Sitting of 24 September 1992

Preamble
The House met at half-past Two o'clock, notice having been given by MADAM SPEAKER, pursuant to Standing Order No. 12 (Earlier meeting of the House in certain circumstances).
PRAYERS
[MADAM SPEAKER in the Chair]
PRAYERS

  BUSINESS OF THE HOUSE
  2.34 pm
  Resolved,
  That this House, at its rising to-morrow, do adjourn till Monday 19th October; that, at this day's sitting, the Speaker shall not later than Ten o'clock put the Questions necessary to dispose of proceedings on the Motion in the name of the Prime Minister; that, at the conclusion of those proceedings, the Speaker shall adjourn the House without putting any further Question; and that, at to-morrow's sitting, the Speaker shall, at half-past Two o'clock, put the Question already proposed from the Chair.—[Mr. Patnick.]

  Economic Policy
  Madam Speaker: We now come to the motion on United Kingdom economic policy—[Interruption.] Order. I am delighted to note that the House has returned in a good mood. Before we begin, I must announce that I have selected the amendment standing in the name of the right hon. and learned Member the Leader of the Opposition—[Interruption.] Order. These are important announcements.
  The House will not be surprised to hear that many of those hon. Members who wish to speak will be disappointed. Therefore, I must put a 10-minute limit on speeches between 6 and 8 pm. However, I make a special plea to those right hon. and hon. Members who speak outside that time to restrict the length of their speeches. We need to hear a variety of opinions in this House and I expect the co-operation of the House in ensuring that that happens.
  2.37 pm
  The Prime Minister (Mr. John Major): I beg to move, That this House expresses its support for the economic policy of Her Majesty's Government.
  Following the developments in the foreign exchange markets over the past weeks, I thought it right to recall Parliament to debate the present position. The essential conditions for Britain's economic success are low inflation, low taxes, free trade and freedom from excessive state interference. I am happy to reaffirm those principles today. The Government stand for a low-inflation, low-tax economy—and so, I believe, do the British people. That is why, five months ago, they made their choice and we sit here and the Labour party sits on the Opposition Benches.
  We joined the exchange rate mechanism in 1990 to help to bring down the rate of inflation in this country. British industry supported us in that decision; indeed, it urged us to join believing that, on balance, it would help to stabilise exchange rates, bring down inflation and bring down interest rates from the high British level, which then applied, to the much lower European levels. Of course, during the period of our membership, interest rates fell from 15 to 10 per cent.

  3
  I congratulate industry on its magnificent response in the battle against inflation. I know that it has not been easy, but, against a difficult background, exports have risen to record levels, costs have been controlled and productivity has soared. It was not just industry which supported entry into the ERM—so did commerce, the City, most trade unions, the TUC and the Opposition parties in this House.
  The Leader of the Opposition, whom I warmly welcome to his new responsibilities, was consistent in his support of the exchange rate mechanism. When we joined it, the right hon. and learned Gentleman supported us, and agreed. When I announced the exchange rate central figure the right hon. and learned Gentleman was generous enough to agree. When, last week, I said that we needed reforms because of the fault lines that had become apparent, the right hon. and learned Gentleman agreed that reform was needed. I congratulate him on his consistency, even though on this issue the House has been not just a debating Chamber but an echo chamber.
  Now, of course, we hear most loudly from those people who were critics of the exchange rate mechanism. They come from all sides and every party. My right hon. Friend Lord Tebbit, I understand, says that the Government were, I think the expression is, "dragged in" by the then Chancellor. Now we all know my right hon. Friend Lord Tebbit. He is an old friend to us all. I admire him as a man of great courage, a fighter, a bruiser. He likes to bite your ankles, even if you are not walking up his pathway. Yet even my right hon. Friend Lord Tebbit lost many battles with my formidable predecessor. Despite this, according to Lord Tebbit, even my formidable predecessor. whose convictions and firmness of purpose are everywhere admired, was somehow dragged into the exchange rate mechanism by her new Chancellor. Ah, yes, I remember it well.
  Since we joined the exchange rate mechanism we have brought inflation, which was rising to 11 per cent., down to nearly 3.5 per cent., and falling. That is an achievement for which my right hon. Friend the Chancellor of the Exchequer deserves to be warmly congratulated, so let me do so and let me say this: I take full responsibility for the actions and policies of my Chancellor.
  In the exceptional circumstances of last week, we were obliged to suspend our membership of the exchange rate mechanism. In the circumstances, there was no choice. No mechanism could have survived the market's attack on the scale that occurred last Wednesday. One after another—not just sterling—the currencies of Europe came under fire. We need to see that against the background of events world wide: a referendum in France, whose outcome was in doubt, and great economic difficulties in Germany where interest rate levels were at their highest level for a decade. Those strains were increased by a slowdown across Europe and the falling exchange rate of the dollar. That speculative attack turned first to the lira, which was forced to devalue and subsequently to step outside the exchange rate mechanism.
  It created havoc beyond the exchange rate mechanism—in the Scandinavian countries, where overnight interest rates in Sweden touched 500 per cent. The market, encouraged by injudicious comments about realignment which should never have been made, then turned on
  4
  sterling. In such circumstances, there could be only one response: to defend the pound with foreign exchange reserves and then to raise interest rates. That is what we did, but the severity of the attack compelled us to leave the mechanism. Other currencies, too, have come under attack and suffered varying degrees of damage. I do not wish to understate the consequences of this event.
  Let me turn first to the exchange rate mechanism itself. I do not see that we could readily return to the mechanism without dealing with the problems that have been thrown up in the past fortnight. These need careful examination and consideration before we can decide whether such a mechanism can be made to work to the benefit of all its members. Some fundamentalists say that it cannot. Other fundamentalists say we should pop straight back in.
  Let me say bluntly to the House that I have no intention of being bound to either course without a proper examination of where future British interests lie. My expectation is that co-operation is a better way, if it can be seen to be adequate, and no one should doubt that we will examine carefully whether a reformed mechanism can be made to work. But I do not believe that we shall be able to go back into the mechanism soon, or into the same mechanism that we left last week. My right hon. Friend the Chancellor of the Exchequer has already made our criticisms very clear to other European Finance Ministers, and I will be doing so at the European summit next month.
  But inside or outside the exchange rate mechanism, the Government's economic policy must retain the same objectives. Our ambitions to bring inflation down steadily but surely during the lifetime of this Parliament were spelled out in the last Budget, and that remains our strategy. Thus far, our anti-inflation strategy has succeeded more spectacularly than anyone in the Opposition ever believed possible.
  Outside the exchange rate mechanism, the conduct of monetary policy cannot, indeed should not, be exactly the same. We must have regard to a range of indicators of monetary conditions to make sure that our objectives on inflation in particular are not at risk. These will include our existing narrow money target, the behaviour of broad money and asset prices and, of course, the exchange rate. Nobody should believe that a floating exchange rate is a free meal, always allowing interest rates to fall to a very low level.
  Mr. Alex Salmond: The Prime Minister spoke about fault lines in the exchange rate mechanism. When did he first discover them? Did his Chancellor, who we now understand is a long-term sceptic of the ERM, ever inform the Prime Minister of his doubts, and if so, when?
  The Prime Minister: The speculative attack on sterling was of a size and scale that we have not seen for beyond a quarter of a century. I do not believe that any mechanism would have been able to withstand the size and scale of that. But I believe that there are other areas within the exchange rate mechanism where reform could have made it a more credible instrument for use last week. We shall discuss that with our European partners and others.
  Mr. Stuart Bell rose—
  The Prime Minister: I shall give way later.
  Interest rates elsewhere in Europe have been driven up this summer, particularly by the strains in Germany.

  5
  Indeed, in the last 10 days of turbulence in the mechanism, interest rates have risen in Greece, Italy, Sweden and France. In Spain they have not only devalued but have effectively reintroduced exchange controls. Ireland, too, this morning reintroduced exchange controls. Since we stood aside from that turbulence, it has been possible to reduce base rates by a full percentage point this week, and the benefit to business and to home owners will help strengthen economic recovery.
  But interest rates alone will not achieve the non-inflationary growth that we need in this country, and that point needs to be understood. That depends even more crucially on keeping firm control of public expenditure. The Government's new system of control will allow money to be directed towards priorities, while we keep strictly within the overall limits laid down for the growth of public expenditure as a whole.
  In essence, the Government have set an upper limit to expenditure and will divide resources between priorities in the public expenditure round. That contrasts with the previous system of individual bids that were added up at the end of individual negotiations. It is a fundamentally different system of controlling public expenditure. It is tough and will be tough, but it is necessary and is an important component part of overall economic strategy.
  Mr. Stuart Randall: Will the Prime Minister give the House some idea of the likely time scale for reforming the exchange rate mechanism? Will it be Christmas or in three of four years' time?
  The Prime Minister: Reform self-evidently depends on negotiation with all the other members of the mechanism. At this stage, nobody can say how long that will take. As I said a few moments ago, given the turbulence that has existed—not least the money supply figures announced in Germany yesterday—I would not expect our return to any mechanism, and certainly not the same mechanism, to be in the near future. I do not believe that that will be practicable, and I must make that clear.
  Mr. Tony Benn: The Prime Minister is speaking as President of the European Council, not just as Prime Minister of Great Britain. He has repeatedly told us that his object is that we should be at the heart of Europe. Will he please explain how allowing speculators to determine our currency, German banks to determine our interest rates and French voters to determine the future of the Maastricht treaty puts this country at the heart of Europe? Is it not clear that the British, like the Danish, Irish and French, are entitled to determine what is essentially a political matter, although in a debate dressed up as an economic debate?
  The Prime Minister: I will turn directly to the question of Britain's place in Europe in detail in a few moments. On the question of speculation, it is certainly within the memory of the right hon. Gentleman that, whether inside the mechanism or outside, inside the European Community or outside, sterling has been subjected to speculative attacks on many occasions in the past. The exchange rate mechanism offered an extra line of defence, athough not a complete defence; as we have seen, and as we have always known, there could be no total and complete defence.
  Sir Teddy Taylor: To avoid any possible misunderstanding, will the Prime Minister say whether it is the Government's intention to seek to rejoin a fixed exchange rate system?
  The Prime Minister: I have explained to the House twice that we shall examine whether a system can be made credible. When we have finished that examination, we shall make our decision.
  Mr. Bell: Will the Prime Minister give way?
  The Prime Minister: I will give way to the hon. Gentleman, and then I shall make some progress.
  Mr. Bell: The Prime Minister is announcing what appears to be a very important and significant change of policy: we are moving away from the external discipline of the exchange rate mechanism and the deutschmark as an anchor to our policy of getting inflation down to an internal discipline. Are we still shadowing the deutschmark, and will there be a wages control policy for public sector employees?
  The Prime Minister: I announced to the House—for I think it has a right to know—how we shall conduct economic policy while we are not in the exchange rate mechanism. It is essential that the House is aware of how we shall conduct policy. I have said that we shall examine the practicality of returning to a reformed exchange rate mechanism and make a judgment on whether that is a workable system and then whether to join. We shall certainly undertake those negotiations.
  I turn now—
  Mr. Nicholas Budgen: Will my right hon. Friend give way?
  Hon. Members: Give way!
  Madam Speaker: Order. the Prime Minister has made it clear that he wants to make a little progress.
  The Prime Minister: I give way to my hon. Friend.
  Mr. Budgen: I am sure that my right hon. Friend will agree that we have been discussing the details and fundamentals of the exchange rate mechanism for very many years in this House. Will he please explain to the House what are the new details that have caught him out so unexpectedly that he requires guidance on them before he can tell the House whether he intends to go back into the mechanism?
  The Prime Minister: My hon. Friend has a long-held view that the right thing to do is to let sterling float. I understand that view, but I must remind him that sterling was floating when, in 1981, interest rates rose by 4 per cent. in less than a month, and that it was under a system of floating exchange rates that interest rates rose to 15 per cent. before we were able to bring them down to 10 per cent. within a co-operative mechanism such as the ERM.
  The Government's general policy towards Europe must be founded on a concern for our long-term national interests, and I believe that it is time that we turned afresh to face directly the whole question of Europe and our place in the European Community.
  There are broadly three schools of thought about our membership of the Community. The first—it is spread thinly across each political party—is that we should leave the Community; that we should never have joined. It is a

  7
  minority view, often disguised by rhetoric affirming support for the principles of membership while actions speak the opposite. There are people who, in their hearts, would prefer it if we were not in the Community, who trade under false colours and who do not address their arguments to the implications of non-membership for jobs, prosperity and the future.
  The second school of thought is that European development is inevitable and goes inexorably in one direction: that sooner or later a centralised Europe is inevitable. Those who take that view are often the direct descendants of those who, 20 years ago, thought that socialism was inevitable, before it became completely discredited around the world.
  I do not share the belief in the desirability or inevitability of a centralised Europe. Each country in the Community at times of crisis will inevitably look first to its own national interest; each will pool some of it in the common interest, but none will sacrifice it. Just as the interests of France and Germany will always come first for them, so the interests of Britain must always come first for us. I understand the fears about a centralised Europe, but I think that they are fanciful, for we will not have one.
  The third school of thought, the one for which I stand, is quite different. It is that it is in the interests of Britain —our interests, our objectives and our prosperity—for us to be part of the development of our continent. By part, I do not mean a walk-on part; I do not mean simply being a member. I mean playing a leading role in the European Community. I mean helping to determine the direction of policy, building the policies that we want and fighting those that we do not want. We will need to compromise on some matters, but so will every national state in Europe unless we return to tribalism right across the European Community.
  This co-operation in Europe demands a wider Europe. It demands the entry of the Scandinavians and the Austrians and, over time, of the east Europeans—those newly democratic states which have every right to look to the Community and the west for a more secure future. This co-operation also requires us to deal with the concerns about the internal development of the European Community. Those concerns exist not only in this country but in every country of the Community.
  There are fears throughout Europe that the Community is too centralised, that it is too undemocratic and that the leaders of the Community are seeking to develop it too fast for their national Parliaments and people. The events of recent months have shown that, if Europe is to be built on a sound foundation, we cannot ignore those feelings or brush them aside as a matter of no concern. The good European does not ignore those fears. He seeks to put them right—and that is the policy we pursued up to Maastricht, during Maastricht and after Maastricht.
  The Maastricht treaty has become a totem around which those in favour of Europe and those opposed to Europe are now dancing. In truth, it is less important than the pro-Europeans claim and in no way as far-reaching as the sceptics tell us. Many of the things for which the Maastricht treaty has been criticised spring inexorably from the treaty of Rome or the Single European Act.
  8
  One of the main criticisms of the Maastricht treaty is the move towards a single currency. The House will recall that I declined to accept that move in the negotiations because I did not believe that Europe would reach the right economic conditions to support a single currency. I have never believed—I have stated it frequently—that Europe would reach the right convergence by the mid-1990s. That is why I refused to commit Britain to a single currency.
  In the light of the continuing economic problems throughout Europe and of the currency turmoil of the past week, I must say that I was right and—[Interruption.]
  Mr. William Cash rose—[Interruption.]
  Madam Speaker: Order. A great many of our fellow citizens were keen that the House should be recalled, and they want to hear what the House has to say—as, I believe, do people thousands of miles away. Let us give each and every one of us a proper hearing. the Prime Minister knows exactly who is standing behind him. If he wants to give way, he will do so.
  The Prime Minister: I must tell those who have exaggerated ambitions for a single currency that it must now be an ambition postponed. In the Maastricht treaty, we safeguarded our national interest on the single currency. Elsewhere in the treaty, we secured other very important gains for Britain. I remind the House that, early in their presidency, the Dutch presented proposals on foreign policy, defence policy, immigration and justice—all of which would have been undertaken under the treaty of Rome. We rejected that. At Maastricht, we secured provision for co-operation between nation states outside the treaty of Rome, outside the power of initiative of the Commission and outside the jurisdiction of the European Court. Those who claim that Maastricht was a treaty too far should ask themselves, "What was the situation before the Maastricht treaty?"
  Another important achievement was the provision restricting the scope for Community action. That provision was put in at our insistence. It reflected our long-standing argument that the Community should take action only where it could do so more effectively than a nation state or more than one member state co-operating voluntarily. We had to fight hard for that provision with the support of some other countries—notably Germany —but it was a break point and we won it. It has since found an echo in public opinion in Denmark, France and right across the Community. Although the Danish people narrowly voted against the Maastricht treaty, the Danish Government have made it clear that that is not necessarily the last word. The Danish Government plan a further referendum.
  Mr. D. N. Campbell-Savours: Will The Prime Minister give way?
  The Prime Minister: I will make some more progress.
  If, however, the Danes were unable to go back to the people, or were to lose again in that further referendum, the Maastricht treaty could not proceed. It would not be acceptable for the 11 to go ahead without Denmark, and against the will of the Danish Government and people. That cannot happen, and it will not happen.
  The Danish Government will publish a White Paper next month, at the start of a process of consultation. It would not make sense to bring the Maastricht Bill back to the House of Commons before we know clearly what

  9
  Danish intentions are, and when and how the Danes propose to consult their people again. When those things are known, however, we must examine the Bill further.
  Those who assume that the Bill is dead have overlooked two things. First, there is much in it that we want; secondly, with the consent of this House of Commons, I agreed that Bill. I do not believe that it would be proper for a British Prime Minister to agree a treaty, and then come back to the House of Commons and disown it.
  In this country, people know that it is in our interests to be in Europe, but they fear that the Community seeks to intervene too intrusively in our national life. They fear that things that have always been dealt with by individual nation states—and should be dealt with by individual nation states—are instead gradually being drawn within the control of the Community. So we need a definition —a settled order—of what is for national action and what is for Community action. We need clear criteria by which Community proposals will be judged. When we are satisfied that such a system has been put in place, and when we are clear that the Danes have a basis on which they can put the treaty back to their electorate, we shall bring the Maastricht Bill back to the House of Commons.
  Mr. Campbell-Savours: If the French, the Germans and the Benelux countries decide to forge ahead with a Community based on greater monetary and political co-operation, will the Prime Minister be prepared in any conditions to leave Britain outside that in the Community?
  The Prime Minister: There might well be circumstances in which others would make decisions that they believed to be in their national interests; but I have said repeatedly, and agreed under the Maastricht treaty, that any question of a single currency must be determined by the House of Commons at the time when others go ahead, and I stick to that view.
  Mr. John Wilkinson (Ruislip-Northwood): Is my right hon. Friend really telling the House that—notwithstanding the fact that two thirds of the French people did not vote in favour of the ratification of the Maastricht treaty; notwithstanding the fact that, when the question was first put to them, the Danes voted against it; and notwithstanding the fact that my right hon. Friend will not grant the British people a referendum—the House is somehow to proceed with this extraordinary process?
  The Prime Minister: We are a parliamentary democracy, and the House is the place in which to consider the Bill—line by line and clause by clause. Other nations may have a tradition of referendums: they may call a referendum, followed by a debate on the whole Bill lasting one or two days, and approve every part of the Bill immediately. That is not our parliamentary tradition, and I do not believe that it would be acceptable to the House of Commons.
  As for the second part of my hon. Friend's question, I have made it clear—and I repeat again—that, when the conditions that I have set out are fulfilled—when we have moved forward on subsidiarity, and when the Danes have decided how they will proceed—I will bring back to the House the treaty that I negotiated with the approval of the House: the treaty that was approved at the general election, and on Second Reading some time ago.
  Let me repeat that, when we are satisfied that a settled order has been put in place, we will bring the Bill back to
  10
  the House. That is one of the matters that are to be put in hand at the special meeting of the European Council on Friday 16 October.
  Mr. Michael Spicer: I am most grateful to my right hon. Friend for giving way. He has expressed the view that the House should take the final decision on the Maastricht Bill. Therefore, will he give consideration to allowing a free vote in the House?
  The Prime Minister: I believe that my hon. Friend stood at the general election supporting the Conservative manifesto, which indicated that we would bring the Bill before the House. I still support the commitment that I had in that regard in the manifesto. I said that that was one of the matters to be put in hand at the special meeting of the European Council on Friday 16 October. That special meeting will take place at the international conference centre in Birmingham.
  That European Council needs to respond to the concerns that people right across Europe have shown about the direction of Community policy, to review what is wrong with the exchange rate mechanism and how the system can be made to work better in future, to consider preparatory work to meet Denmark's concerns and, of course, to give a further impetus to the general agreement on tariffs and trade round. During recent months, our concerns about the Community have been mirrored across Europe. The British agenda is now on the table in every country of the Community.
  It is worth reminding ourselves why the Community was built and why we joined it. Its founders wanted lasting peace in western Europe, and they achieved it. But they wanted something more [Interruption.] Yes, what about the economy? The founders wanted to build up economic prospects across Europe on a scale that no previous generation had seen, and they achieved that. They wanted the prosperity of each generation to exceed that of its parents, so that the chances for each generation would be greater and the opportunities more fulfilling. Collectively in Europe, that is what we have achieved, despite the difficulties that presently exist.
  Mr. Jimmy Boyce: On a point of order, Madam Speaker. Given that the debate's title is the United Kingdom's economic policy, could you tell us when the Prime Minister is going to get round to discussing that policy?
  Madam Speaker: As I have not seen the Prime Minister's speech, I can only say that the hon. Member for Rotherham (Mr. Boyce) must give the Prime Minister the opportunity to reach that point.
  The Prime Minister: Clearly, the hon. Member for Rotherham (Mr. Boyce) does not realise the extent to which our economic well-being depends on our relationship and trade with Europe.
  I have never seen our future as being a sour, isolated country off the mainland of continental Europe. That surely cannot be a way for us. Even though some will swallow hard at compromises that may need to be made, they should remember that others in Europe will need to compromise as well. The voice that is raised to say that we should look after only our own interests is the voice of narrow self-interest. Such a voice always has resonance in

  11
  politics and is almost always wrong. It is a policy more certain to begin with cheers and end in tears than any other policy that has been devised.
  I have never understood why some are so fearful of our prospects in Europe—neither do I understand why those who are often most fearful are those who would claim to be most proud to be British. Why, then, with that pride do they assume that we will always lose the arguments in Europe when that has not been the Community's history and will not be the Community's future?
  We have the chance to build in our time, in our generation, the sort of Europe for which we have always longed; the sort of Europe that I believe its citizens want; a secure Europe of nation states co-operating freely for the common good; a prosperous Europe, generating new wealth within the biggest free trade area in the world; a free trade Europe in which Brussels is kept off industry's back. Only one Government—this Government—offer industry freedom from state control. Only our policies of low taxation and low inflation will allow the genius of British enterprise to flourish, and only this Government's policies will secure for the British people the prosperity that they deserve in the '90s and which this Government will deliver. I commend the motion to the House.
  3.14 pm
  Mr. John Smith: I beg to move, to leave out from "House" to the end of the Question, and to add instead thereof:
  "condemns the total collapse of the Government's entire economic policy following their humiliating withdrawal of the pound from the European Exchange Rate Mechanism; deplores the Government's failed economic policies which have thrown the United Kingdom economy into a deep and damaging recession which has made it weak and vulnerable to speculative attack; believes that the Government's credibility and claims of economic competence are in tatters; demands the adoption of an economic policy which reduces unemployment and recognises that a strong economy can only be built by consistent investment in manufacturing industry and the infrastructure, by a sustained commitment to an expansion of training, the stimulation of innovation, technology, and regional development and by international cooperation for economic expansion; and firmly opposes cuts in public expenditure which will prolong the recession, increase unemployment, and weaken the United Kingdom's vital public services."
  It might just be worth recalling that the motion on the Order Paper is that the "House expresses its support" for the Government's economic policies, because we have heard precious little about that from the Prime Minister. I admit that there is a certain vacuity about such a motion. Seldom have I seen on the Order Paper a shorter statement than
  "expresses its support for the economic policy of Her Majesty's Government."
  Why is that not amplified, defined or explained? For a simple reason. The Government do not know what is their economic policy. That was startlingly clear from the Prime Minister's speech.
  The Prime Minister explained the tragi-comic events surrounding our humiliating withdrawal from the ERM, in simple terms. He said that we were scuppered by the speculators. That is all we are to get by way of explanation from the Government. What has happened during the past week or so is not merely an upset for the Government's economic policy, but the complete destruction of what
  12
  they claimed was a total political and economic strategy—a strategy to which the Prime Minister could not have been more closely committed.
  Only a few weeks ago, The Sunday Times carried the story that the Prime Minister had a new vision of the future. It is said that he had revealed to his colleagues and party supporters that his ambition was no less than to see the pound replace the deutschmark as the most stable currency in the European Community. Under the headline, "Major aims to make sterling the best in Europe"—
  Mr. Phil Gallie: Does the right hon. and learned Gentleman not concede that it would be an objective of his to make the pound a stronger currency than the deutschmark?
  Mr. Smith: The hon. Gentleman will understand the purport of my comments in a minute or two—[HON. MEMBERS: "Answer."]. Any sensible person wants a strong and stable currency in this country, but it comes rich from a party which has just devalued the pound to even mention it in this House.
  I return to the story in The Sunday Times headed
  "Major aims to make sterling the best in Europe."
  Michael Jones and Andy Grice reported that the Prime Minister had
  "embarked on an economic strategy designed to see the British pound replace the German mark as the hardest and most trusty currency in the EC."
  The response to the plan to topple the deutschmark was mixed. At the time, eyebrows were raised among our recession-weary public. The most generous thought that it was a case of audacity straining the bounds of credulity, while others thought that the Prime Minister had simply taken leave of his senses. An acid comment from Goldman Sachs in its International Bonds and FOREX Bulletin—probably the speculators journal—published on 3 August, said:
  "Assuming The Sunday Times headline of 'Major aims to make sterling the best in Europe' is not some brand of morbid humour that we fail to grasp, it is worthwhile considering whether this is likely to happen."
  The passage continued:
  "The Prime Minister certainly has his work cut out—much the same as Eddie the Eagle had in attempting to win the gold at the winter olympics."
  Now, of course, the Prime Minister's words read with a mockingly hollow ring.
  On 10 September the right hon. Gentleman took himself to Glasgow to address the Scottish CBI—picking, as usual, hostile audiences as the best place to float his ideas. There, he said that there would be no devaluation and no realignment. As we all know, that policy was wrecked by his decision on black Wednesday, less than one week after the Glasgow declaration, to withdraw from the ERM, as a result of which the pound has now been devalued by more than 13 per cent. So much for the Prime Minister's vainglorious nonsense about the pound easily replacing the deutschmark as the anchor of the ERM.
  Those who have studied the Prime Minister's utterances since he became involved in our economic affairs—as Chief Secretary, then as Chancellor, and now as Prime Minister—know only too well that such delusions of grandeur are the norm, not the exception. His words were not just a wild aberration—bad enough though that would

  13
  be for a head of Government. I believe that such delusions have been his stock in trade since he became involved in the management of our economy.
  One of the most notable previous examples occurred when the right hon. Gentleman was Chief Secretary to the Treasury. On Second Reading of the Finance Bill in 1988 —that heady year of so-called Conservative success—he observed:
  "During the 1960s we praised and envied the German economic miracle. In the 1980s the position has been precisely reversed."—[Official Report. 26 April 1988; Vol. 132, c. 214.]
  To claim that the German economic miracle had been surpassed, and then, in the middle of the recession, to go on to foresee the pound replacing the deutschmark takes a certain detachment from reality of which Walter Mitty himself would have been proud.
  The real lesson to be drawn from a comparison between the British and German economies is that, before one can have a strong currency, one needs a strong economy—and that to create a strong economy we need consistent investment, a recognition of the vital importance of manufacturing as the basic wealth creator, a strategy for training, for innovation and technology and for regional development—in short, an industrial strategy.
  Mr. Stephen Milligan: The right hon. and learned Gentleman talks about detachment from reality. Does he agree that his colleague, the shadow Chancellor, was even more detached from reality when he suggested that the best way to defend the pound was to cut interest rates?
  Mr. Smith: The shadow Chancellor has argued week in, week out, and month in, month out for an industrial strategy to put this country into a strong position. It is a great pity that his recommendations were not adopted by the Government.
  The comparison with Germany is important, because Germany adopted an industrial strategy. It is a tragedy for Britain that, for the past 13 years, we have been going in the opposite direction. Instead of real achievements, the Government can produce only policy failures garnished with absurd hype and rhetorical fancy.
  Mr. Geoffrey Dickens: Does the right hon. and learned Gentleman agree that most people expect Germany to be on the slide now? Its economy is in a mess and the Germans are paying too much in subsidy to their coal mining industry. There is nothing wrong with the United Kingdom wanting its currency to be at the top. While the right hon. and learned Gentleman talks this country down, it will be down.
  Mr. Smith: If Germany is in such a mess, yet we have been forced to devalue our currency against its currency, what kind of mess is this country in?
  Look at the Prime Minister's record of economic prediction. January 1988:
  "Inflation is low and will remain so."—[Official Report, 14 January 1988, Vol. 125, c. 549.]
  Fact: it doubled in the two years that followed. Prediction, December 1989:
  "The recession is neither likely nor necessary."
  Fact: we have had the longest recession since the 1930s.
  Prediction in June 1991 in The Daily Telegraph:
  "Recovery coming on in weeks".
  Fact: the economy has ever since been mired in such deep recession. Perhaps the prediction most close to public memory was in the last election:
  14
  "Vote Tory on Thursday and recovery will continue on Friday."
  Fact: there has been no recovery at all and now we have a devaluation. So much for the Prime Minister's key promise at the election.
  Regrettably, that is but one of the promises that have been and will be betrayed as the coming public expenditure cuts—never mentioned at the last general election—rip the Conservative manifesto apart. I have little doubt that there are party workers hard at work already on the excuses; no apologies, no expressions of regret, just excuses and more excuses. We heard a few of them today from the Prime Minister in his typical speech.
  In the new situation, the Government propaganda machine clearly faces new challenges. Its principal tasks are to seek to disguise the void in Government policy by pretending that it does not exist and to divert attention from the Government's culpability by seeking to place the blame on others. A good example, I understand, is the note which, according to today's Financial Times, appeared in Minister's boxes on Monday evening headed:
  "ERM. New line to take."
  I am, of course, not able to say whether the line that we got from the Prime Minister today was the line advised on Monday. After all, it might have changed since then.
  But the real problem for the Government in finding a new line to take is the speech given by the Chancellor of the Exchequer to the European Policy Forum on 10 July entitled "Britain and the ERM", which is helpfully reproduced in at least two newspapers today.
  The Chancellor expressed his support for the then policy in robust and uncompromising terms but, interestingly, he went on to examine what he described as the alternatives—all the alternatives—to such a policy and mocked every one in turn. He said,
  "Plenty of alternatives are suggested. But in my view they are all illusory or destined to fail."
  I admit that it might be difficult to know which of those alternatives now is Government policy. After all, according to some newspapers, the Chancellor appears to be on quite a different path from his colleagues in the Government, including the Prime Minister, but whatever that policy is, it must be one of the alternatives that he contemptuously dismissed in his speech.
  The Chancellor described the option of leaving the ERM and cutting interest rates as the "cut and run option"—a cut in interest rates and run on the pound. He went on to say:
  "Many who advocate floating exchange know full well what the consequences would be. They intend a devaluation of the pound and they will certainly achieve it."
  He finally dismissed the option in his conclusion:
  "We would have given up after less than two years … and we were back to our bad old ways."
  Well, are we back to our bad old ways, lurching back to the Thatcherite economics which pulverised our economy during the 1980s?
  The Chancellor then went on to attack a policy of leaving the exchange rate mechanism and setting interest rates according to domestic monetary targets. Here the Chancellor had what I believe was a genuine flash of insight. He told his audience:
  "We have been here before. In the 1980s we fixed domestic monetary targets, and we attempted to meet them by setting interest rates accordingly. But in practice the money supply figures often provided a poor guide to interest rate policy, particularly in the wake of the financial deregulation."
  So much for all the Thatcher years—dismissed like that.

  15
  Those of us of a generous spirit would be inclined to congratulate the Chancellor on an honest, if unrepentant, reassessment. It is, however, difficult to do so if the former sinner is determined to revert so quickly to the sins of those former years. After all, now, with the benefit of experience, he knows that it is wrong and, after this performance, who can ever believe him in anything he ever subsequently says? In his speech on 10 July, the Chancellor ruled out every alternative that he could envisage. How can any one of them be offered now as convincing Government policy?
  In the wake of the destruction of the Government's economic policies, we must ask where we are now. The sad but unavoidable truth is that, instead of reaching the heart of Europe, the Government have succeeded in having Britain relegated to the second division. There are two reasons for that disaster. For years, the Government followed policies that have thrown our economy into a deep and damaging recession, which made it weak and vulnerable—weak and vulnerable, incidentally, to speculators. Faced with a crisis, the Government chaotic mismanagement and sheer incompetence forced them to abandon all that that they stood for in a matter of hours.
  Mr. John Marshall: Will the right hon. and learned Gentleman tell the House whether he would take Britain back into the exchange rate mechanism?
  Mr. Smith: That question was singularly not answered by the Prime Minister in the rather curious answer that he gave. I will answer the hon. Gentleman's question directly. He will not think it unfair if I point out that, when the Prime Minister was asked a roughly similar question, he did not answer it at all. He said that, if a credible exchange rate mechanism could be achieved, he might think about whether or not he would rejoin it. That, as I fairly understand it, is what the Prime Minister said. Let me say what I think. I think that there are advantages in having a system of managed exchange rates. One is that in those circumstances, one is less likely to resort to curbing public expenditure as the anchor or one's economic policy—which is one of the difficulties that we now face.
  The circumstances in which we would rejoin the ERM must be judged according to the state of our economy—and that is regrettably weak. The first thing that the Government should do if they are to acquire any option for Britain's economic future is to build up the strong economy that can be the only foundation for our future.
  Mr. James Paice: I am very grateful to the right hon. and learned Gentleman. Will he tell the House what would be the cost of his recovery package; and what effect that would have on public borrowing and on the currency market?
  Mr. Smith: I did not think that point would be pursued by Conservative Members today. After they lost £1 billion in a hopeless attempt to prop up the currency, and with increasing unemployment costing the taxpayer £8,000 for every person unemployed, they have the sauce to ask us the cost of a recovery programme. I ask them: what is the cost of a non-recovery programme? That is what they appear to be committed to.
  To return to the events of black Wednesday, a bewildered British public watched those tragi-comic events
  16
  unfold. First, there was a 2 per cent. increase in interest rates, and then they were up by 5 per cent.—all in the course of a few hours. It all ended in Britain's withdrawal from the ERM. That was not some considered choice or policy but was forced on the Government by their weakness and incompetence.
  The British people deserve to be told what went wrong. the Prime Minister had the responsibility to tell Parliament and the public today. We heard what he had to say—a few desultory remarks about economic policy, and a long rambling piece of nonsense about the future of the European Community.
  As the Prime Minister was unable or unwilling to tell the House what happened, let us examine the facts. The genesis of the crisis was that Tory election promises of immediate economic recovery following the general election turned out to be totally false. Since April, all the main economic indicators of the real economy have deteriorated. Markets, consumers and industry increasingly lost confidence in the bogus predictions of a recovery that seemed constantly to be postponed.
  What did the Government do? Nothing—absolutely nothing. Even as bankruptcies mounted, home repossessions kept rising, and unemployment remorselessly increased, the Government did nothing—absolutely nothing.
  The continued weakening of the British economy that I have just described coincided with the predictable pressures on currencies arising from the uncertainties of the French referendum and higher German interest rates. The position called for prompt and decisive action to initiate and co-ordinate a Communitywide response—[Laughter.] So this is a matter for laughter. Those who hold the presidency of the European Community deride a Communitywide response even before they hear what any such response might be. I have come across few such revealing actions. the Prime Minister and the Chancellor of the Exchequer, on this day of all days when they are in the dock, are chuckling.
  As I was saying, the position called for prompt and decisive action, for a programme of growth in the Community, for jobs, for investment and for an early reduction in interest rates across the whole of the Community. Britain, holding the presidency of the Community, was uniquely well placed to take such action, as we repeatedly proposed, but it did not.
  The Prime Minister: I was chuckling at the right hon. and learned Gentleman's lack of understanding of how matters work in the Community. He seems to think that, when there is a problem, all we have to do is to persuade the remainder of Europe to do whatever is convenient for the United Kingdom. What does he think happens when it is not convenient for the remainder of the Community to do that? It would have been right to persuade the Community of the need for a general downward realignment of interest rates, but if others in the Community would not agree to that, how would the right hon. and learned Gentleman face that reality?
  Mr. Smith: I shall come in a moment to the question of a realignment of currencies and interest rates. What is revealing about the Prime Minister's intervention is that he obviously did not even try to persuade the remainder of the Community. As President of the Community, to a large extent he can determine the Community's agenda,

  17
  yet he did not put on it a programme for recovery involving all Community countries. If there are those who disagree, the right hon. Gentleman should argue with them and persuade them. At the very least, he should try. Instead, at the first hint of disagreement, he leaves the field. There can be few more revealing instances. If the right hon. Gentleman had so wished, he could have told us a great deal more about that, instead of making a rambling speech that had little to do with the issues.
  The only action that the Chancellor took throughout the whole period was to announce the borrowing of an additional £7 billion. We used to hear great diatribes from the Conservative party about borrowing. When anyone else borrows money, it is a total economic disaster; when the Conservative party borrows money, somehow it is an economic triumph. However, on this occasion, given the underlying fragility of the British economy that move, not surprisingly, was interpreted by the markets as a further sign of weakness—[Interruption.] It was, so there is no point in the Chancellor shaking his head. We can all read the newspapers, perhaps better than he can. We read them and that is what they said.
  As the crisis developed—[Interruption.] I am coming to an important point, to which I hope the Chancellor will listen carefully. As the crisis developed, crucial discussions took place over the weekend of 12–13 September, which resulted in an announcement from Brussels on the Sunday evening that the lira was to be devalued. It was also strongly hinted, not least by British Government sources, that a substantial cut in interest rates would be announced by the Bundesbank. However, when made on the Monday morning, it was the smallest reduction possible. I do not know for certain what happened in meetings and other discussions during that weekend or in the days leading up to it. However, I know that, in the context of the Ecofin declaration in Bath only a week or so previously, it was clear that there would be no realignment of any currency. An outcome that resulted in the devaluation of the lira alone was an open invitation for speculation against another of the weak currencies.
  Mrs. Judith Chaplin: My understanding has always been that a Leader of the Opposition does not say anything that jeopardises sterling in the markets—[Interruption.]
  Madam Speaker: Order. I want to hear the hon. Lady's intervention.
  Mrs. Chaplin: As the right hon. and learned Gentleman called for a slash in interest rates three days before Britain left the ERM, does that mean that tradition has been replaced by opportunism?
  Mr. Smith: I was waiting for someone to blame me for the devaluation last week. The hon. Lady has not disappointed me. Of all the charges that could have been laid against me and of all the comment that there has been in recent weeks, the argument that I have been undermining sterling is the most far-fetched that I have ever heard. It just shows that, whatever one says or does not say, some on the Conservative Benches will find it unacceptable. [Interruption.] It seems that there is a new charge: that any criticism of the Government undermines sterling, but sterling has already been undermined by those who are in charge of our affairs.
  18
  I return to when the lira was devalued. If the Government knew anything about the markets that they profess to understand and what was likely to follow, what consideration did they give to finding an alternative to a potentially disastrous confrontation, with a speculative market in full flood? There was only one feasible alternative: to have a general realignment so that the markets were not presented with an open invitation to speculate in circumstances in which our defences to their attack were weak. If that had been done, we could have had an orderly realignment, not a rout, a co-operative change, not a crisis. Britain would not have been forced to leave the exchange rate mechanism. We should not have had to use billions of pounds of reserves, which involved damaging real losses, which some have estimated at over £1 billion, and interest rates would have been lower throughout the Community.
  What is more, the possibility of considering this option did not appear suddenly and unexpectedly on the Sunday. Widespread reports in the press, both here and abroad, indicated that a number of our European partners were raising the issue of interest rate reductions and having them combined with a currency realignment in the weeks preceding the crisis. The Government must tell us why this option—the multilateral option, the European option, the less inflationary option—was not taken when it was clearly in the national interest.
  The Prime Minister: What the right hon. and learned Gentleman has said is extremely important, and I shall answer it. I draw his attention first to the fact that the Italians, who did not devalue, subsequently had to come out of the system as well. More substantively, what the right hon. and learned Gentleman has just pronounced, presumably as Opposition policy, is that, whenever there is a speculative attack on the pound, he would pre-emptively devalue. That is what he has announced. That policy, if it were to be followed, would encourage every speculator on every occasion to attack the pound.
  Mr. Smith: What the Prime Minister has just announced is that, if he ever goes back into the exchange rate mechanism, he will never be in favour of any realignment, ever, and he might as well call it a single currency. He must know, as everyone who operates in the exchange rate mechanism knows, that it is a system of semi-fixed and adjustable rates. In the early period of the European monetary system, it was frequently realigned and varied.
  The Prime Minister did not answer the question that I put to him: faced with a situation in which the alternative was likely to be that the Government's policy would be scuppered by the speculators, why did they walk blindly on? Why did they not look at an alternative that would have been better for this country, better for our economy and better for our currency? I shall be happy to give way again to the Prime Minister if he wishes to correct me.
  The Prime Minister: Neither the right hon. and learned Gentleman nor anyone else can be certain at any moment what the scale of a speculative attack would be. At this precise moment, at least one other European currency is under attack that has decided to do precisely as we have done: that socialist Government have decided to defend their currency with their reserves and to raise interest rates rather than to take the step of devaluing. They have done that because, of course, devaluation is undesirable for all

  19
  the reasons we set out. We were forced to do it, not because we wished to, not because it was a good option, but because of the inevitability of the size of the speculation —a size that no one, not even the right hon. and learned Gentleman, could ever have foreseen.
  Mr. Smith: That is the defence: overwhelmed by unforeseen events, in charge of the bridge when along came a wave and overturned the vessel, the captain pleads not guilty. That is the nature of the Prime Minister's defence. There was an alternative and I should like the Prime Minister to tell us why it was not adopted. There could have been a general realignment of the currencies. The system allows for that and we know that there were requests for that to be considered. the Prime Minister was defeated but he speaks as if he won. He did not win, he lost, and there was an alternative to that humiliating failure.
  Sir Peter Tapsell rose—
  Mr. Smith: I do not know whether the hon. Gentleman is in charge of the Government's economic policy.
  Sir Peter Tapsell: Has not the right hon. and learned Gentleman's careful reading of the Goldman Sachs comic persuaded him by now that any discussion within the ERM of a realignment immediately sets off speculation? That is precisely why we should not return to fixed but adjustable rates.
  Mr. Smith: The hon. Gentleman does not take account of the fact that such adjustments were made in the past in the very ERM of which he speaks. But they must be made with a little care. I assume that even this Government could manage to make them confidentially, although sometimes I wonder about their capacities. It cannot be argued that it was impossible, which is what the hon. Gentleman says.
  In view of the debacle, one would expect at least a word of explanation or apology, but there was not a hint of that in anything said by the Government, whose most noted characteristic is that no one takes responsibility, no one resigns—at least not yet—and no one takes the blame. They are a "not me" Government.
  The most ingenious and perhaps the most ironic of the Prime Minister's new excuse were in his first comments after he emerged from his air raid shelter. He told us that the problem was that the markets were irrational. What are we to make of that one? Now that the Prime Minister is possessed of a genuinely new insight, may we invite him to refrain from insisting that these irrational market forces should determine all aspects of our national life? Given the total mismanagement that has been so vividly demonstrated, may we have no more assertions about the Conservative party's unique and expert knowledge of the working of markets?
  After all this, we are left with an economy and a society ravaged by recession. There is no more important priority in Britain today than the adoption of a programme for economic recovery. If that is not done, the price will be paid by millions of unemployed. The lesson of recent years as well as of recent weeks is surely clear. We cannot afford to neglect the real economy. I repeat that a strong
  20
  economy is the only sure foundation for a stable currency. We consistently argued that case before Britain joined the ERM, and we have argued it repeatedly since.
  Time after time, we have argued the crucial importance of supply-side policies that would improve our economic performance, raise investment, especially in manufacturing, boost the housing and construction industries, and promote innovation and technology. Perhaps above all, we must enter into a real and sustained commitment to education and training. The result of the Government's policies has been tragically shown by the redundancies announced by British Aerospace and Rolls-Royce.
  Ms. Anne Coffey: Does my right hon. and learned Friend agree that, if desperately needed help and support to British Aerospace had been forthcoming over the past few years, we would not be in the present sorry state of affairs? Unless immediate help and support is given to that industry, in the way that other Governments support their industries, we shall have no aerospace industry and no jobs, and the skills of the people in that industry will be lost to the nation for ever.
  Mr. Smith: My hon. Friend, whose constituency has taken the brunt of the savage redundancies, speaks well in defence of her constituents. I see that the President of the Board of Trade is sitting a suitable distance from the Chancellor of the Exchequer, but even if he cannot see these events, he can at least hear them. I hope that he will pay some attention to that, because it is a tragic comment on what is happening to Britain that British Aerospace is moving its activities to Taiwan, of all places. That is where a British pride has taken us—a Government who remove our jobs to Taiwan.
  The predictable response of the Government when we argue the case for investment, training and regional policy is to say that they have heard it all before—and so they have, but I can tell them that they will hear it again and again until they change their policies.
  I know that the Government do not listen to us, but I hope that they might occasionally listen to employers' organisations. On black Wednesday, the Engineering Employers Federation—I hope that the Government will listen to this, because it is from engineering employers, not engineering unions—said:
  "But what is essential now for the UK—irrespective of what happens to the pound —is to formulate an industrial strategy which will promote recovery and sustain economic success."
  When we use the words "industrial strategy", there is mocking laughter from Conservative Members. I am glad that they are not mocking the engineering employers. The federation continues:
  "After the events of Wednesday 16 September, even the most ardent promoters of unrestrained short-term market forces must be seeking some shelter."
  It goes on to argue for investment and support for British industry. Those are policies that the Government should consider.
  The end of the passage from which I am quoting says:
  "The Government appears to have been paralysed over the past three months by lethargy. Ministers have not been capable of redirecting economic activity towards the manufacturing and infrastructure investment needed for a lasting economic recovery."
  The engineering employers put it very clearly and concisely. I hope that the President of the Board of Trade and his colleagues will do something about it.

  21
  I fear that what we shall get from the Government is not a change of policy, even though by their ineptitude they have caused circumstances to change dramatically, but a new hunt for new excuses, new escape clauses and new ways of wriggling out of broken promises. I have recently come across what I think is a prototype of an excuse that is being market tested. It arises in the context of the Government's policy of privatising the Forestry Commission. A query was put to the Prime Minister by the forestry trades unions and it was answered on the politically significant date of 3 April—the final week of the general election campaign. A letter headed
  "The Right Hon. John Major, From The Office of: the Prime Minister and Leader of the Conservative Party"
  reads as follows:
  "Dear Mr. Murray,
  John Major is grateful for your letter of 7th February, regarding any possible privatisation of the Forestry Commission."
  It is signed by Robert Boscawen.
  Subsequently, a story appeared in The Guardian about correspondence between the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland, which caused a further inquiry to be made to the Prime Minister. The reply sent to Mr. Murray on 27 August said:
  "The Prime Minister has asked me to thank you for your letter of 6th August. I apologise for the delay in replying.
  I appreciate your concern about 'The Guardian' article quoting correspondence between ministers on the possible privatisation of the Forestry Commission.
  You may be unaware that the commitment given by the Prime Minister on this matter was drafted incorrectly during the frenzied activity of the general election campaign".
  [Laughter.] The letter goes on:
  "The correct line is that the Government has no plans at present to privatise the Forestry Commission."
  It is signed by Miss Lucy Miller, political officer.
  So there we have it. What a concoction of weasel words. Provided the background was one of active frenzy, no promise needs to be kept, no commitment honoured. I do not understand how a Prime Minister who gives his word in such an uncompromising and unqualified fashion can thereafter contradict it so spectacularly. There is clearly no more devalued political currency than a Conservative election promise.
  In their frenzied re-election campaign, the Conservatives were prepared to say anything and do anything to get re-elected. [HON. MEMBERS: "What about you?"] I fear that there will be no area in which this will be more spectacularly revealed than in the coming cuts in public expenditure. In the weeks and months ahead, pledge after pledge will be betrayed, commitment after commitment dishonoured, as cuts in public expenditure intensify the recession, weaken our infrastructure and erode the quality of our public services. And the price will be paid by the British people—paid in lost jobs, unbuilt homes, Missed opportunities and declining services.
  The conclusion that our people are reaching is that they are governed by a Government and Prime Minister fatally flawed by incredibility and incompetence. After all, who was it who dismissed the critics of Government policies as "quack doctors"? Who was it who told the CBI in Glasgow:
  "It is too easy to regard Britain's problems as unique or blame them on the ERM"?
  22
  Who was it who said that to leave the ERM would be "the inflationary option" and a "betrayal of our future"? Who, in that same speech, said that there was going to be "no devaluation, no realignment"?
  This is a Government whose economic policy is in tatters, whose credibility is blown, whose incompetence has been exposed. It will no longer do to blame others and it will no longer do to say that their policies will, given time, come right. They have been in power for the longest continuous period in post-war Britain—[HON. MEMBERS: "Hear, hear!"]—and Tories' assent to that proposition means that they must accept that they are the only architects, the sole constructors, of our present dismal situation.
  In the course of a few weeks the one policy with which the Prime Minister was uniquely and personally associated, the contribution to policy of which he appears to have been most proud, has been blown apart, and with it has gone for ever any claim by the Prime Minister or the party that he leads to economic competence. He is the devalued Prime Minister of a devalued Government.
  3.57 pm
  Sir Edward Heath: Our nation is suffering from shock and is much confused, and I believe that it is looking to this House today for clarification of the situation and for a detailed discussion of how our country can move forward in the future.
  Like the Prime Minister, I should like to congratulate the Leader of the Opposition on his appointment. This afternoon he has carried out the customary duties of a Leader of the Opposition—rather well, in fact—but now we must turn to serious business.
  the Prime Minister reaffirmed that he believes that the Maastricht agreement, ratified by this House, is good for Europe and for Britain. I strongly agree. He has also reaffirmed that he does not exclude a return to the ERM at some future date. I should like to say more about that in a moment. He has also reaffirmed that in no circumstances will he agree to a referendum. In that he is absolutely right. I was glad that the Leader of the Opposition succeeded in carrying at least his national executive committee with him in deciding that there will be no referendum. There is no reason why there should be.
  Mr. Dennis Skinner: We are still working on that.
  Sir Edward Heath: I do not think that the hon. Member will have much success.
  Mr. Skinner: The right hon. Gentleman should not kid himself.
  Sir Edward Heath: It must be noted that, when we had a referendum on Europe—Harold Wilson was overturned and went against his undertaking made at the time of our entry into Europe—those who were most forceful about our having a referendum never accepted its result. What is the point of having a referendum if one is not prepared to accept the decision of the people? There are two right hon. Members on the Opposition Benches who have no claim on a referendum.
  Mr. Benn: The right hon. Gentleman is asking us to get the Danes to think again after their referendum. Is it not

  23
  possible for arguments to continue? Do elections and referendums conclude the matter, particularly when new proposals are made?
  Sir Edward Heath: Asking the Danes to think again does not affect our having a referendum. I know that the right hon. Gentleman proposes to introduce a Bill which he hopes will be successful. It will not be, but if it is successful he will have to provide the funds for running a referendum.
  I strongly support the Prime Minister on the three major points I have outlined. He has said that there will be a detailed examination of the situation following last week's events. I welcome that, too. I hope that the examination will not be limited to the ERM or to last week's events. I hope that it will cover a much wider range of Government policy which has to be taken into account if we are to restore the economy.
  We must not hide the fact that there are bound to be inflationary pressures as a result of a 14 per cent. devaluation. We must warn the country and consumers of them. We have experience of this from several other occasions and it would be foolish to try to deny that there will be inflationary pressures. One can say, therefore, that the task will be greater. Various opportunities that will have to be taken to deal with it must be made more acceptable.
  From that point of view, I hope that the Prime Minister's review will go much wider. He is also—rightly —conducting a review for the summit meeting in the middle of October. I ask him to recognise—I am sure he does—that a review of a major item of the Community's life, and its industrial and financial proceedings cannot be done satisfactorily in such a short time. It cannot possibly be done. Nor can satisfactory discussions take place and conclusions be reached in a day's summit. We have suffered far too much from short summits, most of which are taken up with lunch and dinner.
  Mr. Skinner: The right hon. Gentleman had a few.
  Sir Edward Heath: Yes. I have been trying to lose weight ever since.
  The review also requires detailed discussion with the other members of the European Community. I take as an example the faults that are now said to be found in the ERM. Perhaps the Chancellor of the Exchequer will go into rather greater detail about what the faults are. Major members of the Community do not accept that there are faults in the ERM. If this matter is to be discussed at the summit, it will have to be done with great care.
  Already, I am afraid, there is in the Community a belief that the British have taken the presidency to run and change the Community. That is giving rise to resentment and counter-reaction to the proposals. It is not the job of the president to run the Community or even to tell the Community what it should do. The Minister who represents Britain speaks for Britain and makes the arguments about what we think should be done. We will not achieve our ends if we overlook the nature of those discussions in the Community.
  That brings me to the question of the Danes. At the time, I expressed regret that Britain had stalled its action because of the Danish vote. Other countries did not do that; they went ahead. Ireland produced a large majority
  24
  in favour of Maastricht. Referendums are part of the life of the Irish: they are constantly calling referendums. We do not do that. Why did we not celebrate the great Irish achievement, and say, "Yes, we will follow the Irish"?
  The point about Denmark is this. If, at the summit, the Danes come forward with an answer as to what they propose to do, that will free us to go ahead with our own Bill in the House of Commons. If, on the other hand, the Danes say that they will do nothing until autumn next year—and that is what is coming out of Copenhagen at present—we cannot possibly be bound by that to do nothing, when the other major powers in the Community have already gone ahead. I hope that the Prime Minister will make it plain to the Danes that our consideration of their position is limited.
  Also coming out of Copenhagen is what the Danes want. It is said that they want more social service arrangements—more than are contained in the Maastricht treaty—and that they voted against the treaty because they were not going to be given those arrangements. We took the opposite position; we opted out of the social chapter entirely. That explains the Danish vote: the Danes wanted more than they were getting, not less.
  It is also said that the Danes want nothing to do with defence. Of course, they are not bound to defence provisions by Maastricht; but let me put a point to them. They expect to receive the best from the Community, and they expect to be defended by it if anything happens. Why, then, are they not prepared to play their part in Community defence? This is a serious point. The Danes ought not to be allowed to influence our timing of a referendum, or our reaction to it.
  I understand that the Danish Prime Minister has said that he believes that Brussels should be much more open. What does he mean by that? Does he mean that people should be admitted to the discussions of the Commission, Ministers and Heads of Government? I have never been to Denmark, and I do not know whether the Danish Prime Minister invites visitors to Danish Cabinet meetings, just so that they can listen. Is the British Prime Minister prepared to go along with that? Is he prepared to admit all Cook's tours to Cabinet meetings at No. 10—in addition to the IRA? Those are impossible requests, all of which stem from misunderstanding and misinformation about the way in which the Community and the Commission work.
  Last week, a revealing article by a correspondent unknown to me appeared in The Daily Telegraph—not a paper which I usually read, but the article was pointed out to me. It showed the extent to which Whitehall has elaborately decorated the arrangements that emerge from the Commission in Brussels. Do we not blame the Commission all the time? It is the Ministers who make the decisions, but, when they return to their Parliaments, they do not stand up and say, "Yes, I decided this"; they say, "It is that Commission again." That is completely unjustified. It does not achieve our ends, and it ruins a great deal of what is going on in Europe.
  I suppose that the question of currency is by far the most important. The Chancellor will tell us what really happened, but it is said that we rushed out of the exchange rate mechanism at the last moment. I do not rely on newspaper reports, but it is said that there was not time or proper consideration for the full support that should have

  25
  been given to sterling to be organised. The Chancellor can explain all that, but it is what a considerable number of people now believe.
  We must ask ourselves why Germany with the mark and France with the franc can work together so closely, while we apparently could not. There must be an explanation. That question goes to the heart of another question: that of our attitude towards, and co-operation with, other Community members. It looks as though the franc is holding—
  Mr. Skinner: It is in trouble.
  Sir Edward Heath: The hon. Gentleman wants it to be in trouble—he wants trouble everywhere. How the hon. Gentleman can call himself a socialist or be acknowledged by others to be a socialist when he has such hatred of his fellow men and women in other countries, I do not understand.
  Mr. Skinner: Unlike the right hon. Gentleman, I have not been taken in by all the bureaucrats in the Common Market. I did not fall for the daft notion that the Common Market treaty would last for ever. I did not ever believe that there would be political and economic union in the Common Market. I believe that the halcyon days of the Common Market and economic growth are over. Some of us have seen treaties before; we have read this country's history. This country has signed a thousand treaties with other nation states in the past 10 centuries. Most of those treaties have finished up in the political dustbin, which is where the unmitigated disaster of a Common Market will finish.
  Sir Edward Heath: I must thank the hon. Gentleman for using far more refined language than he did last night on television.
  The crux of the matter is that, if there is a flaw. it is not in the ERM, but in the problem of how to cope with speculation of the scale that exists today, which is unchallenged by all the commentators in a modern world with every means of communication at its disposal. That is the crucial question—what is to be the answer? That is the problem to which we must address our minds. Some people will say that we have a long time in which to do so. I am not so sure that we do have such a long time.
  Mr. PÖhl, the former head of the Bundesbank, has said today that he believes that there must be a common currency. When a former head of the Bundesbank says that, and we see the possibility of Germany, France and the Benelux countries joining to use a common currency, we must take account of those factors. If such action occurs, it will happen fairly quickly—one cannot delay it. Therefore, I ask my right hon. Friend the Prime Minister to give serious consideration to that possibility. We do not want to be left on one side again.
  Mr. Nigel Spearing: I think that the House understands the importance of speculators who look ahead, but do not the most successful speculators speculate on what appears to be a good chance or a dead cert? If the right hon. Gentleman is right and the only way forward is one currency, does that not mean one economic policy, one Government, one state?
  Sir Edward Heath: I gave way to the hon. Gentleman as I always know what he is going to say, and I have the answer for him. The single market will require the
  26
  development of those aspects—that is plain to everyone. The form that they will take has yet to be examined and decided on. There must be overall control with a single market.
  When the former head of the Bundesbank says that he believes that there should be a single currency, one should respect his view. We must move to reduce our differences before we achieve that aim. However, the argument about differences is not borne out by what has happened with the single currency in the United States. Let us consider the different economic powers and standing of different states of the United States, which all get on with one single currency. Let us examine the difference between California and New York state, and some of the smaller southern states. The differences between them are enormous, but they all use one single currency.
  Mr. John Marshall: Does my right hon. Friend agree that there is to be a new north American free trade area with three different currencies?
  Sir Edward Heath: Yes, but they have not got it together yet. They have not even signed the agreement. I was in Canada last week.
  Mr. Skinner: Who paid for it?
  Sir Edward Heath: I cannot give that away. It was not an Arab—[Interruption.] I must apologise to the Prime Minister.
  Which people are laughing over the free trade area proposals? The Mexicans, of course. They have infinitely lower labour costs, can churn the stuff out, and will spread it over the United States and Canada. Very well, but that is not what we want, and it is not what we had in the European Free Trade Association either.
  The only long-term answer—
  Mr. Michael Shersby: My right hon. Friend has made a very profound statement this afternoon. He says that he believes that one of the answers to the problems that we face is a single currency, one Government and one Community. Can he tell the House over what period of time he believes that that should be brought about, in view of the economic difficulties that we are facing?
  Sir Edward Heath: We are one Community now—we have all signed the treaty and the House has approved its signature. That is quite clear.
  From 1 January 1993, we shall be one single market. That is clear, and we have supported it completely. The question is how shall we develop after that, and that is through the Maastricht treaty, which the Prime Minister says is good for us and good for Europe. We shall pursue that. On the question of a single market, I believe that the quicker that we get there the better and that it will come more quickly than people think.
  I do not want us to be caught out by there being a single market of the original members of the Community. I do not know whether it would include Italy, but it would certainly include France, Germany and the Benelux countries and would be very powerful. If there is to be a single currency, I want us to be in there.
  On the Community, it is essential that we explain much more to the people of this country about what has been, is and will be involved in Maastricht. the Prime Minister, the Foreign Secretary and the Chancellor of the Exchequer

  27
  have spoken consistently and fully about it. I sometimes wish that other members of the Cabinet had been trooping around the country doing so as well and as frequently. One of the problems is that people do not understand.
  Consider the referendums that are being held. What is the answer to the French referendum? It was not a referendum on Maastricht. The cities and the business classes all voted for Maastricht and there was a vote against by country areas and farmers. That was a vote not against Maastricht but against their treatment in the Community. Farmers, especially in France, are fed up. Our farmers have lost 30 per cent. of their real standard of living as a result of policies carried out by the Government and confirmed by the House, but our farmers lie low. The French farmers do not; they protest, and the referendum was a means of protesting. It was not concerned with Maastricht.
  Now I shall be accused of stirring up the farmers, but I am not doing so. When I first came to the House the president of the National Farmers Union was a major figure. When he made a speech we paid attention to it. I must confess that I do not have a clue who the present president of the NFU is.
  That is what has been happening over Maastricht. We must now pay more attention to understanding people's real needs and how we can meet them, and not have people deciding everything, as they cannot do so. In supporting Maastricht, and refusing to allow a referendum, the Prime Minister is absolutely right, and he has my fullest support.
  Madam Speaker: Order. Will hon. Members who are leaving do so quietly, so that we can continue with our business?
  4.19 pm
  Mr. Paddy Ashdown: It is always a pleasure to follow the right hon. Member for Old Bexley and Sidcup (Sir E. Heath). It is not always easy, but it is always a pleasure. The right hon. Gentleman said things with which I profoundly agree. I shall touch on some of those in my speech, but perhaps his most significant comments, at the start of his speech, were about the right hon. and learned Member for Monklands, East (Mr. Smith). I take great pleasure in welcoming the right hon. and learned Gentleman to his position as Leader of the Opposition. As the right hon. Member for Old Bexley and Sidcup said, the right hon. and learned Gentleman's speech will be regarded by many both inside and outside the House as an excellent speech and an excellent start in his new duties.
  As the right hon. and learned Member for Monklands, East said, we are debating a motion which asks us to approve the Government's economic policies. I had rather hoped that we might hear what those were, but the Prime Minister's speech, probably intentionally, gave us no clue. There were one or two pious hopes in that speech, but not one of the actions needed to turn those hopes into reality.
  There was a commitment to respond in an ad hoc manner to the conditions of the market, but there was absolutely nothing about what the Government's lodestar or guidelines will be. There was nothing about their exchange rate policy and nothing about how to balance interest rates against the capacity to stimulate future inflation.
  28
  We have before us a one-line motion which says nothing—to be precise, no doubt it can be read to mean whatever the various opinions held, not only by Government Back Benchers but within the Cabinet itself, want it to mean. Probably that motion, framed by the Whips, is the only motion which the Conservative party could have tabled for which all Conservative Members will be able to vote tonight. Goodness only knows what it says to the markets out there, which are looking for some kind of guidance or assurance about Government policy. As usual, what comes first is the unity of the Conservative party; what is in the best interests of Britain's economy and of our present economic situation comes second.
  What we do know is that last Wednesday the central plank of the Government's economic policy—and of their foreign policy—was obliterated in a single day. All the things that the Prime Minister told us would not happen did happen. In speech after speech, the right hon. Gentleman gave us an absolute assurance that he would not devalue. But he did devalue. In speech after speech he gave us an absolute assurance that his aim was to put this country at the heart of Europe. But last Wednesday he put this country at the periphery of Europe. During the election and afterwards, he gave us undertakings that he had healed relations with our European colleagues, most notably with the Germans. But since last Wednesday, Minister after Minister has been queuing up to blame the Germans in an attempt to shift the blame from themselves.
  Whenever something goes wrong under the Conservative Government, why is their first action to blame others instead of taking action to put it right? I have some sympathy with them because this time their traditional targets for blame—the Opposition parties—were no longer available to them. We made it clear that we did not support devaluation. Indeed, the calls for devaluation came from Conservative Members; those voices were from the Prime Minister's own party. One could speculate that, of all that was done last week to destabilise our economy and undermine our pound, the comments of Conservative Members about the need for devaluation must be foremost.
  Of course, the Government cannot attack their own, so what they cannot find at home they grub up abroad. They have sought to blame not their bungling, not their mismanagement and past policies, but the present attitude of the Germans. So discreditable an act—an act for which we shall pay a heavy price—is difficult to comprehend.
  Perhaps the best way to describe what has happened is to look, as the Prime Minister recommended to one of his hon. Friends, at the Conservative party's manifesto in 1992. It is quite revealing. It says:
  "When the exchange rate mechanism was being created, during the final days of the last Labour Government, the then prime minister decided Britain could not take part. It is easy to see why. The economy was too weak … The Conservatives have changed all that."
  Well, so they have. So they have.
  The Prime Minister's own words—he said them, not me, and we might describe our present condition best in the words that he chose himself—were that devaluation would betray our future and be a route to the second division in Europe. Correct. What he has described he has now done.
  After last Wednesday, thanks to the Government's policy, Britain is now condemned to being one of the second-tier economies in Europe, alongside and in the

  29
  company of Italy, Spain and Portugal. It will take a long time to rebuild and recover our position and it will take a Government with a clear and determined policy in order to do so. I hoped that we would see that today, but I have to tell the Prime Minister that we have seen none of it.
  Mr. Stephen Day: I do not wish to take any hon. Member into the realm of fantasy in this serious debate, but I do not imagine that that would be hard for the right hon. Gentleman. If the right hon. Gentleman had been the Chancellor on that day, bearing in mind what he has told the House, bearing in mind that the Government took great measures to protect their membership of the ERM, bearing in mind that they announced an increase in interest rates, which took great political courage, and bearing in mind that that did not stabilise the pound, what would the right hon. Gentleman have done to protect Britain's membership of the ERM? Would he have raised interest rates even higher than the Government proposed? What effect does he think that that would have had on the economy?
  Mr. Ashdown: Our position in the ERM could not have been protected on Wednesday because it was the Government's action long before Wednesday that made that simply indefensible, as I shall seek to show the hon. Gentleman in the next portion of my speech. the Prime Minister's defence before us today was that that was an act, as the hon. Gentleman has just suggested, of pure common sense; an act about which the Government had no option; the Government were, just on Wednesday, overwhelmed by a peculiar and singular event. What nonsense. The fact is that the origins of Wednesday's debacle do not rest in last week.
  Mr. Skinner: Débâcle.
  Mr. Ashdown: It is an interesting experience to have my French corrected by the hon. Gentleman.
  The origins of last week's catastrophe lie not in last week but in the underlying weakness of the British economy which has persisted, under Labour and Tory Governments alike, these last 40 years, because we have failed to tackle the real problems of the British economy. They lie in the decision in 1985 not to join the exchange rate mechanism when we could have done at a rate that would have been suitable for Britain and when our joining the ERM at that stage would have prevented the hyperinflated boom of the late 1980s and the deep recession of the early 1990s. They lie in the timing and rate chosen by the Prime Minister himself, personally, in 1990. As Chancellor, he chose the time and the rate, nobody else. He is responsible for that.
  Mr. Greg Knight (Lords Commissioner to the Treasury): What did the Liberal Democrats say in 1990?
  Mr. Ashdown: In 1990 we said that we were delighted that we had gone into the exchange rate mechanism, but let me make it clear to the hon. Gentleman that that was the least worst option at the time. When the Prime Minister, then Chancellor, decided to go in, the ERM was 39 months old. I have taken a look at it. Of those months, 30 would have provided better conditions Man the month that the Prime Minister chose to go in.
  Mr. Malcolm Bruce: He did it for the Tory party conference.
  Mr. Ashdown: Exactly right. We all know why the Prime Minister did it then. He did it because of the Conservative party conference. It had nothing to do with the best interests of Britain; nothing to do with what was right for our economy. It was short-term economic management for the benefit of the Conservative party. That is what has dogged the Government, week in, week out, month in, month out, year in and year out.
  It does not end there. The position was progressively weakened by inaction since the election, and compounded by the most desperate complacency during the summer months. The markets were not commenting—as the hon. Member for Cheadle (Mr. Day) half suggested—on the value of the pound in a single day. They were commenting on the weakness of the British economy, in which—directly as a result of Government policy—30 per cent. of our manufacturing base has been destroyed over the past 12 or 13 years. It is the same trend that yesterday produced redundancies at British Aerospace, followed today by further tragic redundancies at Ford and Rolls-Royce.
  The markets were commenting not on a short-term phenomenon that arose only last week, but on this country's long-term economic management, and the Government's failure to establish an independent central bank and their short-term economic fumbling and mismanagement last week.
  The markets were commenting when they acted last week not on some short-term scenario but on the uncertainties surrounding Britain's long-term intentions—as to whether we will be part of European monetary union or outside it. That led to uncertainties which undermined confidence in sterling, which was reflected in the markets.
  Mrs. Angela Browning: The right hon. Gentleman made allegations about Conservative party conferences. With the benefit of his knowledge of the background to sterling, will he comment on the statement made by the Liberal Democrat economic spokesman, the right hon. Member for Berwick-upon-Tweed (Mr. Beith) last Wednesday, during the course of that party's annual conference, that sterling should move as swiftly as possible to the 2.5 per cent. band?
  Mr. Ashdown: The hon. Lady overlooks my right hon. Friend's other two propositions. He suggested that a clear statement be made about our intention to establish an independent central bank, and that we should immediately take steps in that direction. That would have reassured the market. [HON. MEMBERS: "Oh."] That would have reassured the market. If it had been possible to go to the narrow band, that would have had the same effect. Both comments were perfectly reasonable and I fully support them.
  Mr. Salmond: I agree with the right hon. Gentleman that the origin of the crisis goes back a long way, but long after it was clear that the parity of sterling against the deutschmark was unsustainable, it was publicly supported by the right hon. Gentleman and by the Labour leader —who now argues for realignment, but did not do so then. There must be a better reason for supporting an unsustainable value for sterling against the deutschmark than that the right hon. Gentleman did not want to take the rap from the Tory Benches.
  Mr. Ashdown: The hon. Gentleman again excludes, presumably deliberately, the other points that we made. Of course we said that we ought to seek to hold the value of the pound, but we also said that other steps should be taken to increase the underlying strength of the British economy by beginning to invest and moving towards an independent central bank.
  We now pay the price for those long years of Government mismanagement—for the wrong policies and decisions taken at the wrong time. That price is not paid by Government Members or even by Opposition Members, but in the form of more lost jobs, more lost homes and more broken businesses throughout the country. That is the suffering caused by the whole miserable catalogue of Government blunder and mismanagement.
  The Government could have taken three actions to avoid the consequences of last Wednesday's debacle. First, they could have established in Britain that which every other modern economy has—an independent central bank that is mandated to maintain and to sustain price stability.
  Mr. John Watts rose—
  Mr. Ashdown: Forgive me, but I have already given way a number of times.
  If such a bank had been established, there is no doubt that the confidence created in the market would have enabled the Government to use a larger sum of money to invest in the country's infrastructure—such as transport —and in those other things that the economy will need in the 1990s. Above all, we could have released the controls on capital spending in part if not in full, to enable councils to use the money that they produced from the sale of council houses to stimulate the construction industry and to get building started again in this country.
  The Government could also have cleared up the dangerous uncertainty about our long-term intentions in Europe, saying that we would not opt out on monetary union but that we would be part of it. No question mark should hang over that.
  Mr. Tony Marlow rose—
  Mr. Ashdown: I must make progress, but I shall be happy to respond to the hon. Gentleman later.
  If the Government had taken those actions, Britain's economic position would have been much stronger and we could perhaps have coped with the circumstances of last week.
  That which the Government should have done is what now needs to be done. The Government say that they continue to make fighting inflation the centrepiece of their economic policy. Very well: let them prove it. Let them give independent status to the Bank of England, and mandate it to maintain and to sustain price stability in this country. If the Government will do that, people will begin to believe in their capacity to stick to their undertakings.
  The Government say also that they want to strengthen the economy. Let them prove it, by at least sustaining the level of investment in our capital expenditure. I believe that there will be serious cuts in the next review of public expenditure. Let the Government at least give an undertaking that capital expenditure will be sustained, and release the capital sums held for councils, to help stimulate the construction industry.
  32
  I fear that the economy is in such a weak state that a fall in interest rates by one or two points will lead not to further spending but—as it did in the United States—to people using the greater amount of money that they have to pay off the mountain of private debt that is now borne in Britain. That happened in the United States, and it is likely to happen here.
  Even if there were more private expenditure, it would serve only to create a consumer boom that would suck in more and more imports. To get the economy moving again, it will be necessary to do more than simply reduce interest rates. The Government must take a hand in beginning to stimulate economic activity. If the Government are serious about rebuilding the United Kingdom's position in Europe, let them face up to the challenge posed to this country and to this Parliament by the Maastricht treaty.
  We all understand that the treaty has its flaws, but it was never intended to be a destination. It was always meant as a transition point. If the journey stops at Maastricht, progress towards unity in Europe will begin to unravel, with devastating consequences for Europe and for this country.
  Government policy, as revealed by the Prime Minister, is that, instead of confronting the challenge of bringing Maastricht before the House and staking their own reputation on getting it ratified, the Government take refuge in delay and dodge. I am surprised that the Labour party seems to have joined the Government in that. We heard from members of both Front Benches today that Britain intends to hide behind the skirts of the Danish Government and of the Danish people.
  It strikes me as odd that the Prime Minister was prepared to recommend a firm yes to the French but not to give real advice to the British people about the Maastricht treaty. Shortly after the Danish referendum, the Foreign Secretary told us that the 11 other member states would proceed immediately to ratify. We now hear that Britain must instead wait upon the Danes to decide. Why must we hesitate when almost every other European country finds it possible to proceed? Luxembourg, Ireland, Greece and Italy have all been able to decide without waiting for the Danes, and those countries will shortly be followed by Portugal, Germany and Belgium.
  Why is it that Britain and this Parliament cannot face up to that decision and ratify immediately? That shows a vacuum of leadership which is made worse because with the Government's current presidency of the Community they ought to be giving a lead to not only Britain but the wider European community.
  Mr. Hugh Dykes: Is not the right hon. Gentleman being a little alarmist? If we have only to wait effectively for the preliminary and initial announcements of the Danish Government, Danish political parties and Kobenhavn as to their intentions and how they intend to formulate the questions to be contained in another referendum to the Danish people, there need be no delay in producing our own Maastricht legislation. That can be done well before Christmas.
  Mr. Ashdown: Christmas this year? I must disabuse the hon. Gentleman of that notion. I wish that it were the Government's intention, but it is not and we know that.

  33
  They will not bring the matter before the House until the spring of next year, if not later, for the reasons given by the right hon. Member for Old Bexley and Sidcup.
  Mr. Marlow rose—
  Mr. Ashdown: If the hon. Gentleman will forgive me, I will not give way, as I am keen to give other right hon. and hon. Members an opportunity to speak.
  Why is there such a delay? Why are the Government, apparently aided and abetted by the Opposition, prepared to delay and allow the Danes to decide first? It is not because it is in Britain's interests, but quite simply because it is necessary to hide the divisions in both parties. Britain will pay a real economic price for that. For as long as we do not confront the challenge of Maastricht and we dodge the issue of ratification, for so long will the markets doubt our long-term intentions. For as long as we try to maintain the value of the pound at some given parity—we know not what—so long will the markets require higher levels of interest rates from us in order to do that. For so long it will also cost jobs. While the Front Benches delay and dither, for so long will the voices of the anti-Europeans in both the Conservative and Labour parties grow stronger and stronger and the uncertainties over this country's future become deeper and deeper.
  I want to make one final point before I sum up—a point on which the right hon. Member for Old Bexley and Sidcup touched. If there is one lesson to be learned from last week about what we must do in the face of the growing power of the markets and speculators, it is that we can solve the problem only by going into a single currency and not by running away from it. If we really want to be part of a system that can stand on its own feet against the speculation and the raids to which the Prime Minister referred, that is the lesson we must learn.
  Mr. William Ross rose—
  Mr. Ashdown: I think that I have given way often enough and I must conclude shortly.
  That is the lesson, but the Government dodge it and run away from it. There is no refuge for this country outside an exchange rate system that includes our major trading partners. Because of the effects of the Government's economic policy, it will now be very difficult to get back into the system, but we must get back in. The country and the House must face that fact.
  There is no refuge in allowing a floating exchange rate policy that enables us to devalue. Freedom to devalue is the freedom to suffer inflation, to have lower growth, to decline while others prosper and to boom and bust, just as we have done for the past 40 years. Given Britain's record, asking for that freedom is like asking for the freedom for a drunk to go back into the pub. This country must begin to face the disciplines that we have just been pushed out of because of the Government's failures last week.
  The Chancellor of the Exchequer (Mr. Norman Lamont): The right hon. Gentleman said earlier that he thought that the rate of 2.95 was too demanding and could not be sustained. Now he is saying that he did not want it devalued. Which is it—or is this just the usual Liberal posturing?
  Mr. Ashdown: If the right hon. Gentleman had bothered to listen, he would have heard me say that that rate could not be sustained without other policies to back
  34
  it, such as those that I have just described. Not for the first time, the Chancellor is being highly selective. After all, it was the Government who chose the rate, not us.
  There is no refuge for this country on the periphery of a Europe which is moving faster and faster towards closer unity. The right hon. Member for Old Bexley and Sidcup was right to say that the real danger that faces this country is that the core countries of Europe, France, Germany and the Benelux countries—the countries of the Schengen agreement—will now form a tight core. There will be a second-tier Europe, but we will not even be in that. We will be in the third tier of Europe, the slowest lane of all. Sooner or later this country yet again will have to face a decision about where it wants to be. Sooner or later we will be faced with a choice—are we in or are we out? Sooner or later yet again we will be faced with a choice about whether we will be in or out of a system that we have lost the power to shape and lost the will to be a part of.
  That is the sum of what the Government are asking us to vote in favour of tonight. It is a Government economic policy which has led to the stagnation of the British economy, which now threatens growing inflation over the next two or three years and which is fast leading to isolation. Stagnation, inflation, isolation—that is what the Government's policy has delivered to this country. That is what the Government have brought us. That is what, in the light of the Prime Minister's speech, they now offer us. Their fundamental credibility to govern this country has been, even this early in a Parliament, destroyed. They will not be trusted again. Quite frankly, the sooner they go the better. If we can help that process through tonight's vote, we will.
  4.45 pm
  Mr. John Biffen: When Parliament is recalled in circumstances such as these, there is always a real danger that the entire debate may be dominated by wall-to-wall Privy Councillors. Therefore, I wish to say immediately that I shall speak for only 10 minutes. I hope that the House will excuse me if I take a relatively narrow analysis and proceed with some celerity.
  I wish to discuss the evidence that has accrued over recent months of a growing and effective German power. It is quite legitimate to consider that in the context of a debate that purports to be about the Government's economic policy. Indeed, the topic has touched upon my right hon. Friend the Chancellor's every thought during the past few days.
  The House might reflect on the European diary of 1977 to 1981 of Lord Jenkins of Hillhead—I introduce him for the benefit of the hon. Member for Bolsover (Mr. Skinner) —in which he made a most effective analysis of the partnership that dominated the European Community: Germany with its growing economic power and sophistication but a very relaxed political role; and France, effectively carrying out the politics. We can now see how much that has changed.
  On the whole, I welcome that change. I do not align myself with my right hon. and noble Friend Lord Ridley in taking a dire view of the implications of the revival of German power. Germany has a place in the European sun. The disasters in the inter-war years were as much a consequence of the unhappy Versailles treaty as anything else. I do not identify with those who are fearful and resentful of current German authority. However, I am

  35
  realistic enough to observe that that fear and resentment exists on a scale that transforms the European position. That was noted with some anguish by some of my hon. Friends in the decision on the combat aircraft a few months ago. However, it was never so much noted as in the conduct of German economic and monetary management in the context of the ERM.
  I acknowledge that the reunification of Germany presented the most enormous economic, fiscal and social challenges, and I could not envisage how the much vaunted power of the President of the Bundesbank failed to prevail over political judgments. However, that was the world in which we were living. My right hon. Friend the Chancellor was relaxed in his language, but our right hon. Friend the chairman of the Conservative party was rather more robust in blaming the Bundesbank for a great many of our difficulties in managing our currency within the ERM.
  Many hon. Members here today will say exactly how we should have managed our currency in those circumstances, but I shall not join them. I just wish to offer my good wishes to my right hon. Friend and my appreciation of his past struggles.
  The House would be well advised to identify where all this will go. It is a matter of value judgment. I believe that unification has proved such a powerful, traumatic force in the national German experience that it is no good going back to the world of Helmut Schmidt and Willi Brandt —an era so affectionately regarded by many in the House as the appropriate guide to the future.
  Germany will be increasingly concerned, I believe, with what lies to the east in terms of unification, but she will also want stability on her eastern border and the opportunity of economic influence through investment in that part of the world. Everything that is made available for that purpose is not made available for financial convergence in Spain, Portugal, Italy or Greece. That brings us to the heart of the Maastricht treaty: whether, in fact, it is a prospective reality, whether, in fact, it is rooted in the present or, in any sense, rooted in a likely future.
  The crucial role which has been assigned for Germany was assigned by those living in another time who made an analysis of a situation that no longer prevails. Therefore the likelihood of Maastricht being secured is remote. I am sure that it is distressing to some hon. Members that the peasantry should play a role in French decision taking, but one is faced with the position that, even though the whole business community in France voted yes, a very powerful potential political power has been given to those who voted no.
  I do not believe that French politics will cheerfully drift back into their previous mould. I do not believe that Giscard has that much of a golden future; it is more that of a golden oldie. Chirac will almost certainly not be controlling the UDR party in France for any length of time. If I am right in my analysis, we shall see powerful political forces operating in major European countries whose purpose will be to carry out economic policies that will frustrate what is in the Maastricht treaty. It is not a treaty that compels Government action. It is a treaty that lays down a course of action which it is assumed that Governments will follow. However, we have now
  36
  destroyed a great deal of the popular basis of support for those policies and for that treaty. That, it seems to me, is an uncomfortable reality.
  I turn to my right hon. Friend on the Treasury Bench and say to him that I did not hide my opposition to the exchange rate mechanism and to Maastricht. However, we are now confronted with a position in which we shall be invited to put on the statute book legislation that has little and lessening relevance. It is that fact which causes speculation. Speculators are not just a lot of yuppies from Essex in their braces. They are people of considerable sophistication. If they see that politicians have committed themselves to courses of action that are wildly improbable, they will draw conclusions that are wholly proper.
  May I say, in the presence of the one-time leader of the Conservative party, my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), who coined the phrase "a full-hearted consent" in the context of the European debate, and also to my right hon. Friend the Prime Minister that we have heard from the former leader of the Conservative party that Maastricht is, for him, an integral part of a process to produce one Government, one currency, one state. That, I believe, would lead to its economic provisions being seriously contested and avoided by the member states.
  On any count, that treaty is unacceptable. To proceed with it in the House of Commons, knowing that it gives rise to the sort of expectations held by my right hon. Friend the Member for Old Bexley and Sidcup and knowing the uncertainties surrounding the economic considerations, the true course of British statesmanship is to turn to one's neighbours and say, "Up with this we will not put."
  4.53 pm
  Mr. Peter Shore: It is always a pleasure to follow the right hon. Member for Shropshire, North (Mr. Biffen). I am particularly pleased that he drew attention to the relevance and importance of the Maastricht treaty to all that we are discussing today. It hangs like a cloud over our future. It has direct relevance to the debate about the exchange rate mechanism. If it were not for the fact that the ERM is supposed to be the first stage of a three-stage process leading to economic and monetary union under the treaty of Maastricht, it would not, I believe, have had the kind of pressures put upon it that we have seen in the last 10 days.
  The other point that I should bring in under this general heading is that it was the French referendum that led to particular uncertainties, for nobody could be certain what the French people were going to say. Is it not remarkable that, when the people of a country are invited to vote, they register a vote that is entirely different from the expectations of the professional politicians, the classe politique which is so Euro-federalist at present?
  When the French Chamber of Deputies and Senate met jointly to decide on the treaty of Maastricht, they voted by about 580 to 68 in favour—at least 8:1. When the matter was put to the people of France, it received their consent by a whisker—a 1 per cent. lead. It was the same with the Danes. The Danish political establishment voted for the Maastricht treaty by 125 votes to 25, but when they put it to the people of Denmark we know very well that they rejected it.

  37
  Therefore, I well understand why the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) should feel a certain nervousness about the awful prospect of inviting the British people to consider their own future. He has every reason to be nervous. I say both to him and to others that, if the people of Germany are invited or force their way into a referendum, we may get a very different result from what is assumed by their leaders in the classe politique.
  Mr. David Winnick: Would not the opposition of the British people be even greater if they had heard what the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) said today? He conceded that a single currency would indeed lead to a single state and illustrated the position in the United States as an example of the federal structure that ought to exist among the member states. Does my right hon. Friend believe that there is the slightest support among the British people for such a concept?
  Mr. Shore: One of the great things about the right hon. Member for Old Bexley and Sidcup is that in many ways he blows the gaff. He does speak for a minority view in the House and for an even smaller minority view in the country that wills a federal Europe. The right hon. Gentleman wills the destruction of the British state. He wills the transfer of power to a higher body of federal government in Europe—a united states of Europe that would be something like the United States of America. He wants to hand over all the major, crucial powers of government to that body. That is what he is about. That is what so many people fear is the basic reasoning, the basic intention in the treaty of Maastricht, even though the Government have negotiated for themselves an opt-out from the treaty's most dangerous and sinister clauses relating to economic and monetary union.
  Anyone who turns his mind seriously to this question must face up to the issue. If we go along that road and if we are driven to economic and monetary union, we shall virtually say goodbye to our own effective control over our economic life and, inevitably, to our effective control over the political destiny of this country. That is the real question. Although the Government have an opt-out, as it were, they have not yet faced up to that question.
  Having watched the events of the last two years since we joined the exchange rate mechanism, we very much fear that the Government are doing their utmost to fall in with the requirements of convergence, which would make it possible for them to join the economic and monetary union in 1994. I cannot think of any other rational reason why the Government should have stuck to the ERM parity of DM2.95 for so long, fought so desperately, raised interest rates to 15 per cent., virtually halved our national reserves and borrowed money from abroad, all in order to keep sterling at 2.95 deutschmarks to the pound.
  That is extraordinary. the Prime Minister told us that, when we entered the mechanism, many people supported him. They did not even cavil at the exchange rate. I regret to say that some of those hon. Members should have exercised better judgment.
  It is two years since we joined the ERM in October 1990, and in that time things have not stood still in the countries of Europe. Some convergence has been achieved in terms of bringing our too high inflation down towards the European average. Great progress has been made
  38
  there, but that does not necessarily lead to competitiveness which is not only about the rate of inflation but about the efficiency of output. I shall give the Chancellor an example.
  In the three years from 1989, the British economy has probably registered an output change of minus 1 per cent. In spite of its problems in bringing together east and west Germany, that country has had an output gain of at least 10 per cent. An economy that has declined over three years is not as competitive as it was in 1989, but in the meantime our principal competitor nation, on which we are basing our exchange rate, has increased its output and competitiveness by a good 10 per cent. Unless there is a miraculous coincidence in which the rate of growth in all EC countries is the same, that is bound to happen. It is not a question of getting the exchange rate right on joining the mechanism. It is bound to be wrong in a few years because of differences in the rates of growth and competitiveness in different countries. I ask the House and the Chancellor to think carefully about that.
  the Prime Minister said that we were overcome by a great tidal wave of speculation. That is a fair point, because there was such a great wave, and it affected other currencies as well. But, more importantly, we were forced to lower our exchange rate and to float because it was perceived by virtually all informed opinion that we were no longer competitive. Evidence of that can be found in our current account trade deficit, which is probably the best indicator. Despite nearly 3 million unemployed and the virtual abandonment of industrial investment by almost all firms in Britain and an immense number of company liquidations, we are still running a trade deficit this year of about £1 billion a month.
  Britain is in the grip of the worst recession since the 1930s, but we still cannot pay our way. It is inevitable that, when an economy is seen to be performing as badly as ours, foreign opinion among bankers and Governments will be that the currency is out of line. That leads to waves of speculation of the kind that has finally triumphed.
  I have a relevant question for the Chancellor. Do the Government think that we would be better off if we had managed, with the 15 per cent. interest rate and the squandering of reserves, to hold the exchange rate at DM2.95? Does the Chancellor think that we are better off now that we have freed ourselves from the ERM and the exchange rate is DM2.45 to DM2.48? I have not looked at the latest figures, but there has been a significant devaluation of 12 to 14 per cent.
  Does any hon. Member who is in favour of our membership of the ERM say that we should have remained in the mechanism at the previous rate? Do the Government or anyone else intend rejoining the ERM at a rate of DM2.95 to the pound? If no one proposes that, it looks as if the country may have been done a good turn, because we now have a chance to make industry competitive and begin the process of recovery. We would be foolish not to learn the lesson of what happens to a currency locked into an impossible exchange rate that is bound to attract speculation and pressure. Our exchange rate could be sustained only by interest rates that were so high that they were squeezing the life out of the economy.
  We are only in stage 1 of economic and monetary union. If we were back in the ERM and had renounced the pound so that it was impossible to come out or devalue, what would happen? If there were a permanently fixed exchange rate, let alone a common currency, and our costs and prices were not as competitive as those in Germany, it

  39
  would be just too bad. There would be not 3 million unemployed but 4 million, 5 million, 6 million or more, and British people leaving universities and colleges, after all the good training that my right hon. and learned Friend the Leader of the Opposition is anxious for them to secure, would find jobs not in Britain but on the continent in areas where growth was being sustained.
  Mr. Malcolm Bruce: The right hon. Gentleman cannot resist the opportunity to kick the idea of European union while it is down. His opposition is well known. Is he suggesting that sustained devaluation over the years has helped to strengthen the British economy? Was it not the weakness of his party when it was in government that helped to get us into our present mess?
  Mr. Shore: It is easy to be emotional about exchange rates, but we must try to be rational about them. Leading people who insist that the index of a country's prosperity or its virtue as a nation should be measured by its exchange rate are quite mad. It is said that Japan and Germany are the two most virtuous countries in the world, but they are not. They are quite efficient countries and they have virtues, but they have immense defects as well.
  We should go for a competitive exchange rate that is not out of line or overvalued. That is the only way to secure our prosperity. Of course, there were some post-war devaluations, but since we entered this fixed exchange rate arrangement. unemployment has grown by well over 1 million in the past two years. It is still going up, and nothing will check it.
  Mr. Alan Williams: Does my right hon. Friend recollect that, when he and I were at the Department of Economic Affairs, the 1967 devaluation was recognised as a platform, not a solution? By 1970, we had turned the deficit into a surplus equivalent to £5 billion at today's rates. We also achieved the highest ever level of manufacturing investment, but those things were all blown away when the Government, led by the right hon. Member for Old Bexley and Sidcup (Mr. Heath), abandoned investment and went for consumer-led growth under the then Chancellor Lord Barber.
  Mr. Shore: I recall that, and it is very relevant. I have never believed that devaluation is a policy in itself, but it is a necessary means of achieving not only the opportunity to recover but a balance in the current account, without which long-term measures will not work. That message should be taken on board by all hon. Members.
  It is much better for Britain to float than to be locked into a permanent fixed exchange rate, which would destroy the nation. We simply cannot afford to go along that road. If we are to consider rejoining the ERM, as I suspect we shall, we must ensure that the preconditions that the Labour party laid down in its document in late 1989 are met. We said that we had to enter at a competitive rate and must have the power to keep it competitive, and that it must be part of a general policy of expanding growth in the European Community and in trade.
  Last, but most important, we must break the link between the ER and the new goal under the Maastricht treaty of entering into full economic and monetary union.
  5.10 pm
  Mr. John Watts: The right hon. Member for Yeovil (Mr. Ashdown) argued that we might have been better able to withstand last week's pressure on sterling if we had had an independent central bank and the House did not have the right to determine whether Britain joins a single currency. He did not describe any measures that were not already available to the Bank of England last week. My right hon. Friend the Chancellor was not reluctant to sanction massive intervention in the markets or substantial increases in interest rates to protect the parity of the pound. There were no other measures that an independent Bank of England could have taken.
  The right hon. Member for Yeovil argued that the markets were in some way expressing their doubts about whether Britain intended to stay in the ERM and on course for economic and monetary union. If that is true, what have the markets been commenting on in the past week with regard to the lira and the French franc? Are there doubts about whether France wishes to remain in the ERM or whether it is committed to economic and monetary union? I suggest to the right hon. Gentleman that the markets were commenting on the clear reluctance of the Bundesbank ultimately to be involved in a single currency and on its doubts about whether, with the current policy stance in Germany that is being dictated by domestic concerns—in my view, rightly so—the ERM parities for any of the other currencies were sustainable.
  By reaffirming the fundamentals of economic policy, my right hon. Friend the Prime Minister helped to remove some of the obscuring fog that has surrounded the conduct of policy recently, in particular by emphasising the importance of a policy to drive down inflation. The policy that has been pursued since 1988—when interest rates were raised to an appropriate level to counter inflation that has built up from an inappropriately low interest rate policy and when we were following the deutschmark outside the ERM—has brought about a substantial improvement in inflation.
  It is a matter of record that I have never been an enthusiast of the exchange rate mechanism. I declined to go through the Lobby to support the motion in the name of my right hon. and noble Friend Baroness Thatcher to approve the Government's decision to enter. None the less, I acknowledge that the first 12 months of our membership helped to reduce interest rates without stoking up inflation. In October 1990, the great imperative was to reduce interest rates because of the growing recession without causing a serious sterling crisis and a run on the pound. That was made possible only by our joining the ERM. As inflation at that time was much higher, the inflationary pressures that would have flowed from a weakened currency would have added to our inflationary difficulties. Therefore, although I have never been an ERM enthusiast, I acknowledge that, during that period, our membership assisted policy, the central aim always having been to get inflation under control.
  For about the past eight months, our membership of the ERM has constrained our ability to reduce interest rates in order to stimulate the economy, which has increasingly become the greater imperative. I have found among my constituents a sense of relief that we are no longer bound by our commitment to the ERM.
  There has been much crowing from the Opposition—understandably so—about what has been described as a

  41
  major U-turn in Government economic policy. Opposition Members will not be surprised to learn that I analyse the situation slightly differently. If my right hon. Friend the Chancellor, being aware that the Italian Government intended to devalue the lira, had said, "Let us devalue the pound now," that would have been a U-turn in policy and it would have undermined the credibility of any policy that the Government pursue in the future. But my right hon. Friend did not do that; he stood by the commitment that he, the Prime Minister and the Government have consistently made to seek to maintain our position within the ERM and to take whatever measures are necessary to achieve that objective. Intervention in the markets ultimately did not succeed in steadying the pound and the sanctioning of two rises in interest rates did not succeed in securing stability for the pound.
  Those measures were taken against the background of a whispering campaign—whispers in double forte—by the Bundesbank that the pound and other currencies within the system should be devalued. That reinforcement of sentiments already present in the market built up irresistable pressures. I therefore view the decision that my right hon. Friends took not as a U-turn in policy but as a sensible and pragmatic position to adopt. If one is facing a wall, it is not sensible to bang one's head against it; one turns around and finds another way out of the problem.
  The Leader of the Opposition seemed to offer a two-part solution to recent events, the first part of which was the oft-rejected Labour package of spending more taxpayers' money and borrowing a great deal more money. [interruption.] Yes, borrowing and spending a great deal more than my right hon. Friend the Chancellor has planned to spend or borrow. Such a policy has been rejected by British people in successive general elections. I hope, without intending any personal malice, that the right hon. Member for Islwyn (Mr. Kinnock) does not have the opportunity, by an appointment to the European Commission, to introduce through the European back door policies that have been rejected twice by the British electorate when put forward by the Labour party under his leadership.
  The other part of the Leader of the Opposition's approach is what I would describe as "bier and wurst with the Bundesbank". The argument goes that everything would have been fine if the Governor of the Bank of England and my right hon. Friend the Chancellor had got together with the Germans and asked them nicely if they would agree to a general reduction of interest rates. There should also have been a general realignment of rates within the ERM.
  That approach was clearly doomed to failure before anyone even thought of trying it. While it is perfectly fair to be beastly to the Germans and the Bundesbank for a whispering campaign to undermine sterling, it is not valid to criticise German policy by suggesting that Germany adopt policies inappropriate to the needs of its domestic economy and its great need to get on top 'of the inflationary pressures there. It would do nothing to strengthen the economies of the European Community if the motor economy, the German one, took steps that would weaken itself, especially with reference to inflation.
  Mr. Boyce: I am a hit confused. the Prime Minister said this afternoon that we will rejoin the ERM once we have discussed the matter. The Germans are not going to be kind to us; we cannot use a reasoned approach; and we
  42
  certainly do not have the muscle to use a strong approach. Will the hon. Gentleman therefore explain at what stage we will rejoin and what mechanism we will rejoin?
  Mr. Watts: When the hon. Gentleman reads the Official Report tomorrow, he will find that my right hon. Friend did not speak in the terms that he has just misquoted. I am about to turn to Britain's future in relation to the ERM, so I ask the hon. Gentleman to be patient.
  It would do nothing to improve the position of any other European economy if the German authorities took decisions inappropriate for dealing with the considerable problems facing Germany. By all means let us criticise the Germans, but let us do so for the right reasons—
  Mr. Andrew Hargreaves: Will my hon. Friend agree that that is one of the reasons why the cosy conversation to which the Leader of the Opposition referred, saying that it should have taken place, may well have taken place? Would he further agree that the Germans might have said no, and that the French might have said, "Not until after our referendum"?
  Mr. Watts: That is an interesting speculation, but it would not be helpful to speculate further about a conversation that may not have taken place.
  As for the future of the ERM, one of its core members, France, has been under great pressure in recent days. Probably the logic of the situation is that the mark should have been revalued against the currencies of all other member countries to avoid this blow up. What my right hon. Friend the Prime Minister said about Britain's future relationship with the ERM was that there need to be substantial modifications to the system before we can contemplate rejoining it. We could certainly not rejoin the system as it stands; and the fault lines to which he has referred were clearly the events of recent weeks.
  It was argued before Britain became a member that the reason why we were subjected to such great pressures on the foreign exchange markets was that we were not members of the ERM and that if only we would join, the strength of the mechanism would protect us. The events of the past two weeks have shown that the system could not protect us, the lira, or the peseta, and it remains to be seen whether it can effectively protect the French franc.
  It seems to me that the very least necessary modification would be a requirement for a symmetry of obligations on member currencies. There cannot be just a one-way bet. A currency that is under pressure should not bear all the responsibility for maintaining its parity. There should be an equal and symmetrical obligation on a currency that is strengthening against its central rate to take action to deal with that. That is an essential component if there is to be any prospect of this country rejoining the ERM.
  Looking ahead to the Delors process, the right hon. Member for Bethnal Green and Stepney (Mr. Shore) reminded us that we have not yet moved towards Delors stage 2, under which there would be a commitment to fixed parities. In the light of the experience of recent weeks it seems to me that the only way fixed parities could be maintained would involve an absolute and unlimited obligation on every central bank to convert unlimited amounts of its currency in exchange for the currency of other member states at the fixed agreed rate. So unless there was an obligation on the Bundesbank to convert unlimited amounts of pounds, lira or francs into

  43
  deutschmarks, and hence to expand the supply of marks without limit, this stage could not possibly be made to work.
  This is why this country is so fortunate that our Prime Minister and Chancellor saw the grave difficulties implicit in the plan that Mr. Delors presented to the Community Heads of Government—the plan for economic and monetary union—and that they obtained for us the right to decide, when other member states believe that the conditions for union have been met, whether or not to take part in that union.
  Mr. Derek Enright: Will the hon. Gentleman agree that the so-called Delors plan for economic and monetary union was taken forward on the instructions of the Council of Ministers? Can we get that straight once and for all?
  Mr. Watts: My recollection is that, in most of these matters, it is the Commission's power to initiate and to determine the agenda that has led us into so many of the problems faced by member states in recent years—problems that have brought discredit on the European Community in the eyes of so many of our constituents. I disagree with the hon. Gentleman; the position is as I have explained it, although I stand to be corrected.
  I urge my right hon. Friend the Chancellor not to seek early re-entry into the ERM for sterling, and I urge on our partners the merits of adopting a much more evolutionary approach to economic and monetary union, so that convergence of the economies precedes the creation of new institutions or of a new currency. The lesson that we should learn is that, when economies have become closely integrated, like those of Holland and Germany—there is little in the way of fluctuation between their two currencies —that is a natural process that comes from trade links. We should have a trade-driven Community, and institutions should be created and adapted to meet the requirements of the evolving Community. Bureaucrats or Eurocrats laying down deadlines and creating institutions and then expecting the real world to conform to their master plan cannot succeed.
  Several Hon. Members rose—
  Mr. Deputy Speaker (Mr. Michael Morris): Order. I re-emphasise Madam Speaker's plea for concise speeches. The right hon. Member for Shropshire, North (Mr. Biffen) gave a powerful speech in eight minutes—let that be an example to us all.
  5.28
  Dr. Jeremy Bray: My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) made a point echoed from a different geopolitical standpoint by the right hon. Member for Shropshire, North (Mr. Biffen), but the two have been long-standing allies and they are both still wrong. I should like to concentrate on where we go from here, not on the past.
  The economy is in such poor shape that a crisis could have occurred at any time. Certainly, the French referendum was the trigger, but the current account deficit is running at 2 per cent. of GDP and rising, unemployment is at 9.9 per cent., public sector borrowing stands at 6.5 per cent. and is rising; and even with renewed growth there is
  44
  little prospect of getting public borrowing back under control at present levels of taxation and public expenditure. But even that is not the full measure of our plight.
  Given the present rates of taxation and public expenditure there seems to be no level or path for the exchange rate which would bring the current account and public borrowing back to an even keel next year, the year after or at any time in the next decade, so devaluation offers no solution.
  I did as careful an exercise as I could on the Treasury model, which the right hon. Gentlemen tried to use to support their arguments—they failed. It is a fairly eclectic model. I ran it in comparisons with other macro models. The results were published before the general election. The picture that emerged most strongly from the Treasury model was that there is no path for the exchange rate that brings the economy back into balance. The other models give greater weight to the improvements in exports of manufactures recently, but that improvement does not seem to be being sustained. The volume of exports of manufactures during the past three months is 3 per cent. down on one year ago, whereas the volume of imports of manufactures is 7 per cent. up although total expenditure is so depressed.
  If the markets see no improvements coming through in the current account and from the recent fall in the exchange rate within the year or two it takes the J-curve to work, the pound will slide still faster and still fail to find a sustainable path. All this accords with the attrition of industry that we see in our constituencies.
  I was content to fight the general election campaign on Labour's platform on the expectation that, as my colleagues opened the books and saw the grimness of the prospects, real weight would have been put behind the measures necessary to improve our technological competitiveness, which is what all Opposition Members have emphasised. Such measures take time to have effect, but if the markets take them seriously—that is a big if—the benefits are felt straight away in increased confidence. The alternatives are either a return to the surgery of incomes policies or severe cuts in public expenditure and increases in taxation—despite the recession.
  The Government have not yet launched serious new efforts to improve our technological competitiveness. They believe—on reasonable grounds—that incomes policies would not work, so the prospect is for horrendous expenditure cuts and tax increases. The Government will feel that they could not get away with actual wage cuts, but that is probably what their figuring points to.
  The countries whose currencies were under pressure before the pound—Sweden and Italy—have now announced savage cuts in expenditure and huge increases in taxation. In this situation what should Britain do?
  Recent events certainly show the vulnerability of the ERM in setting up exchange rate targets against which the speculators can pitch their billions, but the treaty of Maastricht made the ERM only an interim stage towards EMU. Within EMU, there would be no room for attack on national currencies—there would be no national currencies to attack.
  The problem of global stability would remain, against the dollar and the yen, but that exists now. Also, there would remain the big political question of how we would manage fiscal and monetary policy within Europe. Here, I would say to my hon. Friends that we are not offered

  45
  equalisation of income, social benefits, unemployment or growth inside or outside the ERM and EMU. It would be nice if that is what convergence meant. The choice for us is whether we wish to manage our taxation and expenditure within the stable monetary regime of EMU or within the hazards of the international money markets.
  For any country to join EMU there has to be convergence of monetary conditions—of inflation and interest rates, and limits on public borrowing—but those constraints have to be faced anyway, whether in the wilds of the international money markets or in the disciplines of the EMU. EMU offers the best environment in which to make the structural changes we must make in the economy.
  We should try, first, to ensure that there is an EMU there for us to join at some time. That means Britain's ratifying the treaty of Maastricht, or its equivalent, which I believe the EC will bring forward, without Denmark.
  Secondly, the Government should set out honestly the magnitude of the task we face in meeting the EMU conditions and the path they propose we should take in pursuit of them. There are differences between the way the Bundesbank and Germany see the problem of economic management and the Anglo-Saxon tradition of economic analysis. To British economists, German arguments seem crude and unsubtle; to German bankers, British arguments seem weak and indisciplined.
  The Treasury has not represented the best of British traditions in recent years, and it is in no position now seriously to criticise the Germans. There needs to be much more serious engagement in technical arguments on the design of policies between finance ministries and central banks. In human terms, perhaps the Bank of England is now in a better position to reopen the dialogue with the Germans and the Community that is the Treasury.
  Thirdly, the Government have to abandon their uniquely hostile attitude to industrial policy, to practical support at a serious level and to the structural changes needed to secure Britain's technological competitiveness. I am not sure that the President of the Board of Trade has all the answers, but he should at least be allowed to reopen the debate on industrial policy. The magnitude of the challenge is revealed by the fact that we have to increase our exports of manufactures by some 2 per cent. per year —£2 billion—faster than would occur from simple considerations of price competitiveness and the growth of world trade. That is a huge task and the achievement must be sustained for a decade if we are to preserve anything like our position in the world economy.
  With a clear goal and a viable strategy, the Government must explain to the British people and the money markets the case for the short-term policy adjustments they will have to make. They will have to be painfully honest. They cannot expect to be believed unless they are painfully honest. If they are, and although the Opposition would have priorities different from the path the Government will pursue, I hope that we will not oppose such objectives as I have outlined or seek to frustrate their achievement.
  5.37 pm
  Mr. Terence L. Higgins: I do not think that anyone would argue that my right hon. Friend the Chancellor of the Exchequer has had an easy time in the past two weeks. I have particular sympathy for him as I was the Minister responsible for international monetary
  46
  affairs when we joined the European currency snake—the precursor of the ERM. I studied the record and noticed that we joined on 1 May and left on 23 June. My right hon. Friend has done a great deal better than we did. We then floated the pound.
  It is worth remembering that the Government joined the ERM under the leadership of the former right hon. Member for Finchley. The move was supported by the vast bulk of the Conservative party, by the Opposition and by the Liberal party.
  Mr. Bob Cryer: It was not supported by this section.
  Mr. Higgins: Indeed. It was not supported by all sections of the Opposition.
  The rate at which we joined the ERM was not the proper one, although it was, of course, the market rate. Subsequently, there was German reunification and the German Government insisted on a particular exchange rate between the east and west German currencies, contrary to the advice of the Bundesbank. The Bundesbank effectively took its revenge be raising interest rates and we have been suffering ever since.
  The Government could not readjust the exchange rate without undermining their declared policy of fighting inflation, so we have gone from month to month in the same situation, It is not so much that the Humpty Dumpty structure of exchange rates that existed when we joined fell off the Berlin wall as that the wall collapsed underneath it.
  I feel strongly that, over the past few days, the Chancellor, having declared his policy very clearly, did everything possible to achieve the aims of that policy. It has been suggested that, 10 days ago, there was a good deal of confusion. I believe that anyone who had sat down to deal with the position a day before all that confusion, and all the pressures in the exchange market, would have done exactly what was done by my right hon. Friend. He would have intervened immediately, as far as reasonably possible, and then raised interest rates; he would have threatened to raise them further, and then waited to see what would happen at 4 pm. At that point, he would know whether he had won.
  As soon as it was clear that he had not won, it would have been entirely appropriate to move the interest rate in the other direction and to float the pound; it certainly would not have been appropriate to fix another specific rate. I believe that my right hon. Friend did all that he could, in the circumstances, to stick to the policy. Now, however, we must look forward—as, indeed, my right hon. Friend has done—while again stressing the vital importance of the battle against inflation.
  The crucial issue is surely the level at which the Government should seek to set interest rates. There is a fundamental balance to be struck. First, we need to set the rates at a level that will result in the pound's settling down at a competitive rate, in relation not only to European currencies but, in particular, to the dollar. The dollar, after all, has been at a very competitive rate: in any previous period, we would have heard complaints about competitive exchange depreciation, beggar-my-neighbour policies and so forth.
  My right hon. Friend, then, must bear in mind the need for interest rates that will bring about a competitive exchange rate. Against that, however, he must set interest rates that will enable him to fund the public sector deficit

  47
  from the non-bank public; otherwise it will not be possible for him to control the money supply, and that must be crucial in the battle against inflation. My right hon. Friend must consider that balance very carefully as the markets gradually settle down. Having said that, I must add that, in that sense, the smaller the public sector borrowing requirement the better. The need for public expenditure control is very important.
  Let me now refer to what was a matter of some controversy for the Treasury Select Committee during the previous Parliament. The Government seemed at that stage to change their position. It would not be right to cut public expenditure to compensate for the fall in revenue and the increase in unemployment benefit which have resulted from the recession. The so-called automatic stabilisers should be allowed to work; otherwise we shall deflate too far.
  I should add—as the Prime Minister said in his speech —that, while we must seek to control public expenditure, we need to get the priorities right within that public expenditure. It is not just a question of cutting; increases are needed in certain sectors, to ensure—over, say, a year or 18 months—a rise in employment and tax revenues, and a reduction in unemployment benefits. I very much hope that it will be possible to include such positive measures in the autumn statement, in conjunction with an overall control of public expenditure.
  It is, of course, always the case that, if a country devalues its currency, the exchange rate will not stick unless deflation takes place as well. I consider that, in the present economic circumstances, the degree of deflation that we already have is probably sufficient to enable the exchange rate to stabilise at a level that is competitive and does not add to inflationary pressures. These are complex and difficult issues, but I believe that the present circumstances do not call—as did all previous devaluations—for a policy of deflation.
  When, if at all, should we rejoin the exchange rate mechanism? I assume for the sake of argument that it will still be there tomorrow morning, although that may turn out not to be the case: the Bank is under considerable pressure, and the Spaniards have introduced a fixed rate. We should appraise that question in the light of our experience over the past few days.
  My right hon. Friend the Prime Minister referred to fault lines in the system. I think that we face a fundamental difficulty. Criticism has been directed very much at the Germans, but we must distinguish between the German Government and the Bundesbank. The German Government have effectively abdicated authority over many of the most important economic levers with which an economy can be controlled to the Bundesbank, an unelected body which is entirely beyond control. I take no account of the silly little cut in interest rates that it made a few days ago; that, in my view, was intended merely as an insult.
  I very much doubt whether it is possible to run an exchange rate mechanism over a broader range of countries than the narrow range of countries around Germany while an independent central bank is operating in Germany. This raises difficult questions. I certainly do not go along with those who argue that we should have an independent central bank here, for the reasons given by my
  48
  hon. Friend the Member for Slough (Mr. Watts): in my view, the Governor of the Bank of England did everything possible in the circumstances, and could have done no more had he been independent.
  Mr. Delors, Mr. Bangemann and others have suggested that the problem arose because we were not operating a single currency. I believe that the argument that we should solve our problems by rushing into a single currency, quite apart from being unworldly, is unbelievably dangerous. If we gave up the present arrangement for all time—long before the introduction of any degree of convergence—in favour of a single currency, parts of the Community would suffer from perpetual unemployment. Moreover, the demand for more and more cash to flow across the exchanges would cause terrible political tensions—al-though I believe that it would never happen in any event. Those tensions would be vastly greater than they would be if we acted in 10, 15 or 20 years' time, when reasonable convergence had taken place.
  Finally, let me say something about the Maastricht treaty. Our dilemma is this. From a British point of view, the negotiation at Maastricht was remarkably successful: once the Community had refused to introduce a general opt-out clause to which anyone could subscribe, my right hon. Friend the Chancellor said, "Very well, we will write our own," and that is what we did. Our clause included many measures—on the fiscal control side, for instance —that we would never have secured in a general clause. I consider it highly unlikely that, in a new negotiation, we would ever obtain terms as good as those that we now have.
  We should watch carefully to see how matters develop. My right hon. Friend the Prime Minister said that, for the rest, it must be an ambition postponed. Surely, in the light of the events of the past two weeks, the idea that we can actually proceed on the timetable proposed at Maastricht —although, as has been pointed out, we have been excluded from it—must breathe some air of realism, across the Community, into those who have adopted the almost pro-federal approach that has been reflected in some speeches this afternoon.
  These are highly complex issues, entirely unsuited to a referendum. The concept of a referendum is, in my view, an alien one, completely incompatible with our system of a representative parliamentary democracy that allows us to consider the issues in depth. If we do that we shall find the right solution, and it will be seen that the way in which the Government have handled their economic affairs in recent days has been wholly appropriate. We shall then be able to continue to pursue an anti-inflation policy, and to get the economy going again.
  Mr. Cryer: On a point of order, Mr. Deputy Speaker. I wonder whether you have been notified by the Government of any request for a statement about the resignation of the right hon. and learned Member for Putney (Mr. Mellor).
  Mr. Deputy Speaker: I have had no such request from any quarter.
  5.49 pm
  Mr. Brian Sedgemore: It is a great pleasure to follow the former Chairman of the Treasury Select Committee, although I do not agree with everything, or indeed much, of what he said.
  I am interested in the fact that the sounds that we are hearing in the House are different from those that we heard in July. The Conservative party will hereinafter be known as the party of devaluation; the party with policies that are both calculated and designed to create inflation; the party that does not understand the workings of the international monetary markets; the party that is led by a Prime Minister who, on his own admission, has betrayed his country because there is a fault line in his brain. The Labour party will hereinafter be known as the party of monetary responsibility; the party that, when the sterling crisis was at its height, stood to attention and sang "Land of Hope and Glory" before declaring that never again would the pound in our pockets be devalued; the party that, in the pitiless pursuit of political virility, put that before intellectual integrity—perhaps the least valuable currency in politics, even less valuable than the pound.
  Today of all days should be a day of penitence in the Chamber on the part of the British political establishment. Their folie de grandeur over the value of the pound has cost the British taxpayer between £500 million and £750 million, perhaps even more. Outside the Chamber there are people who are out of work, people whose homes have been repossessed and people without a future. 'They are asking why the establishment has let them down so badly. They believe that, if politics is to be more than a means of rising in the world, our political leaders must learn from their mistakes. Their message to the Labour Front-Bench team is that, if democracy is to succeed, politics has to be about competing ideas, not elites competing for political power.
  It is not often that I agree with international financiers, who every day push about $1,000 billion across the foreign exchanges, sometimes in a speculative frenzy. But I believe that those poisonous vipers who speculated across the exchanges on black Wednesday were right and the politicians were wrong. Sterling's parity against the deutschmark was unsustainable; the right course was devaluation—the word that dare not speak its name. The fault lay not with Germany, Chancellor Kohl or Mr. Schlesinger, the president of the Bundesbank, but with British politicians, British civil servants and the Bank of England—-an institution that claims to bat for Britain, although one would not think so to judge from its role in black Wednesday's debacle.
  For at least two people in Great Britain it should be hail glad confident morn never again. I refer to the Chancellor of the Exchequer and Sir Terence Burns, the permanent secretary at the Treasury. Those hapless characters behaved like physicists defying the laws of gravity or mathematicians who, when adding two and two, continually came up with any answer but four. If the Chancellor of the Exchequer has a brilliant mind until he makes it up, no one is better at giving in to his own mistakes than Sir Terence Burns.
  Some people are smirking at the Government's plight since black Wednesday, saying that they have no policy on inflation, no policy for recovery. Sanctimony in the expression of unctuous self-satisfaction is not my style, so
  50
  I would not dream of saying, "I told you so." However, for the record, on 15 June 1990 in the House I argued, using the fundamental exchange rate theory, that Britain should enter the ERM at DM2.60 to the pound. My argument was based on the need for a real exchange rate which, in the medium term, would generate a sustainable account on the balance of payments. Subsequently, and since we joined the ERM, I have tried on four occasions on the Floor of the House to enlighten the Government on the need for devaluation. They took no notice and the result is there for anyone to see.
  As the recession tightened, there was another obvious reason for devaluing the pound: the need to reduce interest rates. My argument has always been that devaluation was a useful and necessary step for economic recovery, but a far from sufficient condition for recovery. In current circumstances, it merely helps to provide a macroeconomic framework in which other measures can be made to work. The Labour Front Bench team's policies on housing, employment, training and investment are relevant in that context.
  Mr. Winnick: I am grateful to my hon. Friend and share his criticisms of Government policies. However, he might remember that, when he spoke in the debate on the Maastricht Bill in May, he was extremely enthusiastic about the measure, and wondered whether he should vote for it. Does he agree that, if we were in that framework —I hope that we never shall be—we would certainly not have the flexibility that he rightly advocates now?
  Mr. Sedgemore: I am one of those old-fashioned, fastidious people who believe that a speech should have a beginning, something like a middle and something like an end. My hon. Friend the Member for Walsall, North (Mr. Winnick) has raised an issue that I shall discuss at the end of my speech—I certainly shall not duck it. My hon. Friend falls into the category of most of those anti-Europeans who are and were opposed to ERM. The mistake they make is that they are drunk on devaluation and believe that one devaluation after another, or a permanently depreciating pound, provides the cure for all our economic ills.
  My hon. Friend asked about the future. I believe that we must reject the idea from the plebs of Southend and the nobility of Chingford that we can stop the world and get off, that we can henceforth act in splendid isolation from our European partners, ignore the decisions of the Bundesbank and prepare once again to fight the Germans on the beaches and on the landing grounds. Such Europhobic fantasies are, as the Italian Prime Minister said when rebuking our Chancellor and Prime Minister, for five-year-olds only. Certainly, only a five-year-old could have advanced the idea a fortnight before Armageddon that Britain would have the strongest currency in Europe.
  I do not believe that the Government intend to rejoin the ERM this year, next year or the year after that. The Government do not have the slightest intention, whatever happens to the Maastricht Bill, of accepting the main thrust of the treaty. We are about to witness one of the greatest exercises in political hypocrisy ever seen in Britain. Ministers will talk good about Europe, but, in practice and behind the scenes, they will slowly try to unravel the progress made in the past two years. The Government are

  51
  about to betray Europe, and 'twas ever thus. I imagine that Foreign Office officials are competent enough to carry out that policy as they have been doing for the past 200 years.
  The Government have cast aside the ERM and are casting around for old and new fly-by-the-seat-of-the-pants monetarist signals: M0, M1, M2, M3, M4, M5, DCE, house prices, asset prices, PSLI, PSL2 and God knows what other bogus indicators. One might as well try to control the economy by tracking the prices of second-hand lavatory seats. Last week our economy was under the control of financial speculators; this week it is back in the hands of Thatcherite quacks.
  At present, the only sensible option open to the Government is to go for a system of managed exchange rates. In the medium term, a new exchange rate system for the Community would involve three substantial changes from the ERM and two changes in Britain's domestic policy. At EC level, three changes are necessary. First, a semi-fixed system of exchange rates cannot be operated as if it were a fixed system. The flexible operation of any system has to allow for devaluations. Secondly, as the Chairman of the Treasury Select Committee said, currency realignments should be more symmetrical. Strong currencies have to be prepared to appreciate just as weak currencies have to be prepared to devalue.
  Thirdly, we must create within the international monetary system weapons to enable Governments to take on the speculators. I know that people sneer, but I see no way to achieve that without some new form of exchange controls. We should do what we did when we last introduced exchange controls: send a little man from the Bank of England away for a fortnight and tell him to come back with a new scheme. I am sure that it can be done.
  Two changes are required in domestic policy. First, we need to place more reliance on fiscal policy rather than on allowing interest rates to take all the strain. Secondly, domestic credit expansion should be controlled by administrative and other direct interventionist measures, as well as by interest rates.
  The ultimate goal should still be the creation of a single European currency. I suspect that Germany, France and a few other countries would go ahead, leaving Britain behind. I suspect that Britain will have to pay both the political and economic price of last week's catastrophe for a long time to come. Let no one forget that that price has been brought to bear through the mistakes of the very political establishment that says that it supports European integration.
  Yesterday, the Shadow Cabinet redeemed themselves by backing the idea of a single European currency and warning against the dangers of a referendum. The Government have done nothing to redeem themselves, and I shall happily vote against them in the Lobby tonight.
  Several Hon. Members rose—
  Mr. Deputy Speaker: Order. I remind hon. Members of the 10-minute rule between 6 o'clock and 8 o'clock.
  6 pm
  Sir Peter Hordern: I know that the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) will forgive me if I do not follow him, because of the shortage of time.
  52
  I thought that the speech by the Leader of the Opposition was brilliant—for a Leader of the Opposition —but it masked the fact that for the past two years his policy has been to shadow the deutschmark at a rate of DM2.95, which has also been the policy of the Liberal party and has certainly been the policy of my right hon. Friends. Now that that policy has come unstuck, a great howl of triumph has emerged from critics of the exchange rate mechanism, who say that one cannot buck the market.
  It is worth examining what they mean. Saying that one cannot buck the market is not in itself an economic policy; they really mean that we should return to the days when we tried to run monetary policy by watching carefully the course of M3, M0 and M4—and all those other forms of enjoyment—which caused such great difficulty. That policy was not effective, and because of what was then called the benign neglect of where our currency stood, the pound has fallen. Whenever it has fallen, higher inflation has followed after a suitable lag.
  It is not surprising that that is the case, because overseas holders of sterling recognise that the pound is not going to remain strong, and demand an ever higher interest rate for keeping their money in sterling. During the time that the pound floated freely, that has been very damaging.
  Many people now think that it is fashionable to have a floating pound. I must remind the House of the time when we had a fixed rate, with the Bretton Woods agreement. At that time—in 1963—there were $2.80 and more than DM II to the pound. Short-term money rates were 2 per cent. and the Government could borrow for 20 years ahead at 5.3 per cent. That is so far beyond the bounds of possibility now that no one can believe it. Yet it was achieved by a fixed exchange rate system with the US dollar.
  The thrust of my right hon. Friend the Prime Minister's policy to have a fixed exchange rate within the ERM was absolutely correct from that point of view. It was successful in reducing interest rates from 15 to 10 per cent. and markedly successful in reducing the rate of inflation to its present rate. I was a keen advocate of monetary policy and control many years ago, but I have to admit that it was a failure. For that reason, Baroness Thatcher brought us into the ERM. So sure was she that that was a good step, and as a mark of confidence in the pound, on joining we reduced interest rates by 1 per cent. At that time, there was no talk of bucking the markets.
  When we joined the ERM, we thought that we were joining a currency—the deutschmark—which would exhibit its sober and exemplary record of low inflation and low interest rates. No one imagined that the Federal German Government would have an enormous row with the Bundesbank about the cost of East Germany, that the Government would refuse to raise taxes as they should have done, and that the Bundesbank would raise interest rates instead. That has produced a strain on Europe which has been difficult for other currencies, including our own.
  I am sure that my right hon. Friend the Chancellor did his best, and I do not believe that he is to be blamed in any way for the holocaust which has swept over the lira, the franc and the peseta, as well as sterling.
  The important question now is what is to be done. Some of my right hon. and hon. Friends seem to think that we can reduce interest rates to 5 or 6 per cent. right away, and bother the pound. I read that my right hon. Friend the Chancellor was said to be cheerful after devaluation and even went so far as to sing in his bath. I regard any cheerful

  53
  Chancellor with the greatest possible suspicion. I remember that Lord Barber was about the most cheerful person that one could ever hope to meet—look what happened to him.. Denis Healey once won a prize in Germany for comedian of the year. Of course, that says more about the Germans than it does about Denis Healey. When I see a Chancellor looking happy and content, I am very cautious.
  I hope that my right hon. Friend the Chancellor will take to heart his admirable speech to the European Forum in July, and will be very chary about reducing interest rates. There is no room for any further reduction at the moment. I say that because our monetary policy was tried for an extensive period. People say that we failed to apply it properly and that we should have done it in 1988, instead of reducing interest rates to 7.5 per cent. in that year. It is interesting to note that that year interest rates were quickly increased, to 12 per cent. in August, and by November they were at 13 per cent. The take-off in bank lending did not occur until the following year. It is extraordinarily difficult to run our economy and to control inflation, quite apart from the difficulty of monetary targets. There is a delayed effect and there is also the difficulty of having an impact on the spending public once they have got it into their minds that spending is the thing to do.
  I commend my right hon. Friend's remarks to the European Forum. I have taken them to heart and I trust that he will also do so. All that throws considerable doubt on the single currency. That doubt is properly shared by the Government and that is why we have the opt-out. That is a sensible thing to do. If a single currency is to be gained by the terms and conditions set out in the Maastricht treaty, there is no possibility that a single currency will be reached, because all the countries are way above the 3 per cent. limit for deficit for gross domestic product, including Germany. Germany's deficit is rising faster than that of any other country.
  Surely we wish to broaden the boundaries of Europe and to take in the countries of eastern Europe as well. I do not see how we can do so with the strict conditions that exist for the single currency. I should prefer to proceed with broadening the bounds of Europe than with achieving a single currency, which would put an impossible straitjacket on any natural development of the European Community. Our posture on the single currency —the opt-in and opt-out arrangements, if we should wish to do so—is entirely right.
  The truth is that we cannot isolate ourselves from world markets. We have to have regard to the value of our currency. We cannot afford to let sterling fall too far without causing damaging inflation and job losses. I hope that we may ultimately rejoin the ERM, once the Germans have sorted themselves out and reduced their interest rates. I do not say that with any particular enthusiasm for Europe, but simply as the best long-term method of dealing with inflation and with more than inflation.
  It is nearly 30 years since inflation was consistently under control. A whole generation has grown up knowing and expecting nothing else. Property empires and service industries have been built up expecting nothing but inflation. We read about upwards-only rent reviews. What has that done to manufacturing industry, which depends upon stable prices for investment, stock and work in progress?
  In the past two years, inflation has been brought right down. Of course there is still some way to go, but for the
  54
  first time in many years business has had to win new orders by reducing prices and offering better services, not simply by offering more floor space to satisfy swollen spending. That has been a sea change over many years. After all the hardship of the past two years, it would be criminal folly to allow prices to rise again.
  That is the key to a successful economic policy, and I trust that we shall stick to it.
  6.10 pm
  Mr. William Ross: When Charles Haughey, as Prime Minister of the Irish Republic, was confronted by a series of crises, he always described them as grotesque, unbelievable, bizarre and unprecedented. A much more acute mind than mine immediately shortened that description to "GUBU". If that word had found its way into the dictionary, it would have been much over-used last Wednesday, because it is so descriptive, and fits perfectly what was happening in the markets to the Government's whole economic strategy.
  We did not simply wake up last Wednesday to find that that situation had been created overnight. Its genesis lay some time in the past, when the Government decided to grant control of United Kingdom's economic life to hands that were not British, and were not responsible to the British people. They did that by fixing the value of the pound in relation to other currencies.
  When the Prime Minister ascended the steps of the throne left vacant by his predecessor's departure, those steps were heavily stained with her political blood. Her political assassination and replacement represented more than a change of personalities. They were the outward sign of the triumph of a different policy within the Conservative party.
  So far as anyone outside the Conservative party can judge, the previous Prime Minister viewed the concept of monetary union and its inevitable consequence—a federal European super-state—with some misgiving. It was interesting that her predecessor, the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), said today that he believed a single currency to be the natural outcome of the road upon which Europe has set out. That was not clearly said before 1972, and even today it is rarely said by people who are in favour of the economic Community. It is said only by those such as myself who are against the concept.
  I wished to ask the right hon. Member for Yeovil (Mr. Ashdown) a question during his speech, but he did not give way to me. If the right hon. Member for Old Bexley and Sidcup, a former Prime Minister, were still here I should ask him the same question. When a single European currency comes into existence, will it float, or will it be fixed to some other currency? I believe that it will float. I do not see how it could operate otherwise. People are really saying that, if an economy is big enough, its currency can float. I do not accept that that idea is necessarily tied to large economies; it is tied essentially to successful economies. In so far as the market value of the currency is a measure of how that economy is doing, we should accept that. Whoever succeeded Margaret Thatcher as the leader of the Conservative party would have been the prisoner of those who brought her down, and would have had to tread a path different from hers. Over the past few years, that is what has happened.
  The policy of the Ulster Unionist party on such matters is clear, and was set out in our manifesto. We had hoped

  55
  that that manifesto would be widely read, but it appears to have escaped the eyes of some—certainly those of the Prime Minister. Whenever the right hon. Gentleman referred to people who agreed with the Government's policy he described them as "the Opposition parties", and said that they all supported the same thing. However, the Unionist manifesto said:
  "Two distinct strands of Treasury affairs have to be recognised and addressed. In the first place, the whole question of control of national finances is central to the exercise of power because without such control no Government can be master in its own house. Ulster Unionists are, therefore, opposed to the concept of European monetary union and a single currency since the inevitable consequence would be the transfer of this most fundamental power of government from the elected representatives of the people of the United Kingdom to an unelected body which cannot be dismissed from office by United Kingdom electors.
  For the same reason, we oppose the creation of an independent central bank. National Governments should have the courage to exercise responsibly the power conferred by the electorate. Ulster Unionists are committed to the concept of a balanced budget and, in the long term, to the reduction of the national debt."
  I believe that the Chancellor of the Exchequer will agree that that is not the policy which the Prime Minister suggested had been pursued by all the Opposition parties. We certainly did not and do not accept that it is.
  Because that was our policy, I asked the Chancellor after his autumn statement last year whether the increases in public expenditure that he had signalled foreshadowed an abandonment by the Government of the concept of a balanced budget. He replied that he intended to balance the budget over the cycle. I have heard a lot of elaboration on that theme, but I must say that it still does not mean very much without such elaboration. The reality was that, with a fixed exchange rate, the Chancellor's room for manoeuvre was severely restricted. He was back in the position of every Finance Minister who has to wrestle with the attempt to hold a fixed value for a currency which is constantly changing under market pressures.
  One more burden that has to be borne by politicians in such a position is that they have to be economical with the truth in any public statements that they make on the subject. They cannot be as open, frank and truthful about the economy and the real value of the currency as they would wish. Like Mr. Helmut Schlesinger, they make comments for public consumption and discuss the truth in private. The Government—any Government, but especially the Prime Minister and the Chancellor of the Exchequer—have to defend their stated position to the last ditch before they change. If they did not fully understand that before, I am sure that the Prime Minister and the Chancellor of the Exchequer now have burnt into their brains that simple truism: "You can't buck the market." The market value of the currency reflects the performance of the whole economy of the nation.
  It is strange to me, and to any objective observer, that the party that worships at the altar of the market in relation to every other commodity, whether labour costs, the price of turnips or the price of energy, had to spend £10 billion during the ignominious escapade last Wednesday before finally capitulating to the very market forces that they so respect and applaud in every other sphere. Our
  56
  Government paid out £10 billion, and the Germans paid out a lot of deutschmarks for pounds that are now worth much less than what was paid for them.
  Her Majesty's Opposition and the Liberal Democrats are equally loud in condemnation of the Government. The Ulster Unionists have scant regard for their censure. For years those parties have been demanding that the Government go faster down the slippery slope on which they had already set out.
  The world did not end because of the events of the past two weeks, and it will not end. Both the Government and the Opposition are now scrabbling around looking for new policies. The Labour party has apparently gone for "floating and flexible". To me that means that, instead of holding on until the last ditch one goes down the steps as soon as one possibly can. If it does not mean that, no doubt we shall be told what it does mean. I should like to know, because that seems to be the only way in which it can work. A currency either floats and reflects its true value in the market or it drops in large and small steps. Those are the only ways in which the system can operate.
  The Government are returning to limits on spending. However, if they have learnt anything from the past two years they will not be regarded as having taken the nation through a defeat. They can accept it as a golden opportunity. Recent events have returned to this Parliament the fundamental power of financial control which was so foolishly and tamely handed away, at a high cost to individuals in this country in terms of homes, jobs and businesses.
  There will of course be an autumn statement this year. This time the Chancellor of the Exchequer and the Prime Minister will be free agents as they have never been within the confines of the ERM. They can do something about interest rates—but not too much, because the productive capacity of the nation has been so reduced that we could not produce the goods which a relaxation of monetary policy would allow to be purchased. More imports would be sucked in.
  The Government can do something about the projected public service borrowing requirement—but not too much about that either in the short term, because the framework has already been set for next year. I know that the Government will not call that autumn statement a Budget, but the reality is that there will be an autumn Budget, and it will be a long time before we are back in the ERM.
  6.19 pm
  Mr. Kenneth Baker: Some time ago the right hon. Member for Bethnal Green and Stepney (Mr. Shore), in an illuminating aside, said that there was too much passion in exchange rates, and I would agree with him. People invest into exchange rate systems a degree of intensity and passion which is not needed. One should address the problems of exchange rates drained of passion, with a cool realism, and see what is in the best interests of one's country. That is really the job of the Chancellor of the Exchequer whom I therefore congratulate on withdrawing sterling from the ERM last Wednesday. [Interruption.] My right hon. Friend needs a few congratulations. There have not been too many winging around in the course of the past few days.
  My right hon. Friend also knows clearly the reservations that I have always had about the strength of fixed parity systems. I expressed them to him when I was

  57
  in Government and after I left the Government. The advantages of fixed parity systems have been exaggerated this century. One has only to consider the trouble that this country got into by being fixed to the gold standard in the 1920s. That led us into the slump and the then Chancellor of the Exchequer, Winston Churchill, described that experience in a memorable phrase when he said:
  "I wish that finance had not been so proud."
  In addition, the fixed rate system of Bretton Woods came to an end in the 1960s and collapsed in 1971 when my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was Prime Minister and we welcomed that.
  The advantages of the ERM have been exaggerated and they have been made more difficult for our country by the fact that the German economic cycle has not been in tune with the British economic cycle, and vice versa, for about four years. When we shadowed the deutschmark we had in effect to reduce interest rates at a time when we should have been increasing them. In 1990 we entered the system which I argued against at the time but I did not win the argument. We entered at a time which was historically difficult because Chancellor Kohl had made a political, not an economic, decision to pay for the reunification of Germany, not through the German taxpayer but by borrowing. The inevitable consequence of that was higher interest rates just at the time when Europe and Britain needed lower interest rates.
  One cannot blame Mr. Schlesinger or the Bundesbank. Their job is to be concerned with the German money supply. They cannot be concerned with jobs in Yorkshire, Surrey or London. Mr. Schlesinger took action to control the German money supply and figures yesterday show that he was probably wise to do so since the German money supply is now increasing and it increases for every franc that is bought.
  I hope therefore that the search for a replacement of the ERM will not be too vigorous. I notice that the Prime Minister said that we cannot readily return because there are fault lines. The thing about fault lines is that they are there from the beginning and they are there after the end. The only thing that one can do about fault lines, as any geologist knows, is to wait for an eruption of the earth's surface and then they will be corrected. The search for a system of managed exchange rates is difficult. Such a system is likely to be inherently unstable. The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) put his finger on that, as did other hon. Members. If one wants a stable system one is driven to a single currency, a single monetary policy, a single bank, a single fiscal policy, a single Budget and a single Government. I for one would not want Britain to go down that route.
  I hope that on the minutes detailing conditions for re-entry into the ERM which I am sure are winging their way up to the Chancellor from the officials of the Treasury the Chancellor will scribble Kipling's comment:
  "Only the burnt fool's bandaged finger goes wobbling back to the fire "
  This debate has been something of a search for people to put in the pillory—the Chancellor or the Prime Minister. Sir Terry Burns has also been mentioned. I have little sympathy for him because one does not have to be in Government for long to know that the economic pundits and the mandarins of the Treasury are held in high esteem in Whitehall, not least by themselves. Their advice has been not marginally wrong but comprehensively wrong.
  58
  They have also failed to forecast the extent and depth of the recession. The Treasury forecast in the future will be given the validity that is accorded to a horoscope. The great Treasury forecasting computer has no more validity than the crystal ball and the gipsy's tent.
  I hope that my right hon. Friend will follow the path that he has already mapped out. I welcome the reduction in interest rates. I heard what my hon. Friend the Member for Horsham (Sir P. Hordern) said. We must not abandon an anti-inflation policy. That is important. Floating should not be inflating. I accept that. But in my judgment, with the money supply growth in Britain virtually negative at the moment, there will be scope for further cuts in interest rates. That is certainly what British business needs and it is certainly what British homeowners need. My right hon. Friend now has scope to do that. Therefore, I welcome the road that I think that he will be treading.
  It seems irrefutable that last week tore a gaping hole in the Maastricht treaty. The centre of that treaty is economic and monetary union. Clearly, there are hon. Members on both sides of the House who want that to come about. I do not believe that that accords with the real interests of our country. The Danish and French referenda have shown vividly in the past six months that there is a movement across Europe which is not anti-Europe but anti-bureaucratic and against a centralised and bossy Europe. That is what I believe the no votes in France and Denmark were saying and what many people in Britain feel.
  The Danes have given us an opportunity to think again about the next step forward. Clearly, there will be significant changes to accommodate the Danes. We heard today from the Prime Minister that we will want to know what those changes are. The House will want to debate those changes. It may well be that we will want some of those changes for our country as well. Why should there be changes for just one country in a Community of Twelve? We shall want to examine that carefully.
  Mr. Toby Jessel: Is my right hon. Friend aware that one of the changes likely to be proposed by the Danes, which was not mentioned by our right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), concerns nationality because the Maastricht treaty contains a provision that anyone who is a national of any of the 12 member states thereby becomes a citizen of the European Union? There is a rising tide in Denmark to be exempted from that, perhaps by way of a protocol.
  Mr. Baker: I am grateful to my hon. Friend. That is an important matter; but much more important is what is described by that rather ghastly word subsidiarity. The paragraph in the treaty dealing with that is vague and meaningless, and to the extent that it is interpreted it will be interpreted by the court which is obliged to make decisions in favour of European integration. Therefore, one needs to know exactly what that means. Subsidiarity is not the Commissioners saying what they will leave to us but what we as nation states are prepared to allow the Commissioners to do on our behalf. This centres upon the Commission. The Commission is too powerful.
  It is interesting how quiet the Commissioners were in the run-up to the French referendum. They were overcome with modesty. They had no ambitions. But as soon as the referendum was over Commissioner Bangemann went on television and, misquoting Nelson, said,
  "Now is the time for you in Britain to do your duty."

  59
  He has learnt a little of our history, but we do not need lectures from Mr. Bangemann. He is a federalist. He has admitted that he wants a united government of Europe with him in a prominent position in it. When I was Home Secretary he was the Commissioner who led the campaign against Britain retaining its own immigration controls. Therefore, in the re-examination of Maastricht, we shall have to address the powers of the Commission, and that will be important.
  I am clear that Britain will be inextricably linked with Europe in the future as it has been in the past, but Britain's future in Europe is not that envisaged by the Euro-fanatics. I want to see a wider and looser Europe. I want to see a Europe which draws its vitality and strength from the nation states because that will provide the growth and vitality of Europe in the course of the next 10, 20 or 30 years. I want to see Europe not at any price but at the right price. Above all, I do not want a united states of Europe but a united Europe of states.
  6.29 pm
  Mr. Tony Senn: On 18 August, I wrote to Madam Speaker asking for Parliament to be recalled. I must tell the House that this has been a totally unrealistic debate. Why did people want Parliament recalled? I will give three examples. One man telephoned me and said, "I am going to be evicted on 5 September. I have a mortgage and I owe £700 to a finance company. I am paying it off at £120 a month, but I am still to be evicted." I was unsuccessful in getting that action stopped. Am I to tell that constituent that we are squeezing inflation out of the system?
  When I was first elected, 25 per cent. of the employment available in Chesterfield was provided by the coal industry. Soon there will not be a pit left. Am I to tell them in Markham, "We are shadowing the deutschmark"? I met an unemployed building worker who is also homeless. What was I to say to him, "We are managing our currency"?
  Today, the House has failed to speak for the people that it represents. It has held a second-class, management seminar, addressed by a lot of people who would not even qualify to appear on "Newsnight".
  I will not make a political speech, but my own opinion is that this country's problems will be solved in Britain, by us—and only when we have solved them will we be able to have satisfactory relations with other countries. If we want an industry, we must see to it that there is an industry. We do not leave the police, Army and hospitals to market forces; we decide to have them. Agriculture has been sustained that way. No economic magic—devaluation, floating pound, exchange rate mechanism or independent central bank—will guarantee that Britain retains and expands its industrial base.
  The real cause of the problem stretches across the House. In the 1980s, most, if not all, of us were persuaded that market forces would provide a prosperous economy. They do not, because one cannot close down Rolls-Royce today and open it tomorrow, any more than one can close down a farm today and reopen it tomorrow. That is the only controversial point that I will make.
  This is not an economic debate but a political debate. Longer ago than the 1980s every party—my own was
  60
  equally involved—reached the conclusion that, because world capital was so powerful, the country must integrate itself deeper and deeper into a structure in Europe, where power was to be moved from the electors of the Parliaments to the European Commissioners and to a Council of Ministers, which makes laws in secret. It must be the only Parliament in the world that meets in secret. The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) asked why the Council of Ministers should meet in public, as though it were a Cabinet—but it is a parliament.
  We are rapidly moving towards full European union. I do not use the word "Maastricht" any more, because it does not mean anything to a pensioner who cannot manage on his money. If we ask, "Do you want this country absorbed into a full European union?" people know exactly what we are saying. A referendum does not mean much to people. But if we ask, "Do you think that you have the right to decide before this country is put into a full European union?" the public understand. Let us not use terms such as Maastricht, referendum, or managed exchange rates—let us call a spade a spade. The people have the right to decide the future of this country.
  The treaty that was meant to unite Europe has divided every nation, every party in Europe and every party in the House. I have never known anything more divisive. I will not mention the treaty's name because I do not believe in it, any more than I believe in talking about Thatcherism. I can only say that I only represent Chesterfield and Denmark tonight, so I have a bigger constituency. I also represent half of France, so I cannot be described as holding isolated views, or be called a typical little Englander when the Danes agree with me.
  To talk of being pro-Europe or anti-Europe is a plain lie. We were born Europeans and will die Europeans. It is a matter of geography. The question is what sort of Europe it will be. Am I anti-British because I do not like the Prime Minister or his policies? Of course not. Is one anti-American because one does not believe that they should have done this or that in Panama? We are discussing our own future and that of Europe. I introduced the Commonwealth of Europe Bill, and when the Maastricht treaty—there, I have said it now—dies, I believe that that Bill will acquire greater relevance.
  There are some honest differences. I respect the right hon. Member for Old Bexley and Sidcup for being a committed, passionate federalist. He does not think that the British people have any right to comment on this country's future. One hears talk about the peasants in France. On the BBC the other day, one commentator said, "It has become clear from our analysis that it was the poor and uneducated who voted 'no' in the French referendum." That is only half a minute away from taking the vote from people who are poor and uneducated. I believe that the right hon. Member for Old Bexley and Sidcup would be happy to return to 1832—he has a slight 18th century flavour about him anyway.
  There are some federalists in my own party, though they are a little more discreet. They talk about pooling our sovereignty. They do not want to pool their sovereignty with the British electorate, but they are happy to pool it with the Commission. There are also the nationalists. I am not one of them. I would rather die than go on a platform with Mrs. Thatcher, because the woman who abolished the Greater London council is not for me the best advocate for greater devolution of power. Do not ask me to go along with a woman who thinks that foreigners start at Dover

  61
  and that some of them have got to Wolverhampton. That is not my idea of Europe. I am a democrat, not a nationalist.
  There is the question whether the people had any choice. My right hon. Friend the Member for Islwyn (Mr. Kinnock), the Prime Minister, and the leader of the Liberal Democrats completely agree on this unmentionable treaty. I know from experience that when people really agree with one another, the level of abuse rises to a huge height to conceal the agreement that everyone knows exists. I have seen that happen time and again. The electorate were given no choice. They were told that the treaty would be agreed through parliamentary democracy. We have all been here a year or two and know that the vote on the treaty will be decided by two Johns. Party discipline determines our vote. The BBC asked me today, "Why are all the opponents of the treaty on the Back Benches?" The reason is that if one is on the Front Bench and opposes it, one ends up on the Back Benches—and if one is already on them, one never gets to be a member of the Front Bench.
  I have no confidence that the House will reach a decision on the basis of the merits of the treaty. Party loyalty is very strong. I am a good party man in matters of current policy, but do not tell me that the rights of the British people can be handed away on the pretence of parliamentary democracy, when that is done under the discipline of the Whips.
  Tomorrow, I am launching a national petition, like the chartists did, because I have no confidence in the House being allowed to reach the judgment in which it believes. If right hon. and hon. Members believed in their decision, that would be one thing. My petition ends with a prayer that the House will ensure that
  "before the Maastricht Treaty, or any modification or amendment of it, is approved by Parliament, or ratified by Her Majesty's Government, the Citizens of the United Kingdom shall be given the right to vote for or against that Treaty in a National Referendum, and that the decision reached in that Referendum be accepted as binding upon the Government and Parliament."
  I will also present a Bill tomorrow—the Treaty of Maastricht (Referendum) Bill. The long title states that it is a Bill to provide
  "for the holding of a national referendum, and for the procedure for the subsequent decision of the House of Commons, on the question of British ratification of the Treaty of Maastricht before Her Majesty's Government may lawfully adhere to the Treaty on behalf of the (United Kingdom"—
  and so on. That is all that I can do. Anyone who is listening to this debate or watching it on television will not have any confidence in the House to decide those matters. If there is an outside campaign for a referendum it will sweep the country. It was not for nothing that the chartists and suffragettes struggled for the vote. They did not do that so that the vote could be taken away because business managers and Eurocrats feel that they know better than we do. That is trying to reverse the gain of those who campaigned for the suffrage, and that will not work. I warn the House that if it tries, the next thing that will be undermined will be not the currency but the reputation of this Chamber in which we were all elected to serve.
  6.39 pm
  Mr. David Howell: After that noncontroversial but very enjoyable speech by the right hon. Member for Chesterfield (Mr. Benn), I want to tell my right hon. Friend the Prime Minister how greatly I
  62
  welcomed his statement, which confirmed his plan to hold a special European Council on 16 October and to have a profound look at the position in Europe after the French referendum and various other developments.
  I understand that the agenda for the conference has three main parts. The first is that there is an obvious need to sort out what, if anything, will bring the Danes back on board. They are signatories to the Maastricht treaty, which cannot live again unless they are persuaded to vote for it —which is entirely a matter for them. The second part of the agenda involves reconsideration of the systems for monetary co-operation in Europe. They have broken down and clearly need reforming.
  The third and, perhaps, the most significant part of the agenda is to consider the growth of public concern in Europe since the signing of the treaty and the dramatic events of recent times. We need to examine the whole development of Europe and the fundamental worry whether it is a process of ever-accumulating power at the centre or, as my right hon. Friend rightly said this afternoon it should be, a settled arrangement and a settled sharing of powers between the ancient nation states and the Community institutions.
  I shall comment briefly on each of those agenda points. First, what, if anything, will persuade Denmark to support the treaty? None of us yet knows the answer to that, because the Danes have not agreed it among themselves. They are talking about a variety of devices and it will be interesting to see whether they open up the treaty. They are talking about binding supplements, new protocols and other additions to it. It is inevitable that that will have to come before the House. We must wait to discover what comes out of the special European Council, but that matter must be examined. It is clear that some quite fundamental questions have already been raised by the Danes.
  Secondly, on monetary co-operation, it is clear that the over-rigid version of the ERM was brittle. However, we must remember that that rigidity was created not by the founding fathers of the European monetary system, but by those who came along in the mid-1980s and said, "This is not enough. We must make it a stepping stone to a full single currency and single monetary union." Those people injected the rigidity into the system, which made it much too brittle and unable to sustain shocks, such as the excessive fall in the dollar and rise in the deutschmark, the cost of unification and a few indiscreet remarks from the Bundesbank. The system blew up. We cannot re-enter it and my right hon. Friend the Prime Minister is right to urge that we think again. It is no good the great policy authorities of Bonn and Paris saying, "It is good; it continues." It is a fundamentally weakened system and we must not rejoin it.
  There are those who say, "Let the pound float." As my right hon. Friend the Member for Mole Valley (Mr. Baker) said, we must be careful that floating does not become inflating. It may feel good now because it is the fashion. The economists are switched on to the fashion of floating. They are great lemmings when it comes to fashion. When the chill wind blows, they will wish that there was some sort of ordered system, some sort of harness of co-operation across international currencies. That time will come, as sure as night follows day, and then we will need to think about what sort of co-operation we want. In the meantime, and even when we do have some new system, our monetary and fiscal policies must be very

  63
  tough. Indeed, our monetary policy must have a toughness and quality which, under the present arrangements in this country, we cannot provide.
  I have one point of agreement—although I am afraid it is the only one—with the rather prolix speech of the right hon. Member for Yeovil (Mr. Ashdown), which is that we need to depoliticise some parts of our monetary policy and so enable them to be run in ways that place emphasis on the monetary factors that concern bankers. The Opposition will cry, "That makes them unaccountable", but too much politics in monetary policy makes it unworkable. If we want a strong pound in any future sort of international system we will have to revise our monetary structures. That day will come. The pure floaters may feel happy and ring bells now, but they may wring their hands later.
  Finally, let us consider my right hon. Friend the Prime Minister's fascinating suggestion that we take account of the vast change of mood throughout Europe, not just in this country and in Denmark, but in France, Germany and elsewhere. After the dramas of recent days, my right hon. Friend has set out a new agenda that will carry forward my idea of the European dream, which is not the same as some of the ideas held in Bonn, Paris and Brussels. I urge my right hon. Friend not to be diverted or deflected—and I do not think that he will be—by the flat assertions of Bonn and Paris that we must carry on as before, slap through the Maastricht treaty, go back to the ERM and keep on with the steamroller, the process, the train or whatever. I do not believe that that is the voice of Europe or the line that is good for this country. My right hon. Friend is right to argue for a third way and a new agenda for building the sort of Europe that fits the 21st century and the post-cold war era.
  People talk of a two-speed Europe, but it is much exaggerated. There is no guarantee that the deutschmark will always remain the strongest currency. Perhaps for the time being it will and perhaps there will be a zone, but it will not be a Community zone—it will be one of Switzerland, Austria, Belgium, Holland and, perhaps, France on high days and holidays, together with Germany and the deutschmark. That may not last. The franc has problems, as has the German political system. The speed may alter and the runners may not stay the same distance apart. We should not assume that everything will fall into a two-speed Europe.
  There is an unfinished European agenda that Maastricht does not address. In pointing out the issues that must be profoundly reconsidered post-referendum, my right hon. Friend is creating opportunities—out of what admittedly is a crisis—and giving a lead in what good Europeans should be doing. The unravelling of the whole of European co-operation would be a disaster, but, as others have said, the attempt to solidify the whole of European co-operation into an over-centralised and over-rigid united states of Europe, failing to take account of the diversity of the nation states, would be an even greater disaster. Even now, that has caused much difficulty that good Europeans, including my right hon. Friend the Prime Minister, must reject. We must move on to a recovery that is in the right direction for Europe.
  6.47 pm
  Mr. Giles Radice: The whole House recognises that the Government have suffered a humiliating reversal. They were forced out of the ERM when they said that it was the cornerstone of their policy. Having said that they would never devalue, they have allowed the pound to depreciate by 13 per cent. against the former central rate of the deutschmark. In short, their economic policy is in tatters. Indeed, it was difficult to discover in the Prime Minister's speech whether the Government really have any economic policy. Let us consider the contradictions in what the Government are doing and saying. Having committed themselves to the ERM, they suddenly rediscovered the merits of floating the pound. Having supported the idea of currency stability as the main counter-inflationary discipline, they are now trying to resurrect the old monetary targets—the M-this, the M-that and the M-other. Those are the targets that failed so miserably in the 1980s. So confident are the Government about these targets that they do not propose to tell the world what their tough monetary targets really are. That shows the confusion that they are in.
  As for interest rates, a number of hon. Members have asked whether the Government really believe that they can get interest rates down very much further and faster without, at the same time, creating a massive depreciation of the currency, with all the inflationary consequences that that may have. Above all, what is the Government's policy for getting Britain out of recession? The Government have been telling us for more than two years either that we are not in recession or that we are coming out of recession, but we are still in recession. What is the Government's policy for getting Britain out of recession? We did not hear a word about that this afternoon, but that is what my constituents want to know about. They want to know how the Government are going to improve the underlying strength of the economy.
  The truth is that the Government are running around the ruins of their policy like headless chickens, not knowing what to do. Their humiliation is made even worse by the fact that their policy defeat, as they know very well in their own minds, is largely of their own making. The most junior speculator in the City knows that the main reason that Britain was forced to devalue and leave the exchange rate mechanism was the weakness of our economy. It is as simple as that.
  To continue the chicken metaphor and to quote my right hon. Friend Lord Callaghan, the sky is dark with chickens coming home to roost. The seeds of last week's disaster go back to the policy failures of the 1980s. I remind the House of the record: of the unsustainable Lawson boom that led to the build-up of debt and the property bubble. That was followed by the clobbering of the economy by high interest rates, two years before we even went into the exchange rate mechanism. I believe that it was those high interest rates that were mainly responsible for the collapse of the housing market, the recession, the closing of factories and the rising unemployment.
  Finally, when we did join the ERM, as many of us had urged, we joined in the wrong circumstances. As a Back Bencher I said on 15 October 1990 in the House that the Government's decision to join was taken at the wrong time, for the wrong reasons and at the wrong rate. I have been much quoted, but nobody has attributed the

  65
  quotation to me. That is why I quote myself this evening. It is one thing for a Back Bencher to go around saying that kind of thing, but it is much more difficult for those who sit on the Opposition Front Bench to do that. If they had argued for devaluation, as a few of my hon. Friends have suggested, the Government would have been blaming us for the devaluation, instead of blaming the Bundesbank, as they now are. I think, therefore, that my right hon. and hon. Friends were very wise in the position they have taken.
  Once we were inside the ERM, the Government failed to take the appropriate measures to strengthen the economy: measures to restore consumer confidence, measures to tackle unemployment and measures to improve our industrial efficiency. That is why we are still such a weak economy and so easy to speculate against. As my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, in a most brilliant and devastating speech—we know that it was devastating because no one on the Conservative Benches dared to intervene—the Government showed that they were incompetent even to defend the pound. These people, who are meant to be the masters of our economy, to know how to manage the economy and to understand the markets, did not understand the markets. They failed to defend the pound and we were forced out of the ERM, instead of securing, as would have been far preferable, a managed devaluation inside the ERM.
  This week we have heard the Government blame the ERM for what has happened, we have heard a lot this afternoon about the fault lines within the ERM, but this was the ERM which, according to the Government during the election campaign, helped to bring down inflation from over 10 per cent. to under 4 per cent. For a number of years—and for the United Kingdom over the last two years—the ERM has provided much greater currency stability. It has enabled us to bring down interest rates far faster inside the ERM than outside it—at least, until a year ago. Now, all these "floaters" have suddenly emerged, but less us not forget that floating the pound in the 1980s led to wild swings in the currency that were totally unrelated to any underlying competitiveness. It was in those conditions that industry found that it was so very difficult to plan ahead. That is why industry was in favour of Britain's joining the ERM. That is the case for the exchange rate mechanism and for British membership of it. That case still remains.
  Of course the ERM has been subject to strains, particularly in the run-up to the French referendum, and of course there is the problem that over the last year German interest rates, for very understandable domestic reasons, have been much higher than is justified by the general economic conditions in the other economies of the European Community. There is also a more general difficulty—people have a point when they raise it—that a system that was originally designed to be fixed but flexible has become more inflexible over the last two or three years, partly because of the desire to move towards a single currency.
  But whatever the current strains and whatever the prospects for a single currency, which I certainly still support, the economies of the European Community, particularly the deutschmark bloc and France, are now so interdependent that European decision-makers will want to maintain some kind of fixed currency arrangement. That is the reality, whether we like it or not. Those
  66
  economies have had far too much experience of the shortcomings of floating currency regimes not to keep on with some kind of ERM. That makes it all the more essential that we should at least keep open the strong option of returning to the ERM as soon as possible, but this time at a more defensible rate.
  Instead, the Chancellor gives the impression that to return to the ERM is the last thing he wants to do. According to him, we are going to run a purely British economic policy. That is quite apart from the incredibility of the Chancellor running anything at all, after what has happened during the last two weeks. The rhetoric, which is all very splendid and obviously designed to encourage the Thatcherites inside his party and to strengthen his own position, ignores the fact that we live in a world in which $800 billion are traded on the currency markets every day. It also ignores the fact that our economy is closely linked to other European economies, that two thirds of our trade is now with the continent of Europe and that our main trading partner now is Germany. Therefore, we cannot divorce ourselves from the continent, whether we like it or not. Whether we are inside or outside the ERM, we are closely affected by what happens on the continent of Europe, particularly by what happens in Germany.
  It is a question not only of keeping open the option of going back into the ERM but also of being positively involved in the European Community, which brings me finally to the Maastricht process. I have no fear of supporting the Maastricht treaty because I think that it is a good treaty.
  Mr. Deputy Speaker (Mr. Geoffrey Lofthouse): Order.
  6.57 pm
  Rev. Ian Paisley: The former Prime Minister, the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), said today that politicians should be out in the country explaining things to the people. I think that the people want to ask the politicians what is happening. The treaty of Rome stated clearly that it could not be by passed or changed without all member states being unanimous. Then there was the ratification of Maastricht. Certain countries ratified it in their Parliaments. Others had to hold a referendum. Denmark said no. The strange thing is that we were told that if France said no the treaty was dead, but if certain other countries say no the treaty is, evidently, very much alive.
  I was in the House when my right hon. Friend the Member for Lagan Valley (Mr. Molyneaux) asked the Prime Minister whether he was going to put pressure on Denmark. He said certainly not, but it seems now that the whole of Europe is engaged in putting pressure on those who democratically exercised their right to say no. If they were keeping their own laws, we would not have the controversy that we now have. There is a three-tier system. Some hon. Members say that Germany will go it alone, but if Germany or France or any other member state in the EC is a good member, it will stay and seek to persuade people to take the democratic way.
  People ask, "Why are we always told by politicians that Europe is the answer to everything?" When he campaigned in the EC referendum in the United Kingdom the then Prime Minister, the right hon. Member for Old Bexley and Sidcup, said that unemployment problems would be solved when we entered Europe. Can any hon. Member say that they have been solved? The right hon. Member for

  67
  Old Bexley and Sidcup crusaded for a Europe that is entirely different from the Europe of today. One would not recognise the Europe presented in that referendum.
  The right hon. Gentleman said that the people know nothing about it and he made some disparaging remarks about the peasantry of France. I say, "Well done the peasants of France." They are entitled to say no and their votes are just as important as those of wealthy people. Is the vote to be taken away from ordinary people? I know something about Mr. Delors. He is an arrogant man. I have sat with him in committees for 12 years and I know his style. He has said that 80 per cent. of all decisions will be taken in Brussels. Nobody in this country wants Delors, and no Commission, even one containing Leon Brittan, should make decisions for this country. The people of Britain want this Parliament to take their decisions.
  We are told that the people cannot be trusted. Why should not the people of this country be allowed to speak in a referendum? Hon. Members who believe in European union and one government in Europe—a single state that goes beyond federalism—should go to the country and say to people, "Do you want this?" The House decided that the people of Northern Ireland should decide their future by referendum but now we are told that referendums are undemocratic, alien and foreign. However, one is kept on the statute book for Northern Ireland and it is there because a former Prime Minister proposed it and carried it through.
  We are told that Europe will solve every problem and that trouble in future can be solved by a single market. Our monetary difficulties were to be solved by entering the ERM. The leader of the Liberal Democrat party said in his speech that the answer was full steam ahead for one solid union in Europe, one parliament and one people. In the old days people used to speak about one air force, one navy and one police force. Everybody knows that if that happened there could be no withdrawal. At least we were able to get out of the ERM and float sterling, but a policy such as that proposed by the leader of the Liberal Democrats is similar to the law of the Medes and Persians and is for ever. Why should we be forced or rushed into such a decision?
  The people of Europe are beginning to think again about Maastricht. I asked the French ambassador to the United Kingdom whether he thought that France was divided. He said, "Yes, my country is divided 50:50." Mr. Delors has succeeded in dividing his own country. France was the womb of the EC and supplied the grandfathers and the fathers of the Common Market. It is the Common Market establishment, and when almost 50 per cent. of its population say no surely all the other European countries should think again.
  We were to have an economic debate today. We have had terrible cuts in Northern Ireland and a Scrooge policy is followed by the Northern Ireland Office. Hospitals are closing, housing estates are not being rehabilitated, jobs are being lost and unemployment is at 15 per cent. Those are the issues that worry the ordinary man in the street, and if the money that was wrongly used to try to stay in the ERM had been invested in our own country it would have made a great difference. It would have provided hospitals, houses and schools and investment in employment. The time has come for the Government to
  68
  forget about the ERM and to put their house in order. They should tell us their economic policy, because I have not yet heard in the debate what they propose to do. The House has a right to demand that the Government set out their policy.
  7.6 pm
  Mr. Dafydd Wigley: I certainly agree with the last point made by the hon. Member for Antrim, North (Rev. Ian Paisley). The motion seeks support for the Government's economic policy, but that is asking the House to support a pig in a poke when we do not know the shape of the pig or the direction of the poke. We have had no indication of the new economic policy that will replace what everyone in these islands sees as the shambles of last week. We need to know that there will be change in the policy that has led to the present unemployment in Wales, Northern Ireland, Scotland and even in southern England. Social problems arise from economic problems and there is a crying need for a housing programme. We have not been told about a new economic policy and I fail to see how Conservative Members can support the motion.
  I do not believe for a moment that last week's difficulties surfaced suddenly. I shall speak about speculators later. It is necessary to have some relationship between the currencies in EC countries, and that will be even more necessary from 1 January when there will be free movement of people, goods and capital. We need structures that will enable that to happen coherently.
  We entered the ERM in 1990 at too high a rate. We said that at the time, but there is no kudos to be earned from saying "I told you so". We have been paying the price of too high an entry rate through high interest rates to sustain the currency at that level. That interest rate has caused difficulties for businesses and industry in getting the necessary investment, and it has certainly caused difficulties for people with mortgages.
  We must ensure a new parity and, in the light of current inflation, interest rates could be reduced to 8 or even 7 per cent. If that happened, the pound would drift down even further, perhaps to DM 2.40 or $1.55. I hope that that will happen following lower interest rates, and that we can try to renegotiate ourselves into what may be left of the ERM or a replacement regime. I passionately believe that there must be a replacement regime.
  A couple of weeks ago the Prime Minister inaugurated a factory in my constituency. That factory is the European headquarters of an international company and, as the Prime Minister heard, it exports 98 per cent. of its products. In the lead, up to the general election the Government made great play of the many international companies that have come to Wales from Japan, Germany and other countries. They have come to sell into the European market, but if we do not have a stable currency and a stable economic policy those companies will be undermined. A stable currency is necessary to build on the job opportunities that such firms provide.
  I was saddened by the way in which people were so inclined to blame foreigners for what went wrong last week. It was easy to blame somebody outside. The frightening feature of the coalitions that are opposed to Europe, such as Le Pen in France, is the nasty inward-looking elements who want to turn the clock back. We should be extremely careful to avoid those elements.

  69
  Many people have been willing to blame the Bundesbank, but we should recall that last week it spent DM 50 billion on propping up currency, and DM 35 billion on sterling. We must remember the difficulties that Germany has experienced with the integration of East Germany, despite which it has taken in more than 250,000 refugees— far more than we have been prepared to take. Germany may not have behaved in what we regard as the most desirable manner, but it is easy to blame other people when the wrong decisions have been taken in this country.
  The Prime Minister said that last week's events occurred because of a massive amount of speculation. If people sold sterling that they did not have on an unprecedented scale to undermine it, when it was known to be weak, and then moved against the franc, which was not known to be weak, in order to make a quick buck, we must take measures to ensure that it never happens again. What sickened my constitutents was watching people shuffling paper and making millions of pounds in the process. There must surely be an argument for some control over speculators and for a windfall tax. In addition, there should be rules to ensure that when there is currency speculation people have currency up front rather than being able to turn the currency around within 14 days or whatever period is necessary. The Government must investigate what happened in the currency markets last week to see whether there was deliberate action to undermine sterling and, if so, whether legislation is adequate to deal with it.
  Our economic policy must ensure the regeneration of industry. A strong regional policy is necessary if we are to have fixed parity of exchange rates. Without it, pressure will build up and countries whose economies are not performing well will experience increased unemployment. We need a much stronger regional policy to help not only areas of Wales and other parts of the United Kingdom but Europe.
  Next year will herald a new chapter in Europe and we must be ready for it. There must be fresh new thinking on economic policy to ensure full employment and the maximisation of people's potential. If the events of last week have taught people a lesson and have made them look again at new mechanisms and at ways of ensuring that that potential is maximised, perhaps some good has come out of them. But many people have been hurt in the past two years and the Government must now be a little modest and admit that they have made mistakes from which they have learnt and will build a better future.
  7.13 pm
  Mr. William Cash: For me, the ERM is the Maginot line on the road to Maastricht. It has failed spectacularly and we saw the result the other day with untold damage and anxiety when panic struck the country as interest rates rocketed up. We now have some respite, but the problem is that Maastricht is by no means dead. That troubles me, and no doubt other hon. Members, greatly.
  This year's Conservative party manifesto said:
  "Membership of the ERM is now central to our counter-inflation discipline. But the ERM is not a magic wand."
  We can certainly see that it is not.
  Any modified form of the discredited system would simply not work because a series of divergent economies
  70
  cannot be made to converge. Countries such as Germany on the one hand and Greece and Italy on the other inevitably will not achieve currency parity.
  The cohesion fund under the Maastricht treaty is part of the economic policy that lies at the heart of these matters. The result is that, by our own admission, we have neither the money nor the intention to pay the amount of money that Delors is claiming for his financial package —Delors 2. The money is not available, nor is the will to pay it, so what is the rationale for continuing with the Maastricht Bill or for pursuing the dogma of the ERM?
  With a number of honourable exceptions, I had not expected to hear such blatant hypocrisy from Opposition Members. They have been up to their eyes in this policy throughout. What we heard from the Liberals and my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was unbelievable. They want a unified state. We cannot afford to rewrite the history books by pretending that what has recently happened did not really happen. We cannot brush it all under the carpet, pretending that it is business as usual.
  When the British people reflect on the events of last week they will not find it easy to understand how we can simply continue with Maastricht. I am told that I have a good voting record, but on this occasion, as on the Second Reading of the Maastricht Bill and the confidence motion that was debated in December in the run-up to the general election, I fear that I must abstain—for a good reason. I do not believe for a minute that my constituents or many other people in the country would understand my voting for this motion, given the anti-democratic nature of the Maastricht treaty. In addition, we must remember that we have had no White Paper, for which I have been calling for three years. We have not had a free vote and we have not had a referendum. I heard my right hon. Friend the Member for Old Bexley and Sidcup chattering on about what he would like to see—a unified Europe—but he gave us a White Paper in the 1970s and, as I understand it, there was a free vote in 1972 and a referendum in 1975. I voted to stay in Europe and voted willingly for the Single European Act. I challenge anyone to question my credentials. I believe in European co-operation, but not in a centralising treaty. I have outlined in previous debates and in various publications why I believe that the treaty is a centralising one.
  Finally, I want to ask a simple question about the nature of democracy and to quote a passage from a publication known as "German Comments", a passage reprinted there in July of this year from the "Konrad Adenauer Siftung". The article, written after the Danish referendum, said:
  "More and more frequently elections are now distorting themselves into instruments of protests for the voters. Unless Europe soon encounters a new type of voter governing will become even more difficult than it was in the past."
  That is a pretty remarkable statement and it shows the sort of problem that lies at the heart of so many of our present troubles. The Maastricht legislation and the treaty are riddled with contradictions—masses of them. The treaty is not just a compromise; it is self-contradictory. The only thing that we can do, therefore, is to determine not to have it and not to accept the ERM even in a modified form.
  For a long time we have been taken down the wrong route. I said in a debate shortly after the dark days of our leadership election, following some unflattering comments that I had made about a web of deceit woven over the

  71
  subject of Europe, that I believed that only in the Conservative party would we find the answers to the future of Europe for this country.
  I implore my right hon. Friend the Prime Minister to review the decision that appears to have been taken and not to continue with the treaty. I direct that plea to him in all humility.
  7.21 pm
  Mr. Derek Enright: This was not a failure of the exchange rate mechanism; it was a failure of the Government. The ERM is not a policy; it is a tool, a means of arriving at monetary union. Because I am a socialist, I believe that we should still aim for the goal of monetary union. It is because others are not socialists that they do not believe in trying to control and contain Europe's monetary system so as to avoid disgraceful spectacles such as that which occurred last week. As I saw on television when I returned from the French referendum, young men were swilling down champagne to celebrate the fact that they had made £4 million out of selling their currency down the drain—and the Government are largely responsible for creating the climate in which that happens.
  The Government cannot seriously object if their Back Benchers accept what they say at face value. The Government went to Maastricht declaring that they would fight the foreigners. the Prime Minister and Chancellor went there describing the bureaucracy in Brussels as awful and saying that they were determined to wrest back power from that bureaucracy. They returned claiming that they had fought bureaucracy and the foreigners, but they should have come back and presented the policies from Maastricht that they accepted and could recommend to the House because they were for the good of the people.
  The single market is already in place. In the French referendum the Single European Act, not the treaty of Maastricht, was regularly criticised. If we do not move on to Maastricht and use it we will be left with a grand hypermarket devoid of humanity. The Single European Act, for which various hon. Members have said they voted, presaged Maastricht, and it would be to deny our promises if we did not vote for Maastricht. I am neither for nor against referendums—I would not go to the stake over them—but if we are to hold one we must present it properly. It must include a question on the environment, another on training, another on the powers of the European Parliament and one on the Committee of the Regions. That sort of devolution has not been mentioned in this debate, but it is an important link in the economy and with the European Community.
  What sort of Committee of the Regions do our Government intend to have? Most Governments have declared their intention that it should have elected members. Will our members of it be appointed, as they are to hospital trusts? Will we be represented by estate agents or by people who truly represent the regions where real devolution happens?
  The right hon. Member for Mole Valley (Mr. Baker) said that he did not want people from Brussels taking jobs from Yorkshire. It is the Government, not the Commission, who have taken jobs from my constituency by their heedless energy policies and by their failure to act
  72
  together with the rest of the Community to ensure a common energy policy so that we can use our coal into the next century. That is the sort of planning that is needed.
  If I were the right hon. Member for Mole Valley, I should be careful about criticising the financial expertise of others. After all, he introduced the poll tax, so it ill behoves him to criticise the judgment of others.
  The Government were never going to receive the same defence from the Bundesbank as the French have received, for the simple reason that when the negotiations took place our Government said that they wanted to withdraw —that they were in the ERM and that that was enough for us. They did not want to proceed to EMU; they would save that for a later date and not commit themselves. That was typical of the Government's half-hearted approach not only to the social chapter but to all the other social provisions. That approach has caused a crisis of confidence in the British Government on the part of our continental partners.
  I was at the European Parliament on black Wednesday. It did not cause the stir there that it caused here. Following black Wednesday we said that the ERM was gone—finished—because the United Kingdom is now out. Not so. It is clear that France and Germany and the Benelux countries will come together as quickly as possible and will create a single currency. The remarks of the hon. Member for Antrim, North (Rev. Ian Paisley) notwithstanding, these countries will form the core. How quickly then will we be able to catch them up? How soon will we be able to give our country the benefits that flow from a stable currency? We shall be hanging on to the coat tails of the single currency and, far from being independent, our policies will be directed by the fiscal and financial policies that the core countries pursue.
  We must put together a series of industrial, fiscal and financial policies with our partners in the Community, but that is not to be done the night before one drops out of the exchange rate mechanism—or even the weekend before. It is a long and complicated haul. There is no easy fix. The Government should pick themselves up and start talking to their European partners. They should put their whole heart into Maastricht and tell our partners that we will go forward with them. And they should accept the social chapter as an earnest of their good intent to co-operate in future.
  7.28 pm
  Mr. John Townend: I should like to preface my remarks by expressing my support and sympathy for the Chancellor. He was given a virtually impossible job—to manage the economy in a straitjacket. He had to fix interest rates not at a level appropriate to the British economy but at a level appropriate to the German economy. I was delighted when he took the brave decision to come out of the ERM. If we had stayed in and interest rates had stayed above 10 per cent. for any time, we would have been in danger of the recession turning into a slump. I submit that membership of the ERM has not been beneficial to Britain.
  We should look at the facts and compare our economic performance when we had a floating pound with that of the past two or three years. Between 1979 and 1987, when we had a floating pound, the rest of Europe talked about the British economic miracle. Inflation fell from 22 per cent. in 1980 to 3.4 per cent. in 1986. The budget deficit

  73
  was progressively eliminated and we went into surplus. Trade was mainly in balance. We had economic growth for eight years. Manufacturing productivity rose faster than in any other European country. We had an explosion of enterprise and initiative throughout the country. Thousands of new firms were founded. During that time, the pound declined by no less than 25 per cent. against the deutschmark, but we had no currency crisis and we never heard the word devaluation.
  How did we achieve those magnificent results—by following two basic policies. First, we made monetary policy the cornerstone of economic policy and, secondly, we exercised strict control over Government spending and strove to balance the budget. We should compare those golden years with what is happening today. We have a double deficit—a large public sector deficit and a large balance of payments deficit. We have had three years of minus growth. We have soaring unemployment arid tens of thousands of bankruptcies and closures. We got it right and we threw it away. What went wrong? We changed our two basic policies.
  The Government repeatedly relaxed their policy on public spending and were regularly interrogated by the Treasury and Civil Service Select Committee on that subject. It does no good to say "I told you so", but year after year in debates on the autumn statement I warned the Government of the dangers of letting public spending rise too quickly. Ministers were unable to resist the pressure groups, the health service and the aid and arts lobbies, and no matter how hard they tried, they could not keep local government spending under control. All the time, the Opposition demanded even higher spending.
  We abandoned our monetary policy. Lord Lawson, the architect of our monetary policy when he was Financial Secretary, for some reason, on becoming Chancellor, abandoned that policy and decided that the exchange rate would be the cornerstone. Because the then Prime Minister did not allow him to join the ERM, he shadowed the deutschmark, thus sowing the seeds of his destruction.
  The economy was expanding quickly and Lord Lawson reduced interest rates when he should have increased them. In 1988, broad money rose by 20 per cent. Is not it ironic that we abandoned British monetary policy and put in its place Germany's monetary policy dictated by the Bundesbank? That might have been less damaging if Germany had remained a low-inflation, low-interest rate country but, unfortunately, Herr Kohl made a mess of reunification and the Bundesbank retaliated by putting up interest rates. As a result, we were prevented from cutting our interest rates when we were in the depths of a recession. Our membership of the ERM has made the recession six to nine months longer than it need have been. That has been the cost of our membership of the ERM and excessive public spending.
  The events of last week were not a defeat just for Government policy. They were a defeat for the collective political leadership of the country. The leaders of the Opposition are equally responsible. I remember sitting on these Benches during the 18 months before the former Prime Minister was pressurised into joining the ERM. Every week, the former Leader of the Opposition demanded that we join, as did the present Leader of the Opposition. The new Leader of the Opposition does not seem to know what his policy is. A few days ago it was to rejoin the ERM almost immediately. Will they never learn
  74
  that one cannot buck the market? A fixed exchange rate will not work unless the currencies of the EC converge completely, which, as has been said, will not happen.
  The main casualty of last week was the ERM. It has failed to deliver. It has been shown that the aim of monetary union and a single currency as set out in the Maastricht treaty is a dead duck. In my view, that makes the treaty a dead duck.
  Conservative Members should not regard what has happened as a defeat. We should see it as an opportunity. We should put this experiment behind us and never rejoin the ERM. We should not put British jobs and businesses at risk. We should unite behind the Chancellor to recreate the prosperity of the 1980s.
  What must be in our economic package? Our first priority must be to stimulate economic recovery. Now we have a floating exchange rate, the value of the pound need no longer dominate policy. Monetary policy should be brought to the fore once more. We should fix targets for broad and narrow money but, because of the severity of the recession, broad money should be allowed to rise by up to 10 per cent. over the next 12 months. To prevent inflation, monetary growth should be reduced by at least 1 per cent. per annum. Interest rates can now be fixed at a level to suit the British economy. Because of the depth of the recession and the weakness in the growth of money supply, I should have liked interest rates to have been cut by 2 per cent. That would have given a fillip to confidence and taken pressure off the exchange rate at the same time. I think that there will be another 1 per cent. cut soon.
  We must take the knife to public sector spending. The public sector deficit—it is approaching £40 billion—is unsustainable. We have to bring the budget back to balance. Reductions in spending should be limited to the revenue side, however painful that might be. The construction industry is in a terrible state and a cut in capital spending would do untold damage to that industry and serious damage to the British economy. None of the sacred cows can be exempt. Overseas aid is paid for by borrowing from foreigners. Spending on health, arts, social services, local government and even benefits should not automatically be increased.
  During the recession almost all the pain has been borne by the private sector. Firms have closed and people have lost their jobs. The number of people who have had wage increases is small. Now is the time for the pain to be shared. To get the deficit down, there should be a moratorium on all public sector pay increases for one year. It should affect all employees—doctors, nurses, Members of Parliament, judges, firemen, the police—the lot. I do not think that it is unjustified in the circumstances.
  There should be a housing package to help recovery in the housing market. We shall get no recovery in consumer spending until the housing market recovers, as the greatest asset of 70 per cent. of the population is their home.
  I ask the Government to approach banks and ask them to relieve the pressure on small and medium-sized businesses. If the pressure is caused by lack of capital, the Governor of the Bank of England should tell them to have a rights issue and recapitalise. The Government should reduce the burden of the state and the EC on industry and advise Customs and Excise, the VAT department and the Inland Revenue to be more amenable to small and medium-sized firms with cash flow problems. We need urgent action on the trade deficit, with which I do not have time to deal.

  75
  The City has given its verdict on recent events. There is now a feeling that we are once more in charge of our destiny. For the first time during his tenure of office, the Chancellor has been given an opportunity to run the economy for and in the interests of Britain. The Conservative party was given a new mandate at the general election in May. We must honour that confidence and deliver to the British people in the 1990s the economic miracle that we achieved in the 1980s.
  7.38 pm
  Mr. Denzil Davies: In his speech today—and, indeed, before today, outside the House—the Prime Minister has claimed that the exchange rate mechanism has "fault lines". I agree with him. I also agree that something should be done about it, if that is possible.
  The question that must be asked—it has already been asked today, but it has not been answered—is "Where on earth has the Prime Minister been all this time? Why has he discovered only now that there are fault lines in the system?" The right hon. Gentleman has been Chief Secretary to the Treasury; he has been Foreign Secretary; he was the Chancellor of the Exchequer who persuaded Mrs. Thatcher, as she then was, to take us into the exchange rate mechanism. Now he is Prime Minister—and now he tells us that the ERM contains fault lines.
  Yes, the ERM has fault lines. In my view, it was flawed from the beginning: it acquired some rather bad genes from its immediate ancestor, the snake, which ended up a shambles, and from the Werner report, which made even Jacques Delors sound like a Euro-sceptic. It acquired other bad genes from its immediate parents, Chancellor Schmidt and Giscard d'Estaing—along with the then Mr. Roy Jenkins, who was hovering in the ante-chamber.
  In fact, the ERM was not meant to be an economic currency system. It was meant to be political: it was intended, all along, to take the first step along the path to economic and monetary union and, finally, to a federal Europe. That was what the ERM was about when it was conceived by Chancellor Schmidt and Valery Giscard d'Estaing in 1979, When it was launched, some extraordinary claims were made for the system, as is always the case with such European forays. One claim was that it would create a zone of monetary stability in western Europe—I think that that was the phrase. Frankly, it has failed. Even in the period between 1979 and 1990, before the present turmoil began, there were 10 realignments. In truth, they were not realignments but devaluations—devaluations of all the other currencies against the German mark. Over that time, the French franc was devalued against the mark by 45 per cent.
  It must be conceded that, from 1987 onwards, there were no more devaluations or realignments; a period of stability ensued. I believe, however, that the real reason for that had nothing to do with the ERM. In the main, it was probably connected with international economic factors —particularly the Louvre agreements, which stabilised the dollar for a long time.
  In 1987, the ERM changed from a fixed but adjustable system—rather an inelegant phrase—to a quasi-monetary union system. That happened just after the realignments that took place in January that year, when the present Prime Minister became Chief Secretary to the Treasury.
  76
  From 1987 onwards, the Prime Minister was at the heart of our economic policy; yet, apparently, no one told him that there were fault lines in the system, or else he did not spot them.
  After 1987, the fault lines widened and deepened. The Single European Act had been signed in 1986; the final realignments had taken place in January 1987; a few months later, the Basle-Nyborg agreement conceded, in effect, that countries could support each other's currencies in the short term. Then, four months after that agreement, a memorandum came from the French Finance Minister, arguing that the European monetary system itself should become a European central bank and a full currency union. Throughout that period, we were moving towards a quasi-monetary union.
  At the same time, however, capital and exchange controls were gradually being relaxed. Between 1987 and 1990, country after country took such action; by 1990, no controls remained except for temporary purposes. We were left with an extraordinary system. Greater experts than I sit on the Conservative Benches: I do not know whether an historical precedent exists for a country to operate a fixed exchange rate while having no control over capital movements.
  Today, there are sight deposits in British and European banks. Money can be withdrawn and moved around without capital controls, at a moment's notice. I understand that sight deposits in British banks exceed Britain's reserves tenfold, and that the position in France is similar. How on earth can a fixed exchange system be operated, given the ease with which money can now be transferred from one country to another, and the fact that we have no capital controls? I do not believe that we shall return to them: unfortunately, the world has changed, and money can move very quickly. I do not see how we could operate such a system without becoming involved again in the battle that, eventually, we have had to face over the past few weeks.
  I do not know why the Prime Minister did not know about the position, but I do not think that the Government should blame the Germans. I do not think that they should blame poor Helmut down in the Bundesbank. I feel rather sorry for Helmut: there he was, coming in every morning, wading through piles of esperanto money—kronas, pesetas, heaps of lire and a few pounds, but not too many; by then Helmut was beginning to learn—and possibly even francs. Meanwhile, at the back of the office, Helmut's lovely deutschmarks had been taken away to buy all that esperanto money.
  I do not blame poor Helmut, and I do not think that we should criticise him. Apparently, under the Bundesbank Act, his job is to watch German inflation and to control the money supply, not to worry about the exchange rate; that is a secondary matter. There he was, buying all the flotsam and jetsam of European currencies and paying for it with German marks—putting German marks into the system and pushing up his money supply. Helmut already has problems with the money supply: last week, apparently, his monetary targets were exceeded by 4 per cent., reaching 9 per cent. instead of 5 per cent.
  Poor old Helmut. I do not know what he will do. I hope that he does not set fire to all those currencies; we do not want a bunker mentality in the Bundesbank. I repeat—let us not blame Helmut: the system was flawed, because it was designed not for economic purposes but for the political goal of economic and monetary union.

  77
  For years I have listened to European debates. Sometimes words are used in a very strange way. Sometimes we are told that things have been done for this reason, or for that reason; treaties are debated, signed and discussed behind closed doors. No one admits what it is all really about. The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) admitted it today for the first time: I do not think that he has ever done so before—at least not since 1972.
  Why not tell the British people what it is all about? Why not say, "If political union is thought desirable, let us introduce measures to implement it"? Measures should not be introduced through the back door, by means of financial stratagems that always go wrong in the end.
  7.48 pm
  Sir Teddy Taylor: One of the problems of growing old in this place is the fact that many of the exciting new ideas seem to be ideas that have been tried before and have not worked very well. It was clear from the brilliant and entertaining speech of the Leader of the Opposition that Labour was about to embark again on the whole process of the "national plan". I think that older hon. Members realise that that wonderful idea simply brought great benefits to bureaucrats and the hotel and conference industry.
  We should not complain, however. This is the first debate on European affairs in which we have seen a ray of hope that we can halt the slide towards an undemocratic single state. I must say that I felt a great deal of sympathy for the Prime Minister; there has been a huge change in Commons opinion. I felt sorry for him, because those who once urged him not to Miss the Euro-boat are now shouting at him, "Do not jump over the Euro-cliff." All the organisations—such as the ridiculous CBI—that urged him to rush into the ERM are now saying that it was a disaster, and the whole business has blown up in his face. I hope that we can at least show a certain sympathy for a Prime Minister who has been faced with a huge change in circumstances and a substantial change in his party.
  It is unfortunate that there has been a failure in the debate to appreciate the huge damage done to the United Kingdom and its people by the European Community. The Community is not a great growth enterprise; its share of world trade is decreasing and it has massive unemployment. We have done ourselves a great damage —the ERM is a perfect example. We have deliberately imposed unemployment, misery, housing repossessions and business failures for the sole purpose of maintaining the pound at an artificial level. Where is the logic and common sense in doing that? We have seen the policy explode in our face. What is the point? We are in exactly the same position as we were in September 1931, when we carried out the same exercise. The Government said that inflation was down to minus 7 per cent., but there was massive unemployment and misery—it was a mad policy.
  In the same way, the common agricultural policy is doing huge damage to the economy. I wish that Treasury Ministers would start to look at what is happening to British jobs and prices due to that crazy policy. Some £513 million is being spent each month, largely on dumping, destroying and storing food. Nothing is done to stop that. As a consequence, the average family in Britain is paying £17.23 extra per week for food, which is bad for jobs in Britain.
  78
  Although we are always told that the cost of membership will go down, this year's membership is costing us about £240 million per month, which means £4 per week for British families. If the Government are worried about the economy, should not they ask what effect European enterprise has on jobs, living standards and trade in Britain? Our trade with Europe has shown not a great profit but a huge deficit. We all know that the rest of the world has suffered due to European protectionism, suffering increases as Europe becomes more protectionist. I hope that, as a result of the debate, the Government will consider the matter and ask whether, on balance, the policy has been terribly bad or terribly good for the British economy. Examination of any of the figures shows that we have suffered greatly.
  I hope that the Government will not look for scapegoats or try to kid themselves. I thought that it was sad when the pound was falling. They first blamed the Danes and said that their referendum had caused uncertainty. Then they said that the French referendum was causing uncertainty. When it was pointed out that the franc was not falling but the pound was, they changed their tune and said that the Americans were to blame for the falling pound. They said that the pound's decline was due to the fall in the dollar. When the dollar started to rise, they had to find someone else to blame, and the poor old Germans were the target. They said that German gossip had caused the trouble.
  The Government must know that if their country has a trade deficit of about £900 million a month, their expenditure and income are wildly out of balance and they are borrowing like crazy, clever people in the City who engage in speculation will be more interested in those figures than in the gossip from Germany. The same is true of inflation. We are told that the ERM has helped to reduce inflation. Even silly people in charge of Governments can reduce inflation if the price paid is three million unemployed. In addition, inflation throughout the world has been subsequently reduced.
  We must stop kidding ourselves about the great British exemptions from the Maastricht treaty. We must consider the facts. The Government seem concerned about our exemption from the social charter. Everyone can see from the facts, figures and papers that the effects of the social charter are being felt through the Single European Act. Signing the social charter will make hardly any difference. The same is true of our exemption from a single currency. If we are to be tied to a single currency in a fixed exchange rate system, the effect on our freedom will be similar to having a Scottish pound note.
  I hope that those-who think that subsidiarity is a grand idea will read the relevant clause. They will see that subsidiarity applies only to sectors where the European Community has no competence. I challenge anybody to tell me where the EC does not have competence. I can think of only grammar schools and the council tax. Those who think that the statement of intent is important are kidding themselves.
  The House of Commons must agree to a referendum on Maastricht. Not to do so would be a total denial of democracy. Of course, then face the electors who can say, "Yes, that is OK" or "No, we want to change the policy". But it is wholly wrong to hand over a massive amount of sovereignty and freedom without consulting the people to seek their views.

  79
  Some people say that Parliament is supreme, but there was no vote on the subject in the general election. Those who think that electors in the general election were voting on Maastricht should consider Southend-on-Sea where there were two Members of Parliament. One Member thought that Maastricht was rubbish and the other thought that it was great. The two results were almost identical. People were not voting on Maastricht. It would be wrong for the Government to go ahead with the treaty.
  Where can we go? After the abandonment of Maastricht, for which I hope, the Government should promote a treaty on subsidiarity—a specified list of items that we wish to take back from Europe to the elected member states. That would be a step forward in a different direction.
  For the sake of our economy we must come out of the common agricultural policy, which is damaging people —particularly the poor. We sometimes forget that, in a recession, the people who suffer most are the poor—pensioners and those with limited incomes. There is no way that we can improve matters without withdrawing from the CAP.
  After the catastrophe of the ERM I hope that the Government will at least say that they are not prepared to return to such a system. Surely it is evident that if someone tries to pretend that money is worth what it is not, distortions will be created elsewhere. The previous splendid Chancellor of the Exchequer joined—unofficially —at the wrong rate in the wrong direction. We had to create artificial prosperity; now we have to create artificial inflation. Surely the huge costs of the collapse of sterling should have taught the Government not to go back into a fixed exchange arrangement.
  I have always been in trouble in the House over EC affairs. It is embarrassing to find that, instead of the usual group of half a dozen Members expressing my views, there is an epidemic of them. People are waking up—not because of me or other Conservatives, but because the people of Europe have had their say. Despite the threats from Brussels and warnings that the country would be ruined, the people of Denmark had the courage to say no. French people who had the courage to do the same, despite warnings about the dangers that lay ahead and the threat of starting another war with Germany, have brought about change.
  We should realise that the only way that we can defend ourselves against dictatorship and the collapse of democracy is through the people. That is why I hope that the Government will tonight at least say that they will not go back to a fixed exchange rate system. More importantly, we should give our people the same democratic rights as other nations. Unless the Government have the support of the people on the policy that they intend to adopt, the outcome will be horrendous.
  7.58 pm
  Mr. Alex Salmond: The hon. Member for Southend, East (Sir T. Taylor) deserves a measure of congratulation. He is right: he has ploughed a relatively lonely furrow on this issue, and now finds himself joined by an epidemic of Conservative Members. That does not make him right; it merely makes him less lonely.
  80
  The best prepared text for tonight's debate should be the debate that we had on 23 October 1990 when we debated our entry into the exchange rate mechanism. If we read that debate we see that it left some hon. Members in a relatively strong position to argue tonight and many more in a weak position—that did not stop the latter group arguing.
  My biggest surprise was to hear the Prime Minister this afternoon say that the conclusion that he drew from the events of the past eight days was that he was right in the Maastricht negotiations. I do not think that I misquote him when I say that he stated that events of the past eight days had demonstrated that he had been correct. That was the most remarkable statement that I have heard for some time. I can only believe that his speech writer was the same gentleman who briefed the press about the pound replacing the deutschmark as the dominant currency in Europe.
  The basic problem in this debate is the one that we argued about two years ago—the difficulty in any exchange system of having a strong and a weak investment currency. When sterling entered the ERM it was not merely another currency revolving around the deutschmark; it was a weak international investment currency —a banana currency, to use the jargon of speculators—and there was bound to be polarity between those two major currencies. That made the positioning of sterling within the exchange rate mechanism crucial. When some of us argued in the debate two years ago that the rate of DM2.95 was unsustainable and was not justified by anything happening within the United Kingdom economy, those arguments were brushed aside by the Government and were described as pessimistic or defeatist.
  I agree with the right hon. Member for Bethnal Green and Stepney (Mr. Shore) and the hon. Member for Southend, East on one thing. The underlying feature of the debate is not putting the blame on the Germans or even on those nasty speculators; it is the £12 billion annual deficit in the United Kingdom's balance of payments. When the right hon. Member for Bethnal Green and Stepney argued that, I saw the Chancellor shake his head as if it did not matter that the country was running a £12 billion annual deficit in the trough of a recession. Plenty of Chancellors have been wrong about balance of payments forecasts and plenty have been wrong in their forecasts for economic recovery, but the present Chancellor is the only one that I know of who has simultaneously underestimated the balance of payments deficit and the length of a recession. According to the traditional rule, in the depths of a recession the balance of payments should be substantially in surplus.
  We can all be amateur currency forecasters, but it does not take the most remarkable economic genius to realise that if an economy is running a £12 billion annual balance of payments deficit, its currency is probably not competitive with other currencies. The markets were therefore faced with a one-way bet on sterling and as soon as that happened the result was inevitable.
  In a clever speech this afternoon the Leader of the Opposition said that he supported a realignment. It is a pity that we did not hear more about that before the crisis last week. He is absolutely right to support realignment within the ERM, which is what the Germans have been advocating for the past six months, but realignment within the ERM is a euphemism for devaluation. It is impossible to be in favour of realignment and against devaluation.

  81
  The Leader of the Opposition and the leader of the Liberal party have a point. If they had advocated devaluation, doubtless Tory Back Benchers would have pointed the finger and said that they had undermined confidence in sterling, but last week, the shadow Chancellor would not have been in the ridiculous position of simultaneously arguing for the maintenance of sterling's parity against the deutschmark and for interest rate cuts. The counter argument would have gained credibility and would not have been undermined. It is more important to have a credible argument than to worry about being accused by Tory Back Benchers of being unpatriotic or disloyal.
  One of the features of the debate that will cause some amusement—and I hope some interest in Scottish politics—is that during the economic debate in the general election campaign, a few months ago, it was said that if Scotland were independent it would have a plunging currency, unemployment and economic instability. It has all happened, and not with five years of Scottish independence but within five months of a continuation of the Union. If the Chancellor of the Exchequer has done any service to Scottish politics and to the Scottish people it is because he might be the Chancellor who has finally persuaded them that the men in the Treasury do not know what is best for the Scottish economy or about running the United Kingdom economy.
  In a blithe and almost a throw-away remark the Chancellor said recently that monetary policy during the past few years has been too tight. He conceded that fact as if it were something that he had known all the time and had now revealed to the unsuspecting nation. What has been the result of that tightness? It has been paid for in tens of thousands of job losses throughout the United Kingdom—1,000 jobs a week in Scotland since the general election. Those people's jobs have been sacrificed and jeopardised to save the face of politicians who treat sterling as some sort of totem pole, to be defended at all costs, as long as it can be defended with other people's chips.
  It would be appropriate if someone who was basically in favour of Maastricht and intended to campaign for a yes vote called for a referendum in this debate. I suppose that there is no ultimate argument in principle for referendums and the way in which they are dealt with in the House. Some hon. Members are in favour of a referendum on Europe but against one on Scotland. The Leader of the Opposition is nominally for a referendum in Scotland but against one on Europe. Some hon. Members are against both, which I suppose is quite honourable. I am for a referendum on Europe and on Scotland. We should have that opportunity because the failure to trust and consult the people about the European cause has been one of the things undermining that cause. If I get the chance, I shall vote for Scotland and for Europe in both referendums.
  8.5 pm
  Mr. Ray Whitney: If the people of Scotland were listening to the remarks of the hon. Member for Banff and Buchan (Mr. Salmond), or if they read them seeking to find the Scottish National party's economic policy, they will be sorely disappointed. He seems to have said that he shares the general dismay that I and, no doubt, the Government feel about the events that obliged us to leave the ERM and led to the devaluation of the pound. It would
  82
  be foolish to seek to suggest that this is anything other than a setback for the Government, the Conservative party, and for this country, which is what is of essential importance.
  That does not mean that the Government were wrong to try to follow the policy involved in membership of the ERM as the means to create the conditions for steady economic growth in this country while holding inflationary pressures in check. As we all have good reason to know, those inflationary pressures are particularly strong in Britain compared with many of our competitor countries.
  We must recognise that the discipline of the ERM was difficult, but that any of the systems on offer must involve discipline and pain if they are to be effective. One of the major reasons for entering the ERM was that the other paths that we had tried—the various Ms and medium-term financial strategy—began to lose their effectiveness, partly because of the sophisticated economic world in which we now live and because of the creation of credit.
  One of the causes of the failure of our venture into the ERM was that we entered it too late. We should have adjusted earlier to the pressures of the ERM.
  I question whether the much-touted argument that the pound entered at too high a rate was the major reason for the problems. I refer the House to The Economist of 19 September, which said:
  "According to the test of purchasing power, the pound was, by and large, 'correctly' valued at DM2.95, its central rate in the ERM since 1990; and at its ERM floor of DM2.78 it was somewhat undervalued."
  We can all argue over the value of a currency, and speculators have their own views, but it is too glib and vacuous to suggest that the problem arose because of a highly overvalued pound.
  The monetary system was up-ended by two huge pressures, rather like a boat being crushed by two enormous icebergs, the first being the impact of German unification, to which much reference has been made. In saying that, I do not join in the carping about the Germans that I have heard from some of my right hon. and hon. Friends. The Germans have their own national interests to follow. The problem caused by the absorption of East Germany is undoubtedly an issue.
  The other iceberg was what was happening in the United States, with the cheap dollar policy. That set up so many pressures that I believe they would have caused problems and broken any system, causing the damage that has been done not only to the pound but to all the other currencies, which has been widely discussed by right hon. and hon. Members.
  With regard to the objective criteria governing the level of the pound, a number of misapprehensions are abroad, some of which have been expressed tonight. By many of the normal criteria of the economic strength of the currency, the value of the pound was reasonably set within the ERM.
  I shall mention three such criteria. First, we are often told that Government expenditure in Britain is too high, and that that is one of the causes of weakness. No one can be keener than I to go on pressing to reduce Government expenditure, but in terms of the percentage of GDP our Government expenditure is the lowest in the European Community. Secondly, we are told that one of the other major problems is our PSBR requirement—my hon. Friend the Member for Southend, East (Sir T. Taylor)

  83
  mentioned that. But, again, expressed as a percentage of GDP, the United Kingdom borrowing requirement now runs at precisely the average of the European Community.
  Finally, many Opposition Members have referred to the balance of payments. As a percentage of GDP our balance of payments is precisely at the average EC level. So according to all those criteria the British economy is by no means as badly situated as it has been painted. Certainly the objective situation did not justify what happened last week. None the less, we all know that in the frenzy of the exchange markets, objectivity seems to go out of the window.
  What we have to do now is to stay calm and to say as little as possible. We must concentrate on getting the economy back on the track from which it has been disturbed. Our objective now must be to achieve the strong economy with which we all identify and which we all understand. Once we are moving back in that direction the decision can be taken whether to re-enter a European monetary union as it may obtain at that time—in three months, or however many months ahead it may be.
  It seems likely that there will be a cohesion of the five, six or seven countries at the centre of Europe into a bloc —and, indeed, into a single currency. If so, when our economy is strong enough I would be doubtful whether it would not be in the British national interest to align ourselves with those countries and join in. The dangers of getting left behind are huge.
  My hon. Friend the Member for Southend, East has been splendidly consistent in his demands for Britain's isolation, but he preaches a dangerous doctrine. I believe that the rest of the country understands the danger that Britain may be left behind.
  Sir Teddy Taylor: Have a referendum.
  Mr. Whitney: I should be happy—we have had one referendum already, and when the people came to understand the problems that would arise if we were left behind an operating single currency, the answer would be very different from the one for which my hon. Friend hopes.
  We have heard for many months from some of my hon. Friends about the need for lower interest rates. Now we have them. The three-month inter-bank rate is the most sensible rate to examine. If we set that against inflation we see that, among the seven leading European countries normally credited in the Financial Times, only the Netherlands has a lower real interest rate. Britain has the second lowest real interest rate.
  If the panacea of low interest rates is to be realised, now is our chance. That chance must be realised, and we must adhere to what has been advised by many right hon. and hon. Friends, and not return to what we have seen time and again over the past 30 years: following the devaluation of sterling the belt is let out and off goes the inflationary spiral again. We must not let that happen this time. Too many of my hon. Friends seem to ignore that lesson in history, and to believe that simply to float the pound is a recipe for utopia and living happily ever after. In fact, it is a recipe for considerable danger, which we must recognise and avoid.
  Finally, I agree with a nostrum long advocated by the Liberal party. I myself have long supported it, too,
  84
  although I do not attribute to it the over-arching significance that the Liberal party does. That nostrum is to bring about the independence of the Bank of England. It is ironic that that was the first of the nationalisation measures of the Labour Government after the war, and the last move that the Government now seem prepared to contemplate is the reversal of that policy. It is not true, as was suggested by one of my hon. Friends, that had the Bank of England been independent it would have acted differently, and would not have taken the sensible measures adopted by my right hon. Friend the Chancellor. However, an independent Bank of England would have more credibility.
  Such a decision was reached by our noble Friend Lord Lawson after he had spent five years as Chancellor of the Exchequer. He advised such a policy in 1988, and in a noteworthy speech made on 31 October 1989 he said:
  "There is … one other way in which anti-inflationary credibility might be enhanced in the eyes of the market and that is why, a year ago, I proposed to my right hon. Friend the Prime Minister a fully worked-out scheme for the independence of the Bank of England. But that would be a buttress; it would not be a substitute".—[Official Report, 31 October 1989; Vol. 159, c. 209.]
  That, indeed, is true.
  I shall certainly vote in support of the Government's economic policy tonight—
  Mr. Richard Shepherd: What is it?
  Mr. Whitney: Nothing that I have heard, even from my hon. Friends, let alone from the Opposition, suggests that they have an alternative policy. The policy has to be to continue to bear down on inflation, to keep public spending under control. It will be more difficult to do that outside the ERM than it was within it.
  8.18 pm
  Mr. Geoffrey Hoon: I am sorry that my hon. Friend the Member for Durham, North (Mr. Radice) is not in the Chamber, because I wanted to begin my speech by properly acknowledging a quotation. The Government went into the ERM at the wrong time, at the wrong rate and for entirely the wrong reasons. Over and over again we have heard Ministers trying to justify membership of the exchange rate mechanism on the narrow ground of controlling inflation. We have seen Minister after Minister wriggling on that hook of the Government's own making. If the fight against inflation was the primary purpose of the ERM, the Government's attempted explanations might have made some sense. However, the Government's real policy throughout our membership was to use the ERM as an excuse to justify their scorched-earth economics—high rates of interest leading to high rates of unemployment, leading to chronic homelessness.
  It is no surprise that the crushing of confidence and the destruction of demand has resulted recently in a reduction in inflation. Healthy British companies have been forced to cut costs and reduce their labour costs in order to remain competitive with companies in countries where the cost of borrowing is significantly less.
  Yet even on their central policy of controlling inflation, the Government cannot claim much success for their economic policy. An examination of the increase in consumer prices between 1987 and 1992 across the European Community should make disturbing reading for the Government. In the Netherlands the figure is 11.8 per

  85
  cent., Belgium 13.7 per cent., Germany 14.9 per cent., Luxembourg 15.9 per cent., France 16.4 per cent., Ireland 16.5 per cent. and Denmark 18.1 per cent. I pause there to suggest that that is an emerging first division. Thereafter comes Italy with 32.4 per cent., Spain 34.2 per cent., and, in a disgraceful 10th place, the United Kingdom with 36.7 per cent.
  That is a comment by the markets on the central feature of the Government's economic record—the fight against inflation. Having failed in that fight, it is no particular surprise that the money markets then judge that the pound is over-valued. It is over-valued against those currencies that have inflated less during those five years. Other European countries recognise that the ERM is concerned not solely with the fight against inflation but with providing and promoting stability between competing currencies. Thus again the Conservatives demonstrate how out of touch they are with other European countries.
  The creation, or perhaps, more accurately, the restoration of stable exchange rates, is a central objective of Government policy elsewhere in Europe. By acting together to control currency values members of the ERM are seeking to provide a stable and consistent background against which international trade can take place.
  Those involved in industry have a difficult enough task running their businesses, improving production processes, inventing new products and seeking new markets without worrying whether currency fluctuations will wipe out their profits in one day's frantic currency trading.
  When the pound last floated small companies in my constituency were forced to resort to buying currency as a hedge against changes in exchange rates. Companies find it hard enough to stay in business to provide employment for their employees without their decision-makers spending a disproportionate amount of their time trying to guess at the value of the pound, whether it be tomorrow, next week or next month.
  For that reason floating exchange rates are deeply damaging to industry. They are deeply dangerous for a country's economy. Yet again, at least for the forseeable future, a central feature of what passes for Government economic policy today will be embracing the discredited policies of Milton Friedman.
  In 1953, Milton Friedman argued in favour of floating exchange rates. He suggested that if the value of a country's currency was allowed to fall, the price of exports would be made more competitive, which would in turn restore equilibrium to the balance of payments and confidence in the currency. But that theory fails entirely to allow for the practice of a Government who have run down our manufacturing capacity, undermined investment and left us ill-equipped to take advantage of any recovery, however remote that might be at present.
  Which of our companies, particularly those making high-tech products, will be in a position to expand production after the lay-offs and redundancy have become an everyday item of economic news? They have simply lost the skills that would be required in a recovery.
  Against that background the Government have sought to blame speculators, the Germans or anyone else who has come into their sights. Instead of taking the speculators on, they could have maintained our membership of the ERM as part of a general realignment, an offer which was apparently made to the British Government at the Finance Ministers meeting the weekend before last. That offer was churlishly refused. Like the schoolboy losing a football
  86
  match and taking his ball home, the Chancellor rushed off to Brussels to try to persuade everyone else to stop playing the game. That was supposed to be an act of leadership from the President in office of the Council of Finance Ministers. When the other members of the ERM rightfully refused his request, the Chancellor's and the Government's economic policy was left in shreds.
  Floating exchange rates have already led to a substantial devaluation in the value of the pound. That in turn will lead to higher priced imports. That will feed inflation in the economy and that inflation in turn will devalue our currency against those other currencies still in the ERM. That will produce a vicious spiral—deprecia-tion, inflation and further pressure for devaluation.
  That is the state of the Government's economic policy today. Having staggered from one bankrupt policy to another, the Government are once again at the mercy of speculators and the money markets. The price for that will be paid by the unemployed and the homeless, by those already struggling to repay mortgages on homes worth less than the outstanding balance of debt, by those who will continue to lose their jobs as the Government drive down the level of economic activity and impose still further expenditure cuts. That is the current state of the Government's economic policy. It is hard to see how a Chancellor who has presided over that can continue in office.
  8.25 pm
  Sir Peter Tapsell: Contrary to the almost universal predictions of the media, this has been a good-humoured debate. But no hon. Member should be in any doubt about the anger with which the British people regard the events of the last fortnight. Precisely because the leaders of the three main parties in Britain have been committed to a policy that has ended in failure and national humiliation, the British people are extremely angry.
  I was in Washington attending the meeting of the International Monetary Fund earlier this week, but in the two days that I have been back in this country, everyone to whom I have spoken, from bankers and industrialists to taxi drivers and porters, have all expressed extreme anger and humiliation. The older men have all said to me that this has been the biggest humiliation for Britain since Suez.
  There is no doubt in my mind that this has been the biggest economic crisis for 60 years, since we were forced off the gold standard in 1931 for similar reasons, because we had committed our currency to an over-valuation through linking it to the gold standard.
  Winston Churchill, in his extreme old age, told me that he regarded his decision to link sterling to the gold standard as the biggest mistake that he had made in his life, bigger even than the Dardenelles, but he said that he did it on the advice of the Governor of the Bank of England, all the leading bankers and experts and financial specialists. They all advised him to link sterling to the gold standard. That contributed to the appalling recession of the 1930s which I am old enough to remember. One of my earliest memories as a boy is of standing in a dole queue with my father. I remember the humiliation that he felt at being in that dole queue.

  87
  All my political life I have been intensely opposed to policies which would produce mass unemployment. Do not let us assume that the British people will quickly forgive us for what has happened.
  Mr. Radice: Do not include us in your denunciation.
  Sir Peter Tapsell: I do, because more than anybody else the present Leader of the Opposition, when he was shadow Chancellor, was continually pressing for us to join the exchange rate mechanism. When we did so, he, along with the Liberal party, pressed us to narrow our band. It is no good either the Labour party or the Liberal party trying to shuffle off responsibility, because they were as fully committed, intellectually, morally and politically, to this disastrous policy as the Government. That is why criticism of the Government today has been so muted and why the right hon. Member for Chesterfield (Mr. Benn) was right when he said that this was an unrealistic debate which had not reflected feeling in the country. It is the job of the House to reflect the feelings of the country. We must ensure that such a thing never happens again.
  The extraordinary thing about those events is their inexplicable nature. Everyone who takes a specialist interest in such matters had seen them coming for months. Usually there is some dispute among professional economists over such issues, but I cannot recall an occasion when there was such unanimity among monetarists, Keynesians, the Liverpool school, the Cambridge school, and foreign exchange dealers. Even I came to understand that these events were bound to end in devaluation and national humiliation. That is why I urged the Government in June and July to leave the exchange rate mechanism, float the pound, and cut interest rates to 8 per cent. I said in the House and on television that if we did not do so voluntarily, those actions would be imposed upon us. If we had taken such action in June or July, we would now be looking back on that decision as an act of economic statesmanship. As it is, we must make the best of today's unhappy outcome.
  What should we do now? We must not allow the situation to arise again by rejoining the exchange rate mechanism in two or three years' time at a lower level, and recreate the same crisis. The argument whether or not we should have joined the ERM at DM2.95 is irrelevant and purely academic. I did not think that level was wrong at the time, but the point about the currency markets is that they change every hour. If one asked a currency dealer in October 1990 to guess at the appropriate exchange rate between sterling and the deutschmark in October 1992, he would have laughed. Dealers will not anticipate exchange rates 12 hours or even three hours ahead. Foreign exchange markets move every minute of the hour, 24 hours a day. Foreign exchange dealers will not often take even a two-hour view.
  Mr. A. J. Beith: Does the hon. Gentleman recall the Prime Minister accusing the Leader of the Opposition of being prepared to confront any potential instability in the currency markets by pre-emptive devaluation? Is not the Prime Minister guilty of the same charge, and what is the hon. Gentleman's answer to it?
  Sir Peter Tapsell: I am not advocating pre-emptive devaluation, and I did not do so in June and July. It is a big mistake to confuse the floating of sterling with devaluation, as many people have done. They are entirely different. Temporarily—for a few days or even for a few weeks—there may be a floating downwards, but we floated the whole time in the 1980s. At one point sterling was down almost to parity with the dollar, and at another it was worth almost two dollars.
  Mr. Richard Shepherd: It went to $2.20.
  Sir Peter Tapsell: As my hon. Friend reminds me, it went as high as $2.20. At no stage did anyone call that devaluation. It did not create a crisis, and no one took the view that some national virility symbol was being challenged. We should return to that technique now.
  Mr. Radice: Did not industrialists in the hon. Gentleman's constituency tell him then, "We cannot cope with the pound going up and down in that yo-yo fashion. We cannot plan our businesses in that instability"? It was to meet that argument that many industrialists wanted us to join the ERM.
  Sir Peter Tapsell: I remember industrialists saying that sterling was too high against the deutschmark, when it went as high as 3.10. That happened because my noble Friend Lord Lawson, who was then Chancellor of the Exchequer, was shadowing the deutschmark. That policy started in 1987, which was when things began to go wrong.
  Another aspect of fixed currencies that I dislike is that they tend to devalue the reputations of the statesmen who must operate them. I make no criticism of my right hon. Friends the Prime Minister and the Chancellor for repeatedly saying, in the weeks leading to the floating of the pound, that they would not in any circumstances allow it to float, realign or be devalued. A Prime Minister or a Chancellor has to say that. In the days before James Callaghan devalued in 1967, he was so careful of his honour and personal integrity that he refused categorically to deny that devaluation was coming. He was much criticised for that, because £800 million flowed out of our reserves in the next few days—which was a great deal of money at that time. We should not put Prime Ministers and Chancellors in the position of having to tell the world what they really know are unreliable statements.
  We understand the reasons why that must be done, as do foreign exchange dealers and hankers, but the mass of ordinary people in this country do not. When political leaders make impassioned commitments and must then eat their own words a few weeks later, that is demeaning to the entire political process, and undermines the respect in which all constituents hold their Members of Parliament, irrespective of party.
  I do not believe that our economic crisis is over because we have now floated the pound. That will take the heat off temporarily, but I have never suggested that floating was a soft option. There will need to be more severe cuts in public expenditure than would otherwise have been the case, and monetary targets must be set that are difficult to achieve. Above all, the Conservative party must rethink its attitude to industrial policy. The preoccupation with monetary solutions to our problems since 1980 is at the root of many of our present difficulties. We tried every kind of monetary target, and they all failed to be effective —and will be likely to fail again, because the deregulation

  89
  of the financial institutions, abolition of capital exchange controls, and introduction of 24-hour markets using modern equipment such as faxes makes it virtually impossible to measure monetary instruments.
  In the years before I retired from stockbroking, my firm had a small department staffed by clever young men who worked full time on inventing new monetary instruments. When they discovered one, they would hawk it around the banks of the world saying, "This is a clever new idea. This will not appear in your returns to your country's central bank for two or three years." It was a jolly good business —but it all helped to make monetarism, as I always thought of it in classical terms, a nonsense. Nevertheless, we will need broad money targets and to make the best of them. Above all, we must attempt to relate our future interest and exchange rates to this country's monetary position and not to those of a foreign country.
  That brings me to the point that I wish to make about the Bundesbank. I was critical of it in this House in June and July, but that does not mean that I have a dislike of central bankers. Indeed, many of my best friends are central bankers. I spent 30 years earning my living advising central bankers.
  Germany, like all great nations, will not change its personality. It has two great characteristics, which have been clear throughout its history. First, the Germans have an instinctive urge to dominate Europe; and, secondly, they set about that by appointing groups of elites which are not answerable to anybody. Between 1860 and 1945, that élite was the German general staff. Since 1950, following Professor Erhardt's brilliant policies, the élite that has replaced the German general staff has been the German Bundesbank.
  It is understandable that the Bundesbank has pursued policies in the German national interest, as it sees it, but it has done so quite ruthlessly and with a total disregard for the effect on the remainder of Europe. No one can tell me that such extremely professional central bankers—and Dr. Schlesinger has been in the Bundesbank for 36 years—did not foresee the inevitable outcome of having interest rates of almost 10 per cent. in Germany when they were at 3 per cent. in the United States. Inevitably, Dr. Schlesinger was driving the remainder of Europe into recession and unemployment. Indeed, the probability is that it was a deliberate policy of the Bundesbank, not revealed to Chancellor Kohl, to smash the ERM of the Twelve and replace it with a much smaller currency unit, of which the Bundesbank would be in total control.
  I do not believe that the Bundesbank did anything near as much to support sterling as we had assumed it would under the ERM. As it is going much further in helping the French franc, it is in effect turning the Bank of France into a regional office of the Bundesbank. That is precisely what it intended. We have had sufficient experience of dealing with the Germans over past generations not to try to mislead the British people, who understand the matter very well. The British people are in favour of European economic co-operation, but not of European monetary and political union. As the votes in Denmark and France have shown, the politicians in many European countries have become out of touch with public opinion. It is the job of the leaders of the Conservative party to get back into better touch with British public opinion and—to use the words of my right hon. Friend the Chancellor which I very much welcomed—to pursue a British economic policy from now on.
  8.42 pm
  Mr. Calum Macdonald: Perhaps it is because I come from a different political generation that I find it hard even to connect with, far less understand, the sort of outlook and thinking expressed by the hon. Member for East Lindsey (Sir P. Tapsell).
  Nobody could underestimate the importance of this debate which, I hope, represents a turning point in the way that we debate economic policy and conduct our economic affairs. The events of last week had all the hallmarks of being a watershed for the conduct of economic policy in the United Kingdom. I hope that those events will lead to a change in policy and direction towards the development of an industrial strategy, such as that outlined by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), based on public investment. That is the only way to achieve the goal of non-inflationary growth, which we all agree must be our target.
  Only public investment can tackle the bottlenecks in the supply side of our economy—the inflexibility of the housing market, the shortage of skills and the congestion of the transport system. All those throttle any attempt at growth and simultaneously lead to inflationary pressures in the economy and the collapse of the current account. Those problems must be tackled and only the Government, through public investment, can do that. In short, the medium-term financial strategy must be replaced by a long-term investment strategy. That is common ground among the Opposition parties and it is common ground in the rest of Europe. Only this Government march out of step with the rest of Europe, even in the way that they conduct economic policy.
  I do not believe that this industrial strategy can be successfully pursued in isolation from the rest of Europe. The lesson of the socialist Government in France in the early 1980s shows that the narrow, national pursuit of growth, the pursuit of industrial strategy, simply does not work. The socialist Government in France found themselves compelled to work, within the framework of the exchange rate mechanism, in partnership with other countries in Europe in an effort to achieve long-term, steady, non-inflationary growth.
  I do not believe that the industrial strategy that everyone on the Opposition side favours and that many in my party, who are opposed to Maastricht and the integration of Europe, favour can be carried out in isolation by one country alone. That is why it is particularly sad that in both the Prime Minister's speech today and the comments during the past week we have seen the Government try to shift the blame for this debacle, this crisis, on to the European institutions, the Community itself, the Commission, the Bundesbank and the ERM. But none of those institutions has been discredited by the events of last week. What has been discredited is not the Community, or the Commission, but the Government in their handling of economic policy and the market, and the way that the market operates—in particular, the ideology that the market is always rational, always right and always operates in the public interest. After the events of last week, nobody can say that again.
  The lesson, then, to draw from the debacle of last week is not to abandon all our efforts to control the market but to do precisely the reverse. The markets, the speculators, the profiteers, must be brought under the control of Government, but not just under the control of any

  91
  individual national Government. That is not possible. They must be brought under the control of Governments acting together in a co-ordinated fashion.
  How is that to be done? My hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore) suggested that we need to consider going back to exchange controls of the kind familiar from the past. That may be a stop-gap measure that will have to be taken, but I feel that the era of exchange controls is now gone. Given the vast increase in capital movements around the world and around the markets of Europe, and given also the fact that we have moved away from exchange controls and contraints into an era of free capital movement, I do not believe that we can resurrect these controls credibly. In particular, I do not believe that we can do it in an economy such as that of the United Kingdom where the financial sector looms so large in comparison with economies such as Ireland and Spain that have resorted to these measures.
  If national currency controls are no longer an option but we recognise the need to impose some control over the workings of the speculators and the market, the only way to achieve Government control in the interests of the public is through monetary union and a single currency in Europe. For any socialist or social democrat, the logic of monetary union and currency union remains strong—indeed, stronger after the events of last week. If we really want to be free from the one-sided influence of the Bundesbank, we need a new European central bank, of which the Bundesbank would be just one member and in which we can also exercise an influence over policy.
  The way to kill currency speculation is by having a single currency. I can understand the political right rejoicing when markets, profiteers and speculators triumph over the public policy of a Government, but I am baffled when people on the left take comfort from such events. Floating exchange rates in a Europe of free capital movements is a speculator's paradise. Semi-fixed rates are certainly better, but in the longer term the only way for Government to beat the speculator is by abolishing him, and that can be done only in the European context by a single currency.
  Mr. Winnick: My hon. Friend speaks about a single currency. Does he accept the view of the right hon. Member for Old Bexley and Sidcup (Sir E. Heath), the former Conservative leader, who conceded with enthusiasm that a single currency would mean a single state and that member states in the EMU should be organised on more or less the same federal lines as the states of the United States?
  Mr. Macdonald: The right hon. Member for Old Bexley and Sidcup (Sir E. Heath) said that that would lead to a single government. If by that he means only one level of government I would not agree, because there should be a place for different levels, regional and national. But there must also be a place for central, federal government.
  There is a need to impose control on the markets and the only way for Governments in Europe to achieve such control is by moving towards currency union. That means that the Maastricht process is still valid and even more alive after last week's debacle. All aspects of the Maastricht process are valid, and not just those parts that
  92
  deal with economic and monetary union. The logic of monetary union leads to the logic of a social policy, because one cannot be had without the other.
  Regional and structural policies are necessary and proposals in the Maastricht treaty should be beefed up. If uncompetitive areas such as the United Kingdom have to dispense with their ability to manipulate the exchange rate, there must be a substitute, and it can only be a mechanism to arrange transfers of cash from the competitive to the less competitive parts of the single currency area.
  What is the position after the events of last week and the referendum victory in France? We must face three facts. First, by Christmas every EC country except Britain and Denmark is likely to have ratified the Maastricht process and we shall no longer be able to seek comfort from plucky little Denmark. By that time, Denmark will have had to produce its own solution—either a protocol to clarify certain aspects of the treaty but which does not change it substantially, because the tail certainly cannot be allowed to wag the dog, or a Danish opt-out from sections of the treaty on citizenship, monetary union or common foreign or security policy which the Danes cannot abide.
  The second fact that we must face is that the only parties that oppose the continuation of the Maastricht process are those of the extreme right and extreme left —the communists, the National Front in France and the republicans in Germany. All other major political parties on the continent of Europe are still committed to maintaining it.
  Why do those extreme parties oppose the Maastricht process? It stretches credibility to think that communists are interested in greater democracy or greater decentralisa-tion in Europe. It stretches credibility to believe that the National Front in France is interested in a more socially harmonious Europe. Those parties are feeding on fear, suspicion and prejudice. We must calm those fears, but we must never give in to prejudice.
  The final fact that we must face is that France and Germany are intent on maintaining the process. France and Germany, with the Benelux countries, can move towards monetary union and press on regardless, with or without us. They will do so on monetary union, economic union, on a common foreign and security policy and on social policy. We must be part of that process, or the disaster and humiliation of last week will be as nothing compared with the trauma and impotence to come.
  8.55 pm
  Mr. Bill Walker: I welcome the opportunity to put in a Scottish voice from the Conservative Benches. We must recognise that the United Kingdom Parliament, the monarchy and the United Kingdom's unwritten constitution are the cement that hold together the United Kingdom. Anything that we do to weaken that cement will effectively end the United Kingdom. We should never forget that.
  We should remember that the past attempts of British Governments to enter into fixed single-currency arrangements have always ended in tears, and the most recent example is no exception. I agree with other hon. Members that the British people were humiliated last week and will not forget that quickly or readily. [Interruption.] It was the flaws in the system. [Laughter.] It is easy to laugh, but Conservative Members who have never supported fixed

  93
  exchange-rate systems believe that experience shows that they end in tears. The recent example is a repeat of previous experience.
  I support the Government taking tough fiscal policies to contain inflation, and I believe that the policies of the 1980s substantially achieved that with a floating exchange rate. I do not hold my right hon. Friend the Chancellor personally responsible, because he was carrying out policies within the constraints determined by the Government.
  I remind my Treasury colleagues that some Conservative Members have been concerned for a long time that we have been taking our eye off the ball—what we can do in this Chamber to improve the United Kingdom's prospects in the real world: not the imaginary or theoretical world but the world of business. I remember saying that to colleagues in 1968 when we were talking about the great European dream. I was managing director of a company that traded at that time. I was supposed to know nothing about it, just as people who trade today are told that we politicians know best.
  I sincerely believe that if we hand over more powers to Europe, especially financial powers and eventually political powers, we shall bring forward the demise of what I came into Parliament to defend—the Union, the United Kingdom.
  I recognise, as, I am sure, does the Chancellor because he too comes from north of the border, that the Scots' interests are best served in this House. Under our unwritten constitution Members have the right to ask questions and to have them answered here, and that is the citizen's guarantee against malpractice and other problems. That guarantee will not exist if we enter a system in which redress is achieved through the courts where only the wealthy can be certain of having their wrongs righted. We must consider that carefully when thinking about economic matters. We have political control as long as our Chancellor makes the decisions. I welcome his comment that we will now act in Britain's interest. That means that we are back where I have always wanted to be.
  I find that I can support the Government's policies tonight, but I warn them that when it comes to Maastricht, what I have said about the Union this evening will remain valid, and they cannot then count on my support.
  9 pm
  Mr. Gordon Brown: The motion this evening asks us to support the Government's economic policy. As this debate has already made clear, this is the first time the House has been asked to vote for something that does not exist. If the Government are to carry any conviction with their Back-Bench supporters this evening they must ask us to support not one Government economic policy but two. First, there was last week's policy, which Ministers told us was good for Britain but which is this week, we understand, bad for Britain. Then there is this week's attempt at a policy—one which was once, according to the Prime Minister, a betrayal of Britain but is now supposed to be our salvation.
  Small wonder that in the other House tonight, where the Government cannot always command an enthusiastic payroll majority, their Lordships are being asked not to support the motion but only to note it.
  94
  We heard today a prime ministerial speech with no information of substance, no explanation, no justification and certainly no apology to the people of this country. So the first thing the Chancellor will have to do this evening is apologise. He should apologise to the millions of home owners who were told that three years of high interest rates were essential to bring us nearer zero inflation and who are about to suffer higher inflation as a result of his new policy. He should apologise to the thousands in business who were told that stability was the essence of the Government's macro-economic policy and who have said, as the CBI has said in the past few days, that the Government have a responsibility urgently to restore certainty to the financial markets. They have said that the absence of clear guidance will further weaken business confidence. They have said, as the president of the CBI has said, that they do not need or want a devaluation of sterling but find that they cannot plan ahead with any real confidence because there is no basic framework within which to do so.
  Most of all the Chancellor should apologise to the people whom the Government have made unemployed, thousands of them in the past few days—3,000 at British Aerospace, 1,500 today at Ford, many more this afternoon and many more still this week and this month. These people were told by the Chancellor that their unemploy-ment was a price worth paying to reduce inflation. Now they find that both unemployment and inflation are likely to rise.
  Our argument this evening is that the Government have failed and are no longer credible, that they are pursuing policies which are the opposite of promises they made at the election, and that they have failed to correct the underlying weaknesses of the British economy. Let us be absolutely clear about what the Government have done. There have been two full years of recession in which output, investment and employment have fallen faster than in any similar country in the European Community. There have been two full years of recession in which more businesses have gone under than in any other two-year period of British history. It is now five months since the election in which the Government promised a recovery —five months in which unemployment has risen and investment, output, bankruptcies and confidence have continued to worsen. In these five months it has become clear not only that there is no end in sight to the recession but no Government strategy to bring the recession to an end.
  At the end of all this—bad enough in itself—failure has been compounded by humiliation. First, the Government have withdrawn us from the European exchange rate mechanism—something they said was a necessary framework and something they said they would never do. Secondly, the Government have abandoned what they called the cornerstone of their anti-inflationary policy—something they said they would never do. Thirdly, the Government have wasted billions of our reserves for an eventual bill of nearly £1 billion that was described by one of the speculators as a once-in-a-lifetime gift. Money that could have built new hospitals and new homes and repaired our schools and infrastructure, money that should have been used for the people of Britain was instead given to the speculators of the world.
  Fourthly, the Government have devalued the currency —something they said they would never do—and, even afterwards, interest rates are 9 per cent. It is a humiliation

  95
  made likely by the weakness of the currency which is itself the product of the weakness of the economy and that is the product of the weakness of this Government.
  Our argument is that the Government can blame neither the Germans nor the exchange rate mechanism nor extraordinary events for the scale of what has happened and the abandonment of promises they have so freely given. They have no one to blame but themselves. At every point in this developing and now deepening recession, the Government have made the wrong decisions, and the Prime Minister and the Chancellor have been deeply implicated at every stage from 1988 to 1992. They were wrong, first, when, at the Treasury, they created a consumer credit boom that was unsupported by an industrial policy and created the worsening imports figures, the rise in inflation and the rise in interest rates that led to recession. They were wrong again, but to blame, when they compounded the recession by applying a one-club policy of high interest rates without an underlying plan to improve the real economy. Even in recent days, they have been to blame when they have taken what they themselves call the soft option.
  Does the Chancellor deny information that we now have from within the Italian Government that realignment, including a realignment of the British currency, was possible during the events of the past two weeks? Does he deny the statement of a German official quoted in the newspapers of 19 September that, while the Germans were prepared to move and accept realignment, in the event, the others were not ready for it? Does he deny the statement of Mr. PÖhl, the former head of the Bundesbank, that it was a mistake by Governments not to get together last week to agree a broader realignment? As Mr. Pal said, that would have been accompanied by a more significant cut in base interest rates and the whole thing could have been avoided.
  Will the Chancellor confirm that it is wrong to say that there was no alternative to the events that unfolded? I hope that he will specifically answer those questions when he replies to the debate.
  The Government should admit their mistakes and their failure to tackle the problems of the real economy. Secondly, they should admit that a return to the excesses of monetarism with all the public spending cuts and misery that that would entail would simply be a repetition of the mistakes of the past. Thirdly, they must agree that they should change course and address the problems of the real economy with a national recovery programme. They must introduce a new industry policy and they must call Government Departments together today to formulate an emergency employment programme to remove the fear of unemployment which is paralysing the economy.
  The Government should reaffirm their commitment to exchange rate co-ordination and secure European co-operation for a joint programme to expand the European economies. They should take action against speculation by widening the scope for intervention and by increasing the scale of potential intervention to end the situation described yesterday by one speculator who said that not every deal is as easy as making money out of the Bank of England. Does the Chancellor deny that one Bank
  96
  of England dealer has reputedly been disciplined for admitting that he alone picked up £10 million in profits in one day?
  Let us be absolutely clear. The big difference in policy is this. The Government feel that nothing need be done to tackle the underlying weaknesses of the economy; we believe that any membership of the exchange rate mechanism must be accompanied by an industrial policy for Britain.
  The Government's argument, as I understand it, is that on Wednesday morning they were swept aside by a tidal wave—something that could not be foreseen—in response to which they did the best they could: although in normal circumstances they would not devalue or waste reserves, on this occasion they had no choice. Our argument is that economies do not weaken in a single morning, and that the Chancellor must explain the origins, the causes and the development of the crisis. He must explain why the British and Italian economies became so weak that they could not withstand the pressures; why nothing came of the Government's boast that, under their management, the British economy was now strong enough to withstand every pressure; why no preparations were made to deal with the crisis—in particular, why the reforms in the ERM that the Chancellor supposedly now seeks were never mentioned before he left it—and why the alternatives that I suggested were not considered, although we know that they were available.
  Is it not the case that the basic weakness of the currency was a result of the basic, underlying weakness of the economy? Did not the Prime Minister—who has absented himself from this part of the debate—tell the Treasury and Civil Service Committee on 26 July 1990:
  "It is always extremely undesirable to devalue. In my view, you should follow policies to make sure it does not happen"?
  What is the Government's policy now—or, rather, what are the Government's policies? Let us recall the Chancellor's words on the steps of the Treasury, spoken in 45 seconds. Those 45 seconds cost the Bank of England millions. We may accuse the right hon. Gentleman of having done too little over the summer, but think of the cost to the country had he spoken for three minutes or even longer!
  What did the Chancellor say from the Treasury steps about devaluation? What he said, in 45 seconds, was this:
  "There is going to be no devaluation, no leaving the ERM. We are absolutely committed to the ERM. It is at the centre of our policy. We are going to maintain sterling parity, and we will do whatever is necessary. I hope there is no room for any doubt about that at all."
  There are seven statements in that, the only speech that the Chancellor made during those hectic weeks of the summer —the "no devaluation in our time" speech, unrivalled and unsurpassed for mis-statements and misjudgments. Everything that he said was consistently wrong. The Chancellor is entirely consistent: we can rely on him always to get it wrong.
  Does the Chancellor still agree with what he said in the debate on the economy that took place before the summer? He said then:
  "The idea that we can help the country's economy by depreciating the exchange rate is pure illusion, pure fool's gold."
  Does he still believe what he told Conservative Newsline on 2 September? He said that devaluation would not help recovery; that it would lead to a collapse in market confidence. Does he still agree with his previous view that

  97
  if we left the ERM we would see a huge fall in the pound and an explosion in inflation? Does he still agree with what he told Brian Walden a few months ago, when he said that devaluation would he "the most foolish thing"? Does he now reject the statement that he made to the Daily Express in a question-and-answer session? When asked:
  "Are there any circumstances under which you would consider leaving the ERM?",
  the right hon. Gentleman's answer was
  "No. As I have said, devaluation is fool's gold."
  Why is it that the policy that the Chancellor thought foolish— the policy that would bring about a collapse in confidence, that was pure illusion and that, in one month, was fool's gold—is good for Britain this month? [HON. MEMBERS: "Answer now."] I may have to give the Chancellor more time in which to complete his answers to the questions that I shall put to him.
  Does the right hon. Gentleman agree with what he said before: that many who advocate floating—that is the word that he has been using—know full well what the consequences would be? According to him,
  "They intend a devaluation of the pound, and they would certainly achieve it."
  Does he agree with what he said about the effects on the currency in the long term? He said:
  "When currencies devalue against the deutschmark, the markets do not expect them to be revalued up again. As I have said, this has never happened."
  Does he agree that a premium will have to be paid—that is his view—when currencies devalue against the deutschmark? To quote him:
  "Markets expect a further devaluation and demand higher rates. They expect a further devaluation and demand higher —not lower—interest rates in order to compensate for the risk."
  Does the right hon. Gentleman agree with what he wrote in an academic article only a few months ago, entitled
  "UK Economic Policy—Lessons from History"?
  It was a learned article in the aptly named "International Economic Insight". He said:
  "Devaluationists have failed to grasp the psychology of markets. If the pound sterling is devalued, those holding sterling assets suffer a highly visible loss. The inevitable consequence is that sterling is marked down as a risky currency to hold and people have to be paid more to hold it."
  It is tragic that, after all those remarks and turning round his policy absolutely, the Chancellor shows no shame, makes no apology and gives no hint of remorse for damaging the stability of people's lives up and down the country. Does he still believe that the effect of his policy is, as he said in the articles and interviews, higher inflation, further devaluation and higher interest rates than would otherwise be necessary? We are speaking of the man who said, on 10 March, that his Budget was a Budget for recovery. On 31 December last year he said the "recession has technically ended".
  There are two possible explanations for the Chancellor's behaviour; the Chancellor can choose between them: he has been seriously wrong for the past two years or he has been seriously wrong for the past two weeks. The Chancellor is inflicting on an economy that he has already left in recession for two years without doing anything about it policies that he thought until a few days ago were bad for Britain, inflationary, made conditions difficult and were liable to involve an interest rate premium for the future. The problem is that his future statements will have no credibility.
  98
  What is the Chancellor's position this evening? The Conservatives have a traditional way of managing situations such as that in which the Chancellor finds himself. First, they will cut down his appearances in the media: sightings of him will become rarer and briefer as the Trade Secretary and the Home Secretary begin to take over. Then, the Prime Minister will repeat that the Chancellor is wonderful, marvellous, brilliant and courageous. the Prime Minister will say that the Chancellor is an air raid shelter. I understand that that is the Prime Minister's way of suggesting that the Chancellor is unassailable. Given the problems of repossessions in this crisis, it is just as well that the Prime Minister is not saying that the Chancellor is as safe as houses.
  Next, the Chancellor will go to the Conservative party conference and, despite all the efforts—perhaps an interest rate cut to make the Chancellor's speech more acceptable —the ovation will be shorter. Some people will not even stand; some will crouch and some will even remain sitting. Next, another meeting of the 1922 Committee will be called—of course, just to take stock. Everyone knows what happened to Sir Leon Brittan and perhaps to one other person as a result of such a meeting.
  Finally, newspapers will be told that the Chancellor has become semi-detached. The Downing street press office will ask newspapers to focus less on the Chancellor's successes, and more on his eccentricities and excesses such as singing in the bath on the road to an announcement that he is about to spend more time with his family. The procedure is well known in the Conservative party. It is not a question now of "whether" but "when".
  There is no point in the Chancellor setting monetary targets other than in negotiations with the publishers of his memoirs. There is no point in him worrying about the money supply except if he is negotiating a salary for the City board that he is about to join. There is no point in him thinking about foreign exchange rates unless he is asking about the surcharge on next year's package holiday to Italy. His diary secretary may be planning his appearance in November at the Lord Mayor's banquet, but probably at table 94. All that is left to be done in the changing of' the guard is to book the day for the removal vans from number II and to hand in the keys of his country house at Chevening.
  So what has the Chancellor been doing all summer? The only report of his activities in Downing street that I could find in the cuttings that I have so far examined was of the night of 25 June. Was he talking to manufacturers, business men or industrialists? Had he brought back the building societies that he was so keen to talk to before the election? No, the Chancellor was celebrating in style, at the biggest Downing street party for years, perhaps for decades. I understand from a report in the Evening Standard that the highlight of the evening was the honourable Petronella Wyatt, author of the only recent eulogies of the Chancellor, amidst the flamenco dancing, singing a carefully chosen song that the Chancellor wanted to hear, one of the best known marching songs—a German ditty running through Downing street, "Lily Marlene". Perhaps that is what he was singing in his bath the other day, or perhaps it might have been "Deutschmark, Deutschmark uber alles". That is the Chancellor in a summer in which—
  Sir Peter Tapsell: Does the hon. Gentleman have any views on economics that he would like to share with us?
  Mr. Brown: I spoke more about economics in my first 10 minutes than the Prime Minister in his whole speech.
  Let us consider the Prime Minister's role in all this. the Prime Minister took us into the ERM. His new year message to the Conservative party said that one of his greatest achievements was that he had led us into the ERM with success. In the Conservative party election manifesto the Prime Minister said:
  "Membership of the ERM is now central to our counter-inflation discipline."
  It was the Prime Minister who said:
  "Let me tell you what you need to stay in recession. You need a weaker pound. Let me tell you what you need for a strong recovery. You need stable exchange rates."
  Will he tell the Conservative party conference next month, as Prime Minister, that the very people who stood and cheered at his success in taking Britain into the ERM in 1990 were wrong and that they should have been sitting instead? Does he still agree with the view that he stated two weeks ago about political and economic pressures? Let me quote the Prime Minister, who said:
  "All my adult life I have seen British Governments driven off their virtuous pursuit of low inflation by market problems or political pressures. All too often in the past the solution was the same—to let the exchange rate go … or later the result was the same—rising property prices, rising wages, rising inflation and a long-term deterioration in Britain's competitiveness."
  Can the Prime Minister promise that that will not happen now? When it is clear that there was an alternative that should have been explored during the past few weeks, and that I have already set out, I challenge the Prime Minister to tell us why the unilateral devaluation that he considered 10 days ago, when he spoke to the Confederation of British Industry in Scotland, was a "betrayal of our future" is now the right policy for the Government.
  Does the Prime Minister still believe that devaluation damages long-term competitiveness? Does he still believe, as he said, that
  "there is no subtler no surer means of overturning the existing basis of our society"?
  Does he still believe that it is a "soft option"? Does he still believe that the ERM is "the discipline" and "the framework" and that it is a "cold world" outside it?
  I challenge him to tell us why the policy that he thought good for Britain one week is now bad for Britain this week. I challenge him to tell us why the policy that he called a "betrayal" one week is now our salvation.
  Mr. John Marshall: Earlier this afternoon the Leader of the Opposition refused to say whether he would take us back into the ERM. Can the hon. Gentleman tell us?
  Mr. Brown: The difference between the parties has become clear during the debate. The Chancellor cannot even tell us—nor could the Prime Minister—whether they support floating or managed exchange rates. Our policy is for managed exchange rates. What are the policies of the Government? What has happened to zero inflation? What has happened to the boast that Britain was a miracle country, envied by Germany? What has happened to the boast that we would get inflation in Britain below German levels and keep it there? What has happened to the boast mentioned by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) this afternoon —that we would have a currency superior to that of Germany?
  Who do the Government blame now? Is it the ERM, which the Prime Minister said a few days ago was not to
  100
  blame? Is it the Germans, whom two weeks ago, in his speech to the Scottish CBI, he praised as a model to emulate for their anti-inflation record? Or do the Government blame the markets themselves, which the Prime Minister now calls irrational? the Prime Minister's response to the greatest test of the markets is not to uphold his faith in them but to call them irrational. Whoever heard of a seventh-day adventist choosing judgment day to declare himself an atheist? That is what the Prime Minister has done.
  The case against the Prime Minister is not simply what he has said—that is now inoperative—but the consequences for the British economy of what he has admitted. Can he now lead our economy in Europe, after everything that he has said, which he has now had to turn on its head? Will there not always be a credibility premium now, which will have to be paid, whether in interest rates or in something else, so long as we have a Prime Minister and a Chancellor who promised that there would be no devaluation and who promised to stick with the ERM but who cannot now guarantee that they will not again change our economic policy completely?
  The last time that the Prime Minister spoke in the House about the economy, he said that the real risk of leaving the ERM was that interest rates would rise rather than fall. I wonder whether, over time, the interest rate premium to which he and the Chancellor have drawn attention will have to be paid so long as they are in power.
  All this time we have had the worst growth, the fastest rising unemployment and the lowest investment of any country in the EC. We were bottom of the league in Europe two years ago, we were bottom of the league last year, and we are bottom of the league now. Now the answer to the problems seems to be to return to the monetarist targets of the Thatcherite era—M3, M4 and the other monetary targets which the Chancellor himself said a few weeks ago provided
  "a poor guide to interest rate policy".
  and that he could not remain indifferent to the problem of the exchange rate. All those monetary targets—the right hon. Gentleman is nodding his head. If he is targeting the exchange rate as a means of deciding interest rates, how does he assess it? Is he now shadowing the deutschmark again? How? If he says that he has an exchange rate target, he must explain what he is doing. That is another question that he will have to answer if the House is to be satisfied.
  The Chancellor now says that we are not returning to cuts in interest rates, leaving the ERM and using only monetary targets. He says that he will target the exchange rate too. Conservative Members will do well to question him on what that means. After two full years of recession in which total output has fallen significantly, and five months after an election victory in which the Government promised a recovery that never arrived, we are still at the bottom of the league.
  Our case is still that the weak currency which arises from a weak economy can be dealt with only by measures taken here in Britain to deal with the fundamental weakness of that economy.
  At the election the Government said that they would bring recovery. They did not. They said that they would reduce unemployment through employment action, yet the promised places are 25 per cent. short. The Government guaranteed every school leaver a training place or a job. They have not delivered. They said that most repossessions would stop. Repossessions have continued. During the

  101
  election campaign the Government prophesied that they could keep all their public spending promises, but they never will. They said that they would never devalue and leave the ERM—and they have done so.
  The tragedy is that at this stage it is not the Government who will pay for the problems that they have created. Instead millions of British people will pay, after being hammered by the recession, with another round of public spending cuts.
  The Government blame the problems on the ERM. They blame the Germans. They even try to blame my right hon. and learned Friend the Member for Monklands, East. They say that there is a fault line. Indeed there is a fault line in British politics, and it starts in No. 10 Downing street, passes through No. 11 Downing street, takes in every Government Department, and leads inexorably to Conservative central office.
  The Government did not stay the course; they did not honour their promises. They did not yield the economic miracle. They have lost all claim to economic competence and credibility.
  The Conservative party ran a general election campaign on the slogan "You can't trust Labour" and has shown itself completely unworthy of trust itself. The party that already for years has been the party of unemployment and of poverty is now the party of devaluation; the party which has abandoned the British economy with one hand to the speculators and with the other hand to our competitors so that even the pound is no longer safe in its hands. Ministers who continue to hold responsibilities now cannot command respect. They may hold office for five years, but even after five months they have lost all authority to govern. They have failed the country and they will never be trusted again.
  9.30 pm
  The Chancellor of the Exchequer (Mr. Norman Lamont): First, I congratulate the hon. Member for Dunfermline, East (Mr. Brown) on taking up his position as shadow Chancellor. I look forward to debating with him on many occasions in the future.
  Parliament has been recalled to discuss the events of the past fortnight. Provided that I can be given a hearing, I want to answer the questions that the hon. Gentleman has asked. I want to describe the background to our decision to leave the ERM and I want to describe how policy will operate in the new environment. Before I do that, it is important to remind ourselves why my noble Friend Baroness Thatcher and my right hon. Friend the Prime Minister took us into the ERM in the first place.
  In the 1980s, we brought inflation dramatically down from the catastrophic levels that had prevailed in the 1970s, but that progress was not consolidated. It was not just the Government who were keen to join the ERM; business was particularly attracted because of three advantages that it had seen the ERM bring its competitors in the 1980s—greater exchange rate stability in what had become our major trading zone, the chance to get interest rates down to levels more in line with those faced by our competitors, and, most important, its strong anti-inflationary framework and proven track record.
  The ERM had demonstrated that it could deliver lower inflation. It had existed since 1979 and it had delivered for countries such as Holland and France that had not
  102
  enjoyed low inflation in the past. Even my noble Friend Baroness Thatcher was convinced, at least for a day. There appeared at that time to be a consensus in favour.
  Of course, the right hon. and learned Member for Monklands, East (Mr. Smith) was an early supporter of the ERM, whether because he understood it or because he simply wanted to make some difference between his policy and that of the Government of the day who can say. I cannot, and he probably cannot himself.
  ERM membership brought considerable benefits to the United Kingdom and nowhere is that more evident than our inflation record. Inflation fell from 11 per cent. in the autumn of 1990 to nearer 3.5 per cent. last month. For the last year, United Kingdom inflation has been below the European average. In sum, we took sterling into the ERM because it was right for Britain, and for almost two years it worked.
  But whatever the successes of the ERM in the past, it is clear that in recent weeks it has been under enormous strain. That has arisen because of two unique events. The first was the French referendum which gave the foreign exchange markets something that they had never experienced before—a fixed and definite date against which they could speculate. As the weekend approached, the market became ever more convinced that Sunday would bring with it a major currency realignment. A circumstance more conducive to market instability is difficult to imagine in a market where daily turnover is not, as someone suggested, $1 billion but $1 trillion—a million million dollars.
  The more fundamental underlying cause, as some of my hon. Friends said, was the far-reaching consequences of German reunification and the conflict that that engendered between German policy needs and those of most other countries. Reunification has meant higher German interest rates than many countries need to control their inflation. That is not a criticism of Germany but merely a statement of fact.
  A further consequence of the position in Germany—as my hon. Friend the Member for East Lindsey (Sir P.Tapsell) said—is that the generally high level of European interest rates led to a considerable appreciation of all European currencies against the dollar. That was quite unrelated to fundamentals, and further intensified recession and deflation in Europe. Until last Monday's cut, as my hon. Friend the Member for East Lindsey also said, German interest rates were at a post-war high. At the same time, American interest rates remained at a 30-year low. That is clearly neither a normal nor a sustainable state of affairs.
  That unique set of circumstances not only affected Britain but set off a chain reaction across Europe, starting in the Scandinavian countries. Finland was forced to abandon its link to the ERM, then Sweden was compelled to raise interest rates three times to astonishing levels—75 per cent., 500 per cent., and 700 per cent.—in an increasingly desperate attempt to cling to its ERM link.
  Italy was forced to raise interest rates, then to devalue, and finally to leave the system altogether. Contrary to its stated actions, Spain had to devalue and then to reimpose exchange controls. In every case, Finance Ministers found themselves taking the very actions which they hoped to avoid and which they once publicly set themselves against.

  103
  Still the storm has not subsided. Only yesterday France had to raise interest rates to 13 per cent., which is the last thing that the French economy, with 3 million unemployed, needs at this moment.
  Mr. Nigel Griffiths: The Chancellor implied that other Finance Ministers hoped to avoid those strategies. There was no mention of hope when the right hon. Gentleman spoke on the steps of the Treasury, when he said for definite that he would not leave the ERM. He said for definite also that he would not devalue—and he has. Who can trust what he says tonight?
  Mr. Lamont: I am sorry that I gave way to the hon. Gentleman, but I will deal with his point later.
  We always knew that the period leading to the French referendum would be difficult, and we drew up careful plans to protect sterling's position. We took steps to strengthen our foreign exchange resources—an operation which, contrary to the remarks of the Leader of the Opposition, was widely commended in the markets at the time and which led to a significant strengthening of sterling.
  In conjunction with our European Community partners, including France, I repeatedly pressed the German authorities on a number of occasions not to go against their own policy in Germany but to ease tensions in the ERM by reducing interest rates. That eventually led to what was admittedly a small cut in German interest rates the weekend before last. The initial impact was helpful. At the beginning of last week, the markets seemed to think that sterling might get through the week without further trouble. Unfortunately, at that critical moment the markets were thrown into renewed turmoil by remarks about the need for sterling devaluation attributed to the president of the Bundesbank, Dr. Schlesinger. Those remarks were never convincingly denied, and they triggered the final, irresistible assault on sterling.
  The very next day, the markets opened with sterling right at the bottom of its ERM bands. The House will appreciate that, under the terms of ERM membership, when a currency reaches its floor the country in question is obliged to buy back unlimited amounts of its own currency at that parity. For a currency as widely traded as sterling, that meant that our position became extremely serious. I responded at once by raising interest rates. I raised them again that afternoon. After consulting my right hon. Friend the Prime Minister and senior colleagues, I concluded that Britain's best interests demanded its immediate suspension from the ERM.
  I have read much about those events and I have listened to what people have said and to what has been said in today's debate. I can only say that, after all that, on the matter of the events of last week and the week before, I have not heard of anything that might have been done or handled differently that would have produced a different outcome.
  Many Opposition Members advocated a concerted interest rate reduction across Europe. That is precisely what I, the French and the Italians sought to achieve, but it could never come about without a significant cut in German interest rates and that was not forthcoming. The right hon. and learned Member for Monklands, East made the accusation this afternoon that the Government could
  104
  have avoided the suspension of sterling from the ERM if only we had sought a general realignment of European currencies. I think that that is what he said—
  Mr. John Smith indicated assent.
  Mr. Lamont: The right hon. and learned Gentleman confirms that. What did he mean? Realignment covers a multitude of sins. At one end of the spectrum there is a unilateral upward revaluation of the deutschmark. He says that he is against devaluation, but I must tell him that a unilateral deutschmark revaluation was simply never available. The Germans never sought it, and while the French, the Dutch and others were not prepared to devalue against the deutschmark, the option that he claimed as his solution did not exist. The only option on the table was a sterling devaluation, perhaps in combination with the Italian lira.
  I can hardly believe that the right hon. and learned Gentleman had the cheek to suggest that the way to have avoided a sterling depreciation last Thursday would have been to devalue on Sunday. His suggestion was not only naive; it was extraordinary. He said that it was the obvious solution, but it was not so obvious to his hon. Friend the Member for Dunfermline, East. Just two days before the lira was devalued, he wrote in The Guardian:
  "Our policy is not one of devaluation, nor is it one of revaluation or re-alignment … One of the things the Germans may wish to propose is whether a re-alignment of the currencies will bring interest rates down. There is no guarantee that that would happen and it is not our policy."
  There seems to be some difference between the hon. Gentleman and the right hon. and learned Gentleman. So much for his case—his remedy to cure the problem was expressly rejected by his shadow Chancellor.
  The hon. Member for Dunfermline, East and the right hon. and learned Gentleman made much of what I said in my speech about devaluation about being opposed to devaluation and of my right hon. Friend the Prime Minister's speech to the Scottish CBI. At the time that I made my statements the strains were beginning to appear in the ERM. There was repeated speculation in the press and in the markets that the Government were not wholly committed to the existing parities. My right hon. Friend the Prime Minister and I repeatedly rejected the idea of a devaluation or a withdrawal from the ERM. I believe that we were right to do so. As long as there was the chance to keep sterling in the ERM, I had to reaffirm the agreed policy of the Government, and in the strongest possible terms. To have expressed myself ambiguously or less strongly would have exacerbated the pressures that were building up.
  I implemented every measure that I could to defend sterling's position. I backed my words with action and so did my Finance Minister colleagues around Europe, but we faced a unique and ultimately irresistible set of circumstances. History might have been different had we not been subjected to a constant stream of half-leaks and rumours emanating from certain sources. The days immediately prior to the referendum required extraordinarily sensitive handling and for the authorities to take great care in their public statements. That is not what happened and that is a matter for the profoundest regret.
  Mr. Beith: Why, then, despite all these efforts, did the markets expect that it would be sterling—not the franc or, of course, the deutschmark, or the Belgians, or the Dutch —that would be vulnerable?
  Mr. Lamont: The remarks by the president of the Bundesbank were specifically directed to sterling. I do not want to do a Dr. Schlesinger on the French franc, but it is perfectly apparent from reading newspapers that there is quite a lot of pressure on that currency.
  My right hon. Friend the Prime Minister and I have made it clear that a number of important conditions need to be fulfilled before Britain could rejoin the ERM. First, there can be no question of resuming our membership until the current tensions within the foreign exchange markets have subsided. Secondly, I have made it clear to our European partners that we need to have a proper review of the whole way in which the ERM works, the intervention rules, the co-operation procedures and the obligations that it places upon the those currencies at the top and the bottom of the exchange rate mechanism bands. Thirdly, and most fundamentally, as I have already made clear, the root cause of the current turbulence has been the unique event of German reunification. My preference would have been to stay in the system and to see through the problems that this posed, but now that we have left I do not believe that it would be right for me to recommend that sterling should re-enter the ERM unless and until the German economy and ours are more in step and unless and until the Germans are in a position to bring their interest rates down to levels which are more compatible with sustained, non-inflationary growth.
  Dr. John Reid: Does the Chancellor not recognise that when he listed the culpable persons, none of whom is, apparently, in the British Government, who were responsible for devaluation, it amounted to a staggering confession of the vulnerability of the British pound? People will ask why, when there are problems over uniting east and west Germany, it is the pound that is hit, why, when the French go to vote, it is the pound that is hit, why, when the German Bundesbank, or members associated with it, give leaks, it is the pound that is hit. How does the Chancellor intend to insulate himself from those developments in Europe, apart from shadowing the rouble?
  Mr. Lamont: One quick answer to the hon. Gentleman is that sterling is, of course, a currency which is traded five time as widely as most of the other ERM currencies.
  The decision to take the pound out of the ERM was a setback, but it does not and will not make any difference to our determination to bring inflation down to the lowest levels in Europe. Although this was not the outcome I sought, the events of last week have, in some ways, presented us with an opportunity. As a result of the strains I have described, we have over the past months been forced to pursue a policy that was tighter than was required in order to get inflation down in Britain. The Government were prepared to accept that while sterling remained within the ERM, because of the long-term gains that we wanted to get from low inflation, but now that sterling is floating I have been able to take advantage of the greater discretion we now have to make what is a prudent reduction in interest rates and which is wholly appropriate to Britain's own domestic situation.
  I know that the 1 per cent. cut that I announced on Tuesday was welcomed by businesses and those with mortgages. It means that British interest rates are now among the lowest in the European Community, but I must emphasise to my hon. Friends that I have been able to
  106
  make this move only because of the remarkable success we have had over the last two years in reducing inflation. I would have no hesitation in putting up interest rates again if I thought that our inflation objectives were in jeopardy.
  I want to make one thing crystal clear. No one should fool themselves that a floating exchange rate regime is a soft or easy option. I do not believe in a weak currency; I do not believe in devaluation; but we will have a British monetary policy tailored to the needs of the British economy. I will not throw away the gains on inflation that we have made over the last two years.
  We cannot allow Britain to become an island of high inflation, drifting away from a European zone of price stability. In the early 1980s we showed with a floating regime that it was possible to reduce inflation, as we did from over 20 per cent. to under 5 per cent., while the pound floated. I am determined that we shall achieve that success again.
  In setting interest rates over the period ahead I shall be guided by a range of indicators. We shall maintain our current target of 0 to 4 per cent. for narrow money. We shall also follow broad money, and asset prices as well as the exchange rate itself. The hon. Member for Dunfermline, East seems to be astonished that one cannot set interest rates without taking the exchange rate into account. It has nothing to do with targets. It must be taken into account because it is part of the tightness or looseness of monetary policy in the economy, and we shall take account of exchange rates in setting interest rates. We shall also continue with our policy of fully funding the PSBR.
  I shall shortly set out in more detail in another speech the precise, more detailed monetary framework that we shall follow. Monetary policy will continue, as before, to be supported by our tight fiscal stance. In this new situation it is all the more important for the Government to stick rigorously to our public spending objectives. The strictest control of public expenditure, including public sector pay, is at the top of my policy agenda. Without tight control of public expenditure, interest rate reductions, such as the one that I announced this week, would not be possible. Rapid growth in Government spending would require high interest rates to finance it and to restrain inflation, and that is the greatest divide between Conservatives and the Labour party.
  Neither in the election campaign nor since have the Opposition been able to control their addiction to spending, and that means that they would never have had a hope of cutting interest rates this week or at any stage in the future. Their attitude is to parrot calls for lower interest rates, and they want spending programmes that would send inflation sky high. Let no one be in any doubt: only tight restraint on public spending can assure us of low inflation and low interest rates and only this Government are able and willing to deliver that.
  Mr. John Battle: Will the Chancellor confirm that, despite a promise a mere five months ago that the Government would commit money to housing and housing associations, money for housing is to be reduced in the present round of cuts by £2 billion? How is that holding to his promises? Is not he reneging on them?
  Mr. Lamont: We have recently vastly increased resources to the Housing Corporation.
  Mr. Gordon Brown: During the election campaign the Chancellor said that he would hold to all the public

  107
  spending figures in the various statements, and that was confirmed by the Prime Minister. Can he give an absolute undertaking that that is still the Government's policy?
  Mr. Lamont: I have announced the remit for public spending and we are sticking to our published plans for next year. That is crystal clear.
  Mr. Gordon Brown rose—
  Mr. Lamont: No, I must get on.
  I fully understand the difficulties faced by many businesses and families. The Leader of the Opposition said that since the election every economic indicator had declined. Does he not know that manufacturing output increased in both the first and second quarters of this year? Has his hon. Friend the Member for Dunfermline, East, who, no doubt, has to advise him nowadays, not told him that retail sales rose in the second quarter and continued to rise in the latest three months to the highest level for almost two years? Has the right hon. and learned Gentleman not been told that in the second quarter manufacturing investment rose by over 3 per cent. and that business investment was up in the first and second quarters of this year? Most of all, he did not seem to be aware that, in the quarter following the election, non-oil GDP actually rose. Every one of those developments is good news, but, of course, we could not expect to hear about them from the Opposition.
  The reaction of the hon. Member for Dunfermline, East to the cut in interest rates to 9 per cent. broke all records for gall. He appeared on television and criticised me for changing interest rates five times in four days. What on earth does he mean? Since he supports the ERM, was it wrong to increase interest rates to defend the ERM? What did he mean by saying that he is committed to the ERM? Would he have caved in at the first sign of trouble or would he have increased rates just once and then caved in? Is he saying that once we had left the ERM it made sense to keep interest rates at 15 per cent? Surely he could have welcomed the reduction in interest rates to 9 per cent.—the lowest level since the summer of 1988.
  Only last week, as soon as the Bundesbank announced that German rates would be reduced, the hon. Member for Dunfermline, East was jumping up and down like a dervish, as he seems to be doing now. Even before hearing by how much German rates would be reduced, he rushed to the nearest television studio and called on me to slash interest rates. I received a lot of advice last week, but that was undoubtedly the dumbest that I received.
  The hon. Gentleman's position on interest rates lacks any credibility. He spent his first few weeks as shadow Chancellor calling on me to maintain our position on the ERM but to slash interest rates at the same time. As the right hon. Member for Bethnal Green and Stepney (Mr. Shore) wrote in the Evening Standard:
  "I do not reveal any new economic law when I say that this is simplynonsense."
  The Leader of the Opposition and the hon. Member for Dunfermline, East have tried to maintain that what happened on the foreign exchange markets had something to do with the fundamentals of the British economy, but Britain has a lower rate of inflation than the Community average, has one of the lowest debt-to-GDP ratios in Europe and few European countries have a stronger
  108
  underlying financial position. Are they seriously saying that what the markets are doing to the French franc is due to fundamentals? Do they think that the 13 per cent. interest rate dictated by the French markets is what the French economy fundamentally requires? Is that their view of markets?
  Fortunately, the hon. Member for Dagenham (Mr. Gould) knows better. Only last week he said in The Guardian:
  "It is misleading to say that it is the recession which caused the problem of the pound."
  If he were here, perhaps the hon. Gentleman could explain that to the Leader of the Opposition.
  The hon. Member for Dunfermline, East talks about the need for a long-term strategy for the British economy. We know that his idea of a long-term plan is thinking up tomorrow's soundbite a week in advance.
  Mr. Gordon Brown: The Chancellor's case this evening is that there has been no alternative. Will he answer directly and specifically one question that I put to him: was a realignment discussed?
  Mr. Lamont: I have answered that question. I have said that a unilateral German—[Interruption.] That is what the word realignment means. The hon. Member for Dunfermline, East shows that he does not know what he is talking about. I cannot disclose confidential discussions. [HON. MEMBERS: "Ah".] The hon. Gentleman is asking me to disclose the position of other countries whose currencies would be affected by that, which shows how little he understands.
  Sound money, free enterprise, light regulation and less government are the principles on which we fought the election. Nothing that has happened in recent days changes our commitment to those objectives or the fact that we are the only party that bases its policies on them. We will continue with those policies, which have brought record living standards to this country, the reform of industrial relations, the privatisation programme, which has returned two thirds of nationalised industries to the private sector, and the reform of company taxation, which has given this country the lowest level of corporation tax in the European Community.
  Whatever the difficulties of the past week, our determination to achieve our goals remains unshakeable. We have set them for ourselves, we will stick to them, and I ask my right hon. and hon. Friends to support them.
  Question put, That the amendment be made:—
  The House divided: Ayes 288, Noes 330.

  Division No. 72]

  [10 pm

  AYES

  Abbott, Ms Diane

  Beckett, Margaret

  Adams, Mrs Irene

  Beith, Rt Hon A. J.

  Ainger, Nick

  Bell, Stuart

  Ainsworth, Robert (Cov'try NE)

  Benn, Rt Hon Tony

  Allen, Graham

  Bennett, Andrew F.

  Alton, David

  Benton, Joe

  Anderson, Donald (Swansea E)

  Bermingham, Gerald

  Anderson, Ms Janet (Ros'dale)

  Berry, Dr. Roger

  Armstrong, Hilary

  Betts, Clive

  Ashdown, Rt Hon Paddy

  Blair, Tony

  Ashton, Joe

  Blunkett, David

  Austin-Walker, John

  Boateng, Paul

  Banks, Tony (Newham NW)

  Boyce, Jimmy

  Barnes, Harry

  Boyes, Roland

  Barron, Kevin

  Bradley, Keith

  Battle, John

  Bray, Dr Jeremy

  Bayley, Hugh

  Brown, Gordon (Dunfermline E)

  109

  Brown, N. (N'c'tle upon Tyne E)

  Griffiths, Win (Bridgend)

  Bruce, Malcolm (Gordon)

  Grocott, Bruce

  Burden, Richard

  Gunnell, John

  Byers, Stephen

  Hain, Peter

  Caborn, Richard

  Hall, Mike

  Campbell, Mrs Anne (C'bridge)

  Hanson, David

  Campbell, Menzies (Fife NE)

  Hardy, Peter

  Campbell, Ronald (Blyth V)

  Harman, Ms Harriet

  Campbell-Savours, D. N.

  Harvey, Nick

  Canavan, Dennis

  Hattersley, Rt Hon Roy

  Cann, Jamie

  Henderson, Doug

  Carlile, Alexander (Montgomry)

  Hendron, Dr Joe

  Chisholm, Malcolm

  Heppell, John

  Clapham, Michael

  Hill, Keith (Streatham)

  Clark, Dr David (South Shields)

  Hinchliffe, David

  Clarke, Eric (Midlothian)

  Hoey, Kate

  Clarke, Tom (Monklands W)

  Hogg, Norman (Cumbernauld)

  Clelland, David

  Home Robertson, John

  Clwyd, Mrs Ann

  Hood, Jimmy

  Coffey, Ann

  Hoon, Geoffrey

  Cohen, Harry

  Howarth, George (Knowsley N)

  Connarty, Michael

  Howells, Dr. Kim (Pontypridd)

  Cook, Frank (Stockton N)

  Hoyle, Doug

  Cook, Robin (Livingston)

  Hughes, Kevin (Doncaster N)

  Corbett, Robin

  Hughes, Robert (Aberdeen N)

  Corbyn, Jeremy

  Hughes, Roy (Newport E)

  Corston, Ms Jean

  Hughes, Simon (Southwark)

  Cousins, Jim

  Hume, John

  Cox, Tom

  Hutton, John

  Cryer, Bob

  Illsley, Eric

  Cummings, John

  Ingram, Adam

  Cunliffe, Lawrence

  Jackson, Glenda (H'stead)

  Cunningham, Jim (Covy SE)

  Jackson, Helen (Shef'ld, H)

  Cunningham, Dr John (C'p'l'nd)

  Jamieson, David

  Dafis, Cynog

  Janner, Greville

  Dalyell, Tam

  Johnston, Sir Russell

  Darling, Alistair

  Jones, Barry (Alyn and D' side)

  Davidson, Ian

  Jones, leuan Wyn (Ynys Môn)

  Davies, Bryan (Oldham C'tral)

  Jones, Jon Owen (Cardiff C)

  Davies, Rt Hon Denzil (Llanelli)

  Jones, Lynne (B'ham S O)

  Davies, Ron (Caerphilly)

  Jones, Martyn (Clwyd, SW)

  Davis, Terry (B'ham, H'dge H'l)

  Jones, Nigel (Cheltenham)

  Denham, John

  Jowell, Tessa

  Dewar, Donald

  Kaufman, Rt Hon Gerald

  Dixon, Don

  Keen, Alan

  Dobson, Frank

  Kennedy, Charles (Ross, C&S)

  Donohoe, Brian H.

  Kennedy, Jane (Lpool Brdgn)

  Dowd, Jim

  Khabra, Piara S.

  Dunnachie, Jimmy

  Kilfoyle, Peter

  Eagle, Ms Angela

  Kinnock, Rt Hon Neil (Islwyn)

  Eastham, Ken

  Kirkwood, Archy

  Enright, Derek

  Leighton, Ron

  Etherington, Bill

  Lestor, Joan (Eccles)

  Evans, John (St Helens N)

  Lewis, Terry

  Ewing, Mrs Margaret

  Litherland, Robert

  Fatchett, Derek

  Livingstone, Ken

  Faulds, Andrew

  Lloyd, Tony (Stretford)

  Field, Frank (Birkenhead)

  Llwyd, Elfyn

  Fisher, Mark

  Loyden, Eddie

  Flynn, Paul

  McAllion, John

  Foster, Derek (B'p Auckland)

  McCartney, Ian

  Foster, Don (Bath)

  Macdonald, Calum

  Foulkes, George

  McFall, John

  Fraser, John

  McGrady, Eddie

  Fyfe, Maria

  McKelvey, William

  Galbraith, Sam

  Mackinlay, Andrew

  Galloway, George

  McMaster, Gordon

  Gapes, Mike

  McNamara, Kevin

  Garrett, John

  McWilliam, John

  George, Bruce

  Madden, Max

  Gerrard, Neil

  Mahon, Alice

  Gilbert, Rt Hon Dr John

  Mallon, Seamus

  Godman, Dr Norman A.

  Mandelson, Peter

  Godsiff, Roger

  Marek, Dr John

  Golding, Mrs Llin

  Marshall, David (Shettleston)

  Gordon, Mildred

  Marshall, Jim (Leicester, S)

  Gould, Bryan

  Martin, Michael J. (Springburn)

  Graham, Thomas

  Martlew, Eric

  Grant, Bernie (Tottenham)

  Maxton, John

  Griffiths, Nigel (Edinburgh S)

  Meacher, Michael

  110

  Meale, Alan

  Sheerman, Barry

  Michael, Alun

  Sheldon, Rt Hon Robert

  Michie, Bill (Sheffield Heeley)

  Shore, Rt Hon Peter

  Milburn, Alan

  Short, Clare

  Miller, Andrew

  Simpson, Alan

  Mitchell, Austin (Gt Grimsby)

  Skinner, Dennis

  Moonie, Dr Lewis

  Smith, Andrew (Oxford E)

  Morgan, Rhodri

  Smith, C. (Isl'ton S & F'sbury)

  Morley, Elliot

  Smith, Rt Hon John (M'kl'ds E)

  Morris, Rt Hon A. (Wy'nshawe)

  Smith, Llew (Blaenau Gwent)

  Morris, Estelle (B'ham Yardley)

  Snape, Peter

  Morris, Rt Hon J. (Aberavon)

  Soley, Clive

  Mowlam, Marjorie

  Spearing, Nigel

  Mudie, George

  Spellar, John

  Murphy, Paul

  Squire, Rachel (Dunfermline W)

  O'Brien, Michael (N W'kshire)

  Steinberg, Gerry

  O'Brien, William (Normanton)

  Stevenson, George

  O'Hara, Edward

  Stott, Roger

  Olner, William

  Strang, Dr. Gavin

  O'Neill, Martin

  Straw, Jack

  Orme, Rt Hon Stanley

  Taylor, Mrs Ann (Dewsbury)

  Parry, Robert

  Taylor, Matthew (Truro)

  Patchett, Terry

  Thompson, Jack (Wansbeck)

  Pendry, Tom

  Tipping, Paddy

  Pickthall, Colin

  Turner, Dennis

  Pike, Peter L.

  Tyler, Paul

  Pope, Greg

  Vaz, Keith

  Prentice, Ms Bridget (Lew'm E)

  Walker, Rt Hon Sir Harold

  Prentice, Gordon (Pendle)

  Wallace, James

  Prescott, John

  Walley, Joan

  Primarolo, Dawn

  Wardell, Gareth (Gower)

  Purchase, Ken

  Wareing, Robert N

  Quin, Ms Joyce

  Watson, Mike

  Radice, Giles

  Welsh, Andrew

  Randall, Stuart

  Wicks, Malcolm

  Raynsford, Nick

  Wigley, Dafydd

  Redmond, Martin

  Williams, Rt Hon Alan (Sw'n W)

  Reid, Dr John

  Williams, Alan W (Carmarthen)

  Robertson, George (Hamilton)

  Wilson, Brian

  Robinson, Geoffrey (Co'try NW)

  Winnick, David

  Roche, Ms Barbara

  Wise, Audrey

  Rogers, Allan

  Worthington, Tony

  Rooker, Jeff

  Wray, Jimmy

  Rooney, Terry

  Wright, Dr Tony

  Ross, Ernie (Dundee W)

  Young, David (Bolton SE)

  Rowlands, Ted

  Ruddock, Joan

  Tellers for the Ayes:

  Salmond, Alex

  Mr. Ray Powell and

  Sedgemore, Brian

  Mr. Thomas McAvoy.

  NOES

  Adley, Robert

  Booth, Hartley

  Ainsworth, Peter (East Surrey)

  Boswell, Tim

  Aitken, Jonathan

  Bottomley, Peter (Eltham)

  Alexander, Richard

  Bottomley, Rt Hon Virginia

  Alison, Rt Hon Michael (Selby)

  Bowden, Andrew

  Allason, Rupert (Torbay)

  Boyson, Rt Hon Sir Rhodes

  Amess, David

  Brandreth, Gyles

  Ancram, Michael

  Brazier, Julian

  Arbuthnot, James

  Bright, Graham

  Arnold, Jacques (Gravesham)

  Brooke, Rt Hon Peter

  Arnold, Sir Thomas (Hazel Grv)

  Brown, M. (Brigg & Cl'thorpes)

  Ashby, David

  Browning, Mrs. Angela

  Aspinwall, Jack

  Bruce, Ian (S Dorset)

  Atkins, Robert

  Budgen, Nicholas

  Atkinson, David (Bour'mouth E)

  Burns, Simon

  Atkinson, Peter (Hexham)

  Burt, Alistair

  Baker, Rt Hon K, (Mole Valley)

  Butcher, John

  Baldry, Tony

  Butler, Peter

  Banks, Matthew (Southport)

  Butterfill, John

  Banks, Robert (Harrogate)

  Carlisle, John (Luton North)

  Bates, Michael

  Carlisle, Kenneth (Lincoln)

  Batiste, Spencer

  Carrington, Matthew

  Bellingham, Henry

  Carttiss, Michael

  Bendall, Vivian

  Cash, William

  Beresford, Sir Paul

  Channon, Rt Hon Paul

  Biffen, Rt Hon John

  Chaplin, Mrs Judith

  Blackburn, Dr John G.

  Chapman, Sydney

  Body, Sir Richard

  Churchill, Mr

  Bonsor, Sir Nicholas

  Clappison, James

  111

  Clark, Dr Michael (Rochford)

  Haselhurst, Alan

  Clarke, Rt Hon Kenneth (Ruclif)

  Hawkins, Nick

  Clifton-Brown, Geoffrey

  Hawksley, Warren

  Coe, Sebastian

  Hayes, Jerry

  Colvin, Michael

  Heald, Oliver

  Congdon, David

  Heath, Rt Hon Sir Edward

  Conway, Derek

  Heathcoat-Amory, David

  Coombs, Anthony (Wyre For'st)

  Hendry, Charles

  Coombs, Simon (Swindon)

  Heseltine, Rt Hon Michael

  Cope, Rt Hon Sir John

  Hicks, Robert

  Cormack, Patrick

  Higgins, Rt Hon Terence L.

  Couchman, James

  Hill, James (Southampton Test)

  Cran, James

  Hogg, Rt Hon Douglas (G'tham)

  Critchley, Julian

  Horam, John

  Currie, Mrs Edwina (S D'by'ire)

  Hordern, Sir Peter

  Curry, David (Skipton & Ripon)

  Howard, Rt Hon Michael

  Davies, Quentin (Stamford)

  Howarth, Alan (Strat'rd-on-A)

  Davis, David (Boothferry)

  Howell, Rt Hon David (G'dford)

  Day, Stephen

  Howell, Ralph (North Norfolk)

  Deva, Nirj Joseph

  Hughes Robert G. (Harrow W)

  Devlin, Tim

  Hunt, Rt Hon David (Wirral W)

  Dickens, Geoffrey

  Hunt, Sir John (Ravensbourne)

  Dicks, Terry

  Hunter, Andrew

  Dorrell, Stephen

  Hurd, Rt Hon Douglas

  Douglas-Hamilton, Lord James

  Jack, Michael

  Dover, Den

  Jackson, Robert (Wantage)

  Duncan, Alan

  Jenkin, Bernard

  Duncan-Smith, Iain

  Jessel, Toby

  Dunn, Bob

  Johnson Smith, Sir Geoffrey

  Durant, Sir Anthony

  Jones, Gwilym (Cardiff N)

  Dykes, Hugh

  Jones, Robert B. (W Hertfdshr)

  Eggar, Tim

  Jopling, Rt Hon Michael

  Elletson, Harold

  Kellett-Bowman, Dame Elaine

  Emery, Sir Peter

  Key, Robert

  Evans, David (Welwyn Hatfield)

  Kilfedder, Sir James

  Evans, Jonathan (Brecon)

  King, Rt Hon Tom

  Evans, Nigel (Ribble Valley)

  Kirkhope, Timothy

  Evans, Roger (Monmouth)

  Knapman, Roger

  Evennett, David

  Knight, Mrs Angela (Erewash)

  Faber, David

  Knight, Greg (Derby N)

  Fabricant, Michael

  Knight, Dame Jill (Bir'm E'st'n)

  Fairbairn, Sir Nicholas

  Knox, David

  Fenner, Dame Peggy

  Kynoch, George (Kincardine)

  Field, Barry (Isle of Wight)

  Lait, Mrs Jacqui

  Fishburn, Dudley

  Lamont, Rt Hon Norman

  Forman, Nigel

  Lang, Rt Hon Ian

  Forsyth, Michael (Stirling)

  Lawrence, Sir Ivan

  Forth, Eric

  Legg, Barry

  Fowler, Rt Hon Sir Norman

  Leigh, Edward

  Fox, Dr Liam (Woodspring)

  Lennox-Boyd, Mark

  Fox, Sir Marcus (Shipley)

  Lester, Jim (Broxtowe)

  Freeman, Roger

  Lidington, David

  French, Douglas

  Lilley, Rt Hon Peter

  Fry, Peter

  Lloyd, Peter (Fareham)

  Gale, Roger

  Lord, Michael

  Gallie, Phil

  Luff, Peter

  Gardiner, Sir George

  Lyell, Rt Hon Sir Nicholas

  Garel-Jones, Rt Hon Tristan

  MacGregor, Rt Hon John

  Garnier, Edward

  MacKay, Andrew

  Gill, Christopher

  Maclean, David

  Gillan, Cheryl

  McLoughlin, Patrick

  Goodlad, Rt Hon Alastair

  McNair-Wilson, Sir Patrick

  Goodson-Wickes, Dr Charles

  Madel, David

  Gorman, Mrs Teresa

  Maitland, Lady Olga

  Gorst, John

  Major, Rt Hon John

  Grant, Sir Anthony (Cambs SW)

  Malone, Gerald

  Greenway, Harry (Ealing N)

  Mans, Keith

  Greenway, John (Ryedale)

  Marland, Paul

  Griffiths, Peter (Portsmouth, N)

  Marlow, Tony

  Grylls, Sir Michael

  Marshall, John (Hendon S)

  Gummer, Rt Hon John Selwyn

  Marshall, Sir Michael (Arundel)

  Hague, William

  Martin, David (Portsmouth S)

  Hamilton, Rt Hon Archie (Epsom-Ewell)

  Mates, Michael

  Mawhinney, Dr Brian

  Hamilton, Neil (Tatton)

  Mayhew, Rt Hon Sir Patrick

  Hampson, Dr Keith

  Mellor, Rt Hon David

  Hanley, Jeremy

  Merchant, Piers

  Hannam, Sir John

  Milligan, Stephen

  Hargreaves, Andrew

  Mills, Iain

  Harris, David

  Mitchell, Andrew (Gedling)

  112

  Mitchell, Sir David (Hants NW)

  Spink, Dr Robert

  Moate, Roger

  Spring, Richard

  Montgomery, Sir Fergus

  Sproat, Iain

  Moss, Malcolm

  Squire, Robin (Hornchurch)

  Needham, Richard

  Stanley, Rt Hon Sir John

  Nelson, Anthony

  Steen, Anthony

  Neubert, Sir Michael

  Stephen, Michael

  Newton, Rt Hon Tony

  Stern, Michael

  Nicholls, Patrick

  Stewart, Allan

  Nicholson, David (Taunton)

  Streeter, Gary

  Nicholson, Emma (Devon West)

  Sumberg, David

  Norris, Steve

  Sweeney, Walter

  Onslow, Rt Hon Cranley

  Sykes, John

  Oppenheim, Phillip

  Tapsell, Sir Peter

  Ottaway, Richard

  Taylor, Ian (Esher)

  Page, Richard

  Taylor, John M. (Solihull)

  Paice, James

  Taylor, Sir Teddy (Southend, E)

  Patnick, Irvine

  Temple-Morris, Peter

  Patten, Rt Hon John

  Thomason, Roy

  Pattie, Rt Hon Sir Geoffrey

  Thompson, Patrick (Norwich N)

  Pawsey, James

  Thornton, Sir Malcolm

  Peacock, Mrs Elizabeth

  Thurnham, Peter

  Pickles, Eric

  Townend, John (Bridlington)

  Porter, Barry (Wirral S)

  Townsend, Cyril D. (Bexl'yh'th)

  Porter, David (Waveney)

  Tracey, Richard

  Portillo, Rt Hon Michael

  Tredinnick, David

  Powell, William (Corby)

  Trend, Michael

  Rathbone, Tim

  Trotter, Neville

  Redwood, John

  Twinn, Dr Ian

  Renton, Rt Hon Tim

  Vaughan, Sir Gerard

  Richards, Rod

  Viggers, Peter

  Riddick, Graham

  Waldegrave, Rt Hon William

  Rifkind, Rt Hon. Malcolm

  Walden, George

  Robathan, Andrew

  Walker, Bill (N Tayside)

  Roberts, Rt Hon Sir Wyn

  Waller, Gary

  Robertson, Raymond (Ab'd'n S)

  Ward, John

  Robinson, Mark (Somerton)

  Wardle, Charles (Bexhill)

  Roe, Mrs Marion (Broxbourne)

  Waterson, Nigel

  Rowe, Andrew (Mid Kent)

  Watts, John

  Rumbold, Rt Hon Dame Angela

  Wells, Bowen

  Ryder, Rt Hon Richard

  Wheeler, Sir John

  Sackville, Tom

  Whitney, Ray

  Sainsbury, Rt Hon Tim

  Whittingdale, John

  Scott, Rt Hon Nicholas

  Widdecombe, Ann

  Shaw, David (Dover)

  Wiggin, Jerry

  Shaw, Sir Giles (Pudsey)

  Wilkinson, John

  Shephard, Rt Hon Gillian

  Willetts, David

  Shepherd, Colin (Hereford)

  Wilshire, David

  Shepherd, Richard (Aldridge)

  Winterton, Mrs Ann (Congleton)

  Shersby, Michael

  Winterton, Nicholas (Macc'f'ld)

  Sims, Roger

  Wolfson, Mark

  Skeet, Sir Trevor

  Wood, Timothy

  Smith, Sir Dudley (Warwick)

  Yeo, Tim

  Smith, Tim (Beaconsfield)

  Young, Sir George (Acton)

  Soames, Nicholas

  Speed, Sir Keith

  Tellers for the Noes

  Spencer, Sir Derek

  Mr. David Lightbown and

  Spicer, Sir James (W Dorset)

  Mr. Nicholas Baker

  Spicer, Michael (S Worcs)

  Question accordingly negatived.
  Main Question put:—
  The House divided: Ayes 322, Noes 296.

  Division No. 73]

  [10.15 pm

  AYES

  Adley, Robert

  Atkinson, David (Bour'mouth E)

  Ainsworth, Peter (East Surrey)

  Atkinson, Peter (Hexham)

  Aitken, Jonathan

  Baker, Rt Hon K. (Mole Valley)

  Alexander, Richard

  Baldry, Tony

  Alison, Rt Hon Michael (Selby)

  Banks, Matthew (Southport)

  Allason, Rupert (Torbay)

  Banks, Robert (Harrogate)

  Amess, David

  Bates, Michael

  Ancram, Michael

  Batiste, Spencer

  Arbuthnot, James

  Bellingham, Henry

  Arnold, Jacques (Gravesham)

  Bendall, Vivian

  Arnold, Sir Thomas (Hazel Grv)

  Beresford, Sir Paul

  Ashby, David

  Biffen, Rt Hon John

  Aspinwall, Jack

  Blackburn, Dr John G.

  Atkins, Robert

  Body, Sir Richard

  113

  Bonsor, Sir Nicholas

  Gale, Roger

  Booth, Hartley

  Gallie, Phil

  Boswell, Tim

  Gardiner, Sir George

  Bottomley, Peter (Eltham)

  Garel-Jones, Rt Hon Tristan

  Bottomley, Rt Hon Virginia

  Garnier, Edward

  Bowden, Andrew

  Gill, Christopher

  Boyson, Rt Hon Sir Rhodes

  Gillan, Cheryl

  Brandreth, Gyles

  Goodlad, Rt Hon Alastair

  Brazier, Julian

  Goodson-Wickes, Dr Charles

  Bright, Graham

  Gorst, John

  Brooke, Rt Hon Peter

  Grant, Sir Anthony (Cambs SW)

  Brown, M. (Brigg & Cl'thorpes)

  Greenway, Harry (Ealing N)

  Browning, Mrs. Angela

  Greenway, John (Ryedale)

  Bruce, Ian (S Dorset)

  Griffiths, Peter (Portsmouth, N)

  Burns, Simon

  Grylls, Sir Michael

  Burt, Alistair

  Gummer, Rt Hon John Selwyn

  Butcher, John

  Hague, William

  Butler, Peter

  Hamilton, Rt Hon Archie (Epsom-Ewell)

  Butterfill, John

  Carlisle, Kenneth (Lincoln)

  Hamilton, Neil (Tatton)

  Carrington, Matthew

  Hampson, Dr Keith

  Carttiss, Michael

  Hanley, Jeremy

  Channon, Rt Hon Paul

  Hannam, Sir John

  Chaplin, Mrs Judith

  Hargreaves, Andrew

  Churchill, Mr

  Harris, David

  Clappison, James

  Haselhurst, Alan

  Clark, Dr Michael (Rochford)

  Hawkins, Nick

  Clarke, Rt Hon Kenneth (Ruclif)

  Hawksley, Warren

  Clifton-Brown, Geoffrey

  Hayes, Jerry

  Coe, Sebastian

  Heald, Oliver

  Colvin, Michael

  Heath, Rt Hon Sir Edward

  Congdon, David

  Heathcoat-Amory, David

  Conway, Derek

  Hendry, Charles

  Coombs, Anthony (Wyre For'st)

  Heseltine, Rt Hon Michael

  Coombs, Simon (Swindon)

  Hicks, Robert

  Cope, Rt Hon Sir John

  Higgins, Rt Hon Terence L.

  Cormack, Patrick

  Hill, James (Southampton Test)

  Couchman, James

  Hogg, Rt Hon Douglas (G'tham)

  Cran, James

  Horam, John

  Critchley, Julian

  Hordern, Sir Peter

  Currie, Mrs Edwina (S D'by'ire)

  Howard, Rt Hon Michael

  Curry, David (Skipton & Ripon)

  Howarth, Alan (Strat'rd-on-A)

  Davies, Quentin (Stamford)

  Howell, Rt Hon David (G'dford)

  Davis, David (Boothferry)

  Howell, Ralph (North Norfolk)

  Day, Stephen

  Hughes Robert G. (Harrow W)

  Deva, Nirj Joseph

  Hunt, Rt Hon David (Wirral W)

  Devlin, Tim

  Hunt, Sir John (Ravensbourne)

  Dickens, Geoffrey

  Hunter, Andrew

  Dicks, Terry

  Hurd, Rt Hon Douglas

  Dorrell, Stephen

  Jack, Michael

  Douglas-Hamilton, Lord James

  Jackson, Robert (Wantage)

  Dover, Den

  Jenkin, Bernard

  Duncan, Alan

  Jessel, Toby

  Duncan-Smith, Iain

  Johnson Smith, Sir Geoffrey

  Dunn, Bob

  Jones, Gwilym (Cardiff N)

  Durant, Sir Anthony

  Jones, Robert B. (W Hertfdshr)

  Dykes, Hugh

  Jopling, Rt Hon Michael

  Eggar, Tim

  Kellett-Bowman, Dame Elaine

  Elletson, Harold

  Key, Robert

  Emery, Sir Peter

  Kilfedder, Sir James

  Evans, David (Welwyn Hatfield)

  King, Rt Hon Tom

  Evans, Jonathan (Brecon)

  Kirkhope, Timothy

  Evans, Nigel (Ribble Valley)

  Knapman, Roger

  Evans, Roger (Monmouth)

  Knight, Mrs Angela (Erewash)

  Evennett, David

  Knight, Greg (Derby N)

  Faber, David

  Knight, Dame Jill (Bir'm E'st'n)

  Fabricant, Michael

  Knox, David

  Fairbairn, Sir Nicholas

  Kynoch, George (Kincardine)

  Fenner, Dame Peggy

  Lait, Mrs Jacqui

  Field, Barry (Isle of Wight)

  Lamont, Rt Hon Norman

  Fishburn, Dudley

  Lang, Rt Hon Ian

  Forman, Nigel

  Lawrence, Sir Ivan

  Forsyth, Michael (Stirling)

  Legg, Barry

  Forth, Eric

  Leigh, Edward

  Fowler, Rt Hon Sir Norman

  Lennox-Boyd, Mark

  Fox, Dr Liam (Woodspring)

  Lester, Jim (Broxtowe)

  Fox, Sir Marcus (Shipley)

  Lidington, David

  Freeman, Roger

  Lightbown, David

  French, Douglas

  Lilley, Rt Hon Peter

  Fry, Peter

  Lloyd, Peter (Fareham)

  114

  Lord, Michael

  Shaw, David (Dover)

  Luff, Peter

  Shaw, Sir Giles (Pudsey)

  Lyell, Rt Hon Sir Nicholas

  Shephard, Rt Hon Gillian

  MacGregor, Rt Hon John

  Shepherd, Colin (Hereford)

  MacKay, Andrew

  Shersby, Michael

  Maclean, David

  Sims, Roger

  McLoughlin, Patrick

  Skeet, Sir Trevor

  McNair-Wilson, Sir Patrick

  Smith, Sir Dudley (Warwick)

  Madel, David

  Smith, Tim (Beaconsfield)

  Maitland, Lady Olga

  Soames, Nicholas

  Major, Rt Hon John

  Speed, Sir Keith

  Malone, Gerald

  Spencer, Sir Derek

  Mans, Keith

  Spicer, Sir James (W Dorset)

  Marland, Paul

  Spicer, Michael (S Worcs)

  Marlow, Tony

  Spink, Dr Robert

  Marshall, John (Hendon S)

  Spring, Richard

  Marshall, Sir Michael (Arundel)

  Sproat, Iain

  Martin, David (Portsmouth S)

  Squire, Robin (Hornchurch)

  Mates, Michael

  Stanley, Rt Hon Sir John

  Mawhinney, Dr Brian

  Steen, Anthony

  Mayhew, Rt Hon Sir Patrick

  Stephen, Michael

  Mellor, Rt Hon David

  Stern, Michael

  Merchant, Piers

  Stewart, Allan

  Milligan, Stephen

  Streeter, Gary

  Mills, Iain

  Sumberg, David

  Mitchell, Andrew (Gedling)

  Sweeney, Walter

  Mitchell, Sir David (Hants NW)

  Sykes, John

  Moate, Roger

  Tapsell, Sir Peter

  Montgomery, Sir Fergus

  Taylor, Ian (Esher)

  Moss, Malcolm

  Taylor, John M. (Solihull)

  Needham, Richard

  Temple-Morris, Peter

  Nelson, Anthony

  Thomason, Roy

  Neubert, Sir Michael

  Thompson, Patrick (Norwich N)

  Newton, Rt Hon Tony

  Thornton, Sir Malcolm

  Nicholls, Patrick

  Thurnham, Peter

  Nicholson, David (Taunton)

  Townend, John (Bridlington)

  Nicholson, Emma (Devon West)

  Townsend, Cyril D. (Bexl'yh'th)

  Norris, Steve

  Tracey, Richard

  Onslow, Rt Hon Cranley

  Tredinnick, David

  Oppenheim, Phillip

  Trend, Michael

  Ottaway, Richard

  Trotter, Neville

  Page, Richard

  Twinn, Dr Ian

  Paice, James

  Vaughan, Sir Gerard

  Patnick, Irvine

  Viggers, Peter

  Patten, Rt Hon John

  Waldegrave, Rt Hon William

  Pattie, Rt Hon Sir Geoffrey

  Walden, George

  Pawsey, James

  Walker, Bill (N Tayside)

  Peacock, Mrs Elizabeth

  Waller, Gary

  Pickles, Eric

  Ward, John

  Porter, Barry (Wirral S)

  Wardle, Charles (Bexhill)

  Porter, David (Waveney)

  Waterson, Nigel

  Portillo, Rt Hon Michael

  Watts, John

  Powell, William (Corby)

  Wells, Bowen

  Rathbone, Tim

  Wheeler, Sir John

  Redwood, John

  Whitney, Ray

  Renton, Rt Hon Tim

  Whittingdale, John

  Richards, Rod

  Widdecombe, Ann

  Riddick, Graham

  Wiggin, Jerry

  Rifkind, Rt Hon. Malcolm

  Wilkinson, John

  Robathan, Andrew

  Willetts, David

  Roberts, Rt Hon Sir Wyn

  Wilshire, David

  Robertson, Raymond (Ab'd'n S)

  Wolfson, Mark

  Robinson, Mark (Somerton)

  Wood, Timothy

  Roe, Mrs Marion (Broxbourne)

  Yeo, Tim

  Rowe, Andrew (Mid Kent)

  Young, Sir George (Acton)

  Rumbold, Rt Hon Dame Angela

  Ryder, Rt Hon Richard

  Tellers for the Ayes:

  Sackville, Tom

  Mr. Sydney Chapman and

  Sainsbury, Rt Hon Tim

  Mr. Nicholas Baker.

  Scott, Rt Hon Nicholas

  NOES

  Abbott, Ms Diane

  Armstrong, Hilary

  Adams, Mrs Irene

  Ashdown, Rt Hon Paddy

  Ainger, Nick

  Ashton, Joe

  Ainsworth, Robert (Cov'try NE)

  Austin-Walker, John

  Allen, Graham

  Banks, Tony (Newham NW)

  Alton, David

  Barnes, Harry

  Anderson, Donald (Swansea E)

  Barron, Kevin

  Anderson, Ms Janet (Ros'dale)

  Battle, John

  115

  Bayley, Hugh

  Faulds, Andrew

  Beckett, Margaret

  Field, Frank (Birkenhead)

  Beggs, Roy

  Fisher, Mark

  Beith, Rt Hon A. J.

  Flynn, Paul

  Bell, Stuart

  Forsythe, Clifford (Antrim S)

  Benn, Rt Hon Tony

  Foster, Derek (B'p Auckland)

  Bennett, Andrew F.

  Foster, Don (Bath)

  Benton, Joe

  Foulkes, George

  Bermingham, Gerald

  Fraser, John

  Berry, Dr. Roger

  Fyfe, Maria

  Betts, Clive

  Galbraith, Sam

  Blair, Tony

  Galloway, George

  Blunkett, David

  Gapes, Mike

  Boateng, Paul

  Garrett, John

  Boyce, Jimmy

  George, Bruce

  Boyes, Roland

  Gerrard, Neil

  Bradley, Keith

  Gilbert, Rt Hon Dr John

  Bray, Dr Jeremy

  Godman, Dr Norman A.

  Brown, Gordon (Dunfermline E)

  Godsiff, Roger

  Brown, N. (N'c'tle upon Tyne E)

  Golding, Mrs Llin

  Bruce, Malcolm (Gordon)

  Gordon, Mildred

  Burden, Richard

  Gould, Bryan

  Byers, Stephen

  Graham, Thomas

  Caborn, Richard

  Grant, Bernie (Tottenham)

  Campbell, Mrs Anne (C'bridge)

  Griffiths, Nigel (Edinburgh S)

  Campbell, Menzies (Fife NE)

  Griffiths, Win (Bridgend)

  Campbell, Ronnie (Blyth V)

  Grocott, Bruce

  Campbell-Savours, D. N.

  Gunnell, John

  Canavan, Dennis

  Hain, Peter

  Cann, Jamie

  Hall, Mike

  Carlile, Alexander (Montgomry)

  Hanson, David

  Chisholm, Malcolm

  Hardy, Peter

  Clapham, Michael

  Harman, Ms Harriet

  Clark, Dr David (South Shields)

  Harvey, Nick

  Clarke, Eric (Midlothian)

  Henderson, Doug

  Clarke, Tom (Monklands W)

  Hendron, Dr Joe

  Clelland, David

  Heppell, John

  Clwyd, Mrs Ann

  Hill, Keith (Streatham)

  Coffey, Ann

  Hinchliffe, David

  Cohen, Harry

  Hoey, Kate

  Connarty, Michael

  Hogg, Norman (Cumbernauld)

  Cook, Frank (Stockton N)

  Home Robertson, John

  Cook, Robin (Livingston)

  Hood, Jimmy

  Corbett, Robin

  Hoon, Geoffrey

  Corbyn, Jeremy

  Howarth, George (Knowsley N)

  Corston, Ms Jean

  Howells, Dr. Kim (Pontypridd)

  Cousins, Jim

  Hoyle, Doug

  Cox, Tom

  Hughes, Kevin (Doncaster N)

  Cryer, Bob

  Hughes, Robert (Aberdeen N)

  Cummings, John

  Hughes, Roy (Newport E)

  Cunliffe, Lawrence

  Hughes, Simon (Southwark)

  Cunningham, Jim (Covy SE)

  Hume, John

  Cunningham, Dr John (C'p'l'nd)

  Hutton, John

  Dafis, Cynog

  Ingram, Adam

  Dalyell, Tam

  Jackson, Glenda (H'stead)

  Darling, Alistair

  Jackson, Helen (Shef'ld, H)

  Davidson, Ian

  Jamieson, David

  Davies, Bryan (Oldham C'tral)

  Janner, Greville

  Davies, Rt Hon Denzil (Llanelli)

  Johnston, Sir Russell

  Davies, Ron (Caerphilly)

  Jones, Barry (Alyn and D'side)

  Davis, Terry (B'ham, H'dge H'l)

  Jones, Ieuan Wyn (Ynys Môn)

  Denham, John

  Jones, Jon Owen (Cardiff C)

  Dewar, Donald

  Jones, Lynne (B'ham S O)

  Dixon, Don

  Jones, Martyn (Clwyd, SW)

  Dobson, Frank

  Jones, Nigel (Cheltenham)

  Donohoe, Brian H.

  Jowell, Tessa

  Dowd, Jim

  Kaufman, Rt Hon Gerald

  Dunnachie, Jimmy

  Keen, Alan

  Eagle, Ms Angela

  Kennedy, Charles (Ross, C&S)

  Eastham, Ken

  Kennedy, Jane (Lpool Brdgn)

  Enright, Derek

  Khabra, Piara S.

  Etherington, Bill

  Kilfoyle, Peter

  Evans, John (St Helens N)

  Kinnock, Rt Hon Neil (Islwyn)

  Ewing, Mrs Margaret

  Kirkwood, Archy

  Fatchett, Derek

  Leighton, Ron

  116

  Lestor, Joan (Eccles)

  Radice, Giles

  Lewis, Terry

  Randall, Stuart

  Litherland, Robert

  Raynsford, Nick

  Livingstone, Ken

  Redmond, Martin

  Lloyd, Tony (Stretford)

  Reid, Dr John

  Llwyd, Elfyn

  Robertson, George (Hamilton)

  Loyden, Eddie

  Robinson, Geoffrey (Co'try NW)

  McAllion, John

  Roche, Ms Barbara

  McAvoy, Thomas

  Rogers, Allan

  McCartney, Ian

  Rooker, Jeff

  McCrea, Rev William

  Rooney, Terry

  Macdonald, Calum

  Ross, Ernie (Dundee W)

  McFall, John

  Ross, William (E Londonderry)

  McGrady, Eddie

  Rowlands, Ted

  McKelvey, William

  Ruddock, Joan

  Mackinlay, Andrew

  Salmond, Alex

  McMaster, Gordon

  Sedgemore, Brian

  McNamara, Kevin

  Sheerman, Barry

  McWilliam, John

  Sheldon, Rt Hon Robert

  Madden, Max

  Shore, Rt Hon Peter

  Maginnis, Ken

  Short, Clare

  Mahon, Alice

  Simpson, Alan

  Mallon, Seamus

  Skinner, Dennis

  Mandelson, Peter

  Smith, Andrew (Oxford E)

  Marek, Dr John

  Smith, C. (Isl'ton S & F'sbury)

  Marshall, David (Shettleston)

  Smith, Rt Hon John (M'kl'ds E)

  Marshall, Jim (Leicester, S)

  Smith, Llew (Blaenau Gwent)

  Martin, Michael J. (Springburn)

  Smyth, Rev Martin (Belfast S)

  Martlew, Eric

  Soley, Clive

  Maxton, John

  Spearing, Nigel

  Meacher, Michael

  Spellar, John

  Meale, Alan

  Squire, Rachel (Dunfermline W)

  Michael, Alun

  Steinberg, Gerry

  Michie, Bill (Sheffield Heeley)

  Stevenson, George

  Milburn, Alan

  Stott, Roger

  Miller, Andrew

  Strang, Dr. Gavin

  Mitchell, Austin (Gt Grimsby)

  Straw, Jack

  Molyneaux, Rt Hon James

  Taylor, Mrs Ann (Dewsbury)

  Moonie, Dr Lewis

  Taylor, Rt Hon John D. (Strgfd)

  Morgan, Rhodri

  Taylor, Matthew (Truro)

  Morley, Elliot

  Tipping, Paddy

  Morris, Rt Hon A. (Wy'nshawe)

  Trimble, David

  Morris, Estelle (B'ham Yardley)

  Turner, Dennis

  Morris, Rt Hon J. (Aberavon)

  Tyler, Paul

  Mowlam, Marjorie

  Vaz, Keith

  Mudie, George

  Walker, Rt Hon Sir Harold

  Murphy, Paul

  Wallace, James

  O'Brien, Michael (N W'kshire)

  Walley, Joan

  O'Brien, William (Normanton)

  Warden, Gareth (Gower)

  O'Hara, Edward

  Wareing, Robert N

  Olner, William

  Watson, Mike

  O'Neill, Martin

  Welsh, Andrew

  Orme, Rt Hon Stanley

  Wicks, Malcolm

  Paisley, Rev Ian

  Wigley, Dafydd

  Parry, Robert

  Williams, Rt Hon Alan (Sw'n W)

  Patchett, Terry

  Williams, Alan W (Carmarthen)

  Pendry, Tom

  Wilson, Brian

  Pickthall, Colin

  Winnick, David

  Pike, Peter L.

  Wise, Audrey

  Pope, Greg

  Worthington, Tony

  Powell, Ray (Ogmore)

  Wray, Jimmy

  Prentice, Ms Bridget (Lew'm E)

  Wright, Dr Tony

  Prentice, Gordon (Pendle)

  Young, David (Bolton SE)

  Prescott, John

  Primarolo, Dawn

  Tellers for the Noes:

  Purchase, Ken

  Mr. Eric Illsley and

  Quin, Ms Joyce

  Mr. Jack Thompson.

  Question accordingly agreed to.
  Resolved.
  That this House expresses its support for the economic policy of Her Majesty's Government.
  The House, having continued to sit to twenty-nine minutes past Ten o'clock, adjourned till tomorrow, pursuant to the Resolution this day.

EDUCATION

  Education Expenditure (London)
  Mr. Thomason
  To ask the Secretary of State for Education how the cost of education provision has changed within inner London in comparison to those costs for outer London between the financial years preceding, including and succeeding the abolition of the Inner London education authority.

  Mr. Forth
  The latest year for which information on local education authorities' actual spending is available is 2
  1989–90. That was the last year of the Inner London education authority. In the three years to 1989–90, London LEAs' net recurrent expenditure on education was as shown in the table.

  LEAs' net recurrent expenditure1 on education

  Year

  Inner London £ million

  2Outer London £ million

  1987–88

  1,103

  1,202

  1988–89

  1,086

  1,417

  1989–90

  1,085

  1,485

  1 Net recurrent expenditure includes total expenditure other than capital financing costs, less income other than from specific Government grants. Information is taken from LEAs' returns to the Department of the Environment of their actual spending.

  2 Excluding the following LEAs, which did not complete returns: 1987–88, Ealing and Haringey; 1988–89, Haringey; 1989–90, Haringey and Hounslow.

Preamble
The House met at half-past two of the clock, having been called together by the Lord Chancellor, in pursuance of Standing Order No.14: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Norwich.
Noble Lords—Took the Oath.

Economic Policy
2.37 p.m.
The Lord Privy Seal (Lord Wakeham)The Lord Privy Seal (Lord Wakeham) rose to move, That this House takes note of the economic policy of Her Majesty's Government.
The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper.
I am pleased to be able to open this important debate on the recent events affecting the United Kingdom's economy. I hope your Lordships will agree that the Government were right to ask for the recall of Parliament to discuss these issues. The Government welcome this opportunity to hear your Lordships' views.
We are holding this debate because of the effects of the recent extraordinary turbulence and massive speculative flows in the foreign exchange markets. We have ourselves suspended our membership of the ERM. But we are not alone in being buffeted by extraordinary turbulence. The Italians have had to put up interest rates, to devalue the lira by 7 per cent. and to suspend their ERM membership. The Spanish have had to devalue the peseta by 5 per cent. and have reintroduced exchange controls. The French, assisted by the Germans, have had to intervene heavily in the exchange markets and put up interest rates by 2 percentage points. The Irish punt and the Danish krone have both been on their ERM floors. The Irish have tightened exchange controls. Greece has put up interest rates, as have others outside the Community.
The principal cause of this instability has been that for some time there have been large flows out of the US dollar, which offers low interest rates (around 3.25 per cent.), into the German mark, which offers unusually high interest rates (around 8.9 per cent.) because of the Bundesbank's attempt to dampen the unforeseeably powerful inflationary effects of the costs of German reunification. Those flows placed a considerable strain on the ERM and on other currencies, the most striking effect being the 500 per cent. overnight interest rates introduced by the Swedish authorities.
The tensions were exacerbated by injudicious comments in regard to realignment and by speculation surrounding the future of the ERM and the Maastricht Treaty. Speculation became greater as last weekend's French referendum approached. The difficulties have not disappeared now that the referendum is over.
There are three steps a government can take to defend its currency. It can make statements of intent. It can intervene in the markets. And it can raise interest rates. The Government did all of those. We repeatedly made clear to the markets that we were prepared to take every necessary step to defend the pound. Covert intervention in the foreign exchange markets was superseded by overt intervention by the Bank of England. The Government announced a programme to borrow 10 billion ecu-worth of foreign currency—of which around half has been drawn down—to support that intervention and to signal to the markets their determination to defend the pound. Finally, last Wednesday, matters came to a head.
When the pound failed to rise above its ERM floor, interest rates were increased, first by 2 per cent., and then by a further three. Sterling, however, continued to fall. In those circumstances, the Government again had three options. They could raise interest rates further. But the last interest rate rise had left the market unaffected, so clearly that would not have worked. They could devalue. But, as the Italians demonstrated, that would merely have left sterling equally exposed at a new parity.
The third option was to suspend Britain's membership of the ERM, and, in view of the exceptional circumstances, that is what the Government did. They had done their best to support the pound with every means at their disposal but, when that proved impossible, they acted to safeguard Britain's interests by withdrawing from the mechanism.
The events of the past two weeks have been dramatic and understandably they have led to questions in regard to our economic policies and priorities. I would not want to underplay the significance of the UK's suspension of its ERM membership. But I do not see that we could readily return to the mechanism without dealing with the problems that have been thrown up. It is worth stressing that ERM membership, supported by tight control over public expenditure, has always been seen as an important tool for helping to bring about the lasting defeat of inflation rather than a policy objective in its own right. It has been a means to an end, not an end in itself and, while the means may have changed, the end certainly has not.
Many have questioned our continuing commitment. Some have even sought to portray recent events as an opportunity to re-order our priorities, downgrading the pursuit of low inflation in order to ensure a rapid return to growth.
I should like to make it entirely clear that those views do not in any way reflect the Government's thinking. The achievement of permanently low inflation remains at the very heart of our policy, and monetary policy will be set with that objective clearly in mind; and monetary policy will continue to be supported by a firm fiscal stance, which will be bolstered in future by the new arrangements that we have agreed for determining public expenditure. Nothing that has happened in the past few days diminishes the importance for our future prospects of

415
securing that objective. In considering the matter I invite your Lordships to reflect upon our post-war history.
As your Lordships are fully aware, the fact is that persistently high inflation is bad for an economy, and our acceptance for many years of inflation above the levels of our main competitors did great damage to our economy. The record shows that for virtually the whole of the post-war period we have suffered more from inflation than have other major economies.
In the 1950s and 1960s our inflation rate was reasonably stable, at around 4 per cent. While low enough not to be seen as a major problem even that rate of inflation was high by international standards. Inflation averaged less than 3 per cent. in each of those decades in both Germany and the United States, and in both decades our rate was above both the EC and G7 averages.
If our performance in the 1950s and 1960s was worse than that of competitor nations, our performance in the 1970s was nothing short of disastrous. In the mid-1970s inflation was allowed to reach a peak of no less than 26.9 per cent. Over the whole of the decade inflation in this country averaged 13.7 per cent., and the damage which that did to our economy is incalculable.
The public recognised that failure in 1979 and voted for a government that put as the central plank of their economic policy the conquest of high inflation because the history of the post-war years had shown that a good inflation performance is vital for strong sustainable growth in output and in prosperity.
Backed by a clear mandate to take the difficult steps that were required in order to defeat inflation, the Government acted decisively. Monetary policy was tightened and firmer control applied to public expenditure. The resulting adjustment was a painful one, but by the early part of 1983 the inflation rate was back below 5 per cent. With that firm foundation the economy grew at an average rate of 3.3 per cent. from 1981 to 1988, which was faster than in France, Germany or Italy. Neither was the supply side neglected. Tax cuts were introduced which greatly enhanced incentives, and there were important and overdue reforms to the labour market.
As your Lordships will recall, on 18th October 1987 stock markets around the world experienced their worst crash since 1929, and it was feared that that might lead to a 1930s style depression. There was no post-war precedent from which to gauge what effect that would have on modern economies. Our response, as in other countries, was to allow some easing of monetary policy, and in that we were supported by the opposition parties.
With hindsight it is clear that the impact of the stock market crash was smaller than we feared. In common with most other industrial countries we loosened monetary policy too much in response. It may also be that the effects of financial deregulation were underestimated. As a result, some of our hard-won progress in eliminating inflation from our economy was lost. At its peak in the out-turn of 1990, RPI inflation reached a peak of almost 11 per cent.
As inflation rose the Government were forced rapidly to tighten monetary policy. Between 1988 and 1990 interest rates were raised from 7½ per cent. to 15 per cent.
In the wake of that development there was a widespread consensus among politicians, academics and others that ERM membership would help Britain to restrain its inflationary tendencies. It would send a signal to employers and employees that if costs, and especially wage costs, rose faster than in their competitor countries, British industry would rapidly become uneconomic because there would be no devaluation to bale it out. It would also, it was hoped, enhance Britain's anti-inflation credibility with the markets, allowing interest rates to fall faster than would have been possible outside the mechanism. Finally, British industry was keen to have greater price stability with its principal European partners.
Our membership of the ERM has helped to bring down inflation from 10.9 per cent. to 3.6 per cent., producer output price inflation has fallen to a level not seen since 1969 and, crucially for our competitiveness, average earnings growth is now at its lowest level for 25 years.
During our time in the ERM we were able to cut interest rates nine times, by a total of five percentage points—cuts which reduced industry's interest bill by £7 billion a year and cut payments on a typical £30,000 mortgage by £85 a month.
One measure of the ERM's success is that the gap between UK and German (three-month) interest rates fell as low as a quarter of one percentage point. By comparison, over the past 20 years, United Kingdom interest rates have on average had to be 44¾ per cent. higher than those in Germany.
Overall, a combination of lower inflation and interest rates alongside rising incomes for those in work and renewed productivity growth have laid the foundations for a sustained and durable recovery.
Even so the recovery has proved elusive and I am very much aware that it remains a very difficult period for many businesses and individuals. Some of us feel that the gloom of recent months may have been overdone, and has sometimes threatened to undermine fragile business and consumer confidence. For example, recent figures show that non-oil GDP rose in the second quarter of this year. Manufacturing output increased in each of the first two quarters of this year and retail sales rose in the second quarter. The Society of Motor Manufacturers and Traders estimates that new car registrations were up on a year ago in the key sales month of August. Manufacturing investment, which would normally be expected to lag behind an upturn in activity, showed an increase in the second quarter, as did total business investment which has remained well above the level it fell to during the last recession.
My right honourable friend the Chancellor of the Exchequer has acknowledged that in recent months the strains on the ERM caused by the wide divergence between American and German interest rates might have kept monetary policy tighter than was necessary to bring continued downward pressure to bear on inflation. Until the extraordinary speculative flows of

417
last week forced the UK as well as Italy to suspend ERM membership, he concluded that it was worth persevering in order to gain the long-term benefits of exchange rate stability and anti-inflationary credibility.
Our first task, then, is to ensure that inflation does not take off again. We start from a strong base, since our membership has helped to limit inflationary expectations within the economy and to reform the ratchet system of pay bargaining.
In the meantime, monetary policy will be guided by a range of indicators. We have had a target for MO growth for several years, and have successfully kept MO within its target range for over two years now. The other monetary aggregates will be kept under close scrutiny, as will other indicators such as asset prices, especially house prices; as of course the exchange rate itself will be.
In the light of these indicators, the Chancellor decided on Tuesday that interest rates could come clown another one percentage point to 9 per cent. That is six points below their peak in the autumn of 1990. It is the first time that base rates have been in single figures since the summer of 1988.
But no one should conclude from this further cut in interest rates that the Government are going soft on their commitment to defeat inflation. We are not going to fritter away the gains we have made under the ERM. Neither, as my right honourable friend the Chancellor of the Exchequer has made clear, are we going to see those gains eroded by thoroughly irresponsible fiscal expansion. Recent events have made firm control of public expenditure more important than ever.
We have made clear that we will return to the ERM, but only when certain conditions have been fulfilled. There has to be greater international co-operation on monetary policy. Britain and Germany must be closer to the same stage of the economic cycle, and German interest rates must come down. The ERM must be reformed; and the turbulence in the currency markets must have come to an end. To discuss these and other issues, the Prime Minister, as President of the European Community, has called a European Council meeting for October.
Whatever the outcome of deliberations in the months ahead about how best to proceed with the Maastricht Treaty, completion of the single market will in itself ensure that European economies become increasingly interdependent. The price we would pay if we failed to match the inflation performance of our partners in the future would be even greater than the considerable price we have paid in the past.
Our policies in the months ahead will continue to be driven above all by our determination to secure an inflation performance that matches the best achieved by our competitors. Nothing that has happened in the past two weeks has altered this. I beg to move.
Moved, That this House takes note of the economic policy of Her Majesty's Government.—(Lord Wakeham.)
2.55 p.m.
Lord Cledwyn of Penrhos: My Lords, may I first thank the noble Lord the Leader of the House for his opening speech? We warmly welcome this opportunity to debate the state of the economy and its short and longer term prospects after the chaos of the past fortnight. No one derived any satisfaction from that turmoil except perhaps those who made money out of it.
The noble Lord has put up a brave defence but, I regret to say, not a convincing one. The Government had been warned throughout the summer that trouble was looming but they disregarded the advice they received and ignored the warnings. The crisis here was not the result of some uncontrollable random effect. It was the direct consequence of the economic policies of the Prime Minister and the Chancellor of the Exchequer.
Since the general election there has been an absence of a clear economic policy. The economic turbulence referred to by the noble Lord which has badly shaken this country is a direct consequence of that. The Government's economic policy can be described as a policy of drift or, less charitably, as a paralysis.
There has been a paralysis of action. Nothing was done to tackle the growing monetary pressures which engulfed us or to deal with the fundamental weaknesses of the real economy.
Secondly, there has been a paralysis of ideas. Instead of using the months of June, July and August to develop a coherent approach to tackling the recession, those Ministers who were available at the time relied on slogans which had no relevance to the worsening condition of our economy.
It is a sad story for, as everyone in this House knows, the approaching monetary storm had been clearly visible since the election, when we were told that a Conservative victory was all that was needed to bring recovery. That victory on 9th April 1992 was a defeat for Britain, for it led to the grinding reality of continuing recession and the worst economic crisis for decades; it led to the devaluation which the Prime Minister and his senior colleagues swore they would never accept, a disorderly and unplanned devaluation preceded by the loss of a large part of our foreign currency reserves. The 15th and 16th September were indeed black days in the British calendar.
The sad fact is that, despite all the clear warning signals and the continuing recession, the Government did nothing and appeared to be blind to the gathering clouds. It has been said, and no doubt it will be repeated in this debate, that the difficulties were not the Government's fault but that Germany in general and the Bundesbank in particular were responsible for them. Is that true?
I take it that we must accept that our monetary difficulties have been made worse by the disruptive impact of German unification. We were also caught in the backwash of the speculative currency flows between the dollar and the deutschmark, about which we have heard so much in recent days. But those are not the reasons for our problem. It is the lack of coherent political leadership, both in the formulation and the execution of monetary policy, which is

419
primarily responsible for our plight today. The Government cannot pass the buck. The buck stops on the Cabinet table in No.10 Downing Street.
Furthermore, the presidency of the European Council gave the Prime Minister and his senior colleagues an outstanding opportunity to provide leadership in Europe at one of the most crucial moments in recent history. It was an opportunity to lead concerted action for recovery throughout the Community, and to make the case for co-ordinated monetary action to get interest rates down and at the same time to stabilise the European monetary system.
The Prime Minister was provided with a unique opportunity to act; but I regret to have to say that nothing emerged. Nor does it help to blame the president of the Bundesbank for our monetary problems. It is the job of central bankers to be bankers; it is the job of prime ministers to provide leadership. The Prime Minister and the Chancellor have dithered in a crisis, and leadership has been conspicuous by its absence. That is the reality of the position. That indeed is the tragedy which faces us.
However, we must look beyond monetary matters to what in the longer term is more important; namely, the state of the real economy in Britain at present. That is the real economy of production, of jobs, of mortgages—to which the noble Lord referred as though there were no problem—and of businesses large and small. All this is relevant to our debate today. The House knows that, at a time when production has been stagnant, unemployment has been rising, mortgage repossessions are still at an all-time high and record business failures are creating what one leading industrialist has called "an economic desert", the Government have done nothing. They have taken no action to encourage business investment. There are nothing but cuts in training when we are faced with the paradox of rising unemployment accompanied by the shortage of skills.
It is plain beyond doubt that, if we are to draw some benefit from the collapse of the Government's failed economic strategy and the devaluation of the pound, then the policies of inaction and neglect must now be changed. Britain must set a new course if we are to survive as a leading industrial and commercial nation. The Prime Minister was provided with a unique opportunity to act; but I regret to say that he failed to grasp the opportunity.
In addition to new measures to get people off the unemployment registers and into real training, there must be a new initiative to provide retraining and new business opportunities to the highly skilled men and women who have been paid off from the aerospace and engineering industries. We cannot afford to let the talents of those people go to waste. The neglect of housing and infrastructure investment must be replaced with a strategy for growing government investment. As the trade unions, the CBI and others have said in recent weeks, private industry must also be provided with new incentives to encourage companies to invest their way out of recession.
We welcome the emergency meeting which the Prime Minister has called and which is to take place in
420
a few days' time. We must hope that the Government will take initiatives there and in Edinburgh to launch a new programme of European co-operation to attack recession and unemployment throughout the Community. Europe must not be allowed to fragment in the face of the speculators. I read this morning in two or three of the newspapers that those currency speculators made £2 billion in a few chaotic days. This is the time for the Community to work together to defeat the speculators and create a new stable framework upon which a sound, long-term strategy for growth and for jobs can be based. That must be our objective at the present time.
The noble Lord referred to the question which people have been asking over the past 10 days or so: when do the Government propose to re-enter the exchange rate mechanism? The Government entered the ERM at the wrong moment and Britain has now been catapulted out of the ERM after spending huge sums of public money in a useless struggle to stay in the ERM. It was useless because it became obvious on Tuesday,15th September, that it was virtually impossible to keep sterling above the ERM floor. In this struggle the Government spent a huge sum out of our £25 billion foreign exchange reserves. We cannot afford that. It was one of the most costly misjudgments of the century. It has been argued that it was totally unnecessary because the devaluation of the Italian lira over the weekend gave the Government the opportunity to take action, however distasteful it might have been at the time, without losing a huge part of our reserves. But when shall we re-enter? How long shall we be out? The noble Lord has not answered the question. When the noble Earl, Lord Caithness, winds up the debate perhaps he will enlighten us.
We have read a great deal about the various alternatives recently. I noted over the weekend that Sir Leo Pliatsky, whom we know and respect, advised that the Government should not rush back into the ERM but should be prepared to return,
"at a realistic rate if they want to maintain the development of Europe".
That seems to me to be a sensible reaction.
Perhaps I may refer briefly to the Maastricht Treaty whose future seems uncertain at present, mainly because of the Danish vote. The treaty needs the ratification of all 12 members. However, it seems that that cannot be achieved in time. I shall again be grateful to the noble Earl if he will tell us whether he believes that Britain can meet the deadline.
We do not wish to see the collapse of the treaty, although we should like to see some changes, notably in respect of the Social Charter whose omission we deplore. I hope that the Minister can tell us when we may expect to see the reintroduction of the Bill. We shall of course need to look at the Bill very carefully when it emerges to see precisely what amendments or changes are proposed.
There are those, including some of my noble and honourable friends whom I respect, who advocate a referendum. I must confess that I was never a referendum enthusiast. It is not part of our constitutional practice and we have had only two

421
referenda in our history. Too many of them would not only be unnecessary; they would erode the authority of Parliament and the House of Commons in particular. Hitler used them to destroy what parliamentary democracy existed in Germany at the time. Let us pause to see how matters develop before we contemplate that unpredictable course.
I supported Britain's entry into the Community because I believed that it was the best way to secure a lasting peace and stability in Europe after the great wars of this century and of the past. We must not he unreasonably pessimistic, because the Community has achieved a great deal since its inception. But the events of the past few weeks have shaken people's faith in the Community. We have to face that now and face it seriously. The vote in France proved that. There has been a lack of understanding and a lack of co-operation. The machine appeared to break down, temporarily we hope. But unless it is repaired the Community will be undermined and possibly destroyed in the longer term.
These are critical times for Europe; in Bosnia and neighbouring regions dreadful crimes are being committed; in Eastern Europe and Russia democracy itself is on trial, and stability is essential; in Somalia and other African countries millions are in the deadly grip of starvation. Those are the huge problems which challenge the world. This is not a time for quibbling and carping between our Government and other European leaders. It is a time for inspired leadership to which people everywhere will respond. Let us hope and pray that it will be forthcoming.
3.10 p.m.
Lord Jenkins of Hillhead: My Lords, we have before us the spectacle of a disintegrated government policy. But we also have the spectacle of a disintegrating western world—the world of eastern Europe is already in a state of near shambles—and that is a still more serious matter. It is on that subject, at any rate to begin with, that I propose to concentrate.
We are in grave danger of having our destinies determined not by the so-called bureaucrats of Brussels, not by the voters of France, not even by the Bundesbank, but by 100 or so anonymous currency speculators. Indeed, we are now moving into a position in which everything from the shape of Europe to the cost of a mortgage can be determined by them. I have in the past—even when I held the responsible office and was much discommoded by uncomfortable speculative pressures—always been sceptical of phantasmagoria about the gnomes of Zurich. I thought that they were not so much hobgoblins from Switzerland but rather nervous treasurers of multinational companies trying not to make exchange losses out of the follies of governments.
But in my view that benevolent picture is no longer tenable. They have become more like packs of predatory animals which, once their excitement has been aroused, must always have a victim and swoop relentlessly from one target to another. Aided by considerable mismanagement in both cases, they have
422
gobbled up the lira and the pound. I profoundly hope that they will he unsuccessful in their attack on the French franc.
As most analysts have pointed out. there is no sense in that attack. The French economy is, if anything, in rather better shape than the German economy. But there is often no rational basis for currency speculations. The idea, which has been sedulously propagated during the past few days, not least by the noble Baroness, Lady Thatcher, in Washington, that, once a country's currency is floating, it has a sublime control over its own destiny, tempered only by the need to march in harmonious step with the calm judgment of sagacious market forces, bears absolutely no relation to the reality of what happened in particular to sterling outside the ERM during the early years of the noble Baroness's Administration.
Between the end of 1980 and the beginning of 1985 the pound/dollar exchange rate varied between 2.46 dollars and 1.05 dollars to the pound. The idea that our comparative competitive positions, or relative purchasing powers, had moved at all in a way that was in line with those lurches is manifestly wrong. The two extremes were produced by overcompensation for speculative misjudgments and in no way reflected underlying reality.
Meanwhile during that period the ERM bloc enjoyed relative stability, although the same countries certainly had not clone so in the 1970s. Then the fluctuations between the deutschmark and the French franc were greater than between either of them and the dollar. During the mid-70s—the seven-and-a-half year period between the effective end of Bretton Woods towards the end of 1971 and the beginning of the European monetary system in early 1979—there were fewer sinews of order in the world currency markets than at any time since 1945, except possibly during the past few days. That was a had period altogether. There was the first serious check to growth since 1945, the beginning of the return to mass unemployment and the sprouting of the great inflation. But it was perhaps worst for Europe in comparison with the other two main economic blocs and it was in sharp contrast with the 1960s. The currency instability for Europe was internal and not merely transoceanic, as with the United States and Japan.
It was out of those circumstances and thoughts that the European monetary system sprang. It worked very well, at any rate during the first 11 ½ years when we were outside. There were quite a lot of smoothly effected changes of central rate—small devaluations, if you like—for about the first five years. There were then occasional changes until 1987, which gave some flexibility and eased the settling in.
The date which we ultimately chose to join has always defied rational explanation, except perhaps in relation to internal Conservative Party dispositions. When we joined the system it was 139 months old. At least 130 of those would have been better months in which to join than the one we chose of October 1990. It was rather the same as with joining the Community itself in 1973, although the date of choice was not much within our control. In both cases we missed the good years and came in only for the rough ride.

423
The harness of the deutschmark rate of 2.95 always fitted us somewhat uncomfortably and when the strain came we fell out. There were a number of major mistakes made before and during that Wednesday of sad farce. First, I agree with the noble Lord, Lord Cledwyn of Penrhos, that it was a mistake not to go for an adjustment of parity when the Italians did and to spend such a high proportion of our reserves on defending what had then become the indefensible. It is of course nonsense to suggest that using the reserves to buy pounds is the same as consuming real resources. Reserves so expended could not equally well have been used, say, to finance a large railway investment programme. Also reserves so expended tend to come back eventually. However, they can take a long time to do so; they can take an uncomfortably large number of years to do so. Furthermore, they come back minus the percentage of the devaluation and to that substantial extent the loss is real money.
Secondly, the Government have suffered the most appalling and central defeats both for their home economic and foreign policy strategies. In his speech on 10th July, which the Guardian so thoughtfully printed this morning, the Chancellor of the Exchequer not only nailed himself to the mast but scuppered in advance any alternative strategy which he may at this moment be trying laboriously to outline in another place. Leaving the ERM or varying from the deutschmark 2.95 rate, he said,
"would certainly be the end of the battle with inflation".
He said that we would have surrendered and quite soon interest rates would have to rise again to a much higher level than they are today. There was a great deal more in the same vein.
That speech alone, when followed by last week's events, would have made it not only proper but wiser for him to have followed the honourable example set in 1969 by the noble Lord, Lord Callaghan. However, it is not only the economic policy of the Chancellor and the Government as a whole, but also the European policy of the Prime Minister which is badly mauled. I believe that the Prime Minister genuinely meant to put us at the heart of Europe but the economy that he inherited from the noble Baroness, Lady Thatcher, and also from his own stewardship—the long years of untrammelled power, the years of the so-called economic miracle—just was not up to it. We had only to read about yesterday's combination of news about the real economy—a massive balance of payments deficit which is moving even higher in the depths of a recession and the closure of yet another major plant in a technologically advanced industry—to realise how deep is our plight.
There was one last flick of the old British Adam in the tail of our inelegant devaluation. As soon as we had been forced into it, the Government sent a high official to Brussels to propose that the whole ERM mechanism should be suspended and that others who had lived with it satisfactorily for eleven and a half years before we deigned to enter should be forced to put the mechanism into suspense because of our brief and inglorious membership. That proposal was rejected but for us to suggest it after that short
424
membership cannot have failed to arouse in others the sad thought that things go better without us than with us and that there is much to be said for a variable geometry or two-speed Europe from their point of view. In the circumstances, we cannot be wholly surprised that the Germans show more enthusiasm for helping the French franc than they did for helping the pound sterling.
Some may welcome the concept of a two-speed Europe, although there is no doubt that we would be in the slow lane rather than the fast lane. However, it is a complete negation of Mr. Major's policy. Sadly, I am beginning to believe that some element of a two-speed Europe is inevitable.
One of the general European lessons of the four months of setback, for such there have been, through which we have passed is that totally rigidly fixed exchange rates without a single currency is a state of unstable equilibrium in which there is little chance of surviving for 10 years or more.
The natural assumption is that these events have put back the timetable for monetary union well into the next century, if not indefinitely. However, we may find that the core countries—particularly if France fights off successfully, as I hope and believe it will, the present attack—draw the opposite conclusion and prefer to go faster. If that is so, we should not obstruct. We should compare their experience with ours during the period, brief I hope, when sterling is discovering with which combination of interest and exchange rates it can live.
A fundamental issue for the European Community is to hold and strengthen the essential sinews of unity in an increasingly chaotic world which almost brings nostalgia for the stability of the Brezhnev years while recognising, as it must, that bureaucratic centralism has become unpopular.
The fundamental issue for Britain is to recognise that far from rejuvenating our economy, the 1980s left it almost on its back: the great oil bonus frittered away; a manufacturing base so attenuated that I doubt it has the strength to turn the corner of a post devaluation J-curve; public services, many of which are a disgrace to an allegedly first world country; and even the private service sector, the alleged jewel in the crown of the 1980s, enduring a swathe of bankruptcies in the unending recession. Until it is recognised that, economically, we have for some time been on the wrong road for Britain, I tremble for our future in or out of the ERM.
3.26 p.m.
Lord Howe of Aberavon: My Lords, I have some hesitation in troubling your Lordships for a second time so soon after my first appearance in your Lordships' House. I am all the more hesitant in the company of no less than three ex-Chancellors of the Exchequer, all of whom are senior to me and are political opponents. Certainly I cannot subscribe to the views with which the noble Lord, Lord Jenkins, closed his speech but I believe our occupation of that post tends to give us a common insight into certain matters. I do not mean that we come to share a homogenised, sexless, amorphous Treasury view but

425
rather I believe that we come to share a certain sense of sceptical realism. I am glad to say that that has been adopted by the present Chancellor of the Exchequer who, in his important speech on 10th July, said that he would not regard any economic dispute "as a matter of religious faith".
Speaking personally, I feel amply qualified to take that ecumenical, if not agnostic, view because I must confess that in my time I have subscribed to most of the available faiths. First, as "Minister for keeping down prices", as I was affectionately called by my right honourable friend Sir Edward Heath, I put my faith and weight behind statutory prices and incomes policies. Several colleagues on both sides of the House, including my noble friend Lord Cockfield, shared the experience of testing that proposition to destruction. During my time as Chancellor of the Exchequer, our policy rested firmly upon monetary discipline, upon foundations firmly laid by the noble Lord, Lord Healey, and which were consolidated thereafter by myself, in concert with my noble friends Lord Lawson and Lady Thatcher, in the medium-term financial strategy.
Finally, there came the period when it was felt necessary to move away from the increasingly uncertain and confusing monetary guidelines in favour, after some delay, of the exchange rate discipline of the European monetary system. Of course, the House will have noted that each one of my three Conservative successors in the Treasury has been persuaded of the wisdom of that policy, as was the First Lord of the Treasury, my noble friend Lady Thatcher, at a time when neither my noble friend Lord Lawson nor I had any responsibility for economic policy. As my noble friend Lady Thatcher told the party conference in the following week,
"we had long been committed to joining the ERM"
and we did so at that time because it would, as she said.
"reinforce our own financial discipline against inflation".
Incidentally, it also enabled interest rates to be cut by one full point on the eve of the party conference.
What should we conclude from that history of our country's progress—if that is the right word—through three different frameworks of economic discipline under successive governments? I offer three propositions. First, intellectual, indeed political, fashion may swing between all three as the grass momentarily appears to be greener on the other side of the valley. Secondly, the practical truth is that we need to achieve, as other countries achieve, the strongest possible combination of all three: namely, a firmly disciplined monetary policy; responsibility in collective bargaining (though not, of course, a statutory incomes policy); and commitment to exchange rate stability. In so far as convergence between all three is lacking there remains the need—this is the most difficult part of all—for some means of adjusting parities without unduly eroding discipline. That is the position the Government were in until just over a week ago.
426
The noble Lord, Lord Healey, may recall the first time that we debated the EMS together in another place in November 1978. He will forgive me if I quote myself from that time. I said that,
"the Chancellor is right in saying that he was talking not about a system of fixed exchange rates but about a system of more stable exchange rates, which in the early stages … will inevitably involve some changes in parity".
I went on to say that,
"we need … proper and workable arrangements [for these to be] undertaken … with sufficient frequency to avoid the forces that in the end destroyed Bretton Woods, but not so often as to destroy the credibility of the main commitment to increasingly stable and non-inflationary economic performance".—[Official Report, Commons,29/11/78; cols.483–4.]
That is much more easily said than done, even then. The difficulties are certainly greater today. But I am very far from being convinced that these factors argue against the system—on the contrary.
Of course last week's events are a very serious setback not just for our own country but also for Europe and, as I believe, for the wider world economy. But I do not believe that they destroy or even seriously diminish the case for a European monetary system and for the degree of stability that that aspires to achieve, for it is my conviction, as it was of those who founded and managed the Bretton Woods system, as well as of those who later started the EMS, that citizens and businesses alike do look to governments not only for stable money at home but also for as high a degree as possible of international exchange rate stability. That is not an illegitimate objective. It is just that which the EMS/ERM has increasingly succeeded, for the past decade and more and until very recently, in providing for its member currencies.
So why has it now run into such trouble? I offer several reasons. First, the anchor currency, the deutschmark, has itself been generating exceptionally real interest rates because the German authorities, and not they alone, seriously underestimated the costs of unification and continue to overestimate the extent to which they could or should be shared, by means of monetary policy alone, with their partners in Europe.
Secondly, the authorities on the other side of the Atlantic have at the same time been pressing hard and on almost every front in the opposite direction, with a huge and still rising fiscal deficit; and with interest rates as low as they could possibly be. Therefore, not surprisingly, there has been a flight from the dollar itself which has created fearful tensions for and between the European currencies.
Thirdly, there has been the introduction into this economically tense situation of an unforeseen and unnecessary deadline—that is, the fixed date of the French referendum without any or sufficient attention being given to its effect on the European economic partnership. That fixed date provided a most inviting one-way bet for currency traders. In the closing days there may well have been no interest rate high enough to shield a currency under serious challenge.
Finally, it must be acknowledged that we British have made our own sad contribution to the problem. I am not now referring to the difficulties of the past few days before our withdrawal from the exchange rate mechanism. What I really have in mind is our longer term hesitation to take our place within the

427
system and, in particular, in the ERM. I put it quite simply like this: if it was right for us to take our place in the ERM at the time when my noble friend Lady Thatcher decided that it was just two years ago, when inflation was at almost 11 per cent. and interest rates at 15 per cent., then would it not have been wiser still to have done so at one of a number of points—at the latest from 1985 onwards—when inflation and interest rates were far lower and much more closely convergent with the performance of our most successful European partners?
Had we decided to take the decisive step of joining the ERM at an earlier stage, then it is my belief that the consequences could well have included the following: we in the United Kingdom should have far more safely secured the counter-inflationary, fiscal, and monetary stability, and the other great economic achievements (I repudiate the noble Lord in that respect) that we had been able to make during the first half of the 1980s, thanks to and under the leadership of my noble friend Lady Thatcher herself.
We should have been able, if necessary, to readjust without drama at a later stage, as our partners had and have been able to do, our initial choice of parity within the mechanism. We should have been able, as more experienced streetwise members of the system, to play a more effective role in all the discussions on monetary union which in due course inspired the Delors report and all that followed. The system itself, not just Britain, would have gained in experience and stability and would have been better placed to avoid the damaging turbulence of recent weeks.
What then of the future? It is certainly very clear that recent events are anything but a cause for rejoicing. There are those who see us as having been "liberated" and set free to pursue a "British" economic policy, with apparently almost unlimited freedom to set our interest rates where we wish and to let our exchange rate go where it pleases. I echo here the point made by the noble Lord, Lord Jenkins of Hillhead. It is hard to believe that anyone who has taken part in or shared the experience of economic management at any time during the past two decades can take so cheerful a view and can really believe that in one bound we are free.
I remind the House of just one example taken from my own experience in 1981. In March of that year, at the time of my notorious or celebrated Budget—according to choice—the pound stood at 2.43 dollars and the base rate came down to 12 per cent. Within six months, by 16th September, the pound had come down to 1.76 dollars. The alarm bells were ringing so we raised interest rates by two points to 14 per cent. By the end of that month, on 1st October, almost on the eve of the Conservative Party conference, we raised them by two further points to 16 per cent. If those are the joys of freedom then no wonder that others should look for a different approach.
The great risk is that the authorities, but much more probably, public opinion, might be tempted to believe that we should be more secure by having returned to flying by the seat of our pants. Such a course would be perilously close to that which the
428
Chancellor, in his 10th July speech, dissected and dismissed under the graphic title of "cut and run". On the contrary, I remain convinced—and I hope that the Government do as well—that the exchange rate mechanism, with some adjustment certainly, will be seen to remain the only serious framework for monetary discipline available to the United Kingdom government.
Floating, on whatever terms, outside means that we should be more, not less, exposed. Too much advice to the contrary may come from folk who are are used to considering the management of the dollar, which is very different from the management of the pound sterling. For some time the European area is likely to remain effectively a deutschmark zone whether we are in or out of the ERM. We need to be a part of that as the way to exchange rate stability, which is desirable in itself, and as the foundation for long-term non-inflationary growth. That is the only way to bring our influence effectively to bear on crucial decisions about the economic policy of the entire continent and as a guarantee of Britain's wider influence within Europe as a whole. The establishment of a Franco-German monetary system could all too easily lead to a Franco-German Europe—the one conclusion that those who have had a clear vision of our country's true interests have long struggled to avoid. Therefore, for all those reasons I remain convinced that we need to rejoin the exchange rate mechanism as soon as prudently possible, and to do so within months rather than years.
Perhaps I may make three final points. The first relates to the other half of the entire contemporary debate, the handling of the Maastricht Treaty. I express my conclusion quite simply—that it remains above everything else in Britain's interest that we should not end up as the only country responsible for failure to secure ratification of that treaty. Her Majesty's Government must never allow themselves to lose sight of that point. If Maastricht fails, it must not do so because of Britain.
Secondly, the hugely growing scale of transactions on the foreign currency exchange markets—and, according to a report from the Bank for International Settlements contained in last Saturday's Wall Street Journal, the volume of transactions doubled between 1986 and 1989 to 640 billion dollars per day—makes the task of holding fixed but adjustable rates progressively more difficult. Therefore, the theoretical case—and it will become more than theoretical—for a single European currency grows stronger by the day. Meanwhile—we are not at that point yet—our practical development of policy needs to be conducted with that in mind.
Finally, and perhaps the widest conclusion of all, we should surely be looking for world economic leadership that can strive now to match the needs of the increasingly interdependent world economy. It is difficult to believe that the leaders of the Marshall/Acheson era who were "present at the creation" would have been content to leave present problems unaddressed.
I close by reminding the House that within half a dozen years of the collapse of Bretton Woods, in a

429
lecture at Colombia University in June 1977, that "arch-monetarist"—and I use the labels without being overwhelmed by respect for them—the former Chairman of the Federal Reserve, Arthur Burns (the teacher of Milton Friedman and one can scarcely be less "Keynesian" than that) called for,
"the re-establishment of a rule of law"
for the governance of international financial policy.
If, in his view and in mine, the world stands in need of such rules then so, too, does Europe. We have come a long way since 1978 in building a unique structure of monetary discipline for our continent. We cannot and must not allow that achievement to be lost. We cannot and must not allow Britain to be sidelined within that system. We must strive for and secure Britain's proper place within the European partnership.
3.42 p.m.
Lord Callaghan of Cardiff: My Lords, I have much in common with what has been said by the noble Lord, Lord Jenkins of Hillhead and the noble and learned Lord, Lord Howe of Aberavon. If we are not on the same side of the House, we can certainly all display the same wounds and weals from our past.
As I do not wish to rehearse what I had intended to say (which, frankly, would simply repeat much of what has been said), perhaps in the course of my remarks I may be allowed to widen the scope of what has been said a little even if my remarks are not particularly focused on today's debate because it seems to me that Britain and Europe have arrived at one of those rare moments in politics when the decisions that we take and what we do in the weeks ahead will influence the course of European history for years to come.
The present debate is not only about the future of the exchange rate mechanism; it is not only about the speculators; it is not even about the Government's lack of competence in handling our affairs—important though those things are. The issue is more significant. In my view, in what we do about the ERM and in what we do about the Maastricht Treaty, Parliament is about to play its part in the decisions that will determine the future of this old, war-torn Europe of ours, such as whether our countries go forward together or whether Britain, by standing on one side, chooses a course because of our power and influence that will lead to a divided Europe, to shifting alliances, to the resurrection of old and virulent nationalisms and perhaps even to attempts in due course to redraw disputed boundaries or even worse.
That in my view is the final issue that we face in discussing the mechanics of our economic policy. It has come to a head in most unpropitious circumstances, brought about by over-ambition in Brussels and by the failure of European heads of government to confront the real difficulties of the Maastricht Treaty when they were negotiating it, and by the worst economic recession and the highest unemployment in Britain for 60 years. There could not be a worse combination of circumstances in which to ask our people to take a broad and enlightened view for the future.
430
Even worse because the British people had been misled by Ministers, the currency devaluation of last week came like a clap of thunder. We had been told so often that the pain of bankruptcies, the repossession of homes and the loss of jobs were bringing inflation down and were transforming our economy into one of the strongest in Europe. Indeed, it is only a few weeks ago that a Minister (I believe that it was the Prime Minister but I have not been able to check that) declared that if we hung on a little, sterling could replace the deutschmark as the benchmark currency in Europe. What a vain and empty boast it was! We can only conclude that Ministers deceived themselves as well as us by swallowing their own propaganda. And so it came as a greater shock when nemesis and the speculators struck, when the pound was devalued and the cornerstone of the Government's monetary policy crumbled within 24 hours.
We are now watching in the fluctuating battle to save the franc how even a healthy economy and a perfectly strong currency becomes a potential victim when a mass of free-flowing capital is thrown against it. The pound was much more vulnerable than the franc because, in my view, from the start of our Membership of the ERM the Government had over-valued the pound against the deutschmark, and in doing so had also indirectly over-valued it against the American dollar. There cannot be one of your Lordships who has an American friend who has visited this country this summer who has not been told by him how out of line our prices have been.
The Chancellor was warned and said that he knew better. Indeed, he was saying only 10 days ago that he knew better—and now the truth is out. Our membership of the ERM was crippled from its very beginning by over-valuing the pound. Mr. Major must accept full responsibility for fixing a central rate of 2.95 deutschmarks to the pound which, under pressure, drifted down to 2.78 just before last week and which now, in an unsupported market, stands as low as 2.55—a devaluation of some 14 per cent.
The speculators have had a killing. It is they who tipped sterling out of the ERM bed; but few will or can deny that the present market has now set a more truthful exchange rate than that which existed a month ago. The Government must address themselves urgently to the scandal of speculation. This is not just the work of the barrow-boys whom we see on the screens. They are only the front men, representing and dealing on behalf of the most respected banks and institutions in society, the people with big brass nameplates in the City of London, on Wall Street and in other financial centres. They are the people who are doing this damage to the international monetary system. They have been able to make a killing during the past few days because of the decision in the early 1980s to abolish all controls on the free movement of capital across frontiers and because modern communications make it possible to effect the transfer of hundreds of millions of marks, francs, dollars or pounds in a micro-second. I must not make this just a case of reminiscence but when I was Chancellor a quarter of a century ago, it was possible—and indeed central banks succeeded—to curb the speculators

431
because there were capital controls at that time—and I see that Spain yesterday reintroduced a set of capital controls once more—and because modern technology had not reached the stage it has now. But even then we saw that this situation would come and we were only thankful that it did not arise while we were there.
Something must be done because what is happening is a scandal, and the governments concerned, in my view, should begin discussions with the financial institutions at once to find a solution. One or two of the best minds in financial circles in New York are already beginning to turn their attention to this, and they are right to do so. What solution can be found I do not know, but I will make my own simple suggestion. It is that the institutions should take note of the people's anger over what has happened. The foreign exchange activities and dealings should be kept separate from other activities and it should be quite possible to track them and to determine the amount of profit. Then those deals could be taxed separately with an excess profits tax of about 100 per cent. That coupled with the impact of public opinion would soon slow the dealings down. It would not stop them, but it would slow them down and some of the practitioners involved might then be put to more socially useful work.
That aside, as I say, something must be done. The lesson now being re-learnt by Ministers is that stable exchange rates can be achieved only if the economies of competitor countries are broadly in balance over the long run. Ours is not. We are weaker than our principal competitors, and if last week has any benefit it is that the illusion of something different has been swept aside. Of course the noble Lord, Lord Howe, is absolutely correct when he talks about the fallacy believed by some people about the freedom of sterling outside the exchange rate mechanism. The Chancellor is going to have a more difficult task than he has had so far to balance our lower interest rates against the exchange rate. I heard an important industrialist on the radio this morning calling for a 6 per cent. interest rate. I fear he is bound to be disappointed unless the Government are willing—and clearly they are not—to allow the pound to drift downwards to a much lower value than it has already on the exchange limits.
In my view it is urgent—and I support what has been said by my two predecessors in this debate—that the Government should begin fresh discussions at once with the other members of the ERM to put forward any changes that they wish to see. I do not know what those changes are, but I believe there should be a realignment of currencies against the deutschmark in order to return to some kind of stability. As soon as that is done, and preferably in weeks rather than months—certainly in months and not years—Britain should re-enter the exchange rate mechanism. But for heaven's sake let us learn from the mistakes of last time and do not let us overvalue our own currency, nor join at the worst possible moment.
There is a long hard road ahead for Britain before we recover and Mr. Major could do worse than listen to some of the proposals that have been put forward by my colleagues in the other place, Mr. John Smith
432
and Mr. Gordon Brown, who have reiterated and hammered home time after time the need for more investment, for more and better education and for more training. All these things are long range but they should be tackled. After all, it was the Prime Minister himself who said recently,"There is no easy way out." Devaluation is not an easy way out. I was arguing that 30 years ago, and I have never felt any different about it. I agree with him: it never was a soft option. It just brings a different set of problems which are just as difficult.
I would say in passing, what a damning statement that was from the leader of the party which has had charge of our affairs for 13 years and which we were told had achieved an economic miracle. When I heard the noble Lord, Lord Wakeham, attempting to defend the indefensible I thought he might have summed up his speech with a quotation from Rudyard Kipling. I jotted the words down as I heard him. He might have said:
"It was our fault and a very great fault
And now we must turn it to use;
We have forty million reasons for failure,
But not a single excuse."
Let him weave a sampler and hang it over the bed of the Chancellor of the Exchequer so that he can read it every night.
The Maastricht Treaty is an elaborate, indeed an over-elaborate, text that has given its critics plenty of ammunition with which to attack its central purposes. One saving grace was that the Prime Minister quite rightly insisted on a separate protocol, giving Britain the freedom not to move to the third stage of economic and monetary union without a separate decision by Parliament. Its detailed timetable was, and always has been, quite unrealistic. Nor is it possible for some member states to live up to the prescribed conditions set down in those articles in the Maastricht Treaty on such matters as ratios of debt or of convergence within the specified time limits.
However, having said that, the sceptics who would prevent Britain from ratifying the treaty are wrong. They underestimate its importance, as the noble Lords, Lord Howe and Lord Jenkins of Hillhead, said, both for Britain and for the rest of Europe if only as an expression of political will. It is not possible to understand the determination of the German and French leaders to go ahead with or without us until we recognise the hunger of the demand to establish a permanent settled order in the centre of Europe. And why, my Lords? It is because those leaders profoundly—and in my view rightly—believe that the long-term peace of Europe requires not only mutual military arrangements and trade agreements but also economic, monetary and political unity.
I have said to your Lordships on previous occasions, and I must continue to repeat it, that 80 million Germans now reunited are powerful and free for the first time since World War II to choose their destiny and to shape ours. If Maastricht is rejected, their leaders will once again face the historic dilemma that has dogged their foreign policy for a century: should Germany look East or should Germany look West? All the German political parties have chosen to look West and in doing so have given Europe its best

433
long-term chance for long-term peace. The present generation will persist in a policy that ties them closely to the West, and they will persist irrespective of whether or not Britain is there.
However, Britain will be severely disadvantaged if we stay out. We shall be weakening the prospects of peace on the Continent. If and when the Government, as I hope they will, present this treaty to the House, believing as I do that the logic of events will assert itself when the over-ambitious terms of the treaty become obvious and the deadlines cannot be met, then for these reasons I shall vote in favour of the treaty. The political leaders will have to take into account that many of the citizens of France and Germany, as well as here, do not wish to march to the federal drum; but at the other extreme neither will the Balkanisation of Europe, nor even its division into two, be tolerable. In the words of Denmark's Prime Minister, the treaty "must be clarified"; but it is frankly feeble of British ministers to shelter behind little Denmark.
Let me conclude. The British people are looking for a clear statement of the Government's intentions. Mr. Major is going to require great sensitivity and imagination if he is to overcome his party difficulties and hold the members together, but it is clear where his duty lies—that is, to put the treaty before Parliament. I have no doubt that that is the course which the post-war architects of Europe would have followed. Churchill and Macmillan both possessed a deep sense of history. Attlee and Ernest Bevin both had an intuitive sense and understanding, arising from their wartime experience, of what was needed. All these men comprehended the tides of history. Alas!, for 10 years this country was led by a Prime Minister who, whatever her other qualities, showed little evidence of understanding either Europe's history or its present needs.
Our present Prime Minister is still an unknown quantity but I trust he will see that Britain's interests and Europe's long-term hopes are one and that his objective of placing this country at the heart of Europe requires him to ratify the treaty and to hold to that course. Then I believe that Britain will be marching along a path of long-term prosperity and peace with the rest of our fellow Europeans.
4 p.m.
Lord Ezra: My Lords, I rise to speak with some hesitation, following on the important speeches of three former Chancellors of the Exchequer, with one more to come, and a former Prime Minister. My own experience has been in the management of businesses in the public and private sectors and I therefore propose to confine my remarks in this important debate to measures which I believe should now be taken to stimulate business activity.
In doing that, I believe that we have to recall, as indeed has been mentioned in previous speeches, that the basic problem of the British economy over a long time has been the difficulty of combining growth with low inflation. More often than not the two have diverged. The most recent example has been what happened in the late 1980s when there was a considerable expansion of demand fuelled by excessive
434
credit. This led to the largest balance of payments deficit in our history and a substantial increase in inflation. As a result, as we well know, the Government have had to take emergency measures in the past two years which have had a marked deflationary effect. Inflation has in fact been brought down but at the cost of a deep and continuing recession.
That is why from this side of the House we have continually and strongly advocated measures to offset this adverse impact on the economy. In particular, we consider that more should have been done to stimulate productive investment in both the public and the private sectors.
Now that we have temporarily withdrawn from the ERM there is greater freedom to take measures to combat the recession, such as the recent cut in interest rates, but the risk of inflation has been heightened, as the noble Lord the Leader of the House made clear in his remarks. The worst solution would be to stimulate another consumer boom such as we had in the late 1980s, as that would lead us into another major balance of payments crisis and renewed inflation. My noble friend Lord Jenkins of Hillhead pointed out that even in a recession the latest balance of payments figures are running at a very high rate indeed, at double the rate forecast by the Treasury for the year as a whole. What is needed is not another consumer boom but measures to stimulate exports, taking advantage of the lower value of the currency, and to increase productive investment. At the same time, as has been very strongly emphasised by all previous speakers, we must continue the fight against inflation.
Taking those three factors together, I would recommend the following specific measures. First, I believe that there should be an urgent review and expansion of export services in order to make sure that British industry takes full advantage of the reduced value of the currency to maximise exports. That, after all, is the greatest single benefit we can get from an otherwise undesirable proposition. Secondly, measures should be put in hand to stimulate investment in the private sector, particularly through a substantial increase in investment allowances, something which has been pressed for for a long time. Specific fiscal incentives should be given to investment which has a positive impact on the environment. For example, homes with a high energy efficiency rating should benefit from lower stamp duty or other fiscal alleviation. In the public sector, productive investment in the infrastructure should certainly not be reduced in spite of the pressure to reduce public expenditure and, if at all possible, should be increased. That applies particularly in the housing sector, where more funds should be released to local authorities, in the transport sector, where more investment should take place in the railways, and in training for industry and commerce, as emphasised so vigorously by the noble Lord, Lord Cledwyn.
At the same time as these measures are taken it is vital that there should be credible steps to continue to control inflation. Recent events have shown that determined and brave words are not enough in matters of government financial policy. Therefore, if

435
we no longer have membership of the ERM to help us to combat inflation, something needs to be put in its place. I recommend that a specific mandate should be given to the Bank of England to establish and maintain price stability. The Government would of course remain in ultimate control of the economy but this mandate of the Bank of England could be reported on every three months so that we could all know how the matter was being handled.
By this combination of measures we could relaunch growth where it is most needed—namely, in exports and productive investment—and at the same time demonstrate that the continued control of inflation was being taken seriously.
4.8 p.m.
Lord Cockfield: My Lords, this is a sad occasion. It is entirely wrong and counter-productive to try to dress up defeat as victory. What has happened in the past seven days is a defeat not just for the Government's economic policy; it is a defeat for the country, it is a defeat for the European Community and it is a defeat for the world as a whole. We need to look at matters in that context.
Our own record of financial management and of looking after our own affairs has not been a happy one over a long period of time. Both parties share full responsibility for that. I shall go back no further than 1967 when Mr. Harold Wilson, as he then was, was Prime Minister for the first time. The pound as it then existed was described by Harold Wilson as "the pound in your pocket", but when one put one's hand in one's pocket one discovered that the pound was hardly there any more. That pound is now worth 10 pence. If we continue down the road that we have been travelling over these past 25 years under the guidance of governments of both parties we shall end up before long with a pound that is worth tuppence. We have to find some way of dealing with that situation. The one thing that is completely useless is rummaging through the dustbin of history and recycling the policies which have been tried but have failed and have been discarded not once but several times in the past. The saddest aspect of any debate of this kind is how often the remedies offered are remedies of proven failure, not possible failure but of hard proven failure.
A great deal of new thought is required in this field and a great deal of co-operation among individual countries. That matter is of importance to the European Community because Western Europe is the best forum for co-operation. As the Community expands, either formally by taking in new members or informally through agreements such as the European economic area or new agreements with the countries of Eastern Europe, so that the area of co-operation extends, that will be one of the major new forces of stability.
I should like to comment briefly on the subject of the securities markets which was mentioned by the noble Lords, Lord Callaghan of Cardiff and Lord Jenkins of Hillhead. A great change has taken place in those markets in the last few years. It is all very well to say that one cannot buck the market, but the
436
market that one ought to he expected not to buck should be a genuine market. The securities markets are no longer genuine markets. They are not dealing with real money; they are dealing with slips of paper that bear absurdly large figures which are written on the slips by frenetic young men or with similar figures that appear on computer screens. They have discovered that any figure only marginally above zero, if multiplied by adding sufficient noughts, ends up with a profit of £15 million, or whatever the figure was that the young man was boasting that he had made. Occasionally one of them comes unstuck, which is the story of BCCI. If that is the case, it is not the frenetic young man or the directors of BCCI who have to pay; it is the unfortunate depositors in the organisation.
That is not the only example. Figures have been quoted of transactions that have gone through which no longer bear the slightest resemblance to the trade flows or to the flows of investment money. It is all very well to say that the markets ought to reflect the real world; of course they should, and to the extent that there were errors in economic policy in this country one must expect them to have been reflected in the markets. However, most of what was reflected in the markets had nothing whatever to do with the real world. It is as though we had decided that we were not going to hold general elections in the future; we were going to take the odds quoted by Ladbrokes and decide the outcome of the election in that way. That is exactly what is happening in the currency markets of the world.
We can blame ourselves about the position of the pound if we wish to, or we can say that it is no fault of ours but the fault of somebody else. However, if one looks at the French franc, the French economy was very much stronger and there were no grounds whatever for the attack which was made upon the franc. It was simply that the speculators, having got the bit between their teeth, were determined to run with the carrot that was dangled in front of them of £15 million by lunchtime. That problem must attract the attention of finance ministers in this country, in the Community and in the greater world.
I should not like anyone to think that I am critical of bankers; I am not. However, it will be within your Lordships' recollection that not very many years ago laundering the proceeds of drug trafficking was regarded as a perfectly legitimate activity, in the same way as insider trading was regarded as a perfectly legitimate activity. There are now extreme sanctions against people who launder drug money. Those sanctions have not only been supported by the United Kingdom in the Community but we cited our own legislation on the subject as a pattern for Community legislation.
Taking the securities markets by the scruff of the neck and making them behave properly is entirely in accordance with the philosophy of this side of the House as well as in accordance with the philosophy, or non-philosophy, of the other side of the House.
I should like to comment briefly about the Treaty of Maastricht. I have stated previously that the importance of the treaty has been greatly overstated. That is one of the reasons why there is a serious

437
division of opinion in this country. I entirely understand why our own Prime Minister represented it as a victory, game, set and match. It has therefore been represented by the anti-European lobby as a dragon that they, clad in the armour of St. George—if they could only find where it was—are going out to slay. Therefore, one gets a totally unnecessary polarisation of opinion.
The fact is that all of the important policies in the Maastricht Treaty are already part of Community law or Community policy. The Maastricht Treaty is a very useful, valuable treaty which ought to be ratified. It dots the "i"s and crosses the "t"s in order to make the administrative arrangements to set up the institutions required for the single European currency. The Single European Act specifically contemplated that that should be done under Article 236 of the Treaty of Rome. The Maastricht Treaty was merely an afterthought.
The first thing that went wrong with the Maastricht Treaty was the battles that occurred at the time of the Rome summit in 1990. That summit led to the political assassination of Mrs. Margaret Thatcher, an incident that will no doubt be very much in the minds of some of your Lordships. At that time there were very, very wide-ranging and, some people would say, wild ideas in circulation. However, the first draft of the treaty that was produced by the Luxembourgers cut most of that out; the Dutch then had a go at it and created another row and produced another version, which took even more out. Finally, the treaty was agreed with the best efforts of our own Prime Minister. I will not say that everything that was left was taken out, but a great deal was taken out which from the point of view of this country was regarded as objectionable.
It is a great pity that safeguards of this kind were not given at that time to the Danes. When we drafted the Single European Act in 1985 a whole raft of special provisions were inserted to protect the Danes. They all concerned matters to which we in the United Kingdom objected very strongly. They wanted high environmental standards and absurd matters of that kind to which we felt we ought not to agree. However, the Single Act safeguarded the Danes on these points. When we obtained the safeguards for ourselves in the Maastricht Treaty it is a great pity that corresponding safeguards were not put in for the Danes. I believe that if they had been there would have been none of the trouble that we have experienced.
I should like to say a final word about the single currency. If the Maastricht Treaty is not ratified that will not stop the single currency going ahead. because the legal base of the single currency is in the Single European Act which was ratified in 1985. About that there is no question whatever.
Two things are likely to happen. First of all, it will be less likely that all the countries will come together and will do so by 1999. We shall see a spreading out of the process over a greater number of years, with the strong coming in and the weak following afterwards. Secondly, we must bear in mind that there is already an embryonic single currency in Europe. Germany itself, France, Belgium, Holland and Luxembourg already form a de facto single currency with the
438
deutschmark. Sweden, Austria and, until very recently, Finland belong to the same group. If Maastricht fails, what will happen—and there is an exact precedent for this in the so-called Schengen agreement on the freedom of movement of individuals—is that that central group will become more cohesive and a number of other people will join it. That is the biggest threat to this country because, if there was a single currency from which we were excluded, the pound sterling would become par excellence the speculators' counter. That is just the kind of thing that on the experience of the last few days we must at all costs avoid.
I hope very much therefore that we shall see the treaty ratified. I believe that a delay of some months in the ratification is of no importance whatever. The single Act itself was six months overdue by the time it was ratified—on that occasion it was the Irish not the Danes, but it is always someone—but it did not in the end make any difference at all. It went ahead. There may as time goes on have to be some alleviation of the timetable. That is not without precedent. If you read the Treaty of Rome—and I realise that very few people have—you will see that the single market was due to be completed at the latest—I underline the words at the latest—by 31st March 1973. It will be completed just 20 years behind the set date. I am sure that we shall need to do very much better in the case of the single currency. I am sure it is in the interests of this country to do better in the case of the single currency and I hope that we throw our weight behind it.
4.24 p.m.
Lord Healey: My Lords, I regret to admit that I am the fourth former Chancellor to address you this afternoon, but you will be delighted to hear that I am the last, at least in this debate.
I do not think that the noble Lord, the Leader of the House, set out to entertain or instruct us in his speech this afternoon, but it is a pity that he did not choose to offer one word of apology from the Government for breaking all their promises and reversing all their policies less than a week after a solemn public undertaking by the Prime Minister not to do so. The noble Lord, Lord Cockfield, provided a refreshing contrast by admitting that we face an abysmal situation for which the Government—and not the first government since the war—must take and admit responsibility.
We are debating the Government's economic policy. If we look at the situation as it is today, we have to admit that the Government have brought us the longest recession since the 1930s and that there is now no sign of recovery. Indeed, the Chief Economist of the CBI said the other day that he did not think we should get recovery until 1994. Yet, although we are bumping along the bottom of a slump, we are running into a balance of payments deficit this year of £12 billion, twice what the Government predicted only a month or two ago. Our fiscal deficit looks like being at least £40 billion, many more times what the Government predicted two years ago. Unemployment

439
is racing up towards 3 million and may well touch 4 million even on the Government's unrealistic figures by the time recovery starts.
Yet the Chancellor has consistently refused to face the facts. In every one of the last five Treasury forecasts, he has forecast a sharp upturn in the coming year, although the reality has been a steady decline. This week we had the most disturbing figures published by the Stationery Office comparing British economic performance with that of our European partners. On investment and output in the last few years we have been far below the Community average; in consumption and prices, far above. Only yesterday the Government published figures which showed consumer spending up although output was flat and investment down.
The fact is that in the first 13 years of the Government we have become by far the weakest of the major economies in Europe. The catastrophe that hit us last week was due to the fact that, although we were the weakest economy of the larger economies in Europe, the Prime Minister took us into the exchange rate mechanism at a rate which was unrealistically high without in advance consulting his future partners about whether the rate was reasonable, although they were obligated to support it by the terms of the ERM. He told us—I quote his words two years ago—that the ERM is the modern-day gold standard under another name
"with the deutschmark as anchor".
He knew what he was doing all right, but he had not the slightest idea what the consequences would be. He chose a moment to put us in the ERM when it was already clear that the cost of German unification and the failure of the Bonn Government to raise taxes to cover that cost was bound to compel the Bundesbank to raise German interest rates.
Even in the last month or two the Prime Minister refused every appeal from his colleagues in the exchange rate mechanism to join in a general realignment involving the weaker currencies. Mr Ciampi of the Italian Central Bank apparently told people at the airport—he is quoted in today's Financial Times—that all the others begged him to do that and the German Bundesbank offered a bigger cut in interest rates if there was a general realignment. Instead, he chose far too late, when we came under irresistible attack, to raise interest rates to 15 per cent. That is 12 per cent. in real terms—above the rate of inflation and for small businesses it is equivalent to 17 or 18 per cent. That was a recipe for total economic disaster. On top of all this he spent between £10 billion and £15 billion on intervention. Then he lost his nerve, took us out of the ERM and that night tried to get a Treasury official to pull down the pillars of the ERM as a whole with him. As I said earlier, he has broken every promise. According to his own words, he has betrayed the future of our own people, yet we have not had a word of apology. Indeed, I watched the Prime Minister on television last week telling us after we had floated and were already 10 per cent. below the level at which we entered the ERM,"Oh no, we have not devalued".
440
We now have the Chancellor telling his friends in the Conservative Party that he never believed in the ERM at all in fact and he is delighted that he is now free to pursue British interests. If that is what he really thinks, surely he should persuade Her Majesty to make Dr. Schlesinger an honorary Knight of Great Britain and reward him for giving us this freedom of which the Chancellor is now so proud, instead of loading him with abuse. I am bound to say that I agree with the noble Lord, Lord Jenkins. I cannot see why anyone should believe a word that the Chancellor of the Exchequer now tells us. His credibility is destroyed. It would be far better if he left his office than continue to saddle us with a man responsible for our finances and economy who cannot be believed.
Well, the Chancellor has taken some steps to try to put things right. Since then, he has cut interest rates by 1 per cent. and let the pound fall, I guess, nearly 15 per cent. up to the moment at which I speak, and it may fall further. But every other element in the policy which has reduced us to the state that I have just described remains in place, except the anti-inflation policy. There, he has gone back to reliance upon monetary instruments which failed during the 1980s and which were abandoned by the last but one—is it?—Conservative Chancellor for that reason. For the reasons which the noble Lord, Lord Cockfield, explained, if he wants to protect us against inflation, there is no doubt that he will be compelled before long to raise interest rates again.
I believe that the cut in interest rates and allowing the pound to float in the consequence of this catastrophe is a sensible short-term measure; but it is not enough by itself. The United States is still locked in recession after seeing the dollar fall to half its value a decade ago and interest rates touching zero more than once in the past few years. But it has not pulled the American economy out of recession, nor will it. That is one reason why President Bush will lose the forthcoming election.
The new policy of the Government—that is, if it is new—will be as great a failure as the old unless they take other steps: to cut consumption, to increase investment and training and give massive spending assistance to restore our crumbling social and economic infrastructure. I agree that that will mean an increase in taxes, unless the Government make deep cuts in our defence spending (which is staying higher than that, for example, of Germany as a percentage of our GDP) and reverse the multi-billion pound bribes which were given to the electorate before the election to make the poll tax and the council tax more acceptable. Above all, the Government must rely upon consensus: they must cease saying that "consensus" is a dirty word. The noble Lord, Lord Cockfield, was quite right to say that we should not go back to policies which are proven failures. But that mix of policies has been a proven success in the two countries which are our most formidable competitors; namely, Germany and Japan.
Meanwhile, I fear that we face an appallingly difficult situation in relation to the European Community and our place inside it. We are already in a second tier, along with the Mediterranean countries,

441
and we shall be unable to return to the exchange rate mechanism, still less move to any sort of European monetary union and single currency, unless we adopt the changes in our economic policy which I have described.
I suspect that the noble Lord, Lord Jenkins, was right in what he said in an article in the Independent this week in which he noted that ever since the war there have been spurts of advance in the European spirit. He said that he thought that this last spurt, whether or not Maastricht survives, is just about due to splutter into a culvert round about now. I fear he may be right on that point. The referenda in Denmark and France and current opinion polls in Germany, as well as in Britain, suggest that there is now no enthusiasm among our peoples for that political and economic union to which this country pledged itself when the previous Prime Minister forced the Single European Act through Parliament under a Guillotine Motion.
What lessons can we learn? I ask that question because if we do not learn from our mistakes, we shall continue to make even worse mistakes. First, obviously every politician knows that it is very dangerous to move too far ahead of public opinion. Choosing how far you can move in advance and keep the public following you is one of the most difficult tasks in politics. The second lesson—which, after all, was preached about by the Germans and by economists long ago—is that you cannot have a European monetary union or single currency without a degree of economic convergence which is guaranteed by a single political authority. That has always been the point on which the German Government have insisted right through these discussions. But none of the European Governments is ready for this at present.
In his television debate during the referendum campaign, President Mitterrand specifically rejected the idea that France should ever submit its foreign policy to decision by a majority of other European Governments. He specifically stated—and, I fear, stretched the truth more than a little—that the European Central Bank envisaged under Maastricht would be under the control of the 12 European Governments. That is something which the Germans would always reject and, if the French persisted in that view, it would guarantee the rejection of European monetary union.
Yet, it would be catastrophic to draw the lesson from all of this that European unity is now impossible, still more unnecessary. The single market is vital to this country as it is to all the other 11 countries in the Community and equally vital to the countries in EFTA which want to join the Community. A united Europe is the only hope visible to the countries of Eastern Europe. Here I agree very much with what my noble friend Lord Callaghan said on the matter. Whether we like it or not, I think that it may be necessary to accept that Europe's advance will proceed at several speeds in the immediate future or we may even have some sort of Europe á la carte. That
442
is what the Danes clearly want. They want to be able to pick and choose which elements of the Maastricht Treaty they will carry out and which they will not.
My noble friend Lord Callaghan was so right to point to the wider perspective. We are living in a world of colossal uncertainties. All the predictions that we make now about the Common Market or the single currency may be thrown into ruin in the coming years by events in Eastern Europe or what used to be the Soviet Union or even in the Middle East or on the other side of the Mediterranean Sea. What I find most depressing is the fact that the Chancellor of the Exchequer should have chosen this very moment deliberately to excite the worst form of xenophobia in Britain, egged on with passionate shrieks from the previous Prime Minister on the other side of the Atlantic who actually committed us to political and economic union by forcing through the Single European Act. It is not good to see a British Chancellor behaving like the poor man's Le Pen. I believe that that is a politer description than the one used by the Italian Prime Minister who compared him publicly with a "tot in a tantrum".
The attacks on Germany in particular are grossly unfair. It is the only country in Europe at present which is getting to grips with the problems left by the end of the cold war. It is spending £100 billion on assimilating the 18 million in Eastern Germany; it is giving more assistance to Poland, Hungary and Czechoslovakia than all the other members of the Community put together; and it is taking 100 times more refugees from Eastern Europe than Britain. Moreover, even on the question of the ER M, where its views have been an open secret for many years—indeed, the previous president of the Bundestag, Karl Otto Pohl expressed them publicly before we joined in 1980—last week Germany spent more money defending the pound than it has so far spent defending the franc. Yet the Chancellor gives no hint of those facts in all his public speeches.
Finally, I want to say a word in regard to two fundamental issues, one of which has already been raised by several speakers. One of the worst things that happened in the Western world is that political cowardice has led governments consistently to refuse to raise taxes when it is clearly necessary to do so. That failure to raise taxes, to promote economic growth in our own country and to assist other countries in travail, as the Americans did at the end of the First World War, is one of the reasons that the whole of the Western world has suffered from unusually low growth in the past 13 years. It is a cowardice which exists not only in this country but also in Germany and, above all, in the United States.
The last problem—I am glad it was raised so often in this debate—is that of speculation. As the noble Lord said, it is the fact that exchange rates and interest rates are determined by a Mafia of gilded young lemmings in the dealing rooms of the banks, financial institutions and corporations who treat money as grains of rice with no reference to the underlying flows of trade and production which it has always been supposed to represent. One thousand billion dollars a day can cross the exchanges in micro-seconds in

443
search of speculative profit—a far greater sum than all the pooled reserves of all the countries in the world. Most of that money—95 per cent.—crosses the exchanges not to finance trade or investment, but to win profit for the institutions and of course for the dealers themselves whom we saw defiling our screens more than once last week.
The question is how we can control that. It is interesting to note—the noble Lord, Lord Cockfield, referred to this—that the countries which still hold capital controls have survived the flood; Ireland, Portugal and Spain are seeking to do so. The American Treasury Secretary, Mr. Brady, suggested that the world finance ministers and bankers should get together now to find ways of controlling it. Several people referred to the desirability of that. However, nobody except my noble friend Lord Callaghan suggested how that might be done.
I am glad to say that Mr. Felix Rohatyn—the New York banker who may well become the next Treasury Secretary should Clinton become President—put forward concrete and specific proposals. It is therefore just possible, in spite of the folly of governments, that we may yet be saved.
4.43 p.m.
The Earl of Perth: My Lords, I rise to speak having had the privilege to hear no fewer than four former Chancellors of the Exchequer, not forgetting the noble Lords, Lord Jenkins and Lord Cockfield, who have such specific knowledge of Brussels and the European Commission.
Around two months ago I wrote a letter to The Times which was published. In that letter I urged that we should seize the opportunity to readjust—I used that word; the catchword now is "realign"—the European currencies with Germany. I felt that the situation was becoming totally out of hand and that it would be reasonable for the European countries to approach Germany and say,"We want to realign". I am sure that Germany would have said,"Fine, you are quite right. We are in a somewhat special position and would welcome it".
I took special care that my letter should be seen by the Government, whether by the Chancellor or even the Prime Minister. However, I received no answer. I am not surprised. That is perhaps the way of governments. It seemed to me that either pride in their policies or obstinacy was the reason that they were not prepared to contemplate any change. They felt that the only action they could take was to fight it out on the ground at the present time; fight it out regardless of the enormous suffering that was inflicted on many of the European countries' economies as a result of the wrong levels of currency being imposed.
We know what the outcome was. It was a week of total chaos and farcical behaviour in the markets of this country. Ministers are to blame; clearly the Treasury is to blame; and officials and advisers should all be made to consider their positions. It was a mess. We saw the exchange rate going up and down like a
444
yo-yo. In the 60 years during which I have taken a special interest in banking I have never before seen that happen.
There is a lesson to be drawn from that. Those are monetary matters. The Bank of England is the best equipped to handle them. But no; our Bank is tied to the Treasury, to the Government. It is nowhere near having its own say. I wonder why we cannot follow the example of America with its Federal Reserve or Germany with its Bundesbank. Perhaps it is because the officials think they know best. I make a strong plea that the question of the urgent denationalisation of the Bank of England be considered.
I well understand and entirely agree with the Government that at all costs we must fight inflation. However, there are limits beyond which one cannot go. I was interested to hear the Leader of the House say that perhaps we have been too severe. I cannot remember his exact words but the general tenor was a veiled apology for the policy over the past several months or even year.
The Government should stick to their own role in economic matters. They should be concerned with tough budgets; with economic policy generally; with training people in industry who for one reason or another have found themselves unemployed; and with the services, which are so important these days. They should worry about pay levels. Although I am a great supporter of the police I was rather distressed to read that there was to be a 6 per cent. settlement of their pay. That seems to me to be too high in the light of the present inflation rate. Those are areas in which the Government can take action. If the Government were to stick to their last in relation to those matters and leave other matters to the Bank of England, giving it broad guidelines but stopping at that, I believe that we should all be much better off.
I now turn briefly to the European situation. We have heard from speakers such as the noble Lord, Lord Callaghan—whose speech on the subject of the Maastricht Treaty was of great significance and should be studied by one and all—of the importance of our going ahead now and not at our leisure, at a time when we consider that it would be nice to do so or conditions are right, but now that the Prime Minister is President of the Community. We should drive ahead not only in respect of the Maastricht Treaty—where perhaps there may be a need for one or
two small changes—but more importantly in relation to the question of currency.
The Government, and many of your Lordships, have said that they would like to make changes which would enable us to re-enter the ERM. I read that Sir Edward Heath had said that that is not enough. I agree. We can tinker with the system, but I believe that we should drive for one single currency. I know that that involves difficulties, but it would be more worth while to do that rather than tinkering with the ERM and facing the same difficulties with the next currencies which may be attacked by the speculators, who will say,"This is wonderful. Now we have another chance". Let us be brave and go forward on the basis of a single currency now, if only to outwit the currency speculators.

445
We should take this opportunity to denationalise the Bank of England. These days privatisation is a shibboleth, but I believe that we should consider very carefully before we, for example, denationalise coal. I understand some of the reasons for doing so, but the consequences are so appalling in view of the present level of unemployment that I believe that we should wait. There is no great urgency.
To sum up, I say humbly, in view of the great speakers who have spoken before me, that we should consider the position of the Bank of England and try to ensure that the Government are concerned with their economic policies but not with certain administrative details. Secondly, I do not believe that we can reform the ERM, although it would be nice if I were wrong. Therefore, we should aim for what I believe to be the right and ultimate object, namely, a single currency.
4.53 p.m.
Lord Boyd-Carpenter: My Lords, the debate has shown, if it were necessary for it to be shown, the enormous contribution which your Lordships' House can make to the discussion of important public affairs. The debate so far has produced speeches based on enormous experience in the operation of our economy and in coping with the immensely difficult problems which have to be faced in its management. We have heard so far from four former Chancellors of the Exchequer. Faced with that inflationary input, mere former Chief Secretaries or Financial Secretaries are devalued almost beyond belief. Nevertheless, it is an indication that your Lordships' House musters enormous expertise on the difficult subjects which really matter.
I regret only that so far no mention has been made of what is perhaps the most important economic problem of them all—the completion of the Uruguay Round of GATT. So much depends upon a proper development of GATT, from the point of view not only of the trade and economy of this country but the trade and economy of the world. It is a great pity that our own recent troubles of the past few weeks have tended to obscure discussion and thought on that subject. Therefore, I hope very much that when the noble Earl replies for the Government—I suppose some time a little after midnight—he will be able to say something about the Government's intention, notwithstanding present difficulties, to insist on progress being made with the GATT round.
There is no doubt that there is obstruction in Europe. There is no doubt that France does not want any progress at all to be made on the GATT round and is very happy with the immense over support for agriculture. Therefore, it is very important that in this country we should not allow our concern and preoccupation with our immediate troubles to blur our determination to ensure that a successful conclusion is reached. One hopes very much that in that we shall have the assistance of the United States, whose views on the subject I believe on the whole to be close to our own.
I want to refer to only one other matter. I do so with some diffidence. It is the suggestion that sooner
446
rather than later we should revert to ERM membership my noble friend Lord Howe, in—I hope I may say—a most impressive speech, urged that that should be done. However, he ignored the great question as to why, if the ERM is such a sound system, the disaster of a fortnight ago occurred. A system which is vulnerable to speculation and to such pressures and which can produce such disastrous consequences as we faced a fortnight ago is surely a system not to be re-adopted without a great deal of further questioning.
On that point I ask the noble Earl, when he replies, to also give an indication of the cost to this country of the finance which it is thought had to be raised in the attempt to retain ERM membership, even though in the event it failed. Figures of billions of pounds have been quoted, which I hope are an exaggeration. I believe that it is owed to your Lordships' House to be told the cost of that forlorn hope operation. That information is immensely relevant to the question of whether or not we should re-enter the ERM. If we have had to pay, as I am inclined to believe we have, enormous sums in a forlorn effort to try to remain in the ERM that is surely a warning against taking on similar obligations in the future.
I should like to pursue further the principle involved. Is it wise to have the exchange rate of your currency fixed in line with another currency or currencies and to a considerable extent outside your control? Is that beneficial? The noble Earl, Lord Perth, tended to dismiss that point and said that a common currency probably makes more sense. To a considerable degree I agree with the noble Earl, although I believe that a common currency is a very long way off and that it raises serious questions, such as that of sovereignty, which would have to be considered. After all, the power to issue currency has been almost the classic definition of sovereignty for a thousand years or more. To surrender that power to a European authority would be a tremendously serious decision to take. However, such a decision is, on any view, a long way off.
What we have now to consider is the suggestion, which has been influentially supported by my noble friend behind me and hinted at by the Government, that we might revert to the ERM. I wonder whether that is right. Is there not a great deal to be said for an exchange rate which fluctuates in accordance with the working of the economy? After all, if there is a bad balance of trade—a trade deficit—and one has a freely moving currency, the exchange value of that currency goes down. Surely that is exactly what one wants, because at the same time it will make exports more attractive and competitive and make imports more expensive so that the population is discouraged from purchasing foreign goods. That has a righting effect on the economy. Surely that is one of the advantages of the freely moving exchange rate, which we operated for a great many years.
I hope that Her Majesty's Government will be very careful about plunging again into the ERM. We have had a sorry experience of it and I believe that it has done us no good. I believe too that a freely moving exchange rate, moving in accordance with the

447
developments of our own economy—resisting if necessary the efforts of speculators, of which a good deal has been said—is a much more sensible and self-regulatory system.
I stress that view, which I know is widely held. There was a very sensible leading article along those lines a few days ago in The Times. There is a great deal of opinion in this country which has now moved away from the too easily accepted concept of the ERM and toward the idea of a freely moving currency. I do not expect the noble Earl to give a definite answer today but I hope that he will at least indicate that the Government are not pinning their intentions to the idea of necessarily at some time reverting to the ERM. I hope that it is at least open as to whether or not we are to have it back. My own hope is that we shall not.
5.3 p.m.
Lord Bruce of Donington: My Lords, it is for me a most daunting task to participate in a debate following the very cogent interventions of no fewer than four former Chancellors of the Exchequer, including one Prime Minister and a former Chief Secretary to the Treasury. I am afraid that the only qualification I can offer as even a remote basis of comparison is that I entered politics in 1931 as a young Conservative and left the Conservative Party following events very similar to those which took place last week. At that time we came off the gold standard after having said in the election campaign that we did not intend to do so. It precipitated a good deal of thinking.
Not for the first time I find myself in considerable agreement with remarks that fall from the lips of the noble Lord, Lord Boyd-Carpenter. Whether one likes it or not, if one is to operate within a world system of the supremacy of market forces, sooner or later, whatever system may be in existence across the exchanges and whether or not formal rules continue to exist, currencies will ultimately tend to reflect the economic strength of the countries that issue them. There can be very little doubt about that.
It would not have been unbecoming for the Government to offer some apology this afternoon for what has taken place over the past week. The noble Viscount, Lord Whitelaw, was always at his disarming best in your Lordships' House when, every now and again, he rose and said,"I made a mistake. We all make mistakes, don't we?" But this afternoon we have had no apology whatsoever for what must be regarded as a catastrophic series of events that has taken place since we joined the ERM in October 1990. As many noble Lords may recall, I warned against that course at the time. I regret to say that events have proved that the warnings I then offered and have often reiterated, like many of my colleagues in all parts of the House, have been fully justified. However, apologies by government are less important than the injuries that have been done to individual citizens. Within the closed atmosphere of Westminster we often tend to regard political matters as though our own personal views, fortunes and reputations are somehow involved and of overriding importance.
448
I am quite sure that noble Lords will appreciate that entering the ERM at an over-valued rate (with the benefit of hindsight that is now agreed upon even by the Liberal Party) was a great mistake. Following that decision, unemployment in the United Kingdom has increased by over 1 million, there have been numerous repossessions of houses and there have been bankruptcies galore. There has been rapid deterioration in the social services and the whole infrastructure, while beggars once again are to be seen on the streets of our big cities and even tuberculosis is beginning to reappear. Those are the consequences of economic policies for which Her Majesty's Government must bear sole responsibility. They have had all the power. They cannot blame the trade unions, which they have stripped of most of the powers of which they had previously complained. They cannot blame the ordinary people because the ordinary people of our country have played little part in this at all. The Government can only blame themselves.
In the course of the remarks made by the noble Lord, I noticed that he said that the situation was somehow all due to "turbulence". For the moment let us forget the turbulence that has been caused in the lives of millions of our citizens over the past two years. Let us return simply to the word "turbulence". My noble friend Lord Callaghan effectively demolished that argument. In point of fact, the turbulence and the dealings complained of are conducted in the back rooms (or prominent rooms) of the banks of this country. They are separated from the ordinary operations of the bank by what is called a Chinese curtain. The so-called teenagers or youngsters who operate the foreign exchange markets are employed by the banks. They are instructed by their large clients, including the banks themselves, unit trusts, insurance funds and the corporate treasurers of large companies in the United Kingdom, who give them standing instructions to make as much as they can out of the money that is held. Therefore, oddly enough, the pressures on the exchanges which are dismissed with the word "turbulence" emanate in the main from those very institutions whose managing directors and chairmen periodically go to functions with the Prime Minister and the Chancellor of the Exchequer to applaud adherence to the Government's policies. That is exactly what has happened.
The cost of the operations that have taken place can be exaggerated. Reference has been made to a figure of £2 billion profit made by the banks. I would venture to doubt it. I do not believe that the figure is as large as that. Indeed, money spent in supporting the pound or other currencies is in exchange for currencies which then have to be sold at a later date. There is not an absolute loss. The loss to the United Kingdom may have been about £750 million—it was certainly not £2 billion—and a sizeable proportion of that sum has gone to the banks themselves.
Quite clearly something has gone wrong. When I listened to the explanations that fell from the lips of the noble Lord, Lord Cockfield, I was a little amused. However, the idea that the movement of money across the exchanges at 10 times the amount that is normally required for trading is quite a good figure, but it

449
represents the movement of capital. One of the basic tenets of the European Community—it is one of the first acquis—is that there must be complete freedom of movement of capital. However we may dress up the way in which we shall prevent the speculation to which both noble Lords referred, it will represent the reimposition of some form of exchange control—the same exchange control which, when he was Chancellor of the Exchequer, the noble Lord, Lord Howe, abolished almost immediately on taking office, at the same time as hiking the rate of interest up to 17.5 per cent. If the noble Lord were here, I should have reminded him that one of the greatest devaluations that ever occurred in this country, that of 40 per cent., took place during the two years when he had charge of that aspect of our affairs. He was the largest devaluer.
So much for the past. What of the future? The noble Lord, Lord Ezra, made a number of suggestions with which I found myself in considerable agreement. Certain members of my own Front Bench in another place with whom I sometimes find myself in agreement have also made excellent suggestions as to what can be done. But surely the first thing that has to be done is to reassert the primacy of democracy in the United Kingdom. I do not wish to reopen too many arguments on the subject. However, I remind noble Lords that the democratic control of our own affairs is one of the pillars upon which our constitution now rests. We should not part with it lightly. Yet what has happened?
I can give a somewhat ironical example, addressing for the moment my own Front Bench. My own party in another place advocates for perfectly good reasons the abolition of the House of Lords because it is a non-elected body responsible to no one. I believe that the underlying argument is unassailable. There are countervailing factors. The House of Lords has very few powers. Such powers that we exercise are very wisely exercised. I venture to suggest that the country has benefited greatly from time to time by our interventions and indeed by the contributions that we make to the national debate even though we acknowledge that the other place must have the power. How incongruous it is, therefore, that a party whose official policy is still the abolition of your Lordships' House on the basis that it is undemocratic and unelected should nevertheless express itself in favour of a Maastricht Treaty—if one can interpret the ambiguities which exist—which contravenes every canon of democratic representation. It is a little odd, to say the least.
Maastricht places a vital sector of economic policy under the control of a so-called independent group of bankers—bankers, of all people, after the history of the past half century! It proposes that great segments of decision should be determined not by democratic vote or reference to the people, nor even by the people's elected representatives, but by those so-called independent people; that is, people of independent minds. One cannot stop ordinary politicians denigrating and lowering the status of their own profession. The function of politicians is to determine policy, and to take the responsibility of it for those who elect
450
them. That is why I hope that when the issue is considered, as it must be, we shall look again at those provisions of the Maastricht Treaty which constitute a direct infringement of democracy in our countries and indeed in Europe.
It will be difficult because we have not been quite so open with our fellow countrymen as have the French. The French distributed about 43 million abridged editions of the Maastricht Treaty, explaining what it was all about. To date in the United Kingdom about 1,700 copies of the treaty have been sold; and I am prepared to gamble that a very large number of Members of Parliament—not, of course, those in your Lordships' House—have not even read the treaty upon which they invite the comments of the British people.
If we are to proceed in accordance with our traditions, surely the Government, since they do not feel inclined to have a referendum, could at least ensure that an independent and authentic summary of the treaty is delivered to the doorstep of every voter so that each is in a position to exercise his influence on his Member of Parliament. If there cannot be a referendum, should the Maastricht Treaty come before the other place, let us hope that the Government will have the decency to give Members of Parliament a free vote.
5.20 p.m.
Lord Hailsham of Saint Marylebone: My Lords, if one thing emerges beyond doubt from the debate it is that this is no time for party politics. The divergence which has emerged from the different Benches of your Lordships' House more than justifies the remark made by my noble friend Lord Boyd-Carpenter that it has been strongly supportive of the valuable part which debates in this House can make to a serious and important national situation.
It is odd that not so many months ago we were talking about the peace dividend which everybody would enjoy as the result of the break-up of communism. What kind of a dividend has it been and why has it been delayed? There is, as it were, a Marxian contradiction between the suppositions of the political parties and the facts of economic life. The facts of economic life are that the strength of economies is due largely to factors outside the power of individual governments. It is far more important to realise that than to realise anything else. Whatever a government of this country can do, they cannot alter the fact of the rate of interest at which the Germans are borrowing money, for perfectly understandable reasons, owing to the fragmentation of post-communist eastern Europe. If the Germans must borrow money at 10 per cent. we cannot borrow it at 5 per cent. Equally, nothing in this world that a government of this country can do can alter the fact of the American deficit. Being half American I believe that the deficit is something of a scandal but we cannot alter it. It will continue to affect our economy adversely and indefinitely into the future.
There is a third factor which I doubt we can alter but which is very much within the province of the government of this country. When earlier this year the

451
Chancellor of the Exchequer came to the House of Commons with his Budget he proposed to borrow £28 billion this year. The noble Lord, Lord Healey, in his contribution this afternoon, put the figure at £40 billion, which is something of an increase. All the same, it is odd that coming from the same Benches but from different orators one has the suggestion that we should now invest in our infrastructure on an unprecedented scale. I sympathise with that aspiration because obviously there are things which badly need to be done. However, I was led to believe by my banker that one cannot invest an overdraft. That is exactly what is being advocated by the suggestion that we should invest—I use the word in inverted commas—a large sum of money in addition to the £40 billion.
But something else is odd about the situation and about this debate. We have been around this merry-go-round many times before; there is an element of dé já vu. There was, after all, a paper pound during the Napoleonic wars. When I was an undergraduate an economics don—I think a Professor Cannan—wrote a book called The Paper Pound. After the Napoleonic wars we went on the gold standard. That was not a bad arrangement and it lasted for more than 100 years. When before the First World War my father took my mother to the continent of Europe in the summer he did not bother with travellers' cheques or about what currency they would be accepted in. He took a bag of sovereigns and half-sovereigns. When he wanted foreign currency he would buy a newspaper across the counter in a shop in Paris and be given 25 francs to the pound because the French were on the same standard. Whether that was a single European currency I do not know. It appears to me to be very similar although the theory was that they had francs and we had pounds sterling.
The First World War was an economic as well as an international watershed. We then returned to a fluctuating currency such has been advocated by my noble friend Lord Boyd-Carpenter. In the case of the defeated power, which was then Germany, that led to a worthless currency. I cannot help thinking that recent German policies are somewhat moved by the traumatic experiences of those days. However, a currency which fluctuated entirely according to the whims of the economic facts of life was not a great success or boost to the world economy.
I believe that within limits it is desirable for a concerted attempt to be made to stabilise currency wherever possible. No one could be more critical than I of speculators, who have been much described in this debate. But in the long run the speculators can speculate only about an uncertain situation. One cannot ignore those facts of life either.
I am sure that in the circumstances the Government were perfectly right to attempt to stick to the ERM. It was a bargain and we tried to stick to it. However, I do not doubt for one moment that, as my noble friend Lord Cockfield said, at the rate at which we tried to stick to it we suffered a defeat. We were right to do our best and we were driven off it in circumstances outside our control. The pound has not been devalued—that involves a conscious decision on someone's part and
452
to call it devaluation is to pay a compliment that it does not deserve—but it has floated down and I am sure that it is good to let the pound float a little further before we try to stabilise it again.
I wish to make only one other point because I am a minnow speaking among Tritons in this debate. The suggestion that we should hold a referendum about the Maastricht Treaty is one of the silliest ever made. Those who seriously put it forward, whether from my party or the party opposite, need a cohort of caring men in white coats to examine their mentality. We had the Danes—oh dear, they said "no". In an earlier debate this year I was told by the noble Baroness, Lady Seear—and she is nearly always right—that that answer, which had a majority nationally of about the same as my son took the constituency of Grantham at the general election, was largely influenced by the fact that the Danish Liberal Party, with an uncanny instinct for shooting itself in the foot, advised its supporters to vote "no" on the grounds that the treaty did not go far enough. The French have since completely destabilised the international scene by having a referendum which I can say resulted only in a tiny "oui".
The reasons are not far to seek. Economic problems do not go away because one holds a plebiscite about them. Democracies, like Heinz products, come in about 57 varieties. But the one variety of democracy which has always failed is democracy by plebiscite. It has failed since the days of ancient Athens and will continue to fail. As the noble Lord, Lord Cledwyn, reminded us earlier, in the case of Germany after Weimar a referendum led to a dictatorship, as it has often done in history.
However, there is an even more certain reason why the Maastricht treaty could not be made the subject of a referendum. We have a system of representative democracy. I believe that referenda are inconsistent with representative democracies. However, whatever view one holds about that, one must say that the question must be one to which an absolute yes or an absolute no is a rational answer. In a referendum there cannot be more than two possible answers, and they must be unqualified. The noble Lord, Lord Bruce of Donington, suggested that there should be a simplified version of the treaty. I should not like to be the man who tries to simplify it. About 300 pages of complicated, turgid parliamentary draftsmanship can hardly be reduced to a single sheet of notepaper. The answer is certainly neither yes nor no in the sense that one is either for it or against it. I am in favour of ratifying the treaty but the answer to the treaty can only be,"yes, if" or "no, but" or "yes, but" or "no, if". It is impossible to have an absolute "yes" or "no" answer. The folly of asking for a referendum in those circumstances seems to me to be almost beyond belief.
I thank your Lordships for your careful attention to my ridiculous speech.
5.30 p.m.
Lord Stoddart of Swindon: My Lords, one can always tell when the Government are in trouble because the noble and learned Lord, Lord Hailsham, says that we should not make the issue a party political

453
matter. One then knows that the Government are in trouble. However, let us make no mistake, it is very much a party political matter. While I did not expect a speech of contrition from the Leader of the House when he opened the debate, neither did I expect a history lesson which was rather less than objective, to say the least. Indeed, one has to look at only one or two of the items he mentioned. For example, he said that inflation had been reduced. We know that inflation has been reduced but at what enormous cost to our economy and to people who have been unemployed. He told the House that interest rates had been reduced, which is patently untrue. Real interest rates have clearly increased and because they have increased, they have done considerable damage to economic recovery. Before we joined the ERM, the real rate of interest was 3.5 per cent. When we came out of it, it was 6.4 per cent. In other words, real interest rates have nearly doubled as a result of our membership of the ERM.
To those of us who opposed entry to the ERM, what happened last week was inevitable. We realised that it would happen, which is why we did not wish to join. Unfortunately, that failed experiment has done extreme damage, particularly to the manufacturing industry and to our competitive position. It has been a disaster for thousands of firms which have gone bankrupt and for the additional 1 million people who have been thrown onto the unemployment scrapheap. For them, it has been a disaster and has been two wasted years. Indeed, if the shadowing of the deutschmark at three deutschmarks to the pound is taken into account, it has been four wasted years. How my heart goes out to those 3,000 people who were made redundant by British Aerospace yesterday; to the 950 who were made redundant by Rolls-Royce and to the 2,000 Ford workers who were made redundant today. The ERM is to blame for their misfortunes; let us make no mistake about that.
How sad it is to remember the phrases used by the Prime Minister not so long ago. He must regret speaking at all. He said that if it is not hurting, it is not working. What an insult is that to the unemployed, as it is when the Chancellor of the Exchequer says that higher unemployment is a price worth paying for lower inflation.
The past two or three years have been very bad years for this country. As I said, I believe that joining the ERM at a level of 2.95 deutschmarks to the pound was a disaster indeed. Even more worrying is the talk of re-entering the ERM at some time in the future. Some would like us to re-enter the ERM next week, but perhaps they will tell me at what rate that re-entry should be. At what rate next week, the week after, or in a few months' time, shall we enter? Shall we be given any guarantee that if we enter at that rate, after three months or two years that rate is still valid? That is one of the problems of fixed rate systems; namely, that they cannot adjust to the circumstances of any given time.
It was interesting that when the Chancellor of the Exchequer announced that Britain was leaving the ERM, he said that in terms of monetary and interest rate policy he would now do what was right for the
454
British economy. We all heard him say that. Why on earth has he not been doing that up until now? Why has he suddenly decided that he will now do what is right for the British economy? In whose interests has the policy been operating up until now? He must remember and the Government must remember that they have been elected and put into positions of power to represent British interests and not the interests of the Germans, the USA, or French interests. They are elected to represent British interests and that is what the Chancellor should be doing.
I believe that the Chancellor's attitude arises from a pathetic faith in our so-called partners in the EC. Indeed, in all the "hype" it has been forgotten that they are not our partners but our competitors. We forget that at our peril. They may be political partners but in terms of business and trade, they are our competitors. Our Government should realise that and in future should put British interests above all interests.
Perhaps the British Government should stop worrying about being at the heart of Europe and give priority to keeping Britain's industrial and economic heart heating and beating firmly. Our Prime Minister should take note of the contemptuous treatment of him by the German Chancellor and the French President.
Quite rightly in my view, our Prime Minister, following the French referendum, decided that, as President of the European Council, there should be a meeting of the council after there had been time for due consideration of the French referendum result. But before that could take place the French President and the German Chancellor had a meeting of their own. I believe that that was an insult. It indicates that they are going to stitch up their policy and attempt to impose it on the conference which is being called by the Prime Minister.
But this economic debacle is not just a failure of government policy. It is a failure which rubs off on all those who clamoured for entry into the ERM at the absurdly high rate of 2.95 deutschmarks to the pound. I fear that they too are guilty men in this regard. We need now to forget fixed exchange rates which if they work at all cannot do so without causing recession and slump unless accompanied, as so many people have said this afternoon, by strict exchange controls which I understand will be banned when the single market comes into operation next year. They are almost banned now I believe.
The fact of the matter is that it has been shown that fixed exchanged rates do not work unless they can be accompanied by strict exchange controls. I do not believe that this or any other government within the European Community is going to accept that. Government policy should now concentrate on pulling Britain out of recession by encouraging growth and enterprise.
Low inflation must be part of government strategy; but it must be balanced with the needs of the total economy and not take precedence over everything else. That has been one of the mistakes that the Government have made up to now. I remind them and noble Lords on that side of the House that one of the

455
great reasons why we have had this problem is the lack of credit control. I and many of my colleagues were urging the Government to prevent the obscene credit boom which took place three years ago and which unbalanced the whole of the money and banking system.
We need to encourage investment in industry by making it more attractive to investors to put their money into manufacturing industry rather than into building societies. We need to encourage the people of this country to be industry-orientated investors because therein lies our real future. That must happen if we are to take full advantage of the devaluation of the pound—call it what you like—to a realistic and sustainable level. The demand for British goods will expand abroad and at home as export prices become cheaper and import prices become dearer. Clearly, there is need for a sustained period of low interest rates to encourage large and sustained investment in saving existing productive capacity from further contraction and to encourage new investment.
The Government must immediately set out what their policy is and what it is to be. This is urgent. They should explain clearly how that policy is going to be made to work. They will need all the help that they can get from both sides of industry. They should encourage both sides to talk together and with them. There is a need to put aside chimerical illusions about European economic and political union and never mind about a slow-speed and fast-speed Europe. We need a fast-speed Britain. That is what we should be working towards. We should be concentrating on uniting our own people in the fight to preserve and improve their standards.
Before I sit down, I wish to mention the Maastricht Treaty. I had not intended to, but as so many people have done so I felt I should not be left out. Unlike the noble and learned Lord Lord Hailsham, I believe that we should have a referendum on the Maastricht Treaty. It is a question of unity. Despite what the noble Lord, Lord Cockfield, said, the treaty involves fundamental questions including whether we are all going to be made citizens of a new European union. In those circumstances, and because there are to be further transfers of power from this Parliament to the institutions of the Treaty of Rome, we are altering our constitution to a very great degree. If we are to make it stick and if those in favour of the Maastricht Treaty wish it, they must get the wholehearted consent of the people because, in modern terms, the sovereignty of this country belongs not to Parliament but to the people. It is their self-government and not ours which is at stake.
If we wish to unify opinion and if the Government want to have legitimacy in this matter, there is only one way to do it whether we or the noble and learned Lord, Lord Hailsham, likes it, and that is to consult the people. The people of this country are well educated and intelligent. They are just as capable of making up their minds as we are in this place and as are the elected representatives in another place. On this occasion we should give the people the opportunity to have a say.
456
Perhaps I may say to my noble friend Lord Cledwyn, whom I very much like and respect, that I wish that he could persuade his colleagues on the Front Bench in another place for once to take note of the grass-roots opinion in this country because, according to opinion polls,80 per cent. of the people would like a vote on the Maastricht Treaty. They would like a referendum. For once, let the Labour Party lead opinion. Let it support the ordinary people of this country in their call for a say in the future of their country.
5.48 p.m.
Lord Benson: My Lords, I believe that the basic reason why we were forced to devalue was because our economy was low in comparison with that of other nations. We have devalued before and that was the reason on those occasions. Unless we can strengthen our economy we shall go on devaluing in the years to come.
Some parts of our economy are in good shape. We have the transient benefit of oil; invisibles and exports are productive; agriculture is efficient and tourism is strong. But the whole basic foundation of the economy of this country rests on manufacturing industry. That has been the mainstay for the past 150 years and if that is diminishing it will bring down, and has brought down, the whole economy.
There are three problems. The first is that for the past 40 years our share of available markets in manufacturing goods has diminished disastrously. The result is that the manufacturing base in this country is now too low to sustain the economy.
The second point is that the average standard of productivity of manufacturing industry in this country is below that of our competitor nations and is exacerbating the situation extremely. The third reason is that this Government, like predecessor governments to one degree or another, do not accept that our manufacturing strength has diminished and are unwilling to introduce policies to correct the situation.
There are many people to blame for the humiliating diminishing of the strength of our economy—management, the workforce, the City, the institutions and many others, but the one institution which has the power and the responsibility to correct the situation is the Government—and they have failed to do so. When the Government were re-elected in April of this year, it was to be expected that in the first Queen's Speech thereafter they would expose to the public our declining economy and the policies that they had in mind to correct that position. That did not happen. The gracious Speech made no reference to trade, industry, commerce, manufacturing, the balance of payments, exports, employment or unemployment. There were no defined policies for the future. When the Address was debated in the House, the Government's answers were equally unconvincing.
I was so disturbed by that situation that I took the liberty of writing direct to the Prime Minister to voice these anxieties. I pointed out that such views were held by persons and organisations of unquestioned authority, knowledge and responsibility. There is no secret about the correspondence between the Prime

457
Minister and myself. If any of your Lordships would care to read it, it is available and I have copies with me for that purpose. What emerged from that correspondence was the point that I have emphasised so much already—that the Government do not admit that our manufacturing industry has diminished. They are not prepared to make any change in policy to correct that situation. In that correspondence I stressed how our political and economic position had been declining year by year. Unhappily, by the chance of fortune, only a fortnight after the correspondence closed, we had to devalue—apparently much to the Government's astonishment.
Unless the Government are in a position to inform themselves rather better than they have in the past and unless they are prepared to throw off the shroud of complacency which envelops them, the future of this country and the survival of this Government are in peril.
I conclude by asking certain questions that I have asked before in the House and which have never been answered. How will the Government enlarge our manufacturing base? How will they stimulate new industries? How will they revivify those parts of our industry which have diminished or faded? How will they be able to improve our productivity so that we can compete on equal terms? How will they restore our economy to its erstwhile strength? Unless the Government can give convincing answers to those questions, there is no use contemplating going back into the exchange rate mechanism. It merely means that history will repeat itself in two or three years' time.
5.54 p.m.
Lord Joseph: My Lords, we have heard a chorus of giants of experience and analysis today. They have all spoken in favour—I think every one of them—of a return to the exchange rate mechanism—
Noble Lords: No!
Lord Joseph: My Lords, there has been a chorus in favour of a single currency to which the exchange rate mechanism is intended to be a preparatory stage. The ERM is a stepping stone to economic and monetary union, which means a single currency with a single central bank. Yet of the giants of experience who have spoken only my noble friend Lord Boyd-Carpenter and the noble Lord, Lord Healey, spoke of what would accompany EMU. They alone reminded the House, as I do, that a single currency and a single central bank presuppose a single central government. Governments, including our own, have been less than eager in explaining to their electorates the implications of the single central government which they seem to have accepted in the terms of the treaties that they have signed.
I know that many shrewd business and financial experts, including I now see from the newspapers Mr. Pal, favour a single currency. We have heard the noble Lord, Lord Jenkins of Hillhead, say that among the other advantages of a single currency there might be at least some resistance to the waves of speculation. I accept that a single currency might bring more
458
growth and more stability, although I ask noble Lords to realise quite how much resentment there would be in the backward parts—I use the word "backward" in economic terms—of a large area under a single government. We can witness that in America today, and I believe that the position would be even fiercer in Europe. However, there has been precious little reference in this impressive debate to the concept of single government that lies behind the ERM and EMU.
I pay credit to our Prime Minister for securing at Maastricht the option for this country of excluding itself from a single currency, but I am very glad that the noble Lord, Lord Healey, and my noble friend Lord Boyd-Carpenter have reminded us of the single government element in what we are discussing. I thought that the noble Lord, Lord Healey, was quite unfair in criticising my noble friend Lady Thatcher for drawing into the limelight some of the key issues that her fellow heads of government were apparently willing to ignore. The fact is that, given the implications for our electorate of a single government, we need not only a debate in this House but a huge debate in the country. For there to be a debate of any significance, we need what the Americans took for granted at the end of the 18th century—a heavyweight convention—to analyse where power would come from. I should have thought that most Members of this House would believe that the decisions should come from the individual countries. Such a convention should analyse which powers and which functions should be transferred by the agreement of the individual countries, their parliaments and peoples to a central government and which should remain with the national authorities.
Your Lordships will easily remind yourselves of the quality, the weight and the intellectual authority of that remarkable group of delegates who gathered in Philadelphia in, I think,1786. In my view, governments and the Commission have been downright frivolous in their treatment of the huge issues involved in moving towards a central government. The political union across a wide range of conditions and circumstances could be explosive; and while I am ready to grant for myself that a single currency might improve economic conditions in the area, a single government could well offset any advantages from that economic improvement by the horrendous political resentments that could be created if the move to a single central government were not fully explained to and accepted by the electorates. Incidentally, I cannot remember which noble Lord made reference to Churchill, but I do not believe that Churchill favoured a single European government. He was, as was de Gaulle and as is the noble Baroness, Lady Thatcher, a strong supporter of L'Europe des patries but so far as I can recall not of a single European government.
In the meanwhile we float, and I believe that we should continue to float at least as long as we explore, consider and debate whether we want to be part of a movement to a single central government, and, if so, under what conditions. And while we float I believe we should take back into use the middle-term financial

459
strategy that my noble friends Lord Howe and Lord Lawson together evolved in the 1980s. Of course it is imperfect, of course it is difficult to understand and of course it needs judgment; but basically it is the method that the Bundesbank uses and we admire the Bundesbank for its relative achievements in controlling inflation. So let us not scorn the middle-term financial strategy as an element in our economic policy. I blame myself personally for not reacting strongly when in my last two years in the Cabinet the Government of which I was part abandoned that middle-term financial strategy.
I turn to two final points. Whatever happens, we desperately need, as the noble Lord, Lord Benson, says, to secure the expansion of United Kingdom business. For many reasons we have manufacturing and service sectors which are too slim and too thin, however excellent parts of them are, to provide the jobs and the rising prosperity that we all want. Where I disagree with the noble Lord, Lord Benson, is with his view that this desirable expansion, the deepening and thickening of British business, can be achieved by the Government. Most of the reasons behind the decline in British business have come from long-standing cultural and attitudinal causes. There are a limited number of things which the Government can do, and I would join with the noble Lord, Lord Benson, in urging the Government to study them and carry them out; but the larger changes will take time and they will involve all these different attitudes and cultures, including the anti-trade snobberies that we have allowed to grow up over the decades in this country—under, alas, both governments. I am introducing here a partisan point of view, but I believe that the Labour Party has been more guilty than other parties in stoking those attitudes. This is not a minor factor: it entirely deserves a place in the agenda, as the noble Lord, Lord Benson, said, which should now be in front of Ministers.
I have two suggestions. The first is that we surely should review the burdens of the capital gains tax. We have a far fiercer capital gains tax than many competitor countries. We need to encourage, not discourage, the entrepreneurs who are the creators of jobs. Germany, for instance, has a fiercer capital gains tax than we have but it lasts for only six months. I think that is right, but at any rate it is a relatively short period, and after that there is no capital gains tax.
Secondly, it seems to me that we should encourage the entry of likely entrepreneurs. The people in this country have benefited from the arrival of many entrepreneurs from among the Indians, the Pakistanis and the Ugandans, for instance. We have gained from the job-creating achievements of many entrepreneurial Jews; but, oh dear me, we have missed the opportunities offered such as welcoming migrants from Hong Kong and in recent years from Iran.
Above all, I urge the Government and this House to consider the political aims—a single central government—that accompany the single currency concept which has been so widely applauded by noble Lords this afternoon.
6.6 p.m.
Lord Monkswell: My Lords, I am glad to follow the noble Lord, Lord Joseph. I applaud and agree with his remarks that the economy of Britain should float. The unfortunate thing of course is that Britain is sinking. If we look at a whole range of indices of the position of Britain we can see that we are in fact sinking. The indices I would pick are those that reflect on real human beings and their situation in society. We can see a rising level of poverty; we can see a decline in housing standards and also in our education system, compared with our competitor nations; we can see a rise in suicides; but, above all, we can see a rise in unemployment. This Government have presided over massive increases in unemployment virtually since coming to office in 1979, and it is unemployment which is dragging this country down—unemployment which will prevent our floating successfully on the economic seas of the world.
I am rather intrigued by the Conservative spokesmen who point to the economic record of the early 1980s and then to the economic record over the last few years and say that it has been successful. I am reminded of the doctor's phrase when he said that the operation was a success but the patient died. If we carry on with the operational attitude, the operational economic policy of the Government, this country will die.
I have picked unemployment as the most significant indicator of economical wellbeing in this country. Why do I pick unemployment? It is because unemployment brings death, debilitation, demoralisation and destitution; death through individuals committing suicide because they are rejected by society and they have no value to society; debilitation because those who are unemployed suffer poverty and ill health psychological and physical ill health—as a
direct result of unemployment. As for demoralisation, we need only to look at society, where anti-social acts and criminal behaviour are endemic and where the crime rate escalates year after year after year.
The way we run our economy directly affects employment and unemployment. On the front page of most of today's papers is the news that 3,000 skilled workers at British Aerospace are to be made redundant. We are called here to take note of the economic policy of Her Majesty's Government. The big question has been asked: what policy? Do they have a policy? The only policy I can perceive is the one which states that we must have sound money. That may be all very well for the people with money, but what about the vast majority of British people who work for a living, who want to work for a living, or who are living in poverty because of low wages, low unemployment benefits or low state pensions? The Government of Britain should look to the benefit of all the British people and not just those British people who have wealth.
The Government's policy has brought us to the stage where this country is living beyond its means. Earlier in the debate we were given the figure for the balance of payments deficit of £12 billion. That approximates to £240 for every man, woman and child in this country. It means that we are spending more

461
than we are earning. It means that we export less than we import. The rich get richer and the poor get poorer. Industry suffers and throws people out of work. But we could do things differently. By increasing taxation we could reduce the overall demand in our economy that sucks in imports we cannot afford. When I say "by increasing taxation" I do not mean the kind of taxation increases in which this Government have indulged. I say that advisedly because, although the Conservative Party portrays itself as the party of reducing taxation, it has in fact significantly increased taxes over the past 13 years for the vast majority of the British people. It has reduced taxes for the rich but the British people are paying more in taxation now than they were in 1979. We should reduce the taxation burden on the low-paid, the unemployed and pensioners. We could do it in various ways. We could either directly reduce taxation or we could increase the benefits on which the poorest members of our society depend. We must increase public expenditure in those areas that will improve the competitive performance of this country—whether through education and training, infrastructure development or support for industry—and not spend money on those areas that result in imports.
One of the ways in which we can help our economy is by cutting our defence expenditure and diverting that money into long-term beneficial economic activity such as education and training and support for industry and the public sector generally. We should reduce interest rates for long-term investment in the British economy, and to ensure that a favourable import-export balance is achieved we should reduce the value of the pound. All of those actions are needed but only one of them has been decided upon—it was forced on the Government—over the past week or so. I refer to the reduction in the value of the pound. I hope that the Government will take on those other aspects of policy which might help to get us out of recession.
There has been talk in the debate so far about the Maastricht Treaty. It is a wide-ranging and significant treaty for the European Community but I shall touch on only one aspect of it as we are talking today about the economic policy of the Government. One of the fundamental flaws of the Maastricht Treaty, which was negotiated by the Government and which is dedicated to the concept of sound money as opposed to the benefit of the human beings in our society, is that it incorporates the attitude that an economy should be judged by financial and monetary indicators and not by the real advantages and benefits delivered to human beings in our society. That is why the treaty will not survive the present economic holocaust.
I should like to bring one point of principle to bear. Before the treaty was negotiated it was agreed that the unanimous agreement of all member states was needed before it could come into being and that all member states had to agree it individually. In practice Denmark rejected it. At that point the British Government should have said "That is the end", but we have tried to breathe life into the cause. To my mind that is not the way the British Government should operate. The economic policy of this country is
462
interdependent with the economic policies of the other major economies of the world. The economic policy of the European Community must adjust to ensure that the actions of the European Community benefit the peoples of Europe. We can see the same problems of economic policy present in the United States where a monetarist government say that they cannot increase taxation. The rich must be protected against the demands of a majority of the population.
Earlier in the debate someone said that in the European Community we are all competitors—every country in the European Community is a competitor of ours. Surely the whole point of the European Community is that we should work together to resolve the manifest problems facing all our peoples. The Government of this country should operate on the basis of the good of all of the people of this country. We should not have one group in society—whether in the South East, Scotland, Wales, the North East or the North West—competing against another. Let us try to harness the talents of all our people. Let us eradicate the scourge of unemployment that debilitates action. Let us plead with the Government to adopt policies that will eradicate unemployment.
If the Government will not adopt those policies, then they should go and make way for a Government that will.
6.22 p.m.
Earl Russell: My Lords, I do not blame the Government because they devalued or, as the noble and learned Lord, Lord Hailsham of Saint Marylebone, prefers it, because they were devalued. The rate had become unsustainable partly because we entered at too high a rate and partly because we are now the only economy in the EC with negative growth. What I blame the Government for is that they did it so incompetently.
I do not believe that we have appreciated the shock that was created in the outside world on the day of the three interest rate changes. A great many people, some of them with no interest in politics, will remember for the rest of their lives what they were doing on that day.
During our party conference I chose to listen to the waitress who was serving me coffee. She stated,"If this is going on, I will have to get another job as well as the one I have got, already." If the noble Lord, Lord Monkswell, chooses to remind me that she was one of the fortunate ones, I will agree with him.
The last time that interest rates were raised by 5 per cent. in one day was on the outbreak of the first world war. I do not know the last time that they were changed three times in one day. I should like to know, and I have given the noble Earl, Lord Caithness, notice of the question.
During that day the Prime Minister and the Chancellor reminded me of the unsuccessful 16th century politician who was described as being like a tennis player who could not read the play and who was ever running after the ball. Now that they have done it, they are setting out to persuade us that Pobbles are better without their toes.
I regret to say that during this century we have had a good deal of experience of sterling crises and we have

463
seen much that is familiar. Last Thursday Downing Street issued a statement saying,"We do not like to use the word 'crisis'". Someone, at least, had reminded them not to say "What crisis?"
There is a great deal in common between the present situation and 1931,1967 and 1976. If we can accept that, it might serve to advance the economic debate in this country by reminding us that we all live in glasshouses. It also suggests that it might be useful to look at those crises to see whether or not we can find any common factors between them. I think that we can. In all of them there has been an element of incompetence. Fighting beyond the last ditch is not a political activity. There are a great many political tombstones which bear the epitaph,"The man who said 'never'" I cannot help but wonder whether the Prime Minister's speech of 10th September may in the end be inscribed on one of those.
There is inevitably an element of paranoia my noble friend, Lord Jenkins of Hillhead, has reminded us of the Gnomes of Zurich. Looking at the ticker-tape reports of what the Prime Minister has just stated in another place about the Bundesbank, I wonder whether he is about to commission research on the northward migration of gnomes.
It is no good blaming the exchange rate mechanism. It is rather like going out to the crease, taking guard, being clean bowled and blaming one's bat. There should have been an orderly devaluation with the lira.
The Bundesbank, having spent some £60 billion on the exchanges, was perfectly entitled to say that it was not going to throw good money after bad. There is an instability in an exchange rate mechanism which is not present in a single currency. It is worth remembering that there is precedent in this country. In 1603 England and Scotland had an exchange rate mechanism which the Scots, with great canniness, fixed at too low a rate. In 1707 we had a single currency and I do not think that we need regret it.
The next common factor is that there is always a brute fact which is too big for politicians to deal with and which they have not fully absorbed. On this the noble and learned Lord, Lord Hailsham of Saint Marylebone, spoke with great wisdom. The cost of the end of the cold war is something that we are nowhere near absorbing. I did not speak about a peace dividend. The only time that I was asked directly about the matter, I took my answer from Mr. Asquith: "I have waited and I have seen". I thought that the noble Lord the Lord Privy Seal was a little unwise to describe the consequences of the end of the cold war as unforeseeable. Some people foresaw them the day that the Berlin wall came down. A good many other people have foreseen them for a year or more. To say that the consequences were unforeseeable suggests a view that is not up-to-date with the way in which the world is changing. It is a case of running ever after the ball.
Exchange rate crises happen when throughout the world we are in need of new economic thinking. Politicians steer the ship but economists make the charts. When a ship, as the QE2 recently did, runs
464
aground where she should not have done so, one possibility, as seems to have happened in that case, is that she is navigating by out-of-date charts.
In 1931 we were up against the limits of classical economics. The theory that the labour market cleared if the price of labour was reduced, was clearly not working and was not accurate. In 1967 and 1976 we were up against the problems that Keynes did not live long enough to tackle. Extraordinary though it is to remember, inflation was never a significant problem during the lifetime of Keynes, at least not in this country.
We are now seeing the collapse of the new series of ideas commonly referred to as Reaganomics. In 1980 George Bush described them as voodoo economics. He was more right than he knew. They have certainly put the hex on him. When I read last week that United States business is now busy giving its money not to Bush but to Clinton, I think that we are entering a world of new economic thinking.
As the Prime Minister has often stated, there is a world recession as well as a problem in this country. That is no excuse for him. He was the first one to go down with chicken pox. He cannot claim that he caught it from the others. Nevertheless, it is an epidemic. We will not understand what needs to be done without looking at the matter as a global problem.
As nearly every noble Lord who has spoken realises, there is a major problem with the exchange rates that has been with us since the collapse of Bretton Woods. Some people would say that it is a problem from which Bretton Woods has given us a temporary respite. The reason is that the exchange rate is the point where the free market and the sovereign state collide. The free market has a tiresome habit of not stopping at national boundaries. Therefore, between the free market and the state there is always a potential enmity.
One cannot simply blame the markets. The markets are doing what markets have to do. However, in this situation, where there is a conflict of power, the balance of power has arguably been tipped too far towards the market and away from the state.
The Government have always thought that they can have an equal commitment to the free market and to the sovereign state. Therefore, it is not surprising that the exchange rate, where the two principles collide, should be where it has quite often come into difficulties. and indeed that this should be the weak spot in the Government's vision of Europe.
As I understand it, the Government's vision of Europe is a vision of a single free market of sovereign nation states. That vision is a contradiction in terms. Either they have to decide, as we on these Benches do, that they are prepared to give a qualified allegiance both to the nation states and to the free market or, if they give an absolute allegiance to one, they have to decide which. It cannot be both. I do not pretend for a moment to have an answer to the problems of exchange rates. I shall only ask the Government whether they are giving careful study to yesterday's

465
speech by the US Secretary at the Treasury. Although I do not think that it had the answers, it did seem to me to address some of the questions.
The next thing that we need is less obsession—and I use the word advisedly—with inflation. I am not one of those to whom the noble Lord the Lord Privy Seal referred who want to downgrade the fight against inflation. I want to upgrade other things to go with it. I do not complain when the Prime Minister says that he loathes inflation. I would like to hear him say that it is not the only thing that he loathes. If it is correct that the free market does not stop at national boundaries, we should recognise that zero inflation in one country is an impossibility. The last time we had zero inflation without a slump was when we were last in office. I assure your Lordships that next time we are in office we shall not follow the mistake of the man who hit a six over the top of the pavilion at Lord's and ruined the rest of his career trying to do it again.
The countries in which free market economics have had most influence are perhaps Britain, the United States, Australia and Canada. I wonder whether it is a coincidence that those are now the only countries still left with negative growth. There is sense in the conventional definition of inflation as too much money chasing too few goods. However, if the measures to reduce the amount of money equally reduce the amount of goods, you do not end up reducing inflation. That is why these endless efforts have not wrung inflation out of the system.
Not enough attention has been paid not only to the human consequences of unemployment, on which the noble Lord, Lord Monkswell, dwelt, but also to the sheer, crude economic consequences in particular for the public sector borrowing requirement element. According to an unofficial estimate quoted in the Independent two weeks ago, the Treasury thinks that it accounts for all but £5 billion to £10 billion of the present public sector borrowing requirement.
I see this of course through the social security functions. It is a bit like the view of the battlefield from the casualty department; it is not always the most inaccurate view. My noble kinsman Lord Henley told me in May that 19 per cent. of households at present draw on means-tested social security benefits. That is a colossal weight for the economy to carry. The social security budget as a share of government spending has gone up and up. Attempts to reduce it by petty meannesses which cause hardship far out of proportion to the money that they save do not solve the problem. Only a substantial reduction in unemployment will do that.
More seriously, we have had an 18.3 per cent. fall in the yield of corporation tax. There are technical factors in that which I am sure the noble Earl, Lord Caithness, will explain to us at length later, but that also shows a sickness—and often a mortal sickness—among the geese that lay the golden eggs. This is where the anti-inflationary policy does grave harm to the real economy. There are rigidities in social security policies—I shall not go into those; my noble kinsman has heard me speak about them many times—which are making it harder for people to get into work. These micro-economic issues need attention. In any century
466
there are things you have to say to get a goverment to do something. Hitherto it has always been that it gets down inflation. I think that "It gets down unemployment" should get into the list.
If these things are not done, economic growth will not resume. If that does not happen, I have spent the first half of my adult life learning that we are not in the same league as the United States. I accept that that was necessary. I do not see that it can be otherwise. What I do not want to do, because I do not think it is necessary, is to spend the second half of my adult life learning that we are not in the same league as France and Germany.
6.36 p.m.
Lord Boardman: My Lords, I approach this problem in three phases—the past, the present and the future. As regards the past, it is relevant only if we can draw some lessons from it. I believe that we can certainly draw a lesson from the exchange rate mechanism. I was a supporter of that—I make no bones about it—for a variety of reasons; but there were, and are still, three important rates affecting business, commerce, industry and the like. There is the rate of taxation, the rate of interest and the rate of exchange. Of those, rapid movements in the rate of exchange have the most dramatic effect upon trade and industry and lead to inflation, as has been mentioned by many noble Lords today. It may be, as the noble Earl, Lord Russell, has just said, that when we entered the exchange rate mechanism the rate was too high, although certain trading figures, particularly with Germany, rather suggest that that was not so. However, the fault in the system which has certainly been exposed is the weight of money that is available to attack the system and to defeat the Government's plans or intentions of maintaining the stable rate that they seek.
I believe that my noble friend Lord Cockfield attacked the banks. At any rate, he referred to the weight of money that is transferred. I agree with him that it has no relationship to the amount of credit that crosses the exchanges. There is a vast flow of money which seems to become available for those attacks on a particular currency. Whether that be right or wrong is not for me to argue here today, but I think that my noble friend Lord Cockfield was probably wrong if he said that it was the fault of the banking system. However, I shall not flog that point.
When that weight of money is set against a system and at the same time there are rumours in the market, particularly if those rumours come from such authoritative sources as the Bundesbank, it is inevitable that it becomes impossible to defend the rate of a currency. The noble Lord, Lord Healey, was highly critical of the Chancellor of the Exchequer for having said that he would defend the rate and then not doing so. I found it rather strange coming from the noble Lord when we have had so many examples, from Chancellors on the other side of the House in the other place, of pledges firmly given which have had to be revoked because of the changes that they made. If you are set to retain a stable rate, you have to say,"That is what we intend to do", not,"We'll do it

467
unless something happens". I defend entirely our Chancellor of the Exchequer for trying to save the rate. He did it in the only way that was possible but at the end of the day he was faced with a system that was flawed.
So much for the past. Perhaps I may turn for a moment to the present. It is quite hopeless to try to fix a rate in the present climate, certainly until the current financial fervour or tumult has died down; but there are quite a lot of things that should be done now. First, I welcome the relief from some of the restraints that have been imposed upon the British economy by maintaining the exchange rate at the level that existed before. I welcome particularly the reduction of 1 per cent. in the interest rate and I sincerely hope that without causing inflation a further reduction can be made in the near future.
Secondly, it is necessary to take measures to control the inflationary pressures that inevitably arise from reductions and changes in the exchange rate. That means cuts in public expenditure. Here I make a special plea that in cutting public expenditure they do not take the easy course of just rolling over capital projects. I know that that is the easiest way to make figures for the current year and next year look less, but it is damaging to the economy. I am quite sure that my right honourable friend the Chancellor of the Exchequer will have that very much in mind.
Monetary policy must be strengthened. I know how difficult it is to get accurate measurements. The measurements which were applied in the early part of the 1980s were fairly effective; indeed, I believe that my noble friend Lord Joseph referred to the mid-term financial strategy. While there were a good many errors which appeared in some of the figures supplied, I think that it was helpful in applying a policy which restrained inflation and one which I certainly hope will be pursued with the modifications and improvements that have been developed in the meantime.
I share the thoughts of my noble friend Lord Boyd-Carpenter—like him, I was once a Chief Secretary to the Treasury—that we should be extremely cautious about relying upon going hack into the ERM to contain inflation. I believe that much more work needs to be done. We have to see how in fact those attacks from large sums of money which are flowing around the world can be restrained. That is just one thing that would have to be carefully worked out before we could accept going hack into the ERM. But there are other restraints which, as I said, were effectively applied in the early part of the 1980s and which I hope can be perfected. I certainly hope that work is being carried out on them at present.
As regards the future, well, a great deal depends on what happens elsewhere. For example, will the franc, with the vast vocal and financial support of Germany, withstand the pressures that are apparently being put upon it at present? There is a whole variety of issues which must be allowed to settle down before any firm future plans can be put into operation. I believe that we must retain the freedom to control our own fiscal policy and our own interest rates so that we meet our domestic needs while at the same time restraining and
468
curbing any inflationary pressures which might otherwise arise. That is not an easy task but it is one to which I hope that all the best financial brains in the Treasury and elsewhere are being applied.
I shall raise briefly a point which I do not think has been mentioned during the debate but it is one which has been much mentioned in press comment. I refer to the independence of the Bank of England. I disagree with the view that the Bank of England should be made independent. It is a solution alluded to by a number of financial correspondents. Very often the Bundesbank is pleaded as an example. I believe that that is a very poor example to give. Quite apart from the different conditions which apply in Germany and here, the proof of the Bundesbank's independence has been faulted from time to time. Indeed, one has only to recall how Chancellor Kohl wanted a particular rate of exchange between the East German mark and the West German mark as it then was and Karl Otto Pail and the Bundesbank went for a different rate. One knows that the German nation succeeded in getting its way. That is but one example and there are others. Therefore I hope that we do not use the Bundesbank as an example of complete independence from political control.
In any case, so many economic decisions are really political decisions. It is very difficult to have a major economic decision which does not have very large political undertones and political actions which need to be taken. I should be most reluctant to see those decisions—perhaps branded "economic" but clearly having very large political implications—left to one unelected body. Of course it is absolutely right that the Governor of the Bank of England should advise the Government as strongly as he feels appropriate on the action to be taken in certain circumstances. If the Government neglect to take that advice and the issue is of sufficient importance, he also has the right to resign. The consequence of that upon the Government will clearly be very serious. In practice I believe that the threat of resignation by a Governor of the Bank of England would be sufficient to make most governments sit up and think very carefully about whether they were doing the right thing.
The Government have a very difficult task before them which arose as a result of the financial conditions about which we are all aware. I believe that there are many strengths in the economy at present. Many of the indicators are pointing the right way. I also believe that they will come through these difficulties. I wish them well in their task.
6.45 p.m.
The Earl of Longford: My Lords, a cat may look at a king, and as a former chairman of one of the smaller clearing banks I follow with respect the former chairman of one of the greatest. Incidentally, I gather that the noble Lord was chairman of the bank of my noble friend Lord Bruce. I hope that he is no longer in the position to control Lord Bruce's account in view of some of the remarks he made earlier. It is years since I was admitted to a bank parlour, so I do not know whether they are now rubbing their hands with glee because this has been one of the most profitable

469
weeks in their existence or whether they are bemoaning the national state. I am not up to date in regard to their present state of mind.
I shall speak more briefly than most noble Lords, although no speech has been prolonged. I shall deal with one issue only and one which I do not think has been dealt with today—that is, unless it was mentioned when I left the Chamber just now to strengthen myself before speaking. I refer to the question of the treatment of the social services—I take the phrase in the widest sense—in the immediate future. There is a threat hanging over them. These days The Times is most enjoyable. It cannot be called a lackey of the Government, but for no particular reason it has come out pretty strongly for what is called "a reduction in public expenditure". Of course, that means a cut in the social services or at the very least a reduction in the planned increases. To me that is quite unacceptable. However, I understand the thinking behind it; namely, that if we are to have growth we need increased inequality of wealth in the country. That doctrine was applied in the 1980's and, whether one thinks that that is a good or a horrible idea, no one can doubt the fact that inequality of wealth in this country was much increased during that time.
I see that the noble Lord, Lord Cockfield, who is a financial expert, is looking at me wondering what figures I shall produce. I shall produce but one set of figures. However, I shall not take my stand on any particular figures because the facts are so well known. The figures supplied to me, which derive from government statistics, are as follows. Broadly speaking during the 1980s the average income of the average citizen increased by 30 per cent. in the course of 10 years. That is not very remarkable. It did not increase any faster than before. But, nevertheless, it was a reasonable increase. However, the average increase of the poorest 10 per cent. went down by 6 per cent. Even if one wants to say that those figures are not quite right or that they decreased by only 5 per cent. or 4 per cent., no one doubts that Thatcherism (the doctrine applied in this country during the 1980s) was based on the idea that there must be much more inequality of wealth. Some people may think that is okay and that it is a good idea. There are people who think that the Thatcher era was miraculous; indeed, I believe that it was called a "miracle" at one time, although I do not think that that phrase is used so freely now. At any rate, people who think of those years as miraculously successful say,"That proves it. That is what we had—an increase in the inequality of wealth". I do not want to blame the noble Baroness, Lady Thatcher, for having invented Thatcherism. She made it explicit.
My noble friend Lord Bruce earlier confessed that he was a Conservative until 1931. Older Members of the House may recall that I worked in the Conservative research department between 1930 and 1932. My noble friend Lord Bruce seems to have left a little more promptly than I did. I hung on for a year or two and then did something else for many years.
In those days we took Thatcherism for granted. It was not expounded; it was assumed. It was a whole
470
philosophy of progress. It was voiced in a leading article in The Times in a way which made us all happy. It said,"Unfortunately, wealth is like heat. The only way it is unequally distributed is if it performs what the physicists call work". In our office we wanted to pin that up on the wall—metaphorically at any rate.
That was the official Conservative doctrine up to the war. The war came and with it a great sense of national purpose. A new unity was formed. After all, we had those enlightened statesmen—some of whom are sitting opposite. Apart from those present today, I refer to the late Lord Butler and Lord Stockton, who spoke a different language. However, the country found itself under the control of the older ideas, ideas that would have appealed to Mr. Neville Chamberlain when I worked as his bottle washer.
That was Thatcherism, the doctrine of the 'eighties. The question now is whether or not the country is to be asked to revert to such doctrines. In the recent general election the Conservatives came before us with a smiling face and what they called "caring Conservatism". We all know that Mr. Major is a nice man and the general idea was that the Conservative Party was a party of "niceness"; of decency, and that they were all good chaps. That was the situation presented to the public. By a fairly narrow majority the public voted in favour of the new caring Conservatism.
In the present Dunkirk situation will we say,"We have suffered a disaster but there may be other glories to be expected from it"? Is the country to revert to Thatcherism? Is that what we are being asked to do? When speaking of cuts in public expenditure, it can only mean reducing the social services and increasing the burdens on the poorest and weakest members of our society, which will be totally unacceptable by any Christian or ethical standard.
6.54 p.m.
Lord Skidelsky: My Lords, although I am the twentieth speaker in this afternoon's debate I hope to be able to make one or two observations which have not been made in the distinguished contributions we have heard hitherto.
Full analysis of the recent events will have to be left to historians. I attribute most of our recent troubles to the fact that the Government never made up their mind what they wanted out of the exchange rate mechanism. On the one hand they wanted to use it to beat down inflation; on the other they wanted to make sterling a permanent part of a fixed exchange rate system to underpin the single market and Britain's place at the heart of Europe.
The charge against the policy, made most forcefully by the noble Lord, Lord Jenkins of Hillhead, is that by taking sterling into the ERM at the wrong rate and at the wrong time the Government endangered the ERM and with it our hopes of a liberal Europe. I do not accept the charge of noble Lords opposite that the policy has been a complete failure. We have come close, albeit at great cost, to achieving the major goal of price stability. If that achievement can be sustained it is an inestimable boon. With inflation still going

471
down and many key prices actually falling it means that recovery now carries less risk of again stoking up inflation.
I have always believed that it is much easier to maintain price stability than to acquire it. Once acquired it should not be sacrificed as it was in the mid-1980s. I therefore welcome the Government's commitment to low inflation as an essential prerequisite of recovery, though we will need to ask how they propose to fulfil that commitment.
All that is on the credit side and it is important. When I look at the debit side I am appalled by the wreckage, both to our economy and to the financial system of Europe. The fault line running through the Government's policy was summed up by the Chancellor's statement on 10th July when he said.
"The way to success is to adjust your costs to your exchange rate, not the other way round".
I believe that view to be both theoretically and practically flawed. By deflating the economy one can always make prices fall. But one cannot make costs fall as fast as prices. A deflationary policy brings down prices by bankrupting business and raising unemployment. That was pointed out many years ago. However, it does not,
"adjust your costs to your exchange rate".
That is the reason the exchange rate instrument is liable to break in one's hands when holders of sterling realise that the hurting is not working or not working fast enough. Since sterling joined the ERM at the central parity of 2.95 deutschmarks it has been overvalued by the only test that matters—Britain's ability to pay its way at a normal level of activity.
Over the past two years we have had a large and growing current account deficit at an abnormal and growing level of unemployment. Evidently consumer demand in the economy has not fallen as fast as the destruction of manufacturing capacity. There was never any prospect of foreign or even British holders of sterling waiting long enough for the medicine to work. A currency whose value could he maintained only by interest rates high enough to ensure a continued net inflow of capital is a weak currency, liable at any time to speculative attack for whatever reason. It is no accident that of the three major European currencies it was sterling which broke first.
There is much wrong theory in that idea. I do not particularly blame the Government for holding it. It has been a fashionable theory in economics that the balance of payments is a purely monetary affair. I hope recent experience discredited that view. Inflows of "hot money" can temporarily balance a country's external account. But unless there is an improvement in the fundamentals—in a country's competitiveness—that money will flow out again as easily as it flowed in. That is what happened last week.
A number of speakers referred to the problem of speculators. It is a major problem and makes fixed exchange rate systems much more difficult to maintain. But it is ridiculous to draw the conclusion that a single currency with a single government on top of it is the only way of dealing with the problem of speculation. That would really be to give speculators control over our political future. The main lesson is
472
not to have a single government but to fix national currencies on rates which reflect the competitive power of their economies.
As the noble Earl, Lord Russell, sagely remarked. history has a habit of repeating itself. The overvaluation of the pound in 1925 helped to destroy the gold standard. By overvaluing sterling in 1990 we endangered the future of the ERM. The pressure on sterling has been transferred to the franc. It is an open question whether the European financial structure, so painfully constructed in the 1980s, will survive the strain.
I am appalled at the reflex action in many quarters, though not in this House, of blaming the French and Germans for sterling's fall. Certainly we alone are not to blame for turning what should have been a flexible instrument of policy into a straitjacket. But is it not a fact that the Bundesbank has consistently pressed for a realignment of sterling and other currencies within the ERM? Is it not a fact that the devaluation of sterling was on offer? I have not yet heard a satisfactory answer to that question.
Devaluation gives us a breathing space, but we must remember that the benefits of devaluation depend largely on what happens to wage behaviour in this country. The next year will show how effective the industrial reforms of the 1980s have been in creating a flexible labour market. I should like to ask my noble friend Lord Caithness whether he is persuaded that wages per unit of output will remain stable as output and prices recover. Does he think that the Government have a role to play in keeping them so?
The benefits of devaluation will also depend on what happens to other currencies. I welcome the Government's determination to rejoin a reformed ERM at an appropriate parity as soon as possible or, as may well be the case, to help reconstruct it if it collapses. I should like them to go further and seek an agreement to keep the exchange rates of the main currency groups, including the ERM, steady against each other.
I agree with the view that has been expressed this afternoon that it is madness for us to float sterling except as a strictly temporary measure. Unlike in the 1930s, we are in no position to organise a currency-cum-trading bloc of our own. We did that in the 1930s, but where is that bloc today? Apart from that, do we really want protectionism,"dirty floating" and all the other beggar-my-neighbour devices familiar from the past to be added to the outbreaks of nationalism already taking place in Europe?
The ERM remains the best currency club for us, the best hope for a prosperous Britain and the best hope for a liberal Europe. Next time let us try to make it work.
7.1 p.m.
Lord Elton: My Lords, your Lordships are debating a Motion to take note of Her Majesty's Government's economic policy. Of necessity recent events have focused the attention of that debate on Europe. With my noble friend Lord Boyd-Carpenter I ask your Lordships to remember that it takes place in the context of a stalled, if not a failed, GATT round and

473
that we are in a stagnant world economy. In the long term that is probably a more dangerous situation even than the waters we face in Europe at present. I hope that Her Majesty's Government will never take their eyes off that battle or cease their efforts to free world trade for, while our prosperity may depend on it, in other countries people's lives depend on it.
However, at the moment we are primarily concerned with the ERM and our recent departure from it. I am no expert. I would observe only that that mechanism has two functions. One, as my noble friend Lord Joseph rather anxiously reminded us, is as a prelude to a single currency and a single bank. I do not wish to follow him or my noble friend Lord Boardman into a debate on the desirability of that except to observe that if the Germans can separate their national bank from their political machinery it may also be possible to do that in Europe and there may not be a necessity to have only one political institution controlling one central bank.
That is not my concern. The more pressing matter is the need for a system such as the ERM, the gold standard, M3 or any of the other mechanisms mentioned by my noble and learned friend Lord Howe earlier to hold governments of all colours to long-term policy objectives which can be painful in the short term. The nature of democracy is to put a premium on policies which bring short-term comfort. They often bring long-term pain, but the premium lies in the prospect of being re-elected because the pain has been postponed. Democratically elected governments are therefore in need of some such benchmark and a commitment to some such restraining target. In my view my right honourable friends the Prime Minister and the Chancellor of the Exchequer were right to pursue such a commitment until it ceased to be viable. They could only do so wholeheartedly, and statements of the order made by my right honourable friend in Glasgow were necessary if an honest attempt was to be made.
The question now is whether, in concert with our European partners, we seek to repair that mechanism. It is odd, is it not, that so many Euro-sceptics, whose fears focus on the power of the deutschmark, tell us about the dangers—and even the shame—of submerging the pound in a European currency while few, if any, point out the corresponding and possibly greater advantages to us of sinking the deutschmark at the same time and in the same way? It may be that the French and even the Italians, who have had that as their objective for a number of years, are wiser in that than we are and bound on a safer course.
We as a people will not recognise that wisdom, nor any of the many virtues and strengths of our European partners, for as long as we as a people are heavily under the influence of the British press, and the British tabloid press in particular. The hideous shortcomings of that press in dealing with home affairs should not blind your Lordships to its deep and apparently bitter prejudice in European affairs.
It is a prejudice which left the activities and even the presence of our French allies in the Gulf campaign virtually unnoticed; a prejudice which reported a restraining environmental directive from Brussels as
474
though Britain had been savagely and unreasonably singled out for isolated humiliation and left readers in ignorance of several moves made against the Portuguese, the Italians and, if memory serves, the Germans in exactly the same terms at the same time; a prejudice which leaves any Briton whose knowledge of Europe comes only from the tabloid press to imagine a fantasy continent peopled by ogres and buffoons in which the saintly and intelligent British are the only heroes. Only when British football fans go to the Continent and behave as they do at home does he get a momentary glimpse of life as it really is and an inkling of the way in which we must be seen by a great many cultivated and peaceable people living on the other side of the Channel. Let us hope that their press is more objective than ours.
That power of our press to slant and distort has not yet been sufficiently diminished by television. Some of us wait impatiently while it continues its assault on some of the central standards of our society and some of the central institutions of our state for a proposal from Calcutt for their diminution by law.
My noble friend Lord Tebbit sensibly said—outside the Chamber—that our progress towards a more coherent Europe, and with it a single currency, should not get ahead of British public opinion. We need not only to agree but to reflect that that opinion is heavily influenced by newspaper coverage which is heavily biased. Any new approach to the ERM—and I believe that in the fullness of time such an approach must be made—must be made in the context of public opinion which is properly informed. It is the function of politicians to provide that information in an intelligible form and to find means to get it across. That is no small task and will take no little time.
Within that information must be not only the points cogently made by my noble and learned friend Lord Howe of Aberavon but a reminder of the point from which all plans for the European Community sprang. They sprang from the European Coal and Steel Community. That community set out to integrate those industries which between them had fuelled and armed two world wars in which millions of people were killed. Behind both those wars was the evil spirit of nationalism. If noble Lords doubt that that spirit is alive today they have only to look at Serbia and Bosnia where rivers of blood are again being spilt in its name. They should remember that when thinking of saying no to a cohesive Europe and when our own Prime Minister seeks to bring that closer.
Your Lordships should remember also that we were driven out of Europe once before. That was at Dunkirk. We were not content to remain at home then; neither should we be now. Having lost this battle we must once again make certain that we win the war, the war within the greater war of GATT.
7.8 p.m.
Lord Jay: My Lords, those of us who for the past two years have been arguing that fixed exchange rates cannot work and that in the case of the United Kingdom the 20 per cent. over-valued rate of 2.95 deutschmarks to the pound could only cause high

475
interest rates, intense deflation and ever-rising unemployment must tonight refrain from quoting their past speeches, despite the strong temptation to do so.
To force a fixed over-valued rate on a weak economy is simply to convert what should be a gradual readjustment into a violent political upheaval such as we had last week. It is the over-valuation which makes a currency vulnerable to speculative attack. At the same time, to hand over our fortunes to speculators by decontrol of finance and abandonment of exchange control and expect fixed exchange rates to work is a flat contradiction. It is very easy to denounce speculators but without exchange control there is in the present world no effective way of controlling or restraining them.
The proof that sterling was overvalued at 2.95 DM—here I agree with the noble Lord, Lord Skidelksy—was the fact that the United Kingdom suffered from a balance of payments deficit and rising unemployment at the same time. The right exchange rate is one that enables a country to maintain a sustainable balance of payments and something like full use of productive capacity. Therefore if, as we do, one suffers from both a £12 billion a year balance of payments deficit and heavy unemployment, by definition the rate is over-valued. Incidentally, let us remember that the right rate now will not necessarily be the right rate in two years' time.
I believe that there are two reasons why the Government have been so persistently wrong—as apparently have even its Treasury experts—in the past two years. First, they failed to realise the harm done by a large and obvious payments deficit. An over-valued exchange rate is a tax on exports and a subsidy to imports, so that as long as it is in force the deficit tends to get worse and unemployment continues to rise, as we have seen in the past week. Secondly, I believe that the Treasury forgot that each rise in unemployment cuts the spending of those who lose their jobs and therefore gives rise to a further group of unemployed people. As a result of those miscalculations, the story of 1925 to 1931, which we have already heard tonight, has been repeated almost precisely. I say in passing that there was some justification for the parity we went back to in 1925 because that had the authority of John Locke as long ago as 1694. There was at least an historic tradition. The figure chosen in 1990 was simply plucked out of the air on the spur of the moment.
Nevertheless, the 1931 and 1949 lessons have a good deal to teach us. The right policies were at least followed after the adjustments in the exchange rate. The present Government have done a good deal of harm by wild, scaremongering statements to the effect that an adjustment of the exchange rate would lead to headlong inflation, ever higher interest rates and general chaos. Indeed, their prediction that it would lead to higher interest rates has already been contradicted this week by the 1 per cent. cut that we received from the present Chancellor immediately after the change in the exchange rate. After 1931, interest rates were decisively reduced, beginning with
476
the War Loan conversion in 1932 and, let us remember, bank rate stood at 2 per cent. for the rest of the 1930s. There was no sharp rise in price levels. The exchange rate soon stabilised at lower levels (at which the speculators were glad to come in), which corrected the balance of payments deficit and gave us five years of housing boom and indeed real growth. The 1949 devaluation again led to no sharp rise in prices—almost none in the first 12 months—and gave us the easier conditions of the 1950s by correcting the balance of payments and also the wider balance between the dollar and sterling areas.
Similarly, the fall in the sterling exchange rate in 1985 and 1986 was the main cause of the two or three years' actual rise in real growth that we had in 1987 and 1988. The Government have also done harm with their wild fiction before the change about a free falling exchange rate, runaway inflation and so on. If we lower the exchange rate, some import prices will rise; but that is surely in many ways desirable. What is basically wrong with our economy now is that we are importing too much, in particular of manufactured consumer goods. If we cannot restrain that by selective import controls, as once we did successfully, we can only do it by letting the price of imports rise, to some extent the higher the better. In fact, by lowering an over-valued exchange rate, we abolish both the subsidy to imports and the tax on exports.
Another major blunder of the Government has been to turn one single economic aim—that of lower inflation—into a sort of obsession, to the exclusion of all other goals. To my mind balance, not obsession, is the art of economic policy. One can have zero inflation by having 50 per cent. unemployment. Indeed, one can have zero inflation by having zero employment, zero production and zero consumption. That simple arithmetical fact shows how absurd it is to make fighting inflation the sole aim of all economic policy.
We must restrain rising price levels; but, if there is no incomes policy, a gradually rising price level is simply the inconvenience that must be accepted to achieve international solvency and reasonably full use of capacity. Therefore the right policy now, as I see it—this is very greatly over-simplified—is first to let the sterling exchange rate fall to a level that the markets will sustain and certainly not above 2.60 DM to the pound and let the Bank of England smooth out the short-term jerks and jumps. That is an art at which it has shown itself very successful over a great number of years.
Secondly, interest rates should be brought down decisively, not just to 8 or 9 per cent. but to more like 6 per cent., before the end of the year. As my noble friend pointed out, real rates are still exceedingly high.
Finally, in the now inevitable reconsideration of Maastricht, above all we must retain in the hands of national governments, at any rate for the foreseeable future, the maximum possible control over the exchange rate of their own currency and therefore over the livelihood of their own people. The loss of that has wrecked the Government's economic policy over the past two years and done a great deal of damage to British industry which it will be hard to repair. Whatever we think of the result of the French

477
referendum—a "yes" vote, incidentally, of only about 35 per cent. of the electorate—it was certainly not a vote, any more than was the Danish vote, for handing over to Brussels even more powers of economic self-government.
Finally, having escaped from the crippling straitjacket of the ERM, if only by good luck, for heaven's sake let us not gratuitously walk in again.
7.20 p.m.
Lord Brabazon of Tara: My Lords, for several years until about two years ago I had the privilege of answering the same Question time and again. It was: when will we join the exchange rate mechanism of the European monetary system? The Question was normally asked by the noble Lord, Lord Ezra. It was a Question that I enjoyed answering. It enabled me to play a totally straight bat mainly because I did not know the answer—and it is always easier to reply to a question to which one does not know the answer rather than one to which one knows the answer but does not wish to give it. With respect to the noble Lord, Lord Ezra, it was perhaps a rather naive Question. I am afraid that your Lordships would be kidding yourselves if you thought that entry to the ERM would ever be announced to the House at Question Time. I am sure that the noble Lord knew that.
However, the Question had serious value. It was to find out what support there was for joining. Membership was supported from all sides of the House. The Liberal Party had long been in favour; the Labour Party came around to it and was certainly in favour at the end; and many noble Lords on this side of the House and on the Cross-Benches were also in favour. Membership was also supported by prominent business leaders, bankers, industrialists and the CBI. There were exceptions: the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Stoddart of Swindon, stand out as two such exceptions. There were also exceptions on my own side of the House.
Two years ago the time became right and we joined. Unfortunately, history has shown us that the time was anything but right. Let us be clear about what we really joined. It was the exchange rate mechanism of the German monetary system, a wholly-owned subsidiary of the Bundesbank. Just as the Germans were faced with the problems of reunification and the inflationary pressures from that, we and others within the ERM were beginning to feel the effects of recession. I do not blame the Germans for their actions. We would have done exactly the same if we had faced the same circumstances.
Despite the weight of learned opinion on the ERM, I must admit to having had some doubts about it. The phrase,"You can't buck the markets", has been much used in the past few days. I prefer,"Market forces will prevail", but the message is the same. Any form of fixed or semi-fixed exchange rates between widely divergent economies is bound to have difficulties.
Secondly, we appeared to be joining to make us look better Europeans, whatever that means. That is not a good reason for doing something as important as this. It is certainly true to say, as my noble friend the
478
Lord Privy Seal said, that during our membership in the last two years inflation has fallen from nearly 11 per cent. to the same as Germany's at about 3.5 per cent. and is falling and interest rates have come down from 15 per cent. to 10 per cent., although the differential has widened unfavourably. The ERM undoubtedly has had responsibility for that but the recession has also had its effects and all the credit cannot be given to ERM membership.
As we all know, last week the pressures became too much and despite all the proclamations that we would not devalue from my right honourable friend the Prime Minister and the Chancellor, strongly supported by the leaders of the Labour and Liberal Parties, despite the threat of a rise in interest rates to 15 per cent.—which, thank goodness, did not work—and despite massive intervention in the markets, we were forced to leave the ERM and devalue—and devalue we did; let us not call it anything else.
I certainly do not blame my right honourable friends for having repeatedly said that we would not devalue and for then having done so. One has to continue to say that one will not do so because the moment one stops saying it devaluation will take place anyway. However, I found the call from the Leader of the Opposition, that not only should we hold our parity but should also cut our interest rates rather naive. Just how we could have achieved that on the back of a tiny 0.25 per cent. cut by the Bundesbank I am not quite sure.
We now have to make the best of the situation. But let us not get too euphoric over the consequences. Just as I remember saying at the time that the ERM would not be a panacea for all our ills, or indeed a free lunch (as the present phrase is), neither is a floating pound and devaluation. We shall still be influenced, just as is the dollar outside the ERM, by German policies and interest rates, and indeed forces elsewhere in the world. We now have a much more realistic exchange rate, in particular against the dollar. I believe that our export industries are already competitive and will be made more so by a lower exchange rate. That should help the balance of payments in time. Unfortunately, some of our best export markets are also in heavy recession at present. But conversely, those exporting to us are also unlikely to be able to pass on the full increases. Inward tourism, in particular from the USA, should also benefit since there is no doubt that the 2 dollars to the pound exchange was causing great difficulties. The stock market has risen strongly, in particular with regard to those companies with large overseas earnings; and that is good for confidence. But above all we have been able to cut interest rates, and I hope we shall see further falls as conditions allow.
I am very pleased to hear my noble friend the Lord Privy Seal reinforce the absolute priority of not taking risks with inflation. Of course devaluation brings with it inflationary pressure in higher prices for imports. We have already seen a price rise in petrol, for example, although fortunately there is no great pressure on the oil price at present. I hope and believe that this devaluation is different from previous ones in that there are very few inflationary pressures—indeed the opposite at present.

479
The fall in mortgage interest payments will help to bring down the RPI, although I still believe that mortgage interest payments should be outside the RPI. When at some golden time in the future interest rates have to be raised to damp down an overheating economy, the immediate effect is to raise the RPI while the real effect is the opposite. I hope that that suggestion can be considered.
We are also fortunate that these events are happening at a time when the public expenditure round is taking place. It is vital that the Government keep the tightest possible lid on public expenditure and the consequent PSBR. We must try to get back to a balanced budget because government borrowing is at the expense of borrowing by commercial companies, which are the wealth producers of the economy.
The squeeze must be on current account expenditure. A freeze should be the norm for public sector pay. I was horrified to see that those responsible for the education of our children, the teachers, put in a claim for a 16.5 per cent. rise. What an example of economic naivety to set to our children. That particular paper should be sent back marked "nought out of ten". The Secretary of State for Education should say that if they come back with a figure of 1.65 per cent. he might talk around that figure.
Within the total of public expenditure, priority should be given to capital expenditure. Top of the list, perhaps not unexpectedly, I put roads because they generate the best and quickest benefits for our businesses. But capital expenditure on hospitals, schools and housing would also give a welcome fillip to the construction industry. Again in the transport field, capital expenditure by British Rail and the Civil Aviation Authority—and I emphasise in the case of British Rail that it is capital expenditure, not revenue support—which can be shown to generate a cash return should be taken out of public expenditure controls altogether. The Treasury will no doubt be horrified by that suggestion. But at this time when it is no doubt having to rethink many issues, perhaps it could add that suggestions to its list. I believe that that is something that the markets would accept, and would indeed welcome the extra expenditure on the infrastructure.
During the hours and days that follow our leaving the ERM, the first message from the Government seemed to be that we would rejoin as soon as possible. I for one was very glad that that message became less clear as the days went by; and now re-entry seems to have been put off until conditions allow and reforms to the ERM are made. I believe that the events of the past week—they are not yet over—have shown the present ERM to be fatally flawed. I do not believe that we should rejoin it in its present form. From that it follows that the concept of monetary union, a central bank and a common currency as envisaged in the Maastricht Treaty also falls. For that and other reasons I shall not therefore be able to support the Maastricht Bill if it reaches this House in its present form. However, I hope I am right in thinking that my
480
right honourable friend the Prime Minister has this afternoon in another place set some new conditions for the Bill.
Let us not forget that one of the reasons businessmen wanted entry in the ERM in the first place was to bring some stability to exchange rates, an essential element when planning trading and investment decisions abroad. They now want to see markets calm down again. In conclusion, we want a strong and stable currency, a currency that is wanted in the world because it is backed by a strong economy, a low tax economy, an economy with tight control over government expenditure and a balanced budget. We now have the opportunity to achieve those goals and we should do our best to do so.
7.30 p.m.
Baroness Platt of Writtle: My Lords, nobody wants to see repeated the events of last week, just as we do not wish to see repeated the hurricane winds of a few years earlier. As a little girl I did not understand my father's favourite saying,"It's an ill wind that blows nobody any good", but in adult life I realise how wise he was.
At the time of Maastricht I admired the standpoint of my right honourable friend the Prime Minister, wresting as much subsidiarity as he could from other national leaders set on rapid European unification. Public opinion in Europe is now proving how right he was. I am a convinced European but I believe that the rate of unification was too fast. Thankfully, the Danish vote slowed down that headlong rate in its tracks. The French have voted yes but the vote, with its divided nature, shows doubts in the minds of some half of the voters about whether the treaty fulfils their national aspirations. Again, that should highlight the need for a slower and more measured rate of progress towards unity in Brussels.
We all ratified the Treaty of Rome with high hopes of free trade and, above all, of ensuring peace rather than the terrible wars which throughout history have riven Europe with hatred, taking with them the flower of our youth throughout the nations. No one wants to return to those bellicose years. So much is at stake that we must stay together. I continue to support wholeheartedly my right honourable friend the Prime Minister in his honourable attitude, particularly in his presidential capacity, in attempting to stay with the ERM for as long as possible, as we had promised. However, many adverse outside events prevented that and now we are free to reconsider the matter. I am glad that the Prime Minister has stated clearly that we shall not hurry back and that Maastricht will not be imposed without time for reconsideration to allow voluntary Danish participation. We must also stick to our policy of enhancing subsidiarity to the full. I was interested to hear the Germans now talking about unity in diversity.
I believe that this new situation will allow a much-needed deceleration in the rate of unification. Perhaps Europe should consist much more of clubs of like-thinking nations following their own preferences within the overarching European Community, as suggested recently in The Times. Those common

481
loyalties would gradually develop in an evolutionary manner, which would ensure greater strength and endurance, and the more successful clubs gradually attracting new members. In recent years the trouble has been the over dominance of Brussels, going against the grain of national characteristics. In future Europe needs to work with the grain but more slowly. That will lead to much stronger international bonds in the longer term which are more able to stand up to the occasional hurricane forces of the winds of change that are part of human existence.
As UK Limited we must now plan ahead to retrieve our economic strength as quickly as possible. We must reduce our budget deficit and bring our balance of payments into credit. We must continue with our policy of keeping down inflation and also reduce as soon as possible the number of unemployed people. We stand high internationally in our skills in exporting our goods hut we fall down in our high ratio of imports. That results in our balance of payments deficit.
It is with some diffidence that I speak this afternoon as a minnow among Tritons, as my noble and learned friend Lord Hailsham said. Nevertheless, I wish to make a particular point that I believe is at present of great importance. The Treasury puts together capital and revenue and always concentrates its policy on an annual basis. Like my noble friend Lord Brabazon, I believe that capital and revenue should be separated. Any prudent firm or organisation has to consider how much capital investment it can afford in one year to bring down overheads or to increase efficiency and revenue in future years. That needs time and a longer-term strategy of investment.
I believe that the Government should redirect Treasury policy towards longer-term aims. Fiscal incentives to firms to invest in high technology machinery will reduce future operating costs and make us more competitive in the sale of our products both at home and abroad. I am not recommending civil servants second-guessing successful industrial policy. Small firms are struggling today and need tax allowances to encourage them to invest in new machinery in the year in which they make the capital expenditure. In that way the Inland Revenue could also take its pickings but in succeeding years as profits rise—that is, if the risks were successful.
If arrangements of that kind are not made our manufacturing industry will not be taking risks and exercising the entrepreneurial flair that we need to reduce our balance of payments deficit and at the same time reduce unemployment. We did not need the "QE2" to go to Germany for repair, which will cost us £30 million. We needed a courageous entrepreneur in the UK to hire unemployed ship workers to keep the necessary time schedule and win the contract.
Recently our family has tried unsuccessfully to buy a British hammer and deep freeze. It has had to persevere to buy a British-made non-stick frying pan. My noble friend Lady Faithfull and I unwillingly have our hair cut with Japanese scissors. "Why not Sheffield scissors?", your Lordships may ask. The design of Sheffield scissors is not sufficiently modern and would exhaust the fingers of a hairdresser. Why
482
do we not compete more vigorously in a growth trade and find out what the consumer wants in order to capture the internal markets so that we do not need to import these bread and butter products?
Sir Basil Feldman does a good job in his Better Made in Britain campaign. He does not support buying British for the sake of it. He organises exhibitions of current imports, including price, after-sales service and other quantified information, so that manufacturers here can be fully aware of the competition and meet it head on. Such schemes need more encouragement.
We need to modify Treasury policy so that we act in a longer-term manner to encourage, by fiscal methods and otherwise, a far more entrepreneurial competitive mood in our country. In the short term lower interest rates and a lower pound internationally will help but manufacturing industry needs to see strong Government encouragement of entrepreneurial investment. A fiscal incentive would give that signal strongly.
Furthermore, there is too little competitive attitude in our schools. The Young Engineer for Britain competition and the Young Enterprise and Neighbourhood Engineers schemes, backed by my right honourable friend the Prime Minister, the Engineering Council and the DTI, will help to encourage able young people to see the excitement and challenge of a career in a competitive and forward-looking manufacturing industry investing in new technology. It is an urgent matter and cannot be left to chance. We must all take more positive steps to change our anti-industrial attitude in Britain—that includes the media—so that we can regain our economic status in the world. I hope that we shall use our present freedom from ERM dominance to develop further those policies with the utmost urgency.
At this point I must apologise to your Lordships. I must leave before the end of the debate but I shall read Hansard with diligence.
We have a window of opportunity when time is on our side. We must grasp it. Public opinion in Europe is moving our way against the dominance of a Brussels bureaucracy. In due time Maastricht can be made to form the core of a new agreement but it must be amended towards subsidiarity. Meanwhile, we must enhance the entrepreneurial flair and economic strength of our own manufacturing industry to the benefit of our country.
7.40 p.m.
The Earl of Halsbury: My Lords, I address your Lordships this evening with a rather tired sense of dè jâ vu, a phrase over which I have no monopoly since it has already been used by my coeval friend, the noble and learned Lord, Lord Hailsham. We have both been through it all before and long ago.
I came of age in 1929 when anyone not yet an octogenarian would have been a schoolboy or perhaps even unborn. The storm cones had been flying all summer—agricultural prices had been steadily dropping, the stock market had been unjustifiably booming and then, in October, when I was just 21

483
years and three months with my career ahead of me, came the crash. There was frenzy, panic, hysteria and suicides. Millionaire stockbrokers and bankers were jumping out of the windows above Wall Street onto the pavement where they accumulated like autumnal leaves in Vallombrosa. Half of the M2 in the USA went out of existence in due course.
We went off the gold standard with an overvalued pound in 1931. That was the first of the devaluations in my lifetime. On average they occur every 20 years—1931,1949,1967 and now 1992. We devalue what is overvalued. Winston Churchill set the stage for the first of them as he was advised and accepted the advice of Montague Norman who told him to return to the gold standard at its pre-war value.
The gold standard was all right as far as it went. It was not universal. The Chinese had a silver standard and because they collared and cornered all the silver in the world, that led to the opium war but I shall not go into that in any detail. The trouble with gold as a standard was that the production of gold did not keep pace with the overall value of the production of goods. It was not produced at the same percentage rate as goods. Therefore, it was permanently deflationary.
Another of my old coeval friends, the noble Lord, Lord Boyd-Carpenter, mentioned floating exchange rates. In our youth they were known as purchasing power parities. That is all right except that to preserve balance, the imbalances of trade must be invested long term by the creditor country in the debtor country, and there is no way of ensuring that that happens.
The storm cones were already flying when Parliament last sat. Dollar interest rates were dropped and deutschmark interest rates were raised in the same week. "Watch it, we are in for a crisis", I used to say to as many friends as I could buttonhole and who would listen to me. I said that we have four options: we can follow the dollar; we can follow the deutschmark; we can do nothing; or we can float. I do not know whether the noble Lord, Lord Cledwyn, asked those questions but if he did not say,"Watch it", as I did, then his speech this evening was a kind of natural history museum-piece of being wise after the event.
The media, bless them, have discovered Roosevelt and his famous dictum:
"You have nothing to fear except fear itself—.
However, I was there when he said that. I heard it on the evening news and it was a live matter. However, he did more than utter dicta; he acted. He set up the "New Deal". He sponsored the Tennessee Valley Authority with borrowed money—one may like to call it printed money—to produce capital assets for the nation, which earned a return in due course. Roosevelt was a cripple in a wheelchair but he was a president who presided.
There is all the difference in the world between borrowing money to pay the house books and borrowing money to build a house. One is current expenditure and the other is an asset for the next 100 years. Every issue in the City of London finances the expansion of industry with borrowed money at some level of gearing. If your Lordships do not believe me,
484
perhaps they will ask the noble Lord, Lord Desai. Although he is not in his seat at present, he is to speak later. I know that he agrees with me about that.
Here we stand with a part-worn out, part-collapsed housing stock, schools, hospitals, prisons and so on. Let us rebuild them. We need newer and better. We should modernise and spend for a future return. With an abundance of water in the North West of the country and a shortage of water in the South East, we need to build a giant canal through the Pennine chain; it would be a gigantic enterprise. We are embarked on a joint European project to build a standard fast reactor as a model for the future. Let us go build it and put our plutonium stocks to good use instead of burying them. When wages are paid for useful work, rather than dole to the unemployed, money will be injected into the high street and thence to their suppliers. The suppliers will then take more men and women into employment and pay them wages to do useful work. Instead of deteriorating downwards, the situation will snowball upwards in terms of positive feedback.
So much for Roosevelt and the past; what of the present? We cannot run a trade deficit of £1 billion per month indefinitely, owing money to the rest of the world. It leaves us too vulnerable to raids by currency speculators on the foreign exchange. Those people are a neurotic bunch of parasites liable to attacks of hysteria at the drop of a pfennig. Compared to the days of my youth when foreign exchange dealing was tied to trading in goods and services, the volume of purely professional transactions is fantastic—10 times that of genuine trade finance.
The foreign exchanges, as described by the noble Lords, Lord Bruce of Donington and Lord Cockfield, are run by teams of youngsters with computer keyboards and display screens doing sums in arbitrage and the futures market. That enables them to play at bulls and bears: buying what you cannot pay for or selling what you have not got, waiting for a rise in the one to sell out or a drop in the other to buy in. One such youngster who is vaguely related to me told me that he expects to be burned out at the age of 35. He asked me what I thought he could do thereafter. The honest answer was,"Nothing", but I tried to say that kindly.
Your Lordships have heard what those youngsters do and what the exchange mechanism does to them. What do they actually do. They undertake stock arbitrage. You buy de Beers in London with sterling, sell them in Johannesburg for krugerrands and sell the krugerrands for sterling in London. If that is done quickly enough—that is what the computers are for—and the conditions are right, a small profit can be made. As the noble Lord, Lord Bruce, said, when that is multiplied, the dealer may end up with millions. What a pity that those bright youngsters go in for that sort of parasitic occupation instead of going into industry.
Revenons à nos moutons, messeigneurs. I follow the noble Baroness, Lady Platt, in asking what is wrong with our trade that it is in deficit. The figure is £65

485
billion over the past six years and at the current rate of £12 billion per year, it would be £72 billion over six years according to last month's figures.
For most of my life our industries have in fact failed to pay for their imports with exports, but the invisibles have secured us a favourable balance which we invested abroad, although most of those investments were liquidated during the war. Now the invisibles have gone into deficit too. What is wrong with our industries that we cannot make commonplace things competitively? Why cannot we make them for ourselves? I would like to have a list of what it is alleged that we cannot make for ourselves. Why does such and such an automobile manufacturer, or whoever, make automobiles, or whatever, in Spain in order to sell them in Britain when once upon a time they were made in Britain in order to sell them in Spain? What is wrong with us that we put people off in some sense or other unless they are Japanese, who are content to invest their favourable trade balance with us? If they can manage our labour force, why on earth cannot we manage it?
Ever since the war I have listened to politicians and academics nagging at industry as being slow, unprogressive, unimaginative, soft and so on. My noble friend Lord Benson came rather close to that in what he said today. What effect does one suppose that has on the youngsters who could be the next high fliers when they mature? Highfliers like to work either for or with other highfliers. It stimulates them. They keep one another up to the mark. If they see some sector of the market being nagged at, will they want to enter it?
For me industry, which means making things, has been a happy home all my life. But my grandchildren do not feel that way. They do not want anything to do with it. Why not? I believe that a contributory factor was the recruitment to academe following the expansion of our universities. I believe that many recruits were anti-manufacturing and prejudiced their students somewhat against it.
Adam Smith called the English a nation of shopkeepers. That is a quotation which is usually ascribed to Napoleon Bonaparte, although in fact an Italian observer of the European scene had voiced it a little while before. I have always dated the start of the Industrial Revolution from 1750 when Abraham Darby's first blast furnace for making cast iron with coke was blown. That ushered in the age of cast iron engineering. One hundred years later Prince Albert's Great Exhibition promoted Britain as the workshop of the world, which it was. But wherever we succeeded others followed and that cannot be stopped. We cannot stand still. We cannot lay on our oars or rest on our laurels. But it does not follow that, because that is so, we necessarily acknowledge it and pick up the challenge.
So tired, we revert to shopkeeping. I have nothing against shopkeepers. They provide an essential service which depends on manufactured supplies which are either made at home or abroad. Therefore, all I can do is to respond in kind to the quotation from Kipling made by the noble Lord, Lord Callaghan, who ended his speech with one:
486
"This was none of the Lord's good pleasure For the spirit God set in Man is free But what comes after is measure for measure And not some God who afflicted thee. As was the sowing so is the reaping Now and ever more shall be. Thou art delivered to thine own keeping Only thyself afflicteth thee".
7.55 p.m.
Lord Harmar-Nicholls: My Lords, it is always exhilarating to listen to and follow the noble Earl, Lord Halsbury. He was in top form this evening. The only part of his speech which bothered me a little was when he gave us that rosy picture at the beginning with all the tunnels, bridges and wonderful ideas. I wondered where all the money was coming from to pay for it.
The Earl of Halsbury: My Lords, borrow it!
Lord Harmar-Nicholls: That is right. People will only lend money if they feel that it is going to be spent on something which will produce a result reasonably soon so that they can have a share of it. That is how things work.
I have heard pretty well all of the debate until now. I was most impressed by the speech made by the noble Lord, Lord Benson. He was practical and came within a realm which I understand. He said that we should not bother our heads all the time with short cuts, charters, mergers and international arrangements. He said that the only way that we can get back to anything like the level of success that we used to enjoy is by getting down to it and working ourselves and thereby producing the results. We should also make our own decisions. Most of the comments we have heard have tended to tell other people what to do.
The purpose of the recall of Parliament, as I understand it, was for Parliament—of which we are a part, although the other place is the most important—to make up its mind what Parliament can do and what should be our choice. We cannot do all the wonderful things which would provide the answers. All we can do is set the climate in which the people who can provide the answers are encouraged to do so, and we should get on and do just that.
The noble Lord, Lord Stoddart, reminded us that we cannot have a plebiscite to find out what our next moves should be because our parliamentary system does that since we are a parliamentary democracy. I accept that. I prefer a parliamentary democracy. The theory is that the representatives of the people do their homework and get down to dealing with all the problems. They can make a decision from deeper knowledge than the individual can and they will get on with it. But I wonder if we do that. Parliament has that scope but it is not doing the job.
Instead of being wedded to the Whips in making and confirming decisions which have been made, Parliament should really do its homework and act. I was interested to discover the other day that on 28th October 1971 the House of Commons approved by a vote of 356 against 244, a Government resolution which stated:

487
"That this House approves Her Majesty's Government's decision of principle to join the European Communities on the basis of the arrangements which have been negotiated".—[Official Report, Commons,28/10/71; col.2076.]
They merely voted blindly for that. In my own Government party, because we took some trouble to have a look at the possible consequences that might flow from the decision 38 of us voted against the resolution. We felt that there was very good evidence to show that the negative results that would follow from joining the Community as a result of the negotiations would, when everything including the common agricultural policy and all its sections, was taken into account, result in a move towards eliminating this country as a separate country and a separate power. However, that matter was not examined by the House and there was a big majority in favour. As I have said, there were only 38 of us in the Government party who went into the Lobbies and voted against the resolution.
We felt that the long-term dangers had not been fully examined. The Government had examined the long-term dangers and had come to a different conclusion. There is nothing wrong with that. I do not want them to feel that they have to be dictated to by the Back-Benchers any more than I want the latter to be dictated to by government on issues like this when the general health and freedom of the nation is involved.
But what did the Government do when those arguments were being put forward to try to persuade the House of Commons not to support the resolution so easily but to look at the effects that it could have upon sovereignty and upon our general independence? We were told that all the dangers that had been pointed out by the sceptics were nonsense. The Government said,"That can't happen. We've got the veto and when things are being negotiated the veto can stop such awful things happening". But it did not take us long to find out that the veto was a dead letter. The veto was replaced by majority voting and much of the way in which we live and organise ourselves is now being decided not at home but by people in other parts of the Community who do not have the same reactions or desires as we have at home.
It is up to Parliament to make decisions on the problems that we shall face in the future. If there is to be no referendum, fair enough. If parliamentary examination is being claimed to be just as effective and to go into things just as deeply, then let us see to it that Parliament gets down to it and does just that.
The question before us at the minute is whether or not we shall introduce and vote on the Maastricht Bill. It is quite clear that the Maastricht Treaty is an extension of what was the original intention of the Treaty of Rome and is intended to get us to what for want of a shorter expression, we can call "a federal Europe". That is what it boils down to. One can use all sorts of other descriptions, but the aim is not to have 12 separate nations with individual freedoms to make the decisions which they must live with and live by. The aim is that, at the best, we shall have only a one-twelfth say in what happens to our taxation and the way in which this country is run. It could well be
488
argued that, if we have a good case, we shall be able to persuade the other 11 and we shall then have not just a one-twelfth say but will carry with us the people we have persuaded.
However, it does not take a professor to know that by and large with people as they are—and it is ridiculous to think that people are not as they are—the decisions that are made by other nations will he made on the basis of whether they get anything out of them. The reason why the recent referendum in Ireland was overwhelmingly in support of Maastricht was that the Irish wanted the cash. They are the ones who get a lot and we are the ones who provide the cash. Matters are getting to such a level that I am beginning to wonder whether we can afford this. Even if the theory worked, we would have only one-twelfth say.
When I say,"Remember the promised veto which encouraged us to join the Community", I am not suggesting that we can do any more now than honour the Treaty of Rome. We have gone too far and we are committed to it. However, to go any further and to carry Community powers out of the realm of economics and into the realms of politics and social and political living will be madness. To support Maastricht at this stage would be to take a further step outside the European "Economic" Community and towards the merger that would bring us to the point that I call "centralism".
I want Parliament to understand that. If Parliament says that it does not mind that and if it does not see in it the dangers that I fear as regards our way of life and the general desires of this country, all right, but let us not accept Maastricht simply because a government or party have said so, and because the Whips must be obeyed without thought. If Parliament is not prepared to do that, we must have a referendum—not that I am in favour of referenda in general. But it is essential that Parliament should do its job if its scrutiny is to replace the referendum.
Why do I tie a vote on Maastricht—if the legislation is brought back—to the absence of the veto? We are already being prepared for Maastricht. We are told that all the dangers that we say will flow from allowing the Maastricht Treaty to go through and from its becoming an adjunct to the Treaty of Rome do not matter because we have subsidiarity. We are told that our Prime Minister did a great job by including in the Maastricht decision as it stood an amendment stating that priority must be given to anything that could be done by the nation itself being done by that nation. They called it "subsidiarity".
If anybody can prove to me—and I have read and examined the provisions and if any of Maastricht's authors can put their hands on their hearts and say that they believe subsidiarity means that the individual nations themselves can decide what should be left to them and that those decisions cannot be interfered with by the European Court of Justice or subjected to any other amendment, then subsidiarity will, indeed, mean something in terms of defending ourselves from the giving up of powers that we should retain at home.
However, Maastricht's "subsidiarity" does not even begin to say that. When Maastricht's authors are examined, they make it perfectly clear that, while

489
subsidiarity is the general purpose at which they are all aiming, at the end of the day a nation's decisions can be overturned by the other countries of Europe, and eventually by the Court itself.
Therefore, I beg both Houses to remember the lesson, which is that the dangers that were clear in the Treaty of Rome were discounted because we were told that a veto existed that would make it possible for us to resist the dangers that could be clearly seen. It is the same with Maastricht. We should not be fobbed off with the subsidiarity idea—nor with the idea that Maastricht does not mean what it clearly does mean. We shall not be doing our duty if we replace our powers as an elected democratic parliament and do not put the issue out to a referendum.
We must honour the Treaty of Rome up to the point that we have reached so far. The thing that made me suspicious and bothered me the most was when one "E" was removed from the title of what was the EEC—the "European Economic Community". When Parliament was persuaded to pass that legislation, we were told that all the benefits were based in the economic sphere—
Lord Williams of Elvel: My Lords, I am most grateful to the noble Lord. In saying that we should honour the Treaty of Rome, would he also say that we should honour the Single European Act, which was passed by both Houses of Parliament?
Lord Harmar-Nicholls: My Lords, most certainly. We are committed to the Single European Act under the treaty. I do not want this nation to run away from its legitimate obligations. I am saying that, in conforming with the obligations which we are prepared to honour, we should act within the terms of the treaty that we signed but we should not go any further nor allow the treaty to be diluted because of the way it is administered once we have accepted it. I believe that some good could perhaps come from concentrating upon improving the economic under-takings that we have gained from the Treaty of Rome. However, anything which impinges one inch further upon our sovereignty or which affects our social outlook and interferes with our individual politics should not be accepted.
The noble Lord, Lord Cockfield, who is always well versed in these matters said that there was nothing in Maastricht that could not be done under the Treaty of Rome without Maastricht. If that is so, why do we want Maastricht? I cannot understand explanations of that sort on the one hand and, on the other hand, enthusiasm for enforcing Maastricht. If, as a result—certainly I will give way to the noble Lord.
Lord Stoddart of Swindon: My Lords, I am much obliged to the noble Lord for giving way. I am interested in what he has just said. He is clearly demanding democracy within Parliament. In those circumstances would he agree that, unlike the position on the Treaty of Rome and the Single European Act, which were forced through the House of Commons on a guillotine, this time there should be a wide-ranging and long unguillotined, discussion within the House of Commons?
Lord Harmar-Nicholls: Certainly, my Lords: I thought that what I was saying was that if, where individual sovereignty and way of life are concerned we are not going to have a referendum—I do not want to go to a referendum—but are going to operate a parliamentary system as a better alternative, it is up to the people who are elected to Parliament and to those who sit in this Chamber as part of Parliament to apprise themselves of all that is likely to follow.
I am not frightened of this business of a first-and second-class community. If we preserve our individual freedom we have to let others have theirs and if other parts of the Community want to join together to do things, let them do that. If they say that we should become second-class and no longer first-class, then all I would say is that in such a case I hope they will not expect us to go on, by our subscription, paying a first-class fare if we are to be relegated, as it were, to second-class carriages. If that were to be balanced, the money we should save would go some way towards producing the improvements that the noble Earl, Lord Halsbury, suggested could be attained.
My advice to my friends in the Government who, I understand, have called Parliament out of recess because they want to ascertain the mind of Parliament in lieu of having to go to a referendum or any such alternative is that they should take account of the general feeling in the country, which, so far as Europe is concerned, is that we were to some extent duped by having the veto power dangled and then given up almost overnight. I believe that people resent more than I can possibly describe the idea of being led further along that path by a word called "subsidiarity" which would be the result of bringing Maastricht back and getting parliamentary approval.
8.13 p.m.
Viscount Caldecote: My Lords, I was always in favour of joining the ERM because I thought it provided a stable exchange rate which was helpful to industry. I believed it provided a spur to industrial efficiency and competitiveness because companies could not then expect to pass on increased costs into export prices by devaluation. I also believed that it was a valuable deterrent to inflation. I still believe it was right to go in. Perhaps we went in at too high a value of the pound; but that is not the major issue.
Unfortunately, many people regarded entry to the ERM as a prop to the economy, which of course it was not. It was a challenge to industry to improve performance and to grow with low inflation. Many companies, large and small, rose to that challenge and they have been making a full contribution to the strength of our economy; but alas! too few. Overall, United Kingdom industry—I emphasise "overall" because there are very many first-class companies in this country and top class in the world—has failed to meet the demands and the requirements of United Kingdom purchasers. The balance has been met by imports. Earnings for services will never put right that imbalance.
Therefore even in the recession we built up large deficits on current account and they have continued to this day. Worst of all, misguided economists have

491
advised and persuaded governments that such deficits did not matter. They have talked about them being balanced by capital flows, and as many of your Lordships have made clear tonight, those capital flows around the world have got quite out of hand. In company terms, similar advice would lead directors to ignore a loss year after year on the profit and loss account because the cash outflow could be balanced by capital injections. To continue that policy for long would obviously be the road to disaster and the share price would soon reflect the market views of that policy.
Such was the reaction in world markets to our long-continuing deficit on current account—a fall in the perceived value of sterling. In times past devaluations, steadily or in dramatic steps, have resulted each time we have been in this sort of trouble as the pound took the strain. Those devaluations gave only temporary respite, as other noble Lords have pointed out. As rising costs and inflation rose again, the cycle was repeated with a further depreciation of the pound.
The facts must be faced. The United Kingdom economy, and particularly our manufacturing industry, was not strong enough to withstand the rigours of a fixed exchange rate imposed by entry to the ERM because we do not produce competitive products in sufficient volume and value. That is the problem which has to be solved, and until it is the old economic cycle of boom, inflation, recession, devaluation and boom again, will be repeated indefinitely. The objective of sustained economic growth and acceptable levels of unemployment will elude us for ever. What is more, until we are on the way to solving that problem of increasing the output of manufacturing industry, it would be folly to return to the ERM, as the noble Lord, Lord Benson, indicated.
In all the hectic discussions and the welter of words in the past week or two regarding how to sustain the sterling-deutschmark exchange rate and the like, is it not amazing that the question has never been asked, so far as I know—it has certainly never been answered—as to why is the German economy and the deutschmark so strong? The simple answer is that since the last war the deutschmark has never been devalued, and that is because the German manufacturing industry has been strong and the value of goods produced by German manufacturing industry has exceeded the value of goods purchased in West Germany. In 1991 (the latest figures that I could get) the balance of trade in Germany was a positive £8 billion, compared to ours of a negative £13 billion. That is a difference of £21 billion per annum. Can you wonder, my Lords, that the pound was weak in relation to the deutschmark?
Of course the achievements of German industry have been greatly helped by the action of the Bundesbank in controlling inflation, and by Germany's trade union structure. By comparison, in the United Kingdom under Conservative Governments of the past 10 years or so, we have made enormous strides and there have been great achievements. In the early 1980s under the leadership
492
of my noble friend Lady Thatcher, we removed the stranglehold of the trade unions, making industry much more competitive and restoring the spirit of enterprise. But, alas! those splendid achievements were not exploited and followed through. The talk was all of medium-term financial strategy, monetary aggregates and control of the money supply, with hardly a mention of increasing product supply. Neither the Government nor the Prime Minister herself shared the anxiety which was widely expressed about the situation of manufacturing industry. Concern was often expressed in your Lordships' House about the need to increase investment and output. The dangers which were forecast by the report of a committee on overseas trade in 1985—the committee chaired by my noble friend Lord Aldington—were ignored, as were the recommendations of the report of the Select Committee on Science and Technology on Innovations in Manufacturing Industry in 1991.
At our peril, we have forgotten that the primary responsibility of financial institutions is to channel money into providing resources which will create wealth through added value in manufacturing industry. To make money and earn foreign exchange by manipulating money is valuable too, but of secondary importance. As a result of our failure to appreciate the pivotal importance of increasing the value of the output of manufacturing industry to meet our needs, we have built too much of our economy on the shifting sands of money value instead of on the solid rock of added value in manufacturing industry. I hope that my noble friend Lord Cockfield, who is not at present in the Chamber, will agree with me on that. So when the swirling currents of world market forces swept around us, part of our economic foundations crumbled away. Now we are up against the urgent need, first, to stabilise our economic base and then to move forward from firmer foundations, as there is no doubt we can if we make better use of our resources.
The extent of the task before us is brought into sharp focus by the August balance of payments figures. Even in this deep recession the deficit is still running at the rate of £12 billion per annum. In the past three months, excluding oil and erratic items, exports were 0.5 per cent. higher than a year ago, but imports were 4.5 per cent. higher. I hope that my noble friend who is to reply will not deal complacently with those alarming facts.
In the past few days too we have seen the sad situation in British Aerospace with the loss of thousands of jobs. It is ironic that a little country like Taiwan, which was part of the third world not so long ago, from its strong manufacturing base which it has built up over the years is able, willing and keen to invest in a division of British Aerospace. How much better if our financial institutions would make long term investments in British Aerospace and other manufacturing companies from the profits they made in selling sterling to the Bank of England in the recent crisis and thereby contributing to the weakness of sterling.
This morning on the "Today" radio programme the President of the Board of Trade was asked what

493
should be done for manufacturing industry. He replied,"We must get the economic climate right with low inflation and low interest rates". Of course that is correct—it is a necessary condition for growth—but all too clearly it is not sufficient.
During much of the 1980s the climate was right for UK industry. It was right for investment and expansion. Productivity and profitability greatly increased. But compared to our main competitors, UK industry paid out in dividends a far higher proportion of profits. We did not invest enough in new and improved competitive products and processes. The evidence is clear. A moving and serious piece of evidence comes out of a recent study by Coopers & Lybrand. A sample of 460 of 1,500 major companies indicated that one third of those UK manufacturing companies had introduced no new product or process technology since 1989. How could they possibly be competitive in world markets in such conditions?
Clearly, market forces and incentives for high profits have not stimulated the increased output needed to sustain non-inflationary growth. That is industry's task, but in total—I emphasise again "in total" because there are many splendid companies—industry has not been up to it. I say to my noble friend Lord Joseph that that is the reason why action by government is sorely needed. Government can no longer escape some responsibility. The first essential step is for government to accept and declare unequivocally the need to increase the output of UK manufacturing industry. That will only come through higher investment. There is no short cut, as some people now seem to advocate, through stimulating consumption. That would bring back inflation until British manufacturing industry is able to supply the needs of this country. We would suck in imports and put ourselves into an even worse position than we are in now.
Already a vast home market is available to British manufacturing industry. It is a much easier market than the export market. At least half the deficit could be met from products manufactured by United Kingdom manufacturing industry if only we invested more in new competitive products and processes. That would provide work for thousands, perhaps millions, of people who are now unemployed.
The next step is for the Government, the City and industry to consult together in order to identify and remove the obstacles to achieving greater output. Already they have received some sound advice, and more sound advice has been given by your Lordships today which may answer some of the questions posed by the noble Lord, Lord Benson. Then, laying aside all dogma related to market forces and picking winners, the action required must be put in hand by government in consultation with industry. It is a difficult problem. Consultation is needed with all the people involved. Let us get round the table and see what needs to be done and then do it. An encouraging step forward in that direction is the establishment of the CBI's National Manufacturing Council which is looking at these problems in a broad way. For the first time the CBI has come forward and has recognised the vital importance of manufacturing industry through
494
the formation of this national council. I am told that one of the main subjects for discussion at the CBI conference in November will be manufacturing. God bless it! I hope it is successful and I hope that it will bring changes in the outlook of industry. Above all, I hope it will bring changes in the outlook and action of the Government.
1 hope that my noble friend who is to reply will confirm Her Majesty's Government's full support for the CBI's initiative and for every other initiative designed to stimulate greater output for manufacturing industry as well as accepting that the Government themselves have a vital pro-active part to play. Above all, I hope that my noble friend will not be complacent about the vast problems which beset us.
8.27 p.m.
Lord Desai: My Lords, we are asked to take note of the Government's economic policy. I do not know which economic policy we should take note of. At present there is not one. At present there is not a policy because anything the Government may say about their commitment to fighting inflation, or anything else, is not credible. People are still in office who said things only 10 days ago on which they have not only completely gone back but have gone back without a hint of an apology—indeed with celebration. Not only do they no longer abide by this policy but they did not even believe in the policy when they were affirming it. They have caused misery, as many of my noble friends have pointed out, and now they say that they did not even believe in the policy they advocated.
For a long time I have been an advocate of entry into the exchange rate mechanism. I do not mind saying that. At no stage did I think it was sufficient. I thought it was necessary. I shall explain in a moment why I thought it was necessary. The exchange rate mechanism which we joined was not as rigid and inflexible as the Government pretended it to be. The Government chose to regard 2.95 as a figure they would nail themselves on. It has been six months—even longer—since we on this side of the House asked them to consider a realignment—a co-ordinated realignment. We were denounced. We were told that realignment is a weasel word for devaluation and that the Government were not devaluationists. If I am to believe the noble and learned Lord, Lord Hailsham, we have not devalued yet but are somewhere else. I am glad to know that.
We said that there should be a co-ordinated realignment and an attempt to use our presidency to push the Community towards reflation. Those policies were advocated and they were possible within the structure of the ERM. The Government chose to wrap the straitjacket of the ERM more firmly around themselves than they needed to. Indeed, they chose to wrap it around themselves until the Sunday before the Norman disaster on the Wednesday. They chose to do so because they falsely thought that giving a signal that they were going to discipline would help. Of course it would help. The market somehow thought that it knew better. The market knew that during the past 13 years of Conservative government promises have been made and rhetoric has been used in relation

495
to anti-inflation, control of money supply and control of public spending. The performance has been abysmal. That is the only word for it. If one looks at the numbers carefully, as I have done professionally, there is proof that the money supply has not been controlled. We have changed targets from MO to M1 to M3 to M4, back to MO and so on. The goalposts have been moved in order to prove that we have achieved targets.
Inflation, when it did come down—although it came down after having been doubled in the first instance by the incoming Conservative government of 1979—was controlled only because commodity prices in international trade fell and we had a bonus. We deluded ourselves that it was due to our achievement. You cannot say that you have controlled inflation until you have low inflation at full employment. If you do not have low inflation at full employment and if you do not have low inflation with balance of payments equilibrium, you cannot say that inflation has been controlled. The economy has only been temporarily deflated. Once deflation is let go, inflation will come back.
Therefore, it was incorrect to say that we had controlled inflation. The market also saw that before each election, in 1983,1987 and 1992, there were pre-election bribes. Look at the IMF statistics that were given before each election. The fiscal stance of the Government was loosened. Bribes were given. That was all done under the rhetoric of "No U-turns". Perhaps they were pirouettes, not U-turns. The market knew that ultimately the UK Government were not capable of committing themselves to a sustained policy framework for longer than two years.
The paradox on this occasion is that fiscal profligacy was practised before the election. Noble Lords will remember the Budget. It was a Budget in which, despite £28 billion of PSBR, more money was given away. It was given away in a way which did nothing to revive the economy. There was a tax cut of the most trivial kind. It was a straight election bribe. It would have been better to have put money into the infrastructure.
After the election, with a good majority and no election in prospect for four years, the Government ran and scuttled, not for the purpose of an election but merely to win applause at a party conference due to take place in a fortnight. I can see no other reason why they scuttled and ran. In June, July and August we could have built up reserves. We could have negotiated realignment. We could have agreed to do things which are possible within the ERM. We could have taken a more active fiscal stance to give the signal that we were serious about doing something about the recession. None of that was done. The Government pretended that they did not need any other economic policy except for daily assertions that "We shall not devalue".
Then the danger came. In early September, what did the Chancellor do? He went to the Treasury saying that he would do whatever was necessary to defend sterling. He did not say that he would increase interest rates. He was reluctant to increase interest rates. I
496
remember saying during a debate on the gracious Speech that the Chancellor would have to take interest rate variability if he wanted exchange rate stability. He cannot put interest rates up and down and hope not to crash with the exchange rate.
However, I believe that the way of living in a fixed exchange rate system was not learned. We chose a version of the fixed exchange rate system which was even sterner than required. We should not be surprised that given a policy of reluctance to raise interest rates and reluctance to give proper signals—and indeed the wrong signals—that we have crashed. Let us not blame the Bundesbank for the situation.
The noble Lord the Lord Privy Seal referred to injudicious comments. I think that he was hinting at a statement made by Helmut Schlesinger. Remember that when the ECOFIN conference took place in Bath a good opportunity was wasted, if I may say so. Whatever happened at that conference was confidential, but soon afterwards the Tory tabloids informed us that Norman Lamont had told the Germans where to get off, that he had forced them to cut interest rates or not to raise them. If confidence is broken one way, it will be broken another way. Those confidences that go with the grain of the market will win and those that are not credible will not win. It was not credible for the UK Chancellor to tell the German Bundesbank to do this or that. Nobody can believe that. Markets are not stupid. People have a lot of money at stake.
Many noble Lords have spoken about speculation and the ugly spectacle on television of young people making £50 million. I did not have time to watch television so I do not know about those things.
Deregulation imposes a kind of discipline that those who believe in the market should remember. The Government deregulated the market; we did not. Secondly, we must remember that the markets do not have loyalty to any nation. Professor Hayek may say that that is the secret of the success of capitalism.
The Earl of Longford: My Lords, does the noble Lord agree that companies feel that they have to do the best thing they can for their shareholders?
Lord Desai: My Lords, it is statutory to do so. We are worried that in gambling £15-£20 billion the Government may have incurred a loss of £650-£700 million. We are worried, of course. We did not want the Government to lose money. Why do they expect that the companies want to lose money just because the Chancellor does not know his mind? Should people lose money because the Chancellor cannot get his facts straight and because the Treasury cannot forecast the economy? It is wrong to blame the speculators.
The 500 per cent. interest rate that Sweden has imposed is not very high if one thinks about it because on a daily basis it comes to approximately 1.5 percentage points. The profit to be made in day-to-day trading is much more than 1.5 percentage points. Perhaps it should be the case that on certain kinds of transactions the interest rate should be 500 per cent. and on other kinds of transactions there should be heavy money for speculation and light money for real

497
production. Perhaps we can make a distinction. Perhaps we can use a tax rate, as suggested by my noble friend Lord Callaghan.
Let me not dwell on the sorry past. The question is, should we go back into the ERM? Some of my noble friends have passionately stated that we should not. Memories are short. People almost pretend that flexible exchange rates did not cause recessions, cycles or inflation. Between 1971 and 1990 this economy lived under flexible exchange rates. Does anyone remember that to be a great harmonious period without recession, inflation, unemployment or destruction of the manufacturing industry?
The exchange rate alone is not the problem. You must look at the package of policies along with exchange rates. There must be a fiscal policy, an investment policy and a structural policy. While we have devalued, we have neglected some of the very important things that the noble Lord, Lord Benson, and the noble Viscount, Lord Caldecote, mentioned. We have pretended that the state cannot do anything and have therefore damaged the economy.
We need a reformed exchange rate mechanism in which we acknowledge that we shall have a system of currencies. It currently lacks a proper central bank, a proper discipline of international co-operation and therefore a lender of last resort. The Bretton Woods system had a lender of last resort. When that lender of last resort ran out of money the system collapsed. The Bretton Woods system also had a disciplining authority in the IMF which told people when to devalue and when not to devalue. We do not have either of those things currently in the ERM. When, at the special meeting in two weeks' time, the Prime Minister investigates the fault lines of the ERM there should be a restoration of a flexible system, a proper central bank and proper rules of when and when not to change the exchange rates.
8.41 p.m.
Lord Harding of Petherton: My Lords, I should like to reinforce the words of those of your Lordships who have spoken of the importance of keeping inflation low or non-existent.
Governments can only create and keep intact the right conditions for prosperity and an increased standard of living for all. The important words are "the right conditions". The right conditions as regards inflation have so often not been maintained in the past 40 years and we have all seen and felt the ill effects. When he was Chancellor two years ago, the Prime Minister took us into the ERM. I believe that he was quite right to do so. Until recently we have benefited greatly by being anchored to the deutschmark, the value of which the Bundesbank is constitutionally bound to maintain. I believe that we could have continued to benefit had a more flexible approach to the ERM been adopted by the governments of the EC. We may or may not have joined at too high a rate, as some of your Lordships have stated. I am in no position to judge. The important thing was that until a week ago the rate was held within the 6 per cent. band and more often than not was within narrower limits. That has brought much pain to people and
498
businesses with high borrowings as interest rates have had to be kept high, but that does not mean that the policy was wrong.
The trouble has come in recent months because of the costs of German reunification, the collapse of the US dollar and the way that the ERM became completely inflexible. The exchange rate mechanism, as I understood it, was not meant to be a completely rigid system. Realignment was supposed to happen when currencies came out of line or when interest rates had to be kept too high in order to sustain them. The cause of this inflexibility was the unwarranted belief among some of our partners in the European Community in the too-hasty establishment of a single currency. The idea was, and still is, that if currencies were permanently fixed a common currency would be easy to implement. That idea is fatally flawed.
A single currency may be possible now for a small number of countries tied to the German economy. In the long term it may be in Britain's interests to have the same currency as others in the European Community. Indeed, it may be very much against our interests not to do so. However, at the present time or for the foreseeable future, I do not believe that it is either realistic or desirable for Britain to join one. I hope that the Government will rejoin the ERM or something similar in the not-too-distant future. I do not think that the Chancellor will find it easy to manage the economy and to keep inflation down with a floating pound.
However, the rules must be clear. Realignments must be allowed when currency levels become unsustainable and not be made a matter of pride or prejudice. Also, proper support must be available for currencies in temporary trouble because of panic on the currency exchanges.
I am a firm supporter of our membership of the European Community. So much of our trade is with its other members and there can be no doubt that our future lies at the heart of Europe. I believe therefore that on monetary matters we must co-operate with our European partners. However, the Government must convince our partners to be realistic and practical in these matters. They must be persuaded that the vision of a common currency, and indeed of political union, must be put forward into the future. The voters in the Danish and French referendums may help to persuade them. The important objectives for the Community are genuine free trade among its members and with the outside world and steady, non-inflationary growth. For us British the emphasis must be on growth being non-inflationary as we have erred so much in this respect over the years.
Whether the pound is floating or in the ERM, I hope fervently that the Government stick to their word and get inflation down very low and keep it that way. Only then will we be able to hold our heads high and ensure the future prosperity of this country.
8.46 p.m.
The Earl of Onslow: My Lords, there is almost no greater amusement than the sight of egg on the faces of the mighty. Some may think that I refer to Her Majesty's present advisers. I admit that there is a little

499
there, but a supersonic U-turn will soon dislodge that. However, Her Majesty's loyal Opposition have been covered in vast quantities of egg. They urged us to join the ERM only because they thought that it would irritate my noble friend Lady Thatcher. It was rather unfortunate from that point of view that my noble friend Lady Thatcher and my right honourable friend the Prime Minister shot their fox for them, so they were in effect left to call for action.
We all know what the meaning of the word "action" is. It is a lack-of-thought word. It means, "Do something. I am not quite sure what, but do it so that I can sound important on television". They tried to suggest a conference to persuade the Bundesbank to disobey its own rules. The only constructive and well-thought-out criticism of the Government has come from their own Back Benchers and a few perceptive outside economists. That Her Majesty's Government have been brought round to this point of view shows the Conservative Party at its agile best, leaving the Opposition floundering like a water-logged Rhine barge.
A German Minister said the other day that the future for Europe was either Maastricht or Sarajevo. That is hysterical nonsense. Western Europe, and certainly Germany, are far too sensible and mature for that sort of behaviour. However, it is a great pity that Germany does not have more confidence in herself because she would then not feel the need to cling to the false comfort of European unity as Linus clings to his blanket.
Certainly Western Europe does not need such a chimera. We need a climate that will allow us to trade, to make money, to reform the CAP, to make GATT work and to have the fastest introduction of the European single market as possible. Above all, we do not need 20 per cent. tariffs on Austrian motor cars such as have just been imposed or the trade barriers and tariffs which have been imposed on all the items that the Eastern Europeans can sell us. What have we done? We have cut out their produce and given them vast quantities of aid. That is a waste of everyone's money and of their business.
The Bundesbank knows perfectly well that if one puts too much money into any given economy inflation will occur. German inflation has been kept at zero since the war more or less by doing exactly that. If inflation occurs, interest rates rise. Since Chancellor Kohl made Germany pay too many good deutschmarks for rotten ostmarks, Germany's inflation has risen and its interest rates are consequently higher than we would wish them to be. That is what is causing the present crisis. The currency crisis is perhaps a deutschmark crisis; not a franc, lira or sterling crisis. If the deutschmark had been allowed to float upwardly by itself and had not attempted to drag everyone else with it, the banks of central Europe would not have had to behave like Mr. Maxwell, supporting their own share prices and consequently giving large donatives to the money markets.
However, good appears to have come out of the situation in that Her Majesty's Government are now basing their essential anti-inflation policy on internal
500
monetary conditions instead of fixed exchange rates and other people's monetary conditions. In parenthesis, I have always thought that having the Bundesbank control our money supply because we were too wet to do it was pathetic.
German industry may not necessarily be far from the summit of its power. My evidence for that is purely anecdotal but I think telling. It is noticeable that BMW has expanded its manufacturing capacity not in Germany but in North Carolina because American labour costs are lower than those in Germany. The European manager of one of the big Japanese car companies told me that in his view the German unions were becoming like those in England during the 1960s and 1970s; the social security costs and holiday entitlements were exorbitant; and, furthermore, in the very near future the British car industry would be by far the most efficient in Europe. A South African business friend of mine involved in the components industry both here and in Germany totally agrees with that view. An American acquaintance who has just bought a high-tech company in Wales has just told me that the skills there are as good as any in Silicon Valley in California.
There has been a sea change in union attitudes and a new and more vibrant management ethos which I suspect was largely brought about by Japanese inward investment and dire necessity. Provided that Her Majesty's Government keep their eye on the anti-inflationary ball (light government, sound money and low government expenditure—and please let the Treasury differentiate between capital and income because most other people have to) the prospects for this country are actually rather exciting, especially as inflation has now been altered in effect to include asset values. By that I mean that if one had come into this country two years ago with a sack of money, one would have been able to buy rather more in goods and services than is the case at present. Therefore, for the first time ever since the war the value of the pound internally has actually increased; for example, houses are cheaper, stocks and shares are cheaper, land is cheaper—all assets are cheaper.
A noble Lord: What about food?
The Earl of Onslow: My Lords, food has stayed static, if one balances it all together; for example, the price of corn has not changed since 1985. It was then £105 a tonne ex-farm and it is £105 ex-farm now. Therefore, it has not changed. That applies to most agricultural produce ex-farm. However, what Sainsbury's does is perhaps a different matter altogether.
While in Parthia, the Emperor Trajian ran out of a librum, sesterces, denarius or two, so he made the mint master, who for some extraordinary reason of Roman regional planning found himself at Lyons, place upon the face of the same libra, sesterces or denarii the figure duo instead of unum: net result inflationary boom, followed by bust. But at least he was trying out a new policy. Surely by the time my noble friend Lord Lawson printed pounds to enable us to hold down the value of the pound to three deutschmarks we should have learned the lesson. After all, my noble and

501
learned friend Lord Howe knew it. He did not print money and he brought down inflation from 20 per cent. to just over 3 per cent, even though at the same time the pound depreciated markedly against both the dollar and the deutschmark. If we can keep our inflation at or near zero, British industry can do what is required of it, possibly for the first time since it began to lose its competitive edge not in the 1960s but in the 1860s. For example, Kitchener complained in the Omdurman campaign that the engines which were being built on the Tyne were late and that he could get better ones from Germany. So we have heard much about this for a long time.
In 1987 Sir Alan Walters forecast what would happen. Let it also be remembered that he advised Sir Edward Heath and was sacked by him in 1972. He must be the only man to be sacked by two Prime Ministers for being right on both occasions. He has been uncannily correct ever since. At the same time most of the economic business establishment has wittered on about fixed exchange rates and in so doing nearly forced Mr. Lamont to take the title and Christian name Sir Stafford and the Prime Minister to adopt the new first name of Harold. But now they have a chance to re-adopt their own first names and bring back real prosperity. They of course would be immensely helped in this task if they could be persuaded to make the Bank of England independent, with Sir Alan or a clone of his as governor, and to appoint Tim Congden chief Treasury mandarin. But above all they must never forget the lesson that Trajian learnt in Parthia.
8.55 p.m.
Lord Butterfield: My Lords, I should like to begin by saying that if the noble and learned Lord, Lord Hailsham, and the noble Baroness, Lady Platt, both felt that they might be minnows in this debate, what about me? I feel a mini-minnow. However, I am on my feet because I wish to make two points as regards the subjects about which we have been talking: one from the point of view of the young and the other from the point of view of the elderly.
However, before I begin, I hope that the noble Earl, Lord Caithness, will not mind if I do what he will be doing presently which is to make some complimentary reflections on some of the remarks made by speakers in the Chamber today. For example, I thought that it was very brave of the noble Lord, Lord Cockfield, to stand up and say that we are in fact facing a very serious defeat. I must confess that I have felt like that over the past few days. I was very pleased when the noble Lord, Lord Elton, made the point that we suffered a serious defeat at Dunkirk and we were out of Europe but that we were able to get back in again. I think that that attitude must be encouraged.
The noble Lord, Lord Ezra, pleased me because he made some suggestions based upon industry and the world of work. He put forward points which we might pursue in order to try to get back on our feet. Of course, the noble Lord, Lord Joseph, always pleases me. He talked about the need for something comparable to the conference in Philadelphia when the Americans wrote their famous constitution. He
502
spoke about the absence of our grasp of exactly what is subsidiarity. He did not precisely make that point, but I think that it was behind what he was saying about subsidiarity and perestroika. My mind was immediately carried to the difference between the school and the houses, although in my kind of world it would be the difference between the university and the colleges. I am sure that there must be some talk among the philosophers about the business of giving your sovereignty away and probably being shown lessons from history about how that has been successfully done in so many of our institutions.
I am no economist and I am not really in a position to make any recommendations as regards what to do; indeed, I do not think that I can even make the diagnosis very accurately compared to many noble Lords who are very experienced in the fields of government and economics. But what I really wanted to do was to speak about what I know two groups of people very much hope will be priorities in the Government's policy.
First, perhaps I may speak about the elderly. I have been concerned about the medical care of the elderly for 20-plus years. In fact, I was one of the people who began to tell the other professors, "We must take geriatrics seriously because there will be so many of them and it would be enlightened self-interest if we professors got ready for our old age".
The destruction of the savings of the elderly in this country between the 1970s and today has been appalling. I can assure the House that whenever we asked patients in the out-patient departments of our great hospitals to take off their clothes, when they took the money out of their pockets the people who had hardly any were the elderly; not so the young and often not so the students. I was personally shocked by the penury to which so many elderly people seem to have been brought by the destruction in the value of their money.
I hope that the noble Lord, Lord Monkswell, will not be cross when I say that we are all conscious of the need for generous thought and concern in regard to the unemployed and the whole educational problem. But I hope that the Government will, as they say, stick to their guns and continue to give anti-inflationary measures a high priority in their forward planning.
Noble Lords who visited the Library and looked at a copy of the Daily Star today, would have seen a poor grandmother with a horribly bruised face. The press are making a great fuss about physical attacks on the elderly by young people in our society. I am simply appealing to the Government, through your Lordships' House, not to savage the savings of the elderly in the future. That will be an immense help to the spirit of our industrial activities and may well be a great encouragement to the young people who are looking for work; they may feel that when they find employment, the money they receive is what one might call "real" money.
Today we have all had an opportunity to talk of Maastricht. I live in Cambridge and see many young people. Cambridge people—the cognoscente from Cambridge—will be delighted to hear that I was having dinner in the new Hawk's Club on Monday

503
night. It was obvious from talking to the young men, both during the dinner and at the bar afterwards over drinks, that they are keen that this country does not lose the chance of being part of what I believe the Prime Minister called the "core" of Europe. There were many people from abroad—South Africans and Australians. All could appreciate that the young people hope that we are now in a position where any wars will be small ones which can be managed by the United Nations.
My other policy priority that I wish to bring to the attention of the House is the hope that the Government can re-jig the Maastricht Treaty in such a way that it is acceptable. I believe that the noble Lord, Lord Joseph, was right. It will probably take a great deal of philosophical discussion to find a way to make it work. The mere idea of translating all the words in the first Maastricht Treaty, mimeographed on green paper just to obtain the correct translation and the correct feel for the different words, will take some extremely clever people quite a long time.
Those are my points. They are perhaps small ones. They are more aims than specific recommendations for policy. Nevertheless, those two aims reflect what I believe the young are striving and hoping for and what the old deserve.
9.3 p.m.
Lord Marlesford: My Lords, if there has been one theme in the debate today it has clearly been that of inflation, coupled of course with what we should do in regard to Europe following last week's events.
Since the war Britain's record on inflation has been abysmal. It has been one of endlessly abandoning policies, often without good reason. I agree with what the noble Lord, Lord Desai, said in that regard. One of the reasons is that for a long while people regarded unemployment as a greater evil than inflation. It is perhaps understandable that the Labour Party should take that view and less discreditable than that the Tory Party should—after all, the Labour Party was formed as the political wing of the trade union movement. It is understandable that employment should be a top priority.
In the Tory Party that view came from two sources. One was misplaced guilt about the pre-war situation and the second was a misreading of pre-war history. Somehow it was believed that if unemployment went up the Tories would lose the election. The person who put me right in that regard was the noble Lord, Lord Callaghan. Just before the 1983 election I said, as a journalist, that I imagined the Tories would lose the election given the current rate of unemployment. The noble Lord told me, "Read your history about the inter-war periods and what happened then in regard to unemployment and elections".
At any rate, we are generally agreed that inflation is the main cause of unemployment and that one of the main components of inflation is wages. That has given Britain a peculiar inflationary psychology which is not shared by our main competitors—the Germans, the Americans and the Japanese. It is the view that
504
everyone has the right in some magical way to immediate compensation for whatever inflation has taken place. Then one argues from that point on.
Let me take a simple, current and, I believe, relevant but depressing example; the Ford Motor Company. I would argue that the Ford Motor Company is probably one of the less well-run—one could even be tougher than that—companies in America. For years their British subsidiaries were much less productive than other overseas subsidiaries. I remember being told that by Robert McNamara, who was once the head of Ford.
The unions, understandably, have a schizoid view of the matter. On the one hand they exult in the fact that they are able to obtain large wage awards and show a lot of muscle. Many noble Lords will remember how Ron Todd exulted in the fact that he was able to prevent 2,000 jobs going to Dundee because the manufacturing activity would have been carried out by the engineering union rather than his own. Yet the Transport and General Workers' Union officials had a shrewd idea of reality. I remember speaking to some of them as a journalist at the 1990 Labour Party conference at Blackpool. They were worried about the future at Dagenham and Halewood. I had the impression that, had they been given an ultimatum by the company, they would happily have settled for zero provided the jobs remained intact.
What happened? In October 1991 Ford negotiated a two-year pay deal. The deal involved a 5 per cent. increase between 1991 and 1992 and for October 1992 to October 1993—starting next month—the increase would he the rate of inflation in the 12 months to October 1992 plus 0.5 per cent., or 5 per cent., whichever was the greater. Is it therefore surprising that this week 10,000 workers at Dagenham and Halewood have been put on short time? Also I saw from the tapes this evening that some 1,500 workers have been sacked.
The obvious reaction of the unions is to demand interest rate cuts to compensate. That is precisely what the Government should not do. It is something of a geographical paradox that the British are an undisciplined people. The devaluation which has followed from the inability to sustain the discipline of the ERM has created a dangerous situation. I should like to ask my noble friend when he replies to give an indication of the Government's estimate—and many different figures are given by different economists—of the effect of devaluation on inflation. If the devaluation is 10 per cent. how does he expect that to feed through into prices?
I believe that the Government's aim should be to keep down pay rises for everyone, with a zero norm. With inflation at 3.6 per cent. and very high unemployment, a reduction in real wages of 3.5 per cent. is, to coin a phrase, a price well worth paying for being in a job at all. The Government could impose that on its own employees. I do not believe that there would be riots in the streets or much public sympathy if people went on strike in order to resist such a solution.
The Earl of Onslow: My Lords, perhaps I may be very rude and briefly interrupt my noble friend. Has he noticed that the Government have just given the police an increase of 6 per cent.?
Lord Marlesford: My Lords, I had not. I am sorry to hear it.
The private sector presents a particular problem. There can be no direct control. However, the message must be clear. I suggest that the message should be that reductions in interest rates will be dependent upon the rate of increase in earnings. That must be one of the disciplines, in the short run at least, to replace the ERM.
More is needed. I believe that there should be rigorous control of public spending. Some proposed mega-schemes should be postponed. I suggest as a candidate the proposal to spend £1 billion on building an extra lane round the M.25. That is not the best way of spending the money in the present situation. I was particularly moved by what my noble friend Lord Caldecote said about industry and I would much prefer to see the restoration of the three-year period 100 per cent. capital allowances, which would encourage industry to invest.
We now have an excellent tax environment, thanks very much to my noble friends Lord Howe and Lord Lawson. I find it rather depressing to hear Members of the party opposite talk about the failed policies of the past and higher taxes, as did, for example, the noble Lord, Lord Healey—he of the 98 per cent. marginal rate. Who wants to go back to that, or to exchange controls? Nor do I agree with those who believe that the speculators should be punished in some way. That view has been put forward by speakers on both sides of the House. The noble Lord, Lord Desai, and I seem to agree on that issue. They merely did what they were intended to do. At least if they operate from the United Kingdom the chances are that the Government get back 40 per cent. of their profits in tax, which would not be the case if they operated elsewhere.
I turn now to the ERM. Does it really work? The concept of mutual support by central banks clearly did not work. The problem is that we do not know what the obligations were. What was the deal? I asked the Library whether the European Communities Committee of your Lordships' House had studied the ERM, but it has not produced any such study. I believe that the Treasury Select Committee of another place looked at the ERM but I do not believe that it studied its workings. We do not know exactly the implications and obligations and therefore cannot understand how it was that last week the Germans appeared to fail to support the pound.
Some covers have been lifted. On Thursday I met a group who on Wednesday had met representatives of the Bundesbank in Germany at a very high level. That group received two messages. First thing on Wednesday morning the message was that Herr Schlesinger was not to be said to be wrong but merely unauthorised. The second message was that the Bundesbank was unhappy about having to spend so much money supporting the lira and did not intend to
506
make the same mistake twice. Is it surprising that by lunchtime currency dealers regarded it as a one-way bet to short sterling?
Clearly we cannot rejoin the ERM in the short term. In what other ways can we move forward? The Prime Minister used to talk about the hard ecu but we do not hear much about it now. I should like to ask my noble friend to remind us of the situation in relation to the hard ecu. I always thought that a very sensible idea, but I should be inclined to start something of that kind extremely cautiously. Why not allow some monetary authority in Brussels to issue ecu notes which would have to be fully backed by deposits of currencies in the appropriate proportions'? Then at least if they were made legal tender in all countries of the Community they could gradually be used, if only by tourists—let us not be very ambitious—to start with.
Where does all that leave Maastricht? Obviously it has lost a lot of its charm, not only in Britain. Part of the blame must go to Mr. Delors. A former colleague of mine who was the Economist's man in Brussels 20 years ago recently revisited that city and the Commission. He was very depressed by what he found. They were the same faces. The people were balder and fatter and had been promoted but they had not moved on for 20 years. There was a very inward-looking feel about it.
Criticising Mr. Delors, the analogy that I would use is that of two fishermen: a wise fisherman and a foolish fisherman who each catch a big fish. The wise fisherman plays it carefully, lands it in his net, gets it on to the bank and holds it up in triumph. The foolish fisherman tries to lift the fish out of the water on the end of his line and—plop!—it swims away. The triumphalism which Mr. Delors showed in the wake of the signing of Maastricht greatly antagonised people.
But I believe that Maastricht was a very good deal. It gave Britain some extremely good advantages: no social charter and no obligation to go into EMU until it suited us—things that other countries now wish they had. Also, as a country we have something of which other countries are jealous: we have attracted enormous amounts of foreign investment, particularly Japanese investment. That is a very hopeful sign and I hope that my noble friend Lord Caldecote will feel that there at least there is great scope. I have spoken about the Ford Motor Company. What a contrast there is with Nissan.
If Maastricht fails we shall not be in such a good negotiating position to get a good deal. The Germans helped us then. Will they help us now? We had leverage over Mr. Delors, who wanted to be reappointed to the presidency of the Commission, and were able to use that.
I have one final thought. For centuries the fault line in the political geology of Europe has lain between France and England. After a sleepless night, thinking about what I might say this evening, I was in a kind of dozing dream and saw in my mind's eye a vision of Mr. Delors standing with two other Frenchmen, who were rather spectral figures, both wearing funny uniforms, one man tall and thin with a long nose and the other short, squat and rather aggressive. One was

507
saying to the other: "Well. mon cher, you will soon have the chance of putting the English back where they belong—on a misty island in the Atlantic".
That is why I do not want us to miss the opportunity of ratifying Maastricht. I shall support the ratification if it gets to this House.
9.17 p.m.
Lord Kagan: My Lords, during the Recess I visited Eastern Europe and the USA. Noble Lords might be interested to hear their perspective on us as they see it. The Eastern European economy is being rolled up like a carpet by German industry and German businessmen. It is being done quietly, efficiently, and thoroughly. The Germans have a great advantage because there are millions of highly trained East Germans whose second language—learnt from the age of seven—is Russian. They have worked with the Russians and know the Russian temperament. It is an ideal army of economic occupation. Nobody can match that.
Moreover, they are natural partners. After all, the Russians have what the Germans need: oil, coal, ferrous metals and all the raw materials that we had as a monopoly. Now they have them too. However, there is one difference. I do not know the cost of producing a barrel of oil from the North Sea but I know that the recent strike in the Siberian oilfields, in which the Germans are now 50 per cent. partners, resulted in a settlement in which wages doubled from £2 to £4 a week. That is the competition that we face.
In the military field the Germans, through East Germany, have taken over Russian technology. That includes ready-made MIGs and expensively trained pilots. When the EFA contract came up and our Government tried hard to persuade the Germans to continue with it, and even reminded them that they had paid a massive amount of money as deposit, the Germans simply said,"Keep the change; we get it for free in the East". That is the reality.
My noble friend Lord Callaghan asked: which way is Germany oriented'? Does it look West or East? He quite rightly pointed out that with a war torn, divided Europe, with a resurge of nationalism, it could one day become survival by peace or war. Admittedly, the last war was started deliberately. The next war may start accidentally. But the result will be no different. Therefore, the noble Lord's question is vital.
While in Lithuania I had the opportunity to have interesting talks with various East German technocrats who now operate in West Germany for the West Germans. I raised the question asked by the noble Lord, Lord Callaghan: which way do the Germans look for their future? The answer was, "Emotionally and culturally we look to the West; we like the West. But economically and industrially we look to the East. Indeed, in order to be able to afford your democracy we need the East and its opportunities because you in England live beyond your means, but we wish to live within ours. We will not tolerate inflation".
Germany made an offer which the eastern countries could not refuse. They are natural partners. Germany has what the East needs; and vice versa. Against that,
508
we have to export cars to France and Italy. They make cars to export to us. It is a rather odd and unnatural relationship. It is a competitive rather than complementary relationship. In other words, we could well become surplus to each other's requirements. I hope that I do not view the matter too gloomily. We resent Germany's patronising attitude. They are winners, but they are not modest, elegant winners. Bismarck's dream 100 years ago—German resources, science and organisation with Russian raw materials and labour—is slowly coming true. It suffered a hiccup with Hitler. He tried rape; but Kohl tried seduction and it is working.
When an eight-stone boxer goes into the ring against a 16-stone boxer, no matter how fair the referee is or how much they abide by the rules they do not look alike when they leave it. My noble friend Lord Cledwyn pointed out that democracy is on trial. From the eastern perspective, dictatorship is evil but democracy looks feeble. Those people believe that their choice is which side of the parapet to fall off. With the tentative steps to a market economy and democracy in Eastern Europe, a few have fared exceedingly well and are better off but the masses are in misery.
When I was in Lithuania, I telephoned an old friend with whom I went to school 60 years ago. The man has two degrees. He was for five years a top level librarian of the United Nations. He said that unfortunately he could not come to see me because his pension of £2 a week does not stretch far enough for him to pay the bus fare, which is a farthing. That is a very explosive situation.
I return to what was said by the noble Lord, Lord Joseph. He said that our problems are due to our attitudes; that is, our willingness to involve ourselves and the extent of our commitment. I repeat that if an eight-stone boxer and a 16-stone boxer go into the ring together and are subject to the same laws they do not look alike when they come out. It is no use our blaming the Germans or anyone else. It is we who must pull up our socks if we want to be slotted into the right place. At the end of the day what matters is not what we say but what we do. The specific gravity of our efforts will decide our place in history. Any government or any party which hide behind other facts are misleading the people.
The noble Lord, Lord Benson, put his finger on our problem. No government have dared to ask the right questions; namely, those relating to the erosion of the industrial base, industrial relations, the them and us attitude and so forth. Europe is a fact; it can be a good fact and it can be a cruel fact. The question is not whether but how we shall fare in it. So far British politicians have not dared to ask the questions.
There has never been a mystery about what is the right thing to do. I remember a previous Prime Minister once saying, maybe in confidence, "Well, there is no mystery about what is the right thing to do except that if you do what is politically right it is economical suicide and if you do what is economically right it is political suicide. You can take your pick". That was the story of In Place of Strife and of the winter of discontent. The noble Baroness, Lady

509
Thatcher, continued in conviction politics even when she offered to compromise and gave the good girl's answer of "The answer is not 'no' but 'not yet—. We all know what happened to her—though that is to the advantage of your Lordships' House.
The only way is to take out of the political arena the questions of industry, economics, education and training. They are national problems and persuasion alone will not solve them. As regards those matters at least we cannot afford to enjoy the luxury of ritual adversarial debate and the scoring of points while the Germans operate as "us" and we operate as "we and them".
The Dutch have proved that it can be done. They have had the same problems as we have had. They have had to learn to live without an empire but they have got through. That it can be done in this country has been proved by the Japanese; Nissan is flourishing. It has also been proved by Toyota and Mitsubishi which are running factories in Britain with well-trained British labour and British management. Therefore, it is no use saying that it cannot be done; we have a choice if we wish to take it. Some measures may not be palatable but if we cannot get what we like we shall have to learn to like what we have got.
History may not wait; it is impatient. It may be five minutes to midnight and perhaps I may join the noble Lord, Lord Jenkins of Hillhead, who said that he "trembles for our future in or out of the ERM".
9.30 p.m.
Lord Wade of Chorlton: My Lords, as many noble Lords will remember, the opening phrase of The Tale of Two Cities is:
"It was the best of times, and it was the worst of times".
That is an extremely appropriate sentence about which to think today. It is the best of times in the sense that our technology, our abilities, our opportunities in the single market, the opportunities of GATT and the opportunities of a world which embraces trade and where trade has a great opportunity to increase make it the best of times. And yet, it is the worst of times in that I have never come across more despair among so many people and more feelings of helplessness as regards how to revitalise their businesses which they have seen disappear. Possibly the most critical factor is the great reluctance on the part of those who have wealth to do anything with it because there is a tremendous lack of confidence and knowledge about how the future will unfold for them, for their families and their businesses. Under those circumstances, people wish to keep what they have and hold on to it. Those who have nothing as a result have no chance of filling their coffers. Therefore, there is a division: there are great opportunities and yet there is not the will or the movement to grasp them.
To speak at this stage in a debate means that nearly everything that can be said on the subject has been said. Therefore, I shall tell your Lordships a little story about two companies, company A and company B. For a long time company A has been a successful business. It has built up assets, is well run and is able to pay an extremely satisfactory dividend which has maintained a high share price.
510
Company B is running through a more difficult period. It has had some internal problems and a change of management. However, a new chairman takes over who looks closely at company A. He believes that the success of company A's share price has been that over the years it has maintained a high dividend. Therefore, the new chairman decides to make a policy which means that company B will pay a high dividend. He embarks on that policy without realising that the assets and the profits were not there to support that level of dividend. He encourages the workforce and says that that dividend must be paid out and that if that is what the company seeks to do, then the company will improve. Of course, as we all know it did not and could not improve. The money keeps going out and the profits are not going in until the day is reached when the bank manager calls in the chairman of company B and says that unless drastic action is taken, the company will be made bankrupt.
Therefore, the chairman decides to take a more detailed look at company A. He studies how, over the years, company A has been able to maintain that high dividend. The chairman of company B changes his policy and says that the dividend will be reduced and costs will be reduced drastically. His first action is to get rid of all the major managers and administrators and concentrate on productivity. He cuts out all purchases of unnecessary literature and political donations stop immediately. He stops all other factors which have drained money from the company and concentrates on production. He uses all the assets to upgrade the production and improve productivity. He installs the latest technology.
Slowly the company begins to change. The employees see that the new policy means the growth rather than the decline of the company and they become more enthusiastic about the future. One day the chairman is able to go to his employees and say that he wishes to pay a certain level of dividend. He says that if that is paid, the rewards for the employees will increase accordingly. Suddenly the motivation of the workforce changes. Instead of working for a declining industry, they realise that they are working for a prospering company.
In a short time company B is able to pay a dividend equal to that of company A only to find that previously company A had made an extremely unfortunate takeover and had taken over a company which had used up all its assets. Therefore, at the very stage at which company B was beginning to be successful, company A starts to go through an extremely difficult period and company B takes command.
It would he naive of me to suggest that there is any relationship between those two companies and what we might be going through at this stage. It would be equally naive to think that the simplicities of a company are in any way related to the enormous complexities of a country.
In my view there is one close relationship. It is a point which has been emphasised by the noble Lord, Lord Benson, my noble friend Lord Caldecote and particularly by my noble friend Lord Brabazon of Tara. It was also emphasised by my noble friend Lord

511
Marlesford. If one is in difficulties, the first thing to be done is to concentrate on putting the problems right. I have not yet heard a Minister say that the development and the priorities of our industries are number one and that within this Government we will put all our efforts and abilities into the creation of wealth. We must deal with that single issue which has a tremendous impact on all of us who are struggling and trying to maintain our businesses, our employees and our assets to a time when things will move around. The very knowledge that the Government are making that a priority would make an enormous difference to the feeling of the nation.
These points have been emphasised. I would like to see our economy strong enough to play a full and important part in Europe. It would be wrong and impossible for us actually to run the business of the country isolated in any way from all the other countries in Europe. We will not get the benefit of a single market unless we are clearly determined about Europe. We cannot sleep in comfort in our beds unless we have the knowledge that our children and grandchildren are safe from the dismal possibility of war and internal strife which could happen again. We have seen all the signs that the people who create wars are present today as much as they ever were. All they want is the opportunity to come to the fore.
For all those reasons it is absolutely imperative that we are part of Europe, but that we are not part of one hit of it without realising that we also have to balance with the other parts. I believe that one of the errors has been to go into Europe with one side of our economy without realising that we have to change all the other parts to make it really work. This matter is not just for governments alone. Many of the problems that have enabled them not to give economic growth priority have been due to the pressures which have been brought to bear on governments by people who have now taken their priorities from that subject.
How many times in this House have I heard people ask government to do things which will drain away more of our capital? They ask government to give priority to issues which are far removed from economic growth, the employment of people and the creation of wealth. Not only has there to be a determination by government to give such issues that priority, but there has to be an equal determination on the part of the whole nation. Until we achieve that level of economic growth which makes us strong in Europe, we should all play our part in making that happen.
I hope, pray and believe that one of the main purposes of the debates today in the two Houses is to get over to the people of Britain the serious position that we are in. It is one which cannot be blamed just on governments or even events, but on the general view in Britain that there is another way. The truth is that there is not another way. If one has to do something one has to work at it. One has to create wealth which makes it possible for people in old age to be looked after; for those with social problems to be looked after and for education to be right. There are many other factors which we all know and believe are
512
really our priorities. To achieve them we first have to create the wealth. I hope that from this day that will become a determining factor in the thinking of everybody in Britain.
9.39 p.m.
Lord Griffiths of Fforestfach: My Lords, this has been an excellent debate, confirming once again how fortunate we are to have in this House Members of such wide experience. We are asked today to take note of the economic policy of Her Majesty's Government and, as the 36th speaker and speaking before those who will reply to the debate, I can assure your Lordships that I shall be brief.
This debate is occasioned by the events of last week. None of us in this House would wish to underestimate the significance of those events which were reflected in the rather sombre way in which the Leader of the House introduced the debate. I believe that in the context of last week's events we now face a choice—either we can accept defeat, emphasise the negative, stress the uncertainty and point to the problems of credibility or, accepting the floating pound, we can ask, "What are the opportunities and how can we capitalise on them?"
I should like to emphasise three opportunities which I see. The first is that the events of last week offer us greater freedom with interest rates. Mention has been made in this debate time and again of the serious recession from which we are suffering in this country and of the pain in human terms which it extracts, such as unemployment, the despair among the young who are leaving school without jobs, house repossessions and failed businesses. Already with a floating pound interest rates have come down by 1 per cent. I cannot see how anyone can say that that in itself is anything other than valuable. This is not the freedom to be reckless, but I believe that with a floating rate it is possible to pursue an anti-inflation policy outside the ERM with lower interest rates than we could have had within the ERM. I strongly disagree with those who argue that a floating currency is necessarily a devaluing currency or an inflationary currency. Both the United States and Japan have floating currencies with lower rates of inflation than either ourselves or Germany. Indeed, even Germany, whose record on maintaining low inflation is so much admired, has itself a floating currency because it is the anchor currency of the ERM.
We should not forget—despite the modesty of the noble and learned Lord, Lord Howe of Aberavon, in saying so—that during his period as Chancellor of the Exchequer in the first half of the 1980s inflation was reduced successfully even though the pound was outside the ERM. While the reasons for inflation picking up in the late 1980s are complex and, as was said earlier, reflect deregulation and the state of the world's equity markets, I feel that we cannot avoid accepting that one factor which led to that inflation was the policy of shadowing the deutschmark in 1987 and 1988, after which inflation took off so spectacularly as a result of money and credit being increased.

513
We know how to control inflation outside an exchange rate mechanism by controlling monetary growth, by controlling public spending and by allowing interest rates to reflect the capital markets. But that does not mean that life outside the ERM is easy. I would not suggest that for a minute. I have no doubt that those who have the responsibility for implementing an anti-inflationary policy much prefer the simplicity of a single exchange rate objective. I doubt whether there is any one single measure of money, credit or asset prices, which the Leader of the House mentioned earlier, on which we could target with complete confidence that in doing so inflation will finally he beaten.
In having that problem we are, however, in no different position from the governments or the central banks of Germany, the United States and Japan. By judging those various indicators and, above all, as the Leader of the House again mentioned, by allowing interest rates to be raised when necessary as well as to come down, I believe that we can permanently reduce inflation. However, what gives me more confidence is that what is crucial is not the technical aspect in economics; it is the political will to keep inflation low. I think we should take heart in this House that on leaving the ERM both the Prime Minister and the Chancellor have stressed that keeping inflation low is the overriding objective of policy and that interest rates will be raised if necessary.
Within that commitment, the most attractive feature of life outside the ERM, as I said earlier, is the possibility of interest rates coming down when appropriate and therefore kicking off and helping that recovery. The increased freedom we get in this way is not great; I accept that. I also accept the advice and the wisdom which have been offered by a number of ex-Chancellors that there should be no excuse for a cut-and-run policy or a dash for growth and that the freedom which we get is not great. But, that excepted, we still must realise that we get extra freedom from the policy which we are at present pursuing.
The second opportunity that we have from the events of last week is the freedom to reflect and to think a little more about the ERM and about how much of a hurry we should be in to re-enter. It seems to me that the crisis last week was fundamentally a crisis of the ERM itself and not one of British government policy. It is not as if this Government had suddenly pursued a policy of reckless spending or creating an enormous amount of money or credit in a short period of time, after which a devaluation was necessary. If that had been so it could have been said that the crisis last week was a crisis of government policy. I do not think that that is so.
The ERM, as the noble Lord, Lord Jenkins, mentioned earlier, is not a fragile system. In the first years of its existence it was very robust. It has been in operation for a long time, but it is a system of semi-fixed exchange rates which have neither the strength of a single currency nor the strength of a floating currency. Such a system is always vulnerable to countries pursuing divergent policies. Your Lordships will remember that back in Bretton Woods
514
days the dollar and the system could not take the strain of the fiscal burden of the great society and the financing of the Vietnam war.
I believe, in exactly the same way, that the ERM has proved incapable of taking the quite unexpected fiscal burden of German reunification. These strains have shown the fault-lines within the system. The system has a number of technical defects but the main one is that it always favours Germany in terms of adjustment and that whenever there is a problem the deutschmark will never be revalued or devalued but every other country will have to adjust its domestic policy to conform with what Germany is doing. I believe that in this respect joining the ERM has been good for bringing inflation down. What worries me—it is particularly worrying if you look at the relative performance of France and Germany over the past seven years—is that the ERM is not necessarily a good system for assisting recovery.
I believe we should not underestimate the challenge of reforming the system, which is what the Prime Minister and the Chancellor have said they would like to do, because only if the rules governing the intervention of central banks within the system and the immediate targets of German monetary policy are changed so as to take into account other economies will we really be able to repair these fault-lines. However, the problem there is that that risks inflation rising in Germany. My fear therefore is that for a country like ours it would be unwise to contemplate re-entry into the ERM until we are absolutely convinced that these fault-lines have been repaired.
I sincerely hope that this concern with the mechanics of monetary policy does not dominate our public economic debate in the coming months. I heard about this crisis last week in Asia. I believe that Europe is at present one of the least attractive areas of the world economy. The United States, with Mexico and Canada, is forming a free trade area. The countries of Asia, which are by far the most dynamic part of the world economy, are not concerned with forming a special monetary union. What they are concerned with is lower taxes, deregulation, better investment in people, more access to markets and so on. As a result their economies are booming. If Europe is to succeed—and I was very impressed by the speech of the noble Viscount, Lord Caldecote—we have to beat Asia at its own game, given the wage levels that exist there.
The events of last week also give us the opportunity to reconsider the Maastricht Treaty as it presently stands. We know from last week that we can no longer consider the ERM a robust mechanism. In view of the misgivings which so many people in different countries of the Community are expressing about the move towards political union, it would he a great mistake to press on regardless with the ratification of the Maastricht Treaty. One market does not require one money. The challenge we face in Europe is how to build a common framework in which trade and prosperity can be encouraged and common institutions built up through which co-operation can be pursued and conflicts resolved. It would be tragic for Europe at this moment to retreat into protectionism,

515
capital controls and competitive devaluations. The strength of Maastricht is that it offers a political vision of a community of nations pursuing peace and prosperity, but as yet a significant proportion of the peoples of Europe are not convinced that their best interests are served through such a monetary and political union.
I believe very strongly that the alternative to Maastricht is not narrow nationalism; it is an alternative vision for Europe which stops short of union but which allows and encourages co-operation among its member countries. I believe that the real challenge which follows from the events of last week is to make such a vision, whether of a radically reformed Maastricht or of an alternative to Maastricht, a practical reality for this country.
9.53 p.m.
Baroness Seear: My Lords, the noble Lord, Lord Elton, rightly reminded us that the subject of today's debate is the Government's economic policy and that this, despite the excitement and anxieties of the past week, is something wider even than the issue of the ERM. As we consider the Government's economic policy in this wider framework, we surely have to recognise that we are confronting a world in economic turmoil. No one knows what the economic developments in the Commonwealth of Independent States will be; but no one I meet is sanguine about the prospects. It is a world in which the Eastern European countries are equally in a state of great uncertainty. It is also interesting that when so many countries want to join the European Community those in it—in our case at any rate—seem to be having such surprising doubts about it.
There are overwhelming problems in the third world. The noble Lord, Lord Callaghan, was equally right to remind us that economic policy is only an aspect of the wider political policies of which economic policy is a very important part, but only a part. I have always thought that it is a pity that we abandoned the term "political economy", which links together the political and the economic, and that that division has perhaps had a very had effect on the thinking about policy in this and other countries.
I was delighted that the noble Lord, Lord Boyd-Carpenter, reminded us of the Uruguay Round. If we fail on the Uruguay Round, the repercussions of that over the years will be much more serious than the repercussions from what happened last week.
Therefore, it is very important to see the issues that we are discussing today in their true perspective. Since these questions are so widespread and so important, it is surely right that this country, with its experience, its traditions and its political wisdom—because, despite what has happened recently those things surely are true—ought to be in a position in which we can help to shape and direct what is going on so that we can make a real contribution to the solution, or at least to the amelioration of the hideous problems with which we are surrounded.
Unfortunately, last week to a considerable extent, for the time being we kicked ourselves into touch when
516
we got out of the ERM and when we presented such a pathetic picture to the world at large in the handling of our own economic problems.
The Government have stated, and no doubt will state again, that they had no option but to come out; that there was no alternative. That is a familiar phrase that we do not wish to hear repeated too often. However, my Lords, is that really the position? Is it not to a large extent the Government's own fault that they got into this position?
A number of noble Lords have stated that it was wrong to go in at such a high rate, and nobody has dared to challenge that statement. My Lords, are we certain about that position? The pound has been greatly overvalued against the dollar and nobody denies that fact. However, a recent study produced through the National Westminster Bank showed that so far as concerned purchasing power parity, the pound was spot on for the European countries in the Community. We are all assuming that that was not so. I am not saying that it was not too high but I am saying that to put so much of the blame on to the position of the pound is greatly to overstate the case. It is far truer to say that our difficulties have arisen because we allowed our own economy to get into such a lamentable state.
I should like to reinforce everything that has been stated about the importance of increasing the wealth-creating sections of the country and of backing manufacturing industry. We on these Benches have stressed that fact again and again. Members of other parties have also had good ideas, but my noble friend Lord Ezra has been a leader in emphasising how essential it is that we should build up manufacturing industry. That is something that today nobody is going to deny. The battle of the importance of manufacturing industry appears to have been won. The Government could have taken the advice of those who said, from the days of the Aldington Report, that that is what should be done. They have not done it. We are now where we are and what can the Government do now?
It follows that we must put resources into the wealth-creating sector and money into the infrastruc-ture—railways, housing—and, above all, training. If we do not, what will happen is what has happened again and again; namely, if we succeed in increasing output and productivity, we shall run out of the supply of skilled people. That has happened in the construction industry every time we have begun to recover from a slump. They always find that, if there is a I per cent. increase in GNP, they run out of the people that they need for the wealth creation of the industry concerned.
It is absurd at the present moment to cut the money in training to the TECs. I implore the Government to look at that again and to make sure that now, as we begin to work for recovery in the wealth-creating sector, that the people who will he needed in those skilled industries are there. The TECs will tell you that they do not have the money to do the job. I see that it was reported in the press last week or at the beginning of this week that the money for training and bringing back women into the market will be cut.

517
There will be other reductions which will make it more difficult to meet the manning requirements that will certainly exist if the recovery that we in this House all want to see in manufacturing industry is available.
The money must go into investment. Investment allowances must surely be restored and opportunities given for industry to develop. The extra spending must come in that direction and not through the encouragement of consumer spending. There is every danger that the Government will fall for the temptation of trying to get markets going by the easy route of encouraging consumer expenditure. If that is the way it goes, it will breed disaster. Furthermore, can we not think again about giving to the Bank of England sufficient independence to establish and maintain stable money?
Many noble Lords (although not, I am glad to say, so many as might have been expected) have criticised what the Germans have done in contributing to the difficulties of the present time. There is only one serious criticism that one could make of the Germans: that the German Government did not listen to their independent central bank when they went for one-for-one for the mark at the time of unification. That was the start of the inflationary pressures inside Germany which have required the Germans to keep their interest rates so high. That, rather than what they have done in the past few weeks, is the biggest contribution that the Germans have made to the weakness of the European economy. They had an independent central bank and they defied it for political reasons. I beg the Government to ensure that if they want stability in this country and in all the difficulties of the present time they mean to be able to control inflation, they understand the importance of stability in the economy and will give that amount of independence to the Bank of England.
However, let us remember that coming out of the ERM and floating the pound is fraught with dangers. If we can control consumer expenditure and direct the resources into the wealth-creating sector, we may avoid the great dangers of floating. They are not inevitable, but they are extremely probable. What will happen? We shall suck in imports. We have done it every time. We never succeed in being able to satisfy internal demand by internal manufacturing. I would be the last person in the world to suggest that we should do that by artificial protectionist means. There is a real danger that, as the value of the pound falls, the price of imports goes up and our balance of payments deficit worsens.
If that happens, what will follow? The pound will fall still further and, in order to protect it, the Government will then be forced to raise interest rates
518
again and the last state will be worse than the first. There is every likelihood that that will happen. Doing what the Government are doing at present will bring a temporary easement of the position, but it may make it much worse in the future unless drastic action is taken to ensure that that does not happen.
Finally, we need to get back as soon as we can into the exchange rate mechanism in some shape or form, however that can be done. We need to do so if we are to continue to play our part in Europe. But the exchange rate mechanism is only an intermediate measure and an imperfect one at that, as I think we all agree. What was happening last week? What is it a reflection of? The real position surely is that we have not got this into our systems and into our way of thinking. We now operate in a global economy with a global financial market. We now have the technology in that global financial market to be able to move millions of capital across national boundaries in 10 seconds. That is what we are up against. As I said, it is a global economy and a global financial market. That cannot possibly be handled on a purely national basis; indeed, it needs something far wider than anything that can be done at the national level if we are to deal with a global economy equipped in the way that it is now equipped. You cannot put the genie back into the bottle. It is there. People know that.
As other speakers have said, those speculators (those bankers) about whom we have had much to say were doing the job of bankers in a global economy. What we must do is to adjust our mechanisms and the way in which we work to meet the requirements, the threats and the opportunities of a global economy. To do that, we need to work with other countries. We need an independent central bank—that is, an independent bank at a European level, dominated not by the Germans alone but by the governors of all the banks of the Community countries. That at least will give us more independence as well as more control than we have at present either inside or outside of the ERM and the working of the Community.
Moreover, sooner or later we must have a single European currency. If we had had such a currency it would not have been possible for the speculators to sell pounds against deutschmarks because we would not have had separate pounds and deutschmarks. We would have had only one currency and that would have spiked their guns in a way nothing else could have done. We must wake up to the changes that have taken place. They have been most rapid. It is very difficult for people to adjust to them. But unless we do so, the kind of measures that we took last week, although they may give us a temporary respite, will be no recipe whatever for success in the future.
10.8 p.m.
Lord Williams of Elvel: My Lords, we are now coming to the end of our debate. It is my task to speak for the Opposition on some of the points that have been made by noble Lords both this afternoon and this evening. If your Lordships will permit me, I propose to divide my remarks into four sections: first, I think that your Lordships have conducted something of an inquest into what happened; secondly, I think that your Lordships have analysed the present situation—that is, where we are now; thirdly, there are the policy options which are open to us; and, fourthly, I believe that we should discuss what is the preferred option among those policy options.
In his very amusing contribution, the noble and learned Lord, Lord Hailsham, said that this was not a party political matter. Therefore, at the outset, and in order to contribute to the view of the noble and learned Lord, I propose to argue that the Government have been grossly incompetent and financially naive and that they have deceived the electorate. I regard that as a wholly uncontroversial and non-party political remark.
Well, here we are. We have had a long, interesting—and, at times, very stimulating—debate. We have heard some notable contributions from notable and experienced former Chancellors of the Exchequer. If I may say so without impertinence, I thought that the noble and learned Lord, Lord Howe, made one of the major contributions that I have heard in this House during my time here.
Let me come first to the inquest. Why did it happen? There are really two major points. One is the long run point and the other is the short run point. As my noble friends, Lord Healey and Lord Callaghan, and indeed others, pointed out, in the long run the United Kingdom economy has been maintained over the past decade in a way which, as was pinpointed with great perception by the noble Lord, Lord Benson, and the noble Viscount, Lord Caldecote, abandoned what was our original strength—manufacturing—and relied on North Sea oil and revenue from the financial services sector. That was clearly expressed in debates held in this House in the mid-1980s. What has happened is that the balance of payments deficit is now running at around £1 billion a month; the public sector deficit is around £40 million. The economy is basically weak. When one has an economy which is basically weak one must expect investors not to want to invest in that economy other than at a high risk premium, which is a high interest rate.
So much for the long run problem. The short run problem was that the Government did almost everything which, according to the book, would provoke a speculative run on the pound. The book is extremely simple. First, one says, "We are determined to defend the parity in this fixed exchange market, the ERM. We will die in the ditch and defend the parity". One then announces that one has borrowed £1 billion or 10 billion ecu. One announces that one is determined to return from holiday and defend the position. One then goes on a sound bite of 20 seconds outside 11 Downing Street saying,"We are absolutely determined to defend the parity in the ERM come
520
what may", by which time every dealer in the world will be hanging on to his telephone saying, "There's going to be a devaluation".
Anyone who has dealt with foreign exchange markets knows that that is the classic signal for a devaluation, which is what happened. We are told all that had Cabinet support. I have no doubt that the noble and learned Lord sitting on the Woolsack threw his tri-cornered hat up into the air when it was announced that rates would be increased to 15 per cent. in order to defend the parity. However, anyone with an inkling of financial sense knows that interest rates of 15 per cent. mean the Government have run into a panic. Interest rates of 15 per cent. mean an increase of 0.1 per cent. per week. When one makes the arithmetical calculation on that basis the profit from a devaluation is enormous. That was where the short run policy went wrong. Wednesday of last week was a spectacular example of how to provoke a run on sterling.
What is the present situation? The noble Lord, Lord Harmar-Nicholls, summed it up extremely well. We are committed to the single market. We are committed to the Treaty of Rome. We have no way of avoiding that other than by parliamentary revolution and repealing the European Communities Act. The single European market comes into effect on 1st January next year. As the noble Lord, Lord Boyd-Carpenter, pointed out, more than half our trade is now with the European Community. Our economy is intimately linked with the Community. There is no way in which we can withdraw from that link.
In our view, that link requires a fixed, semi-fixed or partially fixed exchange rate. I should be grateful if the noble Earl could answer my point. I do not see how a single market of the kind envisaged in the Single European Act and which will come into effect can work unless there is some form of currency stability. I do not see how people can sell across a currency frontier. Therefore, in the long run the floating rate solution does not seem to be compatible with the single European market.
The noble Lord, Lord Boyd-Carpenter, and the noble Baroness, Lady Seear, quite rightly pointed out that there are imperatives elsewhere. I would be among the first to say that in our economic policy the Uruguay Round is an imperative of the highest order. I support what the noble Lord, Lord Boyd-Carpenter, and the noble Baroness said. I hope that the Government, disregarding in a sense what has happened in the past week or so, will continue to make every effort to ensure that the Uruguay Round comes to a successful conclusion. That is vital.
What options are now open to the Government? As the noble Lord, Lord Griffiths, said, there is the option of the dash for growth—lower interest rates and high consumer demand. I believe that that would be a mistake. I do not believe that the right way to go about curing our present problem is simply to stimulate consumer demand and hope for the best. The noble Viscount, Lord Caldecote, and the noble Lord, Lord

521
Wade of Chorlton, explained much better than I can exactly what should he done, and I do not intend to repeat their prescription. I agree with it 100 per cent.
We can no longer ignore the fact that our manufacturing industry, our wealth creating sector, has been run down. We must make that a major priority if we are to be able to pay for those things which we want to pay for and if we are to rejoin the ERM at any reasonable rate in the future. The noble Lord, Lord Wade, and the noble Viscount, Lord Caldecote, said that very clearly.
My noble friend Lord Bruce quite rightly pointed to the social effects of what had happened under the ERM regime. We have had high unemployment and a high rate of home repossessions because of the exchange rate policy and the need to keep sterling within its bands. I very much hope that when we eventually rejoin the ERM the Government will pay attention to the wreckage that resulted from the previous experiment of joining at a high rate, at the wrong time and with an economy which was not strong enough to support it.
The options which we prefer would be, first, to recognise the weakness of the United Kingdom economy. We must be frank about that. It is no good saying that it is a strong economy. It is not a strong economy. A balance of payments deficit of the type that we have and a PSBR deficit of the kind we have are indicators of a serious economic problem in this country. I do not wish to hear from the noble Earl when he comes to respond the usual Treasury brief that everything is for the best in the best of all possible worlds. Frankly, it is not. Until we recognise that and start to take measures of the kind which the noble Viscount, Lord Caldecote, and the noble Lord, Lord Wade, started to advocate, we shall not return to what we believe to be the proper position: a strong United Kingdom economy within a reconstructed ERM, where the parity of the pound can be supported by the economic base of our own country.
I have tried to summarise what various noble Lords have said and indicate what we feel to be the right way forward. But finally I have to ask some fairly serious questions about the competence of Her Majesty's Government in managing our affairs. Last week we were the laughing-stock of Europe. We threw away hundreds of millions of pounds in a futile attempt to save the Cabinet's collective face. We behaved like spoilt children in trying to put the blame for our stupidity on the Germans. All that happened during our presidency of the Community. It is without any doubt the sorriest tale in the whole of modern politics.
What has happened since? Have the Government apologised? Have heads rolled? Has a new team taken over? Not a bit of it. We have the same collection of dreary failures as before. One minute they swear by the seven gods that they will die rather than leave the ERM and devalue. The next minute the same people leave the ERM without a hint of a blush of shame, let alone resignation. It is simply not good enough. The electorate in April deserved better than this.
The plain fact is that the main casualty of the whole affair—I say this as solemnly as I can to the noble Earl opposite—has been the Government's own credibility.
522
That has vanished. It has disappeared. Nobody believes any longer what this set of Ministers says. And why should they? This Government will never again be trusted on policy. That is the true price of last week's shambles. It is a price not just for the Government and not just for the Tory Party. It is a price—heaven help us—that the whole country will have to pay.
10.23 p.m.
The Minister of State, Department of Transport (The Earl of Caithness): My Lords, I am extremely grateful to all noble Lords who have taken part in this long debate. I am even more grateful to those of your Lordships who have taken part and stayed to the end. It has been a very interesting debate, with a wealth of expertise, again showing what a useful place your Lordships' House is. I have to say to the noble Lord. Lord Healey, that after today's debate it is certainly not a mausoleum. It is a place which is full of constructive ideas and wisdom.
Inevitably there has been much reviewing of what has happened in the past couple of weeks. The noble Lord, Lord Williams, criticised what the Government have done. He did not of course bother to explain to the House what his party would have done in a similar position. The crisis would have happened the day after the general election had his party won power.
My noble and learned friend Lord Howe said that we should have entered the ERM earlier. I put it to him that he is wrong. Between 1979 and 1985 the average inflation rate of the ERM countries was higher than that of the non-ERM members such as ourselves. It was only in the later 1980s that the ERM's anti-inflationary discipline became apparent. However, after late 1987, because of what was in retrospect too great a reaction to the stock market crash, and because of the unforeseen effects of financial deregulation, our inflation rate was rising. It would have been quite wrong to have joined the ERM until our inflation rate was set to fall again and converge with that of our European neighbours. It was only in late 1990 that that condition was met.
I join with what my noble friend Lord Boardman said, which was also noted by the noble Lord, Lord Bruce of Donington, and the noble Baroness, Lady Seear. I was surprised by the number of noble Lords who not so long ago in debates in this Chamber which I attended had been saying that we must go into the ERM quickly, we must go into the ERM now, but who now say with the wisdom of hindsight—as did the noble Lord, Lord Williams—that we entered at far too high a rate. At the time we entered the ERM, with the deutschmark at 2.95, it was an appropriate level for ensuring that inflation was brought down, which has happened. It was also the market rate. Perhaps noble Lords opposite want to buck the market. More relevantly, it was approximately the real rate that had applied for 25 years.
British industry, British exporters, did not think that the pound was overvalued. It did not prevent our increase of exports to the European Community countries. During the period in the ERM our exports continued to grow healthily, up 6.8 per cent. The noble

523
Lord, Lord Williams, is at the opposite end of the spectrum from the right honourable and learned Member for Monklands, now Leader of the Labour Party, who at the time welcomed our entry into the ERM. He did not question the rate then and indeed he has recently said that he would not have changed the rate.
The noble Lord, Lord Cledwyn of Penrhos, suggested that it was clear on Tuesday 15th September that sterling could not stay in the ERM. That was not the case and the Government, I believe, would have been irresponsible to have given up their ERM membership without trying two out of the three most powerful tools at the Government's disposal: intervention and changes in interest rates which, as my noble friend the Lord Privy Seal explained at the beginning of the debate, we carried out.
The noble Lord, Lord Healey, believes that we should have devalued within the ERM at an earlier date; but perhaps he did not take full account of what happened to the lira when it devalued. It, too, was forced out of the ERM within a very short order.
The noble Lord, Lord Desai, came up with yet a different idea: that we should have raised interest rates sharply, as did Sweden, to curb the speculation. Our overnight rates went up to 180 per cent. last Wednesday, but that was insufficient to stem the tide. In those exceptional circumstances even more extreme action than we took would not have had any impact. I believe that my right honourable friend the Chancellor of the Exchequer was absolutely right in not being prepared to take more draconian interest rate action with consequences for business and mortgages in almost certain knowledge that pressures in the market would not have abated. Suspension of our ERM obligations was the only sensible action to take.
Exchange rate policy inevitably raises issues which involve a major role for governments as well as central banks in all countries, and that includes Germany. That was evident in the EMU negotiations, and indeed is reflected in the Maastricht Treaty.
To the noble Baroness, Lady Seear, I say that I do not believe that the pressures in the exchange markets over the past few weeks would have been any less had the Bank of England been independent. Nor do I believe that we would have had a greater success in getting inflation down over the past two years. What matters is the policies pursued, not who makes the decisions. On the issue of a central bank, I noted with pleasure what my noble friend Lord Boardman said.
The noble Earl, Lord Perth, the noble Baroness, Lady Seear, and the noble Lord, Lord Jenkins of Hillhead, stated that all the trouble that we have suffered over the past couple of weeks would not have happened had we moved to a single currency earlier. That does not take into account the fact that the underlying difficulties caused by lack of convergence in European economies would have remained. A common monetary policy could not simultaneously meet the needs of members in different stages of the economic cycle or members affected differently by one-off shots such as German unificiation. I agree with
524
my noble friend Lord Joseph that recent events are ample justification for the Government's prudent policy; that we cannot decide until much nearer the time whether a single currency would be in the UK's best interests, let alone whether a single European government should be contemplated.
My noble friend Lord Boyd-Carpenter asked how much we had lost or gained in the past couple of weeks. As he knows from experience, the result of a long-standing convention is that the Government's policy is never to reveal the intervention figures. However, I confirm what my noble friend the Lord Privy Seal said: that we have so far drawn down only half of the 10 billion ecu loan programme announced on 3rd September. Gain or loss on this transaction will depend entirely on future evolution of the exchange rate.
As the noble Lord, Lord Jenkins of Hillhead, reminded us, the use of foreign exchange reserves for intervention is not money down the drain. It represents a transfer of assets between foreign currency and sterling. The sterling acquired last week can either be used to replenish the reserves or to reduce the need to sell gilts to fund the PSBR. Any loss incurred depends on the rate at which those funds subsequently buy back foreign currencies when we replenish the reserves. For example, many of the deutschmarks in our reserves were acquired in earlier years at a cheaper price than that at which they were sold last week.
My noble friend Lord Cockfield emphasised the role of market speculation and his remarks were taken up by the noble Lord, Lord Bruce of Donington. The noble Lord has been consistent on this as he has been on one or two other policies. It was interesting to note that the noble Lord, Lord Desai, differed with the noble Lord, Lord Bruce. Market speculation was an inevitable corollary of free markets. The distinction between investment and speculation is not as great at it seems. How long does one have to hold an asset in a particular currency until it ceases to be speculation and becomes an investment? But it is only because of the fundamental strains in the ERM that speculation had the effect that it did. Contrary to what my noble friend has said, those strains have been felt by France too, as M. Sapin, the French finance minister, made clear some weeks ago when he called for monetary relaxation in Germany.
The noble Lord, Lord Bruce of Donington, correctly pointed out that preventing speculative flows would involve reintroducing exchange controls, which would of course drive abroad the financial business now done in London. I believe that we must work out how the ERM can be adjusted so that the strains which have caused speculative flows do not recur. In reply to the noble Earl, Lord Russell, we will of course take account of what our American friends have to say on this subject.
The noble Earl also asked a question to which I believe he knew the answer. He asked when interest rates were last changed three times in a single day. Of course, the answer is never but presumably, rather

525
than change them three times, the noble Earl would have preferred us to have changed only once and left interest rates at 15 per cent.
As we have discussed, the Government suspended UK membership of the ERM as a result of unprecedented currency flows last week, but we have made it clear that we will rejoin when conditions permit. The noble Lord, Lord Cledwyn, asked me when that would be. Obviously I cannot give him a firm date. Not only do we need to wait until the extreme market volatility of recent weeks has died down but we also need to reflect carefully on the lessons of the past few months before rejoining. We also need to consider the experience of other countries affected by the recent turmoil. In particular, the difficulties caused by conflicts between monetary policies appropriate to economies at different stages of the economic cycle need to be addressed and the operating mechanisms of the ERM need to be reviewed. As my noble friends Lord Brabazon and Lady Platt of Writtle said, we do not want a repeat of the past two weeks. I agree with my noble friend Lord Griffiths that before we re-enter we must make sure that the fault-lines are fully erased.
Whether in the ERM or out of it, neither situation is a panacea or a soft option. The Government's policy is clear. They remain determined to achieve permanently low inflation for it is abundantly clear that only by matching the inflation performance of the best of our trading partners shall we be able to compete in world markets. Let us not forget that even now over half our exports are to countries which have lower inflation than we do. As the noble Lord, Lord Kagan, reminded us, we need to compete with Central and Eastern Europe. I go further than that in agreeing with the noble Baroness, Lady Seear, that we need to compete world wide.
Inflation is damaging to individuals, particularly to pensioners, as the noble Lord, Lord Butterfield, rightly reminded us. It is also damaging to business. It clouds the information carried in the price mechanism and thus inhibits the efficient allocation of resources. It adds to the uncertainties already facing business and encourages investment and long-term planning.
Low inflation offers UK business the stable environment in which it can flourish. Too often in the past we have allowed inflationary pressures to escalate, forcing us to choke off growth in demand and output in order to bring inflation back under control. That must not and will not be allowed to happen this time and the events of the past two weeks have done nothing to change that.
Low inflation is not an alternative to economic growth but a precondition for sustainable growth in the future. The very significant falls in inflation which we have achieved so far are the bedrock on which growth will be built. With producer price inflation and that important ingredient of which my noble friend Lord Marlesford reminded us, earnings growth, both at their lowest level for a generation, with retail price inflation reduced sharply and with the continuing strong downward pressure on inflation at all levels of the economy, there is the prospect of further falls to
526
come. Add to that the record levels of productivity, renewed growth in manufacturing and business investment, car registrations in August up on the previous year and lower interest rates, it will be seen why we believe that the conditions for recovery are firmly in place.
We are fully aware that this has been a difficult period for many businesses and families. The boom of the late 1980s was accompanied by rapid debt accumulation. The resulting financial adjustment has necessitated for many households a period of retrenchment. Consumer demand has been and remains weak; and there may yet be some difficult months ahead.
However, it is important not to overdo the gloom. Several recent indicators suggest an improvement in the real economy. Non-oil GDP showed an upturn in the second quarter, as did retail sales. The prospects for a return to economic growth will be reinforced by the cut in interest rates which has followed our suspension of ERM membership.
A number of your Lordships drew attention to the industrial and manufacturing base for the prosperity of this country. I noted that the noble Lords, Lord Benson, Lord Stoddart, Lord Jay and Lord Ezra, the noble Earl, Lord Halsbury, and my noble friends Lord Caldecote, Lady Platt, Lord Onslow and Lord Wade spent some time discussing that issue and they asked how the Government would help. I agree with the view of my noble friends Lord Joseph, Lord Harmar-Nicholls and Lord Harding of Petherton that there are a limited number of ways in which the Government can effectively-and I underline the word "effectively"-help those sectors. We have seen Labour Governments attempt to intervene in and even take over large swathes of industry with, at best, unhelpful results.
The key role for the Government is to establish a macro-economic framework and climate in which business can prosper. Government policies are aimed at just that. Low taxes allow businesses to re-invest the money made and low inflation gives industry an environment of sound money in which to do business. We are committed to reducing the share of national resources taken by the public sector and keeping a tight rein on public spending. That is the right climate for business growth.
Let us not forget the achievements of British business in what recently has been a difficult world background. Manufacturing output grew in the first two quarters of this year and consolidated that in July. It was my noble friend Lord Caldecote who mentioned the 1980s. As regards those years it is worth remembering that the productivity growth in United Kingdom manufacturing was the highest among industrialised countries during those years. It is now at its highest ever level. Business investment has recently been growing at the fastest rate since the war. It rose by 45 per cent. in the three years to 1989 although it has of course fallen back recently. The benefits of that investment should stand us in good stead. During 1990 a record number of businesses

527
were operating. That is the latest year for which we have full figures. They show the number of businesses to be one-third up on 1979.
Despite the difficult trading conditions throughout the world which the noble Baroness, Lady Seear, called "economic turmoil", British exports are still performing well and are currently at near record levels. If the noble Lord, Lord Williams of Elvel, had been anywhere near right in what he said, the UK share of world trade in manufactures would not be estimated to have risen over the past three years.
I agree that we must not be complacent and we certainly are not. What has been achieved under the difficult circumstances of the past few years is, I believe, a great tribute to British industry and should be recognised as that. So let us view the prospects for UK industry in positive terms backed by the Government's proper role in setting the framework of low inflation, low taxes and, as my noble and learned friend Lord Hailsham reminded us, a level of public spending which we can afford.
The noble Lord, Lord Cledwyn, asked about the cutting of training expenditure even when unemployment was rising. The noble Baroness, Lady Seear, also raised the question of training. The employment department will spend almost £2.7 billion in 1992– 93 on training, enterprise and vocational education. That is two-and-a-half times in real terms as much as was spent in 1978– 79.
The noble Lord, Lord Ezra, and my noble friend Lord Marlesford said that capital allowances should be increased. If we did that we believe that it would distort decisions which would lead to lower quality investment. I point out that allowances for plant and machinery already are more generous than commercial depreciation. We believe that it would involve high extra cost to generate little extra investment.
Talking of public sector investment, I say to the noble Lord, Lord Ezra, that it will rise 9 per cent. in 1992– 93 and that the recession has not been allowed to hinder long-term investment programmes. Inevitably, the noble Lord, Lord Williams, reminded us of the good things that the Labour Party promised before the election and which he still adheres to. We ought to remember the consequences of what he promised; namely, the tax increases which he did not mention this afternoon—these would have crippled the wealth creators, the very people he thought that he was trying to help—a minimum wage, which would have thrown the low paid out of work; and trade union laws which were drawn up in Transport House.
I agree with the noble Lord, Lord Williams, that that would have created jobs. It would have created jobs in France, Spain and Germany. It would not have created jobs in Britain. The noble Lord raised the question of GATT, as did my noble friends Lord Boyd-Carpenter and Lord Elton. I believe that it was the noble Earl, Lord Halsbury, who reminded us of the recession in the 1930s. A consequence of that was the massive decline in world trade and a consequence of that was GATT.
528
As the House knows, my right honourable friend the Prime Minister has been working extremely hard to bring to fruition this very important subject. It is not a subject which grabs the headlines or which everybody understands. We believe that it is a most important subject and I agree with noble Lords absolutely on that. I remind them of the key role that my right honourable friend has played in the past, is playing now and will continue to play in the future to obtain an agreement.
I do not want to dwell on the question of Maastricht because I am sure that we shall return to that, but the noble Lord, Lord Bruce of Donington, mentioned something on Maastricht with which I agree—that the Labour Party's policies are never consistent.
We have had a useful debate this evening. Let me recap that we intend to rejoin the ERM as soon as conditions permit. We remain committed to our objective of permanently low inflation and are determined to ensure that monetary conditions remain sufficiently tight to secure the Government's inflation objective. To this end we will continue to target MO growth and will monitor other monetary aggregates, assets prices, including house prices, and of course the exchange rate itself. I cannot too strongly stress tonight that we will take no risks with inflation. Interest rates will continue to be set so long as they bear down on inflation, and the cut in interest rates made earlier this week was made only after a careful assessment of these indicators. We will also continue to maintain a firm grip over public expenditure.
To conclude, I put it to the House that the Government are right to continue to bear down on inflation. Thus far, domestic commitments to control inflation have allowed some loosening of monetary policy since we suspended our ERM membership. No doubt the cuts in interest rates already secured will help the recovery along its way. This Government's policy of setting out to build a low-inflation economy with sustainable growth was right whatever the recent difficulties. The Government are right to continue that policy now and in the future. It is the right policy for Britain.
Lord Williams of Elvel: My Lords, before the noble Earl sits down, will he respond to the point made by my noble friend Lord Healey that the Government were, in fact, offered a realignment within the exchange rate mechanism before the withdrawal on Wednesday, and refused? Is that the case?
The Earl of Caithness: My Lords, there are a number of points to which I have not replied today as is usual in a debate of this length and complexity. There will be a number of points on which I shall be writing to noble Lords.
On Question, Motion agreed to.

River Usk Barrage Bill [H.L.]
Bill withdrawn.
House adjourned at twelve minutes before eleven o'clock.

  EDUCATION ACT 1973, SECTION 2: TRUSTEES
  EDUCATION ACT 1973, SECTION 2: TRUSTEES