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6. Mr. David Laws (Yeovil): On what date his Department started the preliminary technical work for evaluating the five economic tests for euro membership. [35747]

The Chancellor of the Exchequer (Mr. Gordon Brown): After the first detailed assessment of the five tests in 1997, we said that our policy was to prepare and decide and to make an assessment early in the Parliament. The assessment of the five economic tests has not started, but last year we set out the necessary next stage of preliminary and technical work. That preliminary and technical work includes the cyclical behaviour of the United Kingdom economy relative to the euro area and relative responses to economic shocks; the mechanisms by which product, labour and capital markets adjust; the impact of the single currency on the costs and availability of capital; the effect of the single currency on financial services; and the impact of the single currency on trade, competition, productivity and employment.

Mr. Laws: I thank the Chancellor for that very full answer. On the investment test, will reform of the growth and stability pact be necessary before Britain is willing to sign up to the euro? I ask specifically in relation to the document that he is launching today about reform in the European Union. Does paragraph 1.13 of that document mean that reform of the growth and stability pact is a pre-condition to entry to the euro?

Mr. Brown: There is no sixth test. I have just explained the five tests and the work that we are doing to examine them. I hope that all Members would agree that the growth and stability pact is in need of improvement in three separate areas. First, it should be reformed to take account of the economic cycle. In other words, there should be flexibility when the world economy and, indeed, the European economy are in downturn. Secondly, it should be reformed to take account of public investment, which matters to us here because health, education and transport investment are absolutely crucial. However, that matters throughout Europe in the rebuilding of the infrastructure in many countries.

Thirdly, the pact should be reformed to take account of debt sustainability. What is relevant to a country with a debt to GDP ratio of 110 per cent., such as Italy or Belgium, is not relevant to a country such as Britain where, as a result of efforts in the past few years, the ratio has been reduced to 30 per cent.

I believe that those reforms are gaining support within the European Union, and we will continue to push them. Our assessment will be made on the five tests that were set down in 1997, repeated by the Prime Minister in 1999, and repeated in the document to be published later today.

Mr. Barry Sheerman (Huddersfield): Does my right hon. Friend agree that it is important not only that his Department continues the preparations for the evaluation of whether the tests are met, but that the House is well informed? Will he affirm that the preparations for the euro group—comprising those who lead on Treasury matters for all the parties represented in the House—constantly seeks ways in which we can prepare for joining the euro

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in the event of a yes vote in the referendum? It is not a group that promotes the euro, but one that monitors progress in banking, retailing and the public sector.

Does my right hon. Friend agree that the group's most important other function is to make sure that the Government do not spend money on promoting the euro? Given those facts, is it not a wonder that still the Conservative party is the only party in the House that has not joined the committee and did not come to the meeting this week?

Mr. Brown: When we set up the committee, I sent an invitation to all political parties in the House of Commons. The standing committee on euro preparations, which I chair, includes the Governor of the Bank of England, the head of the Confederation of British Industry, the head of the British Chambers of Commerce, and representation from small business and the British Bankers Association—all relevant bodies concerned about economic and financial matters in relation to the euro and economic policy in Europe.

To complement that committee, a standing committee was set up in the House of Commons. We sent an invitation to sit on the committee to every political party in the House of Commons. The invitation was accepted by every political party with only one exception: the Conservative party. That is because the Conservative party has ruled out discussion of those issues as a matter of dogma. That everyone else, including the whole of British industry and British commerce, is prepared to discuss those issues shows how far apart the Conservative party is from business today.

Mr. Peter Lilley (Hitchin and Harpenden): Is the Chancellor aware that most of the business men who support entry into the euro believe that it will first be necessary for the Government to engineer a devaluation to a more competitive exchange rate? Is he also aware that every Government who have devalued the pound have been defeated at the subsequent election?

Mr. Brown: He should know. It is difficult to take lectures from the Conservative party about the running of exchange rate policy given the ignominious exit from the exchange rate mechanism that occurred when the right hon. Gentleman was a member of the Cabinet. [Hon. Members: "You supported it."] Now the Opposition blame us when we were in opposition for the policies that they pursued in government. I know that it is the fate of the Opposition to become irresponsible, but the Conservatives should take responsibility for the policies that they pursued in government, when the shadow Chancellor and the right hon. Member for Hitchin and Harpenden (Mr. Lilley) were members of the Cabinet.

The fact is that we will assess the five tests and report to the Cabinet; if we make a yes decision, we will then report to Parliament and the country. For the first time, a decision on those matters is to be made after fundamental, rigorous and comprehensive examination of the economic issues. One thing is clear about 1990 and the ERM: the Conservatives made no examination of the proper issues.

David Taylor (North-West Leicestershire): If the German fudge shows us anything, it is that sustained cyclical convergence is impossible without deep-rooted

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structural convergence. Does the Chancellor agree that, given the huge differences between us and Europe in trade mix, housing finance, pension finance and company finance, we are further away than ever from meeting the economic convergence criteria that he so frequently spells out? Are we not therefore several years—perhaps it will not happen until deep into the third term of an Administration led by him—from a referendum that will resolve those matters?

Mr. Brown: I have always said that I will not give a running commentary on the five tests—nor on any other matter. The five tests include whether sustainable and durable convergence can be achieved, as well as an examination of employment, investment and flexibility—all the matters that are relevant to a proper and rigorous economic assessment.

We are determined that the decision will be made in the national economic interest. The real divide in politics is between us, who would make a decision based on the national economic interest, and the Opposition, who have ruled out a single currency even if it were to be in the national economic interest. Theirs is an irresponsible position.

Sir Michael Spicer (West Worcestershire): Who is in charge of all this—Mr. Ed Balls or the Minister for Europe, the right hon. Member for Neath (Peter Hain)?

Mr. Brown: I shall present the economic assessment, as I presented the 1997 statement to the House of Commons and chair the standing committee on euro preparations. It is a matter for the Treasury to present its economic assessment and we will do so, as we said, before June 2003. The fact of the matter is that the statement that we made in 1997 remained unchanged in 1999; it is exactly the policy that we are pursuing now and it is the policy of the entire Government.

Joyce Quin (Gateshead, East and Washington, West): As my right hon. Friend knows, more than half our exports of goods go to other European Union countries. Does he acknowledge that in certain regions the figure is far higher? For example, in my area in the north-east the figure is 76 per cent., which is perhaps why many businesses there favour entry into the euro. Does my right hon. Friend therefore agree that it would be crazy, given those facts and, when it takes place, a satisfactory assessment, to rule out membership of the euro, as I assume is still being advocated by the Opposition?

Mr. Brown: My right hon. Friend is right; 750,000 businesses trade with the euro area. It is crucial that we have the best relationships between the United Kingdom and Europe. It is for precisely those reasons that we have said that the decisive test—it would have to be clear and unambiguous—is the economic case for entry; that is what we have to examine and that is why the detailed work that I mentioned to the hon. Member for Yeovil (Mr. Laws) is being done rigorously and comprehensively. The assessment will be made public at the end of that time.

My right hon. Friend is right; it is a mistake to rule out on grounds of dogma what may be in the national economic interest. I have noticed that, during this Question Time, whereas on issues of urban renewal and

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everything else no Conservative Members have sought to intervene, on the issue of Europe just about every Conservative Member wants to intervene. The leader of the Conservative party has said that Conservative Members will not go on talking endlessly about the euro because they are not monomaniacs and have more than one issue, but it is not clear today that they do.

Mr. Michael Howard (Folkestone and Hythe): I am most grateful to the Chancellor for providing me with my cue. May I begin by welcoming him on his return to the Dispatch Box? He will know that he has the sympathy and personal good wishes of hon. Members from all quarters of the House.

Is it not extraordinary that this morning the Chancellor should play ducks and drakes with the Order Paper, deferring consideration of Question 1 without any explanation and for a reason about which we can only speculate?

On the question asked by the hon. Member for Yeovil (Mr. Laws), does the Chancellor agree with Gus O'Donnell that the economic case for joining the single currency can never be clear and unambiguous?

Mr. Brown: Mr. Gus O'Donnell has said that he has no recollection of saying those things. As for Question 1 on the Order Paper, as I understand it, we are responding to a request from the Conservative party that we should deal with it at the end of proceedings. As for the whole question of the euro, I think that the right hon. and learned Gentleman will agree that it is important to look at those matters in detail. We have said that the economic case must be clear and unambiguous, which is why in July last year, and then in September, we published a list of all the studies that we are undertaking.

I should have thought that the right hon. and learned Gentleman would have thought that that was a sensible course of action. Of course, the difference is that when the Conservative Government joined the exchange rate mechanism, they did so as a political act without taking in hand the necessary economic preparations. They did not make the necessary economic assessment and the result was their ignominious exit from the ERM in 1992. The shadow Chancellor must take full responsibility for the actions of that Government.

Mr. Howard: Indeed, I do, but it is important to note that that decision was supported by all parties in the House, by the Chancellor personally at the time, by the Liberal Democrats, by the Confederation of British Industry and by the Trades Union Congress. I certainly do accept my share of responsibility.

Mr. Gus O'Donnell was quoted as saying:

and he has not denied that statement. Is it not the case that all the evidence shows that joining the single currency would be likely to have devastating consequences for the jobs, homes and livelihoods of the people of this country? Why does not the Chancellor accept that, put this distraction to one side, and concentrate on dealing with the crisis in the public services of our country?

Mr. Brown: Mr. O'Donnell has made the position clear. On the question of the euro, our policy, as the right hon. and learned Gentleman well knows, is exactly the

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policy that we set out in 1997. It was repeated in 1999. It is repeated now by me. The reason that that is the right policy, and I can show it to be the right policy, is that we are doing the work that is necessary for the economic assessment to take place.

There is one school of thought in this country that says, "We would rule out a single currency, even if it were in the national economic interest to join."

Mr. Howard indicated dissent.

Mr. Brown: That is exactly the position of the Conservative party, and the shadow Chancellor himself has ruled out the single currency in principle. He said it when he stood for the Conservative leadership in 1997. I know that it got him only 12 votes at the time, but he said that then, and his leader has repeated ever since that the Conservatives are against the single currency in principle. What they are saying is that even if it were in the national economic interest to join, they would not do so, as an act of dogma.

Our position is the sensible position. If a single currency is in the national economic interest, and proved to be so by the five tests that we are assessing at present, we will make a recommendation to the country. That is the sensible position for jobs, business and the economy as a whole. The Conservatives are locked in the past and we should take no lectures from a Conservative party that was responsible for our ignominious exit from the ERM, which the country will never forget.

Denzil Davies (Llanelli): On the question of the devaluation of the pound, does my right hon. Friend agree that one way of engineering such a devaluation would be to put up domestic taxation, thereby achieving a better balance between monetary and fiscal policy?

Mr. Brown: My right hon. Friend was in the Treasury in the 1970s. There were a number of Budgets at that time which put up taxes, but I believe that he did a very honourable job in the Treasury at that time. As regards our policy, we will announce our tax measures in the Budget, we will make the economic assessment in relation to the euro at the appropriate time, and all the facts and figures will be brought before the House. The assessment that we must make is whether a single currency would be good for investment, whether it would be good for jobs, whether there is sufficient flexibility in the economy, what would be the effect on the financial services, and whether there is sustained and durable convergence. Those are the questions that we are examining and on which we will make an assessment.

Matthew Taylor (Truro and St. Austell): First, may I associate myself and my right hon. and hon. Friends with the comments of the right hon. and learned Member for Folkestone and Hythe (Mr. Howard) to the Chancellor? He is welcome back and we feel strongly for him.

The Chancellor has repeatedly said that he does not want a running commentary on the economic assessments. That message does not seem to have got through to his colleagues at the Foreign Office. Could he therefore end the running commentary by making clear the time scale

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on which those tests are in fact being carried out, as compared with the Foreign Office version, with which he seems to disagree?

Mr. Brown: The position is as I set out at the beginning of this Parliament and in my speech to the CBI in October: we will make an assessment, which will be completed before June 2003, and we will publish the results of that, as we did with the 1997 assessment.

The Liberal Democrats are in a difficult position. Only a few days ago, the Liberal Democrat leader named the day on which he thought there should be a referendum. One can adopt the position that we will join irrespective of the assessment of the economic tests. One can name the day, and the Liberal Democrats have also named the exchange rate. Surely the hon. Member for Truro and St. Austell (Matthew Taylor), in his new exalted position, calling himself shadow Chancellor, in competition with the right hon. and learned Member for Folkestone and Hythe (Mr. Howard)—[Interruption.] Yes, it is a good competition. The one respect in which they are not competing well is with those on the Labour Benches. In his new position, surely the hon. Gentleman should consider this issue: if we decide that the single currency is in the national economic interest, it should be on the basis of compelling evidence, and the five economic tests that we have set down are the right basis on which we should make the decision. Far from naming the date and the exchange rate, the hon. Gentleman should look at the more detailed issues that are involved before that decision can be reached.

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