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Baroness Williams of Crosby: My Lords, perhaps I may make it absolutely plain. I strongly favour a referendum. My concern is simply that a great many people who will take part in it have so far received very little information about what is going on.

Lord Mackay of Ardbrecknish: My Lords, that will be up to those of us who join in the debate, from whatever side, and the way in which we put the case across. However, I have more faith in the electorate than that. It can make decisions on matters of considerable

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importance. After all, it is allowed to make a decision every four or five years on who should govern the country. That seems to me to be a pretty important decision. We rely on the electorate to make it and, by and large, over the past 17 years it has come to the right decision.

I return to the decision that we have to take some time in the next two or three years. There are a number of facts which are unclear. As my noble friend Lord Sheppard said, we cannot decide until we know more of the facts. It is an important decision and we need to get it right. If we were to jump one way or the other now--the "pros" would have us jump in now or the "antis" say that right now we shall not join--that would be a mistake.

As my right honourable friend the Chancellor said in is evidence to the Select Committee,


    "It is too soon to say whether EMU will start on 1 January ... I am quite sure that Member States will continue to prepare on [that] basis".
That leads me to the other important point, which I want to make about the lead-in period. Just because we are not making a decision now does not mean that we should not, and do not, play a full part in all the discussions which are going on. I do not know which countries are likely to join in 1999. I believe that the noble Lord, Lord Desai, mentioned that in 1992 nine out of the 15 qualified under the convergence criteria. I would not argue with the noble Lord, but today he thought that about three countries qualified.

It is difficult to know who will meet the convergence criteria. It is an important part of our decision-making. Until we see that clearly, I do not believe that it would be right for us to make a commitment now to join if we met the criteria. Now we continue to play a full part with our European partners in the preparations that are necessary for the single currency. It is essential that our voice is heard. I believe that the noble Lord, Lord Ashburton, underlined that. He said how important it was because EMU will affect us hugely whether we are in or out. Involvement in those preparatory discussions has no bearing whatsoever on the UK opt-out. My noble friend Lord Harding of Petherton underlined that. The Prime Minister himself said on 18th December:


    "It is very important that this country's voice ... is heard in the negotiations right up to the time when a decision is taken as to who should join and who should not. Whether we exercise the right to opt in or to opt out, this country ... will, in one form or another, be affected by the decision to proceed to a single currency, even if only a minority of countries proceed".--[Official Report, Commons; 18/12/95; col. 1228.]
I completely agree with the points that have been made in the report and by a number of your Lordships about the importance of the United Kingdom being in the discussions and building the fundamental foundations of any EMU that may emerge.

The Select Committee chose to focus in its report on the relationship between the "ins" and the "outs". These are vitally important issues. It is clear that not all countries will join EMU in 1999. Not a single noble Lord who spoke even suggested that that might be so. The noble Lord, Lord Dahrendorf, took us beyond the existing 15 members and what they might do to other players in the European scene and what they might do.

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It is important that we work hard on the question of the relationship between the "ins" and "outs". That relationship will be important to Europe on whichever side of that divide we fall, whether we are in or out. In particular, the noble Lord, Lord Dahrendorf, mentioned the divisiveness of the "ins" and "outs". In the Chancellor's letter to the then President of ECOFIN in January 1996 he said that these questions were important for all countries whether in or out. EMU would affect everyone and we must plan for difficulties that might arise so that Europe's achievements were not undermined. He said to your Lordships' Select Committee that it could not be in the interests of anyone inside the European Union to allow friction between the "ins" and "outs" to start to develop. I hope that that is a sufficient response to those who feel that there may be bitterness with regard to the "ins" and "outs". My right honourable friend the Chancellor made that absolutely clear. This is an important point. The work that goes on is of vital importance.

My noble friend Lady O'Cathain referred to the interesting question of the millennium problems in relation to IT. I am responsible for making sure that the computers in the Department of Social Security do not have a problem in the year 2000. To date, I am reasonably satisfied that somebody a few years ago foresaw that the year 2000 would arrive and took precautions so that the machinery would work when the changeover occurred. My noble friend is quite right. There are many other points to be addressed and worked upon by us in this country, and in partnership with our friends, if the transition to a single currency by some or all members of the European Union is to work successfully.

It is a matter of priority that any move to a single currency does not jeopardise the single market. The single market has been a great success story, as the noble Lord, Lord St. John of Bletso, has said. It is important that the gains which are generated are protected. It is imperative that they are not compromised by a single currency. It would be unfortunate if a single currency introduced to reinforce the single market was the force which led to its demise by creating tensions between the single market trading partners.

The noble Lord, Lord Grenfell, appeared to believe that the convergence criteria should be flexible and we could rub them away in order to allow people to join. My noble friend Lord Boardman called that a glorious fudge.

Lord Grenfell: My Lords, I said that flexibility was written into the treaty. It is not a question of the Government, Commission or anyone else deciding that they would like to expand it beyond what had been agreed.

Lord Mackay of Ardbrecknish: My Lords, I am interested that the noble Lord desires to reinforce that point. I did not take notes of his speech along those lines. I took it he was suggesting that a bit of fudging

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could take place and the rules could be bent. They will jolly well have to be bent to make sure that the Belgians get in given their 150 per cent. debt on GDP. If Belgium is not there I do not believe that the process can start for the reason that it must include more than just France and Germany. I shall be interested to see how that can be wished away.

I agree with the noble Lord, Lord St. John of Bletso, that it is important that the criteria are adhered to faithfully otherwise people will not have confidence in the system. The very pressures that most people believe the convergence criteria are necessary to prevent will then emerge. It will be as my right honourable friend the Chancellor said--if it went ahead on an ill-conceived basis he would probably be one of those who would argue that we should not join but should stay outside and seek maximum stability through our own efforts. Because if the criteria are not met, that could easily introduce into the system the kind of instability that none of us wants to see.

The best way to avoid those stresses and strains is for member states to continue to pursue sound economic policies. All countries need to bear down on inflation. All countries need to control their fiscal debts. That ensures stable economic conditions where business and individuals can plan on a long-term basis.

Some people have suggested that joining an ERM would help us to achieve that stability, and that ran through some of the debate. As noble Lords know, ERM 2, as it is called, is on the drawing board, or wherever it is, but membership of it is voluntary. I think I can say that our experience last time tells us that we should not return to any kind of rigid, old style ERM. Our experience shows that that does not work. It does not guarantee stability. The best way to guarantee stability, and lasting exchange rate stability, is to get the fundamentals of an economy right. I have already mentioned some of them: low inflation, sound public finances, and the like.

That allows me to move on to another point which came up on a number of occasions. It is the question of devaluation. My noble friend Lord Cockfield suggested that the French worry about devaluation was that the Italians would do it for reasons connected with the CAP. The noble Lord, Lord Haskel, mentioned what is called competitive devaluation. My right honourable friend the Chancellor gave considerable evidence to the committee about that. On page 278 he made it clear that:


    "I do not believe the so-called competitive devaluation has any lasting advantage to a country that devalues".
I shall not read the rest of the paragraph, but it continues in that vein. It shows clearly that we do not believe that the concept of competitive devaluation is a sensible one. It is fundamentally flawed. We do not accept that there are any long-term benefits. They are at best short-lived and are soon eaten away by higher inflation. I commend those noble Lords who are interested in this to read the reference I made to the evidence given by my right honourable friend.

It is also important, as I said, that all member states continue to pursue sound financial policies, whether in or out of the EMU. The German Government have

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already put forward proposals for a stability pact. The committee mentioned some of the points relating to it. I thought the best description was in paragraph 135:


    "The effects of automatic financial sanctions would be perverse".
The words of my noble friend Lord Kingsdown were quoted. He said that they:


    "would be like imposing a heavy fine on a debtor in court".
One has to think carefully about what kind of fiscal controls one puts in place for people who are in the system, because one could put in controls which would work in a perverse way and make it more difficult rather than easier for a country to do the right thing.

The implications for the EU budget were raised. In his usual refreshing way, the noble Lord, Lord Desai, said that the only way that that would work would be if there were a federal budget of 4 per cent. I am not an economist, as I have told your Lordships before, but I understood the picture he was painting. It was in contradiction to the picture painted by the noble Lord, Lord Monson, who warned us against a united states of Europe a little like the United States of America. I do not believe that the countries of Europe were ever going to go that far. If an attempt were made to go that far the worst predictions of the noble Lord, Lord Dahrendorf, would rapidly come true. I want your Lordships to be clear that we see no reason for the EMU requiring increased amounts of money in the European budget. My right honourable friend the Lord Chancellor said to the inquiry:


    "The start of EMU should not in itself be any reason for any new transfer payments whatsoever. A lot of Finance Ministers, not just me but a good block of Finance Ministers, have no enthusiasm whatever for raising the cost of the European Union any higher at all".

On that point, perhaps because of my interest in social security and pensions, I must say to my noble friend Lady O'Cathain, who mentioned the issue of unfunded pension liabilities, that the treaty is clear that member states are not liable for others' commitments. There is no bale-out clause set out in Article 104B. Certainly that is a point which we, given the position that we are in with a private pension provision of £600 billion--as I told your Lordships some hours ago--must watch that matter most carefully indeed.

The noble Lord, Lord Barnett, asked whether governments would be able to maintain their own tax and spend policies. Paragraph 138 of the report states:


    "We think that any attempt further to reduce fiscal autonomy should be resisted on the grounds that the power to tax is essential to the nation state and that national fiscal flexibility is essential to deal with cyclical pressures and economic shocks".
That is absolutely right and echoes the words which my right honourable friend the Chancellor used in his evidence to the committee.

Perhaps I may turn to the impact of a single currency on industry and the City. I welcome the comments in the report about the strengths and flexibility of the City. They show the excellent position that the City is in to prosper further, whether or not we participate in EMU. It is of course important that the City is ready and able to participate in the new Euro market, whether or not we are in or out. A number of noble Lords mentioned that matter. The Bank of England has established a regular briefing

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mechanism to ensure that firms, in particular in the financial sector, are kept abreast of developments. The bank seeks to ensure that practical issues arising from the single currency, whether the UK is in or out, are properly addressed and co-ordinated. The Treasury stands ready to offer advice and to answer questions on practical issues.

It is up to the private sector to take its own view on the work that needs to be done. Businesses will need different work to be done, depending on where their markets and interests lie. I do not believe that it would be appropriate for the Government to co-ordinate preparatory work until a decision has been taken on whether the UK will participate. I know that a number of noble Lords have had to leave, partly because we have gone on a little long--


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