HL Deb 24 January 2002 vol 630 cc1570-2

3.18 p.m.

Lord Oakeshott of Seagrove Bay asked Her Majesty's Government:

Whether they believe there is something fundamentally wrong in the current euro/pound exchange rate.

Lord Davies of Oldham

My Lords, while the Government do not have a specific exchange rate target, a stable and competitive pound is sought over the medium term. The key to a stable and competitive pound is low and stable inflation, supported by sound public finances.

Lord Oakeshott of Seagrove Bay

My Lords, I thank the Minister for that reply. I do not know if he has yet had a chance to read the minutes of the January meeting of the Bank of England Monetary Policy Committee which were published yesterday. They make interesting reading: the worsening imbalances [in the economy] posed a particular threat. Real domestic demand growth had exceeded real output growth by 5.7% over the past five years … This was unsustainable, and at some stage there could be a sharp correction to the exchange rate in response to a widening current account deficit". Perhaps I may translate that central Bank-speak into English—

Noble Lords


Lord Oakeshott of Seagrove Bay

—"Runaway consumer boom; industry in dire straits; balance of payments up the spout and the pound riding for a fall". That is what the Monetary Policy Committee is saying. Will our complacent Chancellor stop preening himself on his so-called success and now take the advice of his colleagues such as the Secretary of State for Trade and Industry and get on with joining the euro at a competitive rate?

Lord Davies of Oldham

My Lords, I am not sure why the House disagreed with the noble Lord seeking to reinterpret his question. I was rather grateful for it. Far from preening himself, the Chancellor reflects on his achievements with the real economy during the years the Government have been in power. After all, productivity has increased by 13 per cent since 1997, which improves the position of our manufacturing industry as well as other sectors of the economy. As to the issue of the exchange rate against the euro, sterling is in a particularly strong position at the present time. But the noble Lord will recognise that, in regard to exchange rates, we do not look at short-term policies but at our long-term position.

Lord Sheldon

My Lords, is it not clear that the exchange rate problem is with us once again and is very serious indeed? Does my noble friend accept that it is not only our exports which are suffering, but imports coming in which are affecting our balance of trade and balance of payments, and that there is no sign of that improving over the next few years? It is not only a question of the five tests that the Chancellor quite rightly insists on being met, but of the exchange rate at which we go in. That will be the important and dominant factor in regard to entry into the euro mechanism in due course.

Lord Davies of Oldham

My Lords, my noble friend is right—the exchange rate will play its part in the five tests to determine the economic case for entry into EMU. However, he should not reflect too great a pessimism about our present position. Last year was very difficult. It was, after all, a year in which three of the world's great economies—the United States, Japan and Europe—suffered serious decline. But my noble friend will recognise that, at the present time, of all the major economies in the world, the British economy is growing at the fastest rate and is on target to grow by 1.9 per cent this year. Too much gloom is not well founded in these circumstances.

Lord Tebbit

My Lords, the Chancellor has now been in office for five years. Is sterling currently competitive and stable?

Lord Davies of Oldham

My Lords, the noble Lord will recognise that there are very stable factors in regard to the economy—not least, he might reflect, the unemployment rate in comparison to the years when the administration in which he played his part was in power. However, I hasten to add that of course there are fluctuations in exchange rates—we all recognise that—but they reflect the fundamentals of the economy. The reason why sterling is strong at the present time is that the fundamental aspects of the British economy are strong in themselves. Surely even the noble Lord can find it in himself to offer some congratulations on that score.

Lord Marsh

My Lords, given that over the past two or three years sterling has remained fairly stable against the US dollar, the Canadian dollar, the Swiss franc and most other major currencies, while the euro has declined consistently and steadily by something like 30 per cent, might there not be a problem with the euro?

Lord Davies of Oldham

My Lords, the noble Lord is right, the euro has not performed as well as it was hoped it might. But during the past two years the pound has not appreciated against the euro. It did, certainly, up to 2000, but that has not been the case in more recent times. We all look forward to a situation in which the euro economy develops strength. For all peoples of the advanced world at the present time—and this impacts significantly on the under-developed world—there is widespread recession in some of the major economies. Fortunately, under the Government's guidance, this economy is stronger than others.