HL Deb 05 December 2001 vol 629 cc899-918

7.9 p.m.

Lord Taverne

rose to call attention to the case for the Government's decision on British membership of the euro-zone to be based on wider considerations than the five economic tests; and to move for Papers.

The noble Lord said: My Lords, the Motion standing in my name on the Order Paper is rather different from that which appears on the list of speakers. The words on the list of speakers do not make sense.

Most Members of the House—and, indeed, of another place—agree that the question of our choice whether or not to join the euro-zone is immensely important to this country. The Government have called for a public debate; yet we have not often debated the issue, even in this House. I think that the last time that we specifically considered the euro was when we considered the Select Committee report on how the euro was working. We have also discussed Nice, foreign policy and the economic situation.

There are not many speakers from the Government Benches on this Motion. Indeed, when speeches are made in the country by Mr Peter Hain and, lately, by Mr Charles Clarke, if they stray only one inch from the territory staked out by the Chancellor of the Exchequer—the five economic tests—that is immediately regarded as a case of lèse-majesté. The question of the decision whether to join cannot be the Chancellor's personal prerogative. In any event, the five tests to which he perpetually refers—the mantra that he invokes—was cobbled together at the last minute in October 1997, when it appeared that the Prime Minister was keen to take an early decision.

The tests are somewhat arbitrary; they leave out some important issues; and their interpretation can well be subjective. There are wider economic issues and, of course, there is the political decision, which is perhaps the most crucial.

I do not argue that the economic case for entry into the euro is absolutely clear-cut. Those who oppose it sometimes seem full of certainties, but I agree that there are serious arguments against, formidable difficulties that must be faced and uncertainties about the future. Some future developments are hard to forecast.

Let me first consider some of the difficulties. There is the problem of the single interest rate for the whole of the euro-zone. If there is no convergence of the economic cycle, or if there are external shocks peculiar to the United Kingdom, we would lose a useful instrument of policy if we could no longer set our own interest rate. That must he acknowledged. Ireland is the case often cited for that argument. Ireland, which is growing fast, needs higher interest rates; Germany, which is facing stagnation, needs lower interest rates. Ireland is the favourite example cited by those who say that one interest rate policy cannot work.

First, it was interesting to find, during the evidence to the Select Committee on the working of the euro, that the expert witnesses from Ireland testified that they faced no problem that would not be more difficult to solve if they were outside the euro-zone. They also testified that they had found the benefits of membership of the euro-zone even greater than those predicted in the paper that persuaded the government to take the decision to join. Yes, they face higher inflation, but temporary higher inflation is one of the ways in which regions in a single currency area adjust when they grow at a faster rate than they can maintain in the longer run.

My second point is that the biggest shock for Britain has been that of a fluctuating currency. That is the greatest problem that we have faced. In 1989, the pound was worth 3.3 deutschmarks. It declined to 2.2 deutschmarks and has risen again to more than 3 deutschmarks. That has played havoc with manufacturing industry. The best guarantee against that kind of shock is stability of a currency in the area in which most—more than half—of our trade is conducted.

Thirdly, it is significant that after careful examination the Organisation for Economic Co-operation and Development recently found that the United Kingdom was broadly convergent with the rest of the European Union and the euro-zone countries, and that there was now more convergence with Europe than with the United States. Interest rates have converged and joining monetary union is likely to increase that pattern of correlation.

I turn briefly to the serious problem, omitted from the five tests, of exchange rates. We can influence the exchange rate. If we announce a decision to join, subject to a referendum, and if we further announce that we intend to negotiate joining within a range of, say, 2.45 and 2.85 deutschmarks, that should have a considerable influence on the market, as was shown by market reactions just before various countries joined the zone.

Another problem is that of the co-ordination of fiscal policy. Fiscal policy must be co-ordinated to match a single monetary policy; that is a problem. Some people—the anti-euro lobby—argue that that can be done only if we have a European government with a big central budget. That argument is mistaken and based on a false analogy with the United States. Europe and the United States have an entirely different set-up. In the United States, individual states have no resources for stabilisation. In many cases, they are under a constitutional duty to balance their budgets. Any automatic stabilisers must be federal.

A completely different position prevails in Europe, where there is hardly any central budget and it is the states that have the resources and the ability to provide stabilisation. That has been carefully considered and well set out in a classic OECD paper in 1996, paper No. 72 entitled Fiscal Relations Within the European Union.

Lastly, although it is not one of the most important problems and has been much overstated, let me mention unfunded pensions. I was recently rapporteur of a Federal Trust working party on the question of whether Europe can pay for its pensions. Broadly speaking, our conclusion was that it can; there is time for adjustment measures to be brought forward. What has been done recently in Germany and initiatives taken in Sweden show what can be done. Much is changing.

The most important issue is whether the actual age of retirement rises. As the OECD, and, indeed, an important report by Merrill Lynch, has shown, if the average retirement age in Europe were 64, there would be no problem about unfunded pensions. In the past year or two, after many years of decline, the actual retirement age in Europe has started to rise. That is a fact of great importance. It started to rise partly because measures have been taken to encourage it.

Let me turn to the opportunities that exist and mention three that I consider to be the most important. First, let us consider the impact on trade. One would expect in principle that the end of exchange rate uncertainty would boost trade. The evidence that that actually happens is now accumulating. A paper by Mr Rose showed that a country conducts three times as much trade with a country with which it shares a common currency as with other countries that are equidistant. A Canadian study has shown that a Canadian province trades 20 times more goods and services with another Canadian province as with an equidistant US state—despite the cultural affinities between Canada and the United States within the North American Free Trade Agreement.

Secondly, let us consider the impact on business organisation. In evidence to the Select Committee on the workings of the euro, Mr Trichet testified that he had not come across a single business inside the euro-zone—any major business—that has any doubts about the beneficial effect of a single currency. Why should British business be any different? A massive reorganisation of business and business strategy has taken place in the euro-zone in the past two years to adapt to the entirely different picture presented by one currency. I fear that if we continue to postpone entry, we will miss out and will not take those strategic decisions, just as we missed out in 1957, when the Common Market was first brought into being.

Thirdly, there is the picture of foreign direct investment in the UK. The UK has many advantages and attracts a very large share of that investment. Those advantages would be enhanced if the UK was inside a single capital market. While there are still many obstacles to a single capital market, there is little doubt that the advent of the euro is accelerating the move towards it. So far foreign investment has held up well, but it takes time for any change of policy to be felt.

At the moment there is an assumption that we shall join the euro-zone. There are warnings by a number of very large manufacturers about what will happen if we do not. There are the first signs of a decline in foreign direct investment. Before the euro became effective, in the sense of the linking of the currencies, we attracted 28 per cent of the total foreign direct investment into the European Union. The latest figure from Ernst & Young indicates that the share has declined to 21 per cent.

I turn to what I regard as the key—the political future. On balance, I believe that the economic arguments, while not conclusive, will work out in favour of joining. They are not all one way. The political choice, however, is the most important factor. I believe that that is overwhelmingly in favour of taking a positive decision. Let us dismiss talk of a single superstate which the "antis" love to trot out as the bogey. The French, the German Länder and a large number of other countries besides Britain do not favour a single superstate, and each of those states has a veto.

At issue is whether we play an important part, because it is likely that there will be closer co-operation and a greater degree of economic integration. Will we play an important part in developing the economic regulation and governance that the European Union needs and the kind of financial services pattern which will be decided in the next few years? Most important of all, as the European Union becomes more economically integrated through the euro it will increasingly speak with one voice, and it is right that it should. It is not healthy that the world should be dominated by one superpower, however friendly our relations with it may be; and it is economically undesirable that it should be so. Indeed, it is important for the euro-zone to speak with one voice.

However, in relation to the matter that we recently debated following the Statement it is also politically true that we in Europe should exercise a separate influence. Yes, it is right to support the United States in its fight against terrorism, but not if it abandons the fight for justice in Palestine or seeks to extend the conflict to Iraq. There are now some disturbing signs in the United States that the success so far against the Taliban is leading to a mood of triumphalism which in turn may lead to a resurgence of the kind of unilateralism which was originally favoured by the new Administration. That could be very dangerous.

Therefore, it is very important that we should maintain a strong European voice which produces a coalition not only against terrorism but also poverty, as the Prime Minister set out in his very imaginative vision for the future. In this Europe will play a vital part. It is really a matter of commonsense—certainly, this view is shared throughout the European Union—that we cannot be at the heart of Europe and exercise influence if we remain outside its central project, which is to make a success of the single market through the single currency. That is the big issue which I believe the Prime Minister sees clearly, but it is not an issue which should be determined by a narrow Treasury interpretation of the five economic tests. My Lords, I beg to move for Papers.

7.24 p.m.

Lord Coblbold

My Lords, I am grateful to the noble Lord, Lord Taverne, for giving us the opportunity to look again at the arguments for and against British participation in the euro. The Motion calls for the decision to be based on wider considerations than the five economic tests. The noble Lord explained what he meant by that in his most interesting speech.

There is inevitably a political dimension as well as an economic one to this historic decision. The fact that the Government are committed to holding a referendum on the subject means that the decision will be dragged into the wider political debate about our future relations with Europe. I believe that joining the euro must be first and foremost an economic decision. Ever since the days of Jean Monnet and Robert Schumann the new Europe has been built on the premise: get the economics right and the politics will follow. If the economic rationale of joining the euro were unfavourable no one would suggest that we should join for purely political reasons.

On the other hand, the economic arguments will never be acceptable to those who are politically opposed as a matter of principle to the European ideal. The politics and the economics are inevitably intertwined. Were we to adopt the euro clearly it would represent a further pooling of sovereignty with our European partners and strengthen our political commitment. If, on the other hand, we rejected the euro it would be seen as a political rejection of further European integration, would weaken our influence in Europe and could have long-term implications for our continued membership of the Union.

If it is true that approximately 30 per cent of the population are implacably opposed to further integration with Europe and approximately 30 per cent are positively in favour of it, it is the remaining 40 per cent who will determine the outcome of a referendum. I believe that they will need to be convinced by the economic arguments. The euro must sell itself to the British people, and up to now there is very little sign of it doing so. However, this may be about to change. The arrival of euro notes and coins in euro-land from 1st January will bring the euro to centre stage. So far ordinary citizens in the euro-zone have scarcely been touched by the new currency, but from 1st January it will be the money in their pockets and will affect everyone on a daily basis.

It will be fascinating to watch how the changeover works in practice. Will there be huge problems of acceptability? Will price conversions be rounded upwards, with inflationary implications? Hove quickly will the benefits of cross-border travel and price transparency be realised by the consumer? For British citizens the process will be slower. Travellers to the Continent and Ireland will be the first to experience the euro, and it will certainly be appreciated by those who travel from one member state to another. But for the majority of the population it will have little direct impact. Their attitudes will be formed by our ever-fickle press and television.

If the Government are to win a referendum they must win the media battle in the months to come. They must convince the undecided 40 per cent that genuine economic benefits at the consumer level will flow from the macro-economic decision to join. This brings us back to the five economic tests. The Government must be more proactive and positive in their assessment of the tests, or at least three of them. The first two—sustainable convergence and economic flexibility—are an economist's dream of "on the one hand or the other" and to those involved can never be more than judgmental and subjective. The other three, however, are more amenable to genuine measurement.

Let me consider each of them briefly. First, will joining the single currency create better conditions for business to make long-term decisions to invest in the UK? Britain has already been the recipient of much the highest share of inward investment into the European Union. Our healthy economy, our language and our laws have contributed to that. But there is good evidence that decisions have been made, and will continue to be made, on the assumption that we shall join the single currency sooner or later. Were that understanding to reverse, or a referendum to be held and lost, the flow of inward investment could change rapidly to our disadvantage.

The next test is the impact that joining would have on the UK financial services industry. Much has been made of the ability of the City of London to be Europe's financial centre in or out of the single currency, although Paris and Frankfurt are stepping up the competition. But I think that there can be no doubt whatever that the City and our financial services industry would benefit hugely from membership in the long term.

A unified domestic capital market of 350 million people, rising to 500 million people, must help to reduce the cost of capital to industry. The bond market in the euro-zone totals 2.5 trillion euros compared with 1.7 trillion for the United States. A single capital market would free up UK pension funds to diversify and invest in a much wider domestic pool. The domestic deposit base of UK banks would be denominated in euros, allowing the banks to compete on equal terms with their euro-zone competitors in the massively enlarged domestic market.

The final test is whether joining the single currency would be good for employment. This test is closely linked to a positive reading of the inward investment and financial services tests. It is hard to see how such an enlarged domestic market could be anything other than positive for employment, certainly when compared with the negative impact that would inevitably follow a rejection of the single currency or a lost referendum.

There are of course wider considerations than the five economic tests, but I have tried to show that three out of the five tests are of vital importance if the Government are to persuade the 40 per cent of the population that remains undecided.

In granting independence to the Bank of England, we have taken the first step towards making our currency independent of political manipulation. Joining the euro-zone would carry that process one step further by eliminating the possibility of competitive devaluation among the European nations, which did so much damage in the last century. It would create a world-class reserve and trading currency to stand beside the dollar, the yen and probably the Chinese renminbi. Who knows, by the end of this century, there might be just one world currency.

7.32 p.m.

Lord Thomas of Swynnerton

My Lords, I believe that I would be looked upon by the noble Earl, Lord Onslow, as a Euro-creep; that is, I have consistently supported the idea of British involvement in the European Union ever since, during the 1950s, I used to hear the mellifluous tones of the late Lord Boothby telling the Cambridge Union of the benefits of the ideas of Monsieur Monnet and Monsieur Schuman. However, I do not claim that consistency is a good thing. It was described by the American philosopher Emerson as being the "hobgoblin of the mediocre mind".

By that standard, it must be said that the two major parties in this country, the Conservative Party and the Labour Party, have been brilliantly mercurial, and that is because there has been no hint of consistency in their positions over the past 50 years. The Conservative Party, which I joined in 1973, was the great party of Europe from 1960 to 1990. The Labour Party veered from scepticism and division in the 1960s and 1970s to hostility in the 1980s. Since 1990, both parties have changed 100 per cent. No greater or more extraordinary transformation has ever taken place in our long and equally extraordinary political history. The controversies of the Corn Laws, tariff reform and imperial preference, profound as they were in their time, cannot compare with the richness of these major and magnificent intellectual somersaults.

I find myself in virtual agreement with the noble Lord, Lord Taverne. I was particularly struck by his concluding remarks, although I was also impressed with what he said about trade and business organisation. I wish to make only two or three comments. The question of whether we enter the European Monetary Union surely is a matter of balancing the benefits of sovereignty and of power. Certainly, to accept a common currency is a surrender of sovereignty of a considerable kind. But if or, I hope I can say, when we join, we shall in fact increase our power because we shall then be able to participate in, to affect and perhaps to dictate the formation of policies on monetary matters by which we shall be affected, whether or not we are inside the palais d'Europe.

Along with the poet Marvell, I would say that sovereignty is a fine and private place, but in certain circumstances it can be extremely cold. All the nations of western Europe enjoyed sovereignty after 1918 and 1919, but that sovereignty did not help them at all when the storms of the 1930s and the 1940s came. Similar storms could affect us in the future. There is no reason to suppose why we should be insulated from such events. Indeed, we were not particularly insulated in the 1930s and the 1940s. That is one reason why I should like to see our entry into the monetary union as soon as possible.

I have two other points that I should like to make. First, the idea of standing outside the ballroom, pressing our noses against the glass to see whether the dance is going well and then saying that we would like to join in provided that the thing is a success, seems to represent the negation of statesmanship, although I think that that was the position taken by the former Foreign Secretary, now the Leader of the House in another place.

Secondly, to begin with, many people supported the UK joining and subscribing to the European experiment because it seemed to be a good substitute for empire. I suspect that I held that view myself. I do not say that, under the present circumstances, we can expect to lead Europe, but one day we could aspire to do so because we have so much to contribute. The noble Lord, Lord Taverne, hinted at that, as did the noble Lord, Lord Cobbold. Similarly, we benefit greatly from our close attachments to countries which now are not only allies or neighbours, but partners and intimate friends.

It would be foolish not to accept that membership of the monetary union will necessitate some psychological changes in the way in which we regard our arrangements, as well as political and economic affairs. We were not part of Hitler's empire, we were not part of Napoleon's empire, we were not subsidiary states to Louis XIV and we did not form a part of the Holy Roman Empire. But we were part of the Roman empire. Thomas Hardy wrote a famous and very fine poem about a person who finds a Roman coin, a Constantine, in Dorset in the 1920s. For that reason alone, on this occasion I adjure the House o recall Churchill's remark made in 1910 to the effect that, "The changes which are to come, I do not fear to see".

7.39 p.m.

Lord Newby

My Lords, usually when we hold a debate on the euro and European matters, many speakers come forward from all the Benches in your Lordships' House. They clamour to make their points with great passion. Perhaps it would be instructive to begin my remarks by considering why it is that so few noble Lords are in the Chamber this evening. There may be a number of reasons, but two stand out. First, it is the evening of the concert of the Parliamentary Choir. It is to perform Bach's "Christmas Oratorio". Secondly, it is a crucial evening in the European Champions League. I can certainly bring to mind one or two noble Lords from the Government Benches who have more than a passing interest in the fate of Manchester United and Liverpool. Music and sport are two of the strongest strands of cultural life in this country; they are both European strands. They are two of the many strands of activity which bind us to Europe much more strongly than to any other part of the world. Music and sport bring together the whole of Europe—east and west—just as the EU, with its planned enlargement, will, within the foreseeable future, represent the whole of Europe and not only a fraction of the whole.

I raise these issues not because I believe that whether Manchester United get through to the next round of the European Champions League should be an additional test of whether we should join the euro, but because, when taken together, they demonstrate both the continuity and strength of the European cultural tradition and the rapid, fundamental institutional reform which is taking place within and across our continent at the moment. They form a useful, if somewhat unconventional, starting point to the three key issues that we are debating today.

The first issue requires us to take a step back from the euro and to ask ourselves what we wish our relationship with Europe to be; the second is whether our ever joining the euro is consistent with that role; and the third relates to the timing and the taking of the decision and the tests which will have to be passed before we do so. The first issue—our role in Europe—is relevant to the subsequent ones because it helps to set the overall political context within which the decision on euro membership has to be made.

We on these Benches believe straightforwardly that Britain should play a central, wholehearted role in the EU. We believe that it is in the interests of peace and prosperity in Europe that the EU as an institution thrives. We see enlargement as a means to end decades of division in Europe by the choice of free people who want to be part of a single European family.

We reject the pick-and-mix approach to the EU which dictates that we will decide which rules of the club we wish to follow and which rules we wish to ignore. We are self-confident enough to believe that a British contribution to all aspects of public policy making at a European level will improve the quality of the policy and ensure that it is compatible with our national interests.

We believe that as the pressures on the EU to do more increase—whether on the environment, on defence or on security—we need to have a European constitution which enshrines the principle of subsidiarity and sets limits on the roles and powers of the European level of government.

We believe that the single currency will he durable and beneficial to the European economy, and that we should be part of it as soon as it is prudent to be so. Finally, we believe that British influence on the development of economic policy, thinking and co-ordination within the EU is, and will continue to he, diminished as long as we remain outside the euro-zone.

If you believe these things, the issue of membership of the euro is a question of when and not whether. This gives a clear patch of water—whether blue or yellow, I am not quite sure—between ourselves and Mr Duncan-Smith's Conservative Party. For us, it is a question essentially of when.

My noble friend Lord Taverne has rightly pointed out that many issues beyond the Government's five tests are relevant to the decision. I shall come to those in a moment. It is worthwhile, incidentally, recalling that when Barclays Capital carried out its euro-track summary, only 7 per cent of those currently opposed to membership of the euro, but who are open to changing their minds, said that they could change their minds as a result of an assessment of the Treasury's five economic tests. Perhaps the Treasury has not been as successful as it had hoped in explaining those tests.

As to the five tests, the first question is whether business cycles and economic structures are compatible. My noble friend Lord Taverne has mentioned the OECD report, which refers to growing convergence between the British and euro-zone economies, a convergence which most economists confidently expect to continue.

Secondly, there is the question of flexibility to deal with tax and employment problems. The flexibility that we have at present may be greater than elsewhere in Europe; certainly there is a considerable flexibility which we retain in both employment legislation and taxation. I shall come back to taxation later.

Thirdly, there is the question of investment in Britain. Much has been made of the fact that, in the first year of the existence of the euro, foreign direct investment into Britain increased rather than diminished. However, as my noble friend Lord Taverne pointed out, this trend seems to have gone into reverse. If the Government were not worried about this, they would not find themselves—as Mr Boateng did at the weekend when he met the South Koreans—having to spend much of their time explaining that there is no need to worry about our non-membership of the euro, and giving reasons for it, rather than concentrating on the positive reasons why Britain is a good place in which to invest.

The fourth issue concerns the competitive position of the UK's financial services sector. The noble Lord, Lord Cobbold, has made a powerful and convincing argument as to why, in the medium to long term, it is almost inconceivable that the UK financial services sector would be more prosperous outside a successful euro-zone than with Britain inside it.

The final question in regard to the five tests concerns growth, stability and a lasting increase in jobs. In terms of stability, if your major trading partner is locked into a currency, you immediately gain a stability in terms of decision-making by exporters which is completely lacking at the moment. The continuing problems faced by the manufacturing sector would simply not exist if a sensible exchange rate was successfully negotiated. The benefit of a larger market, to which the noble Lord, Lord Cobbold, referred, is surely, to any logical mind, one which is likely to benefit the prospects for job creation in this country.

Some other issues go beyond the five economic tests which are clearly hugely important, both in determining the timing and in persuading people in the UK that joining the euro is sensible. First, there is the issue of the exchange rate. The current exchange rate is too high and monetary policy, because it is fixed on inflation primarily and fundamentally, can do nothing to address the problem. But, as my noble friend Lord Taverne explained, if the Government were to set a sensible target for sterling within the euro, there is every reason to believe that the markets would adjust to that target.

Secondly, it is argued by those who are opposed to euro membership that we could not possibly join an organisation with so much labour market inflexibility. Much is made of all kinds of Spanish practices—not only in Spain but across the EU—in respect of labour market regulation. However, when one looks across the EU, on any day a major debate is on-going about changing some aspect of past labour market rigidities. At the moment, the major focus is on Italy, where Berlusconi is trying to change some of the employment protection legislation in a manner which increases flexibility. It is very difficult to do. It was extremely difficult for the noble Baroness, Lady Thatcher, when she attempted it in this country; it took a number of years to achieve. But all the evidence shows that, within the EU, political leaders are looking for windows of opportunity to move labour markets in a more flexible direction.

Thirdly, some people argue that the fiscal policy framework is too tight and that there needs to be greater scope for tax competition. Much of this argument is based on the misapprehension that there is some kind of "hidden hand" of tax harmonisation preventing countries in the EU from choosing their own level of tax. Anyone who has brought cigarettes for their private use across the Channel knows very well that, at present, any thought of strict tax harmonisation is for the birds. There remains a considerable degree of flexibility within the EU—as there needs to be—whereby member states can use tax policy to balance their economies within the context of the overall European exchange rate.

The fourth reason—on which the noble Lord. Lord Saatchi, has dwelt in the past, and perhaps will again in this debate—relates to the European Central Bank. The ECB does not operate like the Bank of England in every last respect. It does, however, have as its principal aim an almost identical aim to that of the Bank of England; namely, a low and stable level of inflation. Some of the methodology that it uses is slightly different in deciding how to achieve that. The index of prices that it uses is different from the one that we use. The way in which it explains, or does not explain, its decisions is different from the way in which we do. But no one in their right mind could argue that the European Central Bank has been a failure. No one would argue that, if Jean-Claude Trichet were the president of the European Central Bank instead of Wim Duisenberg, the transparency would not change. Frankly, no one would argue that, if the Bank of England had been part of the European Central Bank. many of the things that we find objectionable about it would never have been in place from the start. The European Central Bank is yet another example of a missed opportunity in setting a framework in which Britain could have played a major part.

Finally, people will look carefully at how the euro works in practice once the notes and coins are in circulation in the New Year. My guess is that the horror stories about little old ladies not being able to understand the new currency, and about counterfeiting, will prove to he exactly that, and will not be borne out.

Earlier today, I attended the euro preparation committee established by the Government, which unfortunately is boycotted by the Conservatives. We discussed with the Northern Ireland representative the effect of the introduction of the euro in Northern Ireland—which will be affected because of its close proximity to a euro-zone member state. The view in the committee, both from the businessmen on one side of the table and from the Unionist politicians on the political side, was that within a short space of time the North of Ireland would in effect have a dual currency. The situation will be very different from the present one in which the punt operates a few miles across the border. Within this country, within months, we shall find a dual currency in operation. If it is successful there, and if we can exchange our euros at Marks & Spencer in Oxford Street for our pair of socks and our other purchases, the practical working success of the euro will be demonstrated and attitudes towards it will change considerably.

To return to football, this debate has been the equivalent of a relatively gentle "friendly". Nothing much is at stake other than a chance to pit our competing arguments against each other. On these Benches, we are looking forward to the real thing.

Lord Thomas of Swynnerton

My Lords, before the noble Lord sits down, would he like to re-examine his usage of the expression "Spanish practices" in relation to some English practices? Does he not think that, given our friendship with Spain, the phrase should be entirely removed from the vocabulary of a Liberal Democrat?

Lord Newby

My Lords, I hope that before very long it will be an outdated concept and that, therefore, there will be no need to use such vocabulary.

7.54 p.m.

Lord Saatchi

My Lords, I thank the noble Lord, Lord Taverne, for introducing the debate. I feel sorry for those who are attending musical or sporting events. They have missed out on an interesting debate and, as the noble Lord said, one that is of immense importance—"friendly" though it may be.

The noble Lord made some important points and he tackled head-on some issues that one usually hears dealt with in more opaque terms. For example, he talked about the amount of devaluation that would be required in order to meet a sustainable exchange rate. He talked about tax harmonisation and about unfunded pensions. These are all highly sensitive issues which are normally ducked or swept under the carpet. I admire the straightforwardness that the noble Lords, Lord Taverne and Lord Newby, bring to the debate. We shall soon be able to contrast that with the Treasury's approach, which I fear will be slightly less certain and clear.

The noble Lord, Lord Thomas, apart from his gentle rebuke of the noble Lord, Lord Newby, rebuked myself and the Minister for the endless mind-changing of our parties over the years and the extraordinary "transformations" that we have gone through. The Minister does not need me to defend him, but perhaps I may remind the noble Lord, Lord Thomas, of Keynes's injunction when accused of mind-changing: When circumstances change, I change my mind. What do you do?". It seems to me that we are not debating whether the euro is good or had but, in the terms of the Motion, whether there are wider considerations or whether, as the noble Lord, Lord Cobbold, said, the economic tests are indeed a sufficient test. In other words, we are examining whether economic tests are an appropriate way to assess the question.

I want to put forward the view that they are not. The word "test" suggests a spurious objectivity which is beyond the reach of economics. Economics is not a science. It is not susceptible to scientific measurement; nor do the phenomena that it tests occur in a laboratory. Scientists have always dreamed of the illumination of the whole of knowledge by systematic computation. But it has not worked out quite like that. Instead, we find that it is an inconvenient and stubborn fact that, outside Newton's universe where physical laws do govern reality, the world is conditioned by perception. Perception is conditioned by the distorting factors of society, genetics, class, upbringing and the conscious or unconscious interests of the perceiver.

The modern authority for that rather sceptical view is the noble and learned Lord the Leader of the House, who reminded me last week that "perception is not reality". He is right. All of us know that the sensations produced by the same object can vary with the circumstances. Lukewarm water will seem hot to a cold hand and it will seem cold to a hot hand. Colours look very different under a microscope. Even the sun in the heavens is seen by us only as it was eight minutes previously. It seems that once we describe what we perceive in terms of what we feel or believe—once we express opinions or beliefs or attempt to offer explanations, descriptions or forecasts—error, doubt and uncertainty come to the fore. It is not like hydrogen plus oxygen equalling H20.

The appeal by the noble Lord, Lord Taverne, was essentially a warning. It was an appeal to the fear that we shall "miss out". The noble Lord, Lord Thomas, said much the same. He said that we should be pressing our noses on the window of the ballroom in perpetuity. The noble Lord, Lord Taverne, was warning us, as was the noble Lord, Lord Newby, that if two parts hydrogen do not quickly mix with one part oxygen, we shall have no water and we shall die of thirst. It was a warning that had things will happen: foreign investment will fall, trade will decline and jobs will be lost.

These are not scientific observations; they are forecasts and predictions. That being the case, economic tests cannot help. That is made clear by the Treasury's paper on preliminary and technical work to prepare for the assessment. It makes the job appear far more scientific than it is. The language is of rational methods: of observation, experiment and verification.

The Treasury document sets out a wide range of sub-topics for analysis, such as trade and investment linkages, the behaviour of housing markets, sectoral output and monetary transmission. But none of those is relevant because, as the editor of the FT says, These interesting questions might occupy a dozen doctoral students for as many years without greatly increasing the sum of human certainty". The objects under study are different in their nature. Hydrogen and oxygen are not the same in France as they are in Britain. For example, Britain is the only EU country besides Denmark that exports more oil than it imports. So the way in which a change in the oil price affects Britain is not the same as the way in which it affects, say, Germany.

Likewise, Britain has a much smaller stock of unfunded pension liabilities than the rest of Europe. The noble Lord, Lord Taverne, said that that was not a cause for concern. Perhaps it is not, but the difference is still there. More money is invested in UK pension funds—I believe that it is over £800 billion—than in all the pension funds in the rest of the EU put together. That is a significant difference.

Similarly, British firms and households are more sensitive to interest rate changes than euro-zone countries because of a higher level of home ownership and a larger proportion of variable rate mortgages. As regards the prescription of the noble Lord, Lord Taverne, for around a 15 per cent devaluation of the pound in order to achieve a sustainable rate for entry into the euro, I am sure he is aware that on some forecasts that would lead to a 1.5 per cent increase in UK inflation; that the Bank of England would then have to raise interest rates; that that might itself raise the level of the pound; and that the matter is not quite so easily resolved as simply to say that that is the right rate, announce it and the market will adjust to it. That would create its own problems, as I am sure the noble Lord is aware.

I hope that I can rest my case on these vital differences between the objects that are under study and these tests with the Chancellor himself, for it is he, is it not, who tells us, as he would see it, because of his own skill rather than the legacy that he inherited—but we shall not debate that—that, for whatever reason, Britain is in a completely different position from that of other countries in Europe. We see that in headlines in newspapers and in economic forecasters' documents every day. We are forecasting 2.5 per cent growth in the next few years as compared with near recession in Germany.

I am afraid that the closest science seems to come to economics is the chaos theory of mathematics, the most potent symbol of which is the butterfly that flaps its wings over the Amazon rainforest and sets off an electrical storm over Chicago. But the next time it flaps its wings nothing happens. The Chancellor's five tests are so far from being scientific that any scientist would blush for him. Economics has not yet found its Newton. Even if it had, these tests are testing the wrong thing. It is rather like the scientists who measured sheep's brains rather than cows' brains when studying BSE.

I believe that the noble Lord, Lord Taverne, said that the matter we are discussing is "above all a matter of politics". That is why the Select Committee of your Lordships' House under the noble Lord, Lord Tomlinson, was right to look at other matters—I refer to the "wider considerations" in the Motion—that is, whether or not the euro would, increase the pressure for closer political union". Noble Lords will remember that its excellent report concluded in the last paragraph that, The will to create the euro was political". The public know, as does Sir Eddie George, that, monetary union is fundamentally a political rather than an economic issue". So, too, does the editor of the Financial Times, who says, Ultimately the question will turn on broader political arguments". Therefore, the question I put to your Lordships' House is: why do we not have five tests of that? Is it because the Government do not like it when the president of the Bundesbank says, A single currency does not require a single government hut a single government will follow"? Or is it because the Government do not like it when the governor of the Bank of France explains that we must have monetary union because, It is the essential precondition of political union"? But when the leaders of France and Germany pressed their citizens to join the euro it was not on the basis of economic tests; in fact, it was not on economic grounds. Do noble Lords remember Chancellor Kohl's famous Louvain speech in which he echoed Hamlet's words: I have something in me dangerous, which let thy wiseness fear"? I am told by my German friends that that was what led the German people to give up what they consider their heimat, or homeland; that is, to give up the mark.

Do noble Lords remember hearing President Mitterrand declare that, Nationalism is war"? My French friends tell me that that is what led the French people to give up the franc, as they would lose that war to America unless they joined forces with others.

So why are we alone in being told that economics is all? Why cannot we have five tests of sovereignty, which the noble Lord, Lord Thomas of Swynnerton, rather brilliantly defined, or shared sovereignty, as the Prime Minister puts it? I think that we could have five tests of sovereignty. I should like to put them forward.

First, are we ready for a new culture, that of a continent of humanist values, of the Magna Carta, of the Bill of Rights, of the French Revolution, of the fall of the Berlin Wall? Secondly, do we see Europe as a power in its own right; a power which will have a leading role in the new order of the planet; a power which resolutely mounts campaigns; a power which wants to encompass globalisation; a Europe with greater say in external affairs, security and defence?

Thirdly, do we accept that the single currency is a cornerstone for the harmonisation of the economic, financial and tax environment? Fourthly, do we know who does what? Is there a clear distinction between the exclusive competence of the Union, the competence of the member states and the competence shared between the Union and the member states? Is the role of the national parliaments to be that of a third legislating institution alongside the European Council and Parliament? Fifthly, who will be in charge? Do we plan to encourage the creation of real European political parties and a European political area by creating a European electoral district for the election of a party of European Members of Parliament? Will we make provision for the direct election of the president of the European Commission or the European Council? Do we want to make the qualified majority vote for the adoption of legislation more general?

Noble Lords may imagine that those five tests I have just described arise from the fevered imaginings of paranoid Conservative Eurosceptics. In fact, they are taken verbatim from the Laeken declaration of the EU of 23rd November 2001—last week. They are considered the vital issues for the future of the Union. Only in Britain do our Government have such a low opinion of the intelligence of the public that we are asked to restrict our deliberations to economics alone.

I close with the following thought. I for one am sad to find the great Labour Party sidestepping these great issues and returning to the materialist determinism of Karl Marx in which economics determines politics. I find it depressing to see Labour reduced to the view that money is all. Was that what the new Jerusalem was all about? Sidney and Beat rice Webb would turn in their grave.

8.8 p.m.

Lord McIntosh of Haringey

My Lords, I shall make a boring speech. It may well be a long boring speech. It certainly will be if I am interrupted. However, I have no alternative on these occasions; I have to take this opportunity to address the issues and to explain the rationale behind our policy on economic and monetary union. That is my duty.

The Government's policy on membership of the single currency remains as set out by the Chancellor of the Exchequer in October 1997 and restated by the Prime Minister in February 1999. In principle, the Government are in favour of UK membership of EMU; in practice, the economic conditions must be right. The Government believe that, given the right economic conditions, a successful single currency within a single European market would be of benefit to Europe and to Britain.

The determining factor underpinning any government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. If it is, there is no constitutional bar to British membership of EMU. The five economic tests set out by the Chancellor of the Exchequer will define whether a clear and unambiguous case can be made.

Here I must pause for a moment. Although there has been considerable support in the speeches tonight for the principles of what I have been saying, I was taken aback by the noble Lord, Lord Taverne, saying that somehow, in the end, it would be the Chancellor's prerogative. We have made it clear that that is not the case. Clearly, having made the assessment on the basis of the five economic tests, the Treasury will recommend to government what the conclusion should be. Government will then take a collective decision. It will be put to a vote in Parliament and then to a referendum of the British people. How that can be described as the prerogative of one man escapes me.

Lord Taverne

My Lords, I do not want to prolong the noble Lord's speech, but the assessment in itself will be very influential. It should not be confined to the Treasury. As many speakers have pointed out, there are subjective elements in that assessment.

Lord McIntosh of Haringey

My Lords, I do not deny that. In fact, the next point that I was coming to was the role of the five economic tests. The noble Lord, Lord Saatchi, believes that those tests are irrelevant. I must say that he has come some way from his business success because, if one is making business decisions—this is in substantial part a business decision; it is a decision about our economy—one does so on the basis of tests. One makes those tests as objective as possible and recognises that, under certain circumstances, the tests which one has set oneself will have an element of subjectivity.

Perhaps I may make it clear for the noble Lord, Lord Taverne, that the tests are not the same as a recital of the advantages. I admired his eloquent recital of the advantages, and I agreed with very much of what he said. But the self-evident advantages of, for example, the reduction of transactional costs between our currency and a common European currency do not need to be restated; they are evident to everyone. They are not part of the tests of the issues which, inevitably, are or could be in doubt. The issues of sustainable convergence, of flexibility to cope with economic change, of the effect on investment, of the impact on the financial services industry, and whether they are good for employment are, I believe—despite the element of subjectivity—the correct tests. In adding to them, the noble Lord, Lord Taverne, did not attempt to subtract from them.

I considered the speech of the noble Lord, Lord Cobbold, to be particularly interesting. He said that the first two tests were judgmental, but he took the view that the five tests were important. Indeed, in its 2001 Article IV Report, the IMF stated that the tests were, consistent with the economic considerations that would he important in the decision whether or not to join". Therefore, it is not only the Chancellor or the Government who take that view.

Clearly these issues must be resolved before a decision is taken. We do not deny that the tests are challenging; nor do we deny that, even if it is considered that they have been achieved, there must be a period of stability and settled convergence before we can seriously consider membership. In speaking to the CBI conference on 4th November, the Chancellor said, the assessment as to whether it is in the British national economic interest or not will be comprehensive and rigorous. It is only on this basis—taking into account all relevant economic information—that the Cabinet will decide whether to recommend membership to Parliament and then to the British people". We have said—this is a firm commitment—that we shall produce an assessment of the five tests within two years of the start of the Parliament. What we shall not do is to make a running commentary on whether or not we are achieving the tests. The criteria are set out in the tests in the intervening period. We listen with great respect and great interest to all the comments made by Members of this House and by economic commentators in the press and, indeed, to those in other countries as well.

I do not need to prolong the debate by describing the preliminary assessments that are being made—they have not featured in the debate—except to say that I agree with the noble Lord, Lord Cobbold, about the media battle. I agree that it is necessary that the single currency should sell itself and that we should help to sell it. I believe that he was right—a number of noble Lords also said this—when he said that the effect of the existence of the euro on the ground, in the pocket and in the wallet in less than a month's time would have a major effect on the views that the public of this country took about the success and the relevance of the euro to them.

I had always believed that the word "Euro-creep" applied to a thing rather than to a person. But I suppose that if it applies to a person, the noble Lord, Lord Thomas, and I are Euro-creeps and I do not believe that we are too unhappy about it.

We have had some discussion of the other tests, but, except for those put forward by the noble Lord, Lord Saatchi, they have been mainly economic tests, and rightly so. I do not believe that it is right that we consider the exchange rate or a putative exchange rate as being the sixth test. We have made it clear that in our view there is no sixth test. But, clearly, the exchange rate at which sterling entered the single currency would need to be consistent with economic fundamentals in the United Kingdom and compatible with sustainable convergence between the United Kingdom and other euro economies.

However, I believe that the key here is what the noble Lord, Lord Taverne, said. It is not so much a case of a particular rate that could be different at different times; it is a case of stability of exchange rates. That, of course, comes back to the idea of a clear advantage—an indubitable advantage—rather than one of the five tests.

I hear what the noble Lord, Lord Newby, says about the European Central Bank. He is right that the Bank of England and the Treasury have different views from the European Central Bank about transparency and many other matters. But he is also right to say that what we have in common is most important; that is, a view of the objective of a low and stable rate of inflation.

Interestingly, there has been little discussion of the stability and growth pact and the fiscal policy framework. Perhaps that is because it is becoming more widely recognised that some of the scare talk which has circulated about a superstate does not in fact bear any relation to reality. Fiscal policy in EMU remains the responsibility of individual governments, subject to the avoidance of excessive deficits. That, I am glad to say, thanks to the wise management of the economy over the past four-and-a-half years, is not a problem for this Government. A centralised system of fiscal transfers in EMU is not on the agenda and no member state is arguing that it should be.

Similarly, I was glad not to hear talk of tax harmonisation in the debate. Clearly the noble Lord, Lord Taverne, set that agenda correctly in his speech. There is no reason why EMU should lead to a fiscal authority for Europe. The distance that we are from a fiscal authority—which may be wanted by some of the people quoted by the noble Lord, Lord Saatchi, when we have a commitment in the current perspective to no more than 1.27 per cent of gross national product in the European Union budget—is evidence of how far away we are from the economic superstate which some Eurosceptics fear.

We have talked about the success of the euro and how close we are to the reality of it. I like the analogies of the noble Lord, Lord Thomas, about our pressing our noses to the glass outside the dance. I think that the dance will come outside to us even if we were not to join the euro. The effect of not joining the euro does not mean that we shall be isolated from the euro. That is what I understand by the phrase "euro-creep". With an increasing number of retailers and other businesses, including Government in their financial relations, saying that they will be prepared to deal in euros, I suspect that we shall find that the experience in Northern Ireland—it has been referred to—will apply to other parts of the country as well.

I do not want to say much about constitutional issues. I do not accept the phrase of the noble Lord, Lord Thomas, about surrender of sovereignty, apart from the fact that I do not think of sovereignty as being in any way analogous to, The grave's a fine and private place, But none, I think, do there embrace". It is a pooling of sovereignty. In many respects it is a gain of sovereignty rather than a surrender. The noble Lord, Lord Saatchi, spoke about the Belgian presidency's proposals for Laeken next week. Let us see what comes out of Laeken rather than what goes in from the presidency.

It has been a constructive debate. I am grateful to the noble Lord, Lord Taverne, for raising the issue. I am sorry if my speech has to be as boring and repetitive as it always is on these subjects. However, I leave the House with gratitude to the noble Lord, Lord Taverne, and all who have taken part in the debate.

8.21 p.m.

Lord Taverne

My Lords, I wish to make it clear that it is always a pleasure to listen to the noble Lord. We know the difficulty he is in. He must, inevitably, sometimes repeat himself. I thank all noble Lords who took part in this short but interesting debate. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.