rules—at least not now—or international agreements, but rather that the inadequacy of the current regulatory system allows the UK to supply such weapons to undesirable potential users without the full knowledge of Ministers or Parliament. Other noble Lords have made reference to all four of the main ways in which that is done, such as by licensed production overseas, by brokerage of deals that take place outside Britain and by the use of misleading end-use certificates or failure to insist upon one, falsification of those certificates or failure to act upon them by the recipient.

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The fourth is inadequate description of military equipment in export licences. The category of the weapon is given but not the quantity or the precise definition.
Page 22 of the report Small Arms, Wrong Hands referred to by the noble Earl, Lord Sandwich, deals with export licences and states:
"This limitation of suppressed data and aggregation of data prevents these information sources giving any more than a very generalised picture of the small arms trade, and it would appear that this has been achieved by design rather than mistake".
There appears to be a degree of concealment of the true nature of British arms exports, possibly from Ministers and certainly from Parliament, often under the aegis of commercial sensitivity.
Arms exports are profitable for manufacturers and dealers and help handsomely to minimise our balance of payment deficit. However, the same Oxfam report states that even China is more open in providing information about some of its small arms sales than Britain, and that at times more can be found out about UK exports of small arms from an American database than in the United Kingdom. The White Paper Strategic Export Controls published in July by the DTI, which has been referred to by a number of noble Lords, proposes changes that will require legislation to improve control. At this stage perhaps I may ask my noble friend if she can inform the House when legislation or proposals arising from the White Paper are likely to see the light of day.
The report on the desirability of increased parliamentary scrutiny is not forthcoming. Page 9 of the White Paper, Strategic Export Controls, states:
"The Government does not consider that there should be parliamentary scrutiny of individual applications … Parliamentary scrutiny before licence decisions are taken would inevitably slow down the process of decision-making … Any process involving publication of individual applications … would mean identifying companies and the nature of their planned or actual export business which would be likely to harm their competitive position".
Increased parliamentary scrutiny need not involve publication of commercially sensitive material.
It is worth referring further to the Swedish system mentioned by the noble Earl, Lord Sandwich. I have given notice to my noble friend that I was going to suggest this. Sweden has had confidential prior parliamentary scrutiny of potentially sensitive export licences since the mid-1980s. No commercially sensitive information is ever made public. There are two bodies: the Export Control Council, and the National Inspectorate of Strategic Products. The council has 10 political appointees from all the major parties, chaired by the Inspector General of Military Equipment. The council is advised by the Ministry of Foreign Affairs and the Ministry of Defence which both participate in meetings. It assesses only sensitive exports, chosen according to guidelines which can be updated according to changes in the international situation. The system is deemed to be fair by manufacturers and parliament alike. The UK has similar confidential parliamentary scrutiny of the intelligence services without, so far as I am aware, any danger to
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national security. I shall be interested to hear my noble friend's views on the Swedish system, and whether it could be considered as a model for the UK.
We have already taken a lead in setting up the European Union code which is only a start towards what is necessary. To echo the director of Oxfam—I did not know that he had said it—we should set a good example to the European Union and other countries by getting on now with putting our own house in order.
9.22 p.m.
Lord Redesdale: My Lords, I thank the noble Lord, Lord Hylton, for initiating the debate today. The noble Lord picked a fine day on which to have this short debate. His timing is impeccable. The importance of the issue must be reflected in the fact that the leader of my party today announced his resignation; we had an extremely important debate on the euro; and I believe that there was a short Statement earlier which, I have to admit, I missed. However, it is unfortunate that those events have also taken place today because the debate is extremely important.
One of the problems in winding up a short debate is that the subject is often extremely well researched by those who speak. Many of the points I had wished to raise earlier have been covered in some detail. I refer to brokering, licensing—a point raised by the noble Lord, Lord Judd—and end-use control, an issue on which I wish to conclude my speech. The Minister will be happy to note that I have only one question of which I am giving her warning as I should like an answer.
Perhaps I may refer to my personal experience of small arms. I have to declare an interest; I am a coward. I think that anyone who has ever had a weapon pointed at his head finds that his stock of courage deserts him. The first time that I was threatened with a rifle was in Mozambique. I was returning from Malawi on the way to Zimbabwe. We got out of the trucks, which we had been told not to do, because it was so hot. A Mozambiquan soldier walked over with an FM rifle. The magazine was on and the safety catch was off. It is amazing how you notice these small things! He stuck the rifle up my nose and said, "Cigarette". In Malawi I had decided to give up smoking because I thought it would kill me and now someone was asking me for a cigarette. I had got rid of them all. It was one of the worst experiences of my life and I desperately hoped I had a packet in my pocket which I could give him. The fact that he was high on cannabis did not help. I said in my best Portuguese, "No cigarette" and after a while he wandered off. It was a levelling experience. I believe that no one when threatened with a gun can claim anything but utter terror.
I mention Mozambique in particular because the war was so bloody and fraught with atrocities and has destabilised the whole region. Guns were pumped into Mozambique. I remember working in South Africa and being offered an AK-47 as a favour for £10. That was the cost of such a weapon. It is a high price in South Africa, but in general terms it is not. The noble Viscount, Lord Brentford, spoke about swapping arms for ploughshares. It is interesting to note than an AK-47

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at that price would cost about the same as a mattock for someone trying to reclaim their land in Mozambique. That is a frightening thought.
The spread of small arms is also affecting the region. The number of armed robberies in Malawi has gone through the roof. It was an incredibly safe and friendly country, but has suddenly become dangerous on the streets due to the spread of arms from Mozambique because those who have given up fighting have decided to sell their weapons.
I have come across small arms in a number of other countries. I had the privilege of monitoring the elections in Sri Lanka and came across an interesting situation in the north. I was in an area in the islands where no one else was monitoring. One political party was armed and was using the guns against anyone who opposed it. It was not surprising that there was hardly one vote for any other party in the region.
I have also visited Yemen where the traditional daggers have been replaced by AK-47s. Because of the weakness of the central government it is almost inevitable that the tribesmen use them in a way which could not happen in any other country. It is almost an initiation to give anyone over the age of 10 or 12 an AK-47 to carry around.
The real dangers of small arms can be associated with three examples that I wish to give tonight. Small arms should be associated with disease and poverty, which are the real danger. It is not the tanks because when they run out of fuel they break down and their wrecks can be seen everywhere, but small arms can carry on for ever. The examples I would like to give are Sierra Leone, Kosovo and Angola. There has been a proliferation of small arms in Sierra Leone. The rebel army was on the point of defeat only a few months ago and was almost wiped out. Somehow it got arms from nowhere. Suddenly it has been trained and it is well armed. With horrific results it cornered ECOMOG troops in Freetown and that can be seen most clearly. The cost of that can be shown by the cost to development. I should like to cite a matter raised only yesterday by the Secretary of State for Foreign and Commonwealth Affairs in another place, Mr. Robin Cook, when answering questions on Sierra Leone,
"Finally, Britain remains much the largest national donor to Sierra Leone of reconstruction aid and humanitarian assistance. Since the restoration of President Kabbah, Britain has committed more than £20 million in assistance to Sierra Leone. HMS Norfolk has now been stationed off Sierra Leone to provide humanitarian support and assistance. I can today announce to the House that the Government will be urgently releasing another £1 million of humanitarian assistance for the people of Sierra Leone, and logistical support for ECOMOG".—[Official Report, Commons, 19/1/99; col. 707.]
I believe that that accurately sums up what has taken place in Sierra Leone; that is, the failure of the West to defeat the rebels who have no real aims or ambitions, apart from taking power. They distrust everyone, even themselves. The questions must be asked: where did they get their training from, where did they get their arms from and why are foreign mercenaries turning up among their number? This goes back to the issue of Sandline and whether support for Sandline, although distasteful, should have been extended earlier in the year so that this threat could have been countered. I raise this
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point only because it seems that it is becoming more and more difficult for us to commit troops of our own and that perhaps the only alternative is to use mercenaries in that way.
The second example I should like to put forward is that of Kosovo. The ceasefire, has, in one respect, backfired. Arms are pouring through the border from Albania. The KLA is able to re-arm itself and is financing this by means of drugs and prostitution.
The third example is that of Angola. Until recently, UNITA was on the point of defeat. Unfortunately, it has used the ceasefire to re-arm itself with extremely sophisticated weapons using that country's diamond resources.
These examples have been given for one reason only: that they have been supplied by companies and outside agencies which are all too willing to supply any group. I wish to mention that there may be a deeper issue behind many of the conflicts taking place, especially in Africa; that is, that there may be an element of agent provocateurism. Areas where peace could be brought about have been destabilised where companies from outside—I believe that many companies in the West might be responsible for this—are looking to their own profit margins and are prepared to re-arm groups who wish to go back to war.
I raise that issue because there are still questionmarks over where the guns and ammunition came from to supply Rwanda and Uganda in their march into Zaire. That is obviously one of the reasons that so many wars are taking place in Africa.
I come to the end of my speech and have one question to ask. Many questions have been asked about brokering, licensing and end-use. Which department in the British Government covers end-use control? I believe that that is one of the issues which should be covered and monitored by the Department for International Development. I believe that the DTI has a role in scrutinising arms exports, but I also believe that there was talk recently of a joint committee to be set up in the House of Commons to be made up of members of the DfID sub-committee, the DTI sub-committee, the Foreign Affairs sub-committee and the Treasury sub-committee. They were to combine to look at that issue. What has happened to that committee?
9.35 p.m.
Lord Burnham: My Lords, in a curious way, I am starting at exactly the point that the noble Lord, Lord Redesdale, left off. It is with absolutely no disrespect whatever to the noble Baroness that I say that I am interested and in a way surprised to see her answering this Question because this seems to me to be a subject which could have been handled equally well by the DTI, the Foreign Office or the Ministry of Defence. I suspect that the teams of civil servants went off and had a quiet game of liar dice and the noble Baroness's team lost. I am not in the least surprised, because the Ministry of Defence team were probably trained by the noble Lord, Lord Gilbert. In that context, I must express to him my deep gratitude for the assistance and brief that he has given me with regard to

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this debate, because I consider that so much of it is a matter for the Ministry of Defence. However, as we know, any Minister answers for the whole government and I look forward to hearing the noble Baroness's reply.
In opening, I should pay tribute to the Garda for the work it has done in co-operation with the RUC in unearthing weapons which were exported possibly from this country and possibly from America, with particular emphasis on the haul of heavy machine guns captured last week. Those are small arms even if they are heavyweight small arms capable of bringing down a helicopter.
Last year, your Lordships had the opportunity to discuss the Ottawa Convention and the proposal to ban the use of landmines. Is the Minister able to forecast a date when that convention will be ratified by a sufficient number of nations for it to come into force, because, within the meaning of the words, landmines are small arms and should surely come within the confines of the subject of this debate. Certainly they are not weapons of mass destruction, for which the potential manufacturers and exporters are small in number and relatively easily identified. It is not easy to make a positive identification of what a small arm is. That may be why there has been a delay in making much progress.
Between the extremes of WMDs and small arms come tanks, artillery, aircraft and other weapons which are covered by the United Nations Conventional Arms Register. Manufacturers of those are also comparatively easy to distinguish but we are not specifically concerned with them this evening.
To fill the gap between large and small, the United Nations set up two or three years ago an "expert group" to look into the problems of small arms of all kinds. That group did a lot of work with the intention of developing a register on the pattern of the Conventional Arms Register. Its particular intent was to register heavy machine guns and mortars, weapons which require some technology but which are not ranked with the weapons and artefacts which are on the current register. Such weapons are above the sort of rifles and automatic side arms which can be made in almost any workshop in almost any part of the world. Therefore, control of them is immensely difficult and unsophisticated weapons they may be but they will kill with the best.
When that United Nations group reported to the General Assembly last year, it had achieved little of long-term benefit. The Germans had put a lot of work into it and the Foreign and Commonwealth Office had done some work. I hope that the Minister may be able to tell your Lordships about that.
However, it does not look as though the subject was taken too seriously here. The key figure seems to have been Mitsuro Donowaki, a special assistant to the Japanese Minister for Foreign Affairs. With due respect to the noble Lord, Lord Hylton, today's debate looks to be part of what is known to be an organised attempt to get this problem back on the world agenda. In the gracious Speech the Government undertook specifically to work to strengthen the United Nations. This is an
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instance where they should implement the gracious Speech. It may well be an occasion where the Government could pay tribute to Mr John Major, who, as Prime Minister, played a considerable part in getting the main register established.
In arms proliferation it is the simple piece of equipment which provides the volume and that is something that this country does not produce much of. A number of noble Lords have mentioned Heckler and Koch. It is the only real small arms business in this country. There are one or two other instances where arms firms have applied for export licences and it has not helped anybody to say that there have been delays or refusals to grant them. But surely it is better for us to produce the stuff where we may have a better chance of controlling it than to have it produced by other countries. One specific contract has now left Britain and gone to FN Herstal, which was then a subsidiary of the French-owned GIAT and is now in Belgian provincial government hands. We are losing out on exports and the proliferation goes on.
In any debate on small arms, attention must be drawn to ammunition. For the defence of this country it is immensely important that there should be an adequate home-based supplier and that the Ministry of Defence should not be dependent on foreign manufacturers. To keep such an operation viable, a complementary export market is essential.
The DTI's export control organisation states that the aim of the UK export control policy is to,
"protect the UK's national and security interests effectively and with the least possible disruption to legitimate trade".
The aim is to avoid as far as possible unnecessary bureaucracy by a system of partial self-regulation. Thus the aim has been to divert the consideration of export orders from the individual order to an assessment of the manufacturer and the nature and destination of his goods. As a result, the number of export licence applications dropped from 100,000 in 1988 to 17,000 in 1994. The drop in work caused by the reduction in orders to be processed is obvious, though the Civil Service may not have mentioned it as it is not a great believer in Parkinson's law. That does not mean that there is a corresponding drop in the numbers of small arms exported; but it means that there is greater control, which is almost as important.
In the Strategic Defence Review, much attention was paid to defence diplomacy. The first "specific military task" of the Defence Diplomacy Mission is given as,
"arms control, non-proliferation and security building measures".
It is with that single phrase in mind that I am surprised that the task of replying to this debate—I say this with apologies—has been given to the noble Baroness. I appreciate that she answers for the whole Government and that she has the noble Lord, Lord Gilbert, beside her to hold her hand, but it is not quite the same thing. Nevertheless, what are the immediate plans of the Government to implement this clause in the Strategic Defence Review?
Also what are the Government's plans for the stationing of defence attachés—this too came in the SDR—in foreign and

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know that several, in particular Bangladesh, have been withdrawn. The SDR says,
"We will be working with the Foreign and Commonwealth Office to ensure that we have the right number of attachés in the right places to ensure our defence and security goals".
What has been done? Defence attachés are the people who know what the arms are, who know what is getting into the countries. They are vital to any attempt to avoid undesirable weapons proliferation but it looks as though their numbers are being reduced. Is there a new specification for attachés and can they be used for the type of work for which the noble Lord, Lord Hylton, is looking?
There has recently been much discussion in government circles about the extent to which Britain should be the policeman of the world. We adopt policies that seem to be fashionable at the moment; we are intervening in Sierra Leone, Kosovo, Iraq and anywhere else one can think of at all times and places where there is a crisis. If this is the case, if this is our policy, and if this is the way we will behave, then arms proliferation and its control is our business. However, if we no longer carry the white man's burden, and are responsible for our own affairs only, it is probably the case that this Government, as the Conservative Government before it, are doing a pretty good job. I hope that when the noble Baroness replies, she will clarify such matters and tell your Lordships how far world-wide proliferation of weapons is our affair.
9.45 p.m.
Baroness Ramsay of Cartvale: My Lords, I am grateful to the noble Lord, Lord Hylton, for giving us an opportunity to address such an important and complex subject.
The Government are committed to combating the illicit trafficking of small arms, to responsible and transparent policy on legal transfer of small arms and to the removal and, where possible, destruction of surplus weapons where their existence is a threat to peace and stability. We are working closely with the UN and other regional organisations to promote and effect these policies.
As the noble Earl, Lord Sandwich, very rightly emphasised, co-ordination in this area is a special problem. Your Lordships will be interested to hear that we have recently established an inter-departmental committee, chaired by the FCO, to develop small arms policy and to ensure coherence of UK action in this area.
As both the noble Lords, Lord Redesdale and Lord Burnham, expressed surprise that the FCO is answering this debate, I shall say this in parenthesis. As someone who spent over 20 years in Her Majesty's Diplomatic Service and the FCO I find it not at all surprising that the FCO takes the lead in answering on a topic such as this, which involves many departments of Her Majesty's Government. The DTI and the MoD have been mentioned already, but Customs and Excise and many other arms of government are also involved. On an international issue such as this, which involves severe and difficult foreign policy problems and aspects, it is crystal clear to me that the FCO should take the lead.
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In his opening speech the noble Lord, Lord Hylton, raised a number of pertinent questions on tackling small arms proliferation and matters that affect the export control policy more generally. In the time allowed I shall do my best to answer his questions and those from other noble Lords. On any point that I have to leave because of the pressure of time, I shall write to noble Lords.
The noble Lord, Lord Hylton, asked whether the Government will require registration of UK arms brokers and licensing of their deals, with a licence being refused for transactions breaching the EU code of conduct. That was considered in the preparation of the DTI White Paper, but the Government concluded that it would be better to focus on the need to control specific trafficking and brokering activities.
My noble friend Lord Judd gave a précis of the White Paper's proposals on extending HMG's power to control trafficking and brokering. The White Paper does not favour wider controls on the grounds that those involved in such activities will have to comply with export control laws in the country from which the goods are supplied. Furthermore, enforcing controls on trafficking and brokering is much more difficult than enforcing controls on exports from the UK. But, as with all the White Paper proposals, the Government will review them in the light of comments made by respondents to the White Paper as well as those made on this issue by the House of Commons Select Committee on Trade and Industry in its December report on strategic export controls. My noble friend Lord Rea also mentioned this White Paper. I can tell him that it is being considered by the Government, but that we are doing so in the light of the responses that are coming in.
I turn now to the point made by my noble friend Lord Judd concerning Germany's plans to raise the issue of brokering during its presidency of the EU. The Government look forward to discussing such matters with Germany and all other member states in the coming six months and thereafter. I must thank my noble friend Lord Judd for his very kind comments about the steps that the Government have taken to date in tackling small arms proliferation. In particular, he mentioned our role in securing a code of conduct on arms exports during our EU presidency. I have to say that the Government see this as a major development in this area. I should add that this point was also mentioned by the noble Lord, Lord Hylton.
My noble friend Lord Judd, the noble Lord, Lord Hylton, and other noble Lords made reference as to whether licensing agreements made by UK companies for overseas production of arms and military equipment should be scrutinised in the light of the code of conduct and be made more transparent. They also asked whether any action could be taken to curb the production of arms from factories where licensed production agreements have expired.
The code of conduct addresses the issue of illegal exports from EU member states, but it does not address the question of licensed production per se. Curbing the production of licensed equipment in a third country would involve the extension of extra-territorial powers.

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Her Majesty's Government attach great importance to ensuring that UK exports are not diverted or re-exported to undesirable end-users, in line with national criteria and the EU code of conduct. This question was raised by the noble Lord, Lord Hylton, the noble Earl, Lord Sandwich, the noble Lord, Lord Redesdale, and also one or two other speakers.
I should add here that I shall try to answer all the questions raised, but I hope that noble Lords will forgive me if I do not always include every speaker involved. In fact, many of the questions tonight were raised by several noble Lords.
The European Union code of conduct sets out factors to be considered by member states in assessing the risk of diversion. Work is in hand to consider how to strengthen the monitoring of the end use of defence exports in line with our commitment to prevent diversion to third countries and to ensure that exported equipment is used only on the conditions under which the export licence has been granted. We have compared notes on national practices with both our EU partners and Wassenaar arrangement partners. We have also exchanged information on end-users of concern.
Thorough assessment of licence applications is key to minimising the risk of diversion. The safest way of preventing diversion is not through post-export monitoring but by refusing to issue an export licence if such concern exists. The noble Earl, Lord Sandwich, asked whether HMG could use embassies to check out end-user certificates. It is very important to target resources effectively, but I can say that, on occasion, UK embassies or high commissions are used to check the authenticity of the documentation which companies use in their export licence applications.
The Government are currently considering the view of the House of Commons Trade and Industry Committee that the question of controls on the licensed production of arms and dual-use goods be addressed within the Wassenaar arrangement. A UK company does not require an export licence to allow production of its goods in another country. However, if, in order to enable the production to go ahead, the company concerned needed to supply controlled equipment, technology or software from the UK, it would need a licence. The export of more specialised components of controlled goods is also controlled.
The noble Lord, Lord Hylton, questioned whether the Government would tighten up and increase the transparency of the EU code of conduct on arms exports. My noble friend Lord Judd asked when the Government's first annual report on strategic export controls will be published. Some EU member states already publish annual reports on their arms exports and the Government are committed to doing likewise. We have said that we shall publish the first annual report on the state of strategic export controls and their application as soon as possible. I am afraid that I am unable to give a precise date of publication this evening. However, the UK will seek to use the first annual review of the code's operation to consider further the scope for encouraging all member states to adopt a similar level of transparency.
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The noble Lord, Lord Hylton, asked whether the Government would establish a parliamentary arms export committee and cited the example of Sweden. My noble friend Lord Rea spoke at length of the Swedish model in another connection. As someone who has served in the diplomatic service in Sweden for over three years, I am well aware of some of the excellent parliamentary scrutiny practices of the Swedish parliament. However, it is not always possible to transplant these practices into our Parliament which has quite a different tradition. However, we are well aware of the practices and we shall, of course, try to adopt best practice wherever we can. The Government have not proposed that there should be parliamentary scrutiny of individual applications either before or after the decision on whether to grant a licence has been taken. However, we would expect parliamentary Select Committees to take an interest in the details that we shall publish in the annual report.
I turn to development in connection with tackling the small arms problem. The noble Lord, Lord Hylton, and others asked whether the Government would propose resolutions in the European Development Council of the OECD Development Assistance Committee to enable development aid to include security projects. The Government recognise that security and stability are important preconditions for sustainable development. The White Paper on international development stressed the importance of measures to limit the means of waging war. This includes support for measures limiting the proliferation of small arms. A number of noble Lords have raised the possibility of using EU development funds to finance security projects in this context. This is a difficult issue from a legal point of view, as my noble friend Lord Judd implied. We are making progress, however, in advancing the principle that wherever possible development assistance should contribute to the prevention of conflict. The November 1998 Development Council agreed conclusions to that effect.
Time is pressing and I shall have to write to noble Lords to deal with many of the other questions which they raised. However, I shall mention private military companies. We and our EU partners have always made clear that we unequivocally condemn the recruitment, use, financing and training of mercenaries. We are concerned about the spread of mercenary activity. As regards private military companies, we are still examining the complex issue of regulation. Military companies which carry out their business within the law are generally not a cause for concern. Our principal concerns relate to those companies which are involved in the supply of military equipment or other controlled goods and services in breach of the UK's national commitments on the supply or the offer to supply mercenaries or related military services. Allegations of breaches of UK export restrictions are vigorously investigated, and prosecuted where appropriate. We continue to study the effectiveness of measures taken by other governments to curb mercenary activity. We shall discuss these difficult issues with the UN special rapporteur on mercenaries, Sr. Ballesteros, when he visits the UK later this month. His programme will

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include meeting my honourable friend the FCO Minister of State, Mr. Lloyd, and meetings with those in other interested government departments.
In conclusion, I assure the House that the Government are giving the issues of small arms proliferation and the activities of private military companies our close attention. We are committed to moving international policy forward in these areas. I very much welcome having had an opportunity to discuss these matters and to hear the valuable views expressed by your Lordships this evening. It has been a useful and informative debate.
Lord Judd: My Lords, before my noble friend sits down, I wonder whether she could clarify one point. I believe I understood her to say that the position of the
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Government and the Department of Trade is that it is difficult to deal with licensed production abroad because that interferes with the sovereign rights of the country in which that is happening. But surely to control the process of licensing by companies based in this country is completely within the jurisdiction of this Government?
Baroness Ramsay of Cartvale: My Lords, due to time constraints I could not give as full a reply as I wished on the whole question of controlling end use and surveillance and checking. I think it is best if I write to my noble friend on this matter. I shall, of course, copy that reply to other noble Lords.
House adjourned at one minute before ten o'clock.