The Euro: EUC Report

HL Deb 05 February 2001 vol 621 cc941-95

3.15 p.m.

Lord Tomlinson

rose to move, That this House takes note of the report of the European Union Committee, How is the euro working? (18th Report, Session 1999–2000, HL Paper 124).

The noble Lord said: My Lords, I say right at the outset that the report seeks to avoid at least two contentious issues concerning the euro. The first is whether or in what circumstances the United Kingdom should participate in economic and monetary union. Secondly, we decided not to permit ourselves the luxury of attempting to look into the future. We therefore forswore the use of the crystal ball as any sort of predictive tool.

The genesis of the report is clear. On 1st May 1998 11 member states took the momentous decision to proceed to stage three of economic and monetary union. The report seeks to evaluate the degree to which the hopes and expectations of those participating member states have been met. The report also recognises that the Government's position is that, in principle. a successful single currency within a single European market would be of benefit to Europe and to Britain.—[Official Report, Commons, 27/10/97; col. 583.] My right honourable friend Gordon Brown continued at col. 584 of the Official Report, if, in the end, the single currency is successful and the economic case is clear and unambiguous, the Government believe that Britain should be part of it". The report, following on from the largely positive evaluation of the European Central Bank in June 1998, under the chairmanship of my noble friend Lord Barnett, is now produced as a contribution to the debate on whether, to use the Government's word, the single currency has so far been "successful". In this task we had the enormous benefit of our former clerk, Dr Elizabeth Hopkins, whose skill and dedication set standards that the House had no right to expect. We could not have completed our tasks fully without both her work and that of our specialist advisers, Professor John Driffill, who guided us skilfully through a minefield of complex economic analysis, and Mr Martin Christensen, who was specially helpful in his contribution to the provision of the comprehensive set of economic data in Appendix 3 of the report.

The work of your Lordships' committee is greatly enhanced by the ready, willing and informed assistance of our clerk and specialist advisers. Dr Hopkins decided to retire after the report. The whole committee and many beyond send their very best wishes for her future. We welcome Ms Anna Murphy, the new clerk, who knows that she has a hard act to follow and is already meeting the challenge. The committee would also wish me on its behalf warmly to thank Helen McMurdo for her invaluable contribution to the efficient work of the committee in producing this difficult report.

No report on the operation of the single currency can ever be definitive or final. On 1st January 1999, barely two years ago, the euro was introduced. On 1st January 2002, almost a year ahead, notes and coins will begin to circulate. Against that background the effects of the single currency cannot yet be disaggregated from other causes and events: the success of the single European market; the stability and growth pact and the concomitant economic disciplines that it forces upon member states; the general economic upturn in the euro-zone and what was cause and what was effect; and the information technology revolution. Those were all taking place at the same time as the introduction of the euro. It is almost impossible, therefore, to determine how successful the euro has been.

However, having said that, our inquiries show that it was fully appropriate and by no means too soon to take a considered, interim view on how the euro is working so far, especially in the experience of those countries which are already members of the euro-zone, the role of the European Central Bank and the development of the euro. Hardly surprisingly, the euro-zone governments which gave evidence to us stated that their expectations were certainly fulfilled and frequently exceeded; and that in their opinion the euro was a success.

The Governor of the Bank of England gave clear evidence; and while giving no view—nor was it sought—on whether sooner or later the United Kingdom should join the euro, Mr Eddie George judged that the euro was working well and that the euro was a success for those member states participating in it.

I contrast the clear view of the Governor of the Bank of England with the response of Her Majesty's Treasury. When one considers that it has had over two months to produce it, I find the response insulting to your Lordships' House and its Select Committee. The report's two pages purports to reply to our main conclusions by studiously ignoring them. My only hope is that Treasury officials have briefed my noble friend Lord McIntosh more fully than they have deemed it necessary to give us of their wisdom.

Page 7 of the report lists many of the points that the committee deemed it necessary to explore with witnesses. Was monetary policy achieving price stability? Could the European Central Bank formulate monetary policy with independence while being both transparent and accountable? Were member states adopting appropriate fiscal policies and maintaining budget discipline? Was the integration of financial markets proceeding smoothly and producing anticipated benefits such as lower interest rates, greater liquidity, lower transactional costs and the removal of exchange rate risk? Was the changeover to the euro proceeding smoothly? Was the single currency aiding the completion of the single market? Would the single currency enhance the ability of euro-zone countries to respond to economic crises?

Having pursued those questions when gathering evidence, we came to the view that considerable progress had been made in relation to most of the criteria but less in relation to others. We found evidence in abundance of the economic advantages. The single currency had reinforced the single market. Markets are increasingly transparent bringing competitive improvements to industry as well as to consumers. The introduction of the euro had led to a strengthening of the disciplines of the stability and growth pact on the one hand and the determination of member states to comply with them on the other. The evidence indicates that trade and investment have benefited from the introduction of the single currency.

With regard to financial institutions and markets, it was clear that within and beyond the euro-zone there has been benefit which more than compensates for any earnings loss from reduced foreign exchange transactions. The euro is now widely used for bond and stock issues. This benefits consumers from the liquidity of the instruments created and issuers by reducing the cost of raising money. Evidence we received suggested that the euro now ranks second to the dollar as an international investment, reserve and anchor currency with the potential to challenge the dollar's leading role.

We noted the potential—I emphasise "potential"—downside downside of the "one size fits all" monetary policy. It deprives participating member states and their central banks of adjusting their economies either by altering exchange rates or the introduction of differential interest rates. Euro-zone economic growth has meant that there has been no great pressure on individual member states to break the rules. There has been, therefore, no empirical evidence on how serious such a downturn could be in practice. But I believe that it is right and proper that I should draw the House's attention to the fact that the inability of countries in those circumstances to use exchange rates and interest rates throws burdens on the remaining tools. The scope of fiscal adjustment is already severely limited by the stability and growth pact. On structural change, we noted that some progress had been made but it was patchy and was not leading to sufficient productivity gains; and although there was some movement of flexibility in the labour markets it was not adequate as regards the long-term needs of the euro-zone.

The Select Committee considered Ireland as a possible special case. Fast economic growth and rapidly rising inflation gave rise to the need to consider Ireland separately. As a member of the euro-zone, Ireland cannot now respond by recourse to interest rate movement. However, all our Irish witnesses—from governmental, banking and non-governmental outside banking sectors—predicted that Ireland is likely to experience a soft landing. The committee limits its conclusion to the expression of hope that they are proved right.

I turn to the careful consideration we gave to the European Central Bank and the need for strong management, transparency and accountability in a form which does not prejudice its independence. I do not propose to go through all the arguments because they are made clear in the summary of conclusion on page 9. But on management we stated clearly that the evidence was that the European Central Bank had done pretty well so far. If anyone thinks that those are faint-hearted words, they were the words of the Governor of the Bank of England. When asked whether he was damning with faint praise he said very clearly to your Lordships' committee that he was a central banker and when he spoke of someone else's bank doing "pretty well", that should be regarded as high praise indeed.

On the question of transparency, the committee welcomes the fact that the European Central Bank has been more transparent than had been expected and is becoming more so. It is about to publish much of the data on which it bases its decisions.

On accountability, no one wanted the European Central Bank to be elected. The committee struggled for a definition of accountability. However, we went on to recognise the role of the European Parliament as the body to which the European Central Bank is formally accountable. We welcomed what we were told of the European Parliament's intention to strengthen that accountability.

We inevitably looked at some length—although I shall mention the issue only briefly—at the external value of the euro and its persistent fall since the currency's introduction. We noted with particular interest the persuasive argument of the Governor of the Bank of England that such a fall reflects a continuing net outflow of long-term capital from Europe to the United States. Once that flow ceases or is reversed, perhaps when relative asset prices have changed sufficiently, the influence of economic fundamentals will reassert itself and the rate of the euro against the dollar will rise. Since our report was printed there has been a 6 per cent increase in the value of the euro against sterling and a similar change in its relationship to the United States dollar.

The report is inevitably interim. It cannot be definitive. It properly did not address United Kingdom membership of the single currency. That is a question for the Government—a question that, in my strictly personal view, they should turn to sooner rather than later. However, it is important to have engaged in the study. We reached broadly favourable conclusions on the progress so far from the perspective of those in the euro-zone. I remain hopeful that, after an election, the Government will find a capacity to discuss European monetary policy and possibly even to formulate a view, however tentative, on a subject that will not go away, even if there is an attempt to insist on ignoring it.

This is an interim report on a subject to which the Select Committee will inevitably need to return. At the moment, I believe that it is an informed evaluation that I hope is of benefit to your Lordships' House. I beg to move.

Moved, That this House takes note of the report of the European Union Committee, How is the euro working? (18th Report, Session 1999–2000, HL Paper 124).—(Lord Tomlinson.)

3.33 p.m.

Lord Renton of Mount Harry

My Lords, it was a privilege for me to serve on Sub-Committee A of the European Union Select Committee, under the very able and competent chairmanship of the noble Lord, Lord Tomlinson, who has just spoken. I declare an interest as the chairman of a substantial investment trust that specialises in continental European shares. I strongly support the noble Lord's comments about the Treasury's disgraceful reply to our report. It contains just seven lines referring to us and our conclusions. The rest is a re-statement of well known government positions. I note that the minute is unsigned. I am not surprised. Any Treasury official would feel ashamed to put his name to such an inadequate minute.

Like the noble Lord, Lord Tomlinson, I was struck during our inquiry by the enthusiasm of our witnesses for progress so far in economic and monetary union and the single currency. Only one witness, representing the Irish interest, was seriously concerned. I shall deal with that in a moment. On the whole, our witnesses were more positive than I had expected about the success of the euro so far in promoting internal trade, encouraging inward investment, increasing competitiveness in the continental European market and ensuring transparency of prices from one end of the continent to the other.

Two clear drawbacks were identified, one of which the noble Lord, Lord Tomlinson, has just spoken about—whether "one size fits all" can be suitable for every market from Scandinavia to Greece and from Ireland to Germany. I notice that Mary Ann Sieghart in The Times last week dwelt at some length on the experience of Ireland. She pointed out that the Irish recovery had, if anything, been too rapid and was putting too much pressure on the Irish economy. Under those circumstances, Ireland should have raised its interest rates by considerably more than was permitted by the European Central Bank.

However, the fact is that in the past four or five years, Ireland has had the most astonishing recovery. It has changed from traditional industry to investment in and mastery of the IT industry with fantastic success. There are now advertisements seeking workers to fill skilled or semi-skilled jobs in Ireland. We should also remember that Ireland represents only 1 to 2 per cent of the European Union's GDP, so it is fair to say that it is de minimis for the European Central Bank. It would be very different if one of the big four—Italy, France, Germany or Spain—stepped out of line. That has not happened yet, so we do not know what the outcome would be.

The other difficulty, about which our report spoke rather less, is the fact that the European Central Bank does not have a single government directly behind it to add political weight and to lean on the media and politicians such as ourselves in support of its decisions when a bit of arm-twisting might be needed. To Alan Greenspan, chairman of the Federal Reserve in the United States, are now attributed all the qualities of Solomon when it comes to financial markets. I see that there has been a motion that his term of office should be increased by another 25 years, which would take him to the good age of 99. He would certainly accept that his work was substantially enhanced—and at times definitely helped—by support from Washington and President Clinton. It is interesting that one of the first interviews that the new President Bush gave was to Alan Greenspan.

There is no answer to this point. The European Central Bank is a very independent central bank—probably more independent than any of its predecessors in continental Europe, including the Bundesbank. President Duisenberg has been criticised at times. The noble Lord, Lord Tomlinson, was quite generous in his comments. One or two of our witnesses thought that if Greenspan had been president of the ECB rather than Duisenberg, the fall in the value of the euro would have been about half what it has been. Some have considered him weak and uncharismatic. He has been blamed both for putting up interest rates and for not putting them up. That may mean that, as time and the bank settle down, he and the ECB have not got it too wrong. In the present situation, the European Central Bank does not seem to be doing so badly after all.

The weakness of the euro, which we touched on in our report, was a blessing in disguise for continental manufacturers. I was amazed that the British media seemed always to misunderstand that. As we saw in the recent sad decision by Corus, it enabled French, German and Dutch manufacturers to recover lost ground in export markets at the expense of British manufacturers. The experience of the weak euro was almost exactly the same as ours. When we left the ERM in 1992, sterling lost around 20 per cent in value against the deutschmark. That was a boon to our manufacturers and led to some of the increasing industrial prosperity inherited by the current Labour Government when they took office in 1997.

Many people will hope that the euro does not now recover too much and that, for example, it does not go above parity to the dollar. But at present it must be considered exciting that the continental European gross domestic product is expected to rise at an average of between 2½ and 3½ per cent over the years immediately ahead. That figure is likely to be in excess of the American GDP rises and, therefore, it points to a general improvement in economic conditions on the continent.

As the noble Lord, Lord Tomlinson, said, at the end of our report we manacled ourselves with regard to talking about the future. In the last sentence of the report we said that we would look to the system, the bank and the currency to rise to the challenge of future opportunities and cope with problems as they occurred. However, I shall crave the indulgence of the House for a moment or two while I give a few personal thoughts about the future.

Last week I attended a conference organised by my noble friend Lord Skidelsky, as chairman of the Social Market Foundation, at which both Friedrich Merz, who is co-leader of the German Christian Democrat Union, and William Hague spoke. I was struck by the words of Friedrich Merz. He said that so far as concerned Europe, EMU—economic and monetary union—and the launching of the euro represented a crossing of the Rubicon and provided a common conceptual basis for tackling the future. He added that it formed a shared conceptual basis among the members of EMU for the shaping of economic and social reform. I believe that that is correct. Of course, there is still much to be done—notably the deregulation of labour markets, particularly in Germany, and the change of all the social security systems throughout continental Europe. However, the conceptual basis for doing that is now in place and the practical steps will surely follow.

At the same conference, an ex-colleague of mine, Tim Eggar, who is now chief executive of an oil company, said that he believed that people in this country completely under-estimated the importance of the single currency. I very much agree with that sentiment. I believe that next January, when European notes and coins are in circulation, it will come home to average European citizens just how important is the single currency. They will suddenly discover a far greater openness in competitive pricing throughout continental Europe and a decline in the cost of doing business. There will be a painful realisation for the 8 million Britons who take continental holidays every year that every time they go from and come back to this country they will still lose approximately 10 per cent of their money through the hands of Thomas Cook and others.

Britain has not yet crossed that Rubicon, and we all know the reasons why. However, in his interview in The Times today, I believe that the Foreign Secretary was quite wrong to talk so much of Britain's leading role in Europe. Of course, we are wise. I am told that the well prepared documents produced by our civil servants, with the exception of the Treasury memo to which we have already referred, are generally much better than documents produced by civil servants in any other country. We are particularly important in the defence field, and we shall strive for reform of the common agricultural policy.

But is ours a leading role? No. To refer to a "leading role" in this instance is like saying, "I am captain of the ship, but I am not going to look at the compass, nor touch the rudder". In my judgment, until we cross that Rubicon we are committing ourselves inevitably to a less and less important role in the European Union. Some people want that; I do not. Of course there are dangers ahead, as our report points out. When are there not dangers? However, I see economic and monetary union as increasingly successful and the euro as a currency that increasingly will have a role to play in national reserves.

After serving on Sub-Committee A, after taking part in producing the report and after many months of thinking, I conclude with the hope that the referendum will come soon. When it does, I hope and expect that the answer will be "yes"

3.45 p.m.

Lord Taverne

My Lords, first, I make my personal position clear. I undertook to speak in the debate on the assumption that it would finish by 6.30 p.m. That is the latest time at which I can leave in order to catch a train so that I may give a lecture in Brussels tomorrow.

As a non-member, I find the report extremely valuable and, indeed, enlightening. I want to talk about what it avoids; namely, how it affects our decision as to whether or not to join the euro. The report states that these are early days and, in effect, it says, "So far, so good". However, due to the weakness of the pound, it has not necessarily been good for the United Kingdom. Undoubtedly there are dangers which we could have avoided if we had joined earlier. Over the next few years we may well find that those dangers increase as the reality of being outside the euro-zone becomes more and more clear to foreign investors in this country.

I want to say what is clear from the report. So far, the euro has had good effects. I shall not repeat what the noble Lord, Lord Tomlinson, said in his admirable speech. There has been increased competition and, as I believe the report points out, increased investment and restructuring of industry, perhaps on the scale which we saw when the Common Market was first founded, but in which we are not participating at present.

The report also mentions that the euro has helped to accelerate structural reform. That is a matter of great importance about which I want to say a little more. A fact which has not been much noticed in the British press, which still paints a picture of a sclerotic Europe, is that the extraordinary increase in the amount of part-time work has contributed to the drop in unemployment. The general view has prevailed that wage flexibility on the Continent is rather worse than it is in this country. In fact, one finds that some wages in east Germany are now 75 per cent of the level of those in west Germany. That degree of wage flexibility was brought about by the existence of the euro and is rather greater than that found inside the United Kingdom.

As a result of the euro, there has been considerable pressure to reform pensions in Europe. Some five years ago I wrote a pamphlet which pointed out the pension time bomb, the dangers which that involved and the size of the hidden liabilities. I have just finished writing another paper and the change has been quite remarkable. Pressure is now being exercised to raise the retirement age. Then, the retirement age was going down; now it is rising. Fundamental and enlightened reforms in such countries as Sweden have shown the way providing incentives for longer working lives. To some extent, those reforms have been followed in other parts of the European Union. Indeed, participation rates have risen sharply. That will have a considerable effect on the hidden liabilities of which so many eurosceptics have been scared.

Of course there are dangers, and perhaps the report understates the problems which still exist with regard to the co-ordination of fiscal policy. I do not believe that a culture of co-ordination, which will become increasingly necessary, has yet developed in Europe among the euro-zone 12. To my mind, part of the reason for the huge investment in the United States and for the relative weakness of the euro is that the markets do not have the confidence which they should in the co-ordination of fiscal policy. A most interesting paper on that subject was written recently by two Frenchmen—Jacquet and Pisani-Ferry—and published by the Centre for European Reform. I believe it to be an extremely important paper and it addresses that problem.

I turn to the lessons for the United Kingdom. The first lesson that stands out in the report's minutes of evidence is the fact that all businesses in Europe are convinced of the euro's benefits. The views of M Trichet appear in paragraph 166 on page 48 of the report. He said that businessmen in Europe, consider that their position has dramatically changed for the better. I have no memory of a single French, German or Belgian entrepreneur that I know that would give evidence to your Committee and say: 'I think it is no good, we are going in the wrong direction'. They are all seeing the benefits of having that very, very large single market with a single currency. Businesses in the UK, please take note. Some UK businesses are still saying, "That is all very well for European continental businesses, but we are different". That is the attitude that we adopted when the Common Market was first formed. It is the attitude that has always made this country late to join extremely successful developments on the Continent.

We should study what the report tells us about what I regard as the major difficulty in this regard, which has been referred to on many occasions outside the House and in this debate. That difficulty involves having one interest rate for so many countries. As the noble Lord, Lord Renton of Mount Harry, said in an extremely notable speech—I agreed with his every word—Ireland is an important case in point. It was interesting to note the article by Mary Ann Sieghart in The Times the other day. She is a talented writer for whom I have great respect, but on this occasion her article fell well below her best. Her article was full of mistakes and, economically, it was rather illiterate. Had she bothered to read the report, she would have found a very different story. I refer in particular to the witnesses for Ireland. It seems rather patronising to say, "They may think that they have done well out of the single currency, but we know much better".

The report mentions that in 1996 the Economic and Social Research Institute studied the economic implications for Ireland. It concluded that on balance the arguments were in favour. The minutes of evidence refer to an article in the Irish Times by Mr Terry Baker. He wrote: the risks attached to EMU entry have diminished considerably since mid-1996 … With hindsight, it appears that our 1996 assessment underestimated the advantages of initial entry". We should study Ireland's current problems, including inflation. Yes, of course that country has inflation, but does that make the Irish regret entry? No, it does not. The Irish testimony makes it clear that if Ireland had remained outside monetary union, inflation would have been worse. Despite Irish inflation, goods in the shops in Ireland are cheaper than they would be in the United Kingdom.

Professor John Fitz Gerald stated, on page 78 of the minutes of evidence, that, the Irish economy is too competitive … wage rates have to rise". One way in which a country that has a high rate of inflation and is expanding too fast inside monetary union can adjust is through a rise in prices. What did the evidence reveal about problems with house price inflation? It revealed that the problem would be worse outside monetary union. Professor Fitz Gerald's concluding words in the minutes of evidence were: The consequences of getting things wrong are much less severe for the Irish economy within monetary union than they would have been outside it". The problem that that country faces, in comparison with others, looks terrible. It had to slow down its rate of growth from 8 per cent, which it had maintained for some years, to a modest 5 per cent per annum.

I regret, on behalf of the sceptics, that there is little comfort for them in this thorough report or its minutes of evidence. All members of the union are convinced that it was right for them to join. There is no reason why the United Kingdom should not prosper as other countries have done. The experience of those in the Union and all the arguments favour our membership.

3.55 p.m.

Lord Barnett

My Lords, I hope that I shall be forgiven for speaking in this debate although I am not now a member of the committee that produced the report. However, as a former chairman, I congratulate my successor, Lord Tomlinson, on chairing the committee and the committee on producing an excellent report.

My noble friend Lord Tomlinson referred to a successful single currency. I shall come to that later. The report is, understandably, purely factual: the committee wanted to produce a unanimous report. Having said that, I am not sure whether one or two of its members agreed, although the report was unanimous. They would have disagreed with one or two of the points made by my noble friend.

Perhaps I should declare an interest. My views are pretty well known—I am as strongly in favour of our joining the single currency as I have always been. I was glad to note that the noble Lord, Lord Renton of Mount Harry, concluded—not necessarily because of the committee's report—that he, too, hopes to see us become members of the European Union single currency zone.

Eurosceptics will be unhappy, regardless of the facts disclosed in the report. The euro might have been strong, weak, or going nowhere, but that would have made no difference whatever to Eurosceptics.

In principle, the Government have said yes, subject to five pretty meaningless tests. I raised the matter at Question Time. We are now aware of the Treasury's response. The noble Lord, Lord Renton, rightly described that, although I refrain from using his language. The report refers to the economic case for the UK's joining having to be clear and unambiguous.

Lord Renton of Mount Harry

My Lords, it was not the noble Lord, Lord Renton, who said that; it was the noble Lord, Lord Renton of Mount Harry.

Lord Barnett

My Lords, perhaps I should apologise to the noble Lord, Lord Renton. I think he knows that I meant to refer to the noble Lord, Lord Renton of Mount Harry, but I am not sure whether he would agree with my argument.

Many on the Opposition Front Bench are unambiguous about what we should do about membership of the euro-zone. Some of them are even semi-detached to the European Union.

The Government have, in principle, agreed that they will join at some point. As the noble Lord, Lord Renton of Mount Harry, said, I hope that that will not delay too long. The UK's concern, as we all know, is not about the economic case; it is about the related political problems. I hope it is accepted that the euro-zone and this country will be pretty convergent pretty soon, if we are not convergent already.

In paragraph 137 of the report, the Governor of the Bank of England, who now likes to be known as Sir Edward George, said that, on the basis of fundamentals it was difficult to understand the fall in the value of the euro". I am not a betting man. If I were, I should not mind investing a few bob in the euro as of now; I should bet on what is likely to happen to the euro over the next few years.

One of the most serious criticisms of having a single currency is the fact that one interest rate has to fit all countries. That serious case needs to be answered. To an extent, that argument currently applies within the UK, because parts of the UK are very different from each other. Scotland, the North East and parts of the North West are very different from the South East, but they have to live within a single currency and manage to do so, although sometimes that does not work out too well. The argument seriously applies to the 11 member states in the euro-zone and, to some extent, it will apply even more when the 12th country, Greece, joins.

Lord McIntosh of Haringey

My Lords, Greece is already in.

Lord Barnett

My Lords, I am sorry, I am reminded by my noble friend that Greece joined on 1st January.

By now, having listened to some of the critics in relation to the subject of the single interest rate fits all, one would have expected to see, within nearly two years, some really disastrous economic positions. In fact, the situation has been anything but disastrous for those 12 states, 11 as it was, within the euro-zone. As we know, there are very different economic circumstances in each of the 11 states.

It is worth looking at what has happened. Table 1 attached to paragraph 36 of the report shows that on average—I know that there are wide variations within any average, but one must look at the average within the euro-zone—growth of GDP in the European Union 11 member states in 1999 was 2.4 per cent and in 2000, 3.4 per cent. It has been going pretty well. One can hardly say that the single currency has destroyed the situation or made it very difficult.

Indeed, if one looks at all the tables in Appendix 3, there is no stagnation so far. I say "so far" because one cannot make forecasts. Some economists try to make forecasts or projections but in practice it is not possible to make a forecast as to how the euro-zone or even the UK economy will be in two, three, four or more years. But certainly as of now one can say that the single currency in the euro-zone has not done any serious damage. Indeed, it has been positively helpful in some ways to which I shall refer.

Unemployment within the euro-zone is, of course, much too high. It is much higher, on average, than in the UK. But it is falling and within some member states in the euro-zone it is falling at a rate which is above the average. As I said, one must always look carefully at averages because they mask serious problems in some areas. Certainly in some countries within the European Union, or the euro-zone as it is called, the situation is far from that which exists in the best of those countries.

Inflation, as paragraph 39 of the report points out, was within the 0 to 2 per cent target range throughout 1999 and has risen slightly since. Again, averages mask wide variations. Reference has already been made to Ireland. Inflation has been 5.1 per cent in Ireland while it is only 1.6 per cent in France. So inflation rates vary within the euro-zone. One should not be too surprised by that.

Overall, by now, we certainly have not seen any of disasters forecast by the Eurosceptics because of the one size fits all problem. It is worth referring to—I always call him Eddie George—Sir Edward George, the Governor of the Bank of England. In paragraph 41, he is quoted as saying, "It is working pretty well". That is not bad coming from the Governor of the Bank of England, who can hardly be described as a Europhile.

I concede that problems will undoubtedly be created within the euro-zone. But we have a relatively successful euro-zone, as the report brings out. There will be difficult years here in the UK, as well as inside and outside the euro-zone. But the report brings out the tremendous advantages which will come to members of the euro-zone, as will be seen by any objective reader of the report.

The facts are clear. Paragraph 86 of the report says that membership has been helpful in other ways which have not generally been reported. It helps in withstanding shocks within a possible serious crisis. That is not unimportant.

But more than that, inward investment is clearly a serious matter. Nobody can dispute that. If it were not clear that we shall shortly be joining the euro-zone, inward investment here would be very seriously damaged. But there are enormous benefits from the removal of the exchange rate problems and the risks inherent in that. The noble Lord, Lord Renton of Mount Harry, referred to the 8 million holidaymakers. That will be a serious matter for them personally. But it is even more serious for businesses which are competing within Europe and which will no longer have the exchange rate problem and the risks involved with that. That will be much more significant for the UK.

Any objective observer will agree that the euro is working well so far. Of course, it is still a weak euro. The UK Treasury tells us—and I am not referring to its response to the committee but the evidence from witnesses—in paragraph 147 that, one would expect a slow response to a new currency". I shall not speculate as to whether it would have been better under Trichet or Duisenberg. The noble Lord, Lord Renton of Mount Harry, has had a few words to say about that. Nobody could say that Mr Duisenberg is the most charismatic fellow in the world. But he is running the ECB. He is not the only member of it and those responsible have managed relatively well. I have a feeling, having read what he says in the report, that my noble friend Lord Desai will disagree with me about that. But I think he is fairly alone in relation to that, as he always is.

All in all, the facts in the report speak for themselves. I hope that the UK will be joining the euro-zone very soon.

4.6 p.m.

Lord Shaw of Northstead

My Lords, it is a great pleasure to follow the noble Lord, Lord Barnett. I am grateful, as I believe are all members of the committee, that he has taken part in the debate. When these debates take place, too often one hears people saying, "Oh, I was not a member of the committee so I did not feel that I needed to take part". Contributions from someone such as the noble Lord, Lord Barnett, who was a noble chairman of the committee for several years—we are much indebted to him for the work that he did for that committee during those years—helps to make these debates that much more worth while.

I am as firmly in favour of the European Union as the noble Lord, Lord Barnett, is. But while I have every hope that the euro will succeed, I have concerns about its future. Everybody must accept that the creation of the single currency has been an enormous step in the development of the European Union. Whether or not we should have joined the 11 countries, shortly to become 12, is not a matter for debate today. But the step has now been taken. Whether we are in it, whether we are to join it or whether we remain out of it for some years, it is in all our interests that the euro is a success. If it is a failure, it will hurt members of the euro and those who are not members of the euro.

Therefore, it is right that Sub-Committee A should continue to monitor the progress the euro is making. I have had the privilege of being a member of the committee for the past four years. I believe that its work is of value not just to this House but to a much wider audience. I add my thanks to the noble Lord, Lord Tomlinson, and to our splendid Clerk, who alas has now retired, Dr Elizabeth Hopkins. The report, its contents and its timing largely result from their great efforts.

My first reaction was to note the general satisfaction expressed by witnesses at the way in which the euro is working. That must be encouraging. For example, Dr Norbert Walter, of the Deutsche Bank Group, said that the euro was working very well. The Governor of the Bank of England also told us that the evidence is that the euro, has been working pretty well". I was particularly interested in the evidence from member states at paragraph 86 of the report that membership of the euro had helped them to withstand shocks, as referred to by the noble Lord, Lord Barnett. The Belgian Government, for example, considered that their membership of the single currency had smoothed the shock of the recent crisis caused by dioxin contamination of part of the food chain. They said that, had it not been for the euro, both the exchange rate and interest rates would probably have come under pressure and the consequences would have been felt far beyond the directly affected sectors". Similarly, as paragraph 86 states: The German Ambassador said that without EMU it was highly probable that the effects of the Russian financial crisis in August 1998 would have had repercussions in the money market 'and the normal course of events would have been that the German Mark would have gone up and other currencies of EU countries would have gone down". We were also told in relation to this important matter that, German trade unions had calculated that the effect on the labour market would have been the loss of about a quarter of a million jobs". So the message is, "so far, so good". But EMU has set sail in very favourable economic conditions. Adverse conditions are bound to occur and even now may be starting to occur. They will often affect different members of EMU in different ways. The disciplines accepted at entry may well prove unacceptable, or at least politically contentious.

In paragraph 18 of our report, we state: We decided to adhere strictly to our subject of how the euro has been and is now working, and not to allow ourselves to look into the future". Of course, future problems usually have their roots in present circumstances. Therefore, it is right that we should examine where those problems may have their present beginnings. For example, differences are already appearing between the Commission and the Irish Government as to how the Irish economy should be handled.

The significant point that I raise in this context is that Pedro Solbes, the economic and monetary affairs Commissioner, said that member states could not be allowed to pursue whatever tax and spending policies they wanted once they joined the euro. Yet Charlie McCreevy, the Irish Finance Minister, said that the idea of Brussels lecturing the EU's best performing economy would be greeted with amusement. There does not appear to be much agreement there.

Incidentally, Mr Solbes claims the authority for his action as being, not the Maastricht Treaty, but Article 99 of the EU treaties, which presumably already affect this country as well. I wonder whether the Minister agrees with his comments.

In my view, the position was well made by Mr Jim Power, the former head of economic research at the Bank of Ireland (paragraph 32), who said: First and foremost EMU was a victory for politics over economics. It is a political project. The economic realities are not always logical. I think that is particularly the case for the Irish economy". That leads me directly to paragraph 169 of our report, which states: The will to create the euro was political. Its future must equally depend on the continuing political will to create success. The problems that will arise on enlargement and future changes in the Common Agricultural Policy are obvious difficulties which will test that will". To my mind EMU and the single currency were started far too early. In a free society, a single currency has successfully been adopted by a number of states only after the necessary political cohesion has taken place. The history of the US, for example, has been much quoted. Yet such history sets no precedent for the creation of the EMU. In that case, former colonies with the same background of local government, the same language and the common political ties inherited from colonial days, formed a secure foundation for the creation of a single currency. However, in the case of EMU, the political will to achieve lasting success must overcome many more difficulties.

On the hopeful side, the evidence as to the continuing political will is reasonably encouraging. The Governor of the Bank of England said that in making their terrific—he used the word "terrific"—efforts to meet the criteria many countries had, introduced a greater degree of discipline into their fiscal and monetary policies". Ms Bettina Schulz, of the Frankfurter Allgemeine Zeitung, considered that in Germany the SGP had forced the government to reduce its deficit and its debt and had accelerated structural reforms; even labour reforms were started.

However, too often my experience of EU affairs has been that the difficult practical problems—the nuts and bolts—of any project are always swept under the carpet in favour of the big idea itself. I believe in travelling hopefully, but not blindly.

What are the tests that face a continuing political will to create a lasting EMU? First, one must establish just how far national sovereignty has to be sacrificed to secure a successful common currency. Secondly, the one-size-fits-all monetary policy of the euro-zone is only now being tested. The Irish situation is the first of many that will test the successful working of the system. Thirdly, there are substantial problems affecting the political relationships of member countries that must be resolved.

As our report makes clear, two of those problems are the terms of enlargement and the urgent need to change the CAP. In my view, a failure of will to meet those tests must seriously weaken the chances of a lasting success for the euro. The quicker that the Council of Ministers faces up to the solution of those problems, the greater will be the chances of that success.

4.18 p.m.

Lord Cobbold

My Lords, I want to add my voice to those who have commended this report. It is an excellent document, full of interesting detail. It contains a broad spectrum of views from those who gave evidence, combined with balanced conclusions.

As other noble Lords have pointed out, the essential dilemma, to which only the future will supply answers, is whether the one-size-fits-all interest rate can survive the effects of the inevitable future economic shocks without a central budget to counteract those effects. That is the main political risk. The business and financial market arguments seem to be unquestionably in favour of the euro.

The initial weakness of the euro, which surprised those of us who expected it to be strong—of whom I was one—is explained by the huge attraction of the economy of the United States in recent years and by the massive consequential capital flows into the US dollar that that has engendered. Such flows have delayed the balancing adjustments in international reserve portfolios that I and others believed would make the euro strong initially. But the weakness of the euro, as the noble Lord, Lord Renton of Mount Harry, has pointed out, has benefited the euro-land economies and has helped them to emerge from relatively sluggish circumstances and high unemployment, which a strong euro might have delayed.

Now the situation appears to be changing. The US economy is less attractive and the euro-land economies are showing reasonable, steady growth. As capital flows start to unwind, the euro is beginning to increase in value against the dollar. The government bond market in Europe is already larger than that in the United States, but the most exciting development has been the growth of a corporate bond market in euros. Although still much smaller in total than the US corporate bond market, and despite the turmoil of the past few months, the fact remains that, although down on 1999 levels, the volume of issues in 2000 was three times that of 1998.

The situation is much less rosy in equity markets, where rationalisation is still in full swing. Stock exchanges are fighting with the rapid advances in electronic trading systems and are uncertain how best to cope with the huge potential of the market for equities in euro-land. They are also battling with the still widely different regulatory environments that exist within the so-called single market. This is an area of great potential. Big changes can be expected and must take place in the coming months, especially as the focus of global investment is less concentrated on the United States and the attractions of euro-land become more real. As Europe's principal financial market place, the UK is rightly playing a very active part in this process. But our non-participation in the euro could increasingly work to our disadvantage, not to mention the huge extra stimulus to the development of the euro as an international currency that would follow from the inclusion of the pound sterling within the euro.

With the introduction of notes and coins, 2002 will be a critical year for the euro. Much will depend on how the citizens of euro-land react to the euro when it hits their pockets. I have French friends who still talk about ancien francs Will the French consumers take to the streets and make euro bonfires of the new notes, or will they welcome the new currency and benefit from the transparency that it will bring? Their reactions will be critical to the response of people in this country and to their appetite for joining.

There is still a lot to play for, and there is much uncertainty and excitement ahead. However, as this admirable, interim report concludes, I believe that the euro has been a success so far.

4.23 p.m.

Lord Bruce of Donington

My Lords, when I first saw this report, I thought that the Select Committee would quite impartially have addressed the question whether or not we should join the euro, but would objectively have studied whether the existing euro set-up was working satisfactorily. It seems that I was unusually innocent in that thinking. Most of today's speeches have not followed the edict set out at the beginning of the report. As it is obvious that in some cases it has been forgotten, perhaps I may refresh your Lordships' memories. It states: This Report does not consider whether, or in what circumstances, the United Kingdom should join EMU; it is intended rather as a contribution to the debate on whether the single currency has so far been—to use the Government's word—'successful"'. Anybody listening to today's debate might think that none of them was involved in the report. The speeches that we have heard today have been unequivocally pro-euro and thinly disguised—I say "thinly" because your Lordships are always polite—as an attack on the eurosceptics.

I turn to the report to illustrate the point that I want to make. It is no ordinary report. It consists of 222 pages, comprising approximately 100 pages of text and 127 pages of evidence. It contains a very large number of tables of statistics—43 in total—and no fewer than nine tables in the text itself, to which I may later refer. It is quite a formidable document. The noble Lord, Lord Renton of Mount Harry, said that the report would be clear to citizens, and my noble friend Lord Barnett said that the report would commend itself to objective readers, whatever those terms may mean—

Lord Renton of Mount Harry

My Lords, I am not aware of having said anything of the kind. I believe that I said it was clear to citizens. I approve of the report. I served on the sub-committee that produced it, but I never said the words that the noble Lord has just mentioned.

Lord Bruce of Donington

My Lords, the words used by the noble Lord were, "clear to citizens". We shall see it in Hansard tomorrow. In the mean time, the total cost of the document, which will obviously appeal to the broad, general public, particularly those in gainful employment, is £20.30. I do not know the intended circulation of the report, or to what extent it may be claimed that it will be read by the mass of the population or is likely to impress the mass of the population, but it has not even very much impressed the press, to whom, presumably, complimentary copies have been sent. The report has, of course, been considered by those with the resources to acquire it, who do not comprise the bulk of the population either in Britain or in Europe. It has also been read and understood by a comparatively few trained economists, including econometricians for good measure, and by the business community. Those citizens of the United Kingdom have had the opportunity to see and understand the document.

There arc precedents for this. One recalls that Ministers of the Crown do not always read the treaties that they sign. That was the case with the Treaty of Maastricht, when the noble Lord, Lord Hurd (as he now is), together with the then Chancellor of the Exchequer, admitted that he had not even read the treaty. Anybody who for one moment thinks that Ministers of the Crown read these reports is barking up the wrong tree. I probably would not include my noble friend Lord McIntosh of Haringey, who will wind up the debate and whose neutral stance I, unusually, support.

I turn to the report itself. At page 7, the report states in its conclusions: Less than two years have passed since it was introduced, on 1 January 1999. Euro notes and coins will not start to circulate until 1 January 2002, and most of the general public will have little opportunity to judge how the euro affects their lives"— You can say that again! The report continues, and to reach conclusions about the success of the euro until some time after that. Even where deep-seated structural and macro-economic changes have begun, it is too soon for their full effects to be felt". The euro has not been introduced in a vacuum; it must function within other political and legal frameworks. Those are set out in the stability and growth pact and in various other sections of the Maastricht Treaty. That seriously inhibits the action of member states within the euro and some outside. Does anyone believed that the ordinary people of the country are likely ever to be in the position of being able satisfactorily to judge the real impact of what is happening?

As is always the case when such complex issues are raised, there is a mass of statistical information. Indeed, 20 per cent of the report comprises tables of statistics which will not be intelligible to the ordinary people who inhabit the country. They will have to rely on second-hand opinions. Furthermore, there are some 43 pages of statistics from the Government's database and I have no doubt that sooner or later they will appear on a website. We know that the statistical material emanating from computers is not always permanent. Often, it is completely recast. There have been a number of cases in the United Kingdom in which millions of pounds have been spent on computer programs and print-outs which have subsequently proved to be inaccurate. The same thing applies to the statistics which are quoted with authority in the report.

It is no good for us to proceed on such a basis. There is no point in trying to dazzle people with the figures and arguments as they are currently presented. We know in advance that business and large commercial interests will be in favour but the public will not be sure unless a detailed and impartial presentation of the situation of Britain within the euro and outside is made to them in a manner that they can understand and appreciate as being fair. Until that is done, such reports will do no more than touch the periphery of opinion in this country—and mainly professional opinion at that.

It is already clear—it is clear even in the report—that the imposition of a single currency throughout Europe will not succeed for the simple reason that it will automatically impinge on the lack of ability to vary exchange rates and interest rates. That will deal a fatal blow to the expenditure plans of all governments. Only through government action can the lot of poorer people—the great mass of people in Europe be articulated.

Such articulation stands no chance but it could not be put in words better than those used by M Trichet. It will be recalled that in a complete breach of the treaty M Trichet was appointed in advance, outside the scope of Protocol No. 10 of the Maastricht Treaty, in order that he could take over from Mr Duisenberg the leadership of the European Central Bank.

It is most interesting, therefore, to see exactly what he said about the position that would be likely to arise. In evidence to the committee, M Trichet said at page 38: One of the observations we are also making is that in general it seems to us the level of public spending as a proportion of GDP is too high and should diminish and the best way to be on the safe side in terms of fiscal policy is to attack directly the question of public spending. In that respect I can mention that the euro area has received recommendations by the Eurosystem that are going exactly in that direction: let us diminish public spending as a proportion of GDP; let us try to have a fiscal situation that will be as sound as possible in all respects, including the one that you have mentioned". M Trichet is due to take up leadership of the European Central Bank.

The attacks on public expenditure remain the settled polity of the European Commission. Sooner or later, the people of Britain will know that the only way of redressing their position as against those of the rich and powerful who govern will be progressively to bring pressure for more expenditure on public and other services in order that the yawning gap between the rich and the poor can partially be narrowed and suffer no further deterioration.

In that light, I commend the report to the House. Had I time, I could mention many more niceties within it. I hope that it will be appreciated and I sincerely trust that, despite its supporters here today, it will receive a wider circulation than has been the case.

4.40 p.m.

Baroness Sharp of Guildford

My Lords, I speak from these Benches as a member of the sub-committee which helped to write the report. As the noble Lord, Lord Bruce, noted, the report is substantial, although when we began our deliberations the inquiry was to be a short sequel to the earlier report by the sub-committee on the European Central Bank. We regarded this subject as appropriate to fill the overspill period before the gracious Speech. As it turned out, the exercise was very much more substantial than originally envisaged.

The report is extremely useful from many points of view. I reassure the noble Lord, Lord Bruce, that the report may cost £20 but it can be downloaded from the Internet, which many university students use to obtain the report. I believe that your Lordships' reports are used extensively by universities in this country. Certainly, speaking as someone concerned with the economics of science and technology, the reports of the Select Committee on Science and Technology were regularly used by both me and my students.

When we embarked on the exercise we recognised that it was too early to take any definitive views on what would happen to the euro because the period was still very much a transitional one. The European Central Bank had been set up and a single interest rate covered the euro 11, now the euro 12. Big business used the euro for the purposes of trade and the financial markets in the euro picked up and developed in a substantial way, as the noble Lord, Lord Cobbold, mentioned. But if one visited any country in euro-land one would find that people still used local notes and coins and, although prices were quoted in euros, most still thought in terms of local rather than euro prices and the euro meant very little to them.

Above all, when we tried to take a view as to how the euro was working and looked at the statistics—we spent some time pouring over pages of figures produced to us—we had difficulty in distinguishing the effects of the euro from the general upswing in the macro-economic situation within the Union. Undoubtedly, the recession of the early 1990s, which Germany and France hit somewhat later than the UK—therefore, they went into recession later—had been extended by the build-up to the single currency and the stringent demands placed on many countries by the stability and growth pact. Nevertheless, we believed that it was useful to flush out what was and what was not available and look at the evidence.

The first issue was what criteria should be used to judge how the euro was working. What does one mean by "success"? On page 7 of the report one finds a very long list of issues that can be used to judge success. I very much liked the approach of Sir Edward George, Governor of the Bank of England, who said clearly that it should be judged by its performance. He went on to point out that growth was up, unemployment down and inflation, given the rise in oil prices, surprisingly stable. He summed it up by saying: Basically … it is actually not at all a bad performance; in fact, it is quite a good performance". The problem in performance that Sir Edward George saw was the one that we all witnessed: the fall in the value of the euro. The general public, certainly in this country, asked what was wrong with the euro and why it had dropped so substantially against the dollar. As other speakers have made clear, Sir Edward George said that he did not think that that was the result of the fundamentals of euro-land but the extraordinary outward flow of both direct and portfolio capital from euro-land in particular, but also the UK, into the United States. He believed that the cause was the imbalance across the Atlantic rather than across euro-land. It is interesting that, as the noble Lord, Lord Tomlinson, noted, the glamour of the dot.com economy, which in part pulled in this money, has faded since the time the sub-committee took evidence from the Governor of the Bank of England. One now sees some rebalancing of the two currencies of which Sir Edward spoke. I found that a particularly interesting exercise.

In the early and mid-1990s I had been somewhat sceptical about the development of the euro. I accepted that it could be seen as the logical conclusion of the single market project and that there could be problems if within that single market countries began to adopt competitive devaluation positions. In particular, I recognised that Germany had fears about Italy and Spain, even the UK, using devaluation as a means of positioning themselves more favourably in the market. But I have also spent much of that time studying the underlying competitiveness of European countries, in particular the relationship between the less advantaged and more advantaged countries in the EU—"cohesion" in euro-speak—and the divergence and convergence among those economies. As a result, I was well aware of the divergence between different parts and regions of the European Union. That led me to conclude that the single currency project needed to be taken slowly rather than too quickly. I believed that the more important project politically was enlargement in order to bring in the countries of eastern Europe rather than the single currency.

But I am a political as well as an economic pragmatist. Once it became clear that the all-important axis of France and Germany was determined to press ahead with the single currency, and therefore it became a political project, I believe that Britain would be ill advised not to participate. It was important that if it went ahead we should make it as successful as possible and that we would do better—as in 1958—to be at the table at the beginning helping to shape it rather than come along as a Johnny-come-lately asking people to change the rules.

At that stage I was very interested to see how it was shaping up. Two particular issues influenced me in becoming far more optimistic about the project than I had been earlier. One was the fact that the effect of price transparency was much stronger, even at the early stage, than had been expected. Several witnesses spoke about the degree to which, even before the introduction of notes and coins, consumer prices had been pushed down as a result of everything being priced in euros. That important matter had been noted by Ireland in particular, but it also emerged from other witnesses.

Over the past 20 years in this country we have suffered from the collusion between retailers and manufacturers in the car market to keep prices somewhere in the region of 20 per cent above those in the rest of euro-land. To some extent, the development of single pricing in the European Union is one of the factors which exposes that collusion and gives the Government, as well as the EU competition authorities, something of a stimulus to do something about it, whereas before they turned far too much of a blind eye to it. The issue of consumers benefiting from transparency of prices is of considerable value. If it already exists at a time when we are not using the notes and coins, how much greater it will be when we have a single currency.

The second interesting issue is the stability and growth pact. It has been mentioned that Belgium and Finland both talked about the advantage to their administrations of the stability and growth pact in terms of providing a degree of external discipline to goverments. I had expected Italy to find life within the euro difficult. In my studies I worked fairly closely with a group of Italian economists. I asked them: "What are your views? How are things working out in Italy in relation to the single currency? Are you being pressed too hard by the stability and growth pact?" A tall man—I confess they were all men—relied: "No, Margaret, you must understand this has been of enormous value to us. At long last we have some external discipline on our government that actually reins in public expenditure. No, it has been tough meeting the criteria but it has very definitely been worth while".

I conclude that I have been influenced by a number of issues, but these are two issues I highlight as being a slight surprise in the evidence that we found. The noble Lord, Lord Shaw, made the point that so far we have seen the euro working at a time when the economy is moving forward quite fast. It is important in the sense that trying to make changes within the economy is rather like trying to change gear with derailleur gears: as long as you go forward you can change gear quite well; it is when you stop that the chain falls off.

That is a test still to come. But my reading of the evidence that we received was that the euro has made a good start. Given the confidence that is now being built up in the euro, and given the reassertion of its fundamentals against the dot.com economy of the US, I am fairly confident of its future.

4.52 p.m.

Lord Peston

My Lords, this is an excellent report. I shall not waste time listing everything with which I agree. Instead I shall concentrate on some points of contention. That is less to do with the committee's report and more to do with the precise form of EMU itself.

However, I should tell your Lordships—other noble Lords have done so—where I stand personally on EMU. I use the language so beloved of my right honourable friends in government; namely, that it is in our national interests to join economic and monetary union. The net economic gain is as clear and unambiguous as anything in economics is or is likely to be. That is my position.

The noble Lord, Lord Shaw of Northstead, said that it all started too early. He must know that this matter goes back some 40 years. I certainly started to get involved in it in the early 1960s when people were thinking of it as both a theoretical and practical project. I certainly talked to the noble Lord, Lord Jenkins of Hillhead, when he was president of the Commission in 1975, about the practical prospects then. Far from being too early, this should have happened long ago. The other comment that one should make at this point is that, given the history of what has happened, the fact that EMU has started is actually a miracle. To anyone who knows the problems at every stage in moving forward, it is a remarkable achievement of which Europe can be proud.

I turn to the report. I look first at paragraph 14, again as a point of contention. I do not regard the end of internal competitive devaluation, coupled with differential interest rates, as a potential downside; quite the contrary. The essence of economic and monetary union is that one gives up competitive devaluation and one gives up separate interest rates. That is the point. It cannot possibly be a downside. Indeed, the point of it is the efficiency benefits that will occur in the way the single market is operating in that monetary and micro-economic framework. Therefore, one should not approach the subject in that way. I add that it is a matter of sadness to those of us who believe strongly in the single market how slow we are still being in removing the large number of market imperfections and restrictive practices that remain, both in European Union producer and consumer markets. But EMU will help, I hope, in moving us in the right direction there.

I turn to paragraph 16. Here I agree with the committee. It says that, the ECB has been more transparent than expected". But, as none of us who knows anything about Europe expected it to be transparent at all, anything it has done is more than expected. But it is surely not transparent enough. The ECB compares most unfavourably in this regard, as in so many other ways, with the Monetary Policy Committee of the Bank of England, which is a model of transparency and openness. Therefore, I do not accept that it would be inappropriate for the ECB to publish minutes and voting records. Independence is not, in any way, threatened by so doing or by requiring such secrecy in order for the bank to operate in an independent way. If one really believes that, one has no faith in the European Union in the first place. To say that the ECB would be threatened by normal democratic transparency is a most ridiculous proposition.

That takes me on to accountability. This is a matter that unites most of your Lordships' House, given our own peculiar way of getting here. Accountability to democratic institutions is the essence of democracy. Here again, the ECB compares most unfavourably with the position prevailing in this country with regard to the Monetary Policy Committee. So far, the European Parliament's role in this has been pathetic. I should like to see it show some courage and start to demand an accountability role.

I do not see what the problem is—again I slightly disagree with the committee: if it reflected on the point, I am not sure whether it might not come to agree with me—

Lord Dubs

Oh!

Lord Peston

My Lords, perhaps I may finish. I do not see what the problem is in making the European Central Bank accountable to national parliaments. It would do it the world of good and would improve policy-making if it regularly had to explain itself to the Treasury Select Committee of the other place or, even more valuably, to the new economic affairs subcommittee of your Lordships' House, as well of course to similar bodies in other countries.

The target of the ECB is stable inflation. It refers to stable prices but it always means stable inflation. That is similar to our target. It follows that the external value of the currency is determined by markets given the inflation target and policy to hit it. I am not one of those therefore who believes that it is appropriate, having done that and let markets determine the behaviour of the external value of the currency, to start talking about whether the currency is too high or too low.

I can only say that we will live to see the same kind of people saying how worried they are about fundamentals compared with the value of the euro being too low. It will not be long before they say that the value of the euro is too high. The answer is that these days, in the free world, markets determine the value of currencies and one should stop all these pronouncements on too high or too low; or, to put it differently, in the usual cynical way: if you know what the price should be, you can make a lot of money by working against markets. I would not advocate that to your Lordships.

My right honourable friend the Chancellor of the Exchequer got the inflation target formulation correct and the people who set up the ECB got it wrong. As noble Lords will know, the target in this country is a precise number with a symmetric band, and outside the 1 per cent band of the 2.5 per cent target the governor has to write a letter to the Chancellor explaining what he is up to. Setting an inflation target at less than or equal to a particular inflation rate and then saying it is for the medium term is much inferior as a target method of making policy to our method. Certainly, the lack of the equivalent of an explanation is a weakness. I am not happy with the formulation of the ECB's approach to policy and I hope that it may at some time move in our direction.

I make a similar remark about the stability and growth pact. I entirely accept that one has to have some kind of restraint on fiscal policy. I do not take the arguments of why quite as seriously as my noble friends of all kinds on the committee, but one has to have some restraint as fiscal profligacy could undermine monetary policy. The way in which the stability and growth pact is formulated is extraordinarily unsophisticated. The ECB refers to a deficit of less than 3 per cent and then adds the usual weasel words, in all but exceptional circumstances", which get you off the hook if that is what you need. But that fails to distinguish current from capital expenditure, as our fiscal regime does distinguish. It is entirely correct to make that distinction.

It also assumes that we can easily define the cycle. Our approach assumes it as well and every economist knows how difficult that is. The main point is that capital expenditure should be approached in government budgetary terms differently from current expenditure and should not necessarily be tax financed even over the cycle. If we have stable, democratic and financially sound governments, which at the present time we do have in Europe, I think that then to base fiscal rules on the assumption that they are all stupid is hardly supportive of democracy per se. I hope that EMU will develop so that we achieve a much more sensible stability and growth pact than the one we have at the present time.

In addition, if the European Union is to evolve, it is by no means obvious to me why the emphasis on the fiscal regime should be on national governments. Different circumstances exist. Why should one national government not run a surplus in order to finance another national government's deficit? There is no problem with the economics of that. In order to get my point across to noble Lords and help them to understand it, I ask them to reflect on the position of a large multi-national company with businesses in several EU countries. Let us suppose that someone were to come to that company and say, "What you have to do is balance your accounts in every country and, in addition, you must not be a net borrower". If one really wanted to bankrupt that multi-national, that is how one would do it. If one applies that rule to a multi-national private enterprise, one should at least reflect on whether it might not also be applied to a multi-country European Union.

My comment on the insulting document sent to us by the Treasury is that there must be someone in the Treasury who is still feeling bitter about the behaviour of your Lordships in 1911. I hope that the Treasury takes note of the fact that no one in the Chamber and no member of the committee was responsible for defeating Lloyd George's Budget at that time. I really do believe that the Treasury should forgive us. It should put in a little work and take more seriously the enormous amount work that the committee put into its report.

I conclude by asking and answering four questions. Is the euro working? Answer, yes. Could it work better? Answer, yes. Should Britain join? Answer, yes. Would it work even better still if we joined? Answer, very definitely yes.

5.4 p.m.

Lord Northbrook

My Lords, we are all grateful to the noble Lord, Lord Tomlinson, for initiating this debate and also to the members of the committee, with their vast wealth of experience, many of whom we have had the privilege of hearing during the debate today.

As usual, the committee has made a thorough and detailed report. I have to venture the opinion that its broadly favourable conclusion has not entirely surprised me, as I have been getting to know over the past year or so on which side of the debate on the euro its personal sympathies lie. It is therefore interesting to see in paragraphs 14 and 15 of the report the committee's few concerns about the euro, which in my belief require a much more detailed inspection. I shall spend a little time on those two paragraphs.

Paragraph 14 states: But we have noted the potential downside of the 'one size fits all' monetary policy. It has deprived the national governments and central banks in participating Member States of the possibility of adjusting their economies either by alterations in their exchange rates or by differential interest rates". Too right, my Lords.

The report then moves on to paragraph 15 and looks at the position in Ireland. It observes that the rate of inflation has recently been increasing rapidly and that the Central Bank of Ireland cannot respond by increasing interest rates. Let us look at the Irish situation in more detail. Inflation in Ireland is at its highest level for 16 years. It stood at 7 per cent in mid-December. Interest rates should be at a much higher rate than the current euro-land 4.75 per cent to reduce demand in the economy. Maurice Fitzpatrick, chief economist of Chantrey Vellacott DFK, has suggested that interest rates should be around 14 per cent. As a consequence of the high inflation rate, the unions have recently negotiated a 7.5 per cent pay increase from next April.

Wage price inflation looks to be flourishing in Ireland. In addition, there has been a rapid expansion of credit. By last July it was increasing at the rate of 25 per cent per year. Maurice O'Connell, governor of the central bank, has said that nothing can be done to stem the expansion of credit. He stated There is no authority to impose restrictions as we might wish". A report by PricewaterhouseCoopers in October 2000 stated: If confidence erodes and foreign investors pull out Irish property prices could crash undermining the banking system". The IMF has also suggested that monetary conditions are too loose in Ireland. In a report on the Irish economy in August 2000 it noted: Monetary conditions are clearly expansionary from Ireland's point of view contributing to robust demand growth as well as rapid increases in house prices and private sector credit". The IMF also noted that monetary conditions, now determined on a European area-wide basis, were excessively accommodating for Ireland's cyclical position. Thus the consequences of joining the single currency are all too clear in the case of Ireland where the inability of the national government to put the brakes on an explosive boom could well lead to economic disaster in the long term.

Portugal looks to be going down the same route. It is already experiencing the highest industrial inflation in euro-land at 16 per cent. It has experienced a credit boom and a collapse in savings leading to a massive current account deficit. The Portuguese Government have imposed price controls on energy to hold down increasing inflation, but that subsidy arrangement comes to an end this month. Last August, Vitor Constancio, Governor of the Bank of Portugal, warned of the danger of, a spiral of higher prices and wages". Traditionally, Portugal has one of the highest saving rates in Europe. This fell dramatically when Portugal became a member of Euro-land and real interest rates dropped. In October 2000, the Financial Times reported an estimate from the head of a large commercial Portuguese investment bank, Mr Tavares Moriera of Central, that household debt had tripled in five years to reach 90 per cent of disposable income. He feared that: Interest rate adjustments next year may push many households over the brink". As a result of the credit boom, the current account deficit has ballooned from 4.7 per cent of GNP to 12 per cent in 2000. In October, the economic situation caused a political crisis.

Thus we see how in two European Community countries the euro is causing severe economic problems. What is more, its weakness over the past year or so has enabled larger countries like Germany and France to avoid wholesale economic reform, in particular of labour markets, as my noble friend Lord Renton of Mount Harry pointed out. This would also help euro-land to escape from high structural unemployment. Last October in Germany, Hans Henkel, the then head of the German CBI, stated In the past, we have been good at exporting the strong mark. We should not have to rely on a weak euro to help us". He also stated that the government's lack of urgency and commitment to modernising the German economy were now very worrying.

The German Government have recently increased the burden of labour regulation. Three new regulations extend employee representation in the workplace, reinforce employees' right to work part time and restrict the fixed-term contracts used by many companies to improve their labour flexibility. Economics Minister, Walter Muller, accepted that the new rules might scare off small and medium-sized enterprises. The new president of the German CBI has stated that unemployment could be halved if labour regulation were reformed.

In France, much the same situation exists. Starting in 2002, the government have decided to impose a 35-hour week on even the smallest firms. Lucien Rebuffel, the head of the CGPME, which represents over 1.5 million small firms in France, said that the 35-hour week was, complex, rigid and what's more of little use when creating jobs". He added that no other country had decided to go along that road and this clearly means that French companies will face a serious handicap when it comes to increased costs.

The French Government have also proposed that workers on fixed-term contracts be paid over 10 per cent more than workers on open contracts to encourage companies to take on workers with full employment rights. The French CBI has said that it is hostile to this proposal, believing that it shows a major lack of understanding of the way modern business works.

The European Parliament has strongly resisted economic reform. The parliament has voted to pass amendments to the takeover directive which would make hostile takeover almost impossible in Europe. The amendments were proposed by a group of German MEPs concerned by the hostile takeover of the German firm Mannesman by the British company Vodafone. It also voted for the early imposition of a tax on art sales, which could weaken the European art market. Furthermore, it voted down postal liberalisations.

The most serious long-term problem facing euro-land is unfunded pensions. Whereas citizens in the UK have nearly fully funded their future pensions liabilities, this is not the case in continental Europe, where a "pay as you go" basis is the norm. A study by Niall Ferguson and Laurent Kotlikoff in the publication Foreign Affairs in March 2000 found that in order to fund pension commitments, Italy will have to raise taxes by 10.5 per cent, Germany by 9.5 per cent and France by 6.9 per cent. These figures are with effect from today's levels the immediate and permanent adjustment needed.

What is the attitude of these countries to pension reform? In France, pension reform was dropped in March 2000. The Prime Minister, Lionel Jospin, has stated that he does not believe that "pay as you go" should be replaced by the UK system. In Germany, pensions reform is under threat with large-scale union demonstrations against the planned reforms of the labour Minister, Walter Reister. Why is this pension problem so interconnected with the euro? A common currency would inevitably lead to a common taxation system, despite recent denials. Comments from a senior aide to the German Chancellor (made after a recent meeting with Tony Blair) confirm this. He said: Those who are in euro-land quickly feel the direct obligation that you cannot have the one without the other. You cannot have a common currency that is not embedded in a common and appropriate fiscal and economic policy". Hence the very real probability that the UK will end up, through its net contributions, funding European pensions.

In concentrating on the major problems of the euro, I should like to emphasise that the UK can be part of the EU without joining the single currency. The predictions of politicians and many commentators were that the euro would be strong from day one, I should, however, declare an interest as a manager of an investment trust where we decided to go short on the euro right from the start. I should like to end with the three reasons for doing so, where we forecast the likely unfavourable progress of the euro against the dollar. First, time. Some 135 years have elapsed since the end of the American Civil War. The dollar was fused at the end of it. On the other hand, the euro was cobbled together in only a few years. Secondly, common language. In the USA, this makes mobility of labour much easier than in the EC. For example, a Greek citizen emigrating to Wales or an Italian to Denmark will find it much more difficult than an American moving from one state to another. Thirdly, economic convergence. The examples of Ireland and Portugal show the problems, whereas in the US, economic variations between the different states can be ironed out by market forces.

Perhaps I may ask the Minister how he believes that these problems can be overcome.

5.18 p.m.

Lord Lea of Crondall

My Lords, perhaps I may say right at the start that those of us who served on the subcommittee are extremely gratified by the range and depth of consideration which other noble Lords have given to this matter. I hope that we can do justice to those contributions in the remarks that some members are now able to make.

In debating at this time the question whether the single currency has so far been successful, there will be those who will wish to quote Chou en-Lai, who, when asked what he thought of the French Revolution, replied that it was too early to judge. But to leave it there would of course be untenable for several reasons, not the least of which is that, since 12 countries have taken the plunge, our jobs and investment are starting to be affected. Certainly, investment is in many cases predicated on Britain joining.

Our witnesses assisted us in defining the criteria by which we would measure success. To that end. I should like to put a question to my noble friend on the Front Bench: does he agree that we have set out a reasonable list of criteria on page 7 of the report, even though we cannot mark out of 10 the Treasury's response this afternoon? Our analysis of' the evidence in relation to these criteria is the heart of our report. For the record, there is the conclusion—also on page 7—that, Clearly there has been considerable progress in relation to some of the criteria, but less in relation to others". That will not exactly set the Thames on fire, but if someone from Mars were to mark the answers out of 10, he would probably conclude that the euro was doing fairly well on seven or eight out of 10. As has been mentioned, that is, of course, broadly speaking, the overall assessment of the Governor of the Bank of England.

Another broad impression, which we do not spell out in so many words, is that the whole process since Maastricht—which was, of course, 10 years ago—has been one of very careful preparation and of very careful work on conditions and procedures, stability and growth factors and so on, for this project to be a success. That careful preparation has undoubtedly paid dividends.

Nearly all the witnesses gave the rationale, the logic, that the fruition of the single market is a single unit of account, a single currency. They implicitly reject the position, if I can sum up in a slogan, "single market yes, single money no". They think that is an illogical position.

My noble friend Lord Peston touched on the question of accountability and unelected central bankers, and I shall refer to one of the many interesting remarks that he made. I used to share the view expressed by the noble Lord on the publication of voting. However, the very clear view arising strongly from the evidence was that a particular difficulty arose from the fact that the board consists of one member per member state. If votes were recorded, members would be lobbied and they would be different kinds of animals from the animals they are now. They would find it much more difficult to do what my noble friend Lord Peston says they should do—that is, vote according to their own judgment—if they were to be more openly lobbied by their own governments.

Lord Peston

My Lords, perhaps I may interrupt my noble friend. I hope that he fully appreciates what he is saying. He is saying that these major figures from each of the countries would find, if they had to express their views in public, that they could not behave honestly. That is the position. It is an appalling reflection on the behaviour of the ECB and the European Union if we have to live with that view. I am simply saying that I do not want to live with that view.

Lord Lea of Crondall

My Lords, I knew that that would be the counter argument. I do not think that it is quite as devastating as my noble friend said. After all, we could have a totally different kind of central bank—it could be run, like the Bank of England, through a monetary policy committee—but if we have this system we have this problem. We have a similar problem with the European Court of Auditors, which also consists of one member per country. This is a great step forward and we have to look at the issue in an objective way and not use emotive language about the motives of people. If we are not careful, that will be their behavioural response. I hope that it is now on the record that that is the logic, the reasoning, for the view expressed.

Perhaps I may now say a word about sovereignty. On page 103 of the report the German ambassador quotes the following remark of Paul Henri Spaak more than 50 years ago: In Europe there are only small nations left, those that know they are small and those that do not". Some may think that is pushing it a bit, but it is an arresting and fundamentally accurate analysis. If one looks at a world of 5 billion or 6 billion people and at the accelerating development economically in China and elsewhere, one finds that Europe, with a population of some 500 million, has a maximum of 10 per cent of the world's population. In a world of globalisation, Europe is just about large enough to have some leverage in the WTO and elsewhere.

So what about the proposition that the euro is, to quote another phrase on page 46 of the report, "a currency without a country"—which is almost the converse of the previous question? That is one of a number of propositions which are somehow true ex hypothesi and do not enter into other than a definitional state. The same is to some extent true of "one size fits all" rate of interest, an issue to which I will return in a moment.

We can agree that it is a great leap forward—if I may quote Chou en-Lai twice in one speech. Future historians will probably see it as an act of faith at least as great as the establishment of the EEC in the first place.

As to the rate of interest, the objection that different degrees of capacity utilisation require different interest rates is, of course, as my noble friend Lord Barnett, pointed out, as arguable between London and Cardiff as between London and Brussels. The greater difference is, of course, between London and Cardiff. Indeed, typically there are far more variations of capacity utilisation within countries than between countries.

Noble Lords will be interested to know that we spent a lot of time considering the issue of so-called asymmetrical shocks, whereby a particular member state is affected quite differently from the others by an external shock. The more we looked at this the more we found it to be, in practice, overstated. Finland was cited as an example of where such circumstances may be a factor because of its proximity to Russia. We heard about an interesting innovation in Finland—the social security buffer fund, which is referred to on page 23—whereby the flexibility in labour costs of any asymmetrical shock does not have to be in wage costs per se but in total labour costs. I was very pleased that my former trade union colleague in Helsinki gave that evidence.

Other noble Lords have dealt more than adequately with the questions of the euro's value against the dollar and Ireland, so I should like to skip those issues and say a few words about the problem of public opinion. We perhaps did not say enough about this in the report, although it is mentioned on page 48.

Here I should say a word of caution about the reaction on the streets of Dusseldorf—and this goes also for the streets of Burton-on-Trent. It is not axiomatic that we can visualise, as the noble Lord, Lord Renton of Mount Harry, said, the deregulation of labour markets as a general proposition. At a time of accelerating structural change, we need more labour consultation and protection on some matters as well as updating technology and working practices in other respects.

The difficulties of convincing public opinion, the man and woman in the street, are exacerbated if there is loose talk about deregulating labour markets. For example, deregulating pensions? No. The opposite is required on the agenda. Deregulating holidays? No. We have now agreed a minimum of four weeks holiday and that has massive advantages. What about deregulating standards of training? No. Everyone who has studied the matter in any detail knows that the opposite is true. Deregulating European works councils? No. They are rightly about to be strengthened to help with the restructuring of the European economy. What about deregulating maternity leave? No. That is part of an active labour market. I could go on.

Of course, there are structural changes that require changes in arrangements in the labour market. But the man and woman in the street, in Dusseldorf and in Burton-on-Trent want a prosperous Europe that is also seen to protect their welfare—and if there is an increase in welfare to be had out of all this, why not?

I ask the noble Lord. Lord Northbrook, whether he is aware, when criticising the framework agreement on part-time working and on fixed-time contracts, that this was done by means of a collective framework agreement with the BDI, the German employers, and with the CBI in London as the alternative to a detailed directive. The reason they signed the agreement was that they want to see an agreed role for part-time work and fixed-term contracts as part of the modernisation of the European labour market.

What was the issue in Denmark? The first point was the clear gender gap—with a 10 per cent deficit among women, mainly motivated by anxieties about the future of the welfare state, maternity benefits and so on. To use traditional trade union rhetoric for once, is this a project for bankers, or a project for the people? I say that, if we have to choose, it is a project for the people. But I say to noble Lords: please do not let the issue be posed in such a way. The art of politics is surely to give people an acceptable vision of their role in society. European trade unions have been working hard to adjust to EMU, recognising that European benchmarks for pay and productivity are now more transparent; they will be more so with the introduction of notes and coin. We refer to the matter on page 22 of the report.

So let us maintain a sense of balance on the question of labour markets. It is an important area so far as public opinion is concerned. We shall be negotiating pay in euros. We shall need confidence in the prices index, and in the price tags in the shops. We shall hear a great deal more about this matter in the coming months.

I have the impression that the fashion in what is said about Europe is changing once again in a more positive way. Few now deny that the introduction of the euro is creating the most radical and far-reaching shake-up since the immediate post-war period. We see mergers and all that is associated with this type of restructuring, and we see the extra transparency of the currency itself with the notes and coin at the end of the year.

In conclusion, I ask my noble friend Lord McIntosh this question. Does he agree that there is scope to explain all these matters more adequately in this country—not at a level of high polemics, but systematically, possibly under the 10 headings that we have set out? Perhaps I may make a suggestion to my noble friend. As some recompense for the sins of omission of the Treasury, should not the Government publish a popular version of our report, with a joint foreword written by the noble Lords, Lord Bruce of Donington and Lord Tomlinson?

5.33 p.m.

Lord Hooson

My Lords, I agree with the noble Lord, Lord Lea of Crondall, who disagreed with the noble Lord, Lord Peston, over the idea that the European Central Bank should publish the minutes, and therefore the voting pattern, of its members. I never thought I should live to see the day when I should accuse the noble Lord, Lord Peston, of being naive. But if ever there were a recipe for disagreement in Europe, it is to publish the minutes of the bank's decision. It would invite pressure on individual members, no doubt from the nationalistic elements within their own country.

I have no expertise in this subject; however, I have a great deal of interest in it. The report is very important, and for this reason. I have often been dubious about certain values in this House—for example, whether Question Time is really valuable. But when a committee of this kind goes into a subject in depth, it makes one of the most valuable contributions that this House can ever make. The report is important in that respect.

The report gives those of us who do not have the expertise an appreciation of the attendant progress and problems of the euro. That progress greatly affects our political and economic outlook for the future. I read the report first; then read the evidence, which I found fascinating. An enthusiasm on the part of the witnesses came across, even in detached witnesses, such as the Governor of the Bank of England, who gave a correct appreciation of the benefits of the euro, the problems involved, and so on. The noble Lord, Lord Bruce of Donington, who is not in his place, referred to the costs of the report and said that very few people had read it. He said that the press had not taken it up the following day. Like so many people in this country, I am fed information on the euro which is entirely misleading. The press barons working from America who largely control our press have very little interest in presenting a detached report such as this. That is also why it is so important.

Previous speakers have indicated their approach. I make no bones about the fact—and here I agree with the noble Lord, Lord Bruce—that my approach is political. I think that the whole movement towards a European Union is political. It will be a remarkable achievement, after the wars of the last century—a united Europe, with a population of between 300 million and 500 million depending on which countries join. To achieve that objective, which would bring such security to the world and make an enormous contribution, requires a successful economy. The way to achieve a successful economy is through free trade throughout Europe, and through the organisation within Europe of a sound economy. That is essential. Also, for a single market, a stable and dependable common currency is an obvious must.

In political terms my view is that the Government, when they were elected and when the Prime Minister's popularity was at its height, should have taken the plunge and entered the euro then. I think that it was a rather mean approach to say that we shall join the euro only when the other countries have proven to us that it is a success. Obviously, this country could have made a great contribution to its being a success. I well understand the argument that the time when we should join the euro is largely governed by economic considerations. But the question of whether to join cannot depend simply on an economic assessment. It depends on a political assessment.

I should like to comment on two or three points that emerged clearly in this fascinating report. First, I have the impression that everyone generally was pleased with the progress of the euro and the performance of the European Central Bank. The gentleman from the Economist said in evidence that it was held in reasonably high esteem. That is a fair assessment. But all the witnesses conceded that the real test as regards assessing confidence in the euro was when it demonstrated how it would deal with a recession, especially one with high unemployment—in other words, when the euro economies had been through a bad period.

Secondly, there was considerable emphasis on the strong performance of the US economy. There was little thought then on the part of the witnesses that there would be a downturn in the United States economy. Therefore, already, to a degree, the evidence given and the assessments made by the committee need to be qualified by what is happening now in the United States. The one exception was, I believe, Professor Fitzgerald who gave evidence on behalf of the Irish Government with the Irish Ambassador. The professor laid great emphasis on the relationship between the Republic of Ireland and the United States of America and between the Republic of Ireland and this country, with regard to the proportion of trade that they enjoyed. He appeared to be scared of a sudden decline in the value of the dollar and a sudden increase in the value of the euro and of the problems that that could cause for the European Union generally and for the Republic of Ireland in particular. That is a possibility. One hopes that, as a result of combined efforts on both sides of the Atlantic, the rapid changes in value which he feared will not occur.

Professor Fitzgerald pointed out that sterling very much shadows the dollar and that if there was a sudden decline in the dollar it would hit sterling hard, just as it would hit the Irish economy pretty hard. He dealt with the problem of a possible decline in the global economy. Everyone will be affected if the measures taken in the United States do not prevent a decline in the American economy descending into depression.

I have friends in, and a fair knowledge of, the two peripheral countries of the 12 that are mentioned, Ireland and Finland. The problem of inflation in Ireland largely comprises asset inflation. Property has risen in price enormously. I had a friend in Ireland who died two years ago. He had been a friend since the war. His children phoned me to say that they had to put the house on the market. They mentioned an asking price which I considered would be high for the South East of England. I was told that within two days of it being put on the market it had been snapped up by an American. There is so much direct investment in Ireland for a number of reasons.

Ireland has joined the euro and is a wholehearted member of the European Union. It is the only other English speaking country in the European Union and it is a pleasant country in which to live. American businessmen have discovered that they can run a business in Europe just as well from the Republic of Ireland as from the South East of England. That has added to the boom in the Irish economy. That boom incidentally has probably contributed more than anything else to the change of atmosphere in Northern Ireland that makes a political settlement there a possibility.

I refer to a problem which will lead to great political difficulties in the coming election. Labour is imported from Wales into the Republic of Ireland on a weekly basis. Irish firms must constantly increase their wages to attract people to work in Ireland in the many jobs that are available there. I do not have to remind your Lordships of the great decline in the prospects for the Welsh economy. The contrast between the prosperity of Ireland and the lack of prosperity of Wales will become a real political issue in the coming general election. I imagine that the same thing will happen with regard to Scotland. It appears to me that the Government sometimes do not fully appreciate how close our country and the Republic of Ireland are.

Until I retired last year I was the chairman of Severn River Crossing Plc, which is one of the main arteries from the Republic of Ireland into England through Wales. That company has already made arrangements to accept the euro in payment of tolls from the start of next year. Many other businesses have also already made such arrangements. By 1st January next year when the coins and notes are in circulation we shall see a tremendous change in the attitude towards the euro in this country. I believe that the Republic of Ireland will have a soft economic landing from its inflation problem for a variety of reasons which I shall not go into now.

Like the Republic of Ireland, Finland worries about the American economy. If the American economy went into decline, and Nokia, the big electronics company in Finland, which is now entirely owned by Americans, were closed down or manufacturing moved elsewhere, that would be a great blow to the Finnish economy, irrespective of its position with regard to the euro. For we are really talking about a global economy in which the dollar is an important ingredient and the euro is an increasingly important ingredient. Looking ahead, people surely will one day talk of the merger of the dollar and the euro.

5.49 p.m.

Lord Plumb

My Lords, as another non-member of the committee chaired by the noble Lord, Lord Tomlinson, I congratulate him and his team on a positive report on the working of the euro. For the first time ever in this Chamber I congratulate the noble Lord, Lord Bruce of Donington, on his comment that the report should receive much wider publicity. I should like to think that from today that publicity may be received as the report is positive and thoughtful in its entirety.

Lord Tordoff

My Lords, I hope the noble Lord will forgive me as I hate to interrupt him. I do not think that the publicity that has been given has reached the citizen directly but the noble Lord, Lord Tomlinson, took the trouble of sending a copy of the report to the chairmen of every member of the FTSE 100 index. He received a considerable number of helpful replies from those people. So it has had a quite wide circulation to those 100 people, their economists and staff.

Lord Plumb

My Lords, I thank the noble Lord for that extremely useful intervention. However, the noble Lord, Lord Bruce of Donington, said that the report only reaches those in the City involved in business and not the average person on the street. But it is those people who employ the individuals; we need to get the message to them.

Many of the individuals we meet on the street or in the workplace believe that joining the euro is a step too far. We hear so often that they believe that the single market—the freedom of movement of people, goods services and capital—is as far as we should go. Yet we see the gap—it has been as much as 25 per cent—between the value of the euro and sterling. That means that we have a totally unequal market. It is a playing field that I can only describe as a slippery slope. ft is remarkable that over the past two or three years producers in this country have managed to survive in circumstances where products are pouring into the United Kingdom and we are denied the opportunity to export. In agriculture—the area I know best—in food production, 40,000 left the land during the past year mainly due to the disparity in the market place.

In his opening remarks, the noble Lord, Lord Tomlinson, said clearly that it is almost impossible to judge the full success of the euro. Yet the evidence received from almost everyone was favourable. He said that it can be judged only by the economic conditions of the European Union as a whole and its relations with the remainder of the world. We are all well aware of the growing influence and impact of the World Trade Organisation. In that sense, we in the European Union have a responsibility to get our act together with regard to the rest of the world in terms of trade.

My noble friend Lord Renton of Mount Harry said that the euro would be seen differently when in hard currency. I have made that point on many occasions. One can spell that out to the travellers. As the noble Lord, Lord Barnett, said, the benefits of the hard currency will come home to the 8 million travellers when crossing the borders in euro-land.

That leaves us with the overall situation in the European Union. It is often seen as economically sclerotic and politically bankrupt. We know that that is nonsense. Equally, we should know that our place in the European Union allows us to share in the benefits of the Union, which by any standards is one of the most economically dynamic regions in the world as well as being a bulwark defending democratic values. If the European Union were so awful, why would so many countries be queuing up to join, knocking on the door? It would be a tragedy if the United Kingdom were to turn its back on Europe just as it was on the verge of reuniting the continent of Europe. Shaping events, not reacting to them, is surely the order of the day.

The EU has a global influence on the economic and political plane. That will be reinforced by the European security and defence policy—and, many would say, by the euro itself. But that does not mean that it creates conflict with the United States. The United States is the closest global partner of the EU and will doubtless remain so under a different regime. For all the headlines, the reality is that the Atlantic relationship is flourishing, particularly in the private sector.

Any attempt to put a figure on the membership is doomed to failure. Any attempt to look forward over the next few years to determine what the economic climate will be is pure speculation. But most policies in the European Union—environment, trade, co-operation against crime, the drugs trade, the single market and economic and monetary union—have little or nothing to do with the Budget. Trying to quantify those matters makes no more sense than quantifying concepts such as collective defence, the rule of law or parliamentary democracy.

The assumptions following some public attitudes that we hear far too often are that the European Union is static and that the United Kingdom has no influence in it. Both are wrong. One has only to pick up a newspaper to see that there is a fundamental debate about how the European Union works on top of years of policy change in areas ranging from economic and monetary union to security, and from the fight against crime to economic reform. In many of those areas the United Kingdom has had a profound influence: in police co-operation, economic reform and moving towards a freer trade.

We need more input not less. I take seriously the comment of the noble Lord, Lord Peston. He said that the European Parliament was pathetic in its reaction to the present proposals. I served for 20 years in the European Parliament. I can only say that when the noble Lord, Lord Tomlinson, and I were there it seemed very different.

5.58 p.m.

Lord Desai

My Lords, my noble friend Lord Barnett said that I should be an exception to every rule. As the last speaker before the noble Lords who will wind up the debate, I am tempted to disagree with everyone but I shall not do so. I note that the Labour Party has a new invitation for the election, that we should vote with our heads and our hearts. On this topic, too often the heart is involved rather than the head.

I used to be a wild enthusiast for EMU. In 1992 I wanted immediate entry without any convergence criteria. Since then I am a disappointed enthusiast. Since the Edinburgh summit when Mr John Major was Prime Minister, the EU has become arrested in its development. The steady march towards what I had hoped would be a more integrated state has not occurred. There has been no leadership since Jacques Delors gave up presidency of the European Commission. There is no leadership among chief executives, prime ministers or presidents of Europe, as was evident at Nice. That was no way to run any meeting.

I do not question whether the euro is good or bad, or whether we should go in. I wish to examine the euro critically. Having a single currency without a single state creates problems. Some Euro-sceptics fear that a single currency will lead to a single state. Those who love the EU get defensive about the issue. They do not want to admit that a single currency without a single state will cause severe problems.

I agree with my noble friend Lord Lea that it is too soon to judge whether the euro has arrived. There has been no major event in the past two years that could be described even as a shock, much less a symmetric or an asymmetric shock. We do not know how the system would cope with an asymmetric shock.

We have to examine the euro in an instrumental way as a currency. Is it working? As a past member of the committee, I know what an excellent committee it is and how carefully its reports are written. However, there is one major question for the country that the report does not address. I shall confine myself to my disagreements with the report. Praise will only go to the head of the noble Lord, Lord Tomlinson.

There is a problem of excess volatility. I agree with my noble friend Lord Peston that in a flexible exchange market there is no correct level and there will be volatility. However, I am worried that, although the euro-dollar rate, given in figure 4 on page 39, was more or less between 1 and 1.40 dollars between 1986 and 1999, it has gone below 1 dollar since the establishment of economic and monetary union. It may go up again, but we have to note not just the fluctuation but the fact that the trend of the euro against the dollar is downward. I know that it has turned up slightly in the past three or four weeks, but one must worry when a new currency shows such a steady trend against a leading currency.

It has been argued that the situation is due not to the euro's weakness, but to the dollar's strength. There has been an interesting change in the relationship between the pound and the dollar and between the pound and the euro. The pound used to move with the dollar, but now it has decoupled and is moving more with the euro. However, it is no good denying that the pound is overvalued against the euro. We have to ask why it is so.

I have argued previously that there is a fundamental institutional shortcoming in the Maastricht treaty: nobody is in charge of the external value of the euro. Even in a flexible exchange world, somebody has to be responsible for making a statement on whether the currency is too high or too low. In the United States, the Secretary of Treasury is the only person who makes a statement about the dollar. In Europe, everybody has an opinion and expresses it, from the Chancellor of Germany to every other Minister or member of the Commission.

Those arrangements will not do. That gap in the institutional set-up of the euro must be repaired. Somebody—perhaps ECOFIN—ought to be responsible. Whoever it is, people ought to know who to go to in a moment of crisis for an authoritative statement on whether the euro is high or low. Of course, ECOFIN cannot do anything about the problem because it can give only general orientation to the ECB about the external value of the euro. Some people think either that the external value of the euro does not matter or that devaluations are welcome. Our experience of devaluation has been pretty terrible, so I hope that nobody else starts to rely on it.

It would be very good if the euro were to settle down at some value—I shall not call it an equilibrium value, but some value, plus or minus 5 per cent—and stay there for at least six months. It has not stayed at any specific value for even three months in the past two years. It has been very successful at achieving price stability, but there was price stability before. There has been no great change on that. Inflation was low in the European Union countries and it has not been appreciably altered by the ECB.

This is not about whether we like the EU: it is about whether the currency works. That is a non-emotional question. Currencies are instruments. One cannot die for them—or at least I hope not.

Price stability has certainly not been worsened. I agree again with my noble friend Lord Peston—it is always a surprise when economists agree with each other—that the target has not been set up intelligently. However, the downward trend of the euro is news. We must acknowledge that and not live in a fantasy land where we believe that the euro is on its way up every time it appreciates by 1 cent and that it will soon beat the dollar. We need to forget about the ambition that the euro should be not just a currency, but a revenge against the United States to show how macho we are. The aim of the euro should not be to beat up the dollar. It should aim to be a stable currency against the dollar, at whatever level it chooses. It has failed to do that so far.

That structural defect in the operation of the euro ought to be addressed at some level, either in ECOFIN or at one of the rather untidy summits at 4 o'clock in the morning on the fifth day after the seventh shirt. That situation must be brought under control and the euro has to show that it can be stable to within plus or minus 5 per cent. I do not ask for parity with the dollar any more. I used to want that, but all my life my dreams have been disappointed and one more will not make any difference. It simply needs to stabilise at some level. There ought to be institutional arrangements in the EU to have a single, authoritative spokesperson for the euro. Once that is done, we can address the question of whether we should join. I am not a Euro-sceptic and never have been, but I do not want to join a disfunctioning currency. We have had a disfunctioning currency for too much of the past 40 years. Now that sterling is functioning properly at last, we cannot join another disfunctioning currency.

I should like a sixth condition on top of Gordon Brown's existing five: there needs to be some stability between the dollar and the euro at whatever level, plus or minus 5 per cent. The excess volatility and the euro's downward trend ought to be reversed or fought.

On the other issues, such as accountability, I entirely agree with my noble friend Lord Peston. It is shocking that the democratic deficit in the European Union has been further deepened by the central bank. The sooner the ECB starts to behave like an institution functioning in a proper democratic environment, the better for all of us. It is no good the central bankers hiding behind secret doors. We have to know why they do what they do—or do not do. They are answerable to the citizens of the European Union, because that is where their legitimacy comes from. They cannot be above the law. They have to be subject to the law. If not, when they fail we shall have no recourse to anything.

Lord Marlesford

My Lords, before the noble Lord sits down, perhaps I may ask him a simple question about a matter which I did not understand from his most interesting speech. If exchange rates, among many other things, measure the difference between the functioning and structure of economies, why would he expect there to be stability between the dollar and the euro?

Lord Desai

My Lords, I do not know that a long-term level of equilibrium exists between currencies. I agree with the noble Lord on that point. However, I expect policy to be at least marginally effective in keeping fluctuation between currencies down to a small band. I am not in favour of fixed exchange rates but I believe that, at least in the short to medium term, we should aim to manage currency better. In this case, six months before the euro was launched, no care was taken to stabilise the money flowing into the component currencies. Therefore, the euro started too high. That was the first failure of the ECB and we are still suffering from it.

6.11 p.m.

Lord Newby

My Lords, I join many other noble Lords in congratulating the noble Lord, Lord Tomlinson, and his committee on an extremely valuable report. I agree that it deserves a wider audience than almost certainly it has. I do not know whether, in addition to sending it to the FTSE 100 companies, the noble Lord sent it to the editors of the eurosceptic press. If he did, clearly they have not read it. I also agree with noble Lords who said that the report deserved a better response from the Treasury. Its document was pathetic.

I am sorry not to see the noble Lord, Lord Pearson of Rannoch, in his place. I had hoped that he might use this debate as an opportunity to explain to the House why he withdrew his Bill this evening at such a disgracefully late hour. Perhaps the noble Lord, Lord Saatchi, can enlighten us. The report will of course make extremely depressing reading for the noble Lord, Lord Pearson, and those who share his views. It demonstrates that the euro is achieving the goals set for it and that it is helping the euro-zone to deliver more growth, more jobs and more stability.

I want to refer to the robustness of the euro-zone and the "one size fits all" argument. A number of noble Lords said that we have been in a benign period over the past few years. They forgot to mention that we have seen extreme volatility in the oil price, which in previous decades has had a severe effect on domestic economies. No such severe effect has occurred in the euro-zone, where inflation remains low and stably low. The rise in the oil price has also had a somewhat asymmetric effect, not least on Ireland—an economy much discussed this afternoon.

I want to say two things about Ireland before moving on. First, according to the harmonised index of consumer prices, the latest inflation figure for Ireland has fallen significantly to 4.6 per cent as excise duty rises have fallen out of the index. I believe that it is generally accepted within Ireland that by the end of the year the inflation rate will have fallen to some 3 or per cent. That is hardly a horror story.

My second point with regard to Ireland is that one of the other main reasons why we have experienced such a high level of inflation is that the Irish economy has been extremely successful. We heard from my noble friend Lord Hooson about recruitment from Wales. Can any noble Lord say when the Irish economy has been so strong compared to the UK economy that the Irish have recruited large numbers of workers from this country?

Why is the Irish economy so strong? The answer is principally because, virtually more than any other member of the EU, the Irish have realised the benefits of membership, played by the rules, worked the rules to their advantage and done jolly well out of it. There is a lesson there for the UK. Unfortunately, I fear that many noble Lords who have spoken about Ireland this afternoon have drawn the wrong conclusions.

Before I return to the effects of EMU on the real economy, I want to refer to the ECB. I had the privilege of being a member of the House of Lords Select Committee on the MPC of the Bank of England. Many of the issues discussed in relation to the ECB. are those which we examined in relation to the Bank of England. I agree with the noble Lord, Lord Peston, that the inflation target of a single point in the UK has advantages over a range, as is the case with the ECB. However, the two greater problems which have been identified are transparency and accountability.

With regard to transparency, I believe that some evolution has occurred. There have been positive developments in the publication of forecasts and, now, the publication of the models which the ECB uses. However, I agree with the noble Lord, Lord Peston, that further movement is needed. I am sorry to disagree with my noble friend Lord Hooson, but I believe that minutes should be published.

Leaving to one side the question of voting, which may or may not be included in the minutes by choice, at present many people argue that one should be able to identify from minutes of any type how individual governors have voted. However, if the last paragraph showing the voting intentions is removed, I defy anyone to carry out a textual analysis of the minutes of our MPC and to identify who said what. Therefore, I do not believe that to be a creditable argument against greater transparency.

With regard to voting, I understand why the governors seek the protection of anonymity. However, I am also conscious that the arguments which they use are those which are always used by those in power to justify secrecy. It is possible that at present the publication of voting is a step too far. However, if minutes are published—I do not believe that a compelling argument exists against that—the publication of voting would be the logical next step.

I believe that there are two ways to improve accountability. The first is to strengthen dialogue with the European Parliament. Although the noble Lord, Lord Peston, said that that dialogue has been pathetic, I believe that my colleague, Chris Huhne, and his colleagues in the European Parliament would argue that over the past two years they have been relatively successful in moving the ECB slowly towards greater transparency. Certainly, they believe that they have not yet finished. However, the Parliament is clearly the logical principal body to which the Bank should be accountable and they should keep on trying.

The second form of accountability is no less important, if somewhat less formal. It is for the Bank's president, chief economist and other senior staff to explain constantly to a range of audiences what the Bank is doing and why. In his evidence, Mr Issing, the chief economist, said, As a matter of principle, we do not appear before national parliaments". He appears to have forgotten that he and Mr Duisenberg appeared before the MPC Select Committee of this House. We found it an extremely valuable meeting. The Bank should not shy away from future meetings with UK parliamentarians or with representatives from other EU legislatures.

They should also follow the practice of some members of the UK MPC in making considered speeches to financial and business audiences, setting out the Bank's thinking on the developments and the outlook for the European economy and explaining how the Bank seeks to fulfil its remit. I believe that all those issues about the details of how the Bank operates are of secondary importance when put alongside its achievements in successfully managing the introduction of the euro and the euro-zone inflation rate.

We can also see that considerable success has been achieved if we move away from the inflation performance of the euro-zone and look at the real economy. A number of noble Lords referred to the degree of structural change which has flowed from euro-zone membership. Rightly, the Government have attached great importance to the ability of the euro-zone to introduce greater flexibility into the labour, produce and financial markets. The report sets out changes in labour markets to increase flexibility which have taken place in Spain and the Netherlands, and it refers to the Lisbon commitment to increase flexibility across the euro-zone. Other member states, such as France and Germany, have made less progress. However, to use the words of the German ambassador, they have "made a start".

The key point is not the absolute pace with which individual countries have begun to move and how far they have moved to date but the fact that they have begun to move and are committed to make further changes. On that point, I agree very much with the noble Lord, Lord Plumb, who talked about the fact that the EU is not a static body and that developments are occurring across a wide range.

In addition, we must accept that the structural changes which are suggested and implemented are often extremely politically difficult to achieve, whether they be cutting unemployment benefit, reducing non-wage labour costs, introducing fixed-term contracts or reforming pensions—an issue covered by my noble friend Lord Taverne.

When the UK went down that road in the 1980s and 1990s there was a huge political debate and reform was achieved at some political cost. It is hardly surprising that that is exactly what is currently happening in France and Germany. There is considerable resistance to change—it is difficult to introduce changes. We should now have the wisdom to accept the judgment of many euro-zone members that EMU membership has given the reform process substantial extra impulse.

If we look elsewhere in the real economy, as the noble Lord, Lord Cobbold, explained, we see that there has been an explosive growth in the volume of euro-dominated corporate bonds which is having a strong positive effect on business investment. There has also been an explosion in cross-border mergers and acquisitions, which is another area in which EMU membership has given a boost to economic activity and which is likely to lead to improved productivity and therefore to sustainable growth. As my noble friend Lord Taverne explained, that has almost unanimous business support.

With all that going on, I cannot agree with the noble Lord, Lord Desai, who said that there is no movement. There may at times be a lack of the visionary rhetoric that was apparent 20 or 30 years ago but, as the noble Lord, Lord Peston, pointed out, people were talking about EMU in the 1960s. In the more pragmatic 1990s, we actually got round to introducing it.

For the moment, we in the UK can only watch those developments with no little envy. In 13 weeks we may well find ourselves in a new Parliament with a firm prospect of an early referendum on Britain's EMU membership. As that battle is joined, the report that we are discussing today will be invaluable in setting the scene and in helping to define the battle lines.

6.22 p.m.

Lord Saatchi

My Lords, it is a great pleasure to wind up on behalf of these Benches after such a thought-provoking and timely debate on such an interesting report. Although I enjoyed the debate, if it had been a football match, the score at the moment would be 13–2. However, I shall try to make up for that in extra time.

I must first praise the noble Lord, Lord Tomlinson—I am sure that my praise will not go to his head—and all of the other distinguished members of the committee, who have, as many noble Lords have said. done an outstanding job in producing the report. As the noble Lord, Lord Bruce of Donington, said, it is truly a formidable report. It has tremendous breadth of research and analysis, and evidence was taken from the key people at the highest level. The report's quality of writing is remarkable—it is a tribute to all of the members of the committee, the Clerk and the specialist advisers. It brings great credit to your Lordships' House. The noble Lord, Lord Hooson, said that such reports are one of the greatest contributions that this House can make to public life. I should go further. As the noble Lord, Lord Desai, said during our consideration of another Select Committee report—I believe it was a report on the Monetary Policy Committee—Select Committee reports of your Lordships' House should be required reading in schools and universities. I totally agree.

When I got down to reading the report, I was struck by the committee's definition of its basic purpose, which the noble Lord, Lord Tomlinson, repeated today. He said that he was trying to make a contribution to the debate on whether the single currency has so far been, to use the Government's word, successful. As the noble Baroness, Lady Sharp, reminded us, the report's authors conveniently set out in one paragraph—paragraph 28—some of the criteria by which the euro's success or failure can be assessed. Those criteria include: increased rate of growth; greater incentives for fiscal responsibility and structural reforms; increased transparency; enhanced competition; greater liquidity; savings on transaction costs; and higher investment. No one could desire a more worthy wish list.

The noble Lord, Lord Cobbold, mentioned some other categories that were related to progress in bond and equity markets, and my noble friend Lord Northbrook described the impact that the euro was having in some other countries. I do not propose to analyse any of those criteria today. Other noble Lords have done so better than I can. Those criteria are indeed the stuff of tests and measurements, which can be carried out by what the noble Lord, Lord Barnett, called an objective observer in a laboratory.

I want to concentrate on just one of the concerns that the Committee considered; namely, that about the future, not the past, which my noble friend Lord Shaw of Northstead said was very important. That concern is aired in paragraph 29 of the report, which is about whether the euro might, increase the pressure for closer political union". Five hundred years ago, Dante—I shall quote him only to relieve the noble Lord, Lord Newby, of the stress of hearing me quote Plato—set out the premise on which the euro is based. I shall quote him at some length. In 1459, he wrote: mankind at its best depends upon unity in the wills of its members. The Scythians, for instance, live outside the seventh circle, experience extreme inequalities of day and night and endure an almost intolerably piercing frost; they require a different rule from the Garamantes who live in the equinoctial zone, where the days and nights are of equal duration and where the excessive heat makes it unbearable to wear clothes. But our meaning is that mankind should be directed by a common law issuing from one supreme prince, and applied to those characteristics which are common to all men". Today, the public—the noble Lord, Lord Bruce, called them the ordinary people—are being confronted with powerful arguments for the modern version of Dante's vision. The noble Lord, Lord Hooson, and many other noble Lords who have spoken today are deeply affected and attracted by that. We are told that although everyone wants to be in charge of their own fate, nothing is completely sovereign. No man is an island, not even this one.

We are reminded that with global financial markets, economies are interdependent. We are invited to see the euro as just another symbol of global capitalism; to observe daily mega-mergers and global corporate alliances; to note that jobs move to wherever it suits global corporations to employ people; and to hear employers teaching every day the meaning of e pluribus unum—that unity is strength—and that the strong go forward, that the weak go the wall, that size is everything and that only a few will survive. If nobody can stop the globalisation of companies, can the globalisation of countries be far behind?

That is what political leaders in euro-land argued to great effect in order to give birth to the euro in the first place. From their perspective, it is only misplaced romanticism that leads Britain to refuse, as my noble friend Lord Renton of Mount Harry put it, to cross the Rubicon.

Yet, after all of those powerful arguments, the latest opinion poll in our country shows that 71 per cent of our citizens will not vote to join the euro. That is not a success for the euro but it is, I contend, a tribute to the rationality and sophistication of the great British public. I shall try to explain why. Because, in arriving at that judgment, the public have carefully considered two sets of objections to the euro, both of which are well documented in the report. The first set involves economic objections: that it will fail; that it will cost jobs, raise taxes and lower pensions; and that bad things will happen. The public have worked out that that first set of defects—the economic objections—are capable of remedy by delay. In other words, a rational person could say, "I am a cautious man. I think that this may go wrong. Therefore, I will be prudent and wait and see. What's the rush?". In the event that time passed and that man's fears proved to be groundless, a rational man could say, "Fine. Now I am satisfied. Now I go in". That is a completely coherent position, and it is the position that the public have wisely absorbed.

The public have also considered a second set of objections, which involves our sovereignty, nationhood and traditions and, fundamentally, the accountability of the rulers to the ruled. The noble Lord, Lord Peston, referred to that as accountability to democratic institutions, which, he said, was of the essence. The noble Lord, Lord Desai, made similar remarks. The public have concluded that such constitutional objections are not capable of remedy by delay. There never will be a time when the arguments of sovereignty and accountability can be overcome by observation of economic outcomes or the results of tests, particularly not tests prescribed by the noble Lord, Lord Barnett, as "pretty meaningless".

No, my Lords. Perhaps it is true that, as the noble Lord, Lord Bruce, said, the £20.30 price of this report was too much for the public and, therefore, the public may not have read it. But they are well aware of its conclusion. In the "And finally" paragraph of the report, it says, starkly: The will to create the euro was political". The public know, without reading the report, as Sir Edward George does, that: Monetary union is fundamentally a political rather than an economic issue". That is true, and the public know it but, surprisingly—and it may be ironic—they have not responded in the way that the noble Baroness, Lady Sharp, did. On seeing that it was a political project, the noble Baroness said that we should accept it. But on the other hand, the public have taken a different view and that may be because the public know that in politics, as in law, motive is all. It may be that they are asking themselves where the political will, so-called, to drive the political project, so-called, comes from.

Was the project not driven by envy? Does paragraph 28 of the report not state that the aim was for the euro, to rival the US dollar in world markets". Was it not envy of what Americans had that Europeans wanted, envy of American cultural imperialism, which they saw as paving over precious national identities with a homogenised American version of reality? Was it not envy of American economic imperialism in which American companies march on to world domination in the name of globalisation?

One of the witnesses was the governor of the Bank of France, M Trichet, whom several noble Lords have mentioned today. I do not know whether noble Lords are aware that when M Trichet was asked why it is necessary to have the euro, what is the fundamental reason, his response, which he deploys as a party piece—it is quite effective—is to ask his audience first, "Are you aware, ladies and gentlemen, what is the share of world trade accounted for by America?" The audience is usually baffled and he says, "It is 30 per cent". Then he says to his audience, "And tell me, what is the share of world transactions accounted for by the dollar?" His audience looks blank and he says, "Well, it is 70 per cent". He explains that that is the imbalance, the injustice, which should be corrected by the euro.

My one regret about this magnificent piece of work is that the Select Committee saw no one witness from the American administration. That would have been fascinating.

Those issues of sovereignty and accountability will come to the fore when the debate on the euro begins. But as the Select Committee says, the response to the debate on the referendum, when it begins, will depend on the extent to which the public is provided with accurate information.

At the moment, the Government show no desire for a debate on the euro. One reads every day that the Government's strategy is for no better reason than the polls show that they will lose it. They prefer the sort of language of which Sir Humphrey would approve, as in Dr Itmar Issing's phrase quoted in the report. He said: It remains indispensable for the success of monetary union and the maintenance of price stability that congruent institutional arrangements and appropriate behavioural patterns can now develop". I do not think that the Government liked it very much when the president of the Bundesbank translates that into plain English when he says: A single currency does not require a single government but a single government will follow"; or when the governor of the Bank of France, M Trichet, explains that we must have monetary union because, it is the essential precondition of political union". I fear that the Government think it better to follow the strategy of President Johnson in the White House when he was asked by his aides, during a particularly heated period during the Vietnam war, whether he would conduct a public debate on the Vietnam war in America. He thought about it for a few moments and then his famous answer was, "If you have a one-eyed mother-in-law and her one eye is in the middle of her forehead, you do not bring her out of the kitchen". That appears to be the Government's view. They want us to fret alone in the dark with our fears and insecurities in our heads about how we can make it on our own: are we not too small; are we not too weak? Theirs is a basic appeal to fear. But when the referendum comes, I think that they will find that the British public are made of sterner stuff.

The Select Committee has done a splendid job and, as I said, has shown your Lordships' House at its best.

Lord Barnett

My Lords, the noble Lord has commended to us the view of the 71 per cent of the public who are opposed to joining the euro. Is that the view of the Official Opposition?

Lord Saatchi

My Lords, the Official Opposition's view is always to take an interest in what the public think and what are the public's concerns. Therefore, naturally, we are interested in what they have to say.

6.36 p.m.

Lord McIntosh of Haringey

My Lords, I join with other noble Lords who have congratulated the committee, its chairman, it special advisers and its Clerk on an excellent report. I was particularly grateful—at least for a short time—to my noble friend Lord Tomlinson for his introductory remarks when he said that the committee had ruled out discussion of UK entry and any discussion of the future. I thought to myself, "Well, that cuts out nine-tenths of what I was going to say so I can strike through it". Indeed, I have struck through it.

But, unfortunately, the debate did not take that line. Most noble Lords who have taken part have been talking about UK entry and the future and it is incumbent on me, to some extent, to follow the debate which has taken place.

I do not know that I can follow the exquisite speech of the noble Lord, Lord Saatchi. A debate on public opinion addressing the euro is neither covered by the committee; nor is it covered by the rest of the debate. But I enjoyed his speech very much. I shall read what he said with great care and as a past practitioner in survey research I shall be very interested to see how he arrived at the conclusions he has reached.

I shall go back to the more fundamental issues rather than the issues raised by the report. But in doing so, I should say that I shall save until the end my response to the unfavourable reaction—I put it as neutrally as I can—to the Treasury's response to the committee's report.

The starting point in the report is the criteria by which the success of the single currency could be measured. That is set out very well by the committee in paragraph 8 on page 7 of the report. It is set out as being the view of witnesses rather than the view of the committee but the committee gives general endorsement to the points made in paragraph 8 and the Government would broadly accept that those are reasonable criteria for judgment.

The important point about our response to those criteria would be contained in the comments made by the Chancellor to the Treasury Select Committee hearing in another place on 25th July last. He said that the test of the success of the euro is implicit in the five domestic tests we are applying. In other words, he was reminding the committee that we have indeed set out five economic tests and I was almost driven to repeating them in Starred Questions this afternoon. Those are tests that we would apply to a successful euro. Therefore, before we apply those tests it is incumbent upon us to reach a judgment as to whether the euro is successful. That is where the committee's work in relation to this report, the previous report and the forthcoming reports that are promised, is so important and valuable. Even the noble Lord, Lord Desai, who appeared to be searching for areas of disagreement with other noble Lords, would agree that one has to make a judgment about success as implicit in the five domestic tests we are applying.

A number of noble Lords have said that those tests are meaningless. My noble friend Lord Bruce of Donington said something of that nature; and my noble friend, Lord Barnett, believed that no judgment could be clear and unequivocal, a view with which I sympathise. However, if a test is meaningful and it is not met we would fall into the trap of making the old mistakes. We would mistake exchange rate stability for more general economic stability which would leave the way open for the stop-go economic policies and stop-go economic results that were a feature of much of the past 20 years.

I do not believe that the tests are meaningless; they are challenging. Therefore, I believe that making a decision during this Parliament is not realistic. A period of stability and settled convergence is needed before membership can be considered seriously. I know I am not saying anything new and I do not intend to, but we have said that we shall make an assessment of the five tests early in the next Parliament.

Having said that, my noble friend Lord Bruce challenged me to say whether the Government were neutral on such issues. No, the Government are not neutral. The Government want the euro to succeed for the benefit of Europe and for the benefit of the United Kingdom. The issue of UK entry is, and in our view always has been, dependent on UK economic interests.

On the success of the euro in European terms, which is the thrust of the report, we accept that some of the tests are still to come, as the noble Lord, Lord Shaw of Northstead, and the noble Baroness, Lady Sharp, said. That is true. The noble Lord, Lord Shaw, thinks that we are too early and my noble friend Lord Peston thinks that we are too late. Nevertheless, it is true that we have not been through what one may describe as a full economic cycle. What is wrong with starting at the right time? It must be remembered that at the beginning there were fears of serious economic shocks from crises in East Asia that threatened to spread around the world. Those shocks have been well-absorbed and well-resisted by euro-zone.

That is important not just for Europe, but also for us, because Europe is fundamental to our economy. We have about 3 million jobs that are directly affected by our economic ties with Europe. Over 50 per cent of our total trade is with the European Union; nearly 50 per cent is with the 12 countries in the euro-zone; and the European Union is our largest trade and investment partner. That is why in October 1997 the Chancellor said, as I have quoted so many times The potential benefits for Britain of a successful single currency are obvious: in terms of trade, transparency of costs and currency stability". By helping to sustain a zone of economic stability across Europe, a successful single currency should reduce the harmful effects of volatility on investment, employment and ultimately economic prosperity. That view has been reflected by nearly all speakers. The noble Lord, Lord Saatchi said that the score was 13 to 2 and with him it became 13 to 3. I ask myself why the Euro-sceptics fled away from this debate. Was it because the raw material with which they were supplied by the committee did not in any sense support their arguments?

It is also important to recognise the truth of what is said in paragraph 17 of the report, in contrast to the general level of comment in the UK press. It speaks of the advantage to the economies of European countries of the low euro in its opening months. The noble Lord, Lord Taverne, rightly said that the European business world disagrees with that and the noble Lord, Lord Cobbold, made a valuable point about the growth of the euro bond market and how that shows the approval of the European business community.

On economic development, much has happened in the two months since the report was published. There have been a number of developments in the global economy. There has been a sharp slowdown in the United States and in emerging Asia; some renewed weakness in Japan; a cut of 100 basis points in the US Federal Reserve interest rates; and the prediction by Alan Greenspan of growth "close to zero" this quarter as the momentum of weak consumer spending is exacerbated by falling consumer and business confidence.

The Commission's spring 2000 forecasts projected that GDP was likely to show relatively robust growth rates. The most up to date forecasts available from the Consensus survey in January 2001 showed slightly reduced, but not dramatically reduced, projected growth rates. As the noble Lord, Lord Cobbold, said, the euro has had a significant impact on producing a capital market to rival that of the United States.

The supplementary memorandum to the committee produced by the Treasury after its witnesses had given oral evidence cited the European Central Bank's analysis of January 2000. It said that there had already been consolidation in the financial services industry; it pointed out the increase in the numbers of firms listed in equity markets and in the growth companies. The evidence is that the euro is having profound effects on European financial markets with pervasive consequences not only on their functioning, but also on their contribution to the overall efficiency of the economic system.

In looking at those economic trends it is important to look behind them at the issue of economic reform; in other words, the benefits can be realised only if monetary union is underpinned by markets that work well. We need to make more progress, to build on the foundations of the single market and to improve the functioning of our product, labour and capital markets. That is made easier by the transparency of the single market for all the reasons that I have already given.

A number of your Lordships spoke about Ireland. I tend to agree with the noble Lord, Lord Newby, that that is hardly a horror story. My noble friend Lord Tomlinson described Ireland as a special case. I believe it is generally accepted that Ireland's share of the euro-zone economy is such that it could be treated as de minimis. The noble Lord, Lord Renton of Mount Harry, made that point. Despite the fears of the noble Lord, Lord Northbrook, we have to accept that the stability and growth pact is not breached in any way by Ireland. That has been accepted.

If ECOFIN at its next meeting considers the stability and convergence programmes, including Ireland, the United Kingdom will not be backward in arguing for robust and accurate assessments of every member state's stability or convergence programme. That is because we believe that the process of multilateral surveillance within Europe involving peer review is rigorous. It seems to me extreme to argue that Ireland has in any way disproved the success of the euro.

Lord Shaw of Northstead

I thank the Minister for giving way. According to the reference from Brussels, Pedro Solbes claims that Brussels has the authority, under Article 99, to enforce economic policy coordination among member states to protect the common interest. Do the Government of the United Kingdom take that view?

Lord McIntosh of Haringey

My Lords, if we consider the powers that ECOFIN could express at its meeting next week, it is most likely that it will express only an opinion, which would not be binding. The next step would be a recommendation, which would have to be considered by the European Commission. The power to take over the economic policy of a member state is a very long way away, and nothing that I have said in support of multilateral surveillance and peer review implies that we would support it.

I should like briefly to refer to the European Central Bank, about which there has been a great convergence of view among witnesses who gave evidence to the committee and Members today. It is important that the European Central Bank should be as open and transparent as possible, because that is the way in which it will gain the trust of the European public and of financial markets. That is a key feature of the United Kingdom Government's current monetary policy framework. I agree with the noble Lord, Lord Peston, about that matter, not because I presume to criticise the European Central Bank but because I agree with his praise for the Monetary Policy Committee.

To some extent, matters have improved since the publication of the report. The ECB has for the first time published its staff macroeconomic projections, which were included in a short memorandum to the committee, received by members either on Friday or this morning. Those figures, with the projected HICP inflation in the range of 1.8 to 2.8 per cent and real GDP of 2.6 to 3.6 per cent in 2001 contribute very considerably to our understanding of European economic conditions.

I am not sure that I can agree with the noble Lord, Lord Peston, about accountability to democratic institutions. I certainly cannot agree with those who suggest that because there is a European Central Bank, there also has to be a European central government. I contest the view that further economic union of the kind achieved by the euro inexorably leads to a single political government. That is not the view of the government of any member state. In those circumstances, accountability to the democratic institutions comprising the euro-zone is rather a long way from the accountability of the Monetary Policy Committee to the Government of this country.

In conclusion, I refer to the Treasury's response to the House of Lords committee. It was suggested that the Treasury still nurses a grudge about the rejection by this House of Lloyd George's people's budget of 1909. Although I still bear a grudge about the rejection of the 1909 people's budget, I do not believe that that view is very widespread in the Treasury. The point that I want to make is, "Never mind the width, feel the quality". It is not just a matter of whether the final response is two pages long. One has to consider together the very substantial written memorandum that the Treasury produced before giving oral evidence, the oral evidence that was given to the committee on 11th July and the requests for three further notes, producing an additional supplementary memorandum at the end. Although the noble Lord, Lord Tomlinson, accuses us of answering none of the conclusions, if we take the Treasury's contribution as a whole to this debate it becomes much clearer that our response has been entirely proportionate.

I do not want to be critical of the conclusions of the Select Committee. However, perhaps I may read a few parts of the press release that was issued when the report was published in December: So far, we have examined what is happening in those countries which have joined the euro already, flagging up both the successes and the problems which they have encountered. With the evidence we have received, we are publishing a wealth of features and figures, from which readers can draw their own conclusions…and it is almost impossible to disentangle the effects of the single currency from the other forces at work…All the euro-zone governments from whom we received the evidence assured us that the euro had been successful for them… We recognise that there are also dangers…As for the fall in the value of the euro, so far it has actually benefited the economies of euro-zone countries, but if it continues it could damage the credibility of the euro as a currency". Those are admirable sentiments. However, I am not sure that your Lordships would have expected the Treasury to comment at that level of generality. If we take the—

Lord Tomlinson

My Lords, I thank my noble friend for giving way. Nobody asked the Treasury to comment on a press release. The press release is inevitably at a certain level of generality. Will my noble friend now say why the Treasury did not see fit to answer the report, which was of much greater substance. We thought that the standard of literacy and understanding in Her Majesty's Treasury would exceed that to which the report had to be reduced in order to communicate it to the media.

Lord McIntosh of Haringey

My Lords, I considered taking paragraphs 1 to 19 of the report and seeking conclusions at a lower level of generality. I accept my noble friend's criticism that a press release is at a higher level of generality. I considered that point. I also considered whether it would be appropriate for me to read out sections of the conclusions of the committee's report, and to ask the question—no more than that—whether it would have been appropriate for us to give detailed responses, which could have been anticipated, to points that are fairly and generously put in the committee's report, but which, because of the restrictions that the committee placed on itself, are inevitably still of a level of generality, such that in our view no useful purpose would have been achieved by adding to the very substantial contribution that the Treasury made to this report as the work proceeded.

Lord Tordoff

My Lords, I am grateful to the noble Lord for giving way. As chairman of the Select Committee, I am quite upset by this response. It is said that the Treasury welcomes the opportunity to respond to the main conclusions. It is not said whether it feels that it is a good, well thought out report. Therefore, except in so far as it relates to paragraph 3, it is not a response. It is the duty of government departments to respond, in a given period and in some depth, to Select Committee reports.

I accept that the Minister and the Treasury might not want to go into too much detail on these issues, but the Select Committee has every right to expect a considered response. During the six years I have had the job, this is the first time that we have not had a proper response from a government department.

Lord McIntosh of Haringey

My Lords, I take most seriously what the noble Lord, Lord Tordoff, says. I do not want to open up a division between the Treasury and this House and I apologise if I have been in any way dismissive in my comments. I take that back; that was not my intention.

However, I take the view that it would have been almost patronising to put into a Treasury response the phrase, "Yes, this is a well written report"; the kind of response the noble Lord, Lord Tordoff, suggested would be appropriate. We take the committees of this House more seriously than that. If one takes the whole contribution of the Treasury to the process of the report and adds to that the short note which appears at the end, it will be found that the Treasury has behaved responsibly in every respect.

I am sure that Treasury Ministers will want to consider the views exchanged in the past few minutes and will want to respond to the chairman of the European Union Committee, sending a copy of the response to the chairman of Sub-Committee A, dealing with the issues that were raised.

I have brought this upon myself because at the end of the debate I raised a note which caused controversy. This has not been a controversial report or debate. The work of the committee was welcomed by all noble Lords who have taken part and the Treasury agrees with it. We join those who congratulated the committee on its work.

7.2 p.m.

Lord Tomlinson

My Lords, I thank noble Lords for participating in this interesting debate. I welcome their views and in particular the wide appreciation of the report. I especially welcome the specific points of dissent from the report. We shall all reflect on those issues. I welcome the large number of noble Lords from all parts of the House who appear to be impatient for United Kingdom membership of the single currency. However, I again point out that my welcome is personal, as United Kingdom membership is outside the scope of our report. I confirm the score counted by the noble Lord, Lord Saatchi, as 13 to three. That reflects a wide range of interests in all parts of the House.

There was a great deal to welcome in the debate and I want to address my noble friend Lord McIntosh perhaps more gently than I did in my somewhat abrasive previous intervention. A new standard has been set in basing a report to a Select Committee on what was said by the Treasury in evidence in written submission. We want to know what it thought of our deliberations after we had reflected on its evidence, not all of which was necessarily fully accepted.

I address my noble friend Lord McIntosh in the spirit in which he responded to the debate. He said that the Government would accept that the points listed at paragraph 8 are reasonable criteria for success. My noble friend could say that in the debate, but the committee would have been assisted if the Treasury could have said that in its response. If the Government believe it, they should say it.

My right honourable friend the Prime Minister on his visit to Warsaw spoke about the need for better connection between the people of Europe. In the spirit of compromise finally expressed by my noble friend Lord McIntosh, I suggest that we should at first be a little less ambitious and begin that process by connecting the views of our Treasury to our Parliament. I commend the Motion to the House.

On Question, Motion agreed to.