Exchange Rate

HC Deb 08 March 2000 vol 345 cc163-85WH

Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Robert Ainsworth.]

9.30 am

Mr. Austin Mitchell (Great Grimsby)

I asked for this debate today, which I am delighted to have got, as I want to draw attention to the fact that the pound is grossly over-valued, especially against European currencies. Given that the euro has been falling, I want to argue that the pound's over-valuation is having a deeply damaging effect on our manufacturing industry. It is also damaging our regions, especially the north and the midlands.

I want to argue also that manufacturing is certain to lose jobs and to shrink as a result of policies that have been pursued for six years now. That is how long the pound has been over-valued, and it is only now reaching what might be hoped to be its peak. Unless the Government act, investment decisions will be taken that will shift investment away from this country. Jobs will be lost, and the capacity that is closed will never be opened again.

The Government must not wring their hands, as they have done for two and half years. They have been saying that nothing can be done, but now they must do something. That is the burden of my song today, Sir Alan.

Mr. Deputy Speaker

Order. "Mr. Deputy Speaker" is the correct form of address.

Mr. Mitchell

I apologise for starting on a bum note, Mr. Deputy Speaker. However, that should not undermine the brilliance of the song, nor the beauty of the words.

The pound is undoubtedly at an excessively high level. In the European exchange rate mechanism, a pound was worth DM2.95. That very high level had disastrous consequences for British industry, but the pound has been as high as DM3.27. It is now slightly lower, although the euro fell again yesterday, so the pound's level against the deutschmark may have risen slightly.

By any account, sterling's over-valuation will damage manufacturing. Estimates of its over-valuation vary, but I put it at about 30 per cent., or perhaps a little more. The Institute of Directors puts it at 15 per cent., but that was before the pound went over DM3. The Confederation of British Industry also agrees that the pounds is over-valued.

Why is that over-valuation happening? The Bank of England does not appear to know, and changes its opinion fairly regularly. However, the pound is over-valued because Britain is becoming—or has become—a rentier nation. We have invested massively overseas, just as the rest of the world has invested in this country. The problem is that the return on our investment overseas is about £15 billion a year greater than the return for foreign investors on their investments in Britain. We do better with our investments overseas than do people from overseas who invest in this country. The dividends and profits come to this country, get translated into sterling and thereby keep the pound's value high. The same thing happened at the end of the 19th century, when we were on the gold standard.

The second factor is that the euro has fallen in value. I believe that it has been managed down as part of a competitive devaluation designed to kick-start the European economies. The other possibility is that the euro has fallen because it is a monstrous, unlikely beast that was never going to work anyway. However, I leave that for the nation to judge—it is not part of my song today. I honestly do not know what the answer is, although I suspect that it is being managed down. Those in charge of the euro want the European economies, and especially Germany's, to be more competitive. They therefore need the boost that an undervalued exchange rate gives to the manufacturing economy. They have achieved that, and German industry has benefited greatly.

The third and most important factor is that our interest rates are high, in real terms and in historic real terms. They are nearly double European rates. It is impossible for manufacturing to compete effectively in what is now a single market with very intense competition when we have interest rates double those of our nearest competitors. How on earth can it be expected to compete in a race against very powerful competitors when it has a ball and chain around each ankle—one that is called high interest rates, and the other called over-valuation, which is the consequence of those high interest rates? For some reason, Britain expects the economics of outward bound courses to have a beneficial and stimulating effect on our manufacturing. In contrast, other countries compete more effectively.

Our interest rates are high. The world is awash with growing money flows, due to uncertainties in south-east Asia and about the euro. Inevitably, that money gets parked here because it can earn high rates of interest. It can also profit from the possibility it has been a probability over the past few years—of an appreciation in the exchange rate. Naturally, therefore, this country is attractive to all the money washing around the world.

We are paying the funny-money manipulators to bring that money here and to keep it here. That is doing us great damage. The City might do well out of it, but the rest of the economy does very badly. When sterling is bought and the funny money is parked here, the pound appreciates.

I believe that the Bank of England is using overvaluation of the exchange rate as its only weapon against inflation. The psychology works as follows: over-valuation makes imports, foreign holidays and everything that is imported cheap, and therefore reduces the cost of living, even though it destroys jobs in this country. The second element to be considered is that, in order to compete in a race while hampered with overvaluation, British producers cut back on costs. When they cannot agree wage increases, they shed jobs and put the pressure on labour. It is assumed that the result of all that is that inflation will be defeated, albeit at the expense of our long-term industrial survival.

Inflation is no longer the serious problem that it was in the 1970s. The world is awash with excess capacity in manufacturing. The power of labour has been broken. There is an air of insecurity because people are frightened for their jobs, and competition is now more intense than it has ever been. For those reasons, inflation is no longer the problem that it used to be, but we are fighting it with the monetarist weapons of the 1920s. We appear to believe that disciplines must be imposed on British manufacturing that other countries' industries do not have to bear. In essence, we have aimed the monetarist musket right at the heart of British industry.

If the Bank of England wants high interest rates when inflation is low and sterling is high, what will happen to interest rates when sterling comes down in value, as it is bound to do at some stage? The Bank of England will have to push interest rates ever higher in order to maintain sterling's value, because it will fear the inflationary consequences of a fall in that value.

I think that that fear is unrealistic, but the Bank of England's mentality is such that, having sustained rates at high levels during a benign period when inflation has been pretty well dead, it would have no alternative but to increase rates to prevent a fall in sterling's value that it—the Bank—created in the first place. That folly would ruin British manufacturing. The Tory Government acted in the same way between 1979 and 1982, and between 1989 and 1992. Both those periods of deflation were ended only by falls in the exchange rate. Massive recessions followed on both occasions, and the same policy would result in damaging declines now.

The Labour Government need growth to deliver their promises to the people. C. A. Crosland argued that the essence of socialism was economic growth, as that enabled the redistribution of wealth and improved public spending that made society better for working people. However, this Government, who are supposed to share that ideology, are undermining redistribution and destroying growth. The consequences are certain to be the same as in the two previous, and unnecessary deflations, that I mentioned earlier.

The pound's over-valuation hits manufacturing directly. Manufacturing is on the front line of intense international competition on price. Price is the central competitive factor—people say that it might be the improvement of models, but everything has its price. Manufacturing is faced with increased prices through no fault of its own, because of the exchange rate. The exchange rate translates all our costs into foreign currencies when the goods are sold, meaning that our costs are far too high. They have appreciated by more than 30 per cent. over the past six years because of the exchange rate. Manufacturing has done its best to cut costs. It has made itself very efficient and is now extremely productive, but this burden of costs has been imposed on it as a kind of outward bound course mentality.

There is nothing that manufacturing can do about this. It is exhorted to hold wages down. Even if it holds down wages permanently, cuts wages and every cost available, it cannot cut costs by more than perhaps 2 per cent. a year. Yet the costs in foreign exchange terms have been increased by 30 per cent. It is a hurdle that manufacturing cannot jump.

The evidence of the effects of increased costs can be seen all around. It has happened near Grimsby. Fisons is just closing its fertiliser plant in the neighbouring constituency of Cleethorpes, with the loss of 250 jobs. It is concentrating production in Europe because it is cheaper to produce there at this level of over-valuation. Multinationals usually have a choice of having plants in this country, in other European countries or outside Europe. Fertiliser companies are facing difficulties because of the agricultural depression so, given that choice, they will close the plant that is the least competitive and, given our exchange rate, that plant is, ipso facto, inevitably in Britain.

The same is happening to the agricultural and chemical industries. They all tell me that the pound is not hurting them, it is crucifying them. Something must be done about it. The pig protest outside this House is because our costs are so much higher, thanks to the exchange rate. There are other factors as well, but the burdens of agriculture are largely due to the exchange rate.

It is happening in the steel industry. I have a statement that I asked for from the UK Steel Association. It says that 85 per cent. of all the steel produced in the United Kingdom is sold in the European Union single market. Price is key here and affects the UK markets as well as export sales. The UK steel industry exports half of all it produces. More than 70 per cent. of those exports go to mainland Europe. UK steel exports, however, fell 14 per cent. in 1999. The association says: In 1999, UK steel companies would have realised an extra £300 million a year or £25 million a month on their exports, to underpin UK jobs, if the Sterling/euro exchange rate had remained stable throughout the year instead of hardening by 12 per cent … In the past 20 years, UK steelmakers have improved productivity nearly five-fold. That is 10 per cent. a year, nearly three times better than UK manufacturing as a whole … Now, in euro terms, UK wages have increased by one third in the last three years, destroying years of wage restraint, throwing away productivity gains … The strong pound is making it cheaper to source from Euroland. Imported components for new cars are now 72 per cent., fully 10 per cent. up on three years ago. Why? Because sterling is over-valued, and it is cheaper to import components from Europe. The UK Steel Association says that manufacturing investment is now down 17 per cent. on a year ago. It shows that plant is not being renewed and new technologies are not being adopted.

The effect of the exchange rate on steel is echoed by Corus whose chairman, Sir Brian Moffat, warned Members of Parliament when he spoke here:

Manufacturing industry in the UK is fighting for its very existence and will continue to do so. It is extremely efficient but the impact of the continued strengthening of the pound on its cost base is remorselessly undercutting its competitiveness … The facts are that profits are in decline and already well below the levels needed to provide necessary future investment, never mind reward shareholders. I requested opinions from several organisations. The Engineering Employers Federation says: Of particular concern is the impact the strength of sterling is having on confidence and investment plans. The EEF's latest survey shows that investment plans have been cut back for the sixth consecutive quarter and there has been no let up in the rate of decline. Nissan says: The implications of Sterling continuing at its present level against the Euro are being grossly underestimated and are poorly understood. Should the present circumstances continue unchecked, the UK's manufacturing exporters, their export markets and our domestic markets, are at grave risk. Nissan says that production has been increasing in the UK. It says, however: The position of Nissan in Sunderland is particularly vulnerable, exporting as we do, 75 per cent. of our production—mostly into the heartland of our competitors in continental Europe. Ask any of our competitors in France, Germany or Italy what they think of the current Euro/Sterling relationship—they cannot believe their good fortune … Nissan currently buys 70 per cent. of its total European component spend from UK suppliers—a policy which adds to the burden of competing profitably overseas. The UK supply base must compete … The implication is that UK suppliers will be cut out and that Nissan will buy its supplies from Europe.

That is the story from a clutch of manufacturers. It is repeated everywhere. Raleigh Bicycles closes production in Nottingham and transfers it to south-east Asia. Ford sheds 5,000 jobs at Dagenham and transfers them to Europe. Marks & Spencer cuts down on its purchases in this country, with devastating damage to textile towns in Lancashire, as all my colleagues representing Lancashire constituencies complain, because it is cheaper to have the same goods produced in Morocco or Sri Lanka and import them here. More is being done overseas; more components are being imported, and jobs in this country are going. Long-term investment decisions are being taken. As Bruce Springsteen sings in the immortal "My Home Town", "The foreman said these jobs are going, boys, and they ain't coming back". Investment decisions taken now will affect employment and production in this country for another decade at least. Those decisions are being taken against this country.

I think that the way in which every piece of sewage that can be mustered is being thrown at Ken Livingstone is an atrocious act on the part of the Labour party, which will alienate public opinion. We are now told that there is a Livingstone effect—that the threat of Ken Livingstone as mayor will stop businesses coming to London. There is already an Eddie George effect, and if I were not such a loyal party member, I would call it a Gordon Brown effect.

Mr. Deputy Speaker

Order. I remind the hon. Gentleman of the way in which we address fellow Members of the House—not directly by name.

Mr. Mitchell

I am grateful, Mr. Deputy Speaker. Let us just call it the Eddie George effect—it is much safer that way. It puts investing companies off this country, and the decisions have already been made.

German manufacturers in this country, in particular, say that the solution to our problems is to join the euro. It is not, because we cannot join the euro at this exchange rate or anything like it. That would set it in concrete and make it permanent. The exchange rate operating when we join will have to be that maintained for two years before entry. It is impossible to join the euro at this exchange rate, and people arguing for that are so devoted to Europe that they have lost their sanity or they are Liberal Democrats. Both want euro entry now, which is a folly. When companies say that we should join the euro, they are really saying, "We are not competitive at this exchange rate. Do something about it." That is the real message.

The consequences are that imports are going up and exports are falling, and the balance of trade is turning sour. It is saved only by oil. That trend will affect a dismaying proportion of our gross national product if it continues at this rate, and there is nothing to stop it. We will build up a deficit, and manufacturing and jobs will be hit just as we are in the run-up to an election in May 2001. I had better tell the right hon. Member for Wells (Mr. Heathcoat?Amory), before he slip outs to make preparations, that we are making those preparations for him with this economic policy.

The effects have not hit us before because the most vulnerable firms and industries disappeared in the two previous deflations, and there has been a credit expansion to keep up domestic demand, but it is hitting the fundamentals of production, exports and our position in the world. We have been here before, and it is distressing to hear the same things being said. I hope that the Minister will not say the same again today. We have been having these debates for some time, and Ministers' replies could have been enunciated by Conservative Ministers in the previous two deflations.

We are told that industry is learning to live with the strong pound; well, it is certainly learning to die with the strong pound. It is a truism to say that our existing industry is competitive—the fact that it has survived means that it is competitive. That view makes no allowance for the new industries that are developing or the old industries that we have lost; nor does it deal with the means of survival.

Industry is surviving by exporting; it is hanging on, often without profit, as firms all over the country have told me, just to keep its market share. It is having to cut down on everything—investment, research, design and innovation—just to survive. That formula is uncompetitive in the long term, but it leads to short-term survival. In the drought in the 1970s, people told us that the great trees had survived, and we all marvelled at that feat, but shortly afterwards the trees collapsed one after the other. That is the position of British manufacturing.

We are told that the situation is good discipline for British industry because it will make it competitive, and that is Government policy. We are preaching competitiveness, investment and upgrading skills. All that is desirable, but useless in the face of this over-valuation, because firms cannot cut costs enough to overcome that hurdle. We look fairly silly preaching the need for a cost-cutting, burden-shedding, low-wage economy to European competitors who are now doing well because of their undervaluation while our manufacturing is being crucified by our over-valuation. I cannot understand that approach.

We are told that the pound will come down. The Bank of England clearly does not know what is going to happen. I read from the minutes of the Monetary Policy Committee's last meeting: Committee members differed in their preferred assumptions for the path of sterling's effective exchange rate … Some preferred to assume a constant nominal exchange rate; some others preferred a depreciation in line with interest rate differentials … The assumption used in the best collective projections was half way between the two. It split the difference between the status quo and obvious nonsense—the idea that the exchange rate will decline—to get the projected rate. That is rubbish because the exchange rate has gone up.

The Bank of England does not know what is happening. It sits there in its ivory tower, terrified at the prospect of house price increases in the south-east, where the members of the MPC live, and wage increases in the City, where most of them mix and from where they draw their ideology, and damages the rest of the country by putting up interest rates.

We are intermittently told by Ministers that the pound will come down. I have been told that several times in correspondence. Why does it not come down? When will it come down? What will make it come down? Each time we are told that it will come down, it goes up. That means that the bleeding will continue.

We are told, finally, that there is nothing that we can do, which is an abdication and an obvious nonsense. The pound is a market-clearing mechanism; it must clear markets at a level that allows us to balance our trade in conditions of growth and full employment. It is being deliberately held up to fight inflation even though inflation is no threat. The resources of civilisation are not exhausted; it is no use us just wringing our hands and saying that there is nothing we can do. We can talk the pound down. If the Government and the Bank said that they wanted the pound to come down substantially, that would help to weaken confidence and bring the pound down.

We can reduce interest rates to the European level. Why should they be double those in Europe? We can change the terms of reference of the Bank of England—in my view they were always a folly—because they should certainly take account of employment, and of exchange rates and growth. We could change the targets. We could sell sterling on a scale that will bring it down. Why do we not do that?

We could buy euros. The European Union would regard that as a big favour. That would push up the euro and bring down sterling. Gerry Haltham, the former director of the Institute for Public Policy Research, who now works for Norwich Union, has suggested a scheme whereby we raise £20 billion in public debt. British Government 20-year bonds pay less than 5 per cent., so we should use that £20 billion to buy euros and invest in European public debt.

In France, Italy and Holland, such debt pays a full percentage point more than our public debt, so if we invested £20 billion raised on British public debt, over 20 years we would get £200 million a year for the British taxpayer and the appreciation that will eventually happen when the euro begins to rise, and we would bring down the pound. Why are we not thinking about such sensible methods to solve the problem? I have suggested that to Ministers and the Bank of England.

Mr. Denis MacShane (Rotherham)

I am delighted to hear my hon. Friend sing such high praises for the euro. That needs to be hosannaed around our country. Is he aware that although the Treasury may have had its fingers burned on gold sales and may be a little nervous of Mr. Haltham's idea, Thomas Cook reports that the British people are buying all their holiday money now because they are ahead of policy makers in thinking that in six months, when the summer holiday season starts, the pound will not be worth as much as it is today? He should follow the instincts of the good British people.

Mr. Mitchell

If my hon. Friend heard me singing the praises of the euro, there is something wrong with the acoustics of the Room, which I know are a problem. I would not dream of doing that. I was trying to help the euro in its hour of need by suggesting that we should buy that poor, timid, cowering creature and give it a lifeline to get it up so that we can get down sterling, which is the main problem. My hon. Friend says that people are buying their holiday currency early and that is another argument that the pound will come down, but it is staying up and it will continue to do so with these interest rates.

All the weapons that I have described are available to the Bank of England. It has even considered intervention. Good heavens—what a lot of progress has been made in the two and a half years since the Bank was given its powers. Those weapons are available to the Government. It is easier to intervene to get rates down than to keep them up, as we usually do. Why do not we intervene? It is crucial that we get sterling down to achieve growth.

Since the 1970s, our growth has been 2 per cent. a year, which is pathetic. The rest of the industrial world has had nearly 4 per cent. growth, and that gap is widening. Our manufacturing is weaker, and productivity growth comes only from manufacturing, not from services. The big productivity gains are all made in manufacturing. South Korea has had a cumulative annual growth rate of 14 per cent. because of its expansion in manufacturing. Here, if productivity from services increases at all, it is only by 2 per cent. Yet, we have been shifted from a manufacturing to a service economy, in which growth will be low and the motor of our economy, which provides two thirds of exports. will suffer, reducing the power and capacity to serve the nation, pay our way in the world and attract the necessary investment to sustain such power and capacity.

The only way to achieve higher growth in our economy is to get the exchange rate down to a point where our cost base becomes competitive with the rest of the advanced world. Achieving higher growth is easily done; it requires only a substantial fall in the exchange rate. That is the way to do it, rather than watching the exchange rate go up and up, wringing our hands, saying in the most unsocialist tradition that I know, "There is nothing that we can do against these brute economic forces." There is; and when we do it, we will grow. Unless we do it, we shall be damaged.

I therefore hope that the Government will recognise that something must be done and that there are ways of tackling the problem. I hope that they will get the message from the cries of pain around the country, if not from this crowded Chamber: do something about the problem!

10.1 am

Mr. Denis MacShane (Rotherham)

I congratulate my hon. Friend the Member for Great Grimsby (Mr. Mitchell) on obtaining this debate and on a speech that I know will be read with great sympathy in the steel and other manufacturing and farming communities of our country. Since I shall refer briefly to steel, I should declare at the outset my usual interest in any debate that touches on the industry: a relationship with the Iron and Steel Trades Confederation, the main steel trade union, and 25 shares in Corus, the dividend from which, I am afraid, is less than the price of a McDonald's hamburger, but at least keeps me in touch with what the company is up to.

My hon. Friend has raised the issue at an appropriate moment, but we must set the specific problem of the exchange rate in a broader context. My right hon. Friend the Chancellor has undertaken remarkably successful management of the economy, with levels of stability, growth and job creation that have not been seen for many years. The key strategic decisions and guidelines have been laid down. I welcome independence for the Monetary Policy Committee, control of Government spending and sensible tax policy, which, while all other centre-left Governments of Europe are cutting taxes, I hope the Chancellor will follow in his Budget.

However, there is growing and real concern about the exchange rate, particularly in the steel industry which is so vital to my constituency. All steel prices are posted in deutschmarks—today, of course, we should say euros—for sale across the European Union and further afield, just as oil prices are posted in dollars. The steel industry in our country cannot long survive if it must export in prices that can no longer compete with producers in Ireland—there are some—and on mainland Europe.

Like a Darth Vader who has not been killed by the forces of light, there is one remaining dark and malicious leftover from the boom-and-bust economy that we associate with the Tories: the over-valuation of sterling, which becomes more acute as oil prices harden at the spectre of sterling again becoming a petrocurrency, as it did in the early 1980s, and inflicting yet more damage on manufacturing.

It is surprising that the right hon. and learned Member for Rushcliffe (Mr. Clarke), the former Chancellor, keeps his name as a friend of the euro, since the biggest percentage surge in the pound's value in recent years—from DM2.15 in May 1996 to DM2.70 in May 1997 occurred during the last 12 months of his office. I excuse the right hon. Member for Wells (Mr. Heathcoat-Amory), who will speak for the Conservative party in this debate, from such criticism because he wisely resigned just as the pound was about to shoot up. I raised the issue again and again on the Floor of the House, begging the then Chancellor and the Chief Secretary to the Treasury to take some remedial action on sterling, but they did nothing.

The Tory-initiated policy of an over-valued pound has, more than any other factor, distanced the UK from the euro and begun the process of the crunch on exports and manufacturing, which has cost so many jobs and led in the steel industry to great worry about plants and employment.

The over-valuation of sterling against the real weight of the UK economy—this is important—may be as high as 30 per cent., as the International Monetary Fund recently suggested, and is certainly 15 per cent., as most commentators agree. Since 1996, according to analysis done for me by the House of Commons Library, sterling has appreciated by 10 per cent. against the dollar and 30 per cent. against the ecu—now the euro. That is having a major negative impact on the economy in four areas.

Over-valuation is slowing down the rate of exports, as my hon. Friend rightly pointed out; it is sucking in imports as demand grows; it is encouraging massive flows of capital overseas, because for every pound that comes into the UK, £2.50 to £3 leaves it in money generated in Britain; and it is hitting disproportionately regions to the north of the M25.

The go-go regions of the UK economy—London, the south-east and what I call M25-land—might generate about 40 per cent. of the UK economy, but they run a major balance of trade deficit. In contrast, Yorkshire, the north-west, the north-east and the midlands run a much smaller part of the UK economy and a balance of trade surplus. Therefore, the north earns Britain's money and the south spends it. There is resentment about that unfairness.

Let us not forget the extent to which the UK has been dragged more and more out of line with our main markets in Europe, where we sell most of what we produce, whether as goods or services. In the eurozone, exchange rate problems have been eliminated and policy makers have been able to focus on much tougher decisions about investment, training and productivity, as well as cutting taxes and undertaking the other reforms called for by the Prime Minister to get their economies going again.

Let us not forget that the UK is ranked 10th in terms of gross domestic product per head in the eurozone. We may be the world's fifth or sixth biggest economy—a statistic often rolled out—but in the world league table of purchasing power parities, we have been stuck at 18th for a quarter of a century, well beneath most of our EU partners. Anyone who represents a constituency in the north, as my hon. Friend does, knows the disparities between poverty, deprivation and social exclusion in such areas and in our European partner countries.

There are other insidious effects of an over-valued pound. First, when the pound buys FF11 or 3,000 lire, there is a kind of national cockiness. A strong pound seems to prove that we have swallowed the Viagra and solved our economic problems. For millions of holiday makers, the high pound does mean cheaper margaritas and paellas than ever before. However, for not just our steelworks and manufacturing but our farmers, who are crippled by it, our tourism industry, which suffers from people staying away except perhaps, from spending their money in the rich hotels in London, and our architects, who are trying to sell their products, services and talents, the future is bleak.

The second insidious effect arises from the dependency on an over-valued sterling controlling inflation and improving productivity. We are, and always have been, a great importing nation. The UK imports nearly a quarter of its GDP—22 per cent. in 1998—compared with just 11 per cent. in the United States, which is why the endless Tory refrain that we should couple ourselves with America cannot make sense. Exchange rate variables are far more important to Britain than to America, so the cheaper that we can buy from overseas, the lower the prices at home and the lower costs that shape inflation.

In addition, the first response of firms faced with a high pound is to lay off staff; hence, the scores of thousands of jobs lost in manufacturing—160,000 since 1996, at the last count—and the great worries of the steel and other exporting industries. Technically, if the work force are slashed and output is maintained, productivity improves—that is a mathematical certainty. However, in my judgment, improved productivity should mean more output from the same number of workers, not the same output from fewer workers, which is what currently happens. The pattern we are witnessing is one of cuts in investment in capital stock, because exports stall and better returns on capital are found as the high pound allows profitable investment overseas.

The third insidious effect of a high currency is like that of any drug—the high never lasts. We have a booming pound which might continue to defy the laws of currency gravity for a while longer, but sooner or later the markets, with their usual adulterous infidelity, will fall for another currency; the pound will be spurned and thrown to one side, and its value will start to fall. The key tasks facing policy makers—here I address my hon. Friend the Economic Secretary—is to prepare both public opinion and decision takers for the new thinking that will be needed when the pound trades at a level commensurate with the true weight of the UK economy.

What is certain is that those who make key decisions will always lag behind events. By nature, I am a strong currency man, but a strong currency should be a byproduct of a strong economy. The deutschmark and the Swiss franc hardened over the years as the German and Swiss economies gained in strength. A strong currency does not create a strong economy; rather, the reverse is true. My hon. Friend the Member for Great Grimsby did not use the word "devaluation", but I got the impression that he was calling for the pound's value to be brought down rather suddenly. My view is that, if there is a decline, it must be managed and gentle.

To any of those hon. Members who are interested in the exchange rate, I recommend a remarkable new book that I obtained from the Library. The book's author is the curator of coins at the Ashmolean museum in Oxford, Mr. Nicholas Mayhew, and its title is "Sterling: the Rise and Fall of a Currency". His book more than supplies the historical perspective that is lacking in our debates: it covers 1,000 years of sterling. I know that you, Mr. Deputy Speaker, as a man who proudly wears the symbol of sterling on his lapel, will be interested in reading that book.

In the matter of sterling, there is nothing new under the sun. The repeated sterling shocks experienced by the UK, with over-cockiness followed by over-correction, dance over the centuries, and recent experience reflects the same pattern. In the lifetime of most Members of Parliament, sterling has been one of the most rollercoaster currencies of any mature democratic economy.

The Americans have not made our mistake. Since the Plaza accord of the mid-1980s, the dollar has been relatively stable. That has helped to promote American exports: that part of American GDP taken by exports has significantly increased over the past 10 years because dollar trading has been relatively stable, despite significant shocks originating in south-east Asia. The dollar does not have the up-and-down rollercoaster history that the pound sterling has had over the past 20 years.

Mr. Mitchell

Since the 1970s, we have lived in a world of floating exchange rates, in which sterling has been held at unnaturally and uncompetitively high levels by high interest rates in our economy. As a result, since the early 1970s, British manufacturing prices have increased 40 per cent. over those of our competitors. That is the new feature of the debate. The dollar might have been stable in the 1990s, but between 1985 and 1990, it fell by almost 50 per cent.

Mr. MacShane

My hon. Friend appears to accept my argument. Even in the world of floating currencies that has prevailed since the end of the Bretton Woods era in 1973, it has been possible to maintain stability. After the Plaza and Louvre accords, which brought down the dollar's value, the dollar has been relatively stable whereas sterling has not. In addition, since the era of the exchange rate mechanism and with the introduction of the euro, the main European economies have opted for currency stability against each other, as can be seen in the external exchange rates between France and Germany, Ireland and Spain, the Netherlands and Austria. By contrast, the pound sterling has peaked and troughed with all the stability of a ping-pong ball on a jet of water at a fun fair.

Hansard, alas, does not print charts, graphs or photographs, but the House of Commons Library produced a graph for me that shows sterling against the ecu now the euro—and the dollar since 1996. In both cases, we see up-and-down movements that are the result of mismanagement or non-management of the exchange rate. Contrary to the belief expressed by some of my friends inside and outside the House that the fault lies entirely with the Bank of England Monetary Policy Committee, the evidence is that interest rate movements have not had a direct impact—there is no cause-andeffect link.

There is a problem with the MPC, which is that no member of it has direct experience of manufacturing, or the economy beyond the M25 region, or the ivory towers of Oxbridge and the London school of economics. I urge the Chancellor to ensure that, in future, the membership of the MPC reflects a wider range of experience. I hope that the MPC will listen to our debate and decide this afternoon not to put up interest rates.

I am sure that the Economic Secretary will point out that, thanks to growth in the United States and to the welcome return to growth of the Asian economies, UK manufacturing and exports are recovering, albeit from a very low base. I would answer that, when one falls into a hole, one has to climb upwards to get out, as the graphs show. However, real, sustained and stable growth is not possible with an over-valued currency.

Our first task is to admit that there is a problem; only when we have admitted that can we start to discuss solutions. Therefore, I welcome the discussion that took place at the MPC's most recent meeting. Our need is not so much for an unyielding policy on sterling as for the intellectual and political honesty to admit that we have a serious problem. We need a new policy mix that is aimed at making our currency correspond to our economy's real strengths and is as supportive of the exporting economy as it is beneficial to the importing economy.

It would be helpful if the myriad organisations representing the industrial and exporting sectors could unite and speak with one voice. There is a low-level, haphazard whine emitted by the Confederation of British Industry, the Engineering Employers Federation, the UK Steel Association and trade bodies representing other exporters, but the sum of their justified complaints about sterling is not the convincing and strong voice that is needed to be influential in the public policy arena. The Institute of Directors, with its obsessive anti-Europeanism, has no locus standi in the matter. Until manufacturers and exporters learn to speak with a united voice, they will not have the clout required to influence policy.

I am close to the trade union movement. Trade unions are quick to protest about sterling's rise, but they need to advance concrete propositions on how to keep down inflation and improve productivity—the two beneficial side effects of a strong currency. The best way to improve productivity so that it is not a zero-sum process is to invest in modernising and renewing capital infrastructure and human skills, and much of the Government's policy on training and life-long learning reflects that fact. Nevertheless, manufacturing investment is falling: today, it is 15 per cent. below its 1990s peak, as manufacturers take what profits they can and invest them elsewhere because the over-valued pound makes exporting less profitable and sucks in cheap imports from Europe that have a 30 per cent. price advantage over equivalents made in Britain.

That problem is made worse by short-sightedness and failure to invest when the money is present. Corus, the former British Steel, is right to complain about loss of profits. However, British Steel was making more than £1 billion profit only three years ago, and last year £800 million was taken from the steel industry pension fund to pay a sweetener to shareholders in the company during the merger with the Dutch Hoogovens company that created Corus. That is £2 billion missing, which was available to British Steel and not used to invest, upgrade and protect against the cyclical rise in sterling that has been on the cards since the irresponsible behaviour of the previous Conservative Government.

Unions must embrace flexibility and partnership and ensure, for example, that there is only one union in each workplace, instead of unions representing different categories of workers, each defending its own pay corner in each company or sector.

Increases in earnings in all three sectors—manufacturing, services and the public sector—are running significantly ahead of inflation. The bonuses paid to City executives in December were so big that they influenced the average earnings data. Those big bonuses push up house prices in the M25 region, to which the MPC responds by raising interest rates, which merely fuels the square mile economy and increases the bonuses, so creating the next round of the vicious circle.

We need a new fiscal and regional policy mix to warm up the cold bits of the economy suffering from the high pound, and to cool down those overheated parts of the economy which fuel the interest rate rises that help to keep the pound over-valued.

In other economies, notably the United States, there are sub-national levels of government that can take fiscal, planning and labour market decisions which allow much more rapid adaptation to the markets and to economic changes. In the UK, the one-size-fits-all policies laid down by Whitehall are not sufficiently flexible to allow South Yorkshire, for example, to set its sails to the winds of the global economy. Instead, we are steered on bearings that suit the directions in which the M25 region, and often simply the City of London, wish to head. I plead for greater fiscal flexibility and planning devolution.

The other inescapable part of the argument, and my final point, concerns Europe. I shall not rehearse the arguments over the euro. I thought that my hon. Friend was extremely restrained in the part of his speech dealing with that issue.

I predict that in 10 years, we will have, in effect, a single transatlantic currency uniting the great democratic market economies of the 21st century. It will be called the dollar over there and the euro over here. The currencies will co-operate and be stable with each other in order not just to promote trade and growth, but to defend the common democratic values that unite Europe and North America, and to defend the identity of the nation states that make up this great region.

The anti-Europeans want the pound to float between the dollar and the euro—up today and down tomorrow. As long as that is the case, there will be no stability, sustainability or security for British manufacturing and British exporters.

I fully support the Government's five economic tests, but, on the key issue of convergence, the performance of the pound sterling is leading us further away day by day from Europe. Perhaps that is what some of those who take the key decisions on interest rates and other matters that determine the pound's value secretly desire. If so, they should join my hon. Friend the Member for Great Grimsby and, I think, the right hon. Member for Wells and proclaim their anti-European faith.

I believe, on the contrary, along with the Prime Minister, that a strong and growing Europe needs its single currency, and that it is in Britain's interest for Europe to grow, create jobs and embrace the reform agenda advanced by the Labour Government. To rule out UK participation in the euro as a matter of principle would be to condemn the pound to a life of instability—now strong, now weak, today over-valued, yesterday or tomorrow devalued, always too hot or too cold for Britain's steel and other manufacturing and exporting industries.

For 10 years, the British people have heard only lies about Europe and propaganda against the euro. Now is the time to start telling the truth. We cannot help steel and manufacturing to prosper with a currency that is out of line with the currencies of our main trading partners, whether it is out of line because of devaluation, as in the mid-1990s, or over-valuation, as at present. We cannot have a boom-and-bust pound and expect to do well in the European and world economy.

When those who make policy accept that lesson, we will get a currency that serves our nation again. When those who sit in the board rooms and the trade union executives of our land start to raise their voices and heads to tell the truth about Europe and the euro, and face down the lies from the anti-Europeans and from those who say that an over-valued currency does not matter, we can begin to make progress. That way offers some hope for steelworkers in my constituency and in other steel communities of our country who now face a grave period of worry for their jobs and their families.

10.24 am

Mr. Matthew Taylor (Truro and St. Austell)

Time is fairly short, so I shall try to keep my remarks brief.

The debate deals with serious issues. I welcome the fact that the hon. Member for Great Grimsby (Mr. Mitchell) has secured another debate on the subject. It is one to which he returns regularly, almost irrespective of the level of sterling at any given time.

There is significant pressure on manufacturing industry in particular, which is reflected in the balance of trade and is not being addressed by Government. If there is a vacuum in Government economic policy, it is in the area of exchange rate policy above all.

What is the depth of the problem? Both the hon. Member for Great Grimsby and the hon. Member for Rotherham (Mr. MacShane) dealt with that at length. In summary, the pound's strength relative to the eurozone is the real story. The yen has fallen against the pound, and the dollar has barely changed over the past few years, but sterling is 15 per cent. higher against the euro than it was when the Government were elected, and 30 per cent. higher than in 1996.

That is directly reflected in the current account balance. The seasonally adjusted current account balance has worsened from a small surplus in May 1997 to a deficit that has got worse month by month since. Total export volumes have been falling since August 1999. The global trade deficit in December was £2.7 billion—the worst on record—and £3.1 billion, excluding oil and erratics. The underlying impact on the economy is far worse.

There is some improvement, as we heard, but it is driven by the Asian and US economies, where the exchange rate issue is not significant. The decline has been almost entirely in the goods sector and in trade with the European Union—in other words, in the most price-sensitive sector, and in relation to the economic zone which is our major goods trading partner and where we have by far the biggest exchange rate problem.

I asked the House of Commons Library to do some research for me. The figures confirm that picture—the widening of the global trade deficit in December to the largest monthly deficit on record, the widening of the deficit in trade excluding oil and erratics, and the deficit in trade and goods up for 1999 as a whole to £26.3 billion from just over £20 billion in 1998.

The non-EU data reveal that the deficit was up in January to £2.4 billion from £2.3 billion, but the underlying deficit, excluding oil and erratic items, fell to £1.9 billion in January from £2 billion. The export volume growth figures show exports picking up significantly in the non-EU zone.

We see two different economies working. What is the explanation for that? The exchange rate problem. The consequences are reported day by day in the press long-term significant investment decisions to pull out of purchasing and manufacturing in the UK. We see the major car companies clinging on—but only just—to manufacturing bases. We shall see what BMW's longterm investment plans are for Longbridge, over which there is a big question mark, and what the long-term future is for Halewood and Dagenham. There is a major question mark over whether Ford will retain a manufacturing base at Dagenham.

We know that manufacturers are pulling out of the purchase of UK-sourced components on a huge scale. That is happening not only in car manufacturing, but right across the British economy. We are losing the markets, as well as the manufacturing base. The loss of a market might be corrected in a year or two, with a depreciation, but the loss of a manufacturing base cannot be so easily corrected. That is why the Government's policy is so questionable, as is evident from all the figures relating to the manufacturing sector.

Manufacturing shows little or no growth when other parts of the economy are growing fast. For years, not only months or quarters, there has been a steady quarterly decline in manufacturing investments. There is growth in employment in the economy as a whole, but huge job losses in the manufacturing sector. That has a long-term impact on balance of trade and jobs.

If the Government are serious about pursuing a policy that is based on convergence and joining the euro because it is in Britain's interest, there is no conceivable case for joining at the current exchange rate. That view contradicts the claims of the hon. Member for Great Grimsby about Liberal Democrat policy. There is a vacuum at the heart of the Government's policy on joining the euro.

The big unanswered question; the issue that really counts is the rate at which we join. The benefit of membership of the euro is that it provides long-term stability on exchange rates. However, if we join at a rate that is too high at the start, we will experience at least a massive adjustment problem, and arguably, a long-term loss of welcome prosperity for this country. Yet the rate is a criterion that dare not speak its name in Government policy and pronouncement.

We can press the Government for an explanation of what they believe is necessary to achieve the requisite conditions. Liberal Democrats argue that there should be a pro-active policy to achieve them. We believe, like the hon. Member for Great Grimsby, that we need to pursue an exchange rate policy that has been worked through. However, the Government do not even mention the problem, let alone a policy that might be pursued to secure an answer.

A question mark has always existed over the position of the hon. Member for Great Grimsby. I am not sure what exchange rate the hon. Gentleman would believe to be competitive. However, whatever his view, he has not explained how we would maintain stability. For those who believe that it would be in Britain's interest to join the euro under the right terms—the hon. Member for Rotherham and I agree about that—the answer is that we would have stability in the euro, and that we would thus get rid of the current boom-bust exchange rate fluctuation and its attendant job losses. Temporary fluctuations in the exchange rate cause permanent job losses. That could be resolved by membership of the euro.

If that is not the answer, those who argue against joining the euro must devise a policy for exchange rate stability rather than simply claiming that exchange rates are too high.

Mr. Mitchell

The hon. Gentleman has made a lot of sense until now, but, like my hon. Friend the Member for Rotherham (Mr. MacShane) at the end of his speech, he is beginning to stray. I do not want us to join the euro; it would be a serious mistake. However, if we join, we must maintain exchange rate stability—preferably at a competitive level—vis-a-vis the euro for two years before we enter. The problem of managing the exchange rate for stability is the hon. Gentleman's problem as well as mine.

Mr. Taylor

I agree that we need a policy for achieving stability. However, the timetable for euro entry means that we will not join tomorrow and there is therefore time to devise a policy. However, the Government should be pro-actively pursuing a policy now. There is a vacuum in the Government's euro policy.

I want to consider what is actually happening, because I do not believe that the hon. Member for Great Grimsby has characterised the position correctly. Interest rates do not help, but the position is not fundamentally driven by interest rates, but by sentiment and people gambling on the exchange rate. That is the problem with exchange rates and the reason that they fluctuate so wildly. It is currently believed that tomorrow the exchange rate will be high and therefore it remains high. It is believed that the rate will decrease in the long run, as long-term interest rates show. The markets assume that there will be a fall and also that we will join the euro. However, they do not believe that it will happen tomorrow. Until they believe that, the fall in the exchange rate will not occur.

The sentiment does not already exist because the Government do not state that such a fall is necessary. The Government should take a clearer position of actively arguing the case for low exchange rates and membership of the euro. That would help to create the necessary circumstances for joining. However, the Government do the opposite.

The hon. Member for Great Grimsby tries to put the blame on the Monetary Policy Committee, but our knowledge of the MPC suggests that it believes that the exchange rate should be lower. Eddie George spoke at the most recent meeting of the Treasury Committee. He said that all members of the MPC were worried about the strength of the exchange rate and its impact on specific sectors such as manufacturing, and on some regions. That is the argument that I am presenting.

The MPC pursues an interest rate policy that is not designed to hold up sterling, but assumes that the level of sterling is likely to fall. It does not know when that will happen, therefore it pursues an interest rate policy that assumes that it will happen; its members fall out about the timing. The minority who believes that the level of sterling will remain as it is, argues for a low interest rate policy. Those who believe that it will fall, argue for tightening interest rates to achieve the inflation pressure that they want.

The Government argue that the economy is adjusting. I believe that they are wrong. In the pre-Budget report, the Government argued that there were signs that the economy had nearly completed its adjustment to high sterling values. Nothing could be further from the truth or potentially more damaging to the economy. I hope that the Minister will deal with that when she responds to the debate.

10.37 am

Mr. David Heathcoat-Amory (Wells)

We are grateful to the hon. Member for Great Grimsby (Mr. Mitchell) for raising such an important subject. It tempted me into this new Chamber for the first time. I presume that the matey, horseshoe structure is designed to get us to agree. We agree on much about the damage caused to sections of the economy, especially to manufacturers and exporters. I declare an interest as the director of an engineering company that manufactures and sells agricultural machinery. I can therefore testify to the difficulties in that sector. However, we disagree about some of the causes of, and the supposed cures for the exchange rate problem. Nevertheless, the debate is interesting and presents an opportunity to discover the Government's policy on exchange rates. However, I say that more in hope than expectation.

I have examined the deliberations of the Bank of England and the minutes of the Monetary Policy Committee. To go back a little further, the Bank of England Act 1998 is important because it establishes the responsibilities and duties of the Bank of England for monetary policy. The operational responsibility for setting interest rates, not general monetary policy, was transferred to the Bank of England. Responsibility for monetary policy remains with the Treasury, which is accountable to the House. We must therefore obtain answers.

Under the Bank of England Act 1998, the Bank must maintain price stability, and, subject to that, support the economic policy of Her Majesty's Government. It is therefore relevant to examine the instructions and illustrations about its policy that the Treasury sent to the Bank.

At that point, I struck a problem. Under section 12 of the 1998 Act, the Treasury has to put those instructions in writing and lay a copy before Parliament, but I am advised that that has not been done. I went to the House of Commons Library yesterday and it was unable to find the directions, which have been filed away in another building. However, I was told that, contrary to the requirements of the Act, they had not been laid before the House. That is a matter of more than merely technical importance. The procedure of laying a document before the House is described in "Erskine May". It has to be given to the Votes and Proceedings Office and becomes a paper of the House that can then be ordered by the House to be printed. It is kept in perpetuity and is available to hon. Members and the public. There is no record of that having been done.

If the Government have broken their own law that is a serious matter, but even if I am mistaken—although the Library was pretty clear—they have certainly broken another provision as they did not produce that paper within seven days of the Act receiving Royal Assent. Perhaps the Minister will tell us what happened to that procedure. I hope that she is statutorily immune from breaking the law—I do not want someone to be sent to the Tower of London over this but there has certainly been a discourtesy to the House and she needs to tell us a little more about that. She also has the opportunity to tell us what is in the directions. She must know, so perhaps she can tell this Committee.

Mr. Deputy Speaker (Mr. Nicholas Winterton)

Order. This is not a Committee, but an extension of the House a sitting in Westminster Hall.

Mr. Heathcoat-Amory

I apologise. You, sir, are the Deputy Speaker for these purposes, and much deserved.

Even worse, the House has been the subject of discourtesy, or certainly incompetence, by the Treasury. For the purposes of the debate we need to know what directions were given to the Bank. The MPC is concerned about the exchange rate and reference has already been made to the February minutes, which report that a number of Committee members were very concerned about the further rise in the exchange rate … and the associated imbalances in the economy. Those were graphically described by the hon. Member for Great Grimsby. Interestingly, the minutes said that it was, therefore, desirable to consider whether official policy could do anything to mitigate this. Even more interestingly, in paragraph 37 it continued: The Committee debated whether intervention in the foreign exchange markets could usefully be deployed. I was not aware that intervention, which means selling or buying the currency, is within the powers and responsibilities of the Bank, but it seems that it is. The Minister could confirm that.

The MPC discussed the possibility of intervening and concluded that it would not be wise to do so on the ground that that might not be effective. It also pointed out that sterling's strength mainly reflected euro weakness and hinted, slightly bizarrely, that the publication of the minutes of the discussion on the exchange rate could have a similar effect on the market as if it had intervened. It was certainly disappointed in that and I gather that when the minutes were published sterling strengthened even further.

The MPC is wise to reject intervention. Last year, the Chancellor sold 75 tonnes of gold, just before it went up in price, and bought euros, just before they went down even more. The Treasury's record is rather bleak in respect of swapping assets for euros so I would not recommend that the Bank go down that path. However, a majority of MPC members concluded that a lower exchange rate and a higher interest rate would have been preferable. It put up interest rates by 0.25 per cent., but that has had the opposite effect on the exchange rate. We know its views and deliberations in some detail, but we also need to know the Treasury's views, particularly as a Treasury representative is present at MPC deliberations. Indeed, we read in this morning's press that the Chancellor is to brief it on the Budget.

I believe that it is unwise and probably impossible to specify an exchange rate. That is largely outside the control of Governments. Attempts to fix exchange rates can work temporarily, but usually have undesirable consequences. We all remember the exchange rate mechanism disaster. It was not caused, as is sometimes alleged, simply because we joined at the wrong rate in 1990. That would not explain why the entire system broke up a year after we left in 1992. It was fundamentally flawed and a shock was caused to it by German reunification, which simply meant that policy requirements in Germany were different from those in the rest of Europe.

Other shocks are developing at present. Some are benign, such as the spread of information technology, but the effects of the oil price rise on our own country—and, therefore, on its policy requirements are clearly different from those on the continent. I would argue that variable exchange rates are an essential adjustment mechanism, which is one reason why joining the euro would be such folly. We read in today's press that the euro has sunk to an all-time low of 95.78 cents. Conversely, the oil price rise has had a different effect on sterling, which simply shows not necessarily the superiority or inferiority of the British economy, but the difference between its monetary policy requirements and those obtaining in the eurozone.

That is being painfully felt in Ireland, whose inflation rate is the highest in the eurozone and well over twice the average. It is unable to do anything about that. Interest rates are set for it by a committee of bankers in Frankfurt and not according to the requirements of the Irish economy so its inflation rate is 4.4 per cent. The average is only 2 per cent. For all those reasons, aside from the constitutional and political implications of which the Government are so contemptuous, there is a clear economic case against joining the euro. As the hon. Member for Great Grimsby said, if we joined we would lock in the over-valuation of sterling against the euro almost permanently.

Mr. MacShane

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

No, if the hon. Gentleman will forgive me.

Mr. MacShane

I have a one-line question.

Mr. Heathcoat-Amory

I give way.

Mr. MacShane

Is the right hon. Gentleman saying that the United Kingdom should never join the euro?

Mr. Heathcoat-Amory

I wish that I had not given way. The hon. Gentleman knows our policy on the euro perfectly well and I am saying that our reasons are being validated and proved as every day goes by.

The Government can do something to co-ordinate monetary and fiscal policy and therefore address the strength of sterling. They have attacked savings, for example. The £5 billion a year raid on pension funds was undertaken through the abolition of dividend tax credits and personal equity plans and tax-exempt special savings accounts, which were successful mass savings vehicles, were abolished so the savings ratio has fallen. Savings, in macro-economic terms, are an excellent way to remove expenditure from consumption and relieve inflationary pressures without having to raise interest rates, with all the effects that that has on the exchange rate.

I do not believe that exchange rates can be fixed. However, there is an imbalance between sterling and the euro, which is chiefly caused by the euro's decline against the dollar. We have been pretty stable for about eight years. The Government can and should have used fiscal and monetary policy, working together, to address that problem. They eroded the savings culture in this country by lowering the savings ratio, which contributed to inflationary pressures and persuaded the MPC to keep interest rates higher than they otherwise would have been. That was particularly stupid and short-sighted.

10.50 am

The Economic Secretary to the Treasury (Miss Melanie Johnson)

It is my pleasure to respond to the debate that my hon. Friend the Member for Great Grimsby (Mr. Mitchell) has secured. I shall do my best to deal with the contributions made by other hon. Members, but I have only 10 minutes.

The Government understand very well the concerns of business, especially manufacturers and other exporters, about the level of the pound. Some people have suggested that sterling is high because the Monetary Policy Committee's remit is too narrow. The force of their argument is that the MPC should have not only an inflation target, but an exchange rate target. The Government strongly disagree with that argument. They are determined to avoid the instability that was caused by the ever-changing money targets of the early 1980s, and the dual exchange rate and inflation targets of the late 1980s and early 1990s. I have some sympathy with the points made by the right hon. Member for Wells (Mr. Heathcoat-Amory). The failure of the exchange rate mechanism shows the difficulties of pursuing such a policy. For that reason, the MPC has only one target—the symmetrical inflation target, as my hon. Friend the Member for Great Grimsby knows well.

There have also been suggestions that the Government either directly or by putting pressure on the Bank of England should intervene in foreign exchange rate markets to reduce the value of sterling. It is important to note that the sheer size of the funds involved in currency markets severely limits the effectiveness of any such approach, even if it were thought the right course to pursue.

As a number of hon. Members have said, the issue of intervention was discussed at length by the MPC at its last meeting, but it was agreed not to go ahead with such a move. Hon. Members have selectively quoted from Eddie George's contribution in front of the Treasury Select Committee last week. I should like to point out that he argued that intervention would be ineffective and aggravate upward pressure on the pound. It is important that we recognise the position of the MPC and the Bank of England.

Does the MPC take sufficient account of regional issues? My hon. Friends the Members for Great Grimsby and for Rotherham (Mr. MacShane) may be sceptical about the degree to which the MPC takes account of regional issues. There is one interest rate for the United Kingdom economy as a whole, so the MPC needs to base its decisions on the circumstances and requirements of the UK economy as a whole. However, it takes into account a wide range of regional and sectoral data.

In particular, it closely considers the contribution of the Bank's 13 regional agents, which cover all areas of the UK. The role of the agents is to ask local people how they view economic conditions and prospects. Each year the Bank's agents talk to and visit about 7,000 business contacts, and ensure that regional information is passed to the MPC. I know from discussions with Eddie George that he tries to get out and about the regions.

The Government believe that delivering sound public finances and low inflation is the best contribution that they can make to exchange rate stability, and is consistent with their objective of a stable and competitive pound over the medium term. The Government have done that by putting in place new fiscal and monetary policy frameworks. The frameworks are highly transparent, forward looking and based on clear rules and targets.

A key feature of the Government's macro-economic policy framework is that it delivers effective co-ordination between monetary and fiscal policy. That is particularly relevant, as it has been suggested that sterling is high because fiscal policy has not supported monetary policy. That is not correct.

Fiscal policy should, whenever possible, support monetary policy through the cycle, if that is consistent with meeting the fiscal rules that the Government have introduced. Indeed, that has been happening. In the first two years after the Government took office, they cut borrowing by £30 billion, which significantly eased pressure on interest rates. Official interest rates are higher in the UK than in Europe, but longer-term interest rates are much closer to those in major European economies.

The Government's strategy has helped to lock in economic stability and open the way to steady growth, leaving behind the boom and bust of the past. The short-term outlook for growth is now stronger than previously expected. The Government's economic forecasts will, of course, be updated at Budget time, but the latest forecasts that were released with the pre-Budget report, which the hon. Member for Truro and St. Austell (Mr. Taylor) mentioned, showed that growth is expected to pick up in 2000 and remain strong in coming years. That outcome in part reflects the proactive and forward-looking nature of the Government's macroeconomic policy framework.

I enjoyed the debate between my two hon. Friends on the euro and euro-sterling levels. It is early days for the euro, and it is not appropriate for the Government to comment on it from day to day. I appreciate that it provokes debate, but it is not proper for us to engage in such discussions.

With the platform of stability that is now in place, the Government are delivering high and stable levels of employment. More than 800,000 new jobs have been created since the election, and more people are now in work than ever before. Of the increase in employment in the past year, about 80 per cent. was in full-time work, so they are proper jobs. Unemployment remains on a downward trend. Claimant unemployment at 1.2 million is at its lowest level for two decades. Since the last election, long-term unemployment has been cut by half, and youth unemployment by two thirds.

The strength of business investment in 1999 has exceeded earlier expectations and remains at the level of recent highs. The strength of investment spending in recent years is partly attributable to the clear reduction in macro-economic instability and uncertainty. The UK remains Europe's premier investment location. Inward investors understand the Government's policy of a stable and competitive pound over the medium term. It would not be sensible to implement short-term measures that may put the medium-term position at risk.

There has been substantial investment in the economy. Investment has risen rapidly in recent years, with an annual rate of about 10 per cent. since 1995. Even during 1999, when there was a pause in output growth, business investment remained robust. The latest figures show business investment increased by 1.2 per cent. in the last quarter of 1999. Those investment decisions are reflected in the investment of a number of companies in the UK: Nissan, Jaguar, Peugeot, General Motors, ICL and Microsoft. Indeed, part of the Toyota group chose my hon. Friend's constituency of Rotherham for its European manufacturing plant, which cost £32 million and brought some 400 jobs to the area.

Mr. MacShane

We are pro-European in Rotherham.

Miss Johnson

Those decisions show that the Government's policy is encouraging manufacturing to invest in the UK.

My hon. Friends spoke about the problems of the manufacturing sector in the current substantial downturn in world economic activity. As growth has picked up since the crises that occurred in Europe and Asia, there are encouraging signs that conditions for manufacturers are beginning to improve. Manufacturing output rose by 0.7 per cent. in the last quarter of 1999, and there are continuing signs of a strong recovery. There are also signs that exports are recovering from their recent period of weakness. Export volumes, excluding oil and erratic items, in the three months to December were up 4.8 per cent. on the same three months a year ago.

In addition to delivering greater economic stability, the Government are also helping business in other ways. In particular, they have introduced measures specifically designed to encourage enterprise. They have reduced the main rate of corporation tax, reformed capital gains tax to encourage long-term investment, and worked on improving the way in which regulations affect business. Those and other measures will help firms in all sectors of the economy, including manufacturing.