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European Central Bank: ECC Report

3.20 p.m.

Lord Barnett rose to move, That this House take note of the Report of the European Communities Committee on the European Central Bank (24th Report, HL Paper 112).

The noble Lord said: My Lords, with the leave of your Lordships, I shall pay a few tributes. First of all I thank the members of my committee, who are listed in Appendix 1. Without that excellent committee we would not have the excellent report that we are debating today.

I thank also the Clerks and specialist advisers. John Goddard was our Clerk and specialist adviser almost throughout until, at the end, he had to leave and was succeeded by Dr. Philippa Tudor. Both of them were excellent. We had also a specialist adviser, Professor Charlie Bean, who gave us, in Appendix 4, a definition of the stability pact, which I know is not altogether clear to everybody who reads these things. I would also like to thank our final specialist adviser and Clerk, Dr. Philippa Tudor, for the glossary in Appendix 3. Very often in European matters initials cause some confusion. I hope that that schedule will help.

I am sure my committee would join me in thanking the excellent witnesses. They are listed in Appendix 2 of the report. I shall refer to them again.

The title of our report is The European Central Bank: Will it Work? Our aim, which is set out in paragraph 4, was to consider how and whether the European Central Bank would work. The report does not discuss the merits of the decisions already taken or whether the UK should join. Whether we should join now, in two years, 10 years or never is not an issue as far as the report is concerned, and we did not discuss it.

Nevertheless, I appreciate that there will be many who will want to debate the position of the UK with regard to economic and monetary union and a single currency. I know that if I told the sceptics who might take part in this debate that we should never join the single currency they would say "You do not go far

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enough". I know, despite the shaking of heads, that there are some who would prefer--they would not like to say so--that we were not in the European Union at all. I do not wish to refer to that aspect.

I have said before, and I repeat, that, for my part, I regret that we have not been in at the start of this potentially great, momentous and historic occasion. I emphasise that that is my own view, not the view of the committee.

It would be an enormous step forward in European unity. I hope that at least the Government will join earlier than they have so far indicated. Perhaps my noble friend the Leader of the House will pass on that message when she next goes to Cabinet.

It would be quite disastrous, in every sense of the word, if we were to combine the decision with a general election, especially when the UK is in a stronger position to join under the Maastricht criteria than most of the other 11 member states, particularly on the issue of sustainable convergence. I hope that the Government will not insist on leaving the whole matter until the next general election.

Above all, I hope that nobody will delude themselves that we will be able to remain outside the euro zone without consequences for the UK. We cannot ignore the reality of a major trading group taking crucial decisions which will affect UK trade directly without any input from the United Kingdom.

I apologise for that short, personal and slightly controversial contribution to the debate. It was a digression for which I hope I might be forgiven. I return immediately to the report.

The report was unanimous, although there will be a member of the committee speaking after me who, although he did not vote against the report, which was therefore unanimous, might have differences of opinion on one or two of the final conclusions. We shall no doubt hear from him.

The report concentrates on the crucial question of whether the European Central Bank will work. If the European Central Bank fails, so does economic and monetary union. We have said in our report that some will want it to fail, and some sincerely believe that it will fail. My noble friend Lord McIntosh of Haringey--in a debate on 28th July at col. 1425 of the Official Report, if he or his staff have forgotten--said that he believed that it will work. I know that at times he talks without looking too closely at his brief, but I hope that he will be able to confirm today that what he told us then has been confirmed by the Government.

The report is based on the evidence of those witnesses to whom I have referred. They are listed clearly in Appendix 2. Members of the committee may have slightly differing views, but they all agree on the excellence of our witnesses. They covered covering a very wide range, from Commissioner de Silguy, Dr. Duisenberg, now President of the European Central Bank, M. Trichet, the Governor of the Central Bank of France, Professor Tietmeyer of Germany, our own Eddie George, Paul Volcker, a former head of the

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Federal Reserve Bank in the United States, the CBI, the TUC, Members of the European Parliament and our own Chancellor of the Exchequer.

The report recognises the considerable dangers and risks involved in setting up this operation. Before I turn to those dangers and risks, it is worth starting with what we describe in paragraph 133 as the immense and surprising achievement of 11 independent member states. It is a remarkable fact that the single currency has come about and seems certain to start on time as planned, as a result of the sustained investment of considerable effort. Once adopted the single currency is not absolutely irreversible, although it is intended to be so. The political and economic cost of failure is so great that there is an overwhelming will to make it acceptable and successful. The European Central Bank is an essential element in the operation of a single currency.

Let me turn to the risks and dangers relevant to this great operation. We recognise and list some of those risks. There could be fiscal profligacy following the huge effort made to meet the 3 per cent. of GDP criterion. Some countries have been allowed to join without meeting the total public sector debt criterion. For example, Belgium and Italy have more than double the debt set in the Maastricht Treaty, that is to say more than 120 per cent. There is the failure to meet the necessary structural reforms, which will clearly be serious. There are political dangers, and I shall mention one or two of them. There is the pursuit of national interest. There is the question of sustainable convergence within the economic and monetary union and the problems that would result if that were not achieved. Of course, there is the issue of one interest rate for 11 member states.

It will be seen from the evidence that we put pretty tough questions to our witnesses. Many of them were surprised at the implication of our questions; namely, that it would all end in disaster. They, on the other hand, in reply to our questions, made it quite clear that despite the risks they were convinced they would make the system work. Let me discuss those serious risks. As regards fiscal profligacy, that clearly could happen in member states who find themselves in serious economic difficulties. The main weapon would be the stability pact. The penalties are set out in paragraphs 72 to 94 in the summary of evidence. As I said, there is, I hope, a helpful explanatory note given by our professional adviser in Appendix 4 on page 35.

One of the most impressive of our witnesses was Nigel Wicks, the UK representative who has been on the board of the EMI, the precursor to the European Central Bank. Paragraph 73 states that he thought,

    "'the spirit of the age' was ... towards responsible policies".
One can only hope that he is right. That was his view having attended all those meetings of the EMI. Paragraph 75 states that Commissioner de Silguy stated that in Europe these days there is a stability culture. Again, one can but hope that he is right. For my part, I do not believe that the penalties set out in the stability pact will be used. But as we were told by Herr Regling of the German Ministry of Finance at paragraph 80, they will have some value as a deterrent. But the real way in

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which it will work, if at all, is through this new culture of convergence, of which I have spoken, and through a genuine determination, which we saw in virtually all our witnesses, and a will--I emphasise that will--to make it work. The same applies in particular to the two member states I referred to, Belgium and Italy, who have total debts of some 120 per cent., instead of the 60 per cent. set out in the Maastricht Treaty. They recognise it will take more than 20 years of reasonable policy to bring that down, but the treaty sensibly allows some flexibility. Therefore I hope it will be brought down, perhaps even a little earlier than 20 years' time.

I turn to the political dangers. We have seen a prime example in the presidency of the European Central Bank itself. The committee regretted what had happened over the appointment of the President of the European Central Bank. But when one requires unanimity, inevitably compromise decisions will have to be reached. The alternative is to have simple or qualified majority voting, which I do not think many want. If you do not have simple or qualified majority voting, you will have to have a compromise. For the life of me I have never been able to understand why the Prime Minister felt it necessary to claim a great victory when it was a compromise. There is no need to worry about that; compromises have to be made in these circumstances. To claim a great victory was wrong, but under the treaty Duisenberg has been appointed for eight years. Whatever he told the other governments at the time about a voluntary cessation in four years' time may or may not come about. The post is supposed to be unsackable. I hope your Lordships will forgive a football watcher, but I have witnessed the sacking of many football managers who had substantial contracts. Therefore I would not necessarily wager my hat on presidents of the European Central Bank never being sacked. That can happen.

In any event the members of the committee who met both Duisenberg and Trichet--the French alternative put forward--felt that they were both strong central bankers who would have done an excellent job, if appointed. But therein lies the bigger issue of the independence of the European Central Bank. I refer to the Bank of England in this regard. The Bank of England Act puts the Government's own economic policy second to the question of inflation. My noble friend Lord Peston and I tried to change that in Committee but the Government did not feel able to accept it. The Opposition did not press it too strongly and therefore I assumed they did not feel too strongly about it either. But I do. I would much rather the Bank of England had to take account of matters other than just inflation. But that applies in the case of the European Central Bank. There is a clear difference, of course, between independence, accountability and transparency.

The treaty obliges the president to produce reports and appear regularly before the European Parliament. Obviously we would like him to appear before our Parliament too. But if he had to appear before the parliaments of all 15 member states he probably would not be able to do much other work. Some may feel that may not be a bad idea, but it really would be rather foolish. Eddie George and Duisenberg will be both

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accountable and transparent in what they do. It is the good sense of central bankers on which I personally feel happy to rely. On the other hand Duisenberg stated in paragraph 40 that the European System of Central Banks will have to be "as transparent as possible". That is important. I was glad to receive that assurance.

The main instruction to the European Central Bank is to ensure price stability, without setting any particular level. No doubt some of the many economists who will speak in the debate today will be able to confirm that price stability does not mean 2.5 per cent., but zero. I hope that the European Central Bank will not go for price stability of zero, but it might. In my view it would be wrong for it to do so, particularly if it takes account of the current world problems. I am sure it will, as I am sure our Bank of England will.

But the main question of sustainable convergence and the single interest rate is probably crucial to how the European Central Bank can and will work. No doubt some will believe the worst--I am sure that will be the case--but obviously there will be risks over time. Undoubtedly major financial shocks will come about. We have seen one or two in the past few weeks. That will happen, but I am bound to say I think the members of a European Central Bank stand a better chance of dealing with them than does a single country. They would have a much better chance of achieving something. However, your Lordships do not have to accept only my view. The witnesses were quite clear. There is the overwhelming will to succeed to which I have referred.

While we, of course, recognise the risks and dangers that some have mentioned and we have mentioned in our report, we have answered the question we put to ourselves as to whether the European Central Bank will work quite clearly in paragraphs 96 and 97; namely, that it will work. The risks are considerable but we do not expect it to be allowed to fail. I beg to move.

Moved, That this House take note of the report of the European Communities Committee on the European Central Bank [24th Report, HL Paper 112].-- (Lord Barnett.)

3.38 p.m.

Lord Boardman: My Lords, I am happy to pay tribute to the noble Lord, Lord Barnett, who chaired the committee with his customary efficiency and style on a most controversial matter. Apart from the occasional discordant note--I notice he looked at me when he said that as if I might have had something to do with that--he managed to create harmony in his report which overcame many of my difficulties and at the same time made the message of the committee quite clear.

I look forward to hearing the three maiden speeches which are to follow this afternoon. They will bring fresh outside experience to a most difficult matter.

As the noble Lord, Lord Barnett, said, the question which we have to discuss is not whether we should join but whether it would work. Had the question been a wider one about our role, the report might have been considerably lengthier and more discordant.

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A number of issues came up that were equally applicable to the question which might arise in the future as to whether we should join; for example, the fact that there will be one central bank and, at the present time, 11 quite separate finance ministers, chancellors of the exchequer--call them what you may--with their own financial policies. Massive conflicts must arise. We know that the separation of the Bank of England from the Treasury has struck some discordant notes in this country. That has been clear from what has happened in the last few weeks: many people would have liked the Bank to have done something or for the Chancellor to have taken control--as he might indeed have been tempted to do. There have been demonstrations outside the Bank of England, previously unheard of. That is with just one bank and one treasury.

They are doing this the wrong way round. History shows that monetary control follows political control. They are trying to put monetary control before any other form of control. It has been made clear by a number of overseas ministers, among them Chancellor Kohl, that the aim for monetary policy to lead to fiscal union and, ultimately, to political union.

Most of the witnesses we saw expressed the hope that the euro would lead to a combination of national fiscal policies across the euro zone. There was that enthusiastic wish to join, and a reckoning that the fiscal problems which were outlined to them would take care of themselves; they would all join and follow suit, with a fiscal policy which would satisfy them all. I find it difficult to believe that that is true. They then said, "If they do not work, we have the stability and growth pact", which is meant to fine those nations adopting fiscal policies which are at odds with the rest of the euro body. Looking at the pact itself, and the consequences of trying to invoke it, one sees that a massive delay will result; then, after a further pause and further thought, the action taken could mean fining a nation which is already heavily in debt. That does not seem to be a very suitable method of dealing with matters. For example, and to take a quite arbitrary case, because of internal pressures, France decided that it had very substantially to increase its payroll, which made its debt position unacceptable. Can one believe that France would allow the stability pact to be invoked in order that France itself is fined, when one sees what France has done in other spheres of so-called independence?

Many other issues arise. Evidence was given by the trade union representative that European overseas trade is one-quarter of that of the United Kingdom. That may not be strictly relevant since we have not joined, but that was their evidence. There are certainly variations in overseas trade and the effect of the exchange rate would therefore be very much greater on us than on others. The same applies to mortgages. The method of owning property in Europe varies considerably. An increase in the interest rate on variable rate mortgages would cost four times as much in Germany as it would in Italy. There are similar variations right across the board,

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which give me considerable difficulty in accepting that this will go ahead without massive problems.

The objective of the euro is to maintain price stability. One would have hoped that we would have been given guidance, but it was not given by any of the witnesses, who were asked first what they meant by price stability and, secondly, how they would achieve it either by having a monetary aggregate control or inflation as their target. If they decide on monetary aggregates, which seemed to be where the weight of the evidence lay, a scenario of 11 different banking systems and 11 methods of deposit greatly increase the difficulties. Paul Volcker's evidence added considerable weight to that.

America and its single currency are cited to show how very easy it is. What is completely ignored is the mobility of labour. Mobility of labour in the United States enables them to cover particular problem areas. They are on the same exchange rate. One could not expect to achieve that mobility of labour within Europe, at least within the present generation.

Since the report was prepared there have been two events on which I must comment. The first was the appointment of the President of the ECB. As will be seen in the report, question 219 was put to Dr. Duisenberg when we visited him and he gave evidence. He emphatically said that he would not accept for a limited period the presidency of the bank. Yet some months later, when under considerable pressure applied by other countries, particularly France, he yielded. This casts considerable doubt upon the independence of the euro system, when on one issue, and when everyone else is united apart from France, they all concede to France. With that sort of independence one wonders how one can expect fair, independent judgment on the many issues which will face the one bank controlling 11 separate countries.

Looking at the criteria for joining, there have been a number of illustrations of fudging: the French with their aircraft pension fund, or whatever it was, and I am not sure what the Italians did--nobody really followed their bookkeeping. Fudges were made to enable people to qualify, or appear to qualify, under the criteria which had been set down, and that is very worrying. Above a debt level of 3 per cent. on revenue account, the instability pact is immediately invoked. Most countries started with over 3 per cent., so there are very difficult problems for the future. The sustainability of the criteria is of absolute importance in making the euro work. The debt ratios, for example, of Belgium and Italy were twice the amount set as the minimum qualification. There are many problems facing those countries.

The report sums up by stating that the risks are considerable. I believe that they are. I accept the goodwill on the part of all the countries that were anxious to enter the single currency and that, having entered, they will be determined, if they can, to make it work. However, I have grave concern that the task of achieving those ends is beyond them.

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3.50 p.m.

Baroness Williams of Crosby: My Lords, I, too, join the noble Lord, Lord Boardman, in saying how privileged I felt to be a member of the sub-committee under the chairmanship of the noble Lord, Lord Barnett. I gained greatly not only from his wisdom but from that of other members of the sub-committee. Serving on the sub-committee has been one of my greatest privileges and pleasures since joining this House. I very much look forward to hearing the three maiden speakers, who all have extremely distinguished records in their careers. I shall listen with great interest and benefit to their remarks.

As the noble Lord, Lord Barnett, pointed out, during the course of our investigations we consistently came across a high level of scepticism on the part of those questioning the witnesses and those witnesses who came from the United Kingdom, compared to an extraordinary level of confidence and belief among those who gave evidence from those countries that have now become members of the European monetary union, the euro zone. Indeed, going back through the record of recent years, we find that from 1990, ever since the report of the Delors committee on monetary issues, there has been a consistent record of extreme scepticism on the part of the United Kingdom, a scepticism that seems strangely proof against almost any evidence that can be brought to bear against it.

As the noble Lord, Lord Barnett, also pointed out, all 11 member states that have now joined the euro have fiscal deficits below 3 per cent. Looking at expectations in 1996, and even into the middle of 1997, we find virtually no press speculation that that was even possible. All 11 have had inflation levels at 2 per cent. or below. Again, almost all British comment was to the effect that that could not happen. As recently as May this year, our colleague, the noble Lord, Lord Rees-Mogg, writing in the Daily Telegraph, predicted that interest rates would rise steadily in the euro zone and that rates in Britain would be pulled up as a result of that convergence. As we all know, the movements of interest rates have been downwards, and countries such as Spain and Italy which have had consistently high interest rates in the past are now moving towards lower interest rates in the direction of the German and French rates. It is not surprising that in the opinion of the committee, which was impartial and objective, what happened was "remarkable and unexpected".

However, when we wrote the report in June 1998, the economic climate was very different from what it is today. It looked reasonably optimistic. The projections were for relatively high growth in Europe and in this country for growth rates of about 2 per cent. in the coming year. All those expectations have had to be revised to take into account a profoundly different economic climate. Looking today at the way in which Dr. Duisenberg, president of the European Monetary Institute, has warned his colleagues that we probably underestimated the possible consequences of the Asian economic crisis, we have to say that we are in a much less warm and friendly climate than

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we were even a few months ago. Yet in that new climate, increasingly the European zone is emerging as a zone of stability.

Perhaps I may quote a distinguished American commentator writing earlier this week in the Washington Post. His remarks are well worth listening to. He said:

    "The emergence of the much maligned welfare states of Europe as a zone of relative currency stability and a source of growth is a big economic change that official Washington is having trouble taking on board. It contradicts much of the conventional wisdom that developed about the global economy throughout the 1990s".
That is a quotation from Mr. Hoagland, a leading commentator.

There are questions about the sustainability of the European Central Bank's monetary policies. No one who looks back at the past 20 years of British economic policy can speak with too much optimism about our ability to sustain any single economic policy for any length of time. There are also questions about accountability. But, as the noble Lord, Lord Barnett, pointed out, the accountability of the European Central Bank to the European Parliament is well in advance of what used to be the accountability of the Bank of England to Parliament. It could be improved; however, it is a very exciting new development.

This country is already paying a very high economic price for having decided to stay outside the European Central Bank when it was launched in the summer of this year. That economic price is constituted under three headings. First, it is the price of relatively high interest rates compared to those of most of our European neighbours. In the long run, those higher rates will act as a brake on the relative growth of the United Kingdom.

Secondly, it leaves sterling open to speculation. Nobody who has read the history of our economic policy over recent years can doubt how open and vulnerable sterling is to the possibilities of such speculation. Within the euro zone, to quote the report, the reduced importance of the external exchange rate for trade within the euro zone is 10 per cent., whereas in the United Kingdom it is about a third. That leaves us wide open to the possibility of speculation against our currency.

Thirdly, there is vulnerability to the markets. Those who believe that they can pursue an independent fiscal policy without regard to the globalised financial markets should look at the opinion of the committee as stated at paragraph 100:

    "National fiscal policy is, in practice, constrained by the ability of international financial markets to punish countries pursuing profligate or otherwise unsustainable policies".
We have seen time and again the price that is exacted by the international financial markets from those currencies in which they have lost confidence.

There is also a very high political price. First, we shall have very little influence on the way in which the European Central Bank goes about its new and heavy duties. That troubles me greatly. Perhaps I may quote Sir Nigel Wicks, Permanent Secretary to the Treasury, in his evidence to the committee. He said that the United

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Kingdom would have to accept the arrangements which would be built up over the next few years. If we look closely at the institutional structure of the European Central Bank, we see that the governing council is the crucial international decision-making body, and that consists of the 11. The general council on which we sit is a much less central and powerful body.

Finally, I turn to what I believe to be one of the most serious challenges that Europe has faced, or for that matter, the world has faced. I refer to the global crisis. First, there is the decision about how we are to pursue growth policies, how we are to sustain the rest of the world--because we are a zone of relative stability, and still of relative growth. It is a decision in which inevitably now the United Kingdom will be a marginal player. I profoundly regret that. I believe we have a great deal to contribute. But as was clear last week from the remarks of Mr. Strauss-Kahn, the French Finance Minister, those who are not within the European zone will be regarded as at best a second level of decision-makers.

Finally, perhaps I may say one word about the new global architecture which is likely to be constructed within the next few years and as regards which again we shall not have the political strength we would have as members of the European Central Bank. Last week I was chairman of a World Bank seminar on the social consequences of financial crises. It was frightening to sit in that seminar and hear the evidence of the social consequences already being borne by countries like Indonesia, where the per capita income has fallen 20 per cent. in this year alone and where the levels of unemployment have risen by over 6 million. It was frightening to hear Russia describe the possibility of famine in some of its southern and eastern regions.

I believe the time has come for a major European initiative, and I believe there is no one else who can take on the burden of that initiative, for the United States at present is, as we know, almost totally absorbed in its own internal affairs. I hope that Britain will be part of that initiative. I believe that as members of the European Central Bank we could play a much larger part than, with the best of wills, we are likely to play outside it. I believe that--and I speak for all the Liberal Democrat Benches in saying this--British membership of the European Central Bank is an essential next step towards Britain playing her proper role in the world.

4.1 p.m.

Lord Ashburton: My Lords, the process of putting this report together was certainly a fascinating one, not only because it enabled us to question a significant number of the people who are or will be at the heart of the administration of the common currency, but also for the way in which that process enables one to pick up nuances of feeling and opinion which, given the fact that most of our witnesses were professional public servants, may not be easily expressed if they have to be explicit. Of course, there was also the great pleasure of the chairmanship of the committee by the noble Lord, Lord Barnett, which since I joined the committee I have learnt to admire for all sorts of reasons.

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For anyone interested in the subject, the report deserves careful reading. There were a number of points made to us which encompass and exemplify the intimate mix of political urgency and economic practicality. I quote purely as examples three paragraphs in the Summary of Evidence, Nos. 72, 94 and 96. But there are others: for example, in paragraph 65 of the evidence when the Governor of the Bank of England was speaking to us and in Mr. Wolf's evidence as a whole.

It was often emphasised by the public servants that the setting up of the common currency was rightly and necessarily a matter for political decision and that the role of those with whom we were discussing it was that of enabling the European Central Bank to work in practical terms, not to criticise the decision to embark on such a remarkable enterprise.

I think all of us were impressed by the thought and preparation that had clearly been given to the design of the bank, though there is obviously still room for difference of opinion on whether it is too independent of political control. We heard both sides of that. But that independence seems to me to be inevitable anyway, given the lack of intergovernmental institutions to which the ECB could be made answerable at present.

I believe more or less everything that can be done to forearm the European Central Bank for its task has been done, but a careful reading of this report will reveal a number of paragraphs in which the words "confident" or "believe" or even "hope" are used. These make it clear that no one can know whether the problems that will undoubtedly arise over the years--and, indeed, looking at the economic storms already in progress all over the world are arising now--can be dealt with in a way that will prove socially and therefore politically acceptable to the very disparate electorates which are coming together within European economic and monetary union.

When the project for a common currency was first unveiled, I felt perfectly happy with it as a sound and desirable aim for the European Union. In particular, I have no problem with it in principle on the grounds of loss of sovereignty, and regard that as being more a matter of sentiment than reality. But it never in my wildest dreams occurred to me that it would not take much longer to get off the ground than it has. There were three principal reasons for this. The most fundamental one is the fact that there seemed to me to be a very big job of explanation and education to be gone through before the electorates of the potential participating countries could be anything like ready to embrace the idea fully, let alone to demand it as a desirable way forward.

The second reason was that it seemed inconceivable that the degree of convergence specified as a precondition could be achieved. Here I had common ground with practically everyone. This last assumption gave me some comfort, given my feelings about the lack of popular understanding and support.

The third reason was that the seat of my pants-- a sensory organ that I do not underrate--asked me whether I seriously thought a single identical interest rate from Scandinavia to Iberia would be continuously appropriate.

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I hate shorthand expressions such as "Europhile" and "Europhobe" which conceal at least as much as they reveal. But I must for convenience swallow my dislike because it makes my task that much simpler. I am and always have been a convinced Europhile. I believe this country is a part of Europe and should remain a full and enthusiastic member of the European Union for as long as it exists. Long may it do so. I have already said that I believe the aim of a common currency is well worth pursuing, so I have no reservations in that direction.

But I nevertheless regard the way in which the common currency has been brought forward so swiftly as amounting not so much to an act of faith as to a huge political gamble whose outcome is unknowable. A huge step forward of this kind deserves at least a minimum of bottom-up demand enthusiasm and understanding to match the top-down political drive. I do not believe this move has the necessary bottom-up demand either from electorates or from business as a whole. More important, I do not believe a common currency is necessary for the effective functioning of the single market, which was the most significant and for me precious economic development and achievement of the European Union for many years. That achievement certainly had a broad measure of bottom-up support from industry and thoughtful electors alike.

It seems to me that the danger of social dissatisfaction with economic circumstances in one of the leading significant participating countries being blamed on the euro--that is the hardships they are suffering being blamed on it--is all too real, however misplaced such blame might be. There will be no lack of political opponents in each country ready to foment such trouble. Much more time should have been spent in familiarising electorates with the whole enterprise and a considerably longer period of time taken to make sure that convergence was demonstrated to be robustly sustainable over a long period and not just a snapshot.

As the noble Baroness, Lady Williams, said, I would much prefer to be able to join in a venture such as this ab initio. It is certainly not ideal, to say the least, in terms of our perceived Euro commitment, for us to be biding our time. I nevertheless have come to the conclusion that it is on balance right for us to do so, though it must surely also be right not to set embargoes, as some people seem to be doing, or trying to do, on our joining for as long as the life of the next parliament.

My doubts are not about the ECB; they are much more about governments. If my doubts are shown to be groundless, the gamble is seen to have come off and the European Central Bank has proved equal to the worst problems that arise, then I have no doubt that we should and will join up with the 11, and I shall recant with pleasure and look forward to hearing the same from the seat of my pants.

4.10 p.m.

Lords Burns: My Lords, it is a pleasure to have the opportunity to make my maiden speech in this debate today and I am grateful to noble Lords for their welcoming remarks. I am very conscious, of course, that European monetary union and the European Central

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Bank have been intensely controversial issues for as long as I can recall. In keeping with my former role as a civil servant I will do my best to stay clear of the most controversial aspects, although at times that is quite a tough task.

Perhaps surprisingly, I have had only limited personal experience of Select Committees of your Lordships' House. In 1985 I appeared alongside the Chancellor of the Exchequer before the Select Committee chaired by the noble Lord, Lord Aldington, which was inquiring into the causes and implications of the deficit in the United Kingdom's balance of trade in manufactures. The Chancellor of the Exchequer at the time was, of course, the noble Lord, Lord Lawson, and I recall that both the report and the government's response created quite a stir.

Last year I gave evidence to the Select Committee on the Public Service chaired by the noble and learned Lord, Lord Slynn of Hadley. On both occasions I enjoyed the courtesy and thoughtfulness shown by the committee as well as the challenging questioning that went along with it. I would like to congratulate the noble Lord, Lord Barnett, and other noble Lords who were members of that sub-committee, on what is, I believe, an excellent report. It covers a range of issues that are vital to the future success of European monetary policy. The committee has taken evidence from an impressive list of witnesses--people who are truly expert in their field. The committee has summarised the material, I believe, with great skill.

Today I would like to make three points, which I hope will contribute to your Lordships' discussion of these important issues. The first point is to emphasise that setting monetary policy is extremely difficult, even at the best of times, and that mistakes inevitably occur. Monetary policy affects the economy with long and variable lags, as we all know. The authorities have to deal with imprecise and out-of-date information, and they have to work with fallible economic forecasts, which are often thwarted by changing and unpredictable patterns of behaviour. There is no easy way around this and there are no short cuts.

I believe that what the report of the Select Committee shows is that the task facing the ECB will be even more complicated than usual. It has to set a single monetary policy to cover 11 nations as if they were a single economic entity. But, in the past, key statistics have been collected in different ways and there is no coherent historical database for this 11-nation entity. Economic forecasts could be even more uncertain than usual because a single currency and a single interest rate might well change economic behaviour in some countries. I believe that money supply figures are likely to be particularly affected.

We have the additional complication of the recent worldwide financial turbulence. Widening interest rate spreads, volatile exchange rates and declining share prices have added considerable uncertainty to the outlook. So, whatever systems for monetary control are chosen, I believe that we have to accept that there are significant risks of error. These could come either in the form of easier or tighter monetary conditions than

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intended. There are costs associated with both types of error and in either case there will be plenty of criticism to share around.

My second point is that the best defence against such criticism is to have an open and transparent process of decision-making. I agree with the emphasis that the committee puts on that. It is vital that the explanation for decisions should be comprehensive and should be issued with the minimum of delay. As the committee observes,

    "the Bundesbank culture of mystique surrounding its decisions would be a dangerous one for the ECB to imitate".
I believe that this mystique contrasts well with the publication here of the minutes of what became known as the "Ken and Eddie Show" and subsequently of the new Monetary Policy Committee. These minutes have gone a long way towards improving understanding of the decision-making process and the complexities that go with it.

The Select Committee report says that it has been convinced that,

    "publication should not go so far as to disclose the course of the argument, with its ebb and flow as minds are made up and changed".
I have a good deal of sympathy with that because it could lead to a stifling of discussion and forcing people into inflexible positions. But I do not believe that that rules out an ongoing, timely record which would set out the possible alternative interpretations of the available data, the key uncertainties and the balancing of the arguments. In other words, it should be much more than simply the presentation of the case for the decision.

My third and final point is to support those who argue that the ECB should be much more precise about the inflation performance that they wish to see. I can understand why, in setting policy, the ECB might want to take account both of money supply behaviour and inflation targets. The committee makes the case for "pragmatism and prudence". The separate histories of the individual countries involved mean that they do not want to throw away the methods that they believe have worked for them.

The committee reports that,

    "the tacit consensus among central bankers is that a range for the approved measure of inflation of from zero to two per cent. constitutes prices stability".
My own experience has made me increasingly doubtful about the wisdom of defining price stability in terms of an inflation range. A narrow range gives the wrong impression of the ability to control inflation and a broad range does not give a clear enough steer for policy. Instead, I support the approach that has been taken by the present Government in giving operational independence to the Bank of England and that has been to express their ambitions for inflation in terms of a single figure while recognising that deviations will occur which need to be explained and justified.

This is not just a matter of judging performance; it could have important implications for the conduct of policy. The success in the battle against inflation means that after 20 years or more of a bias towards disinflation, Europe has now reached a position close to price

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stability. We are close to a position where policy can now be unbiased and symmetrical. As the Governor of the Bank of England has reminded us, particularly in the present world conditions, it will be important for the authorities to persuade people that they are just as concerned about inflation falling below target as they are of inflation rising above target. I suggest that this can only be done with a clear statement from the ECB about the inflation outcome that it wishes to see in the period ahead.

Whatever our views about the merits of monetary union, I believe that we must all wish the ECB well. Setting policy for the euro is going to take great wisdom and perhaps a little good fortune as well. I have sat through monetary policy discussions in this country for 18 years now, mainly around the Chancellor of the Exchequer's table in the Treasury, but more recently as an observer at the Monetary Policy Committee of the Bank of England. My experience has convinced me that a degree of precision about the ultimate objectives of policy undoubtedly helps decision-making. Equally, it has convinced me that there is much to be gained from being open and straightforward about the reasons for decisions and the extent of the uncertainty surrounding them. It is important to have a system that can cope with periodic mistakes as well as one that delivers long-term success.

Finally, I take this opportunity to thank your Lordships for the welcome I have received and to thank the admirable servants of the House for their patient help and guidance around this complicated building. I look forward to playing a part in the proceedings of the House in the future.

4.17 p.m.

Lord Dahrendorf: My Lords, my first task is a particularly pleasant one. It is to congratulate the noble Lord, Lord Burns, on a maiden speech of characteristic incisiveness and experience. He has had two very distinguished careers already, one as an academic and one as a mandarin. He has made them look not so far apart as is sometimes assumed. We all look forward to seeing him embark on a third career in which he gives your Lordships' House the benefit of his thoughts, knowledge and experience as he has done today. If I had one wish for him it would be that he has the splendid opportunity of serving on a committee under the chairmanship of the noble Lord, Lord Barnett, and with the kind of colleagues which, like the noble Baroness, Lady Williams of Crosby, I enjoyed tremendously in Sub-Committee A.

As regards the issue we are not discussing and to which, with the exception of the maiden speaker, everyone has addressed themselves so far, my sentiments are close to those of the noble Lord, Lord Ashburton, except that I am not sure that they issue from the same part of my body!

I have, as your Lordships may know, voiced doubts about the project which among other things has given rise to the European Central Bank--not fundamental, let alone fundamentalist, doubts but doubts about two issues. One is that a great deal of management time has

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been spent on subjects which I regard as of secondary importance compared to the great issues of competitiveness, employment and social cohesion which we should all deal with in the European context. One must add to that today the considerable cost of the project, which may yet be a significant fact, given the position in which financial institutions find themselves today.

My second doubt has been that this project may turn out to be divisive for a European Union in which I believe, and may at the end of the day lead not to one but to two European unions--Euroland and the rest. And if, as I dearly hope, the enlargement of the European Union works and works soon, then half the members of the union will be in and half will be out. But having said that, I entirely share the view that what has been started by 11 members must work; and I am bound to say I am impressed by the technical effort, and, so far as one can tell today, the success of the technical effort, which has been put into setting up the institutions which are necessary for monetary union, notably the bank.

Will it work? Probably yes, but let me say a few words about a subject which has puzzled me throughout and which continues to puzzle me. It is that vexing question of independence. President Duisenberg said that there is no other central bank in the world which is as independent of politics as the European Central Bank. Paul Volcker, in answering our questions, spoke of a,

    "central bank Nirvana, a central bank without a government to oversee it or to be independent of".
Indeed, the European Central Bank is independent of a government which does not exist. The French Interior Minister, M. Chevenement--now, sadly, very ill--went further and suggested that we shall have a European currency without a government and European governments without currencies. He asked, "What will it mean?".

There are two schools of thought. One is the so-called functionalist school--not a term which thrills me when I hear it in the European context--which argues that once you have a common currency many other things will almost automatically fall into place. Harmonisation of other policies is bound to happen. In the end there will not only be fiscal harmonisation but tax harmonisation, and indeed at the end of the day what began with the euro will lead to political union.

Some hope that this will happen; some fear that it will happen. It seems to me quite likely that it will not happen and that those who believe in this functionalist progress are quite deeply wrong. The debate conducted in the United Kingdom does not take full account of the massive changes in attitude which have happened in Continental countries in recent years. It could be argued that the political union of Europe was buried at Maastricht, when Germany gave up political union as a condition for the first steps towards monetary union. I do not think anybody seriously discusses full political union in Europe now.

The other possibility is not the functionalist one, but it is one which makes one wonder for other reasons. We have already the beginnings of a monetary policy which

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is sort of separated from the rest of policy--from the rest of economic policy and beyond. In my less responsible moments I wonder whether the euro is likely to become rather like our weights and measures: kilograms or metres. Just as the prototype metre was deposited in Paris after 1899, so the prototype euro is now deposited in Frankfurt and will not change and is unaffected by what happens.

One almost wonders whether, with all the obvious differences, the European Central Bank is not in some ways in the nature of a currency board, except that it is not pegged to some other currency but to its own principles. These are obvious overstatements, but it is important to see that stability has become, for those in charge of the European Central Bank, a kind of fetish. When President Duisenberg was asked what he would do if monetary relaxation was demanded for employment purposes, he replied:

    "Our supreme goal is at all times containment of inflation".
When he was asked whether he foresaw agreements with the dollar a la Plaza or Louvre agreements, he said:

    "Only if they do not conflict with the goal of price stability".
When he was asked about countries at different points of the economic cycle, he said that this was not a matter for a "euro-wide monetary policy" but one "for governments", meaning of course national governments. As a result, we may be going into a situation--or shall I be more careful and say that those who live in Euroland may be going into a situation?--in which they have a stable currency somewhere but in which certain major and evident problems are not at all resolved: in fact they are aggravated by an insistence on stability not embedded in a political culture. I mention just two: employment and relations with other currencies over world crisis problems.

On the employment side many have said--Mr. Adair Turner said in evidence to the Committee--that European monetary union, by encouraging mergers and cross-border mergers--will not exactly make a contribution to the creation of employment; possibly to the contrary. However, the important point is that those who administer the currency will turn a deaf ear and a blind eye to issues of employment in their obsession with an abstract principle of stability. This in turn of course may lead to a whole lot of new conflicts.

So far as the international scene is concerned, I find myself entirely in agreement with my noble friend Lady Williams of Crosby when she says that the time has come for a major European initiative. But in these last few weeks I have had the privilege of seeing more than a handful of members of the various boards of governing councils of the European Central Bank and a number of Ministers of Finance. I have seen them respond to American demands for a European contribution to alleviate the world crisis. The sole response which they made was:

    "Our answer is to keep our own euro zone stable. The stability of the euro zone is the European contribution to the world crisis".

This is fine for those who are in, but it may not be enough. If one is really thinking of creating a space which exercises responsibility in the critical situation of

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the world financial system, as well as providing for the stability of those within, there are--and this is the only point I am trying to make--questions which remind us that the effective setting up of institutions (including the European Central Bank) can only be the beginning. They remind us also that it is once again, as the noble Lord, Lord Ashburton, said, a process from the top down and one that is inward looking rather than from the outset open to the issues around us in the world which are so visible today.

One must hope therefore that the navel-gazing in Europe will stop before long and that the opportunity to create a stable currency that is responsive both within and without will not be missed. If the process proceeds towards a responsible administration which is responsive to political needs within and without it is possible that Euroland will get a stable currency that becomes the envy of those who are not part of it and it may well expand further. If not, I believe that the jury is still out on where this gigantic experiment will end.

4.31 p.m.

Lord Tomlinson: My Lords, I rise to make my maiden speech with mixed emotions. I have a sense of nostalgia in returning to the Palace of Westminster which I entered in another place almost 25 years ago, only to leave it equally quickly some 20 years ago. I also have a tinge of regret that by being here I also come to the end of a period as a Member of the European Parliament, which I have enjoyed immensely. But I come here also with a sense of deep gratitude to friends, colleagues and Officers of the House who facilitated the beginnings of this transition. One of the joys of coming here is my familiarity with the role of the Select Committee on the European Communities and the high regard in which it is held not only throughout the European Union and its institutions but far beyond. The report on the European Central Bank is no exception to the way in which the work of your Lordships' House is received.

Too often debates on matters European are not really debates but exchanges of prejudice that have been held for a long time: on the one hand, uncritical acceptance of everything that emerges from Europe or, on the other hand, a kind of paranoid hostility to all or any such proposals whether or not they contain a benefit for this country or anyone else. Against that background I believe that the report of the Select Committee is especially welcome because it is based on a sound analysis of evidence of high quality.

It is important to emphasise one or two matters that the report is not. It is not a report on economic and monetary union. Were it to be so I would be making a very enthusiastic speech. It is not a report on whether, when, or in what circumstances the United Kingdom should join the single currency. Were it to be so, I would be almost as enthusiastic as was my noble friend Lord Barnett when introducing the debate, parts of which he made on his own behalf rather than on behalf of the committee. It is an evaluation of great clarity and lucidity as to whether or not the European Central Bank will work.

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I concur with a number of the conclusions of the committee and its key opinions. First, in the area of economic policy I believe that the single currency would lack credibility without monetary policy being set by an independent central bank. Article 105 of the European Community Treaty requires that,

    "The primary objective of the European system of central banks shall be to maintain price stability".
There can be marginal argument as to what constitutes price stability. However, I suspect that when we get there we shall recognise it, and given the present circumstances we are pretty close to it. I share the view of the Select Committee that such price stability is conducive to, and probably a prerequisite of, stable growth and employment. Central bank independence and the pursuit of price stability are, in the words of the Select Committee,

    "foundation stones on which the practice of modern economic management rests".
I assert my belief that such policies are an imperative for the United Kingdom and would be so whether we join a single currency or are perverse enough to take the kinds of decisions discussed in Bournemouth and stay out during the medium to long-term.

Secondly, I turn to accountability. It is fundamental that independence from political control should not be confused with an absence of accountability. I believe that the European Parliament remains pivotal to the process of accountability. In his evidence to the Select Committee the Chancellor of the Exchequer stated that based on his experiences of appearing before the Economic and Monetary Committee of the European Parliament he did not expect from it,

    "any failure to inquire [into] or to scrutinise what the European Central Bank does".
Dr. Duisenberg is also required by the treaty to appear annually before the European Parliament, but has already conceded that he will appear quarterly. It is imperative that there is accountability for public acceptability of an independent central bank. I believe that the European Parliament is best placed to play that role. I note with satisfaction the view of the Select Committee that that will raise both the public profile and the perceived importance of the European Parliament.

Thirdly, I turn to the stability pact. In some quarters the convergence criteria to help create the culture of stability have been much maligned. The days of automatic acceptance of excessive and growing budget deficits were outlawed by the treaty. I welcome the committee's positive evaluation of the effectiveness of the stability pact, an integral part of which is the injunction to carry out structural reforms in labour, product and financial markets. In this respect the UK is well placed for the more competitive climate of the single currency. It needs such an advantage to offset the disadvantages that already exist from being outside the single currency: interest rate differentials; susceptibility to speculative attack; and transactional costs for businesses that do not trade in euro.

Finally, the central question in the report is whether the European Central Bank will work. I believe that for too long many in this country have "rubbished" the

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predictions of governments of success on the basis that they are merely statements that reflect an excess of optimism. Many predicted with what sounded like authority that the convergence criteria would not work and that only five or six members would qualify. Sceptics ignored the sound preparatory work of the European Monetary Institute and preferred their prejudices to the ever-emerging evidence.

I believe that the single currency will come about on time for 11 countries. Others, including the United Kingdom, are qualified and in principle are favourably inclined to join. The current achievements are great; the plans proceed on time and the commitment and investment of political will is of the highest order. I can only welcome and share the conclusions of the Select Committee:

    "The European Central Bank is an essential element in the operation of the single currency. While the risks are considerable we do not expect it to be allowed to fail".

4.40 p.m.

Lord Renton of Mount Harry: My Lords, it gives me great pleasure to follow the maiden speech of the noble Lord, Lord Tomlinson. Of course his words were wise and well-informed as one would expect from the amount of work he has done in the European Parliament on European Community issues, in particular finance. It will be a pleasure for us all to hear him more often in your Lordships' House.

We arrived in another place in the same year, 1974. I remember him well in 1975 and 1976 sitting behind the Prime Minister Harold Wilson as his parliamentary private secretary, one of the "doers" and fixers behind the scene, passing notes to his Prime Minister which I, stuck well back on the Conservative Back Benches, would love to have been able to read. The noble Lord must have enjoyed that time greatly before his defeat in 1979. But at least that defeat enabled the noble Lord to go on to the European Parliament where he had an extremely distinguished career.

Perhaps I may also congratulate him for one great piece of wisdom in his maiden speech: his warm congratulations to the noble Lord, Lord Barnett, and other noble Lords including myself who were members of the committee. I made my maiden speech in this House about 15 months ago on a previous report by the committee of the noble Lord, Lord Barnett. To my amazement, a few weeks later, I received a telephone call asking me whether I would like to join the committee. I was pleased to accept; and like the noble Baroness, Lady Williams, the noble Lord, Lord Ashburton, and the noble Lord, Lord Dahrendorf, I, too, found this committee extremely pleasant, intelligent, and able to hear extremely expert witnesses. So perhaps he will be pushing at an open door as well.

I join with others who have congratulated the noble Lord, Lord Barnett, on his chairmanship. I say this to the noble Lord, Lord Tomlinson, in case he joins us at any time. The noble Lord, Lord Barnett, is particularly tough on any member of the committee who wishes to ask a second or supplementary question. We are kept in order in a remarkable way. For those of us who have previously erred and strayed on Select Committees in

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another place, where we could get away with three or four questions before being called to order by the chairman, the committee of the noble Lord, Lord Barnett, is not like that. One is kept strictly to one question at a time. More importantly, much thought, led by the noble Lord, Lord Barnett, went into the preparation of the report. After hard work and some compromises we arrived at a unanimous report. I think that all noble Lords who served under him are pleased that we were able to reach a unanimous report on such a deeply important subject as the future of the European Central Bank.

At this stage of the debate all the arguments for and against the report have probably been put forward. Therefore one tends to move to a rather personal note; I hope that noble Lords will forgive me. Working under the chairmanship of the noble Lord, Lord Barnett, I approached the subject of the European Central Bank with a certain degree of agnosticism. Referring to those labels to which the noble Lord, Lord Ashburton, rightly objects, I have always been labelled as a Europhile. But I have always had considerable agnosticism about whether the time was right, whether as a country we were ready, whether the European Continent was ready to move forward to economic monetary union and a single currency with all that that means in the handing over to a shared body of a degree of sovereignty. Of course it does that. To pass over the ability to print one's own money, to fix one's own interest rate, to a central body of 10, 11 or 12 other countries is a major move of sovereignty; and we should recognise that.

I was worried, too, about fiscal harmonisation as the next step following from the central setting of bank interest rates. I was worried about the centralising of interest rates. One sees some of the problems that can come from that with the pressure that is now being put on Ireland, in the middle of its boom, to bring down its interest rates from around 7 per cent. to 3.5 or 4 per cent. in order to be prepared for 1st January, the single currency and single central interest rates.

At the same time one has Tietmeyer from the Bundesbank making noises last week that he thought that German interest rates were low enough already, that employment figures were improving in the Federal Republic, and therefore why should the Bundesbank lower interest rates any more.

However, despite that agnosticism, throughout the 15 months or so that the committee sat, throughout our proceedings and hearing witnesses my impression was increasingly that the single currency was going to happen, but that it would occur with a good many more members than was thought likely at the start. When we began five or six were generally thought to be the number; it is already 11. Above all, I was impressed by the technical competence, the sheer amount of work, dedication and thought that had gone into the matter from all the experts that we met--Commissioner de Silguy, Trichet, Duisenberg, and Tietmeyer. One felt that every one of them had dedicated past years of their life to making certain that this enterprise was successful.

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As a result of that, and of the feeling from all sides that it was a great European enterprise, I became more convinced that it would be successful.

Last week I was in Brussels for a small international convention. De Silguy was to have spoken to us. However, he had gone to Moscow that morning, and his chef de cabinet came instead. He used to work for Trichet in the Banque de France or in the Tresor. I was impressed by his competence, his certainty that the enterprise would start on time even in these difficult financial world markets and that it would be a success. I take up a point made by the noble Baroness, Lady Williams of Crosby. He emphasised that in the past months of world turbulence one of the strong currencies has been the euro. One can see major international banks in the future wishing to have part of their reserves not only in yen (a questionable currency) or the dollar but in euros too. He pointed out that of the Scandinavian currencies, those which have been weak in recent months are the ones that are not joining the single currency. The currencies which are joining have been remarkably strong.

I have come therefore more and more to the conclusion that the central bank will work and that we should be a member of it and of the single currency. In an interesting and intellectually stimulating speech, as is so often true of him, the noble Lord, Lord Dahrendorf, ended with the words, "the jury is still out". I disagree with that. I think that the jury has returned its verdict. The only difficulty is that it has returned its verdict: that it is going ahead. But we are not part of it, and that is the problem which Britain has to face up to.

Perhaps I may quote a few words from the evidence given by Mr. Paul Volcker to our committee on 24th March. Paul Volcker was an extremely respected head of the American Federal Reserve for many years. In answer to a question he said:

    "The United Kingdom might find it difficult to live for good reasons and happy reasons, with a monetary policy which suits all of the continent of Europe now because it is cyclically out of phase, but in the long run you have to assume those problems are not insurmountable. You do get different cyclical phases in the United States now too. The theoretical advantages of having some monetary independence I think rather pale against the advantages of having a common currency".
That sums up the opinion of many of us: the advantages of stability of exchange rates within the euro zone--a strong currency, and lowering of transaction costs, perhaps adding between 0.5 and 1 per cent. to GDP as a result of being a member of the euro zone. To me those now reflect the balance of probabilities.

Peter Millar, the news editor of the unhappy paper the European, wrote in an article at the weekend:

    "Britain's relationship with Europe has been either confrontational or sticking its head in the sand".
That is an accurate but very gloomy description of our relationship during the past years.

Our position at the moment is one of a good natured ostrich, but we must soon get our heads out of the sand. When we do, when we have a referendum, it will be better for employment in this country, better for industry

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and bring lower short-term interest rates. My opinion is that the decision to join the European currency will be one in favour by a majority of at least 60 to 40.

4.50 p.m.

Baroness Crawley: My Lords, I thank noble Lords and officers of this House for the courtesy they have shown me as a new Member during the past week.

I took a lot of advice from colleagues about the subject of my maiden speech. They said, "Keep it simple, keep it non-controversial, make it funny, but remember to keep breathing!". It was all exceptionally good advice and I thank them for it. So I chose the European Central Bank as my subject, given the non-controversial nature of Europe in this House; and I chose the countervailing theories of the European Central Bank's raison d'etre being either price stability or money supply targeting, just to keep the speech simple!

To be a little more serious, it is a privilege to make my maiden speech in a debate on this report from the Lords Select Committee on the European Communities. For many years, as a Member of the European Parliament, I have been aware of the truly excellent work of the committee chaired by my noble friend Lord Barnett. Indeed, I have watched my European colleagues--Spanish, Greek, Swedish--thumbing through the Lords' committee reports and quoting from them. I have overheard MEP colleagues advising one another, "Don't give evidence to the House of Lords' committee unless you know your subject inside out and back to front. It is a committee not to be trifled with". Brussels acknowledges a major player in the great European debate in its respect for my noble friend's committee.

This report on the European Central Bank raises three essential questions of accountability, transparency and credibility. These questions are pivotal to any serious discussion on whether or not the ECB will work. The committee not only raises these questions but answers them after a thorough analysis of evidence from experts such as Eddie George, Hans Tietmeyer, Dr. Duisenberg, the President of the ECB, and, of course, our own Chancellor of the Exchequer.

First, the committee attaches great importance to the accountability of the ECB to the European Parliament, as suggested by my noble friend Lord Tomlinson. As noble Lords will know, the European Parliament will provide the principal forum in which, in public, the ECB will have to justify itself to elected parliamentarians and, more importantly, to the public at large. The president of the ECB will appear before the European Parliament on a quarterly basis and he and the members of his executive board will attend the parliament's appropriate committees. However, it is vital for the role of accountability beyond this formal link that the ECB listens continually and responds to the tensions, the strains and the achievements of the real economy where businesses have to survive and where men and women have to earn a living.

Secondly, when looking at the issue of transparency, it is important that we do not see the treaty obligation of independence for the central bank as a way of closing

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off the ECB from wider popular scrutiny. As the Chancellor of Exchequer said in his evidence to the committee, the days of an ivory-tower approach from central bankers are over. He went on to say that the reasons for the actions of the central bank must be understood widely by financial markets and by the general public of the member states. I, too, believe that without essential public understanding and eventually trust the ECB cannot prosper as many of us would wish it to.

Credibility is the third major topic approached by my noble friend's committee. The ECB's performance in these first early years will promote its credibility or otherwise. The fact that it is moulded on the structures of the highly successful German Bundesbank should give it a solid foundation; although I share the concerns of the noble Lord, Lord Burns, about the secrecy culture of the Bundesbank.

However, credibility must be seen in a wider context than that. As the committee report succinctly puts it (and I repeat what was said by my noble friend Lord Tomlinson):

    "The independence of the central bank and the primacy of the policy objective of price stability are foundation stones on which the practice of modern economic management rests".

The committee's report continues:

    "We see price stability as desirable because it is conducive to or possibly even a prerequisite for long-term stable growth and employment".
Indeed, for the citizens of Europe, for all of us, success and credibility of the ECB must go beyond price stability and, in words elsewhere in the treaty:

    "be associated with sustainable growth and a high level of employment".
Only then will the ECB gain that public support and trust so necessary for its long-term and therefore our long-term prosperity.

Unless we have spent the past eight months in a separate solar system, we all know that on 1st January 1999 11 of the 15 member states of the European Union will adopt the European single currency. As the report puts it, and as was said by my noble friend Lord Barnett, that is,

    "an immense and surprising achievement".

The ECB is an essential element in the operation of the single currency. Despite all the considerable associated risks, the report does not, as it puts it, expect that the ECB will be allowed to fail. I sincerely hope that we will become part of the single currency as soon as it is in the economic interests of this country to do so and, of course, on the clear agreement of the British people. As the noble Baroness, Lady Williams of Crosby, so eloquently put it, our influence on developing monetary and fiscal policy will be so much greater inside rather than out.

Our discussions today on Europe and the views expressed from all sides of the House put me in mind of an aeroplane journey I had back from Strasbourg last week with a Conservative MEP colleague who was heard to mutter darkly, in response to the steward telling us that we were about to enter an area of extreme turbulence, "Huh, we must be flying over Bournemouth!".

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However, I would quickly add that controversy on Europe is not of course confined to the Benches opposite.

I thank your Lordships for your patience and courtesy. I hope that this excellent report will be widely read. My noble friend Lady Rendell might spice up the plot or have us all asking, "Who done it?", before the conclusions next time, in an effort to ensure that it reaches a much deserved wider audience beyond the political classes of Europe.

It is a privilege to make my maiden speech in this important debate on our future in Europe and it is a real pleasure to do so in this the 40th anniversary year of the first women to take their seats in the House of Lords.

4.59 p.m.

Lord St. John of Bletso: My Lords, it gives me great pleasure to congratulate the noble Baroness, Lady Crawley, on her outstanding and powerfully presented maiden speech. The noble Baroness comes to this House with enormous experience and expertise, having been a member of the European Parliament since 1984, having served as deputy leader of the European parliamentary Labour Party and also serving still on the European Parliament economic and monetary affairs committee. From the brief resume in the House Magazine, I learnt that she started her career as a drama teacher. I popped a brief note across to her saying that that was an excellent precursor to being a Member of your Lordships' House; more so perhaps for being a Member of the other place. I sincerely hope that we shall hear a great deal more from the noble Baroness in the years to come. I should like also to congratulate those other noble Lords who have made their maiden speeches today.

It is perhaps opportune that this debate has been delayed until now. I know that the noble Lord, Lord Barnett, had given the Chief Whip a fairly hard task in trying to get the debate heard before the Summer Recess. I say "opportune" because, as the noble Baroness, Lady Williams of Crosby, mentioned, it comes at a time when the recent global financial turbulence sparked off by the current economic crisis in South East Asia and the emerging markets has put a greater spotlight on whether or not the European Central Bank will be a success under the prevailing circumstances. With investor confidence at a low ebb, hopes that the single currency will be launched on a strong economic tailwind look unlikely.

It is perhaps also "opportune" that the debate has been delayed until today as tomorrow is the 75th birthday of the chairman of the committee, the noble Lord, Lord Barnett. As one of the younger members on the committee, it has for me been one of the greatest honours and privileges that I have had in my times in your Lordships' House, times which, unfortunately, the way government legislation is likely to go, may be short lived. We shall certainly be sad to lose the noble Lord's expertise when he leaves the committee at the end of this Session. His agility, charm and, as the noble Lord, Lord Renton, mentioned, his sometimes bullying tactics

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have been quite refreshing. I wish also to thank the two Clerks who served the committee, our past Clerk, John Goddard, and Dr. Philippa Tudor, for all their assistance.

Our report was far reaching, but focused on the challenges facing the ECB, particularly the challenge of gaining credibility and ensuring price stability and a stable single currency. As many witnesses pointed out, the credibility of this new institution will need to be earned by its results, and this will take some time. I was certainly encouraged by the evidence of Dr. Duisenberg, the ECB President, who stressed that, in order to build support and credibility, the ESCB would have to be as transparent as possible and would have to explain to the European Parliament, to governments and to the public at large, its targets, why it takes or does not take measures, and why its targets have or have not been met.

As the ECB has been modelled on the Bundesbank, it is obviously unlikely to be as transparent as the Bank of England. As for accountability, even though the President of the ECB is formally required to appear once a year before the European Parliament, it was also encouraging to hear from Dr. Duisenberg that he thought that it would be a good idea for him to appear before it four times a year. That shows that he has high on his priority list transparency and accountability in order to gain credibility for this important new institution.

The Chancellor of the Exchequer and other witnesses stressed that for the ECB to work its actions must be understood not just by the financial markets but by the European public. I also think that the comments of Sir Nigel Wicks, who was an excellent witness, are worth mentioning. He said that for there to be confidence in the euro, the ECB would need to,

    "explain, explain, explain, convince, convince ... Parliaments, press and the public at large--about what they are doing and how they are going to do it".
It is all one big PR exercise.

Quite apart from the need for transparency and accountability, one of the major challenges facing Council members will be making the mental transition from the nation state to the euro zone as the exclusive reference point for policy. I believe that this psychological shift will be particularly important, as the ECB will in all likelihood face an unusually uncertain economic outlook.

Several commentators in Europe claimed just several months ago, before the economic crisis, that the Asia and emerging market crisis would not spill over into Europe. How wrong they were! Dr. Duisenberg acknowledged that the international financial turmoil would have a dampening effect on world growth. Clearly, Europe cannot remain immune from a global crisis. At times like this--I say this in my capacity as a consultant to a City firm--investor confidence is a global problem.

This need for the ECB to be closely informed about the real economy and sensitive to the various patterns of growth and decline which occur across the euro zone was highlighted in paragraph 105 of the report. While I support the independence of the ECB, I hope that it

13 Oct 1998 : Column 813

will not be too rigid in its implementation of monetary policy and will allow an element of flexibility. It was interesting to note that, when questioned on whether the single currency would work, the British witnesses were less confident than the European witnesses and tended to see more problems. There did, however, appear to be a general consensus among central bankers that price stability would constitute a measure of inflation between zero and 2 per cent.

The report made scant reference to the fact that there will be different inflation rates in the future between member states. European countries have had very different inflation experiences over the past 30 years and their economic cycles are unlikely to become synchronised simply as a result of European monetary union. Certainly the structure of the balance sheets of their private sectors and the ways in which prices are determined in goods and labour markets across the euro zone differ substantially. As a result, the channels by which a given change in interest rates affects the different economies are likely to vary. This means that the ECB will face a difficult job in setting a single interest rate to keep inflation low.

On average, in the euro zone, it is inevitable that from time to time the interest rate that is appropriate to hit an average inflation target for the whole of the euro zone will be quite inappropriate for some countries. In a recent report published by Merrill Lynch, for which I declare an interest as a consultant--I do not know whether I will still be a consultant after today's debate as it has just announced a number of redundancies but no one knows who they are--it was predicted that if the ECB is unwilling to allow, in its words, "Euroland inflation" to rise above 2 per cent., normal interest rates may need to increase to around 6.5 per cent. by the year 2003. It believes that a more realistic target might be for Euroland inflation to average about 2.5 per cent. and in that case, in its opinion, rates would move slowly and by less.

That Merrill Lynch report forecasts that German inflation would in all likelihood be substantially below the euro zone average for most of the next decade and claimed that Germany may favour having the ECB adopt a loose inflation target for the euro zone. I mention that because the argument of those who claim that it is self-evident that the German members of the ECB Council will push for a tougher regime than others is flawed.

I certainly concur with the statement in paragraph 113 of the report that:

    "we hope that the ECB will be flexible in their application of monetary targets in pursuit of low inflation".
There has been much fresh speculation over the past few months as to whether the ECB will use a combination of inflation targeting and monetary aggregate targeting on a trial and error basis when making interest rate decisions. One of the ECB's more immediate problems in that regard will be the new euro zone economic data, which has no history and track record.

As to whether the ECB will work, I have no doubt that at a technical level, it is totally competent and has the will and leadership to make it work. However,

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I remain sceptical as to the sustainability of the convergence criteria of all member states. Having said that, I agree with Mr. Adair Turner that the achievements of the past few years in terms of convergence have been far greater than anyone would have forecast five years ago.

Clearly, a big test for the ECB will be its ability or inability to cope with asymmetric shocks. The test of a single currency, as the Chancellor of the Exchequer mentioned, will be whether it delivers growth and high employment. The two principal potential economic dangers to the success of the single currency, which were noted in paragraph 131, were unjustified budget deficits and a failure to make structural reforms.

In conclusion, while the challenges and risks for the ECB are high, there is no doubt that there is an overwhelming political will to make it successful and acceptable. While I hope that we shall, in the foreseeable future, become a member of the ECB, I certainly concur with the noble Lord, Lord Dahrendorf, that the jury is out. While I may also be an agnostic Europhile, for the time being, I believe that a "wait and see" policy is the best way forward.

5.12 p.m.

Lord Shore of Stepney: My Lords, I have apologised to my noble friend who introduced this report and who has been chairman of the committee because unhappily, as a member of the Neill Committee, I found myself having to take part in a press conference which coincided precisely with the opening speech on this very important debate. Therefore, I apologised to my noble friend and, indeed, to the noble Lord, Lord Boardman, whose speech I regret to say I did not hear. But I have heard the other speeches and, of course, I have read the reports. Perhaps I should add to my apology to my noble friend because I do not share the enthusiasm for this report which many noble Lords have expressed in the debate so far.

I do not share that enthusiasm for a whole number of reasons, but not least because it is not anything like as informative and penetrating as, for example, the other excellent report over which my noble friend presided and gave us a few months ago on enlargement of the European Union. That really did open up the subject, I thought, in a way which was extremely helpful to the whole House.

Looking back, perhaps it was not the right time to undertake this report. I say that because in a few months time, God knows, we shall have so much more actual evidence of what it is like to have a single currency, which will be of great benefit to us. We shall have actual experience rather than guesswork about the future. In particular, I am thinking of what will happen when our friends and neighbours across the Irish Sea are compelled to align their interest rates with those of the other members of the Euroland. That is a major problem and could even cause an economic crisis.

Moreover, I wish to see how our friends, the Italians, manage to sustain their position in relation to the convergence criteria, not just for the year of convergence but for the next year and the year after.

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Also, I have considerable doubts about whether our Belgian friends will manage to perform as adequately as certainly President Duisenberg expects. I shall say more about him later.

Therefore, it would have been a wonderful time now to be starting this inquiry. It would have been better had it spilled over into the new year when we could have seen a great deal more about how those countries are reacting to the difficulties and much more important--and indeed the main subject of what I shall speak about in a few moments--we should have known how the European Central Bank and single currency had faced the greatest economic challenge that has beset the western world, and, indeed, the world economy, for the past 60 years.

It is the European Central Bank--let it sink in to every Member of this House--which will be in the position of taking the lead in trying not merely to defend Europe from the effects of the approaching slump but also in contributing to the rescue of the whole international economy and community. Does anyone in their senses believe that President Duisenberg is better equipped to handle those problems than the finance ministers of the major countries of the European Union? I leave that to one side for a moment. I hope that I have registered a point of very genuine concern.

However, allowing for all those difficulties, I wish that, even within the scope of the report, the committee had been more inquiring about, for example, the convergence criteria; how far they were genuinely met; and how far they are sustainable. That would have been valuable. Also, a few more penetrating remarks about the relationship between the Euro X Committee and the Economic and Monetary Committee would have been helpful and might have provided some guidance about a potential problem in the not-too-distant future.

Therefore, those are my initial problems. I must say also to my noble friend that it was an odd report in the sense of the question it asked--namely, whether the European Central Bank will work--as though one could dissociate whether it will work from the question of whether it is a good thing. Of course you have to go over the argument again about the pros and cons, as everyone in this debate has found it impossible to avoid doing. It is not a question of, "Will it work?", but of, "Will it work well and better than the present arrangements?"--not only for European neighbour states and the European Union, but for this country also. That is the question with which we should be exercised. In my belief, it is a serious error, a mistake, not to face that but, to some extent, to dodge it.

I wanted to develop a little further what I felt to be the fundamental problem. Perhaps it can best be summed up by quoting what President Clinton said about a fortnight ago when he turned his mind--but, unfortunately, not the mind of the rest of the American political establishment--from his domestic and private affairs to the great affairs of state. Referring to the economic and monetary crisis, he said that, worldwide, the balance of risk has changed from inflation to deflation. Let that be properly absorbed. The fact that the balance of risk has

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changed has been repeated by our Chancellor of the Exchequer. It was put out as a sort of communique by the G7, speaking for the whole international community.

As soon as that point is registered--that "the balance of risk has changed"--one faces the fact that the European Union and the European Central Bank are not remotely tuned into this new and overwhelming problem; nor, I fear, is the committee. It ended up stating on page 3--this has been quoted previously but I shall quote it again:

    "The two principal potential economic dangers to the success of the single currency that we see are fiscal profligacy--excessive and unjustified budget deficits--and failure to make structural reforms".
They are important points, but they are second-order points which should not dominate the considerations and concerns of serious people concerned with the affairs of state here and abroad.

When one starts to think about it, one wonders what role the European Central Bank should play. What if expansion is required of the European Union economy? What if that expansion requirement leads to an excess of the 3 per cent. borrowing limitation which the treaty imposes? Supposing--God knows, this is not all that remote--we are faced with something like that, with something even greater than the 1974 secondary bank crisis when a whole range of banks went bust, what will we do? Then we were a government who controlled the monetary system and the Bank of England. We instructed the Bank of England to organise its lifeboat, which saved all the depositors of those secondary banks but, of course, properly and correctly wiped out the bad management under which their affairs had been conducted. Can we do that in Europe? Can we instruct President Duisenberg to undertake large-scale rescue operations should they be necessary? I am not at all sure but, frankly, I have far less confidence in relying on him than on our own resources and national arrangements--other than, of course, the changes which our own Chancellor so unhappily and unfortunately made in the Treasury's relationship with the Bank of England by giving it the freedom of action which it has now and which I sometimes think that the Chancellor may very much regret having granted.

But it is not only a question of the treaty problems that I have outlined. Here we are about to undertake this massive initiative of the eleven powers by setting up this institution, whose purpose is said to be:

    "the primary objective of the European system of the central banks shall be to maintain price stability."
Would anyone in their senses in 1998, looking at the economic problems that face us, decide to set up such a major institution, the primary objective of which is to maintain price stability? Goodness me, that simply reflects the great concern for what was the major problem of the 1970s and 1980s--inflation. That was written 10 years ago when the problem of inflation and hyper-inflation dominated all our thoughts, but it is hopelessly out of date. What wisdom we have in this country in not having a written constitution. That means that we are able to change policies and institutions as events require. To change that nonsense about the Bank's "primary objective" would need a treaty

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amendment and years of argument. Unanimity would be required before anything could be done. Clearly, that cannot make sense--and it does not.

When I think about this, I am genuinely disturbed. One would have thought that during the summer months President Duisenberg, the ECB president, would have absorbed something of the gravity of the situation, not only in the European economies but in the world economy, yet he was quoted in the Financial Times on 10th July 1998 in, I think, the middle of the Russian crisis--certainly long after the Far East crisis had become apparent--as saying that governments in the Euro-zone must aim to run balanced budgets and that countries with particularly high levels of national debt--Belgium and Italy, for example--should be running surpluses. There was no qualification or mention of what everyone agrees is now the major problem facing the British, European and world community; namely, deflation.

Perhaps noble Lords will allow me to trespass a little beyond my time and to conclude by saying that all of us have a duty to think again about what we have let ourselves in for in relation to European economic and monetary union.

5.28 p.m.

Lord Bruce of Donington: My Lords, from the speeches that I have heard in this debate I fear that, possibly as usual, what I am about to say will not find favour with the majority of noble Lords who are present. That is a phenomenon to which I am accustomed; indeed, to which I am completely inured. Nevertheless, I propose to give some of the reasons why I entirely support the words that have fallen from the lips of my noble friend Lord Shore.

As a distinguished noble Lord opposite said-- I cannot remember the name--"the jury is out on this whole question". However, the noble Lord did not define "the jury". Of course, "the jury" is the people. For the past 60 years or so it has been my privilege to try, as best I have been able, inside Parliament and out, to be of political assistance to the people of my own country. I do not think that there is anything particularly disreputable about that. In fact, it has been a reason for my existence over the past 65 years--and I remain proud of it. We have to look around the world and at our own country today to form some conclusion as to how this new scheme of things, the European Central Bank, will work. One has to bear in mind that the main problem, at the moment and for the foreseeable future, is how to solve the problem of areas where there is an abundance of individuals with varying skills--some skilled, some not--who are willing and anxious to work and make a living. When the abundance of the earth in terms of raw materials is available--in many cases very easily available--and when the world, or part of it, is gorged, with the monetary instruments that enable them to come together, why is it at this time we do not face that problem, as indeed Maynard Keynes faced it? I recall that one of his supporters, a Mrs. Joan Robinson, a very distinguished economist indeed, wrote a very

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perceptive article in the first edition of Contributions to Political Economy, published under the aegis of my noble friend Lord Eatwell. This is what she said:

    "Mrs. Thatcher declares that there 'is no other way'; forgetting that for 20 years after the war we enjoyed continuous growth with almost no inflation."

So for 20 years we were able to make a reasonable shot of it. We were able to take up ever-increasing quantities of people, bring them together with the raw materials and partly-finished goods, and so on, so that unemployment was very low. Inflation for that period was approximately equivalent to the target that has now been set. Surely we have something to learn from that.

From what I have observed so far in the current debate, despite protestations at the commencement of every speech that the speaker did not intend to discuss the merits or otherwise of the single currency, most of the debate has been dominated by that very consideration.

When I read reports of this kind I normally go to the questions and the evidence section first and to the opinions and conclusions afterwards, rather than form opinions and conclusions first and then fish out the evidence in support of them. I suggest that is a very desirable trend among people who read reports of this kind.

The evidence is not, of course, so unequivocally in favour of the establishment of an independent central bank and the establishment of a single currency, as the opinions given in the report would have us believe. I will quote from the opinions arrived at by the Committee. In view of the convention--it is not statutory or covered by the rules or customs of the House or of committees--I can understand that all reports are unanimous. I found that out to my cost way back when I participated in one of the sub-committees. While the report was being drafted I submitted 129 amendments, several of which I threatened to bring to a Division. I disappeared from the European Committees immediately following the end of that particular session. I was sunk and I have not surfaced since within that particular ambit.

This is what the opinion of the committee says. Under the heading "Economic Policy in the Modern Nation State":

    "many, if not all, economists"--
note that; "many, if not all, economists"--

    "even if not yet more widely among the general run of politicians and the public [have] a belief, derived from the experience of success and failure, that the best monetary policy is directed towards long-term price stability and is best left to the operation of a central bank acting independently of short-term political considerations".

I challenge any Member of the Committee, including its Chairman, as to where in the report evidence was given to that effect. It was not. It was a way of insinuating the pressure--with no evidence whatsoever--of a prejudicial trend into the opinion before it even surfaced.

It is even more remarkable, as many of your Lordships who are readers of The Times newspaper--and I still have that addiction--will know. The Times published a letter on the 25th September last from 13 or

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14 economists who completely dissented to the whole proposition. I could add many, many more names to their number. It is somewhat peculiar that this assertion should be made quite clearly in the full knowledge that it was not true. There is no unanimity among economists. The noble Lord, Lord Peston, will agree with that on this particular question or, as far as I know, on any question.

It is the way that the report has been drafted. I am very surprised that it contained the degree of unanimity that it did. Knowing, as I do, most members of the committee personally, and having a high regard for them all, including its Chairman, I know it cannot be true.

The problem is far greater than has been raised. It is not price stability in the sense that it is mentioned here. It has been mentioned in most trenchant terms in the evidence. Consider the stark nature of the evidence that was given to the Committee:

    "Dealing with problems of high or rising unemployment or of lagging economic growth in some areas and not in others is not, and cannot be"--
I repeat, "is not and cannot be"--

    "a primary concern of the monetary authorities."
It goes on to reiterate the reply that,

    "the primary aim of the Central Bank is to achieve price stability and, without prejudice"-- mark those words--to that primary aim, monetary policy shall support the general economic policies in the Community". A little further on the Chairman states,

    "if you look at the unemployment problem ... we all agree and we always say in the Central Bank community"--

it seems to be already established that we now have a central bank community too--

    "and in academia that it is very much of a structural nature".
That flies in the face of all the evidence. I do not wish to criticise Her Majesty's Government--heaven forbid that I should do so!--but in the United Kingdom we have the same central bank control over interest rates and the inflation rate. Already it is quite clear that the universal application of these policies across the United Kingdom in regard to public expenditure, for example, has produced a situation where in some areas there is a high degree of employment, notably in financial circles and in the banks, although that has been a little dented after the events of the past few weeks, but in other parts of the country there is large-scale unemployment. That has occurred with a centralised monetary policy in the United Kingdom.

That is much more the case in Europe as a whole. How is a policy whose primary, indeed dominant, treaty-backed aim is price stability, to deal with patchy unemployment--some of which affects a large percentage of the population--which varies throughout the states of Europe? How can the application of a single monetary policy, whose primary aim is price stability, deal with the varying economic circumstances that exist not only among the individual member states but within the member states themselves?

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It requires a deep conviction--based on what, I do not know--to assume that the European Central Bank will work well, because the conditions are not there in which it can work well. I have no doubt that it will work as the whole machinery of the treaty is behind it. The treaty has laid down with pretend mathematical accuracy the various percentages relating to kinds of economic activity that can be identified, monetary, fiscal or otherwise. It has laid them down. We are tied if we believe what the Commission says. The Commission originated the policy long before Maastricht, when it published its original plan for Europe. It assumed certain things would happen. It laid down in the treaty the various percentages to be given to the varying factors: total current deficits, total capital liabilities, and so on.

We all know what has happened in practice. Two months before the establishment of the European Central Bank those Maastricht criteria incorporated in the treaty and in its protocol were to be strictly adhered to for two years. We have been told that the percentages relating to countries' deficits, public expenditure, total debt and all the rest of it, were set in stone. But recently when the conference was held to establish the bank, those all went out of the window. In point of fact, most of the countries that are participating in the scheme have varied the conditions. Those varied conditions have been accepted. This will not do. I agree with the noble Lord, Lord Ashburton, that we need to be informed to enable us to make a proper judgment because at the moment, with the aid of much money that has been pumped into the information project by the European Commission, we are simply being bamboozled in advance of all the facts becoming known.

5.45 p.m.

Lord Marsh: My Lords, the noble Lord, Lord Barnett, opened with a stern reminder that UK membership of EMU was a non-issue in this report. With the sublime self-assurance of the extreme Europhile he then proceeded to deliver a demand for early and unconditional British entry into EMU with a passion which even enthusiastic Moonies might have found embarrassing. The reality, of course, is that you cannot talk about the prospects for the central bank without raising the UK position, because that and the title of the report encapsulate all the fears of those who want to see and trade with a prosperous Europe and a thriving single market but who want to be sure that this unique experiment will work before we are irrevocably committed to membership of it.

The suggestion that anyone who questions any part of EMU or the European Union is some mad xenophobe is not true. For the past 25 years of my life the overwhelming majority of my income has come from overseas. Most of the time I have worked for foreign companies. I have the honour to be the unpaid chairman of Business for Sterling. It is one of those organisations where one is not paid to run it. One is expected to contribute financially towards the running of it and that is considered a privilege. The majority of the members of that organisation trade in Europe. The biggest market of JCB, for example, is in Europe. The members of that organisation want to see the system work. There will be

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a single currency and there will be a central bank. It is of interest to all of us as to whether it works or does not work. But some of us have doubts about it, thus the simple question,

    "The European Central Bank: will it work?".
It is an attractive question because the answer is also simple and indisputable; namely, no one knows because there is no precedent for a central bank facing the problems that the single currency and EMU present.

Regular attempts are made by those who know better to suggest an analogy with the United States. That is absurd. The United States is a fiercely chauvinistic nation state. When Americans sing "God Bless America" they do so as a politeness knowing in their hearts that the Almighty would never think of doing anything else! Unlike the members of economic and monetary union, the United States has a single constitution, a single legal system and--this is important--a single language. That is a major economic issue that I shall discuss later. Those three factors, a single constitution, a single legal system and a single language, ensure stability and a degree of labour mobility on a scale which is impossible in the area of the European Central Bank, at least for many years.

Having said that, the fact that the central bank will face many problems unique to Euroland cannot rule out the possibility of success, any more than one can rule out the possibility of failure. We do not know. We have no basis upon which to judge it. There are too many imponderables. It is simply a matter of the conclusions we reach on our particular risk analysis. The problems are well known.

There are three possible outcomes for the central bank: first, within a few years it is seen to be a complete success. Nightingales will sing in Berkeley Square. Tony Blair will take the credit for it and will be canonised, and the world will be happy. It is in everybody's interests that it should succeed. Failure would be disastrous for all. It could succeed but some of us are highly sceptical about that. Others take a different view.

Secondly, it will be seen to be working for the other members but not for the United Kingdom. The arguments are well known in terms of trade patterns, the economic cycle and a whole range of factors which make us genuinely different, not because we are cleverer or because foreigners are inferior, but because of our history and a number of other things we have developed differently. It is perfectly possible, therefore--and I know of no one who disputes this--that it could work for Euroland but not for the United Kingdom.

The third possibility is that it will fail, and no one in their right mind could be other than horrified at that prospect. If it fails, then for those who are in it there is only one way out and that is through total chaos. That is why whether we go in or wait is an important question. If it costs something to be absolutely sure that this works, it may well be worth paying the premium in order to establish and preserve the safety of this country by not being involved. It is said, "But we have to go in". What happens to us if we do not? We will be in the same position as every other country in the world except

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for 11 European countries, some of which are very small. Will the French suddenly say, "We will no longer sell our wine to these Rosbifs. They will not come with us"?. Of course they will not. Will the Germans stop selling BMWs or Audis? Will Italian cheese-makers stop selling us cheese? We will trade with them, as we trade with other countries and other currencies. That is therefore an option which is available to us.

The public support for Business for Sterling by a growing number of experienced and senior business executives from all sectors--major companies, merchant banks, manufacturers, retailers--is evidence that an increasing number of people with no political axe to grind but who listen to the advice of their treasuries and of their finance directors believe that the odds against success are seriously underestimated. There are many elements to that concern. There is the concept of "a single interest rate meets the problems of all"--one size fits all. The lack of labour mobility is a counter-balance to serious regional problems. We know what they are.

There is, however, one central issue above all else. the noble Lord, Lord Barnett, has great faith in his view. It is unusual. As a Treasury Secretary he was tough to the point of being obnoxious.

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